UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _____ to _____
Commission file number: 33-7707
CAPITAL GROWTH MORTGAGE INVESTORS, L.P.
Exact name of registrant as specified in its charter
Delaware 13-3434580
State or other jurisdiction
of incorporation or organization I.R.S. Employer Identification No.
Attn.: Andre Anderson
3 World Financial Center, 29th Floor, New York, New York 10285
Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
DEPOSITARY UNITS OF LIMITED PARTNERSHIP INTEREST
Title of Class
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Documents Incorporated by Reference: None
PART I
Item 1. Business
(a) General Development of Business
Capital Growth Mortgage Investors, L.P. (the "Partnership",
formerly Shearson Lehman Pension and Retirement Investors Fund,
L.P.), was formed on July 30, 1986 as a limited partnership under
the Partnership Laws of the State of Delaware. The general
partner of the Partnership is CG Realty Funding Inc. (the
"General Partner", formerly Shearson Lehman Realty Funding
Inc.), a Delaware Corporation and affiliate of Lehman Brothers
Inc. ("Lehman", formerly Shearson Lehman Brothers Inc.). The
Partnership was formed to invest in and originate zero coupon
first and second mortgage loans on properties owned by limited
partnerships sponsored by affiliates of the General Partner,
properties owned by unaffiliated entities, or to refinance
existing mortgage debt.
On October 15, 1986, the Partnership commenced an offering of a
minimum of 3,900,000 and a maximum of 30,000,000 units of limited
partnership interests (the "Units") pursuant to a Registration
Statement on Form S-11 filed under the Securities Act of 1933.
The offering was terminated on June 30, 1987 with a total of
7,047,000 Units sold for proceeds of $70,470,000. The net
proceeds of the offering, after deducting selling expenses and
other offering and organizational costs, aggregated $66,246,500.
During the period from June 30, 1987 (inception of operations) to
July 30, 1987, the Partnership invested $61,999,973 of its
offering proceeds in four zero coupon mortgage loans (the
"Mortgage Loans"). On October 27, 1987, the Partnership invested
$1,452,974 in zero coupon U.S. Treasury securities.
Under the terms of the Agreement of Limited Partnership (the
"Partnership Agreement"), the General Partner has sole
responsibility for the overall management of the investment
portfolio and affairs of the Partnership.
The Partnership's investment objectives were to:
(1) preserve and protect the Partnership's invested
capital;
(2) receive accrued interest and principal at maturity of
the Mortgage Loans; and
(3) share, in certain instances, in the appreciation of
properties securing the Mortgage Loans through a
participation in those loans.
(b) Narrative Description of Business
The Partnership's sole business is the origination and ownership
of the Mortgage Loans. The Partnership originally held two zero
coupon first mortgage loans and two zero coupon second mortgage
loans.
A description and history of the Partnership's four original
loans follows:
(1) On July 28, 1987, the Partnership purchased a 50% interest
in a zero coupon loan for $24,099,945 which included accrued
interest to the date of purchase of $2,099,945 on a mortgage loan
to EQK Green Acres, L.P. ("EQK"), a limited partnership which
owns and operates the Green Acres Mall in southwestern Nassau
County, Long Island, New York. This loan represented
approximately 35% of the Partnership's original loan portfolio.
The property consists of a mall anchored by four major department
stores and 13 freestanding outparcel buildings, located on a site
of approximately 93 acres. In August 1993, EQK secured financing
for a prepayment of the Partnership's loan. On August 19, 1993
the Partnership received a total of $49,174,622, of which
$44,624,814 represented the accreted value of the loan and
$4,549,808 represented a prepayment premium in accordance with
the terms of the loan agreement.
(2) On July 30, 1987, the Partnership originated a participating
zero coupon second mortgage loan in the amount of $17,500,000 to
417 Fifth Avenue Realty Company (the "Borrower"), a New York
general partnership which owned 417 Fifth Avenue, New York, New
York. This loan represented approximately 30% of the
Partnership's original loan portfolio. The property consists of
an eleven-story office building containing a total of 371,648
gross square feet located in midtown Manhattan. The Borrower was
in default on the loan since February 1992. In an effort to
preserve a portion of the Partnership's loan investment, the
Partnership exchanged the loan in early 1994 for an agreement to
share in the proceeds from sale of the property.
On May 10, 1994, Equitable Life Assurance Society of the United
States ("Equitable"), the holder of the first mortgage, sold the
417 Fifth Avenue property, which secured the Partnership's second
mortgage loan. Pursuant to the Intercreditor Agreement between
Equitable and the Partnership, the Partnership received
$1,565,079 out of the sale proceeds. In addition to the sale
proceeds, the Partnership obtained $453,637 from certain escrowed
reserve accounts which were added to the Partnership's cash
reserves to fund projected operating expenses and contingencies.
The assignment of the loan also resulted in the write-off of
$234,653 of deferred charges related to the original financing.
(3) On July 28, 1987, the Partnership purchased a 24% interest
in a participating zero coupon mortgage (the "Laurel Centre
Loan") for $5,555,431 which included accrued interest to the date
of purchase of $155,431 on a first mortgage loan to Laurel Owner
Partners Limited Partnership (the "Owner Partnership"), a
Maryland limited partnership which owns Laurel Centre (the
"Mall"), a regional shopping mall in Laurel, Prince George's
County, Maryland. The remaining 76% interest in the loan was
held by a real estate mortgage investment conduit (the "REMIC").
The Laurel Centre loan represented approximately 10% of the
Partnership's original loan portfolio, and matured on
October 15, 1996, with a total accreted value of $57,894,077, of
which $13,894,578 was the Partnership's share.
On or about October 9, 1996, after Shopco Laurel was unable to
refinance or sell the Mall on terms that would repay the Laurel
Centre Loan, Shopco Laurel entered into an agreement (the
"Agreement") with the Partnership and the REMIC (together, the
"Lenders"), pursuant to which the Lenders, among other things,
(a) indicated their intent to commence a foreclosure action on
the Laurel Centre Loan and appoint a receiver, on or after
October 16, 1996, and (b) agreed to release any claims that they
may have to any cash held by Shopco Laurel or its partners prior
to October 16, 1996. In addition, Shopco Laurel and the Lenders
agreed that all cash flow from the Mall generated on or after
October 16, 1996 would be paid to the Lenders. Foreclosure
proceedings were commenced by the Lenders on October 16, 1996,
and a receiver for the Mall was appointed. During the
foreclosure period, an unaffiliated third-party offered to
purchase the Partnership's interest in the Laurel Centre Loan at
a price equal to the amount the Partnership would have realized
if the Laurel Centre Loan were paid in full, including interest
at the non-default rate of 10.2% to the date of closing of the
purchase, less a $100,000 negotiated discount. The Partnership
closed the sale of its interest in the Laurel Centre Loan on
January 24, 1997, for total proceeds of $14,184,322.
(4) On July 28, 1987, the Partnership purchased a zero coupon
second mortgage loan for $14,844,597, (the "Hotel Loan") which
included accrued interest to date of purchase of $1,519,597 on a
second mortgage loan to Union Square Hotel Partners, L.P. ("Union
Square", formerly Shearson Union Square Associates L.P.) which
owns the Grand Hyatt San Francisco Hotel (the "Hotel") in San
Francisco, California. This loan represented approximately 25%
of the Partnership's original loan portfolio and, matured on
January 2, 1997, with a total accreted value of $42,207,709.
During 1992, Union Square defaulted on its mortgages and
subsequently completed a restructuring of its debt, including the
Partnership's loan. See Note 4 "Loans Receivable" of the Notes
to Financial Statements for a discussion of the restructuring and
the modified terms of the Partnership's zero coupon second
mortgage loan.
In September 1996, Union Square announced that it had entered
into exclusive negotiations to sell the Hotel to one prospective
purchaser. In early November 1996, Union Square agreed to sell
the Hotel to an affiliate of California Hyatt Corporation, the
current operator of the Hotel ("Hyatt"), for $126,900,000 in cash
and the assumption of certain debt owed to an affiliate of Hyatt.
Based upon the negotiated selling price, Union Square would have
sufficient proceeds to pay the first mortgage ("First Mortgage
Loan") balance of approximately $89.7 million as of December 31,
1996. The remaining proceeds however, would be insufficient to
pay the entire balance of the Hotel Loan. The general partner of
Union Square is an affiliate of the General Partner of the
Partnership. Accordingly, the General Partner retained a
nationally-recognized investment bank (the "Partnership's
Independent Advisor") to negotiate with Union Square regarding
the proposed sale of the Hotel, and to render an opinion (as
required by the Partnership Agreement) to the effect that such
transaction is fair, from a financial point of view, and at least
as favorable to the Partnership as such transaction would be if
entered into with an unaffiliated entity in similar
circumstances. The Partnership's Independent Advisor negotiated
an allocation agreement (the "Allocation Agreement") on behalf of
the Partnership, with a similar representative engaged by Union
Square. Pursuant to the terms of the Allocation Agreement, the
Partnership agreed to accept $30,250,000 in full satisfaction of
all of Union Square's obligations to the Partnership. On
February 21, 1997, Union Square sold the Hotel and the
Partnership received $30,250,000, in accordance with the
Allocation Agreement.
See Note 4 "Loans Receivable" of the Notes to the Financial
Statements for a discussion of the terms of the Partnership's
zero coupon mortgage loans.
In 1987 the Partnership purchased $1,452,974 in zero coupon
Treasury securities with net proceeds from the offering not
invested in the zero coupon mortgage loans. These zero coupon
Treasury securities yielded 9.1% with interest compounded
semi-annually and matured on August 15, 1996. At maturity, the
treasury securities were converted to cash and added to the
Partnership's reserves.
(c) Employees
The Partnership has no employees.
Item 2. Properties
The Partnership owns no property other than its interests in the
mortgage loans.
Item 3. Legal Proceedings
On January 24, 1997, certain holders of Units of the Partnership
commenced an action in Delaware Chancery Court against the
General Partner of the Partnership, Union Square Hotel
Partners, L.P., its general partner, and others. The Partnership
was named as a nominal defendant. The litigation seeks to
invalidate the Partnership's acceptance of a discounted pay-off
of the Union Square loan pursuant to the Allocation Agreement
entered into between Union Square Hotel Partners, L.P. and the
Partnership. The litigation does not challenge the closing of
the sale of the Hotel, but merely the allocation of the proceeds
from the sale in accordance with the Allocation Agreement. The
litigation was filed as a purported class action on behalf of all
Unit holders and as a purported derivative action in the name of
the Partnership. The plaintiffs also seek unspecified damages.
The Partnership has retained counsel and is seeking an expedited
resolution of this litigation.
To minimize the risk that the litigation might impede the closing
of the sale of the Hotel, the Partnership and Union Square Hotel
Partners, L.P.(the "Hotel Borrower") entered into a Non-
Distribution and Security Agreement, dated February 21, 1997, and
related documents, pursuant to which certain net sales proceeds
from the sale of the Hotel otherwise distributable to the Hotel
Borrower, in the amount of approximately $6,911,149, were
deposited in a restricted bank account (the "Blocked Account")
with a nationally recognized commercial bank. The terms of the
Blocked Account generally prohibit the release of any funds
therefrom on or prior to April 21, 1997. In addition, Union
Square granted the Partnership a security interest in the Blocked
Account until April 21, 1997, to secure certain of Union Square's
obligations to the Partnership, as they may be determined by the
litigation. If the litigation is not resolved on or prior to
April 21, 1997, or the Blocked Account is not extended by mutual
agreement of Union Square and the Partnership or by order of the
court, Union Square will receive the funds held therein, free
from the Partnership's security interest in such funds. There
can be no assurance that the litigation will be resolved, the
Blocked Account extended or a court order obtained on or prior to
April 21, 1997. The Partnership and its General Partner are
continuing their efforts to resolve the litigation.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted to the Unitholders for a vote during
the fourth quarter of the year for which this report is filed.
PART II
Item 5. Market for Registrant's Limited Partnership Units and
Related Security Holder Matters
(a) Market Information
There is no established trading market for the Units nor is there
anticipated to be any in the future.
(b) Holders
At December 31, 1996, there were 8,162 Unitholders.
(c) Distributions
On September 23, 1993, the Partnership made a cash distribution
to the partners totaling $48,674,622, or $6.84 per Unit, relating
to the prepayment of the EQK Loan.
On July 15, 1994, the Partnership paid a cash distribution
totaling $1,508,250, or $.21 per Unit, resulting from the
Partnership's share of sale proceeds from 417 Fifth Avenue
property in May 1994. In addition to the sale proceeds, the
Partnership obtained $453,637 from certain reserve accounts which
were added to the Partnership's cash reserves to fund projected
operating expenses and contingencies.
The Partnership paid a cash distribution to the partners on
February 18, 1997, totaling $14,236,364, or $2.00 per Unit, as a
result of the Partnership's sale of its interest in the Laurel
Centre Loan.
In April 1997 the Partnership will pay a cash distribution to the
partners in the amount of $28,472,727, or $4.00 per Unit, as a
result of having received $30,250,000 as full satisfaction of the
Union Square loan in accordance with the Allocation Agreement
dated November 1, 1996. Upon liquidation of the Partnership,
which is expected to occur during 1997, any remaining unused
working capital will also be distributed.
Item 6. Selected Financial Data
(dollars in thousands except per Unit data)
For the years ended December 31,
1996 1995 1994 1993 1992
Net Investment Income (1) $ 30,673 $ 1,356 $ 1,221 $ 4,002 $ 5,057
Loan Prepayment Premium -- -- -- 4,550 --
Total Income 30,681 1,363 3,250 8,625 5,150
Net Income (Loss) 30,248 1,088 2,677 7,707 (48,628)(2)
Net Income (Loss) per
Limited Partnership
Unit (7,047,000 outstanding) 4.29 .15 .38 1.09 (6.83)(2)
Cash Distributions per
Limited Partnership Unit -- -- .21(3) 6.84(4) --
Total Assets 45,176 14,934 13,838 12,688 53,662
(1) Includes recovery of $25,029,061 in 1996, and allowances of
$3,770,483 in 1995, $5,016,635 in 1994, $7,184,222 in 1993 and
$6,425,950 in 1992. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes valuation charge of $52,874,238 against the Union
Square and 417 Fifth Avenue loans.
(3) Represents the July 1994 distribution of proceeds from the
Partnership's share of the proceeds from the sale of the 417
Fifth Avenue property in May 1994.
(4) Represents the September 1993 distribution of proceeds of
the prepayment of the EQK Loan in August 1993.
The above selected financial data should be read in conjunction
with the Financial Statements and notes thereto in Item 8,
"Financial Statements and Supplementary Data."
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Partnership's primary assets are its zero coupon mortgage
loans. The Partnership originally held two zero coupon first
mortgage loans and two zero coupon second mortgage loans. During
1993, the loan secured by EQK Green Acres Mall was repaid
together with a prepayment premium. In early 1994, the loan
secured by 417 Fifth Avenue was retired by means of a transaction
which resulted in the receipt of proceeds upon sale of the
property. Below is a summary of the status of the Partnership's
two other loans secured by Laurel Centre Mall and the Grand Hyatt
San Francisco.
Laurel Centre Loan The Partnership held a 24% interest in a
zero coupon first mortgage loan in the original amount of
$5,555,431. The mortgage note matured on October 15, 1996, with
a fully accreted value of $57,894,075, of which $13,894,578 was
the Partnership's share. On or about October 9, 1996, after
Shopco Laurel was unable to refinance or sell the Mall on terms
that would repay the Laurel Centre Loan, Shopco Laurel entered
into an agreement (the "Agreement") with the Partnership and the
REMIC (together, the "Lenders"), pursuant to which the Lenders,
among other things, (a) indicated their intent to commence a
foreclosure action on the Laurel Centre Loan and appoint a
receiver, on or after October 16, 1996, and (b) agreed to release
any claims that they may have to any cash held by Shopco Laurel
or its partners prior to October 16, 1996. In addition, Shopco
Laurel and the Lenders agreed that all cash flow from the Mall
generated on or after October 16, 1996 would be paid to the
Lenders. Foreclosure proceedings were commenced by the Lenders
on October 16, 1996, and a receiver for the Mall was appointed.
During the foreclosure period, an unaffiliated third-party
offered to purchase the Partnership's interest in the Laurel
Centre Loan at a price equal to the amount the Partnership would
have realized if the Laurel Centre Loan were paid in full,
including interest at the non-default rate of 10.2% to the date
of closing of the purchase, less a $100,000 negotiated discount.
The Partnership closed the transaction on January 24, 1997, for
total proceeds of $14,184,322. As a result, the Partnership paid
a cash distribution to the partners on February 18, 1997,
totaling $14,236,364, or $2.00 per Unit.
Union Square Loan The Partnership held a zero coupon second
mortgage (the "Hotel Loan") in the original amount of $13,325,000
funded to Union Square Hotel Partners L.P. ("Union Square,"
formerly Shearson Union Square Associates L.P.), which owned the
Grand Hyatt San Francisco Hotel (the "Hotel") located in San
Francisco, California. The Partnership's loan was subordinate to
a first mortgage held by the Bank of Nova Scotia (the "Bank") in
the original principal amount of $70,000,000. On June 30, 1992,
Union Square consummated a restructuring of its financing and
property management arrangements with the Bank, the Partnership
and certain other creditors. A detailed description of the terms
of the restructuring is incorporated herein by reference to the
Partnership's Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 14, 1992.
During the third quarter of 1992, the Partnership received an
appraisal that indicated that the Hotel's value was insufficient
to collateralize its loan. Accordingly, the General Partner
fully reserved the carrying value of the loan during the third
quarter of 1992. The valuation allowance for this loan at
December 31, 1995 totaled $37,999,250, representing the accreted
value of the loan at such date.
In early November 1996, Union Square agreed to sell the Hotel to
an affiliate of California Hyatt Corporation, the current
operator of the Hotel ("Hyatt"), for $126,900,000 in cash and the
assumption of certain debt owed to an affiliate of Hyatt. Based
upon the negotiated selling price, Union Square would have
sufficient proceeds to pay the first mortgage ("First Mortgage
Loan") balance of approximately $89.7 million as of December 31,
1996. The remaining proceeds however, would be insufficient to
pay the entire balance of the Hotel Loan. The general partner of
Union Square is an affiliate of the General Partner of the
Partnership. As required by the Partnership Agreement, the
General Partner retained a nationally-recognized investment bank
(the "Partnership's Independent Advisor") to negotiate with Union
Square regarding the proposed sale of the Hotel, and to render an
opinion to the effect that such transaction is fair, from a
financial point of view, and at least as favorable to the
Partnership as such transaction would be if entered into with an
unaffiliated entity in similar circumstances. The Partnership's
Independent Advisor negotiated an allocation agreement (the
"Agreement") on behalf of the Partnership, with a similar
representative engaged by Union Square. Pursuant to the terms of
the Agreement, the Partnership agreed to accept $30,250,000 in
full satisfaction of all of Union Square's obligations to the
Partnership, which totaled approximately $42,184,471 at
December 31, 1996.
Based upon the circumstances as discussed above and in particular
the negotiated sales price of the Hotel, the Partnership has
elected to reduce the valuation allowance reflected on the
Partnership's financial statements as of September 30, 1996. As
a result, the second mortgage loan has an indicated value at
December 31, 1996 of $29,500,000.
On February 21, 1997, Union Square sold the Hotel and the
Partnership received $30,250,000, in accordance with the
Allocation Agreement. As a result, the Partnership will pay a
cash distribution to the partners in April 1997, totaling
$28,472,727, or $4.00 per Unit. As of February 21, 1997, the
Partnership had sold or received payment on all of its original
zero coupon mortgage loan investments. Subject to the pending
litigation discussed in Item 3, the General Partner will seek to
liquidate the Partnership and make a final cash distribution to
the limited partners prior to year-end 1997.
On August 27, 1996, an unaffiliated third party: Moraga Fund 1,
L.P., a California limited partnership; Cal-Kan, Inc., a Kansas
corporation; Moraga Gold LLC, a California limited liability
company; Previously Owned Mortgage Partnerships Income Fund 3,
L.P., a California limited partnership; Accelerated High Yield
Institutional Fund I, L.P., a Florida limited partnership;
Accelerated High Yield Institutional Investors, L.P., a Florida
limited partnership; Accelerated High Yield Income Fund I, L.P.,
a Florida limited partnership; Accelerated High Yield Income Fund
II, L.P., a Florida limited partnership; Beagle Fund 7, a
Colorado limited partnership; and Summit Venture, an Arizona
general partnership, (collectively know as the "Bidders"),
commenced an unsolicited tender offer to purchase up to 2,818,000
Units (40% of the total outstanding Units) at a price of $2.10,
net of any distributions paid to limited partners after the date
of the offer and until its expiration. On October 4, 1996, the
tender offer expired with the Bidders accepting for purchase
37,200 Units, or approximately 0.53% of the outstanding Units.
At December 31, 1996, the Partnership had cash and cash
equivalents of $1,486,065, and compared to $910,771, at December
31, 1995. The increase in cash and cash equivalents is mainly
due to the maturity of the U.S. Treasury securities on August 15,
1996, which were transferred to cash, partially offset by the
Partnership meeting its normal operating expenses.
Results of Operations
1996 versus 1995
Net income for the year ended December 31, 1996, totaled
$30,248,408 compared with $1,087,928 for 1995. The increase is
mainly due to higher net investment income as a result of the
recovery of the valuation allowance on the Union Square mortgage
loan, partially offset by higher expenses.
Net investment income for the year ended December 31, 1996,
totaled $30,672,991 compared to $1,355,969 for 1995. The increase
is primarily attributable to the write-up of the Union Square
loan to $29,500,000 as of September 30, 1996, and the compounding
of interest on both the Union Square and Laurel Centre loans.
Total expenses were $433,023 and $274,941, respectively, for the
years ended December 31, 1996 and 1995. The increase in 1996 is
attributable to higher general and administrative expenses. For
the year ended December 31, 1996, general and administrative
expenses were $254,174 compared to $96,089 for 1995. The
increase is the result of higher legal fees related to the
foreclosure of the Laurel Centre Loan and higher printing costs
related to the tender offer.
1995 versus 1994
Net income for the year ended December 31, 1995, totaled
$1,087,928 compared with $2,677,094 for 1994. The decrease in
net income from 1994 reflects the inclusion in 1994 of a gain on
mortgage retirement of the 417 Fifth Avenue loan totaling
$2,018,716, partially offset by a decrease in amortization of
deferred charges.
Net investment income for the year ended December 31, 1995,
totaled $1,355,969 compared to $1,221,305 for 1994. The increase
is primarily attributable to the compounding of interest on the
Laurel Centre loan and higher interest rates earned on the
Partnership's cash balances in 1995, partially offset by the
retirement of the 417 Fifth Avenue loan.
Total expenses were $274,941 and $572,875, for the years ended
December 31, 1995 and 1994, respectively. The decrease in 1995
is primarily attributable to a decrease in amortization of
deferred charges due to the write-off of deferred charges
relating to the 417 Fifth Avenue loan in 1994. The decrease in
total expenses is also attributable to lower general and
administrative expenses resulting from lower legal and other
professional fees in 1995.
Item 8. Financial Statements and Supplementary Data
See Item 14 "Exhibits, Financial Statement Schedules, and Reports
on Form 8-K" for a listing of the financial statements filed with
this 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 Registrant
The Partnership has no officers or directors. The General
Partner of the Partnership is CG Realty Funding Inc. (formerly
Shearson Lehman Realty Funding Inc.), a Delaware Corporation and
affiliate of Lehman Brothers Inc. The General Partner manages and
controls substantially all of the Partnership's affairs and has
general responsibility and ultimate authority in all matters
affecting the Partnership's business.
Certain officers and directors of CG Realty Funding Inc. are now
serving (or in the past have served) as officers and directors of
entities which have sought protection under the provisions of the
Federal Bankruptcy Code. The partnerships which have filed
bankruptcy petitions own real estate which has been adversely
affected by the economic conditions in the markets in which that
real estate is located and, consequently, the partnerships sought
the protection of the bankruptcy laws to protect the
partnerships' assets from loss through foreclosure.
The directors and executive officers of the General Partner are
as follows:
Name Office
Kenneth L. Zakin Director and President
Moshe Braver Director
Daniel M. Palmier Vice President and Chief Financial Officer
Kenneth L. Zakin, 49, is a Senior Vice President of Lehman
Brothers and has held such title since November 1988. He is
currently a senior manager in Lehman Brothers' Diversified Asset
Group and was formerly group head of the Commercial Property
Division of Shearson Lehman Brothers' Direct Investment
Management Group responsible for the management and restructuring
of limited partnerships owning commercial properties throughout
the United States. From January 1985 through November 1988, Mr.
Zakin was a Vice President of Shearson Lehman Brothers Inc. Mr.
Zakin was a director of Lexington Corporate Properties, Inc. from
1993 to 1996. He is a member of the Bar of the State of New York
and previously practiced as an attorney in New York City from
1973 to 1984 specializing in the financing, acquisition,
disposition, and restructuring of real estate transactions. Mr.
Zakin is a member of the Real Estate Lender's Association and is
currently an associate member of the Urban Land Institute and a
member of the New York District Council Advisory Services
Committee. He received a Juris Doctor degree from St. John's
University School of Law in 1973 and a B.A. degree from Syracuse
University in 1969.
Moshe Braver, 43, is currently a Managing Director of Lehman
Brothers and has held such position since October 1985. During
this time, he has held positions with the Business Analysis
Group, International and Capital Markets Administration and
currently, with the Diversified Asset Group. Mr. Braver joined
Shearson Lehman Brothers in August 1983 as Senior Vice President.
Prior to joining Shearson, Mr. Braver was employed by the
accounting firm of Coopers & Lybrand from January 1975 through
August 1983 as an Audit Manager. He received a Bachelor of
Business Administration degree from Bernard Baruch College in
January 1975 and is a Certified Public Accountant.
Daniel M. Palmier, 35, is a Vice President of Lehman Brothers
Inc. in its Diversified Asset Group, and has been employed by
Lehman Brothers since June 1990. He is responsible for the asset
management and restructuring of a diverse portfolio of assets
including commercial real estate and mortgages. From March of
1988, Mr. Palmier worked for LJ Hooker Corporation, Inc. and held
positions of Senior Associate of Mergers and
Acquisitions/Corporate Finance and Vice President in the Real
Estate division. From September 1986, Mr. Palmier was a Real
Estate Acquisitions Officer at John Anthony Associates, Inc. in
New York. From June 1983, Mr. Palmier worked in the public
accounting field, most notably for the firm Price Waterhouse.
Mr. Palmier, a New York Certified Public Accountant, earned a
Masters of Science in Real Estate Degree from New York University
in 1995 and graduated from the University of Notre Dame in 1983
with a B.B.A. in Accounting.
Item 11. Executive Compensation
All of the Directors and Executive Officers of the General
Partner are employees of Lehman Brothers Inc. They do not
receive any salaries or other compensation from the Partnership.
See Item 13 "Certain Relationships and Related Transactions" with
respect to a description of certain transactions of the General
Partner or its affiliates with the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security ownership of certain beneficial owners
As of December 31, 1996, no person was known by the Partnership
to be the beneficial owner of more than five percent (5%) of the
outstanding Units of the Partnership.
(b) Security ownership of management
As of December 31, 1996 none of the officers and directors of the
General Partner owned any Units.
(c) Changes in control
None.
Item 13. Certain Relationships and Related Transactions
The Partnership has and will continue to have certain
relationships with the General Partner and its affiliates, as
discussed below. However, there have been no direct financial
transactions between the Partnership and the directors or
executive officers of the General Partner.
The General Partner is entitled to an Annual Investment
Management Fee of $75,000 for managing the Partnership's
portfolio of mortgages and Treasury securities.
First Data Investor Services Group (formerly The Shareholder
Services Group), an unaffiliated company, provides partnership
accounting and investor relations services for the Partnership.
The Partnership's transfer agent and certain tax reporting
services are provided by Service Data Corporation, an
unaffiliated company. A summary of amounts paid to the General
Partner or its affiliates during the past three fiscal years is
included in Note 5 "Transactions with Related Parties" of the
Notes to Financial Statements.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) (2) Financial statements and financial statement
schedules:
CAPITAL GROWTH MORTGAGE INVESTORS, L.P.
Page
Independent Auditors' Report F-1
Balance Sheets - At December 31, 1996 and 1995 F-2
Statements of Partners Capital (Deficit) - For the years
ended December 31, 1996, 1995 and 1994 F-2
Statements of Operations - For the years ended December 31,
1996, 1995 and 1994 F-3
Statements of Cash Flows - For the years ended December 31,
1996, 1995 and 1994 F-4
Notes to the Financial Statements F-5
Schedule II - Valuation and Qualifying Accounts F-14
Schedule IV - Mortgage Loans on Real Estate F-15
(3) Exhibits:
3.1 Amended and Restated Agreement of Limited Partnership
(filed as Exhibit A to Prospectus dated October 15, 1986)
is hereby incorporated by reference.
10.1 Amended and Restated Shearson Union Square Associates
Limited Partnership Zero Coupon Mortgage Note due January
2, 1997 (filed as Exhibit 10(A) to the Partnership's
Current Report on Form 8-K filed July 14, 1992) is hereby
incorporated by reference.
10.2 Settlement of Loan Defaults and Bankruptcy (Filed as
exhibit 10.2 to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1994) is hereby
incorporated by reference.
(A) Intercreditor Agreement dated August 5, 1993 between
Capital Growth Mortgage Investors, L.P. and the
Equitable Life Assurance Society of The United States.
(B) Letter Agreement dated September 1, 1993 between The
Equitable Life Assurance Society of The United States
and 417 Fifth Avenue Realty Company.
(C) Letter Agreement dated September 22, 1993 between
Capital Growth Mortgage Investors, L.P. and the
Equitable Life Assurance Society of The United States.
27 Financial Data Schedule
(b) Reports on Form 8-K:
A current report on Form 8-K was filed on November 8, 1996,
disclosing information about both the Union Square and
Laurel Centre loans.
A current report on Form 8-K was filed on February 5, 1997,
disclosing information about the Partnership's sale of its
interest in the Laurel Centre loan.
A current report on Form 8-K was filed on February 26, 1997,
disclosing information about the sale of the Union Square
Hotel.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 28, 1997 CAPITAL GROWTH MORTGAGE INVESTORS L.P.
BY: CG Realty Funding Inc.
General Partner
BY: /s/ Kenneth L. Zakin
Name: Kenneth L. Zakin
Title: Director and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates
indicated.
CG REALTY FUNDING INC.
A General Partner
Date: March 28, 1997 BY: /s/ Kenneth L. Zakin
Kenneth L. Zakin
Director and President
Date: March 28, 1997 BY: /s/ Moshe Braver
Moshe Braver
Director
Date: March 28, 1997 BY: /s/ Daniel M. Palmier
Daniel M. Palmier
Vice President and Chief Financial Officer
Independent Auditors' Report
The Partners
Capital Growth Mortgage Investors Fund, L.P.:
We have audited the financial statements of Capital Growth
Mortgage Investors Fund, L.P. (a Delaware limited partnership) as
listed in the accompanying index. In connection with our audits
of the financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Capital Growth Mortgage Investors Fund, L.P. as of December
31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, subsequent to
December 31, 1996, the General Partner liquidated the
Partnership's remaining mortgage loan assets. The General
Partner will seek to liquidate the Partnership in 1997.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 26, 1997
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Zero coupon second mortgage loan receivable,
net of unamortized discount of $459 in 1996
and $4,779 in 1995 (Note 4) $ 42,184,012 $ 37,999,250
Less valuation allowance (12,684,012) (37,999,250)
29,500,000 --
Zero coupon first mortgage loan receivable (Note 4) 14,189,837 12,846,120
Cash and cash equivalents 1,486,065 910,771
Investments in U.S. Treasury securities -- 1,073,105
Notes receivable, net of allowance for doubtful
accounts of $2,611,952 in 1996 and 1995 (Note 4) -- --
Deferred charges, net of accumulated amortization
of $882,731 in 1995 -- 103,849
Total Assets $ 45,175,902 $14,933,845
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 34,777 $ 33,096
Due to affiliates (Note 5) 7,029 12,794
Total Liabilities 41,806 45,890
Partners' Capital (Deficit):
General Partner (983,819) (983,819)
Limited Partners (7,047,000 units outstanding) 46,117,915 15,871,774
Total Partners' Capital 45,134,096 14,887,955
Total Liabilities and Partners' Capital $ 45,175,902 $ 14,933,845
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
Limited General
Partners Partner Total
Balance at December 31, 1993 $13,600,002 $(968,819) $12,631,183
Cash distributions to foreign
limited partners (16,068) -- (16,068)
Cash distributions to partners (1,477,182) (15,000) (1,492,182)
Net Income 2,677,094 -- 2,677,094
Balance at December 31, 1994 14,783,846 (983,819) 13,800,027
Net Income 1,087,928 -- 1,087,928
Balance at December 31, 1995 15,871,774 (983,819) 14,887,955
Cash distributions to foreign
limited partners (2,267) -- (2,267)
Net Income 30,248,408 -- 30,248,408
Balance at December 31, 1996 $46,117,915 $(983,819) $45,134,096
Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Interest income $ 5,643,930 $ 5,126,452 $ 6,237,940
Recovery of (allowance for)
doubtful accounts (Note 4) 25,029,061 (3,770,483) (5,016,635)
Net investment income 30,672,991 1,355,969 1,221,305
Miscellaneous income (Note 5) 8,440 6,900 9,948
Gain on mortgage retirement (Note 4) -- -- 2,018,716
Total Income 30,681,431 1,362,869 3,249,969
Expenses
Amortization of deferred charges 103,849 103,852 370,799
General and administrative (Note 5) 254,174 96,089 127,076
Investment management fee (Note 5) 75,000 75,000 75,000
Total Expenses 433,023 274,941 572,875
Net Income $30,248,408 $ 1,087,928 $ 2,677,094
Net Income Allocated:
To the General Partner $ -- $ -- $ --
To the Limited Partners 30,248,408 1,087,928 2,677,094
$30,248,408 $ 1,087,928 $ 2,677,094
Per limited partnership unit
(7,047,000 outstanding) $4.29 $.15 $.38
Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net income $30,248,408 $1,087,928 $2,677,094
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Gain on mortgage retirement -- -- (2,018,716)
Allowance for (recovery of)
doubtful accounts (25,315,238) 3,770,483 5,016,635
Amortization of deferred charges 103,849 103,852 370,799
Amortization of discount on loan (4,320) (4,317) (4,318)
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Zero coupon mortgage loan
interest receivable (5,524,159) (4,982,638) (6,113,595)
Accounts receivable -- -- 50,000
Investment in U.S. Treasury securities 1,073,105 (91,371) (83,590)
Accounts payable and accrued expenses 1,681 1,531 (19,270)
Due to affiliates (5,765) 6,544 351
Net cash provided by (used for)
operating activities 577,561 (107,988) (124,610)
Cash Flows From Investing Activities
Proceeds from retirement of mortgage loan -- -- 2,018,716
Net cash provided by investing activities -- -- 2,018,716
Cash Flows From Financing Activities
Cash distributions to partners -- -- (1,492,182)
Distributions - income tax withholdings
to foreign partners (2,267) -- (16,068)
Net cash used for financing activities (2,267) -- (1,508,250)
Net increase (decrease) in cash
and cash equivalents 575,294 (107,988) 385,856
Cash and cash equivalents,
beginning of period 910,771 1,018,759 632,903
Cash and cash equivalents,
end of period $1,486,065 $ 910,771 $ 1,018,759
Supplemental Disclosure of
Cash Flow Information:
Included in the recovery of doubtful accounts are $286,177 of collection costs
paid to recover the Second Mortgage reducing the recovery from $25,315,238 to
$25,029,061 on the Statements of Operations.
Notes to the Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
Capital Growth Mortgage Investors, L.P. (formerly Shearson Lehman
Pension & Retirement Investors Fund, L.P.), (the "Partnership"),
a Delaware limited partnership, was formed on July 30, 1986 for
the purpose of investing in and originating zero coupon first and
second mortgage loans made for purposes of financing the
acquisition of properties by limited partnerships sponsored by
affiliates of CG Realty Funding Inc. (formerly Shearson Lehman
Realty Funding Inc.), (the "General Partner"), an affiliate of
Lehman Brothers Inc. and by unaffiliated entities or to refinance
existing mortgage debt. The initial capital was $200,
representing capital contributions of $100 by the General Partner
and $100 by Shearson Zero Coupon Depositary Corp.
On July 31, 1993, certain of Shearson Lehman Brothers Inc.'s
domestic retail brokerage and management businesses were sold to
Smith Barney, Harris Upham & Co. Inc. Included in the purchase
was the name "Shearson." Consequently, the General Partner's
name was changed to CG Realty Funding Inc. to delete any
reference to "Shearson."
The agreement of limited partnership authorizes the issuance of
30,000,000 Depositary Units (the "Units"), which represent
assignments of the economic and certain other rights attributable
to the Partnership interests. The offering period ended on June
30, 1987 at which time 7,047,000 Depositary Units had been issued
and aggregate capital contributed by investors, (the "Limited
Partners") was $70,470,000.
Subsequent to December 31, 1996, the General Partner liquidated
the Partnership's remaining mortgage loan assets and will seek to
liquidate the Partnership and pay a final cash distribution prior
to year end 1997.
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have
been prepared on the accrual basis of accounting in accordance
with generally accepted accounting principles. Interest income
on the zero coupon loans is recognized based upon the contractual
amounts due. Other income is recognized as earned and expenses
are recorded as obligations are incurred.
Accounting for Loans Receivable - The Partnership accounts for its
loans using the guidance of Statement of Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("FAS
114") as amended by FAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." As
of December 31, 1996, the Partnership's zero coupon mortgage loan
receivables are valued based upon the individual loan sale
transaction reduced for estimates of costs to sell (See Note 4).
As of December 31, 1995, the loans were valued at the lower of
carrying value or fair market value.
Cash Equivalents - Cash equivalents consist of short-term, highly
liquid investments with maturities of three months or less from
the date of issuance. The carrying value approximates fair value
because of the short maturity of these instruments.
Concentration of Credit Risk - Financial instruments which
potentially subject the Partnership to a concentration of credit
risk principally consist of cash in excess of the financial
institutions' insurance limits. The Partnership invests
available cash with high credit quality financial institutions.
Marketable securities - Marketable securities, which consisted of
United States Treasury securities, were carried at amortized
cost, which approximated market value. These securities were
held through maturity.
Deferred Charges - Deferred charges consisted of mortgage placement
and mortgage evaluation fees. These fees were amortized using
the straight-line method over the original terms of the
respective loans.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Income Taxes - No provision is made for income taxes since such
liability is that of the individual partners.
3. Partnership Agreement
Allocation of income and losses - Net income is allocated 100% to
the Limited Partners until such time as each investor has
received an amount equal to their Preferred Return (a 14% annual
cumulative non-compounded return on their adjusted capital
contribution). Additional net income is allocated 100% to the
General Partner until such allocation equals 2% of the Gross
Proceeds received from the sale of limited partnership units
($70,470,000). Thereafter, net income is allocated 98% to the
Limited Partners and 2% to the General Partner. Net loss shall
be allocated 99% to the Limited Partners and 1% to the General
Partner. As of December 31, 1996, the Limited Partners have not
yet received their cumulative annual return.
Cash Distributions - Adjusted cash from operations and repayment
proceeds shall be distributed 99% to the Limited Partners and 1%
to the General Partner.
Dissolution of Partnership - If, upon dissolution of the
Partnership, the General Partner has a negative capital account,
it shall contribute capital equal to the amount of the deficit.
In no event, however, shall the required capital contribution
exceed 1.01% of the total capital contributed by the Limited
Partners less all prior contributions by the General Partner.
4. Loans Receivable
Descriptions of remaining and former loans in the Partnership's
portfolio follow:
Remaining Loan Investments
The Union Square Loan - The Partnership owns a zero coupon second
mortgage loan (the "Second Mortgage") to Union Square Hotel
Partners, L.P. ("Union Square" or the "Borrower"), formerly
Shearson Union Square Associates limited partnership, which is
collateralized by the Grand Hyatt San Francisco Hotel in San
Francisco, California. The principal amount of the first
mortgage is $70,000,000 (the "First Mortgage").
On January 9, 1992, the Bank of Nova Scotia (the "First
Mortgagee") delivered a notice of default under the First
Mortgage note as a result of Union Square's failure to pay a
scheduled interest payment due on January 2, 1992. On March 9,
1992, the First Mortgagee recorded with the San Francisco County
Recorder a Notice of Default and Election to Sell under Deed of
Trust (the "Default Notice"). An event of default under the
First Mortgage constitutes an event of default under the
Partnership's Second Mortgage.
On March 17, 1992, the Partnership delivered to Union Square a
notice of acceleration of the Second Mortgage. Pursuant to the
terms of the mortgage agreement, Union Square also owed an
additional premium (the "Default Premium") as a result of the
Default Notice in the amount of $4,476,875. Upon acceleration,
the terms of the Second Mortgage also call for interest to accrue
at a default rate of 15.5% on the accreted value of the loan,
including the Default Premium.
On June 30, 1992, Union Square consummated a restructuring of its
financing and property management arrangements with the First
Mortgagee, the Partnership, certain other creditors and the hotel
management company. As part of the restructuring, the
Partnership agreed to reduce the interest rate on its Second
Mortgage Loan from 12.5% to 11%. The reduction of the interest
rate was effective from and after January 2, 1992. The
Partnership also agreed to waive the mandatory prepayments of
interest of $261,199, $1,014,379 and $1,996,457, otherwise
required to be paid on January 2, 1995, January 2, 1996 and
January 2, 1997, respectively. As a result of these changes, the
total revised amount due upon maturity was $42,207,709 or
approximately $3 million less than the amount that would have
otherwise been due if the interest rate remained at 12.5% and the
scheduled interest prepayments been made as scheduled. The
Partnership also agreed to waive any prepayment (or yield
maintenance) charges in connection with the prepayment of all or
any portion of the principal or accrued interest under the Second
Mortgage.
Also, as part of the restructuring, Lehman Brothers Holdings Inc.
(formerly Shearson Lehman Brothers Holdings Inc., hereafter
referred to as "Lehman"), assigned to the Partnership two
unsecured interest bearing notes previously executed by Union
Square and held by Lehman (the "Unsecured Notes"). The total
indebtedness evidenced by the Unsecured Notes (and certain
related obligations of Union Square) was $2,611,952 in original
principal plus accrued interest. The Unsecured Notes accrued
interest at the following interest rates: (a) 9.699% per annum on
$1,000,000 of the indebtedness represented by the Unsecured
Notes; and (b) the prime rate plus 1% per annum on the remaining
portion of the indebtedness represented by the Unsecured Notes.
The Unsecured Notes matured simultaneously with the maturity of
the Second Mortgage. At that time Union Square will also be
required to pay all accrued but unpaid interest on the Unsecured
Notes.
During the third quarter of 1992, the Partnership received an
appraisal that indicated that the Hotel's value was insufficient
to collateralize its loan. Accordingly, the General Partner
fully reserved the carrying value of the second mortgage and the
unsecured notes during the third quarter of 1992.
In September 1996, the Borrower announced that it had entered
into exclusive negotiations to sell the Hotel to one prospective
purchaser. In November 1996, the Borrower agreed to sell the
Hotel to an affiliate of California Hyatt Corporation, the
current operator of the Hotel ("Hyatt"), for $126,900,000 in cash
and the assumption of certain debt owed to an affiliate of the
prospective buyer.
In connection with any material transactions entered into between
the Partnership and any affiliate, the Partnership's Amended and
Restated Agreement of Limited Partnership requires that the
General Partner of the Partnership retain an independent adviser
to render an opinion to the effect that such transaction is fair,
from a financial point of view, and at least as favorable to the
Partnership as such transaction would be if entered into with an
unaffiliated entity in similar circumstances. Accordingly, the
Partnership engaged a nationally-recognized independent
investment bank (the "Partnership's Independent Advisor") to
negotiate with the Borrower regarding the proposed sale of the
Hotel and to render the required opinion.
On behalf of the Partnership, the Partnership's Independent
Advisor negotiated, with a similar representative engaged by the
Borrower, an allocation that was incorporated in an agreement
dated as of November 1, 1996 (the "Allocation Agreement") and
rendered the aforementioned opinion. Pursuant to the terms of
the Allocation Agreement, the Partnership has agreed (a) subject
to certain limitations, to temporarily forbear during the
pendency of the sale of the Hotel from pursuing foreclosure
action on the Hotel Loan, and (b) to accept $30,250,000 in full
satisfaction of all of the Borrower's obligations to the
Partnership (including unsecured debt obligations and the
obligation to reimburse the Partnership for certain costs).
Based upon the circumstances as discussed above, the Partnership
adjusted the carrying value of its Second Mortgage. The estimate
is based upon the amount to be received under the Allocation
Agreement less the Partnership's estimated costs to settle the
loan.
On February 21, 1997, Union Square sold the Hotel and the
Partnership received $30,250,000, in accordance with the
Allocation Agreement.
The Laurel Centre Loan - The Partnership holds a 24% interest in a
zero-coupon mortgage loan (the "Laurel Centre Loan") previously
made to the owner (the "Laurel Borrower") of the Laurel Centre
Mall located in Laurel, Maryland (the "Mall") and secured by a
first mortgage encumbering the Mall. The remaining 76% interest
in the Laurel Centre Loan is held by a real estate mortgage
investment conduit serviced by a third party (the "REMIC"). The
Laurel Centre Loan accrued interest at the rate of 10.2% per
annum and was due and payable on October 15, 1996. The fully
accreted amount of the Laurel Centre Loan as of October 15, 1996
was $57,894,077.
On or about October 9, 1996, after the Laurel Borrower was unable
to refinance or sell the Mall on terms that would repay the
Laurel Centre Loan, the Laurel Borrower entered into an agreement
(the "Agreement") with the Partnership and the REMIC (together,
the "Lenders"), pursuant to which the Lenders, among other
things, (a) indicated their intent to commence a foreclosure
action on the Laurel Centre Loan and appoint a receiver, on or
after October 16, 1996, and (b) agreed to release any claims that
they may have to any cash held by the Laurel Borrower or its
partners prior to October 16, 1996. In addition, under the
Agreement, the Laurel Borrower and the Lenders agreed that all
cash flow from the Mall on or after October 16, 1996, shall be
paid to the Lenders. On October 16, 1996, foreclosure
proceedings were commenced by the Partnership and a receiver for
the Mall was appointed. Accordingly, the receiver took immediate
possession of the Mall and was authorized, among other things: to
manage the Mall; to collect all rent proceeds from Mall tenants
paid on or after October 16, 1996; and to apply such proceeds to
the payment of, among other things, the Mall's management and
operating expenses, capital improvements and leasing expenses,
with any remaining funds to be paid to the mortgage lenders; in
each case, in accordance with the terms of the agreement.
During the foreclosure period, an unaffiliated third-party
offered to purchase the Partnership's interest in the Laurel
Centre Loan at a price equal to the amount the Partnership would
have realized if the Laurel Centre Loan were paid in full,
including interest at the non-default rate of 10.2% to the date
of closing of the purchase, less a $100,000 negotiated discount.
On January 24, 1997, the Partnership sold its interest in the
Laurel Centre Loan for total proceeds of $14,184,322.
Former Loan Investments
The 417 Fifth Avenue Loan - The Partnership owned a zero coupon
loan in the face amount of $17,500,000 to 417 Fifth Avenue Realty
Company (the "Borrower"), a New York general partnership. The
loan was secured by a second mortgage on an eleven story office
building located at 417 Fifth Avenue in Manhattan, New York (the
"Property"). The carrying value of the loan was fully reserved
for in 1992.
The First Mortgage Holder commenced a foreclosure proceeding
against the Borrower. On May 1, 1992, the Partnership delivered
a notice of default informing the Borrower of its default on the
Partnership's second mortgage loan and also commenced its own
foreclosure proceeding.
On or about August 9, 1993, the Borrower filed a voluntary
bankruptcy petition in the Southern District of New York. On
August 15, 1993 the Partnership agreed with the First Mortgage
Holder to coordinate activities in the bankruptcy and to give the
Partnership an interest in whatever the First Mortgage Holder
ultimately realized in the Property (the "Intercreditor
Agreement").
Pursuant to the Intercreditor Agreement, the Partnership realized
$1,565,079 from the sale of the Property in 1994. In addition to
the sales proceeds, the Partnership obtained approximately
$453,637 from certain reserve accounts. The Partnership
distributed $1,508,250 of the proceeds to the partners and the
remaining funds were added to the Partnership's cash reserves to
fund the projected operating expenses and contingencies. The
assignment of the loan also resulted in the write-off of $234,653
of deferred charges related to the original financing.
On July 15, 1994, a cash distribution was paid totaling
$1,500,000, of which $15,000 was paid to the general partner
pursuant to the terms of the Partnership Agreement, and
$1,485,000 was paid to the limited partners, or $.21 per limited
partnership unit. The Partnership withheld $7,818 from the
limited partners' distribution to recoup foreign withholding
taxes previously paid by the Partnership on behalf of certain
limited partners.
5. Transactions with Related Parties
Cash and cash equivalents reflected on the Partnership's balance
sheets at December 31, 1995 were on deposit with an affiliate of
the General Partner. As of December 31, 1996, no cash or cash
equivalents were on deposit with an affiliate of the General
Partner or the Partnership.
The General Partner and its affiliates received fees and
compensation for the offering of interests in the Partnership,
fees for acting as general partner of the Partnership, and
reimbursement of organization and offering expenses. The
aforementioned amount of fees and organizational and offering
costs was $7,042,300. In addition, the General Partner earned
investment management fees of $75,000 in 1996, 1995 and 1994 of
which $6,250 was unpaid at December 31, 1996 and $12,500 were
unpaid at December 31, 1995.
During 1993, the right of first refusal on a loan formerly held
by the Partnership was sold to an affiliate of the General
Partner for $50,000 which amount was received on November 22,
1994.
6. Reconciliation of Financial Statement Net Income and
Partners' Capital to Federal Income Tax Basis Net Income
(Loss) and Tax Basis Partners' Capital
Year Ended December 31,
1996 1995 1994
Financial statement net income $ 30,248,408 $ 1,087,928 $ 2,677,094
Recovery of valuation allowance
for financial reporting purposes
on the Second Mortgage (24,532,759) -- --
Tax loss on retirement of note -- -- (29,409,324)
Other -- 405 --
Federal income tax basis net
income (loss) $ 5,715,649 $ 1,088,333 $(26,732,230)
1996 1995 1994
Financial statement basis
partners' capital $ 45,134,096 $ 14,887,955 $ 13,800,027
Current year financial statement
net income (over) under federal
income tax basis net income (24,532,759) 405 (29,409,324)
Cumulative federal income tax
basis net income over cumulative
financial statement net income 25,012,165 25,011,760 54,421,084
Federal income tax basis
partners' capital $ 45,613,502 $ 39,900,120 $ 38,811,787
Because many types of transactions are susceptible to varying
interpretations under Federal and State income tax laws and
regulations, the amounts reported above may be subject to change
at a later date upon final determination by the respective taxing
authorities.
7. Litigation
On January 24, 1997, certain limited partners commenced a lawsuit
in Delaware Chancery Court against the General Partner, Union
Square, its general partner, and others. The Partnership was
named as a nominal defendant. The litigation seeks to increase
the amount of the discounted pay-off from the Union Square loan
pursuant to the terms of the Allocation Agreement described in
Note 4. The litigation was filed as a purported class action on
behalf of all Unitholders and as a purported derivative action in
the name of the Partnership. The plaintiffs also seek
unspecified damages. The Partnership has retained counsel and is
seeking an expedited resolution of this litigation.
8. Supplemental Information (Unaudited)
The following are condensed financial statements of the borrowers
on the loans comprising the Partnership's portfolio. This
information is not covered by the independent auditors' report.
Shopco Laurel Centre L.P. and Consolidated Partnership
(A Delaware limited partnership)
Consolidated Balance Sheets At December 31, At December 31,
1996 1995
Assets
Property held for disposition $55,973,759 $ --
Real estate, at cost:
Land -- 5,304,011
Building -- 61,062,234
Improvements -- 3,668,110
-- 70,034,355
Less accumulated depreciation and amortization -- (14,100,499)
-- 55,933,856
Cash and cash equivalents 7,906,335 13,427,085
Accounts receivable, net of allowance
of $254,927 in 1995 -- 242,818
Deferred rent receivable -- 482,624
Deferred charges, net of accumulated
amortization of $273,442 in 1995 -- 133,295
Prepaid expenses -- 553,034
Total Assets $63,880,094 $70,772,712
Liabilities, Minority Interest
and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 657,759 $ 286,860
Zero coupon first mortgage note payable 58,580,564 53,525,503
Second mortgage note payable 2,000,000 2,000,000
Second mortgage note accrued interest payable 74,167 19,167
Due to affiliates 7,768 7,026
Security deposits payable -- 14,633
Deferred income -- 804,171
Distribution payable 6,354,545 588,384
Total Liabilities 67,674,803 57,245,744
Minority interest (783,875) (583,239)
Partners' Capital (Deficit):
General Partner 746,545 917,755
Limited Partners (4,660,000 limited
partnership units authorized, issued
and outstanding) (3,757,379) 13,192,452
Total Partners' Capital (Deficit) (3,010,834) 14,110,207
Total Liabilities, Minority Interest and
Partners' Capital (Deficit) $63,880,094 $70,772,712
8. Supplemental Information (Unaudited) Continued
The following are condensed financial statements of the borrowers
on the loans comprising the Partnership's portfolio. This
information is not covered by the independent auditors' report.
Shopco Laurel Centre L.P. and Consolidated Partnership
(A Delaware limited partnership)
Consolidated Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental income $ 5,000,201 $ 5,835,838 $ 5,526,093
Escalation income 3,992,192 5,092,316 5,004,831
Miscellaneous income 599,178 454,382 316,315
Interest income 585,119 567,284 274,960
Total Income 10,176,690 11,949,820 11,122,199
Expenses
Interest expense 4,550,655 5,298,639 4,822,735
Property operating expenses 3,521,767 3,737,361 3,642,418
Depreciation and amortization 1,650,643 1,984,980 1,873,237
Real estate taxes 811,866 1,023,297 1,034,656
General and administrative 425,485 223,623 209,045
Total Expenses 10,960,416 2,267,900 11,582,091
Loss before discontinued operations
and minority interest (783,726) (318,080) (459,892)
Loss from discontinued operations (1,177,531) -- --
Loss before minority interest (1,961,257) (318,080) (459,892)
Minority interest 20,519 2,811 2,547
Net Loss $(1,940,738) $ (315,269) $ (457,345)
Net Loss Allocated:
To the General Partner $ (19,407) $ (3,153) $ (4,573)
To the Limited Partners (1,921,331) (312,116) (452,772)
$(1,940,738) $ (315,269) $ (457,345)
Per limited partnership unit
(4,660,000 outstanding): Loss before
discontinued operations and minority
interest $(.16) $(.07) $(.10)
Loss from discontinued operations (.25) -- --
$(.41) $(.07) $(.10)
8. Supplemental Information (Unaudited) Continued
The following are condensed financial statements of the borrowers
on the loans comprising the Partnership's portfolio. This
information is not covered by the independent auditors' report.
Union Square Hotel Partners, L.P.
(A Delaware limited partnership)
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Real estate, at cost:
Land $ -- $32,231,229
Building -- 80,121,007
Furniture, fixtures and equipment -- 29,586,047
-- 141,938,283
Less accumulated depreciation -- (43,176,995)
-- 98,761,288
Property held for disposition 96,076,204 --
Cash and cash equivalents 5,291,387 3,378,174
Replacement reserve receivable 1,283,862 500,440
Rent receivable 520,710 318,626
Deferred charges, net of accumulated amortization
of $4,307,099 in 1996 and $3,849,203 in 1995 724,108 495,582
Total Assets $103,896,271 $103,454,110
Liabilities and Partners' Deficit
Liabilities:
Accounts payable and accrued expenses $ 72,765 $ 51,645
Due to affiliates 11,798 10,397
Mortgage loan payable 70,000,000 70,000,000
Accrued interest 13,537,078 13,104,156
Deferred interest 9,672,070 8,800,319
Notes and loans - affiliates 57,585,170 53,016,740
Loan payable - Hyatt 3,882,006 3,772,578
Total Liabilities 154,760,887 148,755,835
Partners' Deficit:
General Partner (1,191,866) (1,136,237)
Limited Partners (49,672,750) (44,165,488)
Total Partners' Deficit (50,864,616) (45,301,725)
Total Liabilities and Partners' Deficit $103,896,271 $103,454,110
8. Supplemental Information (Unaudited) Continued
The following are condensed financial statements of the borrowers
on the loans comprising the Partnership's portfolio. This
information is not covered by the independent auditors' report.
Union Square Hotel Partners, L.P.
(A Delaware limited partnership)
Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental income:
Operating income $10,664,266 $ 7,677,616 $ 5,816,107
Replacement escrow, net 1,406,715 1,247,873 1,147,573
Interest income 157,781 123,210 39,454
Miscellaneous income 1,935 2,757 2,765
Total Income 12,230,697 9,051,456 7,005,899
Expenses
Interest expense 13,761,446 13,159,716 12,337,774
Depreciation and amortization 3,766,273 5,402,353 5,474,406
General and administrative 265,869 206,467 208,946
Total Expenses 17,793,588 18,768,536 18,021,126
Net Loss $(5,562,891) $(9,717,080) $(11,015,227)
Net Loss Allocated:
To the General Partner $ (55,629) $ (97,171) $ (110,152)
To the Limited Partners (5,507,262) (9,619,909) (10,905,075)
$(5,562,891) $(9,717,080) $(11,015,227)
Per limited partnership unit
(7,174,100 outstanding) $(.77) $(1.34) $(1.52)
Schedule II
Valuation and Qualifying Accounts
December 31, 1996
Charged to
Balance at (recovery of) Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
Allowance for (recovery of) doubtful accounts:
Year ended December 31, 1994:
Mortgage loans receivable $68,030,204 $ 5,016,635 $(38,818,072) $34,228,767
Year ended December 31, 1995:
Mortgage loans receivable $34,228,767 $ 3,770,483 $ -- $37,999,250
Year ended December 31, 1996:
Mortgage loans receivable $37,999,250 $(25,029,061) $ (286,177) $12,684,012
Schedule IV - Mortgage Loans on Real Estate
December 31, 1996
Principal
Amount
Description Interest Final Periodic Prior Face Carrying of Loans
Rate Maturity Payment Liens amount of Amount of Subject
Date Terms mortages Mortgages to
at maturity Delinquent
Principal
or Interest
The Implicit 1/02/97 No
Grand annual payment
Hyatt rate of of $70,000,000 $42,207,709 $29,500,022 N/A
San 11% interest
Francisco compounded or
annually principal
are due
until
maturity.(1)
The Implicit 10/15/96 No
Laurel annual payments
Centre rate of of None $13,894,578 $14,189,837 N/A
Loan 10.2% interest (2) (3)
Partici- compounded or
pation semiannually principal
are due
until
maturity.
$56,102,287 $43,689,837
The aggregate cost for Federal income tax purposes of the mortgage
loans at December 31, 1996 is $44,189,837
1 Prior to restructuring, three interim interest payments were required.
2 Represents the Partnership's 24% interest.
3 Represents the Partnership's 24% interest plus interest through 12/31/96.
Reconciliation of Mortgage Loans on Real Estate
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
Beginning of year $12,846,120 $ 11,629,648 $ 10,528,370
Accrued interest 5,524,159 4,982,638 6,113,596
Amortization of discount 4,320 4,317 4,317
Recovery of (allowance for)
doubtful accounts 25,029,061 (3,770,483) (5,016,635)
Collection costs 286,177 -- --
End of year $ 43,689,837 $ 12,846,120 $ 11,629,648
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 1,486,065
<SECURITIES> 0
<RECEIVABLES> 56,373,849
<ALLOWANCES> 12,684,012
<INVENTORY> 0
<CURRENT-ASSETS> 45,175,907
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,175,902
<CURRENT-LIABILITIES> 41,806
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 45,134,096
<TOTAL-LIABILITY-AND-EQUITY> 45,175,902
<SALES> 0
<TOTAL-REVENUES> 5,643,930
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 433,023
<LOSS-PROVISION> (25,029,061)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,248,408
<INCOME-TAX> 0
<INCOME-CONTINUING> 30,248,408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,248,408
<EPS-PRIMARY> 4.29
<EPS-DILUTED> 4.29
</TABLE>
