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 (fee required)
For the fiscal year ended December 31, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
For the Transition period from to
Commission file number: 1-9331
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
Exact name of Registrant as specified in its charter
Delaware 13-3384643
State or other jurisdiction of
incorporation or organization I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor, New York, NY 10285-2900
Attn: Andre Anderson zip code
Address of principal executive offices
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act:
NEW YORK STOCK EXCHANGE
Name of each exchange on which registered
10,700,000 UNITS OF LIMITED PARTNERSHIP SECURITIES
Title of Class
Securities registered pursuant to Section 12(g) of the Act: None
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)
Aggregate market value of voting stock held by non-affiliates of the
registrant: Not applicable.
Documents Incorporated by Reference: Agreement of Limited Partnership, dated
December 1, 1986, incorporated by reference to Exhibit A to the prospectus
contained in the Registration Statement No. 33-9937. Proxy Statement used in
connection with solicitation of Unitholders on June 7, 1994 (the "Proxy
Statement"). With the exception of the pages of the Proxy Statement
specifically incorporated by reference herein, the Proxy Statement is not
deemed to be filed as part of this Form 10-K.
PART I
Item 1. Business
(a) General Development of Business
Midwest Real Estate Shopping Center L.P. (formerly Equitable Real Estate
Shopping Centers, L.P.), a Delaware limited partnership (the "Partnership"),
was formed on October 28, 1986. Midwest Centers Inc. (formerly Shearson ESC/GP
Inc.), a Delaware corporation, is the general partner of the Partnership (the
"General Partner"). Midwest Centers Depositary Inc. (the "Assignor Limited
Partner", formerly Shearson ESC Corp.) is the sole limited partner of the
Partnership. The General Partner and the Assignor Limited Partner are
affiliates of Lehman Brothers Holdings, Inc.
On December 30, 1986, the Partnership completed an offering of $107,000,000 of
limited partnership securities ("Units," the holders of which are referred to
herein as "Unitholders") representing assignments of limited partnership
interests from the Assignor Limited Partner. The net proceeds of the offering
after payment of syndication and organizational costs aggregated $97,925,000.
The Partnership was formed to acquire from The Equitable Life Assurance Society
of the United States ("Equitable") two regional shopping malls which Equitable
had owned since 1978: Brookdale Center, located in Brooklyn Center (Hennepin
County), Minnesota ("Brookdale"), and Northland Center, located in Southfield
(Oakland County), Michigan ("Northland") (together the "Properties"). On
December 30, 1986 the Partnership acquired the lease fee interest in the land
and improvements constituting the Properties for a total purchase price of
$130,025,000 ($49,000,000 for Brookdale and $81,025,000 for Northland).
Two mortgage notes from Equitable were issued on December 30, 1986 in the
initial principal amounts of $15,175,000 (the "Brookdale Note") and $25,675,000
(the "Northland Note") (together, the "Notes"). The Partnership had deferred
payment of principal and interest on the Northland Note until its scheduled
maturity on June 30, 1995. In connection with the impending maturity of the
Northland Note, the Partnership executed a contract with Equitable on March 28,
1994 for the sale of Northland at the price of $6,600,000 in excess of the
balance of the Northland Note (the "Northland Sales Contract"). On July 22,
1994, the sale was completed and the Northland Note paid. The effective date
of the sale of Northland was January 1, 1994 and any positive cash flow
generated by Northland Center from January 1, 1994 to the closing belonged to
Equitable. The Partnership also deferred payment of principal and interest on
the Brookdale Note until its maturity date on June 30, 1995. The General
Partner attempted, but was unable, to sell Brookdale and pay off the Brookdale
Note prior to its maturity date. On July 5, 1995, Equitable notified the
Partnership of its default under the terms of the Brookdale Note and that it
would pursue all remedies available to it, including, without limitation,
foreclosure of the lien of the Mortgage by power of sale or judicial
foreclosure and the appointment of the receiver. Further to its July 5, 1995
notice of default to the Partnership, Equitable commenced advertising Brookdale
for a public nonjudicial foreclosure sale to be held on September 12, 1995. The
date of this foreclosure sale was subsequently postponed to April 5, 1996.
Please refer to Item 7 for a detailed discussion of the Partnership's default
on the Brookdale Note and events subsequent to such default.
The Unitholders were solicited on June 7, 1994 in connection with the sale of
Northland. This solicitation informed the Unitholders that the sale of
Northland would be the first step in the disposition of the assets of the
Partnership with a view to the orderly dissolution and liquidation of the
Partnership. Information involving the plan to dispose of all the assets of
the Partnership with a view to its liquidation is contained under the caption
"The Plan to Liquidate" in the Partnership's definitive proxy statement filed
on May 27, 1994 pursuant to Regulation 14A and is incorporated herein by
reference.
On December 31, 1986 the Partnership entered into an agreement with Equitable
Real Estate Investment Management, Inc. ("EREIM"), an indirect wholly-owned
subsidiary of Equitable, to retain EREIM as asset manager (the "Asset Manager")
to the Partnership. In association with the sale of Northland and intention to
dispose of Brookdale, the asset management agreement with EREIM for both malls
was terminated effective December 31, 1993, thereby releasing the Partnership
from its obligation to pay EREIM an asset management fee of $1,060,000 per
year.
On November 21, 1994, the Partnership changed its name from Equitable Real
Estate Shopping Centers, L.P. to Midwest Real Estate Shopping Center L.P. The
name change was in conjunction with the termination of the former asset
management agreement with EREIM, pursuant to which the Partnership agreed to
cease using the words "Equitable" and "Equitable Real Estate" in its name.
(b) Financial Information About Industry Segments
The Partnership's sole business is the ownership and operation of its remaining
property, Brookdale Center. All of the Partnership's revenues, operating
profit or loss and assets relate solely to such industry segment.
(c) Narrative Description of Business
The Registrant's principal business is to own and operate its remaining
property. The Partnership's principal objective is to produce distributions
to Unitholders on sale. Please refer to Item 5 for a description of the
Partnership's policy concerning distributions.
There is no assurance that this objective will be achieved.
Competition
See Item 2 for a description of the competition in the primary trade area of
the Partnership's remaining property.
Employees
The Partnership has no employees. The affairs of the Partnership are conducted
by the General Partner, and the remaining property is managed on a day-to-day
basis by General Growth Management Inc. (the "Property Manager" or "General
Growth"). On August 2, 1995, at the request of Equitable, the District Court
for the Fourth Judicial District of Minnesota appointed General Growth as the
receiver of Brookdale. Please see Item 7 and Note 9 to the Financial
Statements in Item 8, and Item 13.
Item 2. Properties
The Partnership's remaining property, Brookdale Center, is a regional shopping
mall located in Brooklyn Center (Hennepin County), Minnesota, approximately
five miles northwest of the central business district of Minneapolis. Brookdale
is anchored by five major department stores - Sears, Roebuck and Co. ("Sears"),
J.C. Penney, Inc. ("J.C. Penney"), Dayton-Hudson Corporation, doing business as
Dayton's ("Dayton's"), Mervyn's, a California corporation doing business as
Mervyn's ("Mervyn's"), which acquired Carson Pirie Scott & Co., doing business
as Carson's ("Carson's") on March 6, 1995, and Kohl's Department Stores, Inc.,
doing business as Kohl's ("Kohl's") in a freestanding building, all located on
a site of approximately 81 acres. Brookdale contains approximately 980,000
gross leasable square feet, of which approximately 780,000 square feet is owned
or leased by the anchor tenants and not by the Partnership. Brookdale has
parking for approximately 5,000 automobiles. During 1988, a freestanding Kohl's
department store consisting of approximately 75,000 square feet was completed
on the east end of the mall site. Kohl's commenced operations on August 1,
1988. Brookdale was constructed in 1962, underwent major expansion in 1966,
and was refurbished in 1970 and again in 1983.
The total building area of Brookdale is allocated as shown in the table below.
Square Feet Square Feet Total
Leasable to Owned by Square
Tenants Anchors(1) Feet
Anchor Stores:
Mervyn's (2) - 140,336 140,336
Dayton's - 195,368 195,368
J.C. Penney - 140,320 140,320
Kohl's - 75,000 75,000
Sears - 180,669 180,669
Outparcel Stores (3) - 48,858 48,858
Enclosed Mall Tenants(4) 199,922 - 199,922
199,922 780,551 980,473
Common Area - - 119,113
Total 199,922 780,551 1,099,586
(1) Includes square footage leased by anchors from independent third
parties.
(2) On March 2, 1995, Carson's ceased operations at Brookdale Center. On
March 6, 1995, Mervyn's, a California Corporation, took
possession of the space. See description below under "Anchor tenants."
(3) The four outparcel stores at Brookdale are owned by the tenants and
consist primarily of automotive accessory stores.
(4) Storage area of 3,104 square feet is included in the mall stores'
square footage.
Anchor Tenants
Sears, which owns its own buildings and land, pays its own real estate taxes
and utilities. Sears has an operating agreement and a purchase agreement that
require it to operate a Sears store in its main building until May 1997. Sears
is required to pay a proportionate share of the costs incurred by Brookdale in
maintaining the common areas, which is in proportion to the Sears building area
to the aggregate of all building area in Brookdale. Sears may not sublease its
space except to carry on portions of its business through licensees, lessees,
concessionaires or corporations in which a majority of the voting stock is
owned by Sears. The operating agreement and purchase agreement and all rights
and obligations thereunder, including Sears' obligation to pay common area
expenses, expire in May 1997.
J.C. Penney leases its building and the land on which its building is
constructed from a third party which leases the land from the Partnership until
July 27, 2015; however, it has the option to terminate the lease on either July
27, 1995 or July 27, 2005. J.C. Penney pays its own real estate taxes and
utilities. J.C. Penney was required to operate a J.C. Penney-type department
store until July 27, 1995. J.C. Penney did not exercise the option to
terminate the lease on July 27, 1995 and has not informed the Partnership of
any intention to sublease the premises. J.C. Penney may sublet the entire
premise or assign the lease to any corporation which may take over the business
of J.C. Penney in Minnesota as a result of an assignment or merger. J.C.
Penney is also subject to an operating agreement that requires it to pay a
portion of the common area expenses, including real estate taxes and
assessments of the common area, in proportion to 75% of the gross building area
in its store to the total gross building area.
Mervyn's, a California corporation, finalized an agreement on March 6, 1995,
pursuant to which Mervyn's agreed to purchase all of the outstanding shares of
stock of a wholly-owned subsidiary of CPS Department Stores, Inc., a Delaware
corporation ("Carson's"), thereby acquiring the 140,336 square foot Carson's
store in the Mall and assuming Carson's lease. Carson's ceased operations at
the store on March 2, 1995 and Mervyn's took possession of this space on March
6, 1995. Mervyn's remodeled the store, which reopened during the third quarter
of 1995.
Dayton's land and building are owned by Dayton Development Company ("DDC"), an
affiliate of Dayton's which leases Dayton's land and building to Dayton's.
DDC's lease to Dayton's runs through July 31, 1996. DDC and Dayton's are
subject to an operating agreement that generally requires Dayton's to operate a
Dayton's store in the Dayton's building until July 31, 1996. DDC pays its own
real estate taxes and for the water, gas and electricity used by Dayton's. In
addition, DDC also pays a proportionate share of the costs incurred by
Brookdale in supplying climate conditioning services to the entire shopping
center, plus a $2,442.10 monthly standby charge. DDC is also required to pay a
proportionate share of the costs incurred by Brookdale in maintaining the
common areas. DDC has the right to approve any purchaser of the Brookdale
Center, and if such approval is not granted and the purchaser subsequently
defaults in its common area maintenance obligations, DDC shall have the right
to take over common area maintenance. The Dayton's operating agreement
terminates on July 31, 1996, except that it shall continue thereafter so long
as Brookdale is a shopping center and Dayton's shall continue to operate a
Dayton's department store therein. Dayton's has not informed the Partnership
of any intention to leave the Mall.
Kohl's owns its building and leases land from the Partnership. Kohl's lease
runs for a period of 22 years through January 31, 2010 with two five-year
renewals. The minimum rent is $175,000 per year with percentage rent of 1.5%
of all net sales in excess of $16,000,000 per year. The leases are net ground
leases with the tenant responsible for all costs such as real estate taxes and
utilities. Kohl's pays a fixed common area maintenance charge. Kohl's did not
renew its operating agreement which expired on August 1, 1993, but has not
informed the Partnership of any intention to leave the Mall.
Mall and Outparcel Tenants
As of December 31, 1995, Brookdale had 199,922 square feet of gross leasable
area (excluding anchor stores and outparcel stores), of which 40,652 square
feet (representing kiosks and mall stores totalling 37,548 square feet and
3,104 square feet of storage area) was vacant. During 1995, nine leases
totalling 14,616 square feet terminated and space totalling 10,442 square feet
was leased. Two leases totalling 4,954 square feet were signed with existing
tenants and 5 leases totalling 5,488 square feet were signed with new tenants.
As of December 31, 1995, six tenants, or their parent corporations, at
Brookdale have filed for protection under the U.S. Federal Bankruptcy Code.
These tenants currently occupy approximately 9.1% of the Mall's leasable area
(exclusive of anchor tenants), and at this point their plans to remain at
Brookdale remain uncertain, although Merry Go 'Round closed its store in 1996.
Please refer to Item 7 for a listing of Brookdale tenants which have filed for
bankruptcy protection.
Historical Occupancy
The following table shows the historical occupancy percentage at Brookdale at
December 31 of the indicated years.
1995 1994 1993 1992 1991
Including Anchor Stores 96.0% 94.0% 96.0% 99.0% 99.4%
Excluding Anchor Stores 80.0% 79.0% 85.0% 95.0% 98.0%
Competition
The Minneapolis-St. Paul metropolitan area contains 17 regional shopping
centers containing a total of 14 million square feet of retail space.
Brookdale, which is located in a northern suburb of Minneapolis, competes
directly with three shopping centers - Northtown Mall, Rosedale Center and
Ridgedale Center. Brookdale also competes for customers with a variety of
local shops and merchants.
Northtown Mall is a smaller regional center located five miles north of
Brookdale and is anchored by Mervyn's, Montgomery Ward and Kohl's. Northtown
Mall contains gross leasable area of approximately 800,000 square feet.
Rosedale Center, which is owned by an affiliate of Equitable, is a two-level,
enclosed mall located ten miles southeast of Brookdale and is anchored by
Dayton's, Mervyn's, J.C. Penney and Montgomery Ward. This center contains a
gross leasable area of 1,400,000 square feet and underwent an expansion in
1991, including a new 250,000 square foot Dayton's store. Ridgedale Center is
located eight miles southeast of Brookdale and is anchored by Sears, J.C.
Penney and Dayton's. Ridgedale contains gross leasable area of 1,035,000
square feet. All three centers compete against Brookdale for customers with a
variety of local shops and national retailers.
On August 11, 1992, a super-regional center, Mall of America, opened in
Bloomington, approximately 8.25 miles from downtown Minneapolis and
approximately 14.25 miles southeast of Brookdale. The 4.2 million square foot
center is anchored by Nordstrom's, Bloomingdale's, Sears and R.H. Macy & Co.,
Inc., among others, and includes an amusement park. Although occupancy has
declined over the past few years, the General Partner attributes this decline
to general competition from other shopping centers, of which the Mall of
America is only a part. Mall of America has had an impact on consumer traffic
at Brookdale.
Item 3. Legal Proceedings
On January 17, 1995, the Partnership announced that an action had been filed
against the General Partner, the Partnership and other defendants in the United
States District Court for the Southern District of New York on behalf of all
persons who owned Limited Partnership Units of the Partnership on June 7, 1994.
The complaint alleges, among other things, that the solicitation statement used
by the Partnership to solicit the consent of the Limited Partners to the July
1994 sale of the Northland Shopping Center (the "Solicitation Statement")
contained material misrepresentations and omissions in violation of Section
14(a) of the Securities and Exchange Act of 1934 and Rule 14a-9 promulgated
thereunder. The complaint also alleges claims for breach of fiduciary duty,
negligent misrepresentation and breach of the limited partnership agreement
related to the Northland sale and the partial liquidation of the assets.
Plaintiffs seek, among other things, compensatory damages and to have their
action certified as a class action under the Federal Rules of Civil Procedure.
On May 12, 1995, the Partnership announced that two similar actions had been
filed in the District Court for the Southern District of New York. On November
16, 1995, the complaint in one of these three actions was amended to add a
derivative claim for breach of fiduciary duty on behalf of the Partnership.
The amended complaint also alleges that the General Partner, assisted by the
other defendants, breached its fiduciary duties by failing to take steps to
maximize the value of Brookdale Center. The General Partner believes that the
allegations in these complaints are without merit and will defend these
lawsuits vigorously.
On May 12, 1995, the Partnership also announced that an action had been filed
against the General Partner and other defendants in the Federal District Court
for the Central District of California on behalf of all persons who owned
Limited Partnership Units during the period June 7, 1994 to the present. The
complaint alleges that the Solicitation Statement contained material
misrepresentations and omissions in violation of Section 14(a) of the
Securities and Exchange Act of 1934 and Rule 14a-9 promulgated thereunder.
Plaintiffs seek, among other things, compensatory damages and to have their
action certified as a class action under the Federal Rules of Civil Procedure.
This action has been transferred to the District Court for the Southern
District of New York to be coordinated with the New York actions for pre-trial
proceedings. The General Partner believes that the allegations in this
complaint are without merit and will defend this lawsuit vigorously.
The Partnership also announced on May 12, 1995, that an action had recently
been filed against the General Partner and other defendants in the Superior
Court for Los Angeles County and removed to the District Court for the Central
District Court of California. This action is brought on behalf of all persons
who purchased Limited Partnership Units of the Partnership during the period
from December 26, 1986 to the present. The complaint alleges, among other
things, that the General Partner, assisted by the other defendants, breached
its fiduciary duty to the plaintiffs in connection with the offer and sale of
Limited Partnership Units, the operation of the Partnership and the Northland
sale. Plaintiffs seek, among other things, compensatory damages, punitive
damages, and to have their action certified as a class action under the Federal
Rules of Civil Procedure. This action also has been transferred to the
District Court for the Southern District of New York to be coordinated with the
pre-trial proceedings. The General Partner believes that the allegations in
the complaint are without merit and will defend the lawsuit vigorously.
On August 2, 1995, at the request of Equitable, the District Court for the
Fourth Judicial District of Minnesota appointed General Growth Management, Inc.
("General Growth") as the receiver of Brookdale. In such capacity, General
Growth collects the rent proceeds from Brookdale's tenants and applies the
proceeds to payment of, among other things, Brookdale's operating expenses,
maintenance costs, real estate taxes, tenant improvements and leasing
commissions, with any remaining funds to be paid to Equitable on account of its
mortgage on Brookdale (the "Mortgage"). During December 1995, $700,000 was
forwarded to Equitable and applied against the Mortgage under the terms of the
receivership. As of December 31, 1995, the cash flow generated by Brookdale,
less the cash forwarded to Equitable during December 1995, is reflected on the
Partnership's balance sheet as "Restricted cash" in the amount of $1,012,296.
The restricted cash will be used to pay, at Equitable's discretion, property
operating expenses and real estate taxes for Brookdale. During January and
February 1996, an additional $550,000 was forwarded to Equitable under the
terms of the receivership, and applied against the Mortgage. Shortfalls in
cash flow generated by Brookdale, if any, may be advanced by Equitable and
added to the principal amount of the Mortgage. General Growth is paid a
receiver's fee equal to 4.45% of all fixed minimum rents and percentage or
overage rents collected. General Growth had previously been the Partnership's
property manager for Brookdale and received management fees at the same rate as
receiver fees in its role as property manager.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Unitholders at a meeting or
otherwise during the three months ended December 31, 1995.
PART II
Item 5. Market for the Registrant's Limited Partnership Units and Related
Security Holder Matters
(a) Market Information
The Units are listed on the New York Stock Exchange and trade under the symbol
"EQM". The high and low sales price of the Units on the New York Stock
Exchange as reported on the consolidated transaction reporting system, during
the periods January 1, 1994 to December 31, 1994 and January 1, 1995 to
December 31, 1995 were as follows:
High Low
1994
First Quarter $ 2.38 $ 2.00
Second Quarter 2.13 1.13
Third Quarter 1.75 .69
Fourth Quarter .88 .50
1995
First Quarter $ .88 $ .38
Second Quarter .75 .50
Third Quarter .85 .31
Fourth Quarter .50 .17
(b) Holders
As of December 31, 1995, there were 6,193 Unit Holders.
(c) Distribution of Operating Cash Flow
The Partnership's policy is to distribute to the Unitholders their allocable
portion of Operating Cash Flow (as defined below) in respect of each fiscal
year in substantially equal quarterly installments based on estimated Operating
Cash Flow for the current year.
Distributions of Operating Cash Flow are paid on a quarterly basis to
registered holders of Units on record dates established by the Partnership,
which generally will be the last day of each quarter. If a Unitholder
transfers a Unit prior to a record date for a quarterly distribution of
Operating Cash Flow, the transferor Unitholder may be subject to tax on part or
all of the Net Income from operations, if any, for such quarter (since Net
Income from operations is allocated on a monthly basis, rather than quarterly),
but will not be entitled to receive any portion of the Operating Cash Flow to
be distributed with respect to such quarter.
The amount of Operating Cash Flow available for distribution is determined by
the General Partner after taking into account the cash requirements of the
Partnership, including operating expenses and reserves for future commitments
and contingencies.
For the specific terms of the distribution of operating cash flow, reference is
made to pages 84 and 85 in the Partnership Agreement which is incorporated
herein by reference.
Quarterly Cash Distributions Per Limited Partnership Unit
Distribution amounts are reflected in the period for which they are declared.
The record date is the last day of the respective quarter and the actual cash
distributions are paid approximately 45 days after the record date.
1995 1994
First Quarter $ .07 $ .07
Second Quarter .07 .07
Third Quarter .07 .935*
Fourth Quarter** - .07
TOTAL $ .21 $1.145
* This amount includes the Partnership's third quarter cash distribution of
$.07 per Unit as well as a special cash distribution of $.865 per Unit paid on
August 31, 1994, to unitholders of record as of August 12, 1994. This
distribution represented the net proceeds from the sale of Northland Center and
included a disbursement of $4,484,000 from the Partnership's cash reserves.
See Item 7 for a discussion of the sale of Northland Center.
** Distributions were suspended effective during the fourth quarter of 1995
pending a resolution of the situation with respect to the Partnership's default
on the Brookdale Note. See Item 7.
(d) Distribution of Net Proceeds of Capital Transactions:
The Net Proceeds of a Capital Transaction, which would include the sale of
Brookdale, are distributable to the Unitholders and the General Partner in the
manner described in the Partnership Agreement which is incorporated herein by
reference. See also Note 4 to the Financial Statements.
Related Security Holder Matters
The Partnership is a "publicly traded partnership" for purposes of Federal
income taxation. The Revenue Act of 1987 (the "Act") changed the Federal
income tax treatment of "publicly traded partnerships." Under the Act, the
Partnership could be taxed as a corporation for Federal income tax purposes
beginning in 1998 if the Partnership does not satisfy an income test under the
Act. While the Partnership currently expects to meet this income test, it is
unclear whether the Partnership will always meet the income requirements for an
exception to the rule treating a publicly traded partnership as a corporation.
Publicly traded partnerships are subject to a modified version of the passive
loss rules if they are not taxed as corporations. Under the modified rules
applicable to publicly traded partnerships, the passive loss rules are applied
separately for the items attributable to each publicly traded partnership.
Any Tax-Exempt Entity acquiring Units after December 17, 1987 (including any
acquired pursuant to a reinvestment plan) realizes unrelated business income
("UBI"), with respect to such Units for periods during which the Partnership is
a "publicly traded partnership", and such UBI may cause the Tax-Exempt Entity
to incur a federal income tax liability. It should be noted that the
Partnership agreement stated that "An investment in the Units is not suitable
for Tax-Exempt Entities, including Individual Retirement Accounts ("IRA's") and
Keogh and other retirement plans, because such investment would give rise to
unrelated business taxable income."
Item 6. Selected Financial Data
(dollars in thousands except per Unit data)
As of and for the years ended December 31,
1995 1994 1993 1992 1991
Total Income $ 11,772 $12,695 $ 30,312 $ 31,404 $ 30,383
Net Income (Loss) $(10,764)(3) $(7,567)(2) $(18,377)(1) $ (7,834)(1) $ 389
Net Income (Loss)
per Limited
Partnership Unit
(10,700,000
outstanding) $ (1.00)(3) $ (.79)(2) $ (1.70)(1) $ (.73)(1) $ .04
Real Estate $ 24,500 $35,072 $100,264 $118,416 $127,101
Mortgage Notes
Payable $ 38,029 $33,652 $ 82,011 $ 77,245 $ 70,215
Total Assets $ 32,341 $42,302 $113,448 $131,082 $136,879
Cash Distributions
per Limited
Partnership Unit
(10,700,000
outstanding) $ .21 $ 1.145(4) $ .50 $ .50 $ .50
(1) Includes write-downs in carrying value of the Northland property in
1992 and 1993. See Item 7.
(2) Includes gain on sale of Northland and write-down of Brookdale in 1994.
See Item 7.
(3) Includes write-down in carrying value of Brookdale in 1995. See Item
7.
(4) Includes a special distribution resulting primarily from the sale of
the Northland property in 1994 in the amount of $.865 per unit.
The above selected financial data should be read in conjunction with the
financial statements and notes thereto contained in Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The General Partner has been attempting to sell the Partnership's remaining
property, Brookdale Center (the "Property" or "Brookdale"), and pay off the
Mortgage, which is held by The Equitable Life Assurance Society of the United
States ("Equitable") and secured by the Property. The General Partner was
unable to consummate a sale of the Property and repay the Mortgage prior to
June 30, 1995, the maturity date of the Mortgage. As a result, on July 5,
1995, Equitable issued a notice of default to the Partnership and commenced
advertising Brookdale for a public nonjudicial foreclosure sale to be held on
September 12, 1995. Such date was subsequently postponed until April 5, 1996.
On August 2, 1995, at the request of Equitable, the District Court for the
Fourth Judicial District of Minnesota appointed General Growth as the receiver
of Brookdale. In such capacity, General Growth collects the rent proceeds from
Brookdale's tenants and applies the proceeds to payment of, among other things,
Brookdale's operating expenses, maintenance costs, real estate taxes, tenant
improvements and leasing commissions, with any remaining funds to be paid to
Equitable on account of its mortgage on Brookdale (the "Mortgage"). During
December 1995, $700,000 was forwarded to Equitable and applied against the
Mortgage per the terms of the receivership. As of December 31, 1995, the cash
flow generated by Brookdale, less the cash forwarded to Equitable during
December 1995, is reflected on the Partnership's balance sheet as "Restricted
cash" in the amount of $1,012,296. The restricted cash will be used to pay, at
Equitable's discretion, property operating expenses and real estate taxes for
Brookdale. During January and February 1996, an additional $550,000 was
forwarded to Equitable, per the terms of the receivership, and applied against
the Mortgage. Shortfalls in cash flow generated by Brookdale, if any, may be
advanced by Equitable and added to the principal amount of the Mortgage.
General Growth is paid a receiver's fee equal to 4.45% of all fixed minimum
rents and percentage or overage rents collected. General Growth had previously
been the Partnership's property manager for Brookdale and received management
fees at the same rate as receiver fees in its role as property manager.
The Partnership continues to hold negotiations with Equitable concerning the
Mortgage. In addition to such negotiations, the Partnership is considering all
alternatives available to it with respect to such potential foreclosure sale.
There is no assurance that the parties will reach an agreement that will
prevent the foreclosure sale or that a buyer can be found for Brookdale prior
to the foreclosure sale.
As of the filing date of this report, the following tenants, or their parent
corporations, at the Mall have filed for protection under the U.S. Federal
Bankruptcy Code.
Tenant Square Footage Leased
Gordon's Jewelers 992
Merry Go 'Round 3,378
Mr. Bulky 1,566
Stuarts 8,069
J Riggings 2,815
JW 1,410
These tenants occupy 18,230 square feet, or approximately 9.1% of Brookdale's
leasable area (exclusive of anchor tenants), and at this time their plans to
remain at Brookdale remain uncertain. Pursuant to the provisions of the U.S.
Federal Bankruptcy Code, these tenants may, with court approval, choose to
reject or accept the terms of their leases. Should any of these tenants
exercise the right to reject their leases, this could have an adverse impact on
cash flow generated by Brookdale and revenues received by the Partnership and
the Partnership's negotiations with Equitable with respect to the default on
the Mortgage. Merry Go 'Round closed its store in 1996.
At December 31, 1995, the Partnership had unrestricted cash totalling
$5,971,023 compared to $6,693,502 at December 31, 1994. The decrease is due to
the receipt by Equitable of all net cash flow from Brookdale, which commenced
upon appointment of a receiver on August 2, 1995 as described above.
Accounts receivable totalled $537,561 at December 31, 1995 compared with
$181,358 at December 31, 1994. The increase reflects the accrual for 1995
percentage rent and property tax income.
Accounts payable and accrued expenses decreased from $1,170,453 at December 31,
1994 to $623,499 at December 31, 1995. The decrease is primarily due to
expenditures made for (i) renovations in 1995 of space at Brookdale recaptured
upon the departure of Carson's, a former anchor tenant (ii) the 1994 Michigan
business tax related to the 1994 sale of Northland and (iii) the 1994 annual
audit fee and the Minnesota partnership tax.
Zero coupon mortgage note payable increased from $33,652,305 at December 31,
1994 to $38,028,587 at December 31, 1995 due to the accretion of interest on
the Mortgage which matured on June 30, 1995. Pursuant to its terms, the
Mortgage accrues interest at a default rate of 19% per annum commencing July 1,
1995. See "Liquidity and Capital Resources" above for a discussion of the
default.
Distributions payable decreased from $756,565 at December 31, 1994 to $0 at
December 31, 1995. The Partnership suspended cash distributions beginning with
the fourth quarter of 1995 pending a resolution of the situation surrounding
the Mortgage.
Dayton's land and building are owned by DDC, an affiliate of Dayton's, which
leases Dayton's land and building to Dayton's. DDC's lease to Dayton's runs
through July 31, 1996. DDC and Dayton's are subject to an operating agreement
that generally requires Dayton's to operate a Dayton's store in the Dayton's
building until July 31, 1996. Dayton's has not informed the Partnership of any
intention to leave the Mall. Please refer to Item 2 for additional discussion
regarding Dayton's lease.
Results of Operations
1995 versus 1994
Cash provided by operating activities totalled $2,817,025 for the year ended
December 31, 1995 compared with $4,483,503 during 1994. The reduced cash flow
is primarily due to the funding of all net cash flow from Brookdale to
Equitable, which commenced on August 2, 1995 (see "Liquidity and Capital
Resources" above).
The Partnership recognized a net loss of $10,763,695 for the year ended
December 31, 1995 compared to $7,567,268 during 1994. The increase in net loss
during 1995 primarily reflects the gain recognized on the sale of Northland in
1994 and a greater loss on the write-down of Brookdale to its estimated fair
market value in 1995 compared to 1994. The carrying value of Brookdale was
reduced during the fourth quarter of 1995 and 1994 based upon management's
assessment of the estimated fair market value of the property. The
determination of the estimated fair market value of the property was based upon
the most recent appraisal of the property, which is conducted annually.
Rental income totalled $4,691,179 for the year ended December 31, 1995 compared
with $4,895,956 in 1994. The decrease reflects lower average rental rates on
new leases and a decrease in percentage rent due to the decrease in tenant
sales. Interest income for the year ended December 31, 1995 totalled $421,179
compared to $326,493 in 1994. The increase is mainly due to higher interest
rates earned on the Partnership's invested cash. Miscellaneous income totalled
$606,678 for the year ended December 31, 1995 compared to $1,508,212 during
1994. Miscellaneous income during 1995 primarily consisted of lease buyout
settlements for three Brookdale tenants totaling $444,000 and a $105,728
adjustment for an overaccrual of the Michigan Single Business Tax as a result
of the sale of Northland Center, whereas the balance for the 1994 period
primarily consisted of lease settlements for one former Brookdale in-line
tenant and Carson's, a former Brookdale anchor store, totaling $1,450,000.
Total expenses for the year ended December 31, 1995 totalled $22,535,891
compared to $24,872,636 during 1994. The decrease reflects the absence of
interest expense and depreciation and amortization associated with Northland,
which was sold in 1994, which was partially offset by an increased write-down
of Brookdale in 1995 compared to 1994. Property operating expenses increased
from $2,657,042 for the year ended December 31, 1994 to $2,897,546 during 1995.
The increase is due to the collection of past due Carson's receivables in 1994.
Real estate taxes decreased from $3,528,943 for the year ended December 31,
1994 to $3,205,621 during 1994 primarily due to a reduction in the assessed
value of Brookdale in January 1995. General and administrative expense
decreased for the year ended December 31, 1995 compared to 1994 reflecting
lower transfer agent fees in 1995 and costs associated with the proxy
solicitation incurred in 1994.
Sales for tenants (exclusive of anchor tenants) who operated at Brookdale for
each of the last two years were approximately $35,959,700 and $38,032,700 for
the years ended December 31, 1995 and 1994, respectively. The General Partner
attributes the decrease in sales to increased competition from nearby regional
shopping centers which have been renovated or upgraded and a decline in
consumer spending on softgoods, particularly apparel, a trend experienced by
retailers across the country. As of December 31, 1995, Brookdale was 80%
occupied (exclusive of anchor and outparcel stores), compared with 79% at
December 31, 1994.
1994 versus 1993
Cash provided by operating activities totalled $4,483,503 for the year ended
December 31,1994, compared with $12,701,730 for the year ended December 31,
1993. The reduced cash flow is primarily due to the assignment of positive
cash flow from Northland to Equitable, pursuant to the terms of the sale
contract which provided for all operating income of Northland commencing
January 1, 1994 to be paid to Equitable upon closing of the sale. The
Partnership recognized a net loss of $7,567,268 for the year ended December 31,
1994 compared to a net loss of $18,376,967 for 1993. The decrease in net loss
is due to the fact that the write-down of Brookdale to its estimated value in
1994 was less than the write-down in value of Northland in 1993, as well as the
sale of Northland which resulted in a gain of $4,610,550 in 1994.
The carrying value of Brookdale was reduced during the fourth quarter of 1994,
based upon management's assessment of the estimated fair market value of the
property. The determination of the estimated fair market value of the property
was based upon the most recent appraisal of the property , which is conducted
annually, and the impending maturity of the first mortgage note.
Rental income totalled $4,895,956 in 1994, as compared to $12,622,285 in 1993.
The decrease reflects the absence of Northland activity as well as lower
average occupancy at Brookdale in 1994. Escalation income decreased
$11,262,664 from 1993 to $5,964,157 in 1994. Escalation income represents
billings to tenants for their proportionate share of common area maintenance,
insurance and real estate tax expenses, HVAC and other miscellaneous expenses.
The decrease in escalation income is primarily due to the absence of Northland
activity. Miscellaneous income increased $1,303,568 from 1993, primarily due
to the recognition of the $1,250,000 termination and restructuring fee paid by
Carson's in connection with its lease settlement and the receipt of $200,000 in
connection with the Herman's lease buyout at Brookdale.
Total expenses decreased $23,815,857 from $48,688,493 in 1993 to $24,872,636 in
1994 primarily due to the write-down of Brookdale to its estimated value being
less than the write-down of Northland in 1993, and due to the absence of
Northland activity resulting from the sale of Northland in 1994. Property
operating expenses decreased due primarily to the absence of Northland activity
and a decrease in bad debt expense at Brookdale resulting from the collection
of past due Carson's receivables. This was slightly offset by an increase in
CAM and promotion expenses at Brookdale. Real estate tax expense decreased due
to the absence of Northland activity offset by an increase at Brookdale due to
an increased assessed value of the Mall. Interest expense totaled $6,145,897
compared with $7,857,584 in 1993. The decrease is due to the payment of the
Northland zero coupon note upon closing of the Northland sale on July 22, 1994.
General and administrative expenses decreased in 1994, primarily due to the
termination of the EREIM asset management agreement as of December 31, 1993
(see Note 8 to the Notes to the Financial Statements).
Sales for tenants (exclusive of anchor tenants) who operated at Brookdale for
each of the last two years were approximately $38,032,000 and $38,288,000 for
the years ending December 31, 1994 and 1993, respectively. As of December 31,
1994, Brookdale was 79% occupied (exclusive of anchor and outparcel stores) as
compared to 85% on December 31, 1993. The decline in occupancy is largely
attributable to the reconfiguration of approximately 40,000 square feet of
previously leased space, which was recently renovated. These renovations were
completed in November 1994 and a portion of the space has been re-leased as of
year-end 1994.
Property Appraisal
The Partnership Agreement and the Mortgage Note require the Partnership to
retain an independent, third-party appraisal firm to appraise the Partnership's
property each year. The Partnership is required to provide an appraisal of the
property to the Unit Holders within 90 days after the end of the Partnership's
fiscal year. Cushman & Wakefield, Inc., an independent appraisal firm retained
by the Partnership to appraise Brookdale in 1995, has appraised fair market
value of Brookdale at $25,000,000 as of January 1, 1996.
It should be noted that appraisals are only estimates of current value and
actual values realizable upon a sale may be significantly different. A
significant factor in establishing an appraised value is the actual selling
price for properties which the appraiser believes are comparable. Because of
the nature of the Partnership's remaining property and the limited market for
such properties, there can be no assurance that the other properties reviewed
by the appraiser are comparable. Additionally, the low level of liquidity as a
result of the current restrictive capital environment has had the effect of
limiting the number of transactions in real estate markets and the availability
of financing to potential purchasers, which may have a negative impact on the
value of an asset. Further, the appraised value does not reflect the actual
costs which would be incurred in selling the property, including brokerage
fees.
Item 8. Financial Statements and Supplementary Data
See Item 14a for a listing of the Financial Statements and Supplementary data
filed in 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 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 the General Partner
are now serving (or in the past have served) as officers and directors of
entities which act as general partners of a number of real estate limited
partnerships 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 protection of the bankruptcy laws to protect the
partnerships' assets from loss through foreclosure.
On July 31, 1993, Shearson Lehman Brothers, Inc. ("Shearson") sold certain of
its domestic retail brokerage and asset management businesses to Smith Barney,
Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to this sale,
Shearson changed its name to Lehman Brothers Inc. The transaction did not
affect the ownership of the Partnership or the Partnership's General Partner.
However, the assets acquired by Smith Barney included the name "Shearson."
Consequently, the general partner changed its name to Midwest Centers Inc. to
delete any references to "Shearson."
The directors and executive officers of the General Partner are as follows:
Name Office
Paul L. Abbott Director, President and Chairman of the Board
Stevan N. Bach Director
Kathleen Carey Director
Raymond C. Mikulich Director
Robert J. Hellman Vice President, Director and
Chief Financial Officer
Joan B. Berkowitz Vice President
Elizabeth Rubin Vice President
Robert Sternlieb Vice President
Paul L. Abbott, 50, is a Managing Director of Lehman Brothers. Mr. Abbott
joined Lehman Brothers in August 1988, and is responsible for investment
management of residential, commercial and retail real estate. Prior to joining
Lehman Brothers, Mr. Abbott was a real estate consultant and a senior officer
of a privately held company specializing in the syndication of private real
estate limited partnerships. From 1974 through 1983, Mr. Abbott was an officer
of two life insurance companies and a director of an insurance agency
subsidiary. Mr. Abbott received his formal education in the undergraduate and
graduate schools of Washington University in St. Louis.
Stevan N. Bach, 56, is Executive Vice President of Bach, Thoreen, McDermott
Inc., a real estate valuation and consulting firm based in Houston, Texas. Mr.
Bach has over 32 years of experience in the real estate business. From
December 1980 through July 1984, Mr. Bach was a Senior Vice President, National
Director and General Manager of the Southwestern Region for Landauer
Associates, Inc. From December 1975 through December 1980, Mr. Bach was the
Vice President and Manager of Coldwell Banker Appraisal Services. Mr. Bach is
a graduate of the University of Southern California.
Kathleen B. Carey, 42, is an attorney specializing in commercial real estate.
She is a graduate of the State University of New York at Albany and St. John's
University Law School. In 1987, she joined the Connecticut law firm of
Cummings & Lockwood and served as a partner in the firm from 1989 until
mid-1994. Kathleen's practice has involved all facets of acquisitions, sales
and financing of commercial properties, including multifamily housing, office
buildings and shopping centers. She is admitted to practice in New York,
Connecticut and California and currently works as an independent commercial
real estate consultant.
Raymond C. Mikulich, 42, is a Managing Director of Lehman, and since January
1988, has been head of the Real Estate Investment Banking Group. Prior to
joining Lehman Brothers Kuhn Loeb in 1982, Mr. Mikulich was a Vice President
with LaSalle National Bank, Chicago, in the Real Estate Advisory Group, where
he was responsible for the acquisition of equity interests in commercial real
estate. Over his fifteen years in the real estate business, Mr. Mikulich has
arranged acquisitions and dispositions on behalf of both individuals and
institutional investors. Mr. Mikulich holds a BA degree from Knox College and
a JD degree from Kent College of Law.
Robert J. Hellman, 41, is a Senior Vice President of Lehman Brothers and is
responsible for investment management of retail, commercial and residential
real estate. Since joining Lehman Brothers in 1983, Mr. Hellman has been
involved in a wide range of activities involving real estate and direct
investments including origination of new investment products, restructurings,
asset management and the sale of commercial, retail and residential properties.
Prior to joining Lehman Brothers, Mr. Hellman worked in strategic planning for
Mobil Oil Corporation and was an associate with an international consulting
firm. Mr. Hellman received a bachelor's degree from Cornell University, a
master's degree from Columbia University, and a law degree from Fordham
University.
Joan B. Berkowitz, 36, is a Vice President of Lehman Brothers, responsible for
asset management within the Diversified Asset Group. Ms. Berkowitz joined
Lehman Brothers in May 1986 as an accountant in the Realty Investment Group.
From October 1984 to May 1986, she was an Assistant Controller to the Patrician
Group. From November 1983 to October 1984, she was employed by Diversified
Holdings Corporation. From September 1981 to November 1983, she was employed
by Deloitte Haskins & Sells. Ms. Berkowitz, a Certified Public Accountant,
received a B.S. degree from Syracuse University in 1981.
Elizabeth Rubin, 29, is a Vice President of Lehman Brothers in the Diversified
Asset Group. Ms. Rubin joined Lehman Brothers in April 1992. Prior to joining
Lehman Brothers, she was employed from September 1988 to April 1992 by the
accounting firm of Kenneth Leventhal and Co. Ms. Rubin is a Certified Public
Accountant and received a B.S. degree from the State University of New York at
Binghamton in 1988.
Robert Sternlieb, 31, is an Assistant Vice President of Lehman Brothers and is
responsible for asset management within the Diversified Asset Group. Mr.
Sternlieb joined Lehman Brothers in April 1989 as an asset manager. From May
1986 to April 1989, he was a systems analyst at Drexel Burnham Lambert. Mr.
Sternlieb received a B.S. degree in Finance from Lehigh University in 1986.
Item 11. Executive Compensation
The Directors and Officers of the General Partner do not receive any salaries
or other compensation from the Partnership, except that Mr. Bach and Ms. Carey
receive $12,000 per year for serving as Directors of the General Partner.
Prior to September 1, 1993 Mr. Bach received $10,000, and $2,400 for attendance
in person at any meeting of the Board of Directors of the General Partner or of
the Audit Committee. During 1995, Mr. Bach was paid $21,600 in director fees
and Ms. Carey was paid $19,600 in director fees.
The General Partner is entitled to receive 1% of Operating Cash Flow
distributed in any fiscal year and to varying percentages of the Net Proceeds
of capital transactions. See pages 84 and 85 of the Partnership Agreement for
a description of such arrangements which description is incorporated by
reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners - To the knowledge of
the Partnership, no person owns more than 5% of the outstanding Units as of
December 31, 1995.
(b) Security Ownership of Management - Various employees of Lehman Brothers
that perform services on behalf of the General Partner own no units of the
Partnership as of December 31, 1995.
(c) Changes in Control - None
Item 13. Certain Relationships and Related Transactions
The General Partner, an affiliate of Lehman Brothers, is entitled to receive a
portion of Operating Cash Flow and Net Proceeds from Capital Transactions (see
Item 5). During 1995, the General Partner received $22,698 as its share of
Operating Cash Flow for 1995.
During 1993, the Partnership engaged Lehman Brothers, an affiliate of the
General Partner, in conjunction with the possible sales of Brookdale and
Northland. Pursuant to such agreement, Lehman Brothers was entitled to a fee
equal to 0.875% of the gross proceeds of a transaction, as defined in the
Letter Agreement (incorporated by reference to Exhibit 10.13). Pursuant to
this agreement, the Partnership paid Lehman Brothers $508,774 in 1994 for
advisory services related to the sale of Northland Center. Such agreement was
terminated in 1995.
Affiliates of the General Partner are or have been responsible for certain
administrative functions of the Partnership. For amounts paid to such
affiliates, see Note 7 of the Notes to Financial Statements.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2).
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
(a Delaware limited partnership)
Index to Financial Statements and Schedules
Page
Number
Independent Auditors' Report F-1
Balance Sheets
At December 31, 1995 and 1994 F-2
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1995, 1994 and 1993 F-2
Statements of Operations
For the years ended December 31, 1995, 1994 and 1993 F-3
Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993 F-4
Notes to the Financial Statements F-5
Schedule II - Valuation and Qualifying Accounts F-12
Schedule III - Real Estate and Accumulated Depreciation F-13
(b) Exhibits.
Subject to Rule 12b-32 of the Securities Act of 1934 regarding incorporation by
reference, listed below are the exhibits which are filed as part of this
report:
3.* Registrant's Agreement of Limited Partnership, dated December 1, 1986,
is hereby incorporated by reference to Exhibit A to the Prospectus contained in
Registration Statement No. 33-9937, which Registration Statement (the
"Registration Statement") was declared effective by the SEC on December 23,
1986.
4.1* The form of Certificate of Limited Partnership Interest is hereby
incorporated by reference to Exhibit 4.1 to the Registration Statement.
4.2* The form of Unit Certificate is hereby incorporated by reference to
Exhibit 4.2 to the Registration Statement.
10.1* The form of Property Management Agreement between Registrant and Center
Management Venture is hereby incorporated by reference to Exhibit 2 to the
Registration Statement.
10.2* The form of Transfer Agent Agreement is hereby incorporated by
reference to Exhibit 10.7 to the Registration Statement.
10.3* The form of Promissory Note (Brookdale) is hereby incorporated by
reference to Exhibit 10.8.1 to the Registration Statement.
10.4* The form of Promissory Note (Northland) is hereby incorporated by
reference to Exhibit 10.8.2 to the Registration Statement.
10.5* The form of Mortgage is hereby incorporated by reference to Exhibit
10.9 to the Registration Statement.
10.6* The form of Assignments of Leases and Rents is hereby incorporated by
reference to Exhibit 10.10 to the Registration Statement.
10.7* The Indemnification Agreement is hereby incorporated by reference to
Exhibit 10.11 to the Registration Statement.
10.8* The Agreement of Indemnification is hereby incorporated by reference to
Exhibit 10.11 to the Registration Statement.
10.9* The Second Mortgage Loan Agreement from Equitable to the Partnership
dated June 25, 1991 is hereby incorporated by reference to Exhibit 10.13 to the
Registrant's Form 10-K for the year ended December 31, 1991.
10.10* Letter of Intent to Purchase Northland Center by Equitable Life
Assurance Society of the United States is hereby incorporated by reference to
Exhibit A to the Partnership's Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 19, 1994.
10.11* The Engagement Letter between the Partnership and Lehman Brothers
securing Lehman Brothers services as exclusive financial advisor with respect
to the sale of Northland Center and Brookdale Center, dated October 25, 1993 is
hereby incorporated by reference to Exhibit 10.13 to the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1993.
10.12* Termination and Release Agreement between the Partnership and Equitable
Real Estate Investment Management, Inc. dated March 28, 1994 is hereby
incorporated by reference to Exhibit 10.14 to the Partnership's Annual Report
on Form 10-K for the year ended December 31, 1993.
27 Financial Data Schedule.
* Previously filed
(c) Reports on Form 8-K during the three months ended December 31, 1995:
None.
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 29, 1996
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
BY: Midwest Centers Inc.
General Partner
BY: /s/Paul L. Abbott
Name: Paul L. Abbott
Title: Director, President and
Chairman of the Board
BY: /s/Robert J. Hellman
Name: Robert J. Hellman
Title: Director, Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
MIDWEST CENTERS INC.
General Partner
Date: March 29, 1996
BY: /s/Paul L. Abbott
Paul L. Abbott
Director, Chairman of the
Board and President
Date: March 29, 1996
BY: /s/Raymond Mikulich
Raymond Mikulich
Director
Date: March 29, 1996
BY: /s/Stevan N. Bach
Stevan N. Bach
Director
Date: March 29, 1996
BY: /s/Kathleen Carey
Kathleen Carey
Director
Date: March 29, 1996
BY: /s/Robert J. Hellman
Robert J. Hellman
Director, Vice President
and Chief Financial Officer
Date: March 29, 1996
BY: /s/Joan Berkowitz
Joan Berkowitz
Vice President
Date: March 29, 1996
BY: /s/Elizabeth Rubin
Elizabeth Rubin
Vice President
Date: March 29, 1996
BY: /s/Robert J. Sternlieb
Robert J. Sternlieb
Vice President
Independent Auditors' Report
The Partners
Midwest Real Estate Shopping Center L.P.:
We have audited the financial statements of Midwest Real Estate Shopping Center
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 Midwest Real Estate Shopping
Center L.P. as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedules, when considered
in relation to the financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
The accompanying financial statements and financial statement schedules have
been prepared assuming that the Partnership will continue as a going concern.
As discussed in Note 5 to the financial statements, the Partnership's mortgage
note payable, secured by its remaining property, matured on June 30, 1995.
Market conditions have prevented the Partnership from obtaining sufficient
proceeds from a sale or refinancing to satisfy the mortgage obligation. The
mortgage lender has notified the Partnership of its default and is attempting a
non judicial foreclosure sale scheduled for April 5, 1996. These conditions
raise substantial doubt about the Partnership's ability to continue as a going
concern. These financial statements and financial statement schedules do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1996
Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
Property held for disposition (notes 3 and 5) $24,500,000 $35,072,000
Cash and cash equivalents 5,971,023 6,693,502
Restricted cash (note 5) 1,012,296 -
Accounts receivable, net of allowance
of $174,600 in 1995 and $95,229 in 1994 537,561 181,358
Deferred rent receivable 112,931 90,969
Due from affiliates, net (note 7) 115,062 88,278
Deferred charges, net of accumulated
amortization of $246,676 in 1994 - 33,324
Prepaid assets 92,607 142,679
Total Assets $32,341,480 $42,302,110
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 623,499 $ 1,170,453
Zero coupon mortgage note payable
(note 5) 38,028,587 33,652,305
Distribution payable (note 10) - 756,565
Total Liabilities 38,652,086 35,579,323
Partners' Capital (Deficit) (note 4):
General Partner (111,270) 19,065
Limited Partners (10,700,000
securities outstanding) (6,199,336) 6,703,722
Total Partners' Capital
(Deficit) (6,310,606) 6,722,787
Total Liabilities and Partners'
Capital (Deficit) $32,341,480 $42,302,110
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1995, 1994 and 1993
Limited General
Partners Partner Total
Balance at December 31, 1992 $ 50,928,358 $(482,044) $ 50,446,314
Net loss (18,193,197) (183,770) (18,376,967)
Distributions (note 10) (5,350,000) (54,040) (5,404,040)
Balance at December 31, 1993 27,385,161 (719,854) 26,665,307
Net income (loss) (8,429,939) 862,671 (7,567,268)
Distributions (note 10) (12,251,500) (123,752) (12,375,252)
Balance at December 31, 1994 6,703,722 19,065 6,722,787
Net loss (10,656,058) (107,637) (10,763,695)
Distributions (note 10) (2,247,000) (22,698) (2,269,698)
Balance at December 31, 1995 $ (6,199,336) $(111,270) $ (6,310,606)
Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
Income 1995 1994 1993
Rental income (note 3) $ 4,691,179 $ 4,895,956 $ 12,622,285
Escalation income (note 3) 6,053,160 5,964,157 17,226,821
Interest income 421,179 326,493 257,776
Miscellaneous income (note 2) 606,678 1,508,212 204,644
Total Income 11,772,196 12,694,818 30,311,526
Expenses
Property operating expenses 2,897,546 2,657,042 13,025,506
Loss on write-down of
real estate (note 3) 9,498,921 9,068,553 16,163,153
Real estate taxes 3,205,621 3,528,943 5,705,170
Interest expense 5,076,282 6,145,897 7,857,584
Depreciation and amortization 1,196,967 2,677,432 3,854,330
General and administrative 236,175 311,639 1,289,480
Management fee (note 9) 215,365 230,565 563,654
Professional fees 209,014 252,565 229,616
Total Expenses 22,535,891 24,872,636 48,688,493
Loss from Operations (10,763,695) (12,177,818) (18,376,967)
Gain on sale of property (note 3) - 4,610,550 -
Net Loss $(10,763,695) $ (7,567,268) $(18,376,967)
Net Loss Allocated:
To the General Partner $ (107,637) $ 862,671 $ (183,770)
To the Limited Partners (10,656,058) (8,429,939) (18,193,197)
$(10,763,695) $ (7,567,268) $(18,376,967)
Per Limited Partnership
Security (10,700,000
securities outstanding) $ (1.00) $ (.79) $ (1.70)
Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
Cash Flows from Operating Activities:
1995 1994 1993
Net loss $(10,763,695) $ (7,567,268) $(18,376,967)
Adjustments to reconcile net
loss to net cash
provided by operating
activities:
Depreciation and amortization 1,196,967 2,677,432 3,854,330
Loss on write-down of real
estate 9,498,921 9,068,553 16,163,153
Increase in interest on zero
coupon mortgage note payable 4,376,282 6,145,897 7,766,104
Gain on sale of property - (4,610,550) -
Increase (decrease) in cash
arising from changes
in operating assets
and liabilities:
Restricted cash (1,012,296) - -
Accounts receivable (356,203) 304,519 1,552,961
Deferred rent receivable (21,962) (62,341) (118,152)
Due from affiliates, net (26,784) 36,067 (41,723)
Prepaid assets 50,072 1,533,654 (96,338)
Accounts payable and
accrued expenses (124,277) (1,792,460) 748,362
Deferred income - (1,250,000) 1,250,000
Net cash provided by
operating activities 2,817,025 4,483,503 12,701,730
Cash Flows from Investing Activities:
Net proceeds from sale of
property - 5,625,304 -
Additions to real estate (513,241) (1,114,049) (2,322,045)
Construction escrow - - 84,425
Net cash (used for) provided by
investing activities (513,241) 4,511,255 (2,237,620)
Cash Flows from Financing Activities:
Payoff of note payable - - (3,000,000)
Construction escrow - - 486,280
Distributions paid (3,026,263) (12,969,697) (5,417,550)
Net cash used for
financing activities (3,026,263) (12,969,697) (7,931,270)
Net (decrease) increase in
cash and cash equivalents (722,479) (3,974,939) 2,532,840
Cash and cash equivalents
at beginning of period 6,693,502 10,668,441 8,135,601
Cash and cash equivalents
at end of period $ 5,971,023 $ 6,693,502 $ 10,668,441
Supplemental Disclosure of Cash Flow Information:
Cash paid during the
period for interest $ 700,000 $ - $ 91,480
Supplemental Disclosure of Noncash Investing Activities:
Closing costs of $370,000 and capital expenditures of $422,677 were funded
through accounts payable in 1994.
Supplemental Disclosure of Noncash Financing Activities:
In connection with the sale of Northland Center, Equitable released the
Partnership from the related $54,504,713 mortgage obligation.
Notes to the Financial Statements
December 31, 1995, 1994 and 1993
1. Organization
Midwest Real Estate Shopping Center L.P., formerly Equitable Real Estate
Shopping Center L.P. (the "Partnership") was formed as a limited partnership on
October 28, 1986, under the laws of the State of Delaware. The Partnership was
formed to acquire two regional shopping malls, Brookdale Center and Northland
Center.
In conjunction with the termination of the former asset management agreement
with Equitable Real Estate Investment Management, Inc. (Note 8), the
Partnership was required to cease using "Equitable" and "Equitable Real Estate"
in its name. Consequently, effective November 21, 1994, the Partnership
changed its name to Midwest Real Estate Shopping Center, L.P.
The general partner of the Partnership is Midwest Centers Inc., (the "General
Partner"), formerly Shearson ESC/GP Inc. (see below), an affiliate of Lehman
Brothers Inc., formerly Shearson Lehman Brothers Inc.
The initial capital was $1,000, representing a capital contribution by the
General Partner. The Partnership commenced investment operations on December
30, 1986, with the acceptance of subscriptions for 10,700,000 limited
partnership securities from unitholders, the maximum authorized by the
agreement of limited partnership (the "Partnership Agreement").
On July 31, 1993, Shearson Lehman Brothers Inc. ("Shearson") sold certain of
its domestic retail brokerage and asset management businesses to Smith Barney,
Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale,
Shearson changed its name to Lehman Brothers Inc. ("Lehman Brothers"). The
transaction did not affect the ownership of the General Partner. However, the
assets acquired by Smith Barney included the name "Shearson". Consequently,
effective November 12, 1993, the general partner changed its name to Midwest
Centers Inc. to delete any reference to "Shearson".
The General Partner believes it is in the best interests of the Partnership and
the Unitholders for the Partnership to dispose of its assets and dissolve and
liquidate the Partnership in an orderly manner. During 1993, the Partnership
engaged Lehman Brothers, an affiliate of the General Partner, to assist in this
effort with respect to the sale of the Properties. On March 28, 1994, the
Partnership executed a contract with Equitable for the sale of Northland Center
subject to agreement by the parties to certain additional documentation. On
July 22, 1994, the Partnership sold Northland Center.
The General Partner has been attempting to sell the Partnership's remaining
property, Brookdale Center (the "Property" or "Brookdale"), and pay off the
Zero Coupon Mortgage Note Payable (the "Mortgage"), which is held by The
Equitable Life Assurance Society of the United States ("Equitable") and secured
by the Property. The General Partner was unable to consummate a sale of the
Property and repay the Mortgage prior to June 30, 1995, the maturity date of
the Mortgage. As a result, on July 5, 1995, Equitable issued a notice of
default to the Partnership and commenced advertising Brookdale for a public
nonjudicial foreclosure sale to be held on September 12, 1995. Such date was
subsequently postponed until April 5, 1996.
2. Summary of Significant Accounting Policies
Basis of Accounting. The financial statements of the Partnership have been
prepared on the accrual basis of accounting.
Property Held for Disposition. Property held for disposition, which consist of
buildings, land and personal property, is recorded at its fair market value
less costs to sell. Effective January 1, 1996, Brookdale will no longer be
depreciated. Prior to 1993, the Brookdale real estate investment was recorded
at cost less accumulated depreciation. As further discussed in Note 3, it was
determined that the decline in appraised value of Northland Center as of
December 31, 1993 and the decline in the appraised value of Brookdale as of
December 31, 1994, the decline in national real estate market trends and
continuing decreases in occupancy were not abating and the carrying values
should be reduced to their appraised value. After adjustment for write downs,
depreciation of the buildings was computed using the straight-line method over
an estimated useful life of 40 years. Depreciation of personal property was
computed using the straight-line method over an estimated useful life of 12 yea
s. Amortization of tenant leasehold improvements was computed using the
straight-line method over the lease term.
Accounting for Impairment. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("FAS 121"), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. FAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Partnership has
adopted FAS 121 in the fourth quarter of 1995.
Fair Value of Financial Instruments. Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
("FAS 107"), requires that the Partnership disclose the estimated fair values
of its financial instruments. Fair values generally represent estimates of
amounts at which a financial instrument could be exchanged between willing
parties in a current transaction other than in forced liquidation.
Fair value estimates are subjective and are dependent on a number of
significant assumptions based on management's judgment regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. In addition, FAS 107 allows
a wide range of valuation techniques, therefore, comparisons between entities,
however similar, may be difficult.
Deferred Charges. The following fees and charges were amortized using the
straight-line method over the following periods:
Period
Fee for negotiating the mortgage notes 8.5 years
Fee for placement of mortgage notes 8.5 years
Offering Costs. Offering costs are nonamortizable and have been deducted from
partners' capital.
Transfer of Units and Distributions. Upon the transfer of a unit, net income
and net loss from operations attributable to such unit generally will be
allocated between the transferor and the transferee based on the number of days
during the year of transfer that each is deemed to have owned the unit. The
unitholder of record on the last day of a calendar month will be deemed to have
owned the unit for the entire month. Distributions of operating cash flow, as
defined in the Partnership Agreement, will be paid on a quarterly basis to
registered holders of units on record dates established by the Partnership,
which generally will be the last day of each quarter.
Income Taxes. No provision is made for income taxes since such liability is
the liability of the individual partners.
Net Loss Per Limited Partnership Unit. Net loss per limited partnership unit
is based upon the limited partnership interests outstanding at year-end and the
net income allocated to the limited partners.
Rental Income and Deferred Rent. The Partnership rents its property to tenants
under operating leases with various terms. Deferred rent receivable consists
of rental income which is recognized on the straight-line basis over the lease
terms, but will not be received until later periods as a result of scheduled
rent increases.
Cash and Cash Equivalents. Cash equivalents consists of short-term highly
liquid investments which have maturities of three months or less from the date
of issuance. The carrying amount approximates fair value because of the short
maturity of the instruments.
Restricted Cash. Restricted cash represents net cash flow generated by
Brookdale subsequent to the date of receivership.
Concentration of Credit Risk. Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
and cash equivalents in excess of the financial institutions' insurance limits.
the Partnership invests available cash with high credit quality financial
institutions.
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.
3. Real Estate
The Partnership's real estate, which was purchased on December 30, 1986 from
Equitable, originally consisted of two regional shopping malls known as
Brookdale Center, located in Brooklyn Center, Hennepin County, Minnesota; and
Northland Center, located in Southfield, Oakland County, Michigan
("Northland"), collectively, the "Properties."
Brookdale is a regional shopping mall anchored by five major department stores
- - Sears, Roebuck and Co. ("Sears"), J.C. Penney, Inc. ("J.C. Penney"),
Dayton-Hudson Corporation ("Dayton's"), Mervyn's ("Mervyn's") and Kohl's
Department Stores, Inc. ("Kohl's"), all located on a site of approximately 81
acres. Brookdale contains approximately 985,000 gross leasable square feet, of
which approximately 780,000 square feet is owned or leased by the anchor
tenants and not by the Partnership.
J.C. Penney leases its building and the land on which its building is
constructed from a third party which leases the land from the Partnership until
July 27, 2015; however, it has the option to terminate the lease on either July
27, 1995 or July 27, 2005. J.C. Penney was required to operate a J.C. Penney
type department store until July 27, 1995; however J.C. Penney may sublet the
entire premise or assign the lease to any corporation which may take over the
business of J.C. Penney in Minnesota as a result of an assignment or merger.
J.C. Penney did not exercise the option to terminate the lease on July 27, 1995
and has not informed the Partnership of any intention to sublease the premises.
Sears, which owns its own building and land, has an operating agreement and a
purchase agreement that require it to operate a Sears store in its main
building until its expiration in May 1997. Mervyn's, which opened in 1995, has
a lease which expires in August 2003. Dayton's, which leases its building and
land from a third party, has an operating agreement which terminates on July
31, 1996. Kohl's own's its building and leases the land from the Partnership.
Kohl's land lease terminates on January 31, 2010 with two five-year renewals.
Kohl's did not renew its operating agreement, which expired on August 1, 1993.
None of the above anchors have informed the Partnership of any intention to
leave Brookdale.
During 1995 and 1994, the Partnership wrote down the net book value of
Brookdale by $9,498,921 and $9,068,553, respectively, to its estimated fair
market value less costs to sell. The determination of the estimated fair
market value of the property was based upon the most recent appraisal of the
property, which is conducted annually.
The following is a schedule of the remaining minimum lease payments for
Brookdale as called for under the lease agreements:
Year ending
December 31,
1996 $ 3,962,275
1997 3,741,906
1998 3,447,194
1999 3,243,802
2000 2,693,023
Thereafter 9,789,334
$26,877,534
In addition to the minimum lease amounts, the leases provide for escalation
charges to tenants for common area maintenance, real estate taxes and
percentage rents. For the years ended December 31, 1995, 1994 and 1993,
percentage rents amounted to $282,843, $233,639, and $855,488 respectively,
which amounts are included in rental income.
On July 22, 1994, the Partnership executed an agreement with Equitable for the
sale of Northland for the price of $6,600,000 in excess of the balance of the
first mortgage loan. The carrying value was reduced by $16,163,153 to its
estimated fair market value at December 31, 1993, which reflected the terms of
the sale. The price was determined as if the sale had closed on December 31,
1993 and any positive cash flow generated by Northland from January 1, 1994 to
the closing belonged to Equitable. The Partnership received net proceeds of
$5,625,304. The transaction resulted in a gain on sale of $4,610,550 in 1994.
Pursuant to the Partnership agreement (see note 4), the gain was allocated
$984,449 to the general partner and $3,626,101 to the limited partners.
4. Partnership Agreement
Pursuant to the terms of the Partnership Agreement, profits and losses from
operations shall be allocated 99% to the unitholders and 1% to the General
Partner. Distributions of net cash flow from operations, as defined in the
Partnership Agreement, shall be made in the following amounts and order of
priority: (i) first, 99% to the unitholders and 1% to the General Partner,
until the unitholders receive an amount equal to a cumulative annual return of
11%, compounded quarterly, on their Adjusted Capital Contributions; and (ii)
second, 99% to the unitholders and 1% to the General Partner.
With respect to capital transactions, income and losses will be allocated to
the General Partner and the unitholders in the same proportions as net proceeds
from capital transactions are distributed, except to the extent necessary to
reflect prior capital account adjustments. Distributions of net proceeds from
capital transactions shall be distributed as follows: (i) first, 99% to the
unitholders and 1% to the General Partner, until the unitholders have received,
from aggregate distributions of operating cash flow and net proceeds from
capital transactions, an amount equal to a cumulative annual return of 11%
compounded quarterly on their adjusted capital contributions; (ii) second, 99%
to unitholders and 1% to the General Partner, until the unitholders have
received, from aggregate distributions of operating cash flow and net proceeds
from capital transactions, less distributions constituting the cumulative
priority return, as defined in the Partnership Agreement, an amount equal to
their adjusted capital contributions; and (iii) third, 88.24% to the
unitholders and 11.76% to the General Partner.
5. Zero Coupon Mortgage Note Payable
Financing for the purchase of the Malls was provided by two nonrecourse
mortgage notes from Equitable in the initial principal amounts of $15,175,000
(the "Brookdale Note") and $25,675,000 (the "Northland Note"). Upon the sale of
the Northland Center on July 22, 1994, Equitable released and discharged the
Partnership from the Northland Note and all interest accrued on the principal
as specified in the mortgage note agreement. The Brookdale Note has an
interest rate of 10.2% per annum, compounded semiannually. The note provides
that the Partnership must maintain at all times a "Loan-to-Value Ratio" of not
greater than 90%. Loan-to-Value Ratio is defined generally as the then
outstanding accreted amount of the Brookdale Note divided by the most recent
appraised value of the property, as updated on an annual basis. The Brookdale
Note is secured by a first mortgage on Brookdale Mall and an assignment of
rents and leases.
On May 10, 1995, the Partnership received a notice from Equitable requesting
that the Partnership deposit eligible collateral having a present value of
$3,312,199 by June 3, 1995. The Partnership did not deposit the eligible
collateral.
On July 5, 1995, the Partnership received notice from Equitable that the
Partnership failed to pay all principal and accrued interest due under the
Mortgage on June 30, 1995, the maturity date of the Mortgage. The notice
stated that in the event such amount is not paid within ten days after receipt
of the notice, an Event of Default under the Mortgage will exist and Equitable
will pursue all remedies available to it, including without limitation,
foreclosure of the lien of the Mortgage by power of sale or judicial
foreclosure and the appointment of a receiver. Further to its July 5, 1995
notice of default to the Partnership, Equitable, which holds the mortgage on
Brookdale, commenced advertising Brookdale for a public nonjudicial foreclosure
sale to be held initially on September 12, 1995, and which was postponed to
April 5, 1996.
On August 2, 1995, at the request of Equitable, the District Court for the
Fourth Judicial District of Minnesota appointed General Growth Management, Inc.
("General Growth") as the receiver of Brookdale. In such capacity, General
Growth will collect the rent proceeds from Brookdale's tenants and apply the
proceeds to payment of, among other things, Brookdale's operating expenses,
maintenance costs, real estate taxes, tenant improvements and leasing
commissions, with any remaining funds to be paid to Equitable on account of its
mortgage on Brookdale. From the date of receivership through December 31,
1995, the net cash flow generated by Brookdale, which is reflected on the
Partnership's balance sheet as "Restricted cash" in the amount of $1,012,296,
will be used to pay property operating expenses and real estate taxes for
Brookdale. As of December 31, 1995, $700,000 of restricted cash was forwarded
to Equitable to be applied against accrued interest, per the terms of the
receivership . Debt service shortfalls, if any, may be advanced by Equitable
and added to the principal amount of the Mortgage. The Partnership continues
to hold negotiations with Equitable concerning the mortgage in default. In
addition to such negotiations, the Partnership is considering all alternatives
available to it with respect to such potential foreclosure sale.
Beginning on July 1, 1995, the Partnership started to accrue interest on the
Mortgage at the default rate of 19%, in accordance with the Brookdale Note. As
of December 31, 1995, the Partnership accrued $3,360,015 in default interest,
of which $2,600,015 remained unpaid.
It is not practicable for the Partnership to estimate the fair value of the
Brookdale Note as no quoted market price exists and the cost of obtaining an
independent valuation appears excessive to the Partnership. However, the
Partnership believes the fair value of the Brookdale Note is no more than the
estimated fair market value of Brookdale.
6. Note Payable
On June 25, 1991, the Partnership obtained a $3,000,000 loan from Equitable
Life Assurance Society of the U.S. The note bore interest at 1% above prime and
was secured by a second mortgage lien on Northland Center. Monthly payments of
interest only were required. On June 6, 1993, the Partnership repaid the note
payable from cash reserves.
7. Transactions with Related Parties
The General Partner or its affiliates earned fees and compensation in
connection with the syndication, acquisition and administrative services
rendered to the Partnership of $11,342,000 and incurred unreimbursed costs on
behalf of the Partnership of $570,352. The aggregate amount of the
aforementioned fees and compensation earned and unreimbursed costs was composed
of $7,490,000 included in offering costs and $4,422,352 included in deferred
charges. During 1993, the Partnership engaged Lehman Brothers, an affiliate of
the General Partner, in conjunction with exploring the possible sales of
Brookdale and Northland. Pursuant to such agreement which was terminated in
1995, Lehman Brothers was entitled to a fee equal to .875% of the gross
proceeds of a transaction, as defined in the Letter Agreement. Pursuant to
this agreement, Lehman Brothers received $508,774, in 1994, from the
Partnership for advisory services related to the sale of Northland.
As of December 31, 1995 and 1994, $115,062 and $88,278, respectively, is the
net amount due from affiliates. For the years ended December 31, 1995, 1994 and
1993, $167,032, $665,155, and $151,243, respectively, was earned by affiliates.
Cash and Cash Equivalents. Cash and cash equivalents reflected on the
Partnership's balance sheets at December 31, 1995 and 1994 were on deposit with
an affiliate of the General Partner.
8. Asset Management Agreement
On December 31, 1986, the Partnership entered into an agreement with Equitable
Real Estate Investment Management, Inc. ("EREIM") for the management of the
Properties. The agreement provided for an annual fee equal to $1,060,000 per
annum (included in operating expenses) through December 30, 2001. Effective
December 31, 1993, the Asset Management Agreement with EREIM was terminated.
9. Management Agreement
The Partnership entered into a management agreement with General Growth for the
day-to-day operations of the Properties. General Growth received a monthly fee
of 4.45% (increased from 4% commencing February 1, 1989) of the net rents as
defined in the management agreement. The agreement expired January 31, 1989 and
was extended for two years. The Properties were managed pursuant to the terms
of the agreement through August 2, 1995. Pursuant to the default of the
Mortgage and the appointment of General Growth as the receiver of Brookdale,
General Growth is entitled to receiver's fees equal to 4.45% of all fixed
minimum rents and percentage or overage rents collected. For the year ended
December 31, 1995, General Growth earned receiver fees of approximately
$78,000.
10. Distributions to Limited Partners
Distributions to limited partners for 1995, 1994 and 1993 were $2,247,000 ($.21
per limited partnership security), $12,251,500 ($1.15 per limited partnership
security), and $5,350,000 ($.50 per limited partnership security),
respectively. Cash distributions declared payable to limited partners at
December 31, 1994 were $749,000 ($.07 per limited partnership security). Cash
distributions to limited partners were suspended, beginning in the fourth
quarter of 1995.
11. Reconciliation of Financial Statement Net Loss and Partners' Capital
(Deficit) to Federal Income Tax Basis Net Loss and Partners' Capital
Reconciliations of financial statement net loss and partners' capital (deficit)
to federal income tax basis net loss and partners' capital follow:
1995 1994 1993
Financial statement net loss $(10,763,695) $ (7,567,268) $(18,376,967)
Tax basis depreciation
over financial
statement depreciation (1,539,664) (169,715) (2,565,258)
Tax basis rental income over
(under) financial
statement rental income (54,816) (2,187,492) 1,899,207
Tax basis loss on sale of
property over
financial statement gain
on sale
of property - (12,630,880) -
Financial statement loss on
write-down of
real estate 9,498,921 9,068,553 16,163,153
Other 74,568 (194,409) (31,791)
Federal income tax basis
net loss $ (2,784,686) $(13,681,211) $ (2,911,656)
Financial statement partners'
capital (deficit) $ (6,310,606) $ 6,722,787 $ 26,665,307
Current year financial
statement net loss over
(under) federal income tax
basis net loss 7,979,009 (6,113,943) 15,465,311
Cumulative financial statement
net income (loss) over
(under) federal income tax
basis net income (loss) (485,600) 5,628,343 (9,836,968)
Federal income tax basis
partners' capital $ 1,182,803 $ 6,237,187 $ 32,293,650
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
taxing authorities.
12. Litigation
On January 17, 1995, the Partnership announced that an action had been filed
against the General Partner, the Partnership and other defendants in the United
States District Court for the Southern District of New York on behalf of all
persons who owned Limited Partnership Units of the Partnership on June 7, 1994.
The complaint alleges, among other things, that the solicitation statement used
by the Partnership to solicit the consent of the Limited Partners to the July
1994 sale of the Northland Shopping Center (the "Solicitation Statement")
contained material misrepresentations and omissions in violation of Section
14(a) of the Securities and Exchange Act of 1934 and Rule 14a-9 promulgated
thereunder. The complaint also alleges claims for breach of fiduciary duty,
negligent misrepresentation and breach of the limited partnership agreement
related to the Northland sale and the partial liquidation of the assets.
Plaintiffs seek, among other things, compensatory damages and to have their
action certified as a class action under the Federal Rules of Civil Procedure.
On May 12, 1995, the Partnership announced that two similar actions had been
filed in the District Court for the Southern District of New York. On November
16, 1995, the complaints in one of these three actions was amended to add a
derivative claim for breach of fiduciary duty on behalf of the Partnership.
The amended complaint also alleges that the General Partner, assisted by the
other defendants, breached its fiduciary duties by failing to take steps to
maximize the value of the Brookdale Shopping Center. The General Partner
believes that the allegations in these complaints are without merit and will
defend these lawsuits vigorously.
On May 12, 1995, the Partnership also announced that an action had been filed
against the General Partner and other defendants in the Federal District Court
for the Central District of California on behalf of all persons who owned
Limited Partnership Units during the period June 7, 1994 to the present. The
complaint alleges that the Solicitation Statement contained material
misrepresentations and omissions in violation of Section 14(a) of the
Securities and Exchange Act of 1934 and Rule 14a-9 promulgated thereunder.
Plaintiffs seek, among other things, compensatory damages, and to have their
action certified as a class action under the Federal Rules of Civil Procedure.
This action has been transferred to the District Court for the Southern
District of New York to be coordinated with the New York actions for pre-trial
proceedings. The General Partner believes that the allegations in this
complaint are without merit and will defend this lawsuit vigorously.
The Partnership also announced on May 12, 1995, that an action had recently
been filed against the General Partner and other defendants in the Superior
Court for Los Angeles County and removed to the District Court for the Central
District Court of California. This action is brought on behalf of all persons
who purchased Limited Partnership Units of the Partnership during the period
from December 26, 1986 to the present. The complaint alleges, among other
things, that the General Partner, assisted by the other defendants, breached
its fiduciary duty to the plaintiffs in connection with the offer and sale of
Limited Partnership Units, the operation of the Partnership and the Northland
sale. Plaintiffs seek, among other things, compensatory damages, punitive
damages, and to have their action certified as a class action under the Federal
Rules of Civil Procedure. This action also has been transferred to the
District Court for the Southern District of New York to be coordinated with the
pre-trial proceedings. The General Partner believes that the allegations in
the complaint are without merit and will defend the lawsuit vigorously.
Schedule II Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
Allowance for doubtful accounts:
Year ended
December 31, 1993: $ 1,152,546 $ 544,951 $445,692 $1,251,805
Year ended
December 31, 1994: $ 1,251,805 $(184,872) $971,704 $ 95,229
Year ended
December 31, 1995: $ 95,229 $ 87,621 $ 8,250 $ 174,600
MIDWEST REAL ESTATE SHOPPING CENTER, L.P.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
Costs
Capitalized
Subsequent
Initial Cost to Partnership (A) To
------------------------------------- Acquisition
Land,
Buildings and Buildings and Write-down
Description Encumbrances Land Improvements Improvements Adjustment
Brookdale
Shopping
Center,
Hennepin
County, MN $38,028,587 $5,413,594 $42,816,568 $5,611,188 $29,341,350
$38,028,587 $5,413,594 $42,816,568 $5,611,188 $29,341,350
(CONT.)----------------------------------------------------------------------
Gross Amount at Which Carried
at Close of Period (B)----------------------
Buildings and Accumulated
Description Land Improvements Total Depreciation
Brookdale
Shopping
Center,
Hennepin
County, MN $2,551,918 $21,948,082 $24,500,000 $ -
$2,551,918 $21,948,082 $24,500,000 $ -
(CONT.)------------------------------------------------------------------
Life on which
Depreciation
in Latest
Date of Date Income Statements
Description Construction Acquired is Computed
Brookdale Shopping
Center, Hennepin
County, MN 1962 12/30/86 10-40 years
(A) The initial cost of the Partnership represents the original purchase price
of the property, including amounts incurred subsequent to the acquisition which
were contemplated. The initial costs included the purchase price paid by the
Partnership and acquisition fees and expenses.
(B) The aggregate costs of real estate at December 31, 1995 and 1994 for
Federal income tax purposes is $53,862,752 and $53,602,750, respectively.
(C) During 1995 and 1994, the Partnership recognized a write-down in the book
value of the Brookdale Center of $9,498,921 and $9,068,553, respectively. The
net book value adjusted for the write-down, becomes the new carrying value for
the property.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1995, 1994 and 1993 follows:
Real Estate Investments: 1995 1994 1993
Beginning of year $ 35,072,000 $108,498,993 $125,363,943
Additions 90,564 1,536,726 1,716,870
Write-down (10,662,564) (18,678,786) (18,581,820)
Dispositions - (56,284,933) -
End of year $ 24,500,000 $ 35,072,000 $108,498,993
Accumulated Depreciation:
Beginning of year $ - $ 8,234,897 $ 6,948,395
Depreciation expense 1,163,643 2,510,802 3,705,169
Write-down (1,163,643) (9,610,233) (2,418,667)
Dispositions - (1,135,466) -
End of year $ - $ - $ 8,234,897
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,983,319
<SECURITIES> 0
<RECEIVABLES> 825,092
<ALLOWANCES> (174,600)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 24,500,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,341,480
<CURRENT-LIABILITIES> 0
<BONDS> 38,028,587
<COMMON> 0
0
0
<OTHER-SE> (6,310,606)
<TOTAL-LIABILITY-AND-EQUITY> 32,341,480
<SALES> 0
<TOTAL-REVENUES> 11,772,196
<CGS> 0
<TOTAL-COSTS> 6,318,532
<OTHER-EXPENSES> 1,642,156
<LOSS-PROVISION> 9,498,921
<INTEREST-EXPENSE> 5,076,282
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,763,695)
<EPS-PRIMARY> $(1.00)
<EPS-DILUTED> 0
</TABLE>
