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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-9516
AMERICAN REAL ESTATE PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3398766
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 South Bedford Road, Mt. Kisco, New York 10549
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(Address of principal executive offices) (Zip Code)
(914) 242-7700
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(AREP's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Depositary Units Representing New York Stock Exchange
Limited Partner Interests
5% Cumulative Pay-in-Kind Redeemable Preferred New York Stock Exchange
Units Representing Limited Partner Interests
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether AREP (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based upon the closing price of Depositary Units on March 20, 1997, as reported
on the New York Stock Exchange Composite Tape (as reported by The Wall Street
Journal), the aggregate market value of AREP's Depositary Units held by
nonaffiliates of AREP as of such date was $126,537,476.
Based upon the closing price of Preferred Units on March 14, 1997, as reported
on the New York Stock Exchange Composite Tape (as reported by The Wall Street
Journal), the aggregate market value of AREP's Preferred Units held by
nonaffiliates of AREP as of such date was $1,592,175.
Number of Depositary Units outstanding as of March 20, 1997: 25,666,640.
Number of Preferred Units outstanding as of March 20, 1997: 2,074,422.
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PART I
Item 1. Business.
Introduction
American Real Estate Partners, L.P. ("AREP") was formed in Delaware on
February 17, 1987. Pursuant to an exchange offer (the "Exchange Offer") which
was consummated on July 1, 1987, AREP acquired the real estate and other assets,
subject to the liabilities, of thirteen limited partnerships (the "Predecessor
Partnerships"). The Predecessor Partnerships acquired such assets between 1972
and 1985. A registration statement on Form S-4 relating to the Exchange Offer
(Registration No. 33-13943) was filed with the Securities and Exchange
Commission (the "SEC") and declared effective May 18, 1987.
AREP's general partner is American Property Investors, Inc. (the "General
Partner"), a Delaware corporation which is wholly owned by Carl C. Icahn
("Icahn"). The General Partner's principal business address is 100 South Bedford
Road, Mt. Kisco, New York 10549, and its telephone number is (914) 242-7700.
AREP's business is conducted through a subsidiary limited partnership, American
Real Estate Holdings Limited Partnership (the "Subsidiary"), in which AREP owns
a 99% limited partnership interest. The General Partner also acts as the general
partner for the Subsidiary. The General Partner has a 1% general partnership
interest in each of AREP and the Subsidiary. References to AREP herein include
the Subsidiary, unless the context otherwise requires. As of March 20, 1997,
High Coast Limited Partnership ("High Coast"), a Delaware limited partnership
and an affiliate of Icahn, owned 13,895,712 Depositary Units (hereinafter
defined), representing approximately 54.1% of the outstanding Depositary Units,
and 1,829,472 Preferred Units (hereinafter defined), representing approximately
88.2% of the outstanding Preferred Units. See Item 1 - "Business - Rights
Offering" and Item 12 - "Security Ownership of Certain Beneficial Owners and
Management."
As described below, AREP is in the business of acquiring and managing real
estate and activities related thereto. On August 16, 1996, an amendment (the
"Amendment") to AREP's Amended and Restated Limited Partnership Agreement (the
"Partnership Agreement") became effective which permits AREP to make non-real
estate related investments. As described below, the Amendment permits AREP to
invest in securities issued by companies that are not necessarily engaged as one
of their primary activities in the ownership, development or management of real
estate to further diversify its investments while remaining in the real estate
business and continuing to pursue suitable investments in the real estate
markets.
Description of Business
AREP is in the business of acquiring and managing real estate and
activities related thereto. Such acquisitions may be accomplished by purchasing
assets outright or by acquiring securities of entities which hold significant
real estate related assets. Historically, the properties owned by AREP have been
primarily office, retail, industrial, residential and hotel properties. Most of
the real estate assets currently owned by AREP were acquired from the
Predecessor Partnerships and such assets generally are net-leased to single,
corporate tenants. As of
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March 3, 1997, AREP owned 219 separate real estate assets primarily consisting
of fee and leasehold interests in 35 states.
For each of the years ended December 31, 1996, 1995 and 1994, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of AREP. However, at December 31, 1996, 1995
and 1994, Portland General Electric Company ("PGEC") occupied a property (the
"PGEC Property") which represented more than 10% of AREP's total real estate
assets. See Item 2 - "Properties."
AREP's primary real estate investment strategy in recent periods has been
to seek to acquire undervalued assets including residential development
projects, land parcels for future residential and commercial development,
commercial properties, non-performing loans and securities of entities which
own, manage or develop significant real estate assets, including limited
partnership units and securities issued by real estate investment trusts.
In addition to holding real property, AREP may consider the acquisition of
land development companies and other real estate operating companies which may
have significant assets under development and may enhance its ability to develop
and manage AREP's properties. AREP may originate or purchase mortgage loans
including non-performing mortgage loans. AREP will normally acquire
non-performing mortgage loans with a view to acquiring title to or control over
the underlying properties. AREP also may retain purchase money mortgages in
connection with its sale of portfolio properties, with such terms as the General
Partner deems appropriate at the time of sale. Certain of AREP's investments may
be owned by special purpose subsidiaries formed by AREP or by joint ventures
(including joint ventures with affiliates of the General Partner).
On March 30, 1995, AREP completed a rights offering (the "Rights
Offering"), pursuant to which it raised approximately $107,600,000, net of
related expenses, to acquire new investments. In connection therewith, the
General Partner contributed $2,206,242 in accordance with the terms of the
Partnership Agreement. A substantial portion of the Rights Offering proceeds has
been used to fund investments by AREP.
As discussed below, in August 1996 AREP amended the Partnership
Agreement to permit non-real estate investments which, while AREP continues to
seek undervalued investment opportunities in the real estate market, will
permit it to take advantage of investment opportunities it believes exist
outside of the real estate market in order to seek to maximize Unitholder value
and further diversify its assets. Investments in non-real estate assets will
consist of equity and debt securities of domestic and foreign issuers that are
not necessarily engaged as one of their primary activities in the ownership,
development or management of real estate, and may include, for example, lower
rated securities which may provide the potential for higher yields and
therefore may entail higher risk. AREP will conduct these activities in such a
manner so as not to be deemed an investment company under the Investment
Company Act of 1940 (the "1940 Act"). Generally, this means that no more than
40% of AREP's total assets will be invested in securities. In addition, AREP
will structure its investments so as to continue to be taxed as a partnership
rather than as a corporation under the applicable publicly-traded partnership
rules of the Internal Revenue Code.
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All decisions with respect to the improvement, expansion, acquisition,
disposition, development, management, financing or refinancing of properties or
other investments are at the sole discretion of the General Partner.
The Amendment
Prior to the Amendment, the Partnership Agreement permitted AREP to invest
only in assets related to real estate, except for short-term cash-type
investments such as deposit accounts and money market funds. The General Partner
continues to believe that AREP will benefit from diversification of its real
estate portfolio. To that end, AREP intends to continue to invest its assets
available for investment in undervalued assets in the real estate market.
However, management believes there is significant competition for acquiring such
assets including a number of investment funds that have raised additional
capital for investment in opportunistic real estate transactions which may have
a negative impact on investment returns and AREP's ability to find quality
assets at appropriate yields. The General Partner believes that it is in the
best interests of AREP and its Unitholders for AREP to be permitted to invest a
portion of AREP's funds in assets outside of the real estate market. The
Amendment allows AREP, while remaining in the real estate business and
continuing to pursue suitable investments for AREP in the real estate markets,
to invest in debt and equity securities of issuers that are not necessarily
engaged as one of their primary activities in the ownership, development or
management of real estate.
While the General Partner believes that investments pursuant to the
Amendment may result in increased Unitholder value and further diversification
of the Partnership's assets, there can be no assurances thereof and there are
significant risks which may also attend the Amendment. See Item 1 - "Investment
Opportunities and Strategies - Non-Real Estate Related Investments" below and
Note 1 to the Financial Statements contained herein for more information
relating to the Amendment.
Rights Offering
On March 30, 1995, AREP completed the Rights Offering through which it
raised approximately $107,600,000, net of related expenses. The Rights Offering
enabled AREP to raise funds to increase its assets available for investment,
thereby better positioning it to take further advantage of investment
opportunities, further diversify its portfolio and mitigate against the impact
of lease expirations. Most of AREP's real estate assets are net-leased to single
corporate tenants. AREP is seeking to acquire new investments to diversify its
portfolio.
Partnership Distributions
On March 26, 1997, AREP announced that no distributions on its Depositary
Units are expected to be made in 1997. No distributions were made in 1996 or
1995. In making its announcement, AREP noted that it intends to continue to
apply available cash flow toward its operations, repayment of maturing
indebtedness, tenant requirements and other capital
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expenditures and creation of cash reserves for contingencies facing AREP,
including environmental matters and scheduled lease expirations. As previously
reported, by the end of the year 2000, net leases representing approximately 23%
of AREP's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2002, 42% of such rentals will be due for renewal. In making
its decision, AREP also considered the number of properties that are leased to
retail tenants (approximately 29% of AREP's net annual rentals from its
portfolio) some of which are experiencing cash flow difficulties and
restructurings. See Item 5 - "Market for AREP's Common Equity and Related
Security Holder Matters - Distributions" and Item 7 - "Management's Discussion
and Analysis of the Financial Condition and Results of Operations - Capital
Resources and Liquidity."
On April 1, 1996, AREP distributed to holders of record of its Preferred
Units as of March 15, 1996 approximately 98,700 additional Preferred Units.
Pursuant to the terms of the Preferred Units, on February 28, 1997, AREP
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10. The
distribution is payable March 31, 1997 to holders of record as of March 14,
1997.
Recent Acquisitions
Investment in Real Estate Assets
On August 15, 1995, AREP invested approximately $7.1 million in a note
receivable by purchasing a portion (approximately 1.85%) of an unsecured Senior
Term Facility Agreement ("Facility Agreement"). The borrower is Queens Moat
Houses P.L.C. ("Queens Moat") and certain subsidiaries. Queens Moat is a United
Kingdom based hotel operator with properties in the U.K., Germany, Netherlands,
France and Belgium. AREP purchased its participation portion from Lazard Freres
& Co. LLC at 71.75% of the face amount of AREP's pro rata portion of the
Facility Agreement's outstanding senior advances on the acquisition date. The
Facility Agreement's advances are denominated in Pounds Sterling, Deutsche
Marks, Dutch Guilders, Belgian Francs and French Francs. The discount at
acquisition date, based on the then existing spot rate, was approximately $2.8
million. The Facility Agreement matures December 31, 2000 and bears interest at
LIBOR (London Interbank Offered Rate) plus 1.75% per annum for the relevant
currencies. There are scheduled repayments of the advances over the term of the
loan. In addition, repayments are required when certain underlying assets are
sold.
In June 1994, AREP entered into two joint ventures with unaffiliated
co-venturers for the purpose of developing luxury garden apartment complexes.
The Alabama joint venture has been consolidated in the accompanying financial
statements. The North Carolina joint venture sold its property in December 1996.
The first joint venture, formed as an Alabama limited liability
company, developed a 240-unit multi-family project situated on approximately
twenty acres currently owned by the joint venture, located in Hoover, Alabama,
a suburb of Birmingham. AREP, which owns a seventy percent (70%) majority
interest in the joint venture, contributed approximately $1,890,000. The
co-venturer is the general partner and has a limited partner interest.
Distributions will be made
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in proportion to ownership interests. The complex was completed in
September 1995, and all rental units were available for occupancy. The total
development costs, including the acquisition of land, were approximately
$10,909,000. In connection with this property, a reinvestment incentive fee of
approximately $38,000 was paid to the General Partner in 1996.
The second joint venture, formed as a Delaware limited partnership,
developed a 288-unit multi-family project situated on approximately
thirty-three acres in Cary, North Carolina (Raleigh-Durham area). AREP, which
owned a ninety percent (90%) majority interest in the partnership, contributed
approximately $4,022,000 and was a limited partner. The co-venturer was the
general partner and had a limited partner interest. AREP was entitled to a
cumulative annual preferred return of 12% on its investment before cash
distributions were made in proportion to ownership interests. The complex was
completed in August 1996 and all rental units were available for occupancy. The
total development costs, including the acquisition of land, were approximately
$16,000,000. In connection with this property, a reinvestment incentive fee of
approximately $72,000 was paid to AREP's general partner. In December 1996, the
joint venture sold the property for $21,000,000. AREP received approximately
$8,300,000 of the net proceeds and recognized a gain of approximately
$4,900,000.
Investment in Real Estate Limited Partnership Units
In June 1996, AREP entered into an agreement with non-affiliated third
parties and became a member of a limited liability company, Beattie Place LLC
("Beattie"). The purpose of Beattie is to acquire, hold, and ultimately dispose
of limited partnership units in ten Balcor Limited Partnerships (the "Balcor
Units") in connection with previously commenced tender offers. These Balcor
limited partnerships own and operate commercial and multi-family real estate
properties nationwide. AREP agreed to purchase a non-voting membership interest
in Beattie of approximately 71.5%. Beattie purchased approximately 117,000
Balcor Units of which approximately 84,000 Balcor Units represent AREP's pro
rata share. A total of approximately $9,600,000 was invested by AREP in this
venture. AREP received approximately $2,260,000 and $5,050,000, representing
third and fourth quarter 1996 distributions, respectively, from this investment.
Approximately $1,900,000 and $4,700,000 of these distributions represented
return of capital, respectively.
On July 17, 1996, AREP and Bayswater Realty and Capital Corp.
("Bayswater"), an affiliate of Icahn, became partners of Boreas Partners, L.P.
("Boreas"), a Delaware limited partnership. AREP and Bayswater have a 69.999%
and 30% limited and general partner interest, respectively, and a wholly-owned
subsidiary of AREP has a .001% interest as a general partner of Boreas. Boreas
together with unaffiliated third parties entered into an agreement and became
limited partners of Raleigh Capital Associates, L.P. ("Raleigh") for the purpose
of making a tender offer for up to 46% of the outstanding limited partnership
and assignee interests ("Units") of Arvida/JMB Partners, L.P. ("Arvida") a real
estate partnership. Boreas and an affiliated general partner have a total
interest in Raleigh of 33 1/3%. A total of approximately $9,800,000 was invested
by AREP in these ventures representing approximately 18,750 Arvida Units. See
Note 7 to the Financial Statements contained herein.
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Investment in RJR
At December 31, 1996, AREP owned 3,121,700 shares of RJR Nabisco
Holdings Corp.("RJR"), representing approximately 1.1% of the total outstanding
RJR common shares, at a total cost of approximately $83,000,000, and at an
average cost per share of $26.46 per share. On December 31, 1996, the closing
price of RJR common shares on the New York Stock Exchange ("NYSE") was $34,
representing a market value of approximately $106,000,000 and approximately
16.5% of AREP's total assets. Icahn owned (through affiliates) an additional
16,808,100 shares of RJR, as of December 31, 1996, representing approximately
6.2% of the total outstanding RJR common shares. In February 1997, AREP sold
its entire interest in RJR for net proceeds of approximately $112,000,000
realizing a gain of approximately $29,000,000. See Note 6 to the Financial
Statements contained herein.
Investment Opportunities and Strategies
Real Estate Investments
In selecting future real estate investments, AREP intends to focus on
assets that it believes are undervalued in the real estate market, which
investments may require substantial liquidity to maintain a competitive
advantage. The General Partner believes that AREP will benefit from
diversification of its real estate portfolio. The General Partner believes that,
because of overdevelopment in certain real estate markets and the desire of
certain real estate holders (including financial institutions) to dispose of
real estate assets, there are still opportunities available to acquire new
investments that are undervalued, including commercial properties, residential
development projects, land parcels for future residential and commercial
development, non-performing loans and the securities of entities which own,
manage or develop significant real estate assets, including limited partnership
units and securities issued by real estate investment trusts. Such investments
may not be generating positive cash flow in the near term; however, the General
Partner believes that in the current market, investments requiring some degree
of management or development activity have the greatest potential for growth,
both in terms of capital appreciation and the generation of cash flow.
The General Partner believes that the acquisition by AREP of properties
requiring some degree of management or development activity is consistent with
AREP's historical investment objectives of reinvesting the proceeds of sales and
refinancings in properties that offer greater growth potential and portfolio
diversification. To further these investment objectives, AREP may consider the
acquisition of land development companies and other real estate operating
companies which may have significant assets under development and may enhance
its ability to develop and manage these properties as well as its ability to
reduce the operating expenses related to such properties. Such acquisitions may
include those from affiliates of the General Partner, provided the terms thereof
are fair and reasonable to AREP and approved by the Audit Committee of the
Board of Directors of the General Partner (the "Audit Committee").
Other real estate investment opportunities AREP may pursue include
investments in joint venture arrangements with developers for the purpose of
developing single family homes, luxury
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garden apartments and shopping centers and the acquisition of underperforming
distressed properties through outright purchase or the purchase of the debt or
securities of such entities. For example, AREP may elect to establish an
ownership position by first acquiring debt secured by targeted assets and then
negotiating for the ownership of some or all of the underlying equity in such
assets. AREP also may seek to establish a favorable economic and negotiating
position through the acquisition of other rights or interests that provide it
with leverage in negotiating the acquisition of targeted assets. AREP also will
seek to acquire assets that are not in financial distress but which, due to the
particular circumstances of their ownership, use or location, present
substantial opportunities for development or long-term growth. AREP may also
consider acquiring additional net-leased properties at appropriate yields.
While AREP believes opportunistic real estate acquisitions continue to
remain available for companies like AREP, such acquisition opportunities for
value-added investors are becoming more competitive to source and the increased
competition may have some impact on the spreads and the ability to find quality
assets at appropriate yields.
Non-Real Estate Related Investments
In selecting future investments, AREP may, while remaining in the real
estate business and continuing to pursue suitable investments for AREP in the
real estate markets, invest a portion of its funds available for investment in
securities of issuers that are not necessarily engaged as one of their primary
activities in the ownership, development or management of real estate. Such
investments may include equity and debt securities of domestic and foreign
issuers. The investment objective of AREP with respect to such investments will
be to purchase undervalued securities, so as to maximize total returns
consisting of current income and/or capital appreciation. Undervalued securities
are those which AREP believes may have greater inherent value than indicated by
their then current trading price and/or may lend themselves to "activist"
shareholder involvement. These securities may be undervalued due to market
inefficiencies, may relate to opportunities wherein economic or market trends
have not been identified and reflected in market value, or may include those in
complex or not readily followed securities. Less favorable financial reports,
lowered credit ratings, revised industry forecasts or sudden legal complications
may result in market inefficiencies and undervalued situations.
The equity securities in which AREP may invest may include common stocks,
preferred stocks and securities convertible into common stocks, as well as
warrants to purchase such securities. The debt securities in which AREP may
invest may include bonds, debentures, notes, mortgage-related securities and
municipal obligations. Certain of such securities may include lower rated
securities which may provide the potential for higher yields and therefore may
entail higher risk. In addition, AREP may engage in various investment
techniques, such as options and futures transactions, foreign currency
transactions and leveraging for either hedging or other purposes.
AREP will conduct its investment activities in such a manner so as not to
be deemed an investment company under the 1940 Act. Generally, this means that
AREP does not intend to enter the business of investing in securities and that
no more than 40% of AREP's total assets will be invested in securities. The
portion of AREP's assets invested in each type of security
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or any single issuer or industry will not be limited. Investments may be made
directly by AREP or indirectly through entities in which it has an interest.
AREP will concentrate on undervalued securities, which may include, for
example, high yield securities and neglected securities, and AREP's investments
may be subject to significant amounts of business, financial, market and other
risks. There can be no assurance that AREP will correctly evaluate such
investments and their attendant risks or that such investments will be
profitable to AREP. In addition, the securities in which AREP may invest are
subject to the following inherent risks:
Equity Securities. Equity securities fluctuate in value, often based on
factors unrelated to the issuer of the securities, and such fluctuations can be
pronounced.
Fixed-Income Securities. Even though interest-bearing securities are
investments which may promise a stable stream of income, the prices of such
securities generally are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. The value of
fixed-income securities also may be affected by changes in the credit rating or
financial condition of the issuer.
Lower Rated Securities. AREP may invest a portion of its funds in higher
yielding (and, therefore, higher risk) securities (commonly known as junk
bonds). Such investments generally may be subject to certain risks with respect
to the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated convertible debt securities. The secondary market for
these securities may be less liquid than that of higher rated securities;
adverse conditions could make it difficult at times for AREP to sell certain
securities or could result in lower prices.
Foreign Securities. Foreign securities markets generally are not as
developed or efficient as those in the United States. Securities of some foreign
issuers are less liquid and more volatile than securities of comparable U.S.
issuers. Similarly, volume and liquidity in most foreign securities markets are
less than in the United States and, at times, volatility of price can be greater
than in the United States. Since foreign securities often are purchased with and
payable in currencies of foreign countries, the value of these assets measured
in U.S. dollars may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations.
Use of Leverage. Use of borrowed funds to leverage acquisitions can
exaggerate the effect of any increase or decrease in market value. Such
borrowings would be subject to interest costs which may not be recovered by
appreciation in value of the securities purchased.
Use of Derivatives. AREP may use derivatives ("Derivatives"), which are
financial instruments which derive their performance, at least in part, from the
performance of an underlying asset, index or interest rate, such as options and
mortgage-related securities. While Derivatives can be used effectively in
furtherance of AREP's investment objectives such as by providing a hedging
technique, under certain market conditions they can increase the volatility or
decrease the liquidity of AREP's assets.
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Financing Activities
During 1996, AREP had approximately $17,000,000 in maturing balloon
mortgages due, of which approximately $14,600,000 have been repaid in 1996 and
approximately $2,400,000 was extended to and paid in the first quarter of 1997.
Approximately $4,800,000 of additional balloon payments are due during 1997.
During the period 1998 through 1999 approximately $12,000,000 in balloon
mortgages will come due. AREP will seek to refinance a portion of these maturing
mortgages, although it does not expect to refinance all of them and may repay
them from cash flow and reserves created from time to time, thereby reducing
cash flow otherwise available for other uses. See Note 10 to the Financial
Statements contained herein.
AREP also has significant maturing debt requirements under its two
unsecured note agreements (the "Note Agreements") that it entered into in May
1988. Under the Note Agreements, AREP is required to make semi-annual interest
payments and annual principal payments. In May 1994, 1995 and 1996, AREP repaid
$10,000,000, $11,308,000 and $11,308,000, respectively, of the outstanding
principal balance under the Note Agreements. Prior to 1994, AREP was not
required to pay principal under the Note Agreements. Principal payments of
approximately $11,308,000 are due under such agreements annually during 1997 and
1998. See Note 11 to the Financial Statements contained herein. See Item 2 -
"Properties."
Leasing Activities
In 1996, 22 leases covering 22 properties and representing approximately
$2,413,000 in annual rentals expired. Eleven of these 22 properties' leases,
originally representing approximately $1,152,000 in annual rental income, were
re-let or renewed for approximately $1,260,000 in annual rentals. Such renewals
are generally for a term of five years. Four properties, with an approximate
annual rental income of $277,000 are currently being marketed for sale or lease.
Seven properties with an approximate annual rental income of $984,000 were sold,
including two sold to tenants who exercised their purchase options.
In 1997, seven leases covering seven properties and representing
approximately $812,000 in annual rentals are scheduled to expire. Three of these
leases, originally representing approximately $278,000 in annual rental income
have been or will be re-let or renewed for approximately $273,000 in annual
rentals. Such renewals are generally for a term of five years. One property with
an approximate annual rental income of $151,000 will be marketed for sale or
lease when the current lease term expires. The status of three leases with
approximate annual rental income of $383,000 is uncertain at this time.
By the end of the year 2000, net leases representing approximately 23% of
AREP's net annual rentals from its portfolio will be due for renewal, and by the
end of the year 2002, net leases representing approximately 42% of AREP's net
annual rentals will be due for renewal. In many of these leases, the tenant has
an option to renew at the same rents they are currently paying and in many of
the leases the tenant also has an option to purchase the property. AREP believes
that tenants acting in their best interests will renew those leases which are at
below
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market rents, and permit leases for properties that are less marketable (either
as a result of the condition of the property or its location) or are at
above-market rents to expire. AREP expects that it may be difficult and time
consuming to re-lease or sell those properties that existing tenants decline to
re-let or purchase and that AREP may be required to incur expenditures to
renovate such properties for new tenants. AREP also may become responsible for
the payment of certain operating expenses, including maintenance, utilities,
taxes, insurance and environmental compliance costs associated with such
properties which are presently the responsibility of the tenant. In addition,
net leases representing approximately 29% of AREP's net annual rentals from its
portfolio are with tenants in the retail sector, many of which are currently
experiencing cash flow difficulties and a number of which are in bankruptcy. As
a result, operating expenses may be incurred with respect to the properties
underlying any such leases rejected in bankruptcy and those expenses, coupled
with the effects of the downturn in the retail markets, could have an adverse
impact on AREP's net cash flow.
On July 24, 1996, AREP entered into a gross lease with AT&T Corp. for its
Atlanta office building formerly leased to Days Inn of America, Inc. The initial
term of the lease is for five years at $1,478,923 per annum with five (5) year
renewal periods. The renewal rent is the initial term rent plus 50% of the
increase in the Consumer Price Index from the date of the lease commencement.
Tenant improvements, allowances and commissions in connection with this lease
are estimated to be approximately $2,100,000. The lease commenced on November
25, 1996. Annual operating expenses are estimated to total approximately
$650,000. The tenant will pay increases in operating expenses above the base
year. AREP has retained the current property manager to perform on-site and
supervisory and management services.
On April 8, 1996, AREP entered into a build-to-suit lease with Staples,
Inc. ("Staples"), a national office supply retailer. The building, which is
approximately 24,200 square feet, has been constructed on land presently owned
by AREP in East Syracuse, New York. The cost of construction for improvements to
this land parcel and the Staples building was approximately $1,300,000. The
initial term of the lease is for fifteen years plus three five year renewal
periods. The rent is approximately $248,000 during the first ten years and
$286,000 during the next five years. The tenant is also responsible for its
pro rata share of common area charges, insurance, and real estate taxes. The
tenant took possession of the premises and rent commenced on August 27, 1996.
Bankruptcies and Defaults
AREP is aware that 14 of its present and former tenants have been or are
currently involved in some type of bankruptcy or reorganization. Under the
Federal Bankruptcy Code (the "Bankruptcy Code"), a tenant may assume or reject
its unexpired lease. In the event a tenant rejects its lease, the Bankruptcy
Code limits the amount of damages a landlord, such as AREP, is permitted to
claim in the bankruptcy proceeding as a result of the lease termination.
Generally, a claim resulting from a rejection of an unexpired lease is a general
unsecured claim. When a tenant rejects a lease, there can be no assurance that
AREP will be able to re-let the property at an equivalent rental. As a result of
tenant bankruptcies, AREP has incurred and expects - at least in the near term -
to continue to incur certain property expenses and other related costs. Thus
far, these costs have consisted largely of legal fees, real estate taxes and
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property operating expenses. Of AREP's 14 present and former tenants involved in
bankruptcy proceedings or reorganization, nine have rejected their leases,
affecting 28 properties, all of which have been vacated. These rejections have
had an adverse impact on annual net cash flow (including both the decrease in
revenues from lost rents, as well as increased operating expenses). In addition,
a number of AREP's properties are leased to retail chains, some of which are
currently experiencing cash flow difficulties or restructurings, and three of
which are in bankruptcy as discussed below. A continued downturn in the retail
market affecting AREP's tenants could have an adverse impact on AREP's annual
net cash flow.
The three most significant bankruptcies which affected AREP in 1996
involved Bradlees Stores, Inc. ("Bradlees"), Caldor Corp. ("Caldor") and Best
Products, Inc. ("Best Products"). On September 18, 1995, Caldor, a tenant in a
property owned by AREP, filed a voluntary petition for reorganization pursuant
to the provisions of Chapter 11 of the Bankruptcy Code. The annual rental for
this property is approximately $248,000. The tenant is current in its
obligations under the lease, with the exception of approximately $12,000 of
prepetition rent. The tenant has not yet determined whether it will exercise its
right to reject or affirm the lease, which will require an order of the
Bankruptcy Court. At December 31, 1996, the property had a carrying value of
approximately $1,942,000 and was unencumbered by any mortgage.
On June 23, 1995, Bradlees, a tenant leasing four properties owned by
AREP, filed a voluntary petition for reorganization pursuant to the provisions
of Chapter 11 of the Bankruptcy Code. The annual rentals for these four
properties is approximately $1,320,000. The tenant is current in its obligations
under the leases. The tenant has not yet determined whether it will exercise its
right to reject or affirm the leases, which will require an order of the
Bankruptcy Court. There are existing assignors who are still obligated to
fulfill all of the terms and conditions of the leases. At December 31, 1996, the
carrying value of these four properties was approximately $7,265,000. Two of the
properties are encumbered by nonrecourse mortgages payable of approximately
$1,775,000.
On September 24, 1996 Best Products, a tenant leasing a property owned
by AREP, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Bankruptcy Code. The annual rental for this
property is approximately $508,000. The tenant is current in its obligations
under the lease. The tenant has not yet determined whether it will exercise its
right to reject or affirm the lease which will require an order of the
Bankruptcy Court. At December 31, 1996, the property has a carrying value of
approximately $3,418,000 and is unencumbered by any mortgage.
On January 25, 1995, Grand Union, a tenant leasing eight of AREP's
properties representing approximately $1,450,000 in annual rentals (including
two properties which are sublet, representing approximately $58,000 in annual
rentals), filed a prepackaged voluntary petition for reorganization pursuant to
the provisions of Chapter 11 of the Bankruptcy Code. The tenant rejected the
lease on one property located in Waterford, New York effective July 31, 1995 by
order of the Bankruptcy Court on June 6, 1995. The annual rent for this property
was approximately $103,000. AREP is now actively marketing this property for
sale. The property's carrying value is $900,000 at December 31, 1996 and is
unencumbered by any
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mortgage. In June 1995, Grand Union emerged from bankruptcy and affirmed five of
the seven remaining leases and allowed the two sublet properties' leases to
remain in effect.
For a description of certain other tenant and mortgagor bankruptcies
affecting AREP, please refer to Notes 9 and 16 to the Financial Statements
contained herein. The General Partner monitors all tenant bankruptcies and
defaults and may, when it deems it necessary or appropriate, establish
additional reserves for such contingencies.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its property.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the release of such hazardous
substances. If any such substances were found in or on any property invested in
by AREP, AREP could be exposed to liability and be required to incur substantial
remediation costs. The presence of such substances or the failure to undertake
proper remediation may adversely affect the ability to finance, refinance or
dispose of such property. AREP will generally require that properties in which
AREP invests have been subject to a Phase I environmental audit, which involves
record review, visual site assessment and personnel interviews, but does not
involve invasive procedures such as air and soil sampling or groundwater
analysis. There can be no assurance, however, that these audits will reveal all
potential liabilities or that future property uses or conditions or changes in
applicable environmental laws and regulations or activities at nearby properties
will not result in the creation of environmental liabilities with respect to a
property.
Most of AREP's properties continue to be net-leased to single corporate
tenants, and AREP believes these tenants would be responsible for any
environmental conditions existing on the properties they lease. Normally,
therefore, such conditions should not have a material adverse effect on the
financial statements or competitive position of AREP. Many of the properties
acquired by AREP in connection with the Exchange Offer were not subjected to any
type of environmental site assessment at the time of the acquisition.
Consequently, AREP undertook to have Phase I Environmental Site Assessments
initiated at certain properties (approximately 160) in its portfolio, including
54 Phase I Environmental Site Assessments initiated in 1996. In addition, AREP
is undertaking to conduct approximately 50 more Phase I Environmental Site
Assessments during 1997 on some of the properties in its portfolio which have
not yet been assessed. AREP believes that under the terms of its net leases with
its tenants, the costs of any environmental problems that may be discovered on
these properties generally would be the responsibility of such tenants. However,
while most tenants have assumed responsibility for the environmental conditions
existing on their leased property, there can be no assurance that AREP would not
be deemed to be a responsible party or that the tenant could bear the costs of
remediation.
The Phase I Environmental Assessments received on these properties
inconclusively indicate that certain sites may have environmental conditions
that should be further reviewed.
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<PAGE> 14
AREP has notified the responsible tenants to attempt to ensure that they cause
any required investigation and/or remediation to be performed. It is possible
that, in some instances, the tenant will either refuse to take appropriate
action, or fail to respond at all, in which case AREP may be required to act.
Therefore, in addition to AREP's possible exposure with respect to the Lockheed
property described below, if the tenants fail to perform responsibilities under
their leases in respect of such sites, based solely upon the consultant's
preliminary estimates resulting from its Phase I Environmental Site Assessments
referred to above, it is presently estimated that AREP's exposure could amount
to $2-3 million. However, as no Phase II Environmental Site Investigations have
been conducted by the consultant, there can be no accurate estimation of the
need for or extent of any required remediation. Phase I Environmental
Assessments will also be performed in connection with new acquisitions and with
such property refinancings as AREP may deem necessary and appropriate.
In addition to conducting such Phase I Environmental Site Assessments,
AREP has developed a site inspection program. This program is being conducted by
two in-house employees (both of which are experienced construction managers and
registered architects) who visit AREP's properties and visually inspect the
premises to assess the physical condition of the properties in an effort to
determine whether there are any obvious indications of environmental conditions
which would potentially expose AREP to liability and to ensure that the physical
condition of the property is being maintained properly. There is no assurance,
however, that this program will in fact minimize any potential environmental or
other cost exposure to AREP.
AREP could also become liable for environmental clean-up costs if a
bankrupt or insolvent tenant were unable to pay such costs. Environmental
problems may also delay or impair AREP's ability to sell, refinance or re-lease
particular properties, resulting in decreased income and increased cost to AREP.
Lockheed Missile & Space Company ("Lockheed"), a tenant of AREP's
leasehold property in Palo Alto, California, has entered into a consent decree
to undertake certain environmental remediation at this property. Although
Lockheed was found responsible for approximately 75% of the costs of such
remediation and AREP was allocated no responsibility for any such costs,
Lockheed has indicated that it may exercise its statutory right to have its
liability reassessed in a binding arbitration proceeding. In April 1995 Lockheed
began ground water remediation at the leasehold property. See Item 2 -
"Properties - Environmental Litigation," Item 3 - "Legal Proceedings" and Note
16 to the Financial Statements contained herein.
Other Property Matters
Under Title III of the Americans with Disabilities Act of 1990 and the
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, owners and certain tenants of public
accommodations (such as hotels, restaurants, offices and shopping centers) must
remove architectural and communication barriers which are structural in nature
from existing places of public accommodation to the extent "readily achievable"
(as defined in the ADA). In addition, under the ADA, alterations to a place of
public accommodation or a
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<PAGE> 15
commercial facility are to be made so that, to the maximum extent feasible, such
altered portions are readily accessible to and usable by disabled individuals.
Except for certain properties operated by AREP, the General Partner
believes that the existing net leases require the tenants of the majority of
AREP's properties to comply with the ADA. If a tenant does not comply with the
ADA or rejects its lease in bankruptcy without complying with the ADA, AREP may
ultimately have to bear the expense of complying with the ADA.
As AREP acquires more operating properties, it may be required to make
expenditures to bring such properties into compliance with the ADA and other
applicable laws.
Employees
Seventeen people, including three who are officers of the General Partner,
presently perform services for AREP on a full-time basis. These people perform
administrative services for AREP, including accounting, legal, financial,
investor services, secretarial, real estate management and other services.
Management believes it currently has sufficient staffing to operate effectively
the day-to-day business of AREP.
Competition
Competition in leasing and selling remains strong as current economic and
real estate conditions have made it more difficult for AREP to re-let upon
favorable terms properties vacated by tenants. As previously discussed, many of
AREP's tenants have rights to renew at prior rental rates. AREP's experience is
that tenants will renew below market leases and permit leases that are less
marketable or at above market rents to expire, making it difficult for AREP to
re-let or sell on favorable terms properties vacated by tenants. The real estate
market continues to be weak in certain areas of the country, particularly in the
retail category. The downturn in the retail markets and ongoing corporate
consolidations have contributed to increasing vacancy rates and oversupply for
retail tenants. AREP believes it is one of the largest real estate entities of
its kind and that it will continue to compete effectively with other similar
real estate companies, although there are real estate entities with greater
financial resources than AREP.
Competition for investments of the type AREP intends to pursue has been
increasing in recent years, including that from a number of investment funds
that have raised additional capital for such investments, resulting in, among
other things, higher prices for such investments. Such investments have become
more competitive to source and the increased competition may have an adverse
impact on the spreads and AREP's ability to find quality assets at appropriate
yields. While AREP believes its capital base may enable it to gain a competitive
advantage over certain other purchasers of real estate by allowing it to respond
quickly and make all cash transactions without financing contingencies where
appropriate, there can be no assurance that this will be the case.
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<PAGE> 16
Item 2. Properties.
As of March 3, 1997, AREP owned 219 separate real estate assets (primarily
consisting of fee and leasehold interests and, to a limited extent, interests in
real estate mortgages) in 35 states. These properties are generally net-leased
to single corporate tenants. Approximately 91% of AREP's properties are
currently net-leased, 4% are operating properties, 1% are in the process of
being developed and 4% are vacant and being marketed for sale. See Note 10 to
the Financial Statements contained herein for information on mortgages payable.
The following table summarizes the type, number per type and average net
effective rent per square foot of AREP's properties:
Number Average Net Effective
Type of Property of Properties Rent Per Square Foot
- ---------------- ------------- --------------------
Retail 104 $4.20(1)
Industrial 23 $2.37(1)
Office 28 $8.05(1)
Supermarkets 21 $3.36(1)
Banks 8 $5.13(1)
Other:
Properties That
Collateralize Purchase
Money Mortgages 11 N/A
Land 16 N/A
Truck Terminals 4 $1.69(1)
Hotels 3 N/A
Apartment Complexes 1 N/A
- ----------
(1) Based on net-lease rentals.
The following table summarizes the number of AREP's properties in each
region specified below:
Location Number
of Property of Properties
----------- -------------
United States:
Southeast 92
Northeast 48
South Central 10
Southwest 19
North Central 43
Northwest 7
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From January 1, 1996 through March 3, 1997, AREP sold or otherwise
disposed of 19 properties. In connection with such sales and dispositions, AREP
received an aggregate of approximately $51,000,000 in cash, net of closing costs
and amounts utilized to satisfy mortgage indebtedness which encumbered such
properties. As of December 31, 1996, AREP owned 12 properties that were being
actively marketed for sale. The aggregate net realizable value of such
properties is estimated to be approximately $3,698,000.
On January 11, 1996, Forte Hotels, Inc. ("Forte") a/k/a Travelodge, a
tenant in a property owned by AREP entered into a Lease Termination and Mutual
Release Agreement ("Agreement"). This Agreement terminated the lease, which was
due to expire on June 30, 1996, effective January 17, 1996 and required Forte
to pay AREP $2,800,000 in consideration of the early lease termination and in
payment of certain deferred maintenance items. As a result of the above
settlement, AREP recognized "Other income" of approximately $2,700,000, net of
related costs, in 1996. AREP actively marketed this property for sale and
therefore reclassified it to "Property held for sale." The carrying value of
this property at December 31, 1996 was approximately $762,000. In January 1997
AREP sold this property for approximately $2,100,000, net of closing costs. A
gain of approximately $1,300,000 will be recorded in the first quarter of 1997.
On May 10, 1996, AREP sold a property in Miami, Florida that was tenanted
by the Cordis Corporation. AREP permitted an early exercise by the tenant of its
purchase option as AREP believed the option price to be above the market price.
The selling price for the property was $24,310,000. First and second mortgages
with principal balances outstanding of approximately $14,416,000 were repaid at
closing. In addition, closing costs of approximately $228,000 were incurred. As
a result, AREP recognized a gain on the sale of this property of approximately
$4,659,000. In connection with the early extinguishment of the outstanding
mortgage balances, AREP paid approximately $522,000 in prepayment penalties
which were recorded as an extraordinary item in the 1996 Statement of Earnings.
On July 29, 1996, AREP sold a property in Woodbury, New York that was
tenanted by Pioneer Standard Electronics, Inc. The selling price was $2,000,000
and AREP recognized a gain of approximately $1,040,000 in 1996.
On August 15, 1996, AREP sold a property in Philadelphia, Pennsylvania
that was tenanted by A & P and Ginos. The selling price for the property was
$3,500,000. A first mortgage with a principal balance outstanding of
approximately $301,000 was repaid at closing. In addition, closing costs of
approximately $194,000 were incurred. As a result, AREP recognized a gain on the
sale of this property of approximately $2,198,000 in 1996.
On September 17, 1996, AREP sold the two apartment complexes located in
Lexington, Kentucky. Although these complexes were held for a relatively short
period of time, AREP believed that competition among investors for similar
properties enabled AREP to obtain a favorable selling price. The selling price
for these properties was $20,325,000. First mortgages with principal balances
outstanding of approximately $9,800,000 were repaid at closing. In addition,
closing costs of approximately $337,000 were incurred. As a result, AREP
recognized a gain on the sale of these properties of approximately $6,723,000 in
1996.
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<PAGE> 18
On September 30, 1996, AREP sold a property in Southfield, Michigan that
was tenanted by the Penske Corporation. The selling price for the property was
$4,700,000 and AREP recognized a gain on the sale of this property of
approximately $3,253,000 in 1996.
On January 7, 1997 AREP sold three properties tenanted by Federal
Realty Investment Trust ("FRIT") for a total selling price of approximately
$9,363,000. Two first mortgages with principal balances outstanding of
approximately $878,000 were repaid at closing. In addition, closing costs of
approximately $100,000 are expected to be incurred. As a result, AREP will
recognize a gain of approximately $1,500,000 in the first quarter of 1997. In
addition, on January 7, 1997, FRIT made a loan to AREP in the approximate
amount of $8,759,000 secured by a fourth property tenanted by FRIT located in
Broomal, Pennsylvania. Concurrently with this loan, AREP granted and FRIT
exercised an option to purchase the Broomal property with a closing to occur on
or about June 30, 1998. The purchase price will be the unpaid balance of the
mortgage loan of approximately $8,500,000 at the closing date. The nonrecourse
mortgage loan bears interest at the rate of 8% per annum and requires monthly
debt service payments of approximately $72,000.
In February 1997, AREP executed a contract to sell the hotel property
located in Phoenix, Arizona. The selling price is $15,750,000 and if such sale
is consummated a gain of approximately $7.5 million will be recognized in 1997.
This property is encumbered by a nonrecourse mortgage with a principal balance
outstanding of approximately $3,220,000 at December 31, 1996, which will be
repaid at closing. A prepayment penalty of approximately $250,000 will be due.
For each of the years ended December 31, 1996, 1995 and 1994, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of AREP. However, at December 31, 1996, 1995
and 1994, PGEC occupied a property, which represented more than 10% of AREP's
total real estate assets. PGEC is an electric utility engaged in the generation,
purchase, transmission, distribution and sale of electricity, whose shares are
traded on the NYSE.
The PGEC Property is an office complex consisting of three buildings
containing an aggregate of approximately 803,000 square feet on an approximate
2.7 acre parcel of land located in Portland, Oregon. A Predecessor Partnership
originally purchased the PGEC Property on September 11, 1978 for a price of
approximately $57,143,000.
The PGEC Property is subject to one underlying mortgage, which as of
December 31, 1996, had an outstanding principal balance of $24,820,228. This
mortgage bears interest at 8.5% per annum, provides for annual debt service of
$2,856,960 and matures on October 1, 2002, at which time a balloon payment of
$19,304,091 will be due and payable. By its terms, this mortgage is prepayable
at any time subject to certain restrictions. A second mortgage which bore
interest at 10% per annum and provided for interest-only payments during its
term (an aggregate of $1,000,000 per annum) matured in December 1996, at which
time a balloon payment of $10,000,000 was due and paid.
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<PAGE> 19
The PGEC Property is net-leased to a wholly owned subsidiary of PGEC for
forty years, with two ten-year and one five-year renewal options. The annual
rental is $5,137,309 until 2003, $4,973,098 until 2018 and $2,486,549 during
each renewal option. PGEC has guaranteed the performance of its subsidiary's
obligations under the lease. The lessee has an option to purchase the PGEC
Property in September of 2003, 2008, 2013 and 2018 at a price equal to the fair
market value of the PGEC Property determined in accordance with the lease and is
required to make a rejectable offer to purchase the PGEC Property in September
2018 for a price of $15,000,000. A rejection of such offer will have no effect
on the lease obligations or the renewal and purchase options.
AREP is continuing to seek opportunities to refinance upon favorable terms
and sell certain of its properties to generate proceeds for future investments,
in addition to the proceeds from the Rights Offering. In the current real estate
environment, management continues to seek to improve the long-term value of
AREP's portfolio by, among other means, using its available cash and reinvesting
capital transaction proceeds to maximize capital appreciation and
diversification of the portfolio. In selecting real estate related investments,
AREP intends to focus on assets that it believes are undervalued in the current
real estate market, such as development properties, non-performing loans and
securities of companies with significant real estate assets, which the General
Partner believes have the potential to diversify and enhance the long-term value
of AREP's portfolio. AREP also may acquire land development companies and other
real estate operating companies which may have significant assets under
development and may enhance its ability to develop and manage properties it
acquires as well as its ability to reduce the operating expenses related to
investments which require active management. The cash flow generated by an asset
will be a consideration, but AREP may acquire assets that are not generating
positive cash flow. While this may impact cash flow in the near term and there
can be no assurance that any asset acquired by AREP will increase in value or
generate positive cash flow, management intends to focus on assets that it
believes may provide opportunities for long-term growth and diversification of
its portfolio.
Item 3. Legal Proceedings.
Unitholder Litigation
In August 1994, three class action complaints against AREP were filed with
the Delaware Court of Chancery, New Castle County, in connection with the Rights
Offering, Allan Haymes, I.R.A. v. American Real Estate Partners, L.P., American
Property Investors, Inc. and Carl C. Icahn and Steven Yavers v. American Real
Estate Partners, L.P., American Property Investors, Inc. and Carl C. Icahn and
Wilbert Schoomer v. American Real Estate Partners, L.P., American Property
Investors, Inc. and Carl C. Icahn (the "Complaints"). The Complaints were
consolidated. The Complaints claimed defendants breached fiduciary and common
law duties owed to plaintiffs and plaintiffs' class by self dealing and failing
to disclose all relevant facts regarding the Rights Offering, and sought
declaratory and injunctive relief declaring the action was properly maintainable
as a class action, declaring the defendants breached their fiduciary and other
duties, enjoining the Rights Offering, ordering defendants to account for all
damages suffered by the class for alleged acts and transactions and awarding
further relief as the court
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<PAGE> 20
deemed appropriate. On April 7, 1995, defendants moved to dismiss the
consolidated complaint as moot. On July 28, 1995, the parties submitted a
stipulation of dismissal agreeing to dismiss the action as moot. The plaintiffs
have reserved their right to make application to the Court for fees and
expenses. On August 3, 1995, the Court signed an order dismissing the
plaintiffs' claims with prejudice as moot. The Court retained jurisdiction with
respect to any application filed by the plaintiffs for fees and expenses.
In January 1997, the plaintiffs by their attorneys submitted an
application for an award of attorneys' fees and reimbursement of expenses in the
aggregate of $500,000. AREP believes that it has no liability for such fees and
expenses and intends to vigorously contest such action.
Environmental Litigation
Lockheed, a tenant of AREP's leasehold property in Palo Alto, California,
has entered into a consent decree with the California Department of Toxic
Substances ("CDTS") to undertake certain environmental remediation at this
property. Lockheed has estimated that the environmental remediation costs may be
up to approximately $14,000,000. In a non-binding determination by CDTS,
Lockheed was found responsible for approximately 75% of such costs and the
balance was allocated to other parties. AREP was allocated no responsibility for
any such costs.
Lockheed has served a notice that it may exercise its statutory right to
have its liability reassessed in a binding arbitration proceeding. In this
notice of arbitration, Lockheed stated that it will attempt to have allocated to
AREP and to AREP's ground-lessor (which may claim a right of indemnity against
AREP) approximately 9% and 17%, respectively, of the total remediation costs.
AREP believes that it has no liability for any of such costs and, in any
proceeding in which such liability is asserted against AREP, AREP intends to
contest such liability vigorously. In the event any of such liability is
allocated to AREP, AREP intends to seek indemnification for any such liability
from Lockheed in accordance with its lease. In April 1995 Lockheed began ground
water remediation at the leasehold property.
On December 11, 1995, Panos Sklavenitis commenced an action against the
Subsidiary and others related to a shopping center that he purchased from a
successor-in-interest to AREP. The action was brought in the United States
District Court for the Central District of California, for reimbursement of the
cost of remediating certain environmental contamination that appears to have
been caused by a dry cleaner that was a tenant at the property; the amount of
damages sought have not yet been quantified. Mr. Sklavenitis is suing the
parties who are in the chain of ownership, as well as the dry cleaner and its
predecessor. AREP believes that it has no liability for any such costs and
intends to vigorously contest the action. In the event any liability under the
suit is allocated to AREP, AREP will seek indemnification for such monies from
Federated Department Stores, Inc., Ralph's Grocery Company and Los Coyotes
Associates and the other owners in the chain of title.
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<PAGE> 21
Bankruptcies
AREP is aware that 14 of its present and former tenants have been or are
currently involved in some type of bankruptcy or reorganization. Of AREP's 14
present and former tenants involved in bankruptcy proceedings or reorganization,
nine have rejected their leases, affecting 28 properties, all of which have been
vacated. See also Notes 9 and 16 to the Financial Statements contained herein
and "Business - Bankruptcies and Defaults" which describe various tenant and
mortgagor bankruptcies for which AREP has filed claims.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Unitholders during 1996. However,
see Note 1 for a discussion of the Information Statement of AREP mailed to
Unitholders on July 27, 1996 relating to the Amendment.
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<PAGE> 22
PART II
Item 5. Market for AREP's Common Equity and Related Security Holder Matters.
Market Information
AREP's Depositary Units are traded on the NYSE under the symbol "ACP."
Trading on the NYSE commenced July 23, 1987, and the range of high and low
market prices for the Depositary Units on the New York Stock Exchange Composite
Tape (as reported by The Wall Street Journal) from January 1, 1995 through
December 31, 1996 is as follows:
Quarter Ended: High Low
- ------------- ---- ---
March 31, 1995 8.50 7.25
June 30, 1995 8.125 7.75
September 30, 1995 8.75 6.75
December 31, 1995 9.375 8.125
March 31, 1996 9.375 8.625
June 30, 1996 9.25 8.75
September 30, 1996 9.125 8.625
December 31, 1996 9.25 8.875
On March 20, 1997, the last sales price of the Depositary Units, as
reported by the New York Stock Exchange Composite Tape (as reported by The Wall
Street Journal) was $10.75.
As of March 20, 1997, there were approximately 18,000 record holders of
the Depositary Units.
Since January 1, 1994, AREP has made no cash distributions with respect to
the Depositary Units.
Distributions
On March 26, 1997, the Board of Directors of the General Partner announced
that no distributions are expected to be made in 1997. In making its
announcement, AREP noted it plans to continue to apply available Partnership
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash reserves
for Partnership contingencies, including environmental matters and scheduled
lease expirations. As previously reported, by the end of the year 2000, net
leases representing approximately 23% of AREP's net annual rentals from its
portfolio will be due for renewal, and by the end of the year 2002, 42% of such
rentals will be due for renewal. Another factor that AREP took into
consideration was that net leases representing approximately 29% of AREP's net
annual rentals from its portfolio are with tenants in the retail sector, some of
which are currently experiencing cash flow difficulties and restructurings. In
addition, AREP
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noted that net operating cash flow in 1996 was approximately break even, after
payment of approximately $34,600,000 of periodic principal payments and
maturing debt obligations, including an $11.3 million principal payment made in
May 1996 on its Senior Unsecured Debt, capital expenditures and the creation of
additional cash reserves for its obligations. AREP further stated that it
continues to believe that excess cash should be used to enhance long-term
Unitholder value through investment in companies with assets undervalued by the
market. AREP believes that in the real estate area it should focus on
diversifying its portfolio and seek to make acquisitions of land development
companies and other real estate operating companies which may have significant
assets under development and may enhance its ability to develop and manage
these properties. These types of investments may involve debt restructuring,
capital improvements and active asset management, and by their nature may not
be readily financeable and may not generate immediate positive cash flow. As
such, they require AREP to maintain a strong capital base both to react quickly
to these market opportunities as well as to allow AREP to rework the assets to
enhance their turnaround performance. See Item 7 - "Management's Discussion and
Analysis of the Financial Condition and Results of Operations - Capital
Resources and Liquidity."
As of March 20, 1997, there were 25,666,640 Depositary Units and
2,074,422 Preferred Units outstanding. Trading in the Preferred Units commenced
March 31, 1995 on the NYSE under the symbol "ACP PR." The Preferred Units
represent limited partner interests in AREP and have certain rights and
designations, generally as follows. Each Preferred Unit has a liquidation
preference of $10.00 and entitles the holder thereof to receive distributions
thereon, payable solely in additional Preferred Units, at a rate of 5% of the
liquidation preference thereof, payable annually on March 31 of each year
(each, a "Payment Date"), commencing March 31, 1996. On any Payment Date
commencing with the Payment Date on March 31, 2000, AREP, with the approval of
the Audit Committee may opt to redeem all, but not less than all, of the
Preferred Units for a price, payable either in all cash or by issuance of
additional Depositary Units, equal to the liquidation preference of the
Preferred Units, plus any accrued but unpaid distributions thereon. On March
31, 2010, AREP must redeem all, but not less than all, of the Preferred Units
on the same terms as any optional redemption. Holders of Preferred Units will
have no voting rights except as mentioned in Item 10 - "Directors and Executive
Officers of AREP," below.
On April 1, 1996, AREP distributed to holders of record of its Preferred
Units as of March 15, 1996, approximately 98,700 additional Preferred Units.
Pursuant to the terms of the Preferred Units, on February 28, 1997, AREP
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10.00. The
distribution is payable March 31, 1997 to holders of record as of March 14,
1997.
Each Depositary Unitholder will be taxed on the Unitholder's allocable
share of AREP's taxable income and gains and, with respect to Preferred
Unitholders, accrued guaranteed payments, whether or not any cash is distributed
to the Unitholder.
Repurchase of Depositary Units
II-2
<PAGE> 24
AREP announced in 1987 its intention to purchase up to 1,000,000
Depositary Units. On June 16, 1993, AREP increased the amount of shares
authorized to be repurchased to 1,250,000 Depositary Units. As of March 3, 1997,
AREP had purchased 1,037,200 Depositary Units at an aggregate cost of
approximately $11,184,000. Management has not been acquiring Depositary Units
for AREP, although AREP may from time to time acquire additional Depositary
Units. Under the terms of the Note Agreements for the Senior Unsecured Debt,
distributions and the amounts used to repurchase Depositary Units cannot exceed
net cash flow, as defined therein, plus $15,000,000. See Item 7 - "Management's
Discussion and Analysis of the Financial Condition and Results of Operations -
Capital Resources and Liquidity." To date this restriction has not impaired the
ability of AREP to make distributions.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Unit Amounts)
Year Ended December 31,
--------------------------------------------------------------
1996* 1995* 1994* 1993* 1992*
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 71,773 $ 69,920 $ 61,551 $ 60,157 $ 57,781
======== -------- -------- -------- --------
Earnings before gain on
property transactions
and extraordinary items $ 34,732 $ 30,833 $ 19,577 $ 18,379 $ 20,581
Gain on sales and
disposition of real estate 24,517 5,092 4,174 4,760 342
Provision for loss on real
estate (935) (769) (582) (462) (8,847)
--------- --------- -------- -------- --------
Earnings before
extraordinary items 58,314 35,156 23,169 22,677 12,076
(Loss) from early
extinguishment of debt (492) -- -- -- (784)
--------- -------- -------- ------- --------
Net earnings $ 57,822 $ 35,156 $ 23,169 $ 22,677 $ 11,292
======== ======== ======== ======== ========
Net earnings per limited
partnership unit:
Earnings before
extraordinary items $ 2.04 $ 1.33 $ 1.64 $ 1.60 $ .84
Extraordinary items (.02) -- -- -- (.05)
--------- -------- -------- -------- --------
Net Earnings $ 2.02 $ 1.33 $ 1.64 $ 1.60 $ .79
======== ======== ======== ======== ========
Distributions to partners $ -- $ -- $ -- $ 7,078 $ 14,333
At year end:
Real estate leased to others $357,184 $412,075 $437,699 $444,409 $435,959
Hotel operating properties $ 12,955 $ 13,362 $ 13,654 $ 14,070 $ 12,459
Mortgages and note receivable $ 15,225 $ 15,056 $ 8,301 $ 20,065 $ 22,447
</TABLE>
II-3
<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets $641,310 $620,880 $492,868 $502,981 $503,262
Senior indebtedness $ 22,616 $ 33,923 $ 45,231 $ 55,231 $ 54,684
Mortgages payable $115,912 $163,968 $174,096 $195,274 $205,938
Partners' equity $485,559 $404,189 $259,237 $236,068 $221,855
</TABLE>
* To the extent financial information pertaining to AREP is reflected, such
information is consolidated for AREP and its Subsidiary.
Item 7. Management's Discussion and Analysis of the
Financial Condition and Results of Operations.
General
Historically, substantially all of AREP's real estate assets have been
net-leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore AREP is not typically responsible for payment of
expenses, such as maintenance, utilities, taxes and insurance associated with
such properties. Economic conditions in recent years led the General Partner to
reexamine from time to time AREP's cash needs and investment opportunities.
Tenant defaults and lease expirations caused rental revenues to decrease and
property management and certain operating expenses to increase and led to
expenditures to re-let. The General Partner determined to conserve cash and
establish reserves from time to time and distributions were suspended. As
discussed below, AREP's investment strategy is to apply its capital transaction
proceeds and Rights Offering proceeds, including interest earned thereon, toward
its investments.
By the end of the year 2000, net leases representing approximately 23% of
AREP's net annual rentals from its portfolio will be due for renewal, and by the
end of the year 2002, net leases representing approximately 42% of AREP's net
annual rentals will be due for renewal. Since most of AREP's properties are
net-leased to single, corporate tenants, it is expected that it may be difficult
and time-consuming to re-lease or sell those properties that existing tenants
decline to re-let or purchase and AREP may be required to incur expenditures to
renovate such properties for new tenants. In addition, AREP may become
responsible for the payment of certain operating expenses, including
maintenance, utilities, taxes, insurance and environmental compliance costs
associated with such properties, which are presently the responsibility of the
tenant. As a result, AREP could experience an adverse impact on net cash flow
from such properties.
As a consequence of the foregoing, AREP decided to raise funds through the
Rights Offering to increase its assets available for investment, take advantage
of real estate investment opportunities, further diversify its portfolio and
mitigate against the impact of potential lease expirations. The Rights Offering
was successfully completed during April 1995 and net proceeds of approximately
$107.6 million were raised for investment purposes. In order to enhance AREP's
investment portfolio (and ultimately its asset values and cash flow prospects),
AREP is seeking to acquire investments in undervalued properties, including
commercial
II-4
<PAGE> 26
properties, residential development projects, land parcels for the future
development of residential and commercial properties, non-performing loans and
securities of entities which own, manage or develop significant real estate
assets, including limited partnership units and securities issued by real estate
investment trusts. Such assets may not be generating positive cash flow in the
near term; however, the General Partner believes that the acquisition of
properties requiring some degree of management or development activity have the
greatest potential for growth, both in terms of capital appreciation and the
generation of cash flow. These types of investments may involve debt
restructuring, capital improvements and active asset management and by their
nature as under-performing assets may not be readily financeable. As such, they
require AREP to maintain a strong capital base. AREP notes that acquisition
opportunities in the real estate market for value-added investors have become
more competitive to source and the increased competition may have some impact on
the spreads and the ability to find quality assets that provide the returns that
are sought.
The Amendment became effective in August, 1996 and permits AREP to
invest in securities issued by companies that are not necessarily engaged as
one of their primary activities in the ownership, development or management of
real estate while remaining in the real estate business and continuing to
pursue suitable investments for AREP in the real estate market. AREP made an
investment in accordance with the Amendment in the common stock of RJR. Such
shares were sold in 1997, as described below.
Expenses relating to environmental clean-up have not had a material effect
on the earnings, capital expenditures, or competitive position of AREP.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants have
assumed responsibility for the environmental conditions existing on their leased
property, there can be no assurance that AREP will not be deemed to be a
responsible party or that the tenant will bear the costs of remediation. Also,
as AREP acquires more operating properties, its exposure to environmental
clean-up costs may increase. AREP completed Phase I Environmental Site
Assessments of certain of its properties by third-party consultants. Based on
the results of these Phase I Environmental Site Assessments, the environmental
consultant has recommended that certain sites may have environmental conditions
that should be further reviewed. AREP has notified each of the responsible
tenants to attempt to ensure that they cause any required investigation and/or
remediation to be performed. If such tenants do not arrange for further
investigations, or remediations, if required, AREP may determine to undertake
the same at its own cost. If the tenants fail to perform responsibilities under
their leases referred to above, based solely upon the consultant's estimates
resulting from its Phase I Environmental Site Assessments referred to above, it
is presently estimated that AREP's exposure could amount to $2-3 million,
however, as no Phase II Environmental Site Assessments have been conducted by
the consultants, there can be no accurate estimation of the need for or extent
of any required remediation, or the costs thereof. During 1996, 54 Phase I
Environmental Site Assessments were initiated and are in process. In addition,
AREP is planning Phase I Environmental Site Assessments for approximately 50
more net-leased properties during 1997. Phase I Environmental Site Assessments
will also be performed in connection with new acquisitions and with such
property refinancings as AREP may deem necessary and appropriate.
II-5
<PAGE> 27
Results of Operations
Calendar Year 1996 Compared to Calendar Year 1995
Gross revenues increased by approximately $1,853,000, or 2.7%, during
the calendar year 1996 as compared to the same period in 1995. This increase
reflects approximate increases of $2,641,000 in dividend income, $1,713,000, or
21.0%, in other interest income, $357,000, or 1.8%, in rental income, $312,000
in other income, and $209,000, or 2.1%, in hotel operating income partially
offset by a decrease of approximately $3,379,000, or 11.5%, in financing lease
income. The increase in dividend income is primarily due to AREP's investment
in RJR common stock. The increase in other interest income is primarily due to
increased interest income earned on the Rights Offering and sales proceeds and
the investment in the Facility Agreement. The increase in rental income is
primarily due to the joint ventures' properties which are now operating. The
hotel operating revenues were generated by two hotels operated by AREP through
a third party management company since August 7, 1992. The decrease in
financing lease income is primarily attributable to normal lease amortization
and property sales.
Expenses decreased by approximately $2,046,000, or 5.2%, during the
calendar year 1996 compared to the same period in 1995. This decrease reflects
decreases of approximately $3,263,000, or 16.6%, in interest expense and
$42,000, or .5%, in hotel operating expenses, partially offset by increases of
approximately $584,000, or 15.2%, in property expenses, $342,000, or 6.4%, in
depreciation and amortization, and $333,000, or 12.8%, in general and
administrative expenses. The decrease in interest expense is primarily
attributable to normal loan amortization and reductions due to repayments of
maturing balloon debt obligations, including the Senior Unsecured Debt, as well
as the sale of encumbered properties. The hotel expenses were generated from the
hotels mentioned previously.
Earnings before property transactions and extraordinary items increased
during the calendar year 1996 by approximately $3,899,000 as compared to the
same period in 1995, primarily due to increased dividend and interest income,
decreased interest expense, partially offset by a decrease in financing lease
income.
Gain on property transactions increased by approximately $19,425,000
during the calendar year 1996 as compared to the same period in 1995, due to
differences in the size and number of transactions.
During the calendar year 1996, AREP recorded a provision for loss on real
estate of $935,000 as compared to approximately $769,000 in the comparable
period of 1995.
During the calendar year 1996, a net loss from early extinguishment of
debt was incurred of approximately $492,000. No such loss was incurred in the
comparable period of 1995.
Net earnings for the calendar year 1996 increased by approximately
$22,666,000 as compared to net earnings for the calendar year 1995. This
increase is primarily attributable to the increase gain on property transactions
due to differences in the size and number of transactions.
II-6
<PAGE> 28
Calendar Year 1995 Compared to Calendar Year 1994.
Gross revenues increased by approximately $8,370,000, or 13.6%, during
calendar year 1995 as compared to calendar year 1994. This increase reflects
approximate increases of $6,715,000, or 466.8%, in other interest income,
$2,655,000 in other income, $980,000, or 11.1%, in hotel operating income, and
$558,000, or 2.9%, in rental income, partially offset by a decrease of
approximately $2,538,000, or 7.9%, in financing lease income. The increase in
other interest income is primarily due to an increase in AREP's short-term cash
investments as a result of the Rights Offering proceeds and the investment in
the Facility Agreement. The increase in other income is primarily due to the
settlement of the Chipwich and Be-Mac bankruptcy claims. The hotel operating
revenues were generated by two hotels formerly leased to Integra. AREP has been
operating these hotel properties through a third-party management company since
August 7, 1992. The increase in rental income is primarily due to increased
rents at the two apartment complexes in Lexington, Kentucky and the new
apartment complex in Alabama, partially offset by the loss of rents due to
property sales. The decrease in financing lease income is primarily
attributable to normal lease amortization and property sales.
Expenses decreased by approximately $2,886,000, or 6.9%, during calendar
year 1995 compared to calendar year 1994. This decrease reflects decreases of
approximately $3,122,000, or 13.7%, in interest expense, $586,000, or 13.3%, in
property expenses and $185,000, or 6.7%, in general and administrative expenses,
partially offset by increases of approximately $630,000, or 8.9%, in hotel
operating expenses and $377,000, or 7.6%, in depreciation and amortization
expense.
The decrease in interest expense is primarily attributable to normal loan
amortization and reductions due to repayments of maturing balloon debt
obligations, including the Senior Unsecured Debt, certain loan refinancings, as
well as the sale of encumbered properties. The decrease in property expenses is
primarily attributable to decreases in certain operating property expenses and
environmental review expenses. The hotel expenses were generated from the hotels
mentioned previously.
Earnings before property transactions increased during the calendar year
1995 by approximately $11,256,000, or 57.5%, from calendar year 1994 primarily
due to increased interest income earned on the Rights Offering proceeds, other
income from the settlement of bankruptcy claims and decreased interest expense
due to refinancings and repayments of maturing debt obligations, partially
offset by a decrease in financing lease income.
Gain on property transactions increased by approximately $918,000 during
the calendar year 1995 as compared to calendar year 1994, due to differences in
the size and number of transactions.
During calendar year 1995, AREP recorded a provision for loss on real
estate of approximately $769,000 as compared to $582,000 in 1994.
Net earnings for the calendar year 1995 increased by approximately
$11,987,000, or 51.7%, as compared to net earnings for the calendar year 1994.
This increase was primarily
II-7
<PAGE> 29
attributable to the increase in other interest income, other income from the
settlement of bankruptcy claims and decreased interest expense, partially
offset by a decrease in financing lease income.
Capital Resources and Liquidity
Generally, the cash needs of AREP for day-to-day operations have been
satisfied from cash flow generated from current operations. In recent years,
AREP has applied a larger portion of its cash flow to the repayment of maturing
debt obligations. Cash flow from day-to-day operations represents net cash
provided by operating activities (excluding working capital changes and
non-recurring other income) plus principal payments received on financing leases
as well as principal receipts on certain mortgages receivable reduced by
periodic principal payments on mortgage debt.
AREP may not be able to re-let certain of its properties at current
rentals. As previously discussed, net leases representing approximately 42% of
AREP's net annual rentals will be due for renewal by the end of the year 2002.
In 1996, 22 leases covering 22 properties and representing approximately
$2,413,000 in annual rentals expired. Eleven of these 22 leases originally
representing approximately $1,152,000 in annual rental income have been or will
be re-let or renewed for approximately $1,260,000 in annual rentals. Such
renewals are generally for a term of five years. Four properties, with an
approximate annual rental income of $277,000, are currently being marketed for
sale or lease. Seven properties representing approximately $984,000 in annual
rental income have been sold, including two sold to tenants who exercised their
purchase options.
In 1997, seven leases covering seven properties and representing
approximately $812,000 in annual rentals are scheduled to expire. Three of these
leases originally representing approximately $278,000 in annual rental income
have been or will be re-let or renewed for approximately $273,000 in annual
rentals. Such renewals are generally for a term of five years. One property,
with an approximate annual rental income of $151,000, will be marketed for sale
or lease when the current lease term expires. The status of three leases, with
approximate annual rental income of $383,000, are uncertain at this time.
In 1996 AREP sold twelve properties representing approximately $2,064,000
of net operating cash flow for net proceeds of approximately $40.6 million which
are being retained for reinvestment. Three of these properties were sold to
tenants pursuant to purchase options, three were sold subsequent to lease
expiration and six were marketed and sold on favorable terms due to current
market conditions.
On March 26, 1997, the Board of Directors of the General Partner announced
that no distributions on its Depositary Units are expected to be made in 1997.
In making its announcement, AREP noted it plans to continue to apply available
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash reserves
for contingencies including environmental matters and scheduled lease
expirations. As previously reported, by the end of the year 2000, net leases
representing approximately 23% of AREP's net annual rentals will be due for
renewal, and by
II-8
<PAGE> 30
the end of the year 2002, 42% of such rentals will be due for renewal. Another
factor that AREP took into consideration was that net leases representing
approximately 29% of AREP's annual rentals from its portfolio are with tenants
in the retail sector, some of which are currently experiencing cash flow
difficulties and restructurings. In addition, AREP noted that net operating
cash flow in 1996 was approximately break even, after payment of approximately
$34,600,000 of periodic principal payments and maturing debt obligations,
including an $11.3 million principal payment made in May 1996 on its Senior
Unsecured Debt, capital expenditures and the creation of cash reserves for its
obligations.
During the year ended December 31, 1996, AREP generated approximately
$31,900,000 in cash flow from day-to-day operations which excludes approximately
$4,000,000 in interest earned on the Rights Offering proceeds which will be
retained for future acquisitions. In addition, during 1996, approximately $3.2
million of non-recurring income, including approximately $2.7 million from the
Forte lease termination, was recorded. During 1995, AREP generated approximately
$26,900,000 in such cash flow from day-to-day operations. In addition, during
1995, approximately $2.8 million of non-recurring income, including
approximately $2 million from the Chipwich bankruptcy settlement, was recorded.
Capital expenditures for real estate, excluding new acquisitions, were
approximately $3,900,000 during 1996. During 1995, such expenditures totalled
approximately $2,100,000.
During 1996, approximately $25.9 million of balloon mortgages were repaid
out of AREP's cash flow, including the scheduled payment due on AREP's Senior
Unsecured Debt. In addition, approximately $600,000 of mortgages were paid as a
result of lease terminations. During 1995, approximately $14.9 million of
balloon mortgages were repaid out of AREP's cash flow, including the scheduled
payment due on AREP's Senior Unsecured Debt. In addition to payments due under
AREP's Senior Unsecured Debt, approximately $4,800,000 of maturing balloon
mortgages are due in 1997, and during the period 1998 through 1999 approximately
$12,000,000 in maturing mortgages come due. AREP may seek to refinance a portion
of these maturing mortgages, although it does not expect to refinance all of
them and may repay them from cash flow and increase reserves from time to time,
thereby reducing cash flow otherwise available for other uses.
During 1996, net operating cash flow after payment of maturing debt
obligations, capital expenditures and creation of cash reserves of approximately
$1.5 million was approximately break even, excluding non-recurring income and
interest earned on the Rights Offering proceeds which will be retained for
acquisitions. AREP's operating cash reserves are approximately $24.5 million at
December 31, 1996 and are being retained to meet maturing debt obligations,
capitalized expenditures for real estate and certain contingencies facing AREP.
AREP from time to time may increase its cash reserves to meet its maturing debt
obligations, tenant requirements and other capital expenditures and to guard
against scheduled lease expirations and other contingencies including
environmental matters. Rights Offering proceeds and related interest income are
being retained for investment in undervalued assets including commercial
properties, residential development projects, land parcels for the development
of residential and commercial properties, non-performing loans and securities of
entities which own, manage or develop significant real estate assets, including
limited partnership units and securities issued by real
II-9
<PAGE> 31
estate investment trusts. To further its investment objectives, AREP may
consider the acquisition of land development companies and other real estate
operating companies which may have significant assets under development and may
enhance its ability to develop and manage these properties as well as the
ability to reduce costs and expenses related to such properties. The Amendment
permits AREP to invest a portion of its funds in securities of issuers that are
not primarily engaged in real estate. In 1996 AREP invested approximately $83
million in the common stock of RJR. In February 1997, AREP sold its entire
interest in RJR for net proceeds of approximately $112 million and realized a
gain of approximately $29 million in the first quarter of 1997. AREP's pro rata
share of third party expenses relating to such RJR investment was approximately
$2,200,000 which was paid in the first quarter of 1997 and approved by the
Audit Committee.
AREP also has significant maturing debt requirements under the Note
Agreements. As of December 31, 1996, AREP has $22,615,552 of Senior Unsecured
Debt outstanding. Pursuant to the Note Agreements, AREP is required to make
semi-annual interest payments and annual principal payments. The interest rate
charged on the Senior Unsecured Debt is 9.6% per annum. Under the terms of the
Note Agreements, AREP deferred and capitalized 2% annually of its interest
payment through May 1993. In May 1994, 1995, and 1996, AREP repaid $10 million,
$11.3 million and $11.3 million, respectively, of its outstanding Senior
Unsecured Debt under the Note Agreements and principal payments of approximately
$11,308,000 are due in 1997 and on the final payment date of May 27, 1998. As of
December 31, 1996, AREP was in compliance with the terms of the Note Agreements.
The Note Agreements contain certain covenants restricting the activities
of AREP. Under the Note Agreements, AREP must maintain a specified level of net
annual rentals from unencumbered properties (as defined in the Note Agreements)
and is restricted, in certain respects, in its ability to create liens and incur
debts. Investment by AREP in certain types of assets that may be regarded as
non-income producing, such as land or non-performing loans, is restricted under
the Note Agreements. The holders of the Senior Unsecured Debt have agreed,
however, to waive this restriction with respect to any capital raised by AREP in
the Rights Offering.
The Note Agreements contain certain prepayment penalties which AREP would
be required to pay if it extinguishes any portion of the outstanding principal
prior to its annual due date. The Note Agreements require that such prepayment
consist of 100% of the principal amount to be prepaid plus a premium based on a
formula described therein. As of March 3, 1997, the premium required in order to
prepay the Note Agreement in full would have been approximately $929,000.
Sales proceeds from the sale or disposal of portfolio properties totalled
approximately $40.7 million in 1996. During 1995, sales proceeds totalled
approximately $21.3 million. During 1995, AREP received $9.8 million of mortgage
proceeds from the financing of its two apartment complexes located in Lexington,
Kentucky. AREP intends to use property sales, financing and refinancing proceeds
for new investments. In addition, AREP successfully completed its Rights
Offering in April 1995 and net proceeds of approximately $107.6 million were
raised for investment purposes.
II-10
<PAGE> 32
AREP's cash and cash equivalents decreased by approximately $60.7 million
during 1996, primarily due to the approximate $113 million of invested funds in
RJR and limited partnerships, partially offset by the approximate $2.7 million
Forte lease termination payment, $4 million of interest earned on the Rights
Offering proceeds, $40.7 million of sales proceeds and $1.5 million net cash
flow from operations. The funds on hand excluding AREP's operating cash
reserves, are being retained for investment.
II-11
<PAGE> 33
Item 8. Financial Statements
INDEPENDENT AUDITORS' REPORT
The Partners
American Real Estate Partners, L.P:
We have audited the accompanying consolidated balance sheets of American Real
Estate Partners, L.P. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, changes in partners' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. In connection with our audits of the consolidated financial statements,
we also have audited the 1996 financial statement schedule as listed in the
Index at Item 14 (a) 2. These consolidated financial statements and the
financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Real
Estate Partners, L.P. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
New York, New York
March 19, 1997
II-12
<PAGE> 34
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------------------------------------- ------------ ------------
<S> <C> <C>
REAL ESTATE LEASED TO OTHERS:
Accounted for under the financing
method (Notes 2, 4 and 9) $253,781,903 $281,532,529
Accounted for under the operating
method, net of accumulated
depreciation (Notes 2, 5 and 9) 103,402,315 130,542,549
MARKETABLE SECURITIES (Note 6) 106,172,301 -
CASH AND CASH EQUIVALENTS (Note 2) 105,543,329 166,261,635
INVESTMENT IN LIMITED PARTNERSHIPS (Note 7) 29,947,816 -
MORTGAGES AND NOTE
RECEIVABLE (Notes 8, 9 and 18) 15,225,405 15,056,367
HOTEL OPERATING PROPERTIES, net of
accumulated depreciation (Notes 5 and 9) 12,955,389 13,362,375
RECEIVABLES AND OTHER ASSETS (Note 18) 8,604,646 4,587,765
CONSTRUCTION-IN-PROGRESS (Note 9) 679,400 5,622,156
DEBT PLACEMENT COSTS - Net of
accumulated amortization (Note 2) 1,299,053 1,931,472
PROPERTY HELD FOR SALE (Notes 2, 9 and 17) 3,698,112 1,983,033
------------ ------------
TOTAL $641,309,669 $620,879,881
============ ============
</TABLE>
(Continued)
II-13
<PAGE> 35
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995 (Continued)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
- -----------------------------------------------------
MORTGAGES PAYABLE (Notes 4, 5, 10 and 18) $115,911,504 $163,967,561
SENIOR INDEBTEDNESS (Notes 11 and 18) 22,615,552 33,923,329
CONSTRUCTION LOAN PAYABLE (Note 9) - 7,834,175
ACCOUNTS PAYABLE, ACCRUED EXPENSES
AND OTHER LIABILITIES (Notes 7, 9 and 18) 12,248,555 5,770,443
DEFERRED INCOME (Note 8) 3,460,042 3,524,349
DISTRIBUTIONS PAYABLE (Notes 3 and 19) 1,514,605 1,671,069
------------ ------------
155,750,258 216,690,926
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 16)
LIMITED PARTNERS:
Preferred units, $10 liquidation preference,
5% cumulative pay-in-kind redeemable; 4,200,000
authorized; 2,074,422 and 1,975,640 issued and
outstanding as of December 31, 1996 and 1995 21,522,128 20,497,265
Depositary units; 26,850,000 authorized; 25,666,640
outstanding as of December 31, 1996 and 1995 465,335,952 386,609,631
GENERAL PARTNER 9,885,196 8,265,924
TREASURY UNITS AT COST:
1,037,200 depositary units (11,183,865) (11,183,865)
------------ ------------
PARTNERS' EQUITY (Notes 2, 3 and 12) 485,559,411 404,188,955
------------ ------------
TOTAL $641,309,669 $620,879,881
============ ============
</TABLE>
See notes to consolidated financial statements.
II-14
<PAGE> 36
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
REVENUES: 1996 1995 1994
--------------- ----------- -------------
<S> <C> <C> <C>
Interest income:
Financing leases $26,073,205 $29,452,066 $31,990,262
Other 9,866,131 8,153,310 1,438,491
Rental income 19,998,946 19,641,915 19,084,506
Hotel operating income (Note 9) 10,042,634 9,833,752 8,853,480
Other income (Notes 8 and 9) 3,151,878 2,839,423 183,987
Dividend income (Notes 6 and 7) 2,640,609 - -
--------------- ----------- -------------
71,773,403 69,920,466 61,550,726
--------------- ----------- -------------
EXPENSES:
Interest expense 16,350,791 19,613,860 22,735,908
Depreciation and amortization 5,680,025 5,337,884 4,960,704
General and administrative expenses (Note 3) 2,938,684 2,605,331 2,791,123
Property expenses 4,411,023 3,827,641 4,413,651
Hotel operating expenses (Note 9) 7,661,067 7,702,874 7,072,641
--------------- ----------- -------------
37,041,590 39,087,590 41,974,027
--------------- ----------- -------------
EARNINGS BEFORE PROPERTY
TRANSACTIONS AND EXTRAORDINARY
ITEMS 34,731,813 30,832,876 19,576,699
PROVISION FOR LOSS ON
REAL ESTATE (Notes 9 and 16) (935,000) (768,701) (582,000)
GAIN ON SALES AND
DISPOSITION OF REAL ESTATE
(Note 9) 24,516,867 5,091,445 4,173,865
--------------- ----------- -------------
EARNINGS BEFORE EXTRAORDINARY
ITEMS 58,313,680 35,155,620 23,168,564
EXTRAORDINARY ITEMS (Note 9) (491,628) - -
--------------- ----------- -------------
NET EARNINGS $57,822,052 $35,155,620 $23,168,564
=============== =========== =============
NET EARNINGS ATTRIBUTABLE TO
(Note 3):
Limited partners $56,671,393 $34,456,023 $22,707,510
General partner 1,150,659 699,597 461,054
--------------- ----------- -------------
$57,822,052 $35,155,620 $23,168,564
=============== =========== =============
NET EARNINGS PER LIMITED
PARTNERSHIP UNIT (Notes 2 and 13):
Before extraordinary items $2.04 $1.33 $1.64
Extraordinary Items (.02) - -
--------------- ----------- -------------
NET EARNINGS $2.02 $1.33 $1.64
=============== =========== =============
LIMITED PARTNERSHIP UNITS
OUTSTANDING AT YEAR-END 25,666,640 25,666,640 13,812,800
=============== =========== =============
</TABLE>
See notes to consolidated financial statements.
II-15
<PAGE> 37
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Limited Partners' Equity
General -------------------------- Held in Treasury Total
Partner's Depository Preferred ------------------------ Partners'
Equity Units Units Amount Units Equity
---------- ------------ ------------ ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $4,920,324 $242,331,870 $ - $(11,183,865) 1,037,200 $236,068,329
Net earnings 461,054 22,707,510 - - - 23,168,564
---------- ------------ ------------ ------------- --------- ------------
BALANCE, DECEMBER 31, 1994 $5,381,378 $265,039,380 $ - $(11,183,865) 1,037,200 $259,236,893
Net earnings 699,597 34,456,023 - - - 35,155,620
Rights offering (Note 12) - 88,903,800 19,756,400 - - 108,660,200
Expenses of Rights offering
(Note 12) (21,293) (1,048,707) - - - (1,070,000)
Capital Contribution (Note 12) 2,206,242 - - - - 2,206,242
Pay-in-kind distribution
(Note 12) - (740,865) 740,865 - - -
BALANCE, DECEMBER 31, 1995 $8,265,924 $386,609,631 $20,497,265 $(11,183,865) 1,037,200 $404,188,955
Net earnings 1,150,659 56,671,393 - - - 57,822,052
Unrealized gains on securities
available for sale (Note 6) 468,613 23,079,791 - - - 23,548,404
Pay-in-kind distribution (Note 12) - (1,024,863) 1,024,863 - - -
---------- ------------ ----------- ------------- --------- ------------
Balance, December 31, 1996 $9,885,196 $465,335,952 $21,522,128 $(11,183,865) 1,037,200 $485,559,411
========== ============ =========== ============= ========= ============
</TABLE>
See notes to consolidated financial statements.
II-16
<PAGE> 38
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $57,822,052 $35,155,620 $23,168,564
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 5,680,025 5,337,884 4,960,704
Amortization of deferred income (26,218) (26,218) (26,218)
Gain on sales and disposition of real estate (24,516,867) (5,091,445) (4,173,865)
Provision for loss on real estate 935,000 768,701 582,000
Changes in:
Increase (decrease) in accounts payable and
accrued expenses 6,448,792 (782,826) 1,139,297
Decrease in deferred income (3,640) (3,767) (3,640)
(Increase) decrease in receivables and other assets (2,357,404) 72,249 (177,434)
----------- ---------- ----------
Net cash provided by operating activities 43,981,740 35,430,198 25,469,408
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in mortgages and note receivable (569,879) (7,396,106) 116,524
Net proceeds from the sales and disposition of real estate 40,673,431 21,303,820 11,171,802
Principal payments received on leases
accounted for under the financing method 7,313,949 7,204,850 6,708,644
Construction in progress (5,264,592) (14,080,412) (6,681,333)
Principal receipts on mortgages receivable 330,119 301,273 275,459
Property acquisitions (102,947) (3,280,259) (3,336,145)
Capitalized expenditures for real estate (3,855,054) (2,067,824) (2,331,380)
Balloon payment on mortgage receivable - - 1,392,649
Acquisition of marketable securities (82,595,762) - -
Acquisition of limited partnership interests (29,947,816) - -
----------- ---------- ----------
Net cash (used in) provided by investing activities (74,018,551) 1,985,342 7,316,220
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Proceeds from rights offering - 110,866,442 -
Expenses of the rights offering (20,842) (468,380) -
Distribution to partners (156,464) (105,413) (1,868,607)
Debt:
(Decrease) increase in mortgages payable (593,049) 18,631,467 282,391
Early extinguishment of mortgages payable - - (3,364,023)
Periodic principal payments (8,091,097) (8,959,273) (9,241,669)
Balloon payments (14,598,151) (3,632,696 (6,682,984)
Senior debt principal payment (11,307,777) (11,307,777) (10,000,000)
Increase in construction loan payable 4,033,554 5,440,221 2,393,954
Debt placement costs 52,331 (234,068 (621,678)
----------- ------------ -----------
Net cash (used in) provided by financing activities (30,681,495) 1,230,523 (29,102,616)
----------- ------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (60,718,306) 147,646,063 3,683,012
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 166,261,635 18,615,572 14,932,560
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $105,543,329 $166,261,635 $18,615,572
============ ============ ===========
(Continued)
</TABLE>
II-17
<PAGE> 39
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash payments for interest $16,510,213 $19,903,859 $22,762,631
============ ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property acquired in satisfaction of mortgages:
Additions to property accounted for under the
operating method $36,271 $256,492 $6,645,589
Decrease in mortgages receivable (96,938) (365,774) (9,109,376)
Increase to property held for sale - - 300,530
Decrease in deferred income 60,667 109,282 2,163,257
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
Reclassification of real estate to operating lease $10,207,078 $15,139,589 $ -
Reclassification of real estate from operating lease (2,437,340) (1,104,916) (840,844)
Reclassification of real estate from financing lease (234,878) (669,187) -
Reclassification of real estate from construction in progress (10,207,078) (15,139,589) -
Reclassification of real estate to property held for sale 2,672,218 1,774,103 840,844
------------ ------------ -----------
$ - $ - $ -
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
II-18
<PAGE> 40
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1. ORGANIZATION AND BASIS OF PRESENTATION
On July 1, 1987, American Real Estate Holdings Limited Partnership (the
"Subsidiary"), in connection with an exchange offer (the "Exchange"),
entered into merger agreements with American Real Estate Partners, L.P.
(the "Company") and each of American Property Investors, L.P., American
Property Investors II, L.P., American Property Investors III, L.P.,
American Property Investors IV, L.P., American Property Investors V, L.P.,
American Property Investors VI, L.P., American Property Investors VII,
L.P., American Property Investors VIII, L.P., American Property Investors
IX, L.P., American Property Investors X, L.P., American Property Investors
XI, L.P., American Property Investors 82, L.P. and American Property
Investors 83, L.P. (collectively, the "Predecessor Partnerships"), pursuant
to which the Subsidiary acquired all the assets, subject to the liabilities
(known and unknown) of the Predecessor Partnerships.
The limited partners of the Predecessor Partnerships received limited
partner interests in the Subsidiary. The number of such limited partner
interests received by a limited partner was determined based upon his
percentage ownership interest in the Predecessor Partnerships, the value of
the Predecessor Partnerships' net assets and the number of limited partner
interests allocable to the Predecessor Partnerships' general partners and
their affiliates. The limited partner interests in the Subsidiary were
contributed to the Company in exchange for limited partner interests
therein. Limited partnership interests were allocable to the Predecessor
Partnerships' general partners and their affiliates as a result of their
rights: (i) to receive a portion of the cash flow of the Predecessor
Partnerships by virtue of their ownership of interests in such partnerships
and their entitlement to receive management fees and nonaccountable expense
reimbursements and (ii) to share in the proceeds from the sale or
liquidation of the assets of the Predecessor Partnerships and to receive
real estate commissions with respect to the sale of properties by the
Predecessor Partnerships. These rights of the Predecessor Partnerships'
general partners and their affiliates were valued in connection with the
Exchange. As a result of such valuation, and the assignment of the
interests receivable by the corporate affiliates to American Property
Investors, Inc. (the "General Partner"), an aggregate of 1,254,280 units
and a 1% general partner interest in the Company were issued to the General
Partner and 5,679 units were issued to noncorporate affiliates of the
Predecessor Partnerships' general partners. In addition, the General
Partner also received a 1% general partner interest in the Subsidiary.
By virtue of the Exchange, the Subsidiary owns the assets, subject to the
liabilities, of the Predecessor Partnerships. The Company owns a 99%
limited partner interest in the Subsidiary. The General Partner owns a 1%
general partner interest in both the Subsidiary and the Company
representing an aggregate 1.99% general partner interest in the Company and
the Subsidiary.
The participation in the transaction by a Predecessor Partnership was
conditioned upon obtaining the approval of a majority-in-interest of the
limited partners in such Predecessor Partnership. Such approvals were
obtained with respect to each of the Predecessor Partnerships prior to July
1, 1987.
II-19
<PAGE> 41
During 1989, Integrated Resources, Inc. ("Integrated"), the former parent
of the General Partner, experienced serious financial difficulties and, on
February 13, 1990, it filed in the Bankruptcy Court for the Southern
District of New York a voluntary petition for reorganization pursuant to
the provisions of Chapter 11 of the Federal Bankruptcy Code (the "Filing").
The General Partner was a separate entity and neither the General Partner
nor any other subsidiary of Integrated was included in the Filing.
On September 13, 1990, in connection with its voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code, Integrated
entered into an agreement whereby it agreed to sell all of its stock in the
General Partner to Meadowstar Holding Company, Inc. ("Meadowstar").
Neither the Company nor the General Partner was a party to such agreement.
The sale of the stock of the General Partner to Meadowstar was approved by
the Bankruptcy Court on October 22, 1990. On November 15, 1990, pursuant
to the terms of the Acquisition Agreement, Meadowstar purchased all of the
outstanding shares of Common Stock of the General Partner. In May 1993,
Carl C. Icahn acquired all of Meadowstar's interest in the General Partner.
See Note 12 pertaining to the Rights Offering consummated in March 1995.
An amendment (the "Amendment") to the Company's Partnership Agreement
became effective on August 16, 1996 which permits the Company to make
non-real estate investments. The Amendment permits the Company to invest
in securities issued by companies that are not necessarily engaged as one
of their primary activities in the ownership, development or management of
real estate to further diversify its investments while remaining in the
real estate business and continuing to pursue suitable investments in the
real estate markets. Under the Amendment, investments may include equity
and debt securities of domestic and foreign issuers. The proportion of the
Company's assets invested in any one type of security or any single issuer
will not be limited. The investment objective of the Company with respect
to such investments will be to purchase undervalued securities so as to
maximize total returns consisting of current income and/or capital
appreciation.
The Company will conduct its activities in such a manner so as not to be
deemed an investment company under the Investment Company Act of 1940.
Generally, this means that no more than 40% of the Company's total assets
will be invested in securities. In addition, the Company will structure
its investments so as to continue to be taxed as a partnership rather than
as a corporation under the applicable publicly-traded partnership rules of
the Internal Revenue Code.
As the Company will concentrate under the Amendment on undervalued
securities, which may include, for example, high-yield securities and
neglected securities, its investments may be subject to significant amounts
of business, financial, market and other risks. Investments in securities
issued by companies that are not engaged as one of their primary activities
in the ownership, development or management of real estate will entail
somewhat different risks from those associated with investments in real
estate assets. The equity securities in which the Company may invest
pursuant to the Amendment may include common stocks, preferred stocks and
securities convertible into common stocks, as well as warrants to purchase
those securities. The debt securities in which the Company may invest may
include bonds, debentures, notes, mortgage-related securities and municipal
obligations. Certain of such securities may include lower-rated
securities which may provide the potential for higher yields and therefore
may entail higher risk. In addition, the Company may engage in various
investment techniques, such as options and futures transactions, foreign
currency transactions and leveraging for either hedging or other purposes.
Use of borrowed funds to leverage acquisitions can exaggerate the effect of
any increase or decrease in market value. There can be no assurance that
the Company will correctly evaluate such investments and their attendant
risks or that such investments will be profitable to the Company.
II-20
<PAGE> 42
Transactions under the Amendment may include transactions with affiliates
of Carl Icahn ("Icahn"), the Chairman of the Board of its General Partner
and, through High Coast, its principal unitholder, provided the terms
thereof are fair and reasonable to the Company. Mr. Icahn has confirmed
that neither he nor his affiliates would receive any fees from the Company
for services rendered in connection with non-real estate related
investments by the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
Financial Statements and Principles of Consolidation - The consolidated
financial statements are prepared on the accrual basis of accounting and
include only those assets, liabilities and results of operations which
relate to the Company and the Subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation.
Registration Costs, Expenses of the Exchange and Rights Offering Expenses -
Registration costs of the Predecessor Partnerships were charged against
partners' equity upon the closing of the public offerings in accordance
with prevalent industry practice. Expenses of the Exchange were charged
against partners' equity upon consummation of the Exchange. Rights
Offering Expenses were charged against partners' equity upon consummation
of the Right's Offering.
Net Earnings and Distributions Per Limited Partnership Unit - For financial
reporting purposes, the weighted average number of depositary units and
equivalent units assumed outstanding for the year ended December 31, 1996
was 28,023,641. The weighted average number of depositary units and
equivalent units outstanding and subscribed for assumed outstanding for the
year ended December 31, 1995 was 27,427,389. For the year ended December
31, 1994 the weighted average number of depositary units assumed
outstanding was 13,812,800. There were no distributions in 1996, 1995 or
1994.
Unit Option Plan - The Company adopted a Nonqualified Unit Option Plan (the
"Plan") in 1987, which was further amended in 1989, under which options to
purchase an aggregate of 1,416,910 depositary Units may be granted to
officers and key employees of the General Partner and the Company who
provide services to the Company. To date, no options have been granted
under the Plan.
Cash and Cash Equivalents - The Company considers short-term investments,
which are highly liquid with original maturities of three months or less
from date of issuance, to be cash equivalents.
Included in cash and cash equivalents at December 31, 1996 and 1995 are
investments in government backed securities of approximately $102,270,000
and $164,130,000, respectively.
Marketable Securities - Investments in equity securities classified as
available for sale, for accounting purposes, are required to be carried at
fair value on the Balance Sheet of the Company. Unrealized holding gains
and losses are excluded from earnings and reported as a separate component
of Partners Equity.
Investment in Limited Partnership Units - Investment in these Limited
Partnership Units are accounted for under the cost method with income
distributions reflected in earnings and return of capital distributions as
a reduction of investment.
Income Taxes - No provision has been made for Federal, state or local
income taxes since the Company is a partnership and, accordingly, such
taxes are the responsibility of the partners.
II-21
<PAGE> 43
Leases - The Company leases to others substantially all its real property
under long-term net leases and accounts for these leases in accordance with
the provisions of Financial Accounting Standards Board Statement No. 13,
"Accounting for Leases," as amended. This Statement sets forth specific
criteria for determining whether a lease is to be accounted for as a
financing lease or operating lease.
a. Financing Method - Under this method, minimum lease payments to
be received plus the estimated value of the property at the end of the
lease are considered the gross investment in the lease. Unearned
income, representing the difference between gross investment and
actual cost of the leased property, is amortized to income over the
lease term so as to produce a constant periodic rate of return on the
net investment in the lease.
b. Operating Method - Under this method, revenue is recognized as
rentals become due and expenses (including depreciation) are charged
to operations as incurred.
Properties - Properties, other than those accounted for under the financing
method, are carried at cost less accumulated depreciation unless declines
in the values of the properties are considered other than temporary.
For each of the years ended December 31, 1996, 1995 and 1994 no individual
real estate or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of the Company. At December 31, 1996
and 1995, Portland General Electric Company occupied a property, consisting
of corporate offices, which represented more than 10% of the Company's
total real estate assets.
Depreciation - Depreciation on properties accounted for under the operating
method is computed using the straight-line method over the estimated useful
life of the particular property or property components, which range from 5
to 45 years. When properties are sold or otherwise disposed of, the cost
and accumulated depreciation are removed from the property account and the
accumulated depreciation account, and any gain or loss on such sale or
disposal is generally credited or charged to income (See Note 9).
Debt Placement Costs - Debt placement costs are amortized on a
straight-line basis over the term of the respective indebtedness.
Use of Estimates - Management of the Partnership has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Assets Held for Sale - Assets held for sale are carried at the lower of
cost or net realizable value.
Accounting by Creditors for Impairment of a Loan - On January 1, 1995, SFAS
No. 114, Accounting by Creditors for Impairment of a Loan ("Statement
114"), as amended by SFAS 118. Accounting by Creditors for Impairment of a
Loan - Income Recognition Disclosures, was adopted by the Company. In
accordance with these standards, if it is probable that based upon current
information that a creditor with be unable to collect all amounts due
according to the contractual terms of a loan agreement, the asset is
considered "impaired". Reserves are established against impaired loans in
amounts equal to the difference between the recorded
II-22
<PAGE> 44
investment in the asset and either the present value of the cash flows
expected to be received, or the fair value of the underlying collateral if
foreclosure is deemed probable or if the loan is considered collateral
dependent. The adoption of Statement 114 and 118 had no impact on net
income.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of ("Statement 121") - The Company has adopted
Statement 121, which was issued in March 1995, and requires that
long-lived assets and certain identifiable intangibles, and goodwill
related to those assets to be held and used by an entity and long-lived
assets and certain identifiable intangibles to be disposed of, be reviewed
for impairment whenever events changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
In performing the review for recoverability, the Company estimates the
future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the asset an impairment loss is recognized. Otherwise, an
impairment loss is not recognized. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that the Company expects to
hold and use is based on the fair value of the asset. Long-lived assets
and certain identifiable intangibles to be disposed of are reported at the
lower of carrying amount or fair value less cost to sell.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
a. The General Partner and its affiliates may realize substantial
fees, commissions and other income from transactions involving the
purchase, operation, management, financing and sale of the
Partnership's properties, subject to certain limitations relating to
properties acquired from the Predecessor Partnerships in the Exchange.
Some of such amounts may be paid regardless of the overall
profitability of the Partnership and whether any distributions have
been made to Unitholders. As new properties are acquired, developed,
constructed, operated, leased, financed and sold, the General Partner
or its affiliates may perform acquisition functions, development and
construction oversight and other land development services, property
management and leasing services, either on a day-to-day basis or on an
asset management basis, and other services and be entitled to fees
and reimbursement of expenses relating thereto, including the
Reinvestment Incentive Fee, property management fees, real estate
brokerage and leasing commissions, fees for financing either provided
or arranged by the General Partner and its affiliates, development
fees, general contracting fees and construction management fees. The
terms of any transactions between the Company and the General Partner
or its affiliates must be fair and reasonable to the Company and
customary to the industry.
Reinvestment incentive fees as payment for services rendered in
connection with the acquisition of properties from July 1, 1987 through
July 1, 1997 were 1% of the purchase price for the first five years and
are 1/2% for the second five years.
Reinvestment incentive fees are only payable on an annual basis if the
sum of (x), the sales price of all Predecessor Partnerships' properties
(net of associated debt which encumbered such properties at the
consummation of the Exchange) sold through the end of such year, and
(y), the appraised value of all Predecessor Partnerships' properties
which have been financed or refinanced (and not subsequently sold), net
of the amount of any refinanced debt, through the end of such year
determined at the time of such financings or refinancings, exceeds the
aggregate values assigned to such Predecessor Partnerships' properties
for purposes of the Exchange. If the subordination provisions are not
satisfied in any year, payment of reinvestment incentive fees for such
year will be deferred. At the end of each year, a new determination
will be made with respect to
II-23
<PAGE> 45
subordination requirements (reflecting all sales, financings and
refinancings from the consummation of the Exchange through the end of
such year) in order to ascertain whether reinvestment incentive fees
for that year and for any prior year, which have been deferred, may be
paid.
From the commencement of the Exchange through December 31, 1996
the Company (i) sold or disposed of an aggregate of 149 properties of
the Predecessor Partnerships for an aggregate of approximately
$84,870,000, net of associated indebtedness which encumbered such
properties at the consummation of the Exchange and (ii) refinanced 25
Predecessor Partnership properties with an aggregate appraised value,
net of the amount of the refinanced debt, of approximately $44,431,000
for a sum total of approximately $129,301,000. Aggregate appraised
values attributable to such properties for purposes of the Exchange
were approximately $128,011,000. Sixteen properties have been acquired
since the commencement of the exchange, including two joint ventures
entered into in 1994, for aggregate purchase prices of approximately
$58,000,000. Reinvestment incentive fees of approximately $480,000
have previously been paid to the General Partner. No properties were
acquired in 1996, and therefore, no reinvestment incentive fees are due
the General Partner.
b. The Company and certain affiliates of its General Partner entered
into an agreement with the third-party landlord of its leased
executive office space. The agreement provided for the Company and
these affiliates to relocate their offices to an adjacent building also
owned by the landlord which relocation occurred in September 1995. In
accordance with the agreement, the Company entered into a lease,
expiring in 2001, for 7,920 square feet of office space, at an annual
rental of approximately $153,000. The Company has sublet to certain
affiliates 3,205 square feet at an annual rental of approximately
$62,000, resulting in a net annual rental of approximately $91,000.
The prior lease, which was terminated, provided for approximately 6,900
square feet at an annual rental of $155,000. During the year ended
December 31, 1996, the affiliates reimbursed the Company approximately
$62,000 for rent in connection with the new lease.
In addition, in 1995, the Company and an affiliate received a lease
termination fee of $350,000 which has been allocated $175,000 to the
Company and $175,000 to the affiliates. Such allocations and terms of
the sublease were approved by the Audit Committee of the Board of
Directors of the General Partner.
c. The Company was reimbursed by an affiliate of the General Partner
for payroll and certain overhead expenses related to certain
employees of the Company who provided services on a part-time basis in
the amounts of approximately $50,000 and $86,000 for the years ended
December 31, 1996 and 1995, respectively. Such reimbursements were
approved by the Audit Committee of the Board of Directors of the
General Partner.
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<PAGE> 46
4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE FINANCING METHOD
Real estate leased to others accounted for under the financing method is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------ -------------
<S> <C> <C>
Minimum lease payments receivable $321,413,667 $378,482,993
Unguaranteed residual value 143,916,365 156,165,105
------------ -------------
465,330,032 534,648,098
Less unearned income 211,548,129 253,115,569
------------ -------------
$253,781,903 $281,532,529
============ =============
</TABLE>
The following is a summary of the anticipated future receipts of the
minimum lease payments receivable at December 31, 1996:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ------------
<S> <C>
1997 $32,502,961
1998 32,502,441
1999 31,612,362
2000 30,226,789
2001 26,493,343
Thereafter 168,075,771
------------
$321,413,667
============
</TABLE>
At December 31, 1996, approximately $173,584,000 of the net investment in
financing leases was pledged to collateralize the payment of nonrecourse
mortgages payable.
5. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD
Real estate leased to others accounted for under the operating
method is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Land $50,261,046 $57,739,747
Commercial building 93,642,174 119,887,821
------------ ------------
143,903,220 177,627,568
Less accumulated depreciation 40,500,905 47,085,019
------------ ------------
$103,402,315 $130,542,549
============ ============
</TABLE>
As of December 31, 1996 and 1995, accumulated depreciation on the hotel
operating properties (not included above) amounted to approximately
$3,254,000 and $2,321,000, respectively (See Note 9).
II-25
<PAGE> 47
The following is a summary of the anticipated future receipts of minimum
lease payments under noncancelable leases at December 31, 1996:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ -----------
<S> <C>
1997 $11,984,442
1998 10,827,188
1999 9,501,026
2000 7,711,336
2001 5,922,150
Thereafter 24,617,354
-----------
$70,563,496
===========
</TABLE>
At December 31, 1996, approximately $65,899,000 of real estate leased to
others was pledged to collateralize the payment of nonrecourse mortgages
payable.
6. MARKETABLE SECURITIES
In 1996, the Company purchased 3,121,700 shares of RJR Nabisco Holdings
Corp. ("RJR") common stock at a cost of approximately $82,596,000 at an
average cost per share of $26.46. As of December 31, 1996 the Company
owned 3,121,700 shares of RJR, representing approximately 1.1% of the total
outstanding RJR common shares. On December 31, 1996, the closing price of
RJR common shares on the New York Stock Exchange was $34.00 representing a
market value of approximately $106,000,000 and approximately 16.5% of the
Company's total assets. Carl C. Icahn, the Chairman of the Board of the
General Partner, owned (through affiliates) an additional 16,808,100 shares
of RJR, as of December 31, 1996, representing approximately 6.2% of the
total outstanding RJR common shares.
The Company recorded "Dividend income" of $2,281,000 for the year ended
December 31, 1996 on the 3,121,700 shares of RJR purchased in 1996.
Unrealized holding gains of approximately $23,540,000 were recorded as a
separate component of Partners Equity at December 31, 1996.
In February 1997, the Company sold its entire interest in RJR for net
proceeds of approximately $112,000,000 realizing a gain of approximately
$29,000,000 which will be recorded in the first quarter of 1997. The
Company's pro rata share of third party expenses relating to such RJR
investment was approximately $2,200,000 which was paid in the first quarter
of 1997 and approved by the Audit Committee.
7. INVESTMENT IN LIMITED PARTNERSHIP UNITS
a. In June 1996, the Company entered into an agreement with
non-affiliated third parties and became a member of a limited
liability company, Beattie Place LLC ("Beattie"). The purpose of
Beattie is to acquire, hold, and ultimately dispose of limited
partnership units in ten Balcor Limited Partnerships (the "Balcor
Units") in connection with previously commenced tender offers. These
Balcor limited partnerships own and operate commercial and multi-family
real estate properties nationwide. The Company agreed to purchase a
non-voting membership interest in Beattie of approximately 71.5%.
Beattie purchased approximately 117,000 Balcor Units of which
approximately 84,000 Balcor Units represent the Company's pro rata
share. A total of approximately $8,598,000 was
II-26
<PAGE> 48
invested by the Company as of December 31, 1996, net of approximately
$1,902,000 of return of capital distributions received in 1996.
Approximately $360,000 of income distributions were received and
recorded in "Dividend income" for the year ended December 31, 1996.
In January 1997, the Company received the fourth quarter 1996
distribution of approximately $5,051,000 representing approximately
$348,000 of income distribution and approximately $4,703,000 of return
of capital.
b. In July 1996, the Company's subsidiary, American Real Estate
Holdings Limited Partnership ("AREH") and an affiliate of the
General Partner, Bayswater Realty and Capital Corp. ("Bayswater")
became partners of Boreas Partners, L.P., ("Boreas"), a Delaware
limited partnership. AREH and Bayswater have a 69.999% and 30% limited
and general partner interest, respectively, and a wholly owned
subsidiary of AREH has a .001% interest as a general partner of Boreas.
AREH's total interest is 70%. Boreas together with unaffiliated third
parties entered into an agreement and become limited partners of
Raleigh Capital Associates, L.P. ("Raleigh") for the purpose of making
a tender offer for up to 46% of the outstanding limited partnership and
assignee interests ("Units") of Arvida/JMB Partners, L.P. ("Arvida") a
real estate partnership. Boreas and an affiliated general partner have
a total interest in Raleigh of 33 1/3%. In 1996, Boreas made capital
contributions of approximately $17,650,000 to Raleigh which purchased,
as of December 31, 1996, approximately 27,000 of the outstanding Units.
In February 1997, Raleigh returned approximately $3,625,000, together
with interest earned thereon of approximately $29,000 of excess
capital contribution.
The Company has consolidated Boreas in the accompanying financial
statements and $5,325,000 representing Baywater's minority interest has
been included in "Accounts payable, accrued expenses, and other
liabilities."
c. In December 1996, the Company deposited approximately $5,000,000
with an unaffiliated escrow agent for the purpose of investing
in limited partnership units in seven Dean Witter Realty Limited
Partnerships (the "Dean Witter Units") in connection with tender offers
initiated by the Company. These Dean Witter limited partnerships own
and operate commercial real estate and invest in revenue bonds
collateralized by multi-family residential properties. As of December
31, 1996, the Company had purchased, as confirmed by the transfer
agent, approximately 160,000 Dean Witter Units at a cost of
approximately $2,760,000. Approximately $1,600,000 of the funds held
by the escrow agent at December 31, 1996 are included in short-term
investments.
As of January 31, 1997, the Company has purchased approximately 54,000
additional Dean Witter Units at a cost of approximately $1,235,000.
In January and February of 1997, the Company received distributions of
$282,000 and $214,000, respectively, of which approximately $261,000
and $162,000 were return of capital, respectively.
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<PAGE> 49
8. MORTGAGES AND NOTE RECEIVABLE
<TABLE>
<CAPTION> Balance at
Balance Monthly December 31,
Collateralized by Interest Maturity at Payment ---------------------
Property Tenanted by Rate Date Maturity Amount 1996 1995
- ------------------------- -------- -------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gino's Inc. and Foodarama
Supermarkets, Inc. 8.051% 1/92 1,005,237 - $ - 96,938
Hardee's Food Systems, Inc. 9.00 (a) 11/05 - 735 (a) 153,460 153,460
Bank of Virginia 9.00 (b) 1/06 847,902 1,436 (b) 353,522 347,739
Best Products Co., Inc. 9.00 (c) 9/01 - - (c) 197,330 224,704
Data 100 Corp. 9.00 12/10 - 9,589 915,251 946,406
11.6087 12/19 - - (d) 537,097 516,664
Easco Corp. 8.875 2/97 (e) 3,586,940 26,758 (e) 3,493,364 3,515,824
Winchester Partnership 9.00 11/01 - 33,857 1,609,396 1,858,525
Queens Moat Houses,
P.L.C. (Note receivable) Variable (f) 12/00 9,838,819 (f) - (f) 7,965,985 7,396,107
------------ -----------
$ 15,225,405 15,056,367
============ ===========
</TABLE>
(a) 5.75% is paid currently and 3.25% is deferred. The principal and
deferred interest is payable in monthly installments from March 1999
until November 2005.
(b) 4.5% is paid currently and 4.5% is deferred until maturity.
(c) Payments are $46,931 through November 1, 1996 and $54,276 through
September 1, 2001.
(d) Interest only will accrue until December 1, 2010; commencing
January 1, 2011, monthly payments of $39,035 will be due, which will
self-amortize the outstanding principal and current and deferred
interest, with the final payment due December 1, 2019. Increased
rentals on the property, if any, during the renewal term of the
underlying lease will be applied against accrued interest and then the
outstanding principal.
(e) As of January 31, 1997, the purchase money mortgage was amended.
The maturity date was extended to February 1998 and the monthly
payments decreased to $26,758.
(f) On August 15, 1995, the Company invested approximately $7.1
million in a note receivable by purchasing a portion (approximately
1.85%) of an unsecured Senior Term Facility Agreement ("Facility
Agreement"). The borrower is Queens Moat Houses P.L.C. ("Queens
Moat") and certain subsidiaries. Queens Moat is a United Kingdom
based hotel operator with properties in the U.K., Germany,
Netherlands, France and Belgium. The Company purchased its
participation portion from Lazard Freres & Co. LLC at 71.75% of the
face amount of the Company's pro rata portion of the Facility
Agreement's outstanding senior advances on the acquisition date. The
Facility Agreement's advances are denominated in Pounds Sterling,
Deutsche Marks, Dutch Guilders, Belgian Francs and French Francs.
The discount at acquisition date, based on the then existing spot
rate, was approximately $2.8 million. The Facility Agreement matures
December 31, 2000 and bears interest at LIBOR (London Interbank
Offered Rate) plus 1.75% per annum for the relevant currencies.
Interest accrued from July 1, 1995 to June 30, 1996, in the approximate
amount of $622,000, has been capitalized into the note receivable in
accordance with the terms of the Facility Agreement. Subsequent to
June 30, 1996 interest periods and payments can vary from one month to
two, three or six months at the discretion of the borrower. There are
scheduled payments of the advances over the term of the loan. In
addition, repayments are required when certain underlying assets are
sold.
II-28
<PAGE> 50
During the years ended December 31, 1996 and 1995, these repayments
totalled approximately $419,000 and $102,000, respectively.
The discount at acquisition date will be amortized over the term of the
Facility Agreement. For the years ended December 31, 1996 and 1995,
approximately $619,000 and $225,000 of discount was amortized including
$122,000 and $30,000 as a result of repayments, respectively. In
accordance with accounting policy, foreign exchange gains and losses
will be recorded each quarter based on the prevailing exchange rates at
each balance sheet date. Foreign exchange losses of approximately
$253,000 and gains of approximately $158,000 have been recognized and
are included in "Other Income" for the years ended December 31, 1996
and 1995, respectively.
The Company has generally not recognized any profit in connection with the
property sales in which the above purchase money mortgages receivable were
taken back. Such profits are being deferred and will be recognized when
the principal balances on the purchase money mortgages are received since
profit recognition was not allowed under generally accepted accounting
principles at the time of sale.
9. SIGNIFICANT PROPERTY TRANSACTIONS
Information on significant property transactions during the three-year
period ended December 31, 1996 is as follows:
a. On September 16, 1991, the Company brought suit against Alco
Standard Corporation and its affiliates, a former tenant of an
industrial facility located in Rome, Georgia whose lease expired in
October 1990. The action was brought against the defendants in the
United States District Court, Northern District of Georgia, Rome
Division for reimbursement of costs that could be incurred for
clean-up of hazardous materials on the site and certain deferred
maintenance. In July 1994, this litigation was settled and the
property was sold for $525,000. A gain of approximately $100,000 was
recognized in the year ended December 31, 1994. In addition, Alco
reimbursed the Company for $150,000 of expenses incurred and
indemnified the Company against any future liability in connection
with any site contamination. The expense reimbursement has been
included in "Property expenses" in the financial statements for the
year ended December 31, 1994.
b. On July 14, 1992, Integra, a Hotel and Restaurant Company ("Integra"),
which leased two hotel properties located in Miami, Florida and
Phoenix, Arizona filed a voluntary petition for reorganization
pursuant to the provisions of Chapter 11 of the Bankruptcy Code. The
tenant's petition, previously filed with the Bankruptcy Court, to
reject the aforementioned leases, was approved on August 7, 1992, and
the Company assumed operation of the properties on that date. The
Company has submitted a claim to the Bankruptcy Court. In 1996, the
Company received approximately $276,000 in partial settlement of its
claim which has been included in "Other Income" for the year then
ended.
At December 31, 1996, the property located in Miami, Florida had
a carrying value of approximately $5,175,000 and is unencumbered by any
mortgages. This property is subject to a ground lease. Based on
current conditions, management believes the carrying value of the Miami
property is reasonably stated.
II-29
<PAGE> 51
At December 31, 1996, the property located in Phoenix, Arizona had a
carrying value of approximately $7,782,000 and is encumbered by a
nonrecourse mortgage payable of approximately $3,220,000. This
mortgage was refinanced during the year ended December 31, 1994 (See
Note 10b). Based on current conditions, the management believes the
carrying value of the Phoenix property is reasonably stated.
During the year ended December 31, 1996, capital expenditures of
approximately $192,000 and $335,000 were incurred at the Miami and
Phoenix Holiday Inn's, respectively. During the year ended December
31, 1995 approximately $162,000 and $368,000 were incurred at the Miami
and Phoenix properties, respectively.
The Company entered into a management agreement for the operation of
the hotels with a national management organization. Since August 7,
1992, the hotels have been classified as Hotel Operating Properties and
their revenues and expenses separately disclosed in the Consolidated
Statements of Earnings. Net hotel operations (hotel operating revenues
less hotel operating expenses) totalled approximately $2,382,000,
$2,131,000 and $1,781,000 for the years ended December 31, 1996, 1995
and 1994, respectively. This was approximately $222,000 more and
$29,000 and $379,000 less than the rent would have been from the
rejected leases for the years ended December 31, 1996, 1995 and 1994,
respectively. Hotel operating expenses include all expenses except for
approximately $933,000, $822,000 and $776,000 of depreciation and
$335,000, $339,000 and $456,000 of interest expense for the years ended
December 31, 1996, 1995 and 1994, respectively. These amounts are
included in their respective captions in the Consolidated Statements of
Earnings. The results for the year ended December 31, 1996 are not
necessarily indicative of future operating results.
In February 1997, the Company executed a contract to sell the hotel
property located in Phoenix, Arizona. The selling price is $15,750,000
and if such sale is consummated, a gain of approximately $7.5 million
will be recognized in the second quarter of 1997. This property is
encumbered by a nonrecourse mortgage with a principal balance
outstanding of approximately $3,220,000 at December 31, 1996 which will
be repaid at closing. A prepayment penalty of approximately $250,000
will be due.
c. On July 31, 1992, Chipwich, Inc. ("Chipwich"), parent of Peltz
Food Corporation, a tenant in a property owned by the Company
filed a voluntary petition for reorganization pursuant to the provisions
of Chapter 11 of the Federal Bankruptcy Code. Chipwich then filed a
motion for rejection of the lease and, pursuant to an order of the
Bankruptcy Court, the lease was rejected on September 29, 1992. There
was a guarantor of the lease and the Company settled its claim against
the guarantor.
In 1995, the guarantor paid the company $2,200,000 in full satisfaction
of its leasehold obligation which, net of related costs, resulted in
approximately $2,034,000 of "Other income" in the year ended December
31, 1996. The company reclassified this property to "Property held for
sale" and reduced its carrying value to net realizable value by
recording a provision for loss on real estate of $250,000 and $611,552
in the years ended December 31, 1996 and 1995, respectively. At
December 31, 1996, the property had a carrying value of approximately
$50,000 and is unencumbered by any mortgage.
d. During 1992, leases on two properties formerly tenanted by
Petrolane, Inc. located in Belle Chasse, Louisiana and Nisku, Alberta,
Canada, expired and were re-let at rents substantially less than the
previous leases. As a result, the Company previously recorded a
provision for loss on real estate in the year ended December 31, 1992.
In addition, after
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<PAGE> 52
further evaluation and review, the Company believed the Belle Chasse
property's carrying value at June 30, 1994 to exceed the recoverable
value in the amount of $237,000. As a result, the Company recorded a
provision for loss on real estate in the amount of $237,000 for the
year ended December 31, 1994.
In September 1995, the Company sold the property located in Belle
Chasse, LA to the current tenant pursuant to a purchase option for
$575,000. A gain of approximately $116,000 was recorded in the year
ended December 31, 1995. In December 1995, the properly located in
Nisku, Alberta, Canada was sold to the current tenant for a sale price
of approximately $730,000. A gain of approximately $6,000 was recorded
in the year ended December 31, 1995.
e. On December 9, 1991, Stop N Go Markets of Texas, Inc. ("National
Convenience Stores, Inc.") filed a voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the
Bankruptcy Code. The tenant, who previously leased twenty-three
locations, filed a motion with the Bankruptcy Court to assume four
leases and reject the remaining leases. Pursuant to a stipulation by
the Bankruptcy Court on February 4, 1993, the tenant's motion was
approved effective as of August 31, 1992. On March 19, 1993, the
Company filed a proof of claim with the Bankruptcy Court. In April of
1995, May of 1994 and November of 1993 stock of the debtor was received
in settlement of its claim. In January 1995, the entire NCS stock was
sold pursuant to a tender offer for proceeds totaling $364,500. A gain
of approximately $250,000 was recognized in the year ended December 31,
1995. This amount is included in "Other Income" for the year then
ended.
f. On November 2, 1992, the Company purchased approximately fifteen
acres of land in East Syracuse, New York for approximately
$3,500,000 and contracted to build a 116,000 square foot BJ's Warehouse
Store ("BJ's") upon the site. The Company has entered into a twenty
year lease with Waban, Inc. ("Waban"), the parent company of BJ's
Warehouse Club. Construction was substantially completed on May 22,
1993 and Waban took possession of the premises, which is situated on
approximately ten acres of land, and commenced rental payments on that
date. The lease provides for an initial annual net rental of $659,262
with CPI increases every five years, not to exceed 8.77%. Under the
lease, Waban is responsible for any required structural repairs. Of the
remaining five acres of adjacent land approximately 4.3 acres was
available for future development by the Company.
At December 31, 1996, the BJ's land, including related improvements,
cost a total of approximately $4,957,000 and the building cost a total
of approximately $3,421,000. The carrying value of this property at
December 31, 1996 is approximately $7,986,000 and is encumbered by a
nonrecourse mortgage payable of approximately $3,715,000.
A reinvestment incentive fee was paid in 1994 to the General Partner of
approximately $45,000 pertaining to this acquisition and development.
On April 8, 1996, the Company entered into a build-to-suite lease with
Staples, Inc. ("Staples"), a national office supply retailer. The
building which is approximately 24,200 square feet, has been constructed
on approximately 3.8 acres of land which was available for future
development. The cost of construction for improvements to this land
parcel and the Staples building is approximately $1,300,000. The
initial term of the lease is for fifteen years plus three five year
renewal periods. The rent is approximately $248,000 during the first
ten years and $286,000 during the next five years. The tenant is also
II-31
<PAGE> 53
responsible for its pro-rata share of common area charges, insurance,
and real estate taxes. A commission of approximately $116,000 was
incurred in connection with this lease. The tenant took possession of
the premises and rent commenced on August 27, 1996. The carrying value
of this property at December 31, 1996 was approximately $2,456,000.
g. On January 31, 1994, the Company held two nonrecourse wrap-around
mortgages in the amount of approximately $3,692,000 secured by
two properties tenanted by The Wickes Corp. The mortgages had been
taken back by a Predecessor Partnership in connection with the sale of
such properties. The tenant remained current in its obligations under
the lease.
In January 1994, the debtor paid the balloon mortgage due, net of the
underlying first mortgage, on one Wickes property and a gain of
approximately $1,238,000 was recognized in the year ended December 31,
1994. In addition, the Company foreclosed on the remaining Wickes
property in January 1994 and real estate with a carrying value of
approximately $643,000 was recorded in the year ended December 31,
1994. No loss was incurred upon foreclosure because the estimated fair
value of the property is equal to its carrying value.
h. On June 17, 1993, the Company purchased two non-performing
mortgage loans for a combined price of $13,000,000. Each loan
was collateralized by a residential apartment complex located in
Lexington, Kentucky. The face value of the non-performing loans was
approximately $21,188,000.
The first non-performing loan, purchased for $6,990,000, was
collateralized by a 396 unit multi-family complex. The Company
foreclosed on this property ("Stoney Falls"), and received the deed on
October 11, 1993. The Company entered into a management agreement for
the operation of this property with a national management organization
which began operating the property effective September 1, 1993. During
the year ended December 31, 1994, the Company completed major
renovations which totalled approximately $1,360,000. In connection
with these renovations, approximately $350,000 of non recurring
maintenance expenses where incurred. These expenses are included in
"Property expenses" for the year ended December 31, 1994. During the
year ended December 31, 1995, approximately $267,000 of capital
expenditures were incurred.
The second non-performing loan, purchased for $6,010,000, was
collateralized by a 232 unit apartment complex. The Company foreclosed
on this property ("Stoney Brooke") and received the deed on February 11,
1994. Subsequent to the acquisition, the Company received distributions
from the seller of the note and began to receive cash flow from the
property pertaining to the period prior to formal foreclosure, net of
expenditures incurred by the Company, which have been applied as a
reduction to the initial cost of the loan. This cash flow, net of
expenditures incurred by the Company, totalled approximately $735,000.
A reinvestment incentive fee of approximately $65,000 was paid to the
General Partner in 1994. (See Note 3).
On September 17, 1996, the Company sold the two apartment complexes.
The selling price for these properties was $20,325,000. First
mortgages with principal balances outstanding of approximately
$9,800,000 were repaid at closing. In addition, closing
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<PAGE> 54
costs of approximately $337,000 were incurred. As a result, the
Company recognized a gain on the sale of these properties of
approximately $6,723,000 in the year ended December 31, 1996.
See Note 10c in connection with the mortgage financing of these two
properties in 1994.
i. In June 1994, the Company sold a property to the tenant, Lockheed
Sanders, Inc. The property, which was located in Plainfield,
N.J., was subject to a purchase option which was exercised. The selling
price was $5,625,000 and a gain of approximately $1,961,000 was
recognized in the year ended December 31, 1994. The property was
unencumbered by any mortgage.
j. The Company entered into two joint ventures in June 1994 with
unaffiliated co-venturers for the purpose of developing luxury garden
apartment complexes. The Alabama joint venture has been consolidated in
the accompanying financial statements. The North Carolina joint venture
sold its property in December 1996.
1. The first joint venture, formed as an Alabama Limited Liability
Company, developed a 240 unit multi-family project situated on
approximately twenty acres, currently owned by the joint venture,
located in Hoover, Alabama, a suburb of Birmingham. The Company, which
owns a seventy percent (70%) majority interest in the joint venture,
contributed $1,750,000 in June 1994 and the co-venturer contributed
$250,000. As of December 31, 1996 and 1995 approximately $135,000 and
$220,000, respectively, representing the minority interest of the
co-venturer has been included in "Accounts payable, accrued expenses,
and other liabilities" in the accompanying financial statements.
Distributions, which totaled $75,000 in 1996, are made in proportion to
ownership interests. The co-venturer will be credited with $500,000 of
additional capital in lieu of receiving a general contractor's fee.
Permanent financing has been obtained by the joint venture in the
amount of $8,860,000 of which $360,000 is guaranteed by the co-venturer
and personally by its principals. The Company funded approximately
$140,000 of $200,000 of approved additional improvements with the
co-venturer funding the balance. The complex was completed in
September 1995, and all rental units were available for occupancy. As
of December 1996, approximately 92% of the units are leased. The
development totalled approximately $10,889,000, including the
acquisition of land valued at approximately $1,138,000. An affiliate
of the Company's co-venturer is managing the property.
For the years ended December 31, 1996 and 1995, net rental operations
resulted in losses of approximately $209,000 and $301,000, including
approximately $502,000 and $289,000 of depreciation and amortization,
before consideration of the co-venturer's minority interest in such
losses of approximately $63,000 and $90,000, respectively. These
amounts are included in their respective captions in the Consolidated
Statements of Earnings.
A reinvestment incentive fee of approximately $38,000 was paid to the
general partner upon completion of the project (See Note 3).
2. The second joint venture, a Delaware limited partnership,
developed a 288 unit multi-family project situated on approximately
thirty-three acres in Cary, North Carolina (Raleigh-Durham area). The
Company, owned a ninety percent (90%) majority interest in the
partnership, contributed approximately $4,022,000 and was a limited
partner. The Company has fulfilled its contribution obligation. The
co-venturer was the general partner and had a limited partner interest.
The Company was entitled to a cumulative annual preferred return of
12% on its investment before cash distributions were made in proportion
to ownership interests. Construction financing was obtained by
II-33
<PAGE> 55
the joint venture in the amount of $12,205,000 and was guaranteed by the
joint venture general partner and personally by its principals. The
complex was completed in August 1996 and all rental units were available
for occupancy. The total development costs including the acquisition of
land, were approximately $16,000,000. In December 1996, the joint
venture sold the property for $21,000,000. The Company received
approximately $8,300,000 of the net proceeds and recognized a gain of
approximately $4,900,000.
A reinvestment incentive fee of approximately $72,000 was paid to the
Company's general partner upon completion of the project (See Note 3).
k. On February 1, 1995, the Penske Corp. exercised its purchase option on
three properties leased from the Company (two in New Jersey and one in
New York). The selling price was approximately $4,535,000 and a gain of
approximately $1,003,000 was recognized in the year ended December 31,
1996. Each property was encumbered by first and second mortgages which
totalled approximately $1,152,000 and which were paid from the sales
proceeds.
l. On March 24, 1995, the Company sold the property tenanted by Pace
Membership Warehouse, Inc. in Taylor, Michigan. The selling price was
$9,300,000 and a gain of approximately $3,307,000 was recognized in the
year ended December 31, 1995. The property was encumbered by a
nonrecourse mortgage payable of approximately $4,346,000 which the
purchaser assumed.
m. On May 18, 1995, the Company purchased approximately 248 acres of
partially improved land located in Armonk, New York. The purchase
price was approximately $3,044,000. The Company intends to construct
approximately 45 to 50 single-family detached luxury homes subject to
subdivision and other required approvals. No material development costs
have yet been incurred.
A reinvestment incentive fee of approximately $15,000 was paid to the
Company's general partner in 1996 (See Note 3).
n. On June 28, 1995, General Signal Technology Corporation, a tenant
of a property located in Andover, Massachusetts exercised its rights
under the lease to purchase the property. The selling price was
approximately $19,808,000 and a loss of approximately $125,000 was
recognized in the year ended December 31, 1995. The property was
encumbered by two nonrecourse mortgages payable which totalled
approximately $10,670,000 and were paid from the sales proceeds.
o. On January 11, 1996, Forte Hotels, Inc. ("Forte") a/k/a Travelodge, a
tenant in a property owned by the Company entered into a Lease
Termination and Mutual Release Agreement ("Agreement"). This Agreement
terminated the lease, which was due to expire on June 30, 1996,
effective January 17, 1996 and required Forte to pay the Company
$2,800,000 in consideration of the early lease termination and in
payment of certain deferred maintenance items. In addition, this
property was encumbered by two mortgages. The first mortgage with a
principal balance of approximately $84,000 was paid off on January 18,
1996. The second mortgage with a principal balance of approximately
$231,000 was paid off March 1, 1996.
As a result of the above settlement the Company recognized "Other
income" of approximately $2,700,000, net of related costs, in the year
ended December 31, 1996. The Company actively marketed this property
for sale and therefore reclassified it to "Property held for sale."
The carrying value of this property "at December 31, 1996 is
approximately $762,000. In January 1997, the Company sold this
property for
II-34
<PAGE> 56
approximately $2,100,000, net of closing costs. A gain of
Approximately $1,300,000 will be recorded in the first quarter of 1997.
p. On May 10, 1996, the Company sold a property in Miami, Florida
that was tenanted by the Cordis corporation. The Company permitted an
early exercise by the tenant of its purchase option as the Company
believed the option price to be above the market price. The selling
price for the property was $24,310,000. First and second mortgages with
principal balances outstanding of approximately $14,416,000 were repaid
at closing. In addition, closing costs of approximately $228,000 were
incurred. As a result, the Company recognized a gain on the sale of
this property of approximately $4,659,000.
In connection with the early extinguishment of the outstanding mortgage
balances, the Company paid approximately $522,000 in prepayment
penalties. As a result, an extraordinary loss of the same amount was
recorded in the year ended December 31, 1996.
q. On July 24, 1996, the Company entered into a gross lease with
AT&T Corp. for its Atlanta office building formerly leased to Days Inn
of America, Inc. The initial term of the lease is for five years at
$1,478,923 per annum with five (5) year renewal periods. The renewal
rent is the initial term rent plus 50% of the increase in the Consumer
Price Index. Tenant improvements, allowances and commissions in
connection with this lease are estimated to be approximately $2,100,000.
The lease commenced on November 25, 1996. Annual operating expenses are
estimated to total approximately $650,000. The tenant will pay
increases in operating expenses above the base year amount. The Company
has retained the current property manager to perform on-site and
supervisory and management services.
r. On July 29, 1996, the Company sold a property in Woodbury, NY
that was tenanted by Pioneer Standard Electronics, Inc. The selling
price was $2,000,000 and the Company recognized a gain of approximately
$1,040,000 in the year ended December 31, 1996.
s. On August 15, 1996, the Company sold a property in Philadelphia,
Pennsylvania that was tenanted by A&P and Ginos. The selling price
for the property was $3,500,000. A first mortgage with a principal
balance outstanding of approximately $301,000 was repaid at closing. In
addition, closing costs of approximately $194,000 were incurred. As a
result, the Company recognized a gain on the sale of this property of
approximately $2,198,000 in the year ended December 31, 1996.
t. On September 30, 1996, the Company sold a property in Southfield,
Michigan that was tenanted by the Penske Corporation. The selling
price for the property was $4,700,000 and the Company recognized a gain
on the sale of this property of approximately $3,253,000 in the year
ended December 31, 1996.
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<PAGE> 57
u. On January 7, 1997, the Company sold three properties tenanted by
Federal Realty Investment Trust ("FRIT") for a total selling price of
approximately $9,363,000. Two first mortgages with principal balances
outstanding of approximately $878,000 were repaid at closing. In
addition, closing costs of approximately $100,000 are expected to be
incurred. As a result, the Company will recognize a gain of
approximately $1,500,000 in the first quarter of 1997.
In addition, on January 7, 1997, FRIT made a loan to the Company in the
approximate amount of $8,759,000 secured by a fourth property tenanted
by FRIT located in Broomal, PA. Concurrently with this loan, the
Company granted and FRIT exercised an option to purchase the Broomal
property with a closing to occur on or about June 30, 1998. The
purchase price will be the unpaid balance of the mortgage loan of
approximately $8,500,000 at the closing date. The nonrecourse mortgage
loan bears interest at the rate of 8% per annum and requires monthly
debt service payments of approximately $72,000.
10. MORTGAGES PAYABLE
At December 31, 1996, mortgages payable, all of which are nonrecourse to
the Company, are summarized as follows:
<TABLE>
<CAPTION>
Annual Principal Balance at
Number of Range of Range of and December 31,
Mortgages Interest Rates Maturities Interest Payment --------------------------
--------- -------------- --------------- ---------------- 1996 1995
------------ ------------
<S> <C> <C> <C> <C> <C>
14 6.000% - 8.875% 6/30/99 - 6/1/12 $ 8,226,124 $ 57,951,666 $ 71,926,694
37 9.000 - 10.875 1/31/97 - 12/13/14 9,332,976 55,073,008 88,055,516
4 11.500 - 12.250 11/30/01 - 12/31/05 583,092 2,886,830 3,985,351
----------- ------------ ------------
$18,142,192 $115,911,504 $163,967,561
=========== ============ ============
</TABLE>
The following is a summary of the anticipated future principal payments
of the mortgages:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
--------------- ------------
<S> <C>
1997 $ 14,749,647
1998 10,830,752
1999 15,860,415
2000 18,421,750
2001 6,721,626
2002 - 2006 36,977,661
2007 - 2011 11,240,124
2012 - 2014 1,109,529
-----------
$115,911,504
============
</TABLE>
a. On March 4, 1994, the Company paid off one nonrecourse mortgage
loan and refinanced two nonrecourse mortgage loans that encumbered a
total of seven properties tenanted by Toys "R" Us. The loan paid off,
which encumbered one property, had an outstanding principal balance of
approximately $616,000, bore interest at 10.375%, and was callable at
the lender's option in 1994. The two loans refinanced had outstanding
principal balances of approximately $1,550,000 and $2,863,000, bore
interest at 9.25% and 9.55%, were self-liquidating, and were callable
at the lender's option in 1995 and 1996, respectively. The two new
mortgage loans, in the principal amounts of approximately $1,464,000
and $3,636,000, bear interest at 7.08%, are self-liquidating and
mature
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<PAGE> 58
January 15, 2012. Debt placement costs of approximately
$226,000 have been incurred. The new annual debt service of
approximately $532,000 reflects a decrease of approximately $89,000.
b. A balloon payment of approximately $6,266,000 was originally due
June 1, 1994 on a nonrecourse mortgage which encumbered the Holiday
Inn in Phoenix, Arizona; however, the Company paid off approximately
$2,966,000 on that date and was granted an extension on the remaining
balance. The interest rate was 10.75%. On June 27, 1994 the Company
refinanced the remaining balance with a nonrecourse mortgage loan in
the amount of $3,300,000. The new mortgage loan matures July 27,
1999, bears interest at 10.35% and has a balloon payment due at
maturity of approximately $3,120,000. Debt placement costs of
approximately $143,000 were incurred. The new annual debt service is
approximately $370,000.
c. On July 25, 1994 the Company obtained financing on the two
apartment complexes located in Lexington, Kentucky. The two
nonrecourse mortgage loans in the amount of $5,500,000 and $4,500,000
for Stoney Falls and Stoney Brooke Apartments, respectively, bore
interest at 8.375% and matured in ten years when balloon payments
totaling approximately $8,150,000 were due. Under the terms of the
loans, $100,000 was initially funded on each loan with the balance
funded in January 1995. Debt placement costs of approximately
$250,000 were incurred. Both of these mortgages were paid off in
connection with the disposition of the property in September of 1996
(See Note 9).
d. On December 9 and 23, 1994, the Company prepaid the first and
second mortgages, respectively, with aggregate outstanding balances
of approximately $3,364,000 which encumbered a property tenanted by
Chomerics, Inc. located in Woburn, Massachusetts. The first and
second mortgages were scheduled to mature August 1, 2011 and February
1, 2005, respectively, and both bore interest at 13.875%. The first
mortgage was callable August 1, 1996.
11. SENIOR INDEBTEDNESS
On May 27, 1988, the Company closed a $50,000,000, 10-year senior unsecured
debt financing. The notes bear interest at 9.6%, payable semiannually, 2%
of which was deferred and added to the principal at the Company's option
during the first five years. In May 1994, 1995 and 1996, the Company repaid
$10,000,000 and approximately $11,308,000 and $11,308,000 of the outstanding
principal balance of the notes, respectively. The Company is required to
make principal repayments of approximately $11,308,000 in 1997 and on the
final payment date of May 27, 1998.
The note agreements also place limitations on the Company with respect to,
among other things, additional debt and the use of proceeds from property
sales. In addition, distributions and the amounts used to purchase
partnership interests cannot exceed cash flow, as defined in the
agreements, plus $15,000,000. The Company is also required to maintain,
among other things, specified levels of (i) net annual rentals, as defined
in the agreements, on properties unencumbered by mortgage financing and
(ii) net cash flow.
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<PAGE> 59
12. RIGHTS OFFERING
A registration statement relating to the Rights Offering was filed with the
Securities and Exchange Commission and declared effective February 23,
1995.
On March 1, 1995, the Company issued to record holders of its Depositary
Units one transferable subscription right (a "Right"), for each seven
Depositary Units of the Company held on February 24, 1995, the record date.
The Rights entitled the holders thereof (the "Rights Holders") to acquire
during the subscription period at a subscription price of $55, six
Depositary Units and one 5% cumulative pay-in-kind redeemable preferred
unit representing a limited partner interest ("Preferred Units"). The
subscription period commenced on March 1, 1995 and expired at the close of
business on March 30, 1995.
The Preferred Units have certain rights and designations, generally as
follows. Each Preferred Unit has a liquidation preference of $10.00 and
entitles the holder thereof to receive distributions thereon, payable
solely in additional Preferred Units, at the rate of $.50 per Preferred
Unit per annum (which is equal to a rate of 5% of the liquidation
preference thereof), payable annually on March 31 of each year (each, a
"Payment Date"), commencing March 31, 1996. On any Payment Date commencing
with the Payment Date on March 31, 2000, the Company with the approval of
the Audit Committee of the Board of Directors of the General Partner may
opt to redeem all, but not less than all, of the Preferred Units for a
price, payable either in all cash or by issuance of additional Depositary
Units, equal to the liquidation preference of the Preferred Units, plus any
accrued but unpaid distributions thereon. On March 31, 2010, the Company
must redeem all, but not less than all, of the Preferred Units on the same
terms as any optional redemption. The first Payment Date was April 1, 1996
on which 98,782 additional Preferred Units were issued. As of December 31,
1996, 2,074,422 Preferred Units are issued and outstanding.
1,975,640 Rights were issued in the Rights Offering of which 418,307 were
exercised. 190,554 Depositary Units and 31,759 Preferred Units were
subscribed for through the exercise of the Over-Subscription Privilege by
Rights Holders other than High Coast Limited Partnership ("High Coast"), a
Delaware limited partnership.
High Coast acted as guarantor for the Rights Offering and is an affiliate
of Carl C. Icahn, ("Icahn"), the Chairman of American Property Investors,
Inc., ("API"), the general partner of the Company. API is also the general
partner of the guarantor and the two limited partners are affiliates of and
are controlled by Icahn. Pursuant to its subscription guaranty, High Coast
oversubscribed for a total of 9,343,998 Depositary Units and 1,557,333
Preferred Units. As a result, the Rights Offering was fully subscribed.
The proceeds received by the Company, after deduction of expenses of
approximately $1.1 million incurred by the Company in connection with the
Rights Offering, were approximately $107.6 million.
In addition, in accordance with the terms of the Company's and its
subsidiary's partnership agreements, API was required to contribute
$2,206,242 in order to maintain its aggregate 1.99% general partnership
interest.
On April 12, 1995, the Company received $108,660,200, the gross
proceeds of the Rights Offering, from its subscription agent and $2,206,242
from API. The Company issued 1,975,640 Preferred Units and an additional
11,853,840 Depositary Units. Trading in the Preferred Units commenced
March 31, 1995 on the New York Stock Exchange ("NYSE") under the symbol
"ACP PR". The Depositary Units trade on the NYSE under the symbol "ACP".
As of March 3, 1997, High Coast owns 1,829,472 Preferred Units and
13,895,712 Depositary Units.
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<PAGE> 60
13. EARNINGS PER SHARE
Net earnings per limited partnership unit and equivalent partnership units
are computed using the weighted average number of units and equivalent
units outstanding during the period. For the years ended December 31, 1996
and 1995, the dilutive effect of preferred units and the pro rata quarterly
portion of the annual pay-in-kind distribution to preferred Unitholders
have been included in the earnings per share calculation, as calculated
under the effective yield method, as equivalent depositary units. The
earnings per share calculation for the year ended December 31, 1995 assumes
the Depositary and Preferred Units subscribed for in the Rights Offering
were outstanding at the beginning of the year. Also, with respect to the
year ended December 31, 1995 calculation, net income has been increased by
approximately $2,100,000 in accordance with the modified treasury stock
method. (See Note 12).
14. RECONCILIATION OF NET EARNINGS PER FINANCIAL STATEMENTS TO TAX REPORTING
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ----------- -----------
<S> <C> <C> <C>
Net earnings per financial statements $57,822,052 $35,155,620 $23,168,564
Minimum lease payments received,
net of income earned on leases
accounted for under the financing
method
7,313,949 7,204,850 6,708,644
Gain on real estate transactions for tax
purposes in excess of that for
financial statement purposes 8,866,645 9,739,167 1,325,735
Provision for loss for financial
statement purposes 935,000 768,701 582,000
Difference attributed to joint
ventures and minority interest (142,998) (85,692) (29,367)
Difference between expense accruals,
net of income accruals, at
beginning of year and end of year 806,672 (993,688) (256,431)
Depreciation and amortization for
tax purposes in excess of that for
financial statement purposes due
to leases accounted for under the
financing method (5,214,314) (7,071,152) (9,532,694)
Other (26,218) (26,218) (26,218)
----------- ----------- ----------
Taxable income $70,360,788 $44,691,588 $21,940,233
=========== =========== ===========
</TABLE>
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<PAGE> 61
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
March 31, June 30,
------------ --------
1996 1995 1996 1995
---------------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues $20,592 $16,199 $16,976 $17,234
================ ============== ========== =========
Earnings before property transactions $10,949 $ 6,155 $7,648 $ 7,336
Provision for loss on real estate - - (175) -
Gains on property transactions 52 4, 321 5,454 (85)
Loss from early extinguishment of debt - - (522) -
---------------- -------------- ---------- --------
Net earnings $11,001 $10,476 $12,405 $ 7,251
================ ============== ========== =========
Net earnings per limited partnership unit $ .39 $ .48 (1) $ .43 $ .25 (1)
================ ============== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
September 30, December 31,
--------------------- -----------------------
1996 1995 1996 1995
--------------------------- -------------- -------- -------------
<S> <C> <C> <C> <C>
Revenues $16,760 $19,245 $17,446 $17,242
======== ======= ======= =======
Earnings before property transactions $ 7,841 $9,966 $8,295 $ 7,376
Provision for loss on real estate - (611) (760) (158)
Gains on property transactions 13,595 176 5,415 680
Gain from early extinguishment of debt $ - - 30 -
-------- -------- ------- ------
Net earnings $21,436 $9,531 $12,980 $7,898
======== ======== ======= =======
Net earnings per limited partnership unit $ .75 $ .33 (1) $ .45 $ .27 (1)
======== ======= ======= =======
</TABLE>
Net earnings per unit is computed separately for each period and,
therefore, the sum of such quarterly per unit amounts may differ from the
total for the year.
(1) Includes the issuance of additional Partnership units and equivalent
units in 1995.
16. COMMITMENTS AND CONTINGENCIES
a. Lockheed Missile and Space Company, Inc. ("Lockheed"), a
tenant of the Company's leasehold property in Palo Alto,
California, has entered into a consent decree with the California
Department of Toxic Substances Control ("CDTS") to undertake certain
environmental remediation at this property. Lockheed has estimated that
the environmental remediation costs may be up to approximately
$14,000,000. In a non-binding determination by the CDTS, Lockheed was
found responsible for approximately 75% of such costs and the balance
was allocated to other parties. The Company was allocated no
responsibility for any such costs.
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<PAGE> 62
Lockheed has served a notice that it may exercise its statutory right
to have its liability reassessed in a binding arbitration proceeding.
In connection with this notice, Lockheed has stated that it will
attempt to have allocated to the Company and to the Company's
ground-lessor (which may claim a right of indemnity against the
Company) approximately 9% and 17%, respectively, of the total
remediation costs. The Company believes that it has no liability for
any of such costs, and in any proceeding in which such liability is
asserted against it, the Company will vigorously contest such
liability. In the event any of such liability is allocated to the
Company, it will seek indemnification from Lockheed in accordance with
its lease.
b. On January 25, 1995, the Grand Union Company, a tenant leasing
eight properties owned by the Company, filed a prepackaged voluntary
petition for reorganization pursuant to the provisions of Chapter 11
of the Federal Bankruptcy Code. These eight properties' annual
rentals total approximately $1,450,000 (including two properties which
are sublet, representing approximately $58,000 in annual rentals).
The tenant rejected the lease on one property located in Waterford, NY
effective July 31, 1995 by order of the Bankruptcy Court on June 6,
1995. The annual rent for this property was approximately $103,000.
The Company is now actively marketing this property for sale and
believes the property's carrying value of $1,057,149 at December 31,
1995 to exceed its estimated net realizable value by $157,149, for
which a provision for loss on real estate was recorded in the year
then ended. At December 31, 1996 the property is classified as a
"Property held for sale" with accompanying value of $900,000. The
property is unencumbered by any mortgage.
In June 1995, the tenant emerged from Bankruptcy. The tenant affirmed
five of the seven remaining leases and allowed the two sub-let
property's leases to remain in effect. At December 31, 1996, the
carrying value of these seven properties is approximately $10,910,000.
One of these properties is encumbered by a nonrecourse mortgage payable
of approximately $4,578,000. The Company has filed a proof of claim
with the Bankruptcy Court for the rejected lease.
c. On June 23, 1995, Bradlees Stores, Inc., a tenant leasing four
properties owned by the Company, filed a voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the Federal
Bankruptcy Code. The annual rentals for these four properties is
approximately $1,320,000. The tenant is current in its obligations
under the leases. The tenant has not yet determined whether it will
exercise its right to reject or affirm the leases which will require
an order of the Bankruptcy Court. There are existing assignors who
are still obligated to fulfill all of the terms and conditions of the
leases.
At December 31, 1996, the carrying value of these four properties is
approximately $7,265,000. Two of the properties are encumbered by
nonrecourse mortgages payable of approximately $1,775,000.
d. On September 18, 1995, Caldor Corp., a tenant in a property owned
by the Company, filed a voluntary petition for reorganization
pursuant to the provisions of Chapter 11 of the Federal Bankruptcy
Code. The annual rental for this property is approximately $248,000.
The tenant is current in its obligations under the lease with the
exception of approximately $12,000 of prepetition rent. The tenant has
not yet determined whether it will exercise its right to reject or
affirm the leases which will require an order of the Bankruptcy Court.
At December 31, 1996, the property has a carrying value of
approximately $1,942,000 and is unencumbered by any mortgage.
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<PAGE> 63
e. On September 24, 1996, Best Products, a tenant leasing a property
owned by the Company, filed a voluntary petition for reorganization
pursuant to the provision of Chapter 11 of the Federal Bankruptcy
Code. The annual rental for this property is approximately $508,000.
The tenant is current in its obligations under the lease. The tenant
has not yet determined whether it will exercise its right to reject or
affirm the lease which will require an order of the Bankruptcy Court.
At December 31, 1996, the property has a carrying value of
approximately $3,418,000 and is unencumbered by any mortgage.
f. The current owners of a Long Beach, California property formerly
owned by the Company have commenced an action against the Company,
former owners and tenants of the property seeking indemnification for
the costs of remediating an environmental condition alleged to have
been caused by the dry cleaner at this shopping center. The Company
had acquired this property in a sale-leaseback transaction and will
seek indemnification from the seller and master tenant of the
property, pursuant to the terms of the former lease, if any liability
is allocated to it.
17. PROPERTY HELD FOR SALE
At December 31, 1996, the Company owned twelve properties that were being
actively marketed for sale. At December 31, 1996, these properties have
been stated at the lower of their carrying value or net realizable value.
The aggregate value of the properties is estimated to be approximately
$3,698,000, after incurring a provision for loss on real estate in the
amount of $275,000 in the year ended December 31, 1996. At December 31,
1995, the aggregate value of the properties was estimated to be
approximately $1,983,000 after incurring a provision for loss on real
estate in the amount of $157,149 in the year then ended (See Note 16b).
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable, Construction Loan Payable,
Mortgages Payable and Accounts Payable, Accrued Expenses and Other
Liabilities
The carrying amount of cash and cash equivalents, accounts receivable,
Construction Loan Payable, Mortgages Payable and accounts payable, accrued
expenses and other liabilities are carried at cost, which approximates
their fair value.
Mortgages Receivable
The fair values of the mortgages receivable past due, in process of
foreclosure, or for which foreclosure proceedings are pending, are based on
the discounted cash flows of the underlying lease. The fair values of the
mortgages receivable satisfied subsequent to year end are based on the
amount of the net proceeds received.
The fair values of the mortgages receivable which are current are based on
the discounted cash flows of their respective payment streams.
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<PAGE> 64
The approximate estimated fair values of the mortgages receivable held as
of December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
At December 31, 1996
----------------------
Collateralized by Net Estimated
Property Tenanted by Investment Fair Value
--------------------------- ---------- ----------
<S> <C> <C>
Hardee's Food Systems, Inc. $51,000 $177,000
Bank of Virginia 353,000 445,000
Best Products Co., Inc. 197,000 198,000
Data 100 Corp. 788,000 1,065,000
Easco Corp. 928,000 3,450,000
Winchester Partnership 1,609,000 1,593,000
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995
----------------------
Collateralized by Net Estimated
Property Tenanted by Investment Fair Value
--------------------------- ---------- ----------
<S> <C> <C>
Gino's Inc., and Foodarama
Supermarkets, Inc. $36,000 $5,000
Hardee's Food Systems, Inc. 51,000 169,000
Bank of Virginia 348,000 419,000
Best Products Co., Inc. 225,000 224,000
Data 100 Corp. 798,000 3,105,000
Easco Corp. 951,000 3,535,000
Winchester Partnership 1,859,000 1,809,000
</TABLE>
The net investment at December 31, 1996 and 1995 is equal to the carrying
amount of the mortgage receivable less any deferred income recorded.
Senior Indebtedness
The approximate fair value and carrying value of the Company's senior
indebtedness at December 31, 1996 and 1995 is $22,756,000 and $22,616,000,
$34,106,000 and $33,923,000, respectively. The estimated fair value is
based on the amount of future cash flows associated with the instrument
discounted using the rate at which the Company believes it could currently
replace the senior indebtedness.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
19. DISTRIBUTIONS PAYABLE
Distributions payable represent amounts accrued and unpaid due to
non-consenting investors ("Non-consents"). Non-consents are those
investors who have not yet exchanged their limited partnership interest in
the various Predecessor Partnerships for limited partnership units of
American Real Estate Partners, L.P.
II-43
<PAGE> 65
20. SUBSEQUENT EVENTS
Pursuant to the terms of the Preferred Units, on February 28, 1997, the
Company declared its scheduled annual preferred unit distribution payable
in additional Preferred Units at the rate of 5% of the liquidation
preference of $10. The distribution is payable March 31, 1997 to holders
of record as of March 14, 1997.
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<PAGE> 66
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
II-45
<PAGE> 67
PART III
Item 10. Directors and Executive Officers of AREP.
The names, offices held and the ages of the directors and executive
officers of the General Partner are as follows:
Name Age Office
---- --- ------
Carl C. Icahn 61 Chairman of the Board
Alfred D. Kingsley 54 Director
William A. Leidesdorf 51 Director
Jack G. Wasserman 60 Director
John P. Saldarelli 55 Vice President, Secretary and
Treasurer
Carl C. Icahn has been Chairman of the Board of the General Partner since
November 15, 1990. He is also President and a Director of Starfire Holding
Corporation (formerly Icahn Holding Corporation), a Delaware corporation ("SHC")
and Chairman of the Board and a Director of various of SHC's subsidiaries,
including ACF Industries, Inc., a New Jersey corporation ("ACF"). SHC is
primarily engaged in the business of holding, either directly or through
subsidiaries, a majority of the common stock of ACF and its address is 100 South
Bedford Road, Mount Kisco, New York 10549. Mr. Icahn has also been Chairman of
the Board of Directors of ACF since October 29, 1984 and a Director of ACF since
June 29, 1984. ACF is a railroad freight and tank car leasing, sales and
manufacturing company. He has also been Chairman of the Board of Directors and
President of Icahn & Co., Inc. since 1968. Icahn & Co., Inc. is a registered
broker-dealer and a member of the National Association of Securities Dealers. In
1979, Mr. Icahn acquired control and presently serves as Chairman of the Board
of Directors of Bayswater Realty & Capital Corp., which is a real estate
investment and development company. ACF, Icahn & Co., Inc. and Bayswater Realty
& Capital Corp. are deemed to be directly or indirectly owned and controlled by
Carl C. Icahn. Mr. Icahn was Chief Executive Officer and Member of the Office of
the Chairman of Trans World Airlines, Inc. ("TWA") from November 8, 1988 to
January 8, 1993; Chairman of the Board of Directors of TWA from January 3, 1986
to January 8, 1993 and Director of TWA from September 27, 1985 to January 8,
1993. Mr. Icahn also serves as a director of Cadus Pharmaceutical Corporation, a
public biotechnology company. Mr. Icahn also has substantial equity interests
in and controls various partnerships and corporations which invest in
publicly traded securities.
Alfred D. Kingsley has served as Director of the General Partner since
November 15, 1990. He was also Vice Chairman of the Board of Directors of TWA
from February 1, 1989 to January 8, 1993 and a Member of the Office of the
Chairman from November 8, 1988 to
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January 8, 1993. Mr. Kingsley was a Director of TWA from September 27, 1985 to
January 8, 1993. He also was a Director and Executive Officer and Director of
Research at Icahn & Co., Inc. and related entities from 1968 until December
1994. He also has been Vice Chairman of the Board of Directors of ACF since
October 29, 1984 and a Director of ACF since June 29, 1984. Mr. Kingsley has
also been a Senior Managing Director of Greenway Partners, L.P. since May 1993,
which invests in publicly traded securities.
William A. Leidesdorf has served as Director of the General Partner since
March 26, 1991. Since April 1995, Mr. Leidesdorf has acted as an independent
real estate investment banker. From January 1, 1994 through April 1995, Mr.
Leidesdorf was Managing Director of RFG Financial, Inc., a commercial mortgage
company. From September 30, 1991 to December 31, 1993, Mr. Leidesdorf was Senior
Vice President of Palmieri Asset Management Group. From May 1, 1990 to September
30, 1991, Mr. Leidesdorf was Senior Vice President of Lowe Associates, Inc., a
real estate development company, where he was involved in the acquisition of
real estate and the asset management workout and disposition of business areas.
He also acted as the Northeast Regional Director for Lowe Associates, Inc. From
June 1985 to January 30, 1990, Mr. Leidesdorf was Senior Vice President and
stockholder of Eastdil Realty, Inc., a real estate company, where he was
involved in the asset management workout, disposition of business and financing
areas. During the interim period from January 30, 1990 through May 1, 1990, Mr.
Leidesdorf was an independent contractor for Eastdil Realty, Inc. on real estate
matters.
Jack G. Wasserman has served as a Director of the General Partner since
December 3, 1993. Mr. Wasserman is an attorney and a member of the New York
State Bar and has been with the New York based law firm of Wasserman, Schneider
& Babb since 1966, where he is currently a senior partner. Mr. Wasserman also
serves as a director of Cadus Pharmaceutical Corporation, a public biotechnology
company.
John P. Saldarelli has served as Vice President, Secretary and Treasurer
of the General Partner since March 18, 1991. Mr. Saldarelli was also President
of Bayswater Realty Brokerage Corp. from June 1987 until November 19, 1993 and
Vice President of Bayswater Realty & Capital Corp. from September 1979 until
April 15, 1993, both of which are deemed to be directly or indirectly owned and,
controlled by Carl C. Icahn.
William Leidesdorf, Jack G. Wasserman and Alfred D. Kingsley are on the
Audit Committee of the Board of Directors of the General Partner.
Each of Messrs. Icahn and Kingsley served on the Board of Directors of
TWA. On January 31, 1992, TWA filed a petition for bankruptcy in the U.S.
Bankruptcy Court in Delaware, seeking reorganization under Chapter 11 of the
Bankruptcy Code. In connection therewith, the Pension Benefit Guaranty
Corporation asserted that there existed in the TWA defined benefit plans an
underfunding deficiency, and that if the Plans were terminated, TWA and all
members of the controlled group of which TWA was a member, including the General
Partner, would be liable, jointly and severally, for approximately $1.2 billion.
On January 8, 1993, TWA, the Pension Benefit Guaranty Corporation, Mr. Icahn and
the members of the
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controlled group, among others, settled all claims and potential claims which
they had against each other.
Each executive officer and director will hold office until the next annual
meeting of the General Partner and until his or her successor is elected and
qualified. Directors who are not employed by AREP or certain affiliates, receive
fees of $3,000 for attendance at each quarterly meeting of the Board of
Directors. Mr. Kingsley, Mr. Leidesdorf and Mr. Wasserman each received $15,000
for attendance at meetings in 1996. In addition, directors who are not employed
by AREP or certain affiliates may receive additional fees for special meetings
of or services rendered on behalf of the Audit Committee.
Each of the executive officers of the General Partner performs services
for other affiliates of the General Partner.
There are no family relationships between or among any of the directors
and/or executive officers of the General Partner.
If distributions (which are payable in kind) are not made to the holders
of Preferred Units on any two Payment Dates (which need not be consecutive), the
holders of more than 50% of all outstanding Preferred Units, including the
General Partner and its affiliates, voting as a class, will be entitled to
appoint two nominees for the Board of Directors of the General Partner. Holders
of Preferred Units owning at least 10% of all outstanding Preferred Units,
including the General Partner and its affiliates to the extent that they are
holders of Preferred Units, may call a meeting of the holders of Preferred Units
to elect such nominees. Once elected, the nominees will be appointed to the
Board of Directors of the General Partner by Icahn. As directors, the nominees
will, in addition to their other duties as directors, be specifically charged
with reviewing all future distributions to the holders of the Preferred Units.
Such additional directors shall serve until the full distributions accumulated
on all outstanding Preferred Units have been declared and paid or set apart for
payment. If and when all accumulated distributions on the Preferred Units have
been declared and paid or set aside for payment in full, the holders of
Preferred Units shall be divested of the special voting rights provided by the
failure to pay such distributions, subject to revesting in the event of each and
every subsequent default. Upon termination of such special voting rights
attributable to all holders of Preferred Units with respect to payment of
distributions, the term of office of each director nominated by the holders of
Preferred Units (the "Preferred Unit Directors") pursuant to such special voting
rights shall terminate and the number of directors constituting the entire Board
of Directors shall be reduced by the number of Preferred Unit Directors. The
holders of the Preferred Units have no other rights to participate in the
management of AREP and are not entitled to vote on any matters submitted to a
vote of the holders of Depositary Units.
Filing of Reports
To the best of AREP's knowledge, no director, executive officer or
beneficial owner of more than 10% of AREP's Depositary Units failed to file on a
timely basis reports required by
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ss. 16(a) of the Securities Exchange Act of 1934, as amended, during the year
ended December 31, 1996.
Item 11. Executive Compensation.(1)
The following table sets forth information in respect of the compensation
of the Chief Executive Officer and each of the other four most highly
compensated executive officers of AREP for services in all capacities to AREP
for the fiscal years ended December 31, 1996, 1995 and 1994.(2)
SUMMARY COMPENSATION TABLE
Annual Compensation
- --------------------------------------------------------------------------------
(a) (b) (c)
Name and Principal Position Year Salary ($)
- --------------------------- ---- ----------
John P. Saldarelli(3) 1996 132,300
Vice President, Secretary and Treasurer 1995 126,000
1994 126,000
AREP has adopted a Nonqualified Unit Option Plan (the "Plan") pursuant to
which options to purchase an aggregate of 1,416,910 Depositary Units at an
option price equal to the market price on the date of grant may be granted to
officers and key employees of the General
- ----------
(1) Pursuant to applicable regulations, certain columns of the Summary
Compensation Table and each of the remaining tables have been omitted, as
there has been no compensation awarded to, earned by or paid to any of the
named executive officers by AREP or by the General Partner, which was
subsequently reimbursed by AREP, required to be reported in those columns
or tables.
(2) Carl C. Icahn, the Chief Executive Officer, received no compensation as
such for the periods indicated. In addition, other than John P.
Saldarelli, no other executive officer received compensation in excess of
$100,000 from AREP for the applicable period.
(3) On March 18, 1991, Mr. Saldarelli was elected Vice President, Secretary
and Treasurer of the General Partner. Mr. Saldarelli devotes substantially
all of his time to the performance of services for AREP and the General
Partner. The other executive officers and directors of the General Partner
devote only a portion of their time to performance of services for AREP.
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In February 1993, AREP adopted a 401K plan pursuant to which AREP will
make a matching contribution to an employee's individual plan account in the
amount of one-third (1/3) of the first six (6%) percent of gross salary
contributed by the employee.
Item 12. Security Ownership of Certain
Beneficial Owners and Management.
As of March 3, 1997, High Coast, which is controlled by Icahn, owned
13,895,712 Depositary Units, or approximately 54.1% of the outstanding
Depositary Units and 1,829,472 Preferred Units or approximately 88.2% of the
outstanding Preferred Units.
The affirmative vote of Unitholders holding more than 75% of the total
number of all Units then outstanding, including Depositary Units held by the
General Partner and its affiliates, is required to remove the General Partner.
Thus, since Icahn, through High Coast, holds approximately 54.1% of the
Depositary Units outstanding, the General Partner will not be able to be removed
pursuant to the terms of the Partnership Agreement without Icahn's consent.
Moreover, under the Partnership Agreement, the affirmative vote of the General
Partner and Unitholders owning more than 50% of the total number of all
outstanding Depositary Units then held by Unitholders, including High Coast, is
required to approve, among other things, selling or otherwise disposing of all
or substantially all of AREP's assets in a single sale or in a related series of
multiple sales, dissolving AREP or electing to continue AREP in certain
instances, electing a successor general partner, making certain amendments to
the Partnership Agreement or causing AREP, in its capacity as sole limited
partner of the Subsidiary, to consent to certain proposals submitted for the
approval of the limited partners of the Subsidiary. Accordingly, as High Coast
holds in excess of 50% of the Depositary Units outstanding, Icahn, through High
Coast, will have effective control over such approval rights.
As of January 15, 1997, to the best knowledge of AREP, Wellington
Management Company, a Massachusetts corporation, who filed a Schedule 13-G on
January 24, 1997, owned 1,307,646 Depositary Units, or approximately 5.1% of the
outstanding Depositary Units.
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The following table provides information, as of March 20, 1996, as to the
beneficial ownership of the Depositary Units and Preferred Units of AREP for
each director of the General Partner, and all directors and executive officers
of the General Partner as a group.
Beneficial Beneficial
Name of Ownership of Percent Ownership of Percent
Beneficial Owner Depositary Units of Class Preferred Units of Class
- ---------------- ---------------- -------- --------------- --------
Carl C. Icahn(1) 13,895,712 54.1 1,829,472 88.2%
All directors and
executive officers 13,895,712 54.1 1,829,472 88.2%
as a group (6 persons)
- ----------
(1) Carl C. Icahn, through High Coast, is the beneficial owner of the
13,895,712 Depositary Units set forth above and may also be deemed to be
the beneficial owner of the 50,402 Depositary Units owned of record by API
Nominee Corp., which in accordance with state law are in the process of
being turned over to the relevant state authorities as unclaimed property;
however, Mr. Icahn disclaims such beneficial ownership. The foregoing is
exclusive of a 1.99% ownership interest in AREP which the General Partner
holds by virtue of its 1% General Partner interest in each of AREP and the
Subsidiary, but inclusive of the Depositary Units High Coast acquired
through the Rights Offering. Furthermore, pursuant to a registration
rights agreement entered into by High Coast in connection with the Rights
Offering, AREP has agreed to pay any expenses incurred in connection with
two demand and unlimited piggy-back registrations requested by High Coast.
AREP understands that 11,689,896 Depositary Units and 1,806,722 Preferred
Units have been pledged by High Coast as collateral for a loan made by a
bank in order to secure the loan made to an affiliate of Mr. Icahn.
Item 13. Certain Relationships and Related Transactions.
Related Transactions with the General Partner and its Affiliates
Icahn, in his capacity as majority Unitholder, will not receive any
additional benefit with respect to distributions and allocations of profits and
losses not shared on a pro rata basis by all other Unitholders. In addition,
Icahn has confirmed to AREP that neither he nor any of his affiliates will
receive any fees from AREP in consideration for services rendered in connection
with non-real estate related investments by AREP such as advice to purchase RJR
shares which generated $29 million of profits for AREP in the first quarter of
1997. AREP may determine to make investments in which Icahn or his affiliates
have independent investments in such assets; in addition, AREP may enter into
other transactions with the General Partner and its affiliates, including,
without limitation, buying and selling assets from or to the General Partner or
its affiliates and participating in joint venture investments in assets with the
General Partner or its affiliates, whether real estate or non-real estate
related, provided the terms of all such transactions are fair and reasonable to
AREP. Furthermore, it should be noted that the Partnership Agreement provides
that the General Partner and its affiliates are permitted to have
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<PAGE> 73
other business interests and may engage in other business ventures of any
nature whatsoever, and may compete directly or indirectly with the business of
AREP. Icahn and his affiliates currently invest in and perform investment
management services with respect to assets that may be similar to those AREP
may invest in and intend to continue to do so; pursuant to the Partnership
Agreement, however, AREP shall not have any right to participate therein or
receive or share in any income or profits derived therefrom. See Item 1.
"Business - Investment in RJR" and "Investment in Limited Partnership Units."
For the years ended December 31, 1996 and 1995, AREP made no payments with
respect to the Depositary Units owned by the General Partner. However, in 1996
and 1995 the General Partner was allocated $1,150,659 and $699,597,
respectively, of the income of AREP as a result of its 1.99% general partner
interest in AREP.
In May 1995, AREP and an affiliate of the General Partner ("Affiliate")
entered into an agreement with the third-party landlord of its leased executive
office space. The agreement provided for AREP and the Affiliate to relocate
their offices to an adjacent building also owned by the landlord which
relocation occurred in September 1995. In accordance with the agreement, AREP
entered into a lease, expiring in 2001, for 7,920 square feet of office space,
at an annual rental of approximately $153,000. AREP has sublet to certain
affiliates of the General Partner 3,205 square feet at an annual rental of
approximately $62,000, resulting in a net annual rental of approximately
$91,000. Affiliates of the General Partner reimbursed AREP for approximately
$62,000 in rent paid by AREP on its behalf during 1996 in connection with the
new lease. The prior lease, which was terminated, provided for approximately
6,900 square feet at an annual rental of $155,000 to AREP. In addition, AREP and
the Affiliate received a lease termination fee of $350,000 allocated $175,000 to
AREP and $175,000 to the Affiliate. Such allocations and the terms of the
sublease were reviewed and approved by the Audit Committee of the Board of
Directors of the General Partner. In addition, in the first quarter of 1997,
AREP agreed in principle to sublease a portion of office space from an affiliate
of its General Partner. The terms of such sublease are being reviewed by the
Audit Committee.
Property Management and Other Related Transactions
The General Partner and its affiliates may receive fees in connection with
the acquisition, sale, financing, development and management of new properties
acquired by AREP. As development and other new properties are acquired,
developed, constructed, operated, leased and financed, the General Partner or
its affiliates may perform acquisition functions, including the review,
verification and analysis of data and documentation with respect to potential
acquisitions, and perform development and construction oversight and other land
development services, property management and leasing services, either on a
day-to-day basis or on an asset management basis, and may perform other services
and be entitled to fees and reimbursement of expenses relating thereto, provided
the terms of such transactions are fair and reasonable to AREP in accordance
with AREP Agreement and customary to the industry. It is not possible to state
precisely what role, if any, the General Partner or any of its affiliates may
have in the acquisition, development or management of any new investments.
Consequently, it is not possible to state the amount of the income, fees or
commissions the General Partner or its affiliates might be paid in connection
with the investment of the Rights Offering proceeds since
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<PAGE> 74
the amount thereof is dependent upon the specific circumstances of each
investment, including the nature of the services provided, the location of the
investment and the amount customarily paid in such locality for such services.
However, Unitholders may expect that, subject to the specific circumstances
surrounding each transaction and the overall fairness and reasonableness
thereof to AREP, the fees charged by the General Partner and its affiliates for
the services described below generally will be within the ranges set forth
below:
o Property Management and Asset Management Services. To the extent that
AREP acquires any properties requiring active management (e.g., operating
properties that are not net-leased) or asset management services, including on
site services, it may enter into management or other arrangements with the
General Partner or its affiliates. Generally, it is contemplated that under
property management arrangements, the entity managing the property would receive
a property management fee (generally 3% to 6% of gross rentals for direct
management, depending upon the location) and under asset management
arrangements, the entity managing the asset would receive an asset management
fee (generally .5% to 1% of the appraised value of the asset for asset
management services, depending upon the location) in payment for its services
and reimbursement for costs incurred.
o Brokerage and Leasing Commissions. AREP also may pay affiliates of the
General Partner real estate brokerage and leasing commissions (which generally
may range from 2% to 6% of the purchase price or rentals depending on location;
this range may be somewhat higher for problem properties or lesser-valued
properties).
o Lending Arrangements. The General Partner or its affiliates may lend
money to, or arrange loans for, AREP. Fees payable to the General Partner or its
affiliates in connection with such activities include mortgage brokerage fees
(generally .5% to 3% of the loan amount), mortgage origination fees (generally
.5% to 1.5% of the loan amount) and loan servicing fees (generally .10% to .12%
of the loan amount), as well as interest on any amounts loaned by the General
Partner or its affiliates to AREP.
o Development and Construction Services. The General Partner or its
affiliates may also receive fees for development services, generally 1% to 4% of
development costs, and general contracting services or construction management
services, generally 4% to 6% of construction costs.
o Reinvestment Incentive Fees. Subject to the limitations described below,
the General Partner is entitled to receive a reinvestment incentive fee (a
"Reinvestment Incentive Fee") for performing acquisition services equal to a
percentage of the purchase price (whether paid in cash, Depositary Units, other
securities and/or with mortgage financing) of properties (other than Predecessor
Properties) acquired from July 1, 1987 through July 1, 1997. This percentage is
1% for the first five years and 1/2% for the second five years. Although a
Reinvestment Incentive Fee accrues each time a property is acquired,
Reinvestment Incentive Fees are only payable on an annual basis, within 45 days
after the end of each calendar year, if the following subordination provisions
are satisfied. Reinvestment Incentive Fees accrued in any year will only be
payable if the sum of (x) the sales price of all Predecessor Properties (net of
associated debt which encumbered these Properties at the consummation of the
Exchange) sold through the
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<PAGE> 75
end of that year and (y) the appraised value of all Predecessor Properties
which have been financed or refinanced (and not subsequently sold), net of the
amount of any refinanced debt end of that year and (y) the appraised value of
all Predecessor Properties which have been financed or refinanced (and not
subsequently sold), net of the amount of any refinanced debt through the end of
that year determined at the time of such financings or refinancings, exceeds
the aggregate values assigned to those Predecessor Properties for purposes of
the Exchange. If the subordination provisions are not satisfied in any year,
payment of Reinvestment Incentive Fees for that year will be deferred. At the
end of each year a new determination will be made with respect to subordination
requirements (reflecting all sales, financings and refinancings from the
consummation of the Exchange through the end of that year) in order to
ascertain whether Reinvestment Incentive Fees may be payable irrespective of
whether distributions have been made or are projected to be made to
Unitholders. Through December 31, 1996, an aggregate of (i) 149 Predecessor
Properties were sold or disposed of for an aggregate amount of approximately
$84,870,000 net of associated indebtedness which encumbered these Properties at
the consummation of the Exchange, and (ii) 25 Predecessor Properties were
refinanced at an aggregate appraised value, net of the amount of the refinanced
debt, of approximately $44,431,000 for a sum total of approximately
$129,301,000. Aggregate appraised values attributable to these Predecessor
Properties for purposes of the Exchange were approximately $128,011,000.
Accordingly, through December 31, 1996, AREP satisfied the subordination
requirements detailed above.
AREP may also enter into other transactions with the General Partner and
its affiliates, including, without limitation, buying and selling properties and
borrowing and lending funds from or to the General Partner or its affiliates,
joint venture developments and issuing securities to the General Partner or its
affiliates in exchange for, among other things, assets that they now own or may
acquire in the future, provided the terms of such transactions are fair and
reasonable to AREP. The General Partner is also entitled to reimbursement by
AREP for all allocable direct and indirect overhead expenses (including, but not
limited to, salaries and rent) incurred in connection with the conduct of AREP's
business.
In addition, employees of AREP may, from time to time, provide services to
affiliates of the General Partner, with AREP being reimbursed therefor.
Reimbursement to AREP by such affiliates in respect of such services is subject
to review and approval by the Audit Committee of the Board of Directors of the
General Partner. In 1996 such amounts were approximately $50,000, which
reimbursement was approved by the Audit Committee of the General Partner. In
addition, an affiliate of the General Partner provided certain administrative
services to AREP in the amount of $3,000 in 1996.
The Audit Committee of the Board of Directors of the General Partner meets
on an annual basis, or more often if necessary, to review any conflicts of
interest which may arise, including the payment by AREP of any fees to the
General Partner or any of its affiliates. The General Partner and its affiliates
may not receive duplicative fees.
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Nonqualified Unit Option Plan
AREP has adopted the Plan, under which options to purchase an aggregate of
1,416,910 Depositary Units may be granted to officers and key employees of the
General Partner and AREP who provides services to AREP. To date, no options have
been granted under the Plan. See Item 11 - "Executive Compensation."
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Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements:
The following financial statements of American Real Estate Partners, L.P.
are included in Part II, Item 8:
Page
Number
------
Independent Auditors' Report II-12
Consolidated Balance Sheets - II-13-14
December 31, 1996 and 1995
Consolidated Statements of Earnings - II-15
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Partners' Equity - II-16
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - II-17-18
Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements II-19-44
(a)(2) Financial Statement Schedules:
Schedule III - Real Estate Owned and Revenues IV-5-22
Earned (by tenant or guarantor,
as applicable)
All other Financial Statement schedules have been omitted because the required
financial information is not applicable or the information is shown in the
Financial Statements or Notes thereto.
(a)(3) Exhibits:
3.1 Certificate of Limited Partnership of AREP, dated February 17,
1987 (filed as Exhibit No. 3.1 to AREP's Annual Report on Form
10-K for the year ended December 31, 1987 and incorporated
herein by reference).
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3.2 Amended and Restated Agreement of Limited Partnership of AREP,
dated as of May 12, 1987 (filed as Exhibit No. 3.2 to AREP's
Annual Report on Form 10-K for the year ended December 31, 1987
and incorporated herein by reference).
3.3 Amendment No. 1 to the Amended and Restated Agreement of Limited
Partnership of AREP (filed as Exhibit 3.3 to AREP's Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
3.4 Certificate of Limited Partnership of American Real Estate
Holdings Limited Partnership (the "Subsidiary"), dated February
17, 1987, and amendment thereto, dated March 12, 1987 (filed as
Exhibit No. 3.3 to AREP's Annual Report on Form 10-K for the
year ended December 31, 1987 and incorporated herein by
reference).
3.5 Amended and Restated Agreement of Limited Partnership of the
Subsidiary, dated as of July 1, 1987 (filed as Exhibit No. 3.4
to AREP's Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).
4.1 Depositary Agreement among AREP, the General Partner and
Registrar and Transfer Company, dated as of July 1, 1987 (filed
as Exhibit No. 4.1 to AREP's Annual Report on Form 10-K for the
year ended December 31, 1987 and incorporated herein by
reference).
4.2 Amendment No. 1 to the Depositary Agreement (filed as Exhibit
4.2 to AREP's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
4.3 Specimen Depositary Receipt (filed as Exhibit No. 4.2 to AREP's
Annual Report on Form 10-K for the year ended December 31, 1987
and incorporated herein by reference).
4.4 Form of Transfer Application (filed as Exhibit No. 4.3 to AREP's
Annual Report on Form 10-K for the year ended December 31, 1987
and incorporated herein by reference).
4.5 Specimen Certificate representing Preferred Units (filed as
Exhibit No. 4.9 to AREP's Registration Statement on Form S-3
(Registration No. 33-54767) and incorporated herein by
reference).
10.1 Nonqualified Unit Option Plan (filed as Exhibit No. 10.1 to
AREP's Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).
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<PAGE> 79
10.2 Distribution Reinvestment Plan (filed as Exhibit No. 10.3 to
AREP's Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).
10.3 Note Purchase Agreements, dated as of May 27, 1988 among AREP,
the Subsidiary and The Prudential Insurance Company of America
(the "Note Agreements") (filed as Exhibit Nos. 2a and 2b to
AREP's Current Report on Form 8-K dated May 27, 1988 and
incorporated herein by reference).
10.4 Amendment No. 1 to the Note Agreements dated November 17, 1988
(filed as Exhibit No. 10.2 to AREP's Registration Statement on
Form S-3 (Registration No. 33-54767) and incorporated herein by
reference).
10.5 Amendment No. 2 to the Note Agreements dated November 17, 1988
(filed as Exhibit No. 10.3 to AREP's Registration Statement on
Form S-3 (Registration No. 33-54767) and incorporated herein by
reference).
10.6 Amendment No. 3 to the Note Agreements dated as of June 21, 1994
(filed as Exhibit No. 10.4 to AREP's Registration Statement on
Form S-3 (Registration No. 33-54767) and incorporated herein by
reference).
10.7 Amendment No. 4 to the Note Agreements dated as of August 12,
1994 (filed as Exhibit No. 10.5 to AREP's Registration Statement
on Form S-3 (Registration No. 33-54767) and incorporated herein
by reference).
10.8 9.6% Senior Promissory Note of AREP and the Subsidiary due May
27, 1998 payable to The Prudential Insurance Company of America
(filed as Exhibit No. 2c to AREP's Current Report on Form 8-K
dated May 27, 1988 and incorporated herein by reference).
10.9 9.6% Senior Promissory Note of AREP and the Subsidiary due May
27, 1998 payable to Prudential Property and Casualty Insurance
Company (filed as Exhibit No. 2d to AREP's Current Report on
Form 8-K dated May 27, 1988 and incorporated herein by
reference).
10.10 Subscription Guaranty Agreement between AREP and High Coast
Limited Partnership (the "Guarantor") (filed as Exhibit 4.10 to
AREP's Registration Statement on Form S-3 (Registration No.
33-54767) and incorporated herein by reference).
10.11 Registration Rights Agreement between AREP and the Guarantor
(filed as Exhibit 4.11 to AREP's Registration Statement on Form
S-3 (Registration No. 33-54767) and incorporated herein by
reference).
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<PAGE> 80
10.12 Amended and Restated Agency Agreement (filed as Exhibit 10.12 to
AREP's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference).
10.13 Subscription Agent Agreement (filed as Exhibit 10.13 to AREP's
Annual Report on Form 10-K for the year ended December 31, 1994
and incorporated herein by reference).
16 Letter dated September 27, 1991 of Deloitte & Touche regarding
change in accountants (filed as Exhibit No. A to AREP's Current
Report on Form 8-K dated October 3, 1991 and incorporated herein
by reference).
22 List of Subsidiaries (filed as Exhibit No. 22 to AREP's Annual
Report on Form 10-K for the year ended December 31, 1987 and
incorporated herein by reference).
(b) Reports on Form 8-K:
(1) AREP filed a Current Report on Form 8-K (the "1996 Form 8-K") with
the Securities and Exchange Commission on June 21, 1996. Pursuant to Item
5 of the 1996 Form 8-K, the Board of Directors of the General Partner
stated that it had approved the proposal of the Amendment to AREP's
Partnership Agreement and further described the terms of the Amendment.
(2) AREP filed a Current Report on Form 8-K (the "1997 Form 8-K") with the
Securities and Exchange Commission on March 28, 1997. Pursuant to Item 7
of the 1997 Form 10-K, AREP reported its fourth quarter and full year
results and that no distributions are expected to be made in 1997.
IV-4
<PAGE> 81
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership
Schedule III
------------
Page 1
REAL ESTATE OWNED AND REVENUES EARNED
<TABLE>
<CAPTION>
Part 1 - Real estate owned at December 31, 1996 - Accounted for under the:
-------------------------------------------------------------------------
Operating Method
--------------------------------------------------------
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PROPERTY LAND AND BUILDING
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Acme Markets, Inc. and FPBT of Penn. PA 1 $2,004,393 $2,004,393 $1,352,155
Alabama Power Company AL 5 $4,680,325
Amer Stores and The Fidelity Bank PA 1
Amer Stores, Grace, & Shottenstein Stores NJ 1 2,043,567 2,043,567 1,507,397
American Recreation Group, Inc. NC 1
Amterre Ltd. Partnership NJ 1 1,559,648 1,559,648
Amterre Ltd. Partnership PA 2 867,847 639,797 639,797
Amterre Ltd. Partnership PA 1 2,090,127
Best Products Co., Inc. VA 1
Caldor, Inc. MA 1
Chesebrough-Pond's Inc. CN 1 1,549,805 1,549,805 1,090,444
Chomerics, Inc. MA 1
Coldwell Banker & Co. CA 1
Coldwell Banker & Co. MN 1
Coldwell Banker & Co. VA 1
Coldwell Banker & Co. MO 1
Collins Foods International, Inc. OR 6 82,457 218,713 218,713
Collins Foods International, Inc. CA 3 131,970 87,810 87,810
Cordis Corporation FL 1
David Miller of California CA 1 1,036,681 1,036,681 473,898
Dillon Companies, Inc. MO 1 546,681 546,681 297,442
Dillon Companies, Inc. LA 8 1,555,112 1,555,112 842,444
Druid Point Bldg. GA 1 4,919,956 1,219,736 6,139,692 661,844
Duke Power Co. NC 1 3,198,097
European American Bank and Trust Co. NY 1 1,355,210 1,355,210 1,271,504
Farwell Bldg. MN 1 1,162,240 5,052,286 20,993 5,073,279 837,344
Federated Department Stores, Inc. CA 1 363,342 363,342
First National Supermarkets, Inc. CT 1 14,536,079
First Union National Bank NC 1
Fisher Scientific Company IL 1 597,806 597,806 120,718
Foodarama Supermarkets, Inc. PA 1 1,317,844 1,317,844 835,225
Forte Hotels International, Inc. NJ 1 699,694
Forte Hotels International, Inc. TX 1
Fox Grocery Company WV 1 1,343,018
Gino's, Inc. MO 1 61,942 209,213 209,213
</TABLE>
<TABLE>
<CAPTION>
Part 2 - Revenues earned for the
Year ended December 31, 1996
-------------------------------------------------------------
Operating Method Financing Method
----------------- ------------------------
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
end of period Investment of period to period expenses to period
- -----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PROPERTY LAND AND BUILDING
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Acme Markets, Inc. and FPBT of Penn. ($20,491) $245,888 $38,617 $207,271
Alabama Power Company $7,833,206 ($92,771) 825,971 450,887 375,084
Amer Stores and The Fidelity Bank 693,620 (11,708) 86,866 96 86,770
Amer Stores, Grace, & Shottenstein Stores (9,475) 232,735 24,317 208,418
American Recreation Group, Inc. 685,807 68,401 1,825 66,576
Amterre Ltd. Partnership 3,331,346 459,735 9,767 449,968
Amterre Ltd. Partnership 2,014,875 285,432 88,685 196,747
Amterre Ltd. Partnership 6,220,298 (70,618) 620,821 232,660 388,161
Best Products Co., Inc. 3,418,326 127,055 338,557 0 338,557
Caldor, Inc. 1,942,431 11,716 185,380 1,180 184,200
Chesebrough-Pond's Inc. (11,770) 141,236 19,580 121,656
Chomerics, Inc. 6,398,366 80,505 814,924 431 814,493
Coldwell Banker & Co. 24,673 10,840 13,833
Coldwell Banker & Co. 71,909 31,746 40,163
Coldwell Banker & Co. 41,122 6,723 34,399
Coldwell Banker & Co. 0 832 (832)
Collins Foods International, Inc. 198 109,018 46,392 13,399 32,993
Collins Foods International, Inc. 4,721 46,444 53,826 40,561 13,265
Cordis Corporation 713,383 524,921 188,462
David Miller of California 5,290 63,482 20,750 42,732
Dillon Companies, Inc. (3,272) 63,753 12,756 50,997
Dillon Companies, Inc. (19,668) 183,340 14,297 169,043
Druid Point Bldg. 191,746 539,377 (347,631)
Duke Power Co. 5,030,971 510,580 323,979 186,601
European American Bank and Trust Co. 175,000 64,244 110,756
Farwell Bldg. 938,078 753,817 184,261
Federated Department Stores, Inc. 12,779 393,414 65,392 292 65,100
First National Supermarkets, Inc. 24,148,717 (221,459) 2,235,207 1,409,668 825,539
First Union National Bank 614,834 57,047 0 57,047
Fisher Scientific Company (13,583) 163,000 52,085 110,915
Foodarama Supermarkets, Inc. 120,516 19,507 101,009
Forte Hotels International, Inc. 6,540,478 (59,447) 596,849 105,983 490,866
Forte Hotels International, Inc. 2,619,501 16,508 2,602,993
Fox Grocery Company 3,395,645 305,550 131,015 174,535
Gino's, Inc. (4,027) 174,807 34,985 6,527 28,458
</TABLE>
IV-5
<PAGE> 82
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership
Schedule III
------------
Page 2
<TABLE>
<CAPTION>
Part 1 - Real estate owned at December 31, 1996 - Accounted for under the:
-------------------------------------------------------------------------
Operating Method
--------------------------------------------------------
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gino's, Inc. CA 1 54,342 225,100 225,100
Gino's, Inc. OH 1 57,160 201,938 201,938
Gino's, Inc. IL 1 46,597 235,972 235,972
Gino's, Inc. NJ 1 49,887 259,525 259,525
Gino's, Inc. & The A&P Co. PA 1
Grand Union Co. NJ 1 430,664 430,664
Grand Union Co. MD 1 372,383 372,383 244,749
Grand Union Co. NY 3 1,110,120 1,110,120
Grand Union Co. NY 1
Grand Union Co. VA 1 266,468 266,468 175,421
Grand Union Co. NY 1 4,577,761
Gunite IN 1 193,475 1,134,565 1,134,565 1,050,721
G.D. Searle & Co. MD 1 299,229 299,229 140,461
G.D. Searle & Co. MN 1 261,918 261,918 170,818
G.D. Searle & Co. AL 1 0 0 0
G.D. Searle & Co. IL 1 256,295 256,295 155,239
G.D. Searle & Co. FL 1 0 0 0
G.D. Searle & Co. MN 1 339,358 339,358 141,715
G.D. Searle & Co. IL 1 323,559 323,559 218,967
G.D. Searle & Co. TN 1 214,421 214,421 139,979
G.D. Searle & Co. TN 1 0 0 0
G.D. Searle & Co. MD 1 325,891 325,891 141,434
Hancock LA 1 2,284,232 4,484,256 4,484,256 729,669
Haverty Furniture Companies, Inc. GA 1 272,303
Haverty Furniture Companies, Inc. FL 1 205,616
Haverty Furniture Companies, Inc. VA 1 258,411
Holiday Inn AZ 1 3,220,181 9,028,875 335,254 9,364,129 1,582,362
Integra A Hotel and Restaurant Co. AL 2 245,625 245,625
Integra A Hotel and Restaurant Co. IL 1 198,392 198,392
Integra A Hotel and Restaurant Co. IN 1 231,513 231,513
Integra A Hotel and Restaurant Co. OH 1
Integra A Hotel and Restaurant Co. MO 1 224,837 224,837
Integra A Hotel and Restaurant Co. TX 1 228,793 228,793
Integra A Hotel and Restaurant Co. MI 1 234,464 234,464
Intermountain Color KY 1 42,652 559,644 559,644 413,759
J.C. Penney Company, Inc. MA 1 2,484,262 2,484,262 1,508,829
Kelley Springfield Tire Company TN 1 120,946 120,946 74,925
</TABLE>
<TABLE>
<CAPTION>
Part 2 - Revenues earned for the
Year ended December 31, 1996
-------------------------------------------------------------
Operating Method Financing Method
----------------- ------------------------
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
end of period Investment of period to period expenses to period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gino's, Inc. (4,736) 166,443 44,136 7,703 36,433
Gino's, Inc. (4,311) 148,879 40,373 7,831 32,542
Gino's, Inc. (4,899) 154,733 46,992 8,287 38,705
Gino's, Inc. (5,354) 191,535 49,627 19,324 30,303
Gino's, Inc. & The A&P Co. 185,702 50,127 135,575
Grand Union Co. 452,308 87,711 29 87,682
Grand Union Co. 33,750 44,739 (10,989)
Grand Union Co. 1,165,869 226,083 0 226,083
Grand Union Co. 0 215,822 (215,822)
Grand Union Co. 24,150 6,029 18,121
Grand Union Co. 7,532,429 696,186 468,655 227,531
Gunite (17,000) 204,000 54,400 149,600
G.D. Searle & Co. (2,383) 27,000 5,372 21,628
G.D. Searle & Co. 22,162 3,519 18,643
G.D. Searle & Co. 0 663 (663)
G.D. Searle & Co. (1,918) 23,013 5,990 17,023
G.D. Searle & Co. 0 3,417 (3,417)
G.D. Searle & Co. 30,614 3,557 27,057
G.D. Searle & Co. (2,360) 28,319 4,516 23,803
G.D. Searle & Co. 18,740 0 18,740
G.D. Searle & Co. 0 4,632 (4,632)
G.D. Searle & Co. 28,598 5,365 23,233
Hancock (33,161) 442,204 396,849 45,355
Haverty Furniture Companies, Inc. 659,017 59,473 27,946 31,527
Haverty Furniture Companies, Inc. 499,255 (468) 45,055 21,042 24,013
Haverty Furniture Companies, Inc. 636,081 57,671 26,444 31,227
Holiday Inn 222,608 5,970,105 5,083,284 886,821
Integra A Hotel and Restaurant Co. 1,478,067 247,756 0 247,756
Integra A Hotel and Restaurant Co. 505,753 107,664 0 107,664
Integra A Hotel and Restaurant Co. 641,103 124,887 0 124,887
Integra A Hotel and Restaurant Co. 674,639 96,555 0 96,555
Integra A Hotel and Restaurant Co. 514,167 112,159 0 112,159
Integra A Hotel and Restaurant Co. 621,382 143,690 0 143,690
Integra A Hotel and Restaurant Co. 613,076 141,595 0 141,595
Intermountain Color (6,417) 77,000 33,217 43,783
J.C. Penney Company, Inc. (20,854) 250,244 83,517 166,727
Kelley Springfield Tire Company 11,449 16,435 (4,986)
</TABLE>
IV-6
<PAGE> 83
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership
Schedule III
------------
Page 3
REAL ESTATE OWNED AND REVENUES EARNED
<TABLE>
<CAPTION>
Part 1 - Real estate owned at December 31, 1996 - Accounted for under the:
-------------------------------------------------------------------------
Operating Method
--------------------------------------------------------
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
K-Mart Corporation LA 1
K-Mart Corporation WI 1
K-Mart Corporation FL 1
K-Mart Corporation MN 1 580,000
K-Mart Corporation FL 1 2,756,998 3,120 2,760,118 1,655,604
K-Mart Corporation IA 1
K-Mart Corporation FL 1 2,636,000 2,636,000 1,729,316
K-Mart Corporation IL 1 302,575
Kobacker Stores, Inc. MI 4 215,148 215,148
Kobacker Stores, Inc. KY 1 71,607 88,364 88,364
Kobacker Stores, Inc. OH 5 70,906 354,030 354,030
Kobacker Stores, Inc. FL 1
Kraft, Inc. NC 1 1,434,125 1,434,125 1,072,369
Landmark Bancshares Corporation MO 1
Levitz Furniture Corporation NY 1 1,648,463 (660,000) 988,463
Lockheed Corporation CA 1 2,449,469 2,449,469
Lockheed Corporation NJ 1
Louisiana Power and Light Company LA 8 4,469,597
Louisiana Power and Light Company LA 7 2,673,758 3,496,322 (4,891) 3,491,431
Macke Co. VA 1 553,113 553,113 357,209
Marsh Supermarkets, Inc. IN 1 5,001,933 5,001,933 1,902,204
Montgomery Ward, Inc. PA 1 762,571 3,289,166 3,289,166 2,070,624
Montgomery Ward, Inc. NJ 1
Morrison, Inc. AL 1 324,288 324,288
Morrison, Inc. GA 2 347,404 347,404
Morrison, Inc. FL 1 375,392 375,392
Morrison, Inc. VA 2 363,059 363,059
M.C.O. Properties CO 1
North Carolina National Bank SC 6 2,938,008 2,938,008 957,698
Occidental Petroleum Corp. CA 1 1,975,646 2,564,053 2,564,053 404,295
Ohio Power Co. Inc. OH 1
Old National Bank of Washington WA 1 4,190,632 4,190,632 2,323,660
Penske Corp. NJ 2
Penske Corp. OH 1 138,869
Penske Corp. NY 1
Penske Corp. MI 1
Pioneer Standard Electronics, Inc. NY 1
</TABLE>
<TABLE>
<CAPTION>
Part 2 - Revenues earned for the
Year ended December 31, 1996
-------------------------------------------------------------
Operating Method Financing Method
----------------- ------------------------
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
end of period Investment of period to period expenses to period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
K-Mart Corporation 1,725,687 (15,267) 145,127 6,606 138,521
K-Mart Corporation 1,969,353 (18,583) 177,408 0 177,408
K-Mart Corporation 2,321,964 (25,947) 222,498 0 222,498
K-Mart Corporation 1,826,407 13,340 149,630 50,738 98,892
K-Mart Corporation 69,387 224,639 185,929 38,710
K-Mart Corporation 1,406,004 (13,921) 132,186 0 132,186
K-Mart Corporation (20,952) 1,911,191 (20,200) 420,360 39,199 381,161
K-Mart Corporation 1,013,873 80,977 28,168 52,809
Kobacker Stores, Inc. 6,479 439,493 63,420 0 63,420
Kobacker Stores, Inc. 1,884 103,511 19,514 8,508 11,006
Kobacker Stores, Inc. 9,691 636,305 94,689 8,356 86,333
Kobacker Stores, Inc. 3,715 3,770 (55)
Kraft, Inc. (25,207) 150,042 21,803 128,239
Landmark Bancshares Corporation 4,678,726 656,654 6,425 650,229
Levitz Furniture Corporation (13,017) 2,283,078 (27,661) 365,774 52 365,722
Lockheed Corporation (26,396) 4,258,420 (53,812) 712,506 12,858 699,648
Lockheed Corporation 0 646 (646)
Louisiana Power and Light Company 12,945,748 (172,448) 1,625,331 457,182 1,168,149
Louisiana Power and Light Company (39,198) 4,551,301 (63,957) 1,034,036 280,944 753,092
Macke Co. 15,000 60,000 6,928 53,072
Marsh Supermarkets, Inc. 566,537 231,479 335,058
Montgomery Ward, Inc. (26,190) 314,280 124,622 189,658
Montgomery Ward, Inc. 1,623,021 (15,885) 142,509 7,160 135,349
Morrison, Inc. 3,518 752,983 10,372 138,345 0 138,345
Morrison, Inc. 3,793 722,129 10,097 123,177 0 123,177
Morrison, Inc. 3,997 759,682 10,204 145,812 0 145,812
Morrison, Inc. 3,940 1,849,561 24,420 283,874 282 283,592
M.C.O. Properties 64,743 22,076 42,667
North Carolina National Bank 17,582 221,822 50,325 171,497
Occidental Petroleum Corp. 0 301,886 (301,886)
Ohio Power Co. Inc. 4,050,937 (59) 377,799 0 377,799
Old National Bank of Washington 677,222 493,183 184,039
Penske Corp. 0 2,189 (2,189)
Penske Corp. 601,293 (8,967) 58,550 17,995 40,555
Penske Corp. 0 892 (892)
Penske Corp. 248,691 36,584 212,107
Pioneer Standard Electronics, Inc. 49,990 1,660 48,330
</TABLE>
IV-7
<PAGE> 84
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership
Schedule III
------------
Page 4
REAL ESTATE OWNED AND REVENUES EARNED
<TABLE>
<CAPTION>
Part 1 - Real estate owned at December 31, 1996 - Accounted for under the:
-------------------------------------------------------------------------
Operating Method
--------------------------------------------------------
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pneumo Corp. OH 1 1,033,195
Portland General Electric Company OR 1 24,820,228
Rouse Company MD 1 3,686,118
Safeway Stores, Inc. LA 1 1,782,885 1,782,885 1,047,998
Sams MI 1 5,614,527 8,844,225 8,844,225 1,210,387
Smith's Management Corp. NV 1 400,681
Southland Corporation FL 0 1,162,971 1,162,971 642,164
Sperry - Sun Drilling CAN 1
Staples NY 1 2,455,975 2,455,975
Stop 'N Shop Co., Inc. NY 1 5,013,507 5,013,507 3,522,410
Stop 'N Shop Co., Inc. VA 1 1,012,607
Super Foods Services, Inc. MI 1 6,921,253
SuperValu Stores, Inc. MN 1 1,370,965 1,370,965 185,269
SuperValu Stores, Inc. OH 1 3,000,671 3,000,671 416,095
SuperValu Stores, Inc. GA 1 2,344,836 2,344,836 321,821
SuperValu Stores, Inc. IN 1 2,267,573 2,267,573 310,838
Telecom Properties, Inc. OK 1 50,452
Telecom Properties, Inc. KY 1 131,378 281,253 281,253
The A&P Company MI 1
The TJX Companies, Inc. IL 1
Toys "R" Us, Inc. MA 1 588,362 330,605 330,605
Toys "R" Us, Inc. IL 1 763,033 427,993 427,993
Toys "R" Us, Inc. NY 1 859,561 480,785 480,785
Toys "R" Us, Inc. TX 1 896,334 501,836 501,836
Toys "R" Us, Inc. MI 1 849,539
Toys "R" Us, Inc. TX 1 606,814
Trafalgar Industries, Inc. NY 1
USA Petroleum Corporation SC 2 163,161 163,161
USA Petroleum Corporation OH 1 78,443 78,443
USA Petroleum Corporation GA 2 138,062 138,062
Waban NY 1 3,715,255 8,298,301 79,794 8,378,095 391,636
Watkins MO 1 965,741 965,741 59,904
Webcraft Technologies MD 1 543,470 780,774 780,774 86,072
Wetterau, Inc. PA 1
Wetterau, Inc. NJ 2
Wickes Companies, Inc. CA 3 1,619,489 2,447,297 2,447,297 1,208,359
</TABLE>
<TABLE>
<CAPTION>
Part 2 - Revenues earned for the
Year ended December 31, 1996
-------------------------------------------------------------
Operating Method Financing Method
----------------- ------------------------
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
end of period Investment of period to period expenses to period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pneumo Corp. 2,384,240 (27,923) 233,583 103,890 129,693
Portland General Electric Company 52,721,021 428,109 4,550,192 3,139,812 1,410,380
Rouse Company 6,546,154 62,280 579,247 380,395 198,852
Safeway Stores, Inc. 85,150 13,236 71,914
Sams (83,315) 999,779 719,007 280,772
Smith's Management Corp. 861,937 77,566 39,259 38,307
Southland Corporation 127,573 11,271 116,302
Sperry - Sun Drilling (3,693) (5,536) 1,843
Staples 88,392 15,943 72,449
Stop 'N Shop Co., Inc. 3,000 454,145 81,315 372,830
Stop 'N Shop Co., Inc. 2,931,886 (30,930) 264,457 97,595 166,862
Super Foods Services, Inc. 10,387,320 (128,889) 1,104,986 601,437 503,549
SuperValu Stores, Inc. (53,355) 114,885 26,679 88,206
SuperValu Stores, Inc. 181,025 319,834 58,394 261,440
SuperValu Stores, Inc. 37,697 224,215 46,114 178,101
SuperValu Stores, Inc. 46,858 193,024 44,128 148,896
Telecom Properties, Inc. 121,075 1,338 11,412 5,202 6,210
Telecom Properties, Inc. 2,293 106,968 1,274 37,544 13,573 23,971
The A&P Company 1,732,229 181,948 0 181,948
The TJX Companies, Inc. 2,752,407 (54,094) 240,906 2,108 238,798
Toys "R" Us, Inc. 748,757 107,419 44,056 63,363
Toys "R" Us, Inc. 965,125 123,662 57,136 66,526
Toys "R" Us, Inc. 1,077,629 126,520 64,364 62,156
Toys "R" Us, Inc. 1,129,852 132,231 64,403 67,828
Toys "R" Us, Inc. 1,068,425 94,219 46,002 48,217
Toys "R" Us, Inc. 1,486,541 144,755 67,117 77,638
Trafalgar Industries, Inc. 0 95,333 (95,333)
USA Petroleum Corporation 288,980 41,032 744 40,288
USA Petroleum Corporation 138,932 19,727 0 19,727
USA Petroleum Corporation 244,525 34,720 60 34,660
Waban 659,262 447,761 211,501
Watkins (9,150) 0 108,900 22,243 86,657
Webcraft Technologies 171,353 85,569 85,784
Wetterau, Inc. 872,586 92,460 5,000 87,460
Wetterau, Inc. 1,892,310 198,118 9,307 188,811
Wickes Companies, Inc. 72,451 686,887 250,718 436,169
</TABLE>
IV-8
<PAGE> 85
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership
Schedule III
------------
Page 5
REAL ESTATE OWNED AND REVENUES EARNED
<TABLE>
<CAPTION>
Part 1 - Real estate owned at December 31, 1996 - Accounted for under the:
-------------------------------------------------------------------------
Operating Method
--------------------------------------------------------
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL PROPERTY LAND AND BUILDING
- -------------------------------------
Stoney Falls KY 1
Stoney Brooke KY 1
Crown Cliffs AL 1 8,713,583 10,889,183 55,700 10,944,883(2) 734,307
Westover Hills NC 1
COMMERCIAL PROPERTY - LAND
- --------------------------
Easco Corp. NC 1 157,560 157,560
Foodarama supermarkets, Inc. NY 1 140,619 140,619
Foodarama supermarkets, Inc. PA 1 112,554 112,554
Gino's, Inc. MD 1 86,027 86,027
Gino's, Inc. PA 1 36,271 36,271
Gino's, Inc. MI 1 71,160 71,160
Gino's, Inc. MA 2 102,048 102,048
Gino's, Inc. NJ 2 143,938 143,938
J.C. Penney Company, Inc. NY 1 51,009 51,009
Levitz Furniture Corporation CA 2 1,134,836 1,134,836
Levitz Furniture Corporation KS 1 460,490 460,490
COMMERCIAL PROPERTY - BUILDING
- ------------------------------
Bank South GA 1 1,923,683
Harwood Square IL 1 6,861,480 30,161 6,891,641 2,800,329
Holiday Inn FL 1 6,654,817 191,866 6,846,683 1,671,668
Lockheed Corporation CA 1
Safeway Stores, Inc. CA 1 558,652 558,652 493,237
Toys "R" Us, Inc. RI 1
United Life & Accident Ins. Co. NH 1
Wickes Companies, Inc. PA 1
Weigh-Tronix, Inc. CA 1
</TABLE>
<TABLE>
<CAPTION>
Part 2 - Revenues earned for the
Year ended December 31, 1996
-------------------------------------------------------------
Operating Method Financing Method
----------------- ------------------------
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
end of period Investment of period to period expenses to period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL PROPERTY LAND AND BUILDING
- -------------------------------------
Stoney Falls 1,521,877 1,262,358 259,519
Stoney Brooke 998,632 856,861 141,771
Crown Cliffs 1,692,044 1,838,024 (145,980)
Westover Hills 1,283,658 1,786,713 (503,055)
COMMERCIAL PROPERTY - LAND
- --------------------------
Easco Corp. 1,033 12,400 333 12,067
Foodarama supermarkets, Inc. 14,000 0 14,000
Foodarama supermarkets, Inc. 12,000 953 11,047
Gino's, Inc. 7,143 0 7,143
Gino's, Inc. 2,976 5,822 (2,846)
Gino's, Inc. 7,143 0 7,143
Gino's, Inc. 14,286 0 14,286
Gino's, Inc. 10,119 65 10,054
J.C. Penney Company, Inc. 458 5,500 0 5,500
Levitz Furniture Corporation 117,077 1,192 115,885
Levitz Furniture Corporation 3,917 47,009 0 47,009
COMMERCIAL PROPERTY - BUILDING
- ------------------------------
Bank South 3,866,235 (41,073) 391,996 230,075 161,921
Harwood Square (34,071) 681,726 169,316 512,410
Holiday Inn 400,622 4,072,528 3,905,708 166,820
Lockheed Corporation 5,716,407 860,834 292 860,542
Safeway Stores, Inc. 26,900 21,037 5,863
Toys "R" Us, Inc. 1,055,043 (10,430) 100,473 0 100,473
United Life & Accident Ins. Co. 4,548,793 (43,667) 384,219 188,093 196,126
Wickes Companies, Inc. 3,338,906 (46,366) 614,654 6,602 608,052
Weigh-Tronix, Inc. 2,719,614 280,323 346 279,977
</TABLE>
IV-9
<PAGE> 86
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership
Schedule III
------------
Page 6
REAL ESTATE OWNED AND REVENUES EARNED
<TABLE>
<CAPTION>
Part 1 - Real estate owned at December 31, 1996 - Accounted for under the:
-------------------------------------------------------------------------
Operating Method
--------------------------------------------------------
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENT PROPERTY
- ------------------------------
Dellwood NY 1 3,104,793 15,524 3,120,317
Grassy Hollow NY 1 598,145 2,990 601,135
East Syracuse NY 1 138,108 138,108
------------------------------------------------------------------------
$115,911,504 $158,822,393 $1,290,247 $160,112,640(1) $43,754,936(1
========================================================================
</TABLE>
<TABLE>
<CAPTION>
Part 2 - Revenues earned for the
Year ended December 31, 1996
-------------------------------------------------------------
Operating Method Financing Method
----------------- ------------------------
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
end of period Investment of period to period expenses to period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEVELOPMENT PROPERTY
- ------------------------------
Dellwood 0 0 0
Grassy Hollow 0 0 0
East Syracuse 0 0 0
--------------------------------------------------------------------------
$613,691 $253,781,903 ($495,840) $58,823,724 $30,912,453 $27,911,271
==========================================================================
</TABLE>
(1)Amount shown includes hotel operating properties.
(2)The Company owns a 70% interest in the joint venture which owns this
property.
IV-10
<PAGE> 87
Schedule III
Page 7
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1996
1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel operating properties,
was carried at the beginning of the period, with the total at the close of
the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1996 $193,311,259
Additions during period 11,991,211
Write downs (660,000)
Reclassifications during period from financing leases 233,879
Reclassifications during period to assets held for sale (6,110,905)
Disposals during period (38,652,804)
------------
Balance - December 31, 1996 $160,112,640
============
</TABLE>
b. A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:
<TABLE>
<S> <C>
Balance - January 1, 1996 $49,406,334
Depreciation during period 4,895,252
Disposals during period (6,530,965)
Reclassifications during period to assets held for sale (4,015,685)
-----------
Balance - December 31, 1996 $43,754,936
===========
</TABLE>
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life of
the particular property or property components, which range from 5 to 45
years.
2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning of
the period, with the total at the close of the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1996 $281,532,529
Other (988)
Reclassifications during period (233,879)
Disposals during period (20,201,810)
Amortization of unearned income 26,073,205
Minimum lease rentals received (33,387,154)
------------
Balance - December 31, 1996 $253,781,903
============
</TABLE>
3. The aggregate cost of real estate owned for Federal income tax purposes
is $340,405,247.
(Continued)
IV-11
<PAGE> 88
Schedule III
Page 8
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1996
4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
<TABLE>
<S> <C>
Net income applicable to financing and operating leases $27,911,271
Add interest income - other and dividend income 12,949,679
-----------
40,860,950
-----------
Deduct expenses not allocated:
General and administrative expenses 2,938,684
Nonmortgage interest expense 2,604,345
Other 586,108
-----------
6,129,137
-----------
Earnings before gain on property transactions and
extraordinary item 34,731,813
Provision for loss on property (935,000)
Gain on sales of real estate 24,516,867
Extraordinary Items (491,628)
-----------
Net earnings $57,822,052
===========
</TABLE>
(Continued)
IV-12
<PAGE> 89
Schedule III
Page 9
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1995
1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel operating properties,
was carried at the beginning of the period, with the total at the close of
the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1995 $185,327,608
Additions during period 22,019,288
Write downs (768,701)
Reclassifications during period to assets held for sale (3,227,355)
Disposals during period (10,039,581)
------------
Balance - December 31, 1995 $193,311,259
============
</TABLE>
b. A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:
<TABLE>
<S> <C>
Balance - January 1, 1995 $48,234,722
Depreciation during period 4,731,153
Disposals during period (2,106,287)
Reclassifications during period to property held for sale (1,453,254)
-----------
Balance - December 31, 1995 $49,406,334
===========
</TABLE>
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life of
the particular property or property components, which range from 5 to 45
years.
2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning of
the period, with the total at the close of the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1995 $314,260,786
Reclassifications during period (1,280,739)
Disposals during period (24,242,668)
Amortization of unearned income 29,452,066
Minimum lease rentals received (36,656,916)
------------
Balance - December 31, 1995 $281,532,529
============
</TABLE>
3. The aggregate cost of real estate owned for Federal income tax purposes
is $376,471,538.
(Continued)
IV-13
<PAGE> 90
Schedule III
Page 10
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1995
4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
<TABLE>
<S> <C>
Net income applicable to financing and operating leases $29,312,510
Add interest income - other 8,398,380
-----------
37,710,890
-----------
Deduct expenses not allocated:
General and administrative expenses 2,605,331
Nonmortgage interest expense 3,696,889
Other 575,794
---------
6,878,014
---------
Earnings before gain on property transactions 30,832,876
Provision for loss on property (768,701)
Gain on sales of real estate 5,091,445
---------
Net earnings $35,155,620
===========
</TABLE>
(Continued)
IV-14
<PAGE> 91
Schedule III
Page 11
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1994
1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel operating properties,
was carried at the beginning of the period, with the total at the close of
the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1994 $176,050,393
Additions during period 12,496,354
Write downs (322,000)
Reclassifications during period to assets held for sale (1,340,935)
Disposals during period (1,556,204)
------------
Balance - December 31, 1994 $185,327,608
============
</TABLE>
b. A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:
<TABLE>
<S> <C>
Balance - January 1, 1994 $45,040,784
Depreciation during period 4,501,318
Disposals during period (709,930)
Reclassifications during period to assets held for sale (597,450)
-----------
Balance - December 31, 1994 $48,234,722
===========
</TABLE>
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life of
the particular property or property components, which range from 5 to 45
years.
2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning of
the period, with the total at the close of the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1994 $327,470,322
Additions during period 41,256
Write-downs (110,000)
Disposals during period (6,432,148)
Amortization of unearned income 31,990,262
Minimum lease rentals received (38,698,906)
------------
Balance - December 31, 1994 $314,260,786
============
</TABLE>
3. The aggregate cost of real estate owned for Federal income tax purposes
is $402,624,341.
(Continued)
IV-15
<PAGE> 92
Schedule III
Page 12
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1994
4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
<TABLE>
<S> <C>
Net income applicable to financing and operating leases $26,648,827
Add interest income - other 1,438,491
-----------
28,087,318
-----------
Deduct expenses not allocated:
General and administrative expenses 2,791,123
Nonmortgage interest expense 4,731,517
Other 987,979
---------
8,510,619
---------
Earnings before gain on property transactions 19,576,699
Provision for loss on property (582,000)
Gain on sales of real estate 4,173,865
-----------
Net earnings $23,168,564
===========
</TABLE>
(Continued)
IV-16
<PAGE> 93
Schedule III
Page 13
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Net
State Investment
-------------- -------------------
<S> <C>
Alabama $10,064,256
California 13,300,742
Connecticut 24,148,717
Florida 5,492,092
Georgia 5,491,906
Illinois 5,391,892
Indiana 641,103
Iowa 1,406,004
Kentucky 210,480
Louisiana 19,222,737
Maryland 6,546,154
Massachusetts 9,089,554
Michigan 14,240,540
Minnesota 1,826,407
Missouri 5,367,699
Nevada 861,937
New Hampshire 4,548,793
New Jersey 14,030,998
New York 12,059,006
North Carolina 6,331,611
Ohio 8,635,226
Oklahoma 121,075
Oregon 52,830,039
Pennsylvania 13,140,285
Rhode Island 1,055,043
South Carolina 288,980
Texas 3,237,774
Virginia 8,835,855
West Virginia 3,395,645
Wisconsin 1,969,353
------------
$253,781,903
============
</TABLE>
(Continued)
IV-17
<PAGE> 94
Schedule III
Page 14
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Amount at which
Carried at Reserve for
State Close of Year Depreciation
-------------- --------------- -------------
<S> <C> <C>
Alabama $11,514,796 $734,307
Arizona 9,364,129 1,582,362
California 10,867,240 2,579,786
Connecticut 1,549,805 1,090,444
Florida 13,781,164 5,698,752
Georgia 8,969,994 983,665
Illinois 8,931,657 3,295,252
Indiana 8,635,584 3,263,763
Kansas 460,490 -
Kentucky 929,261 413,759
Louisiana 11,313,683 2,620,111
Maryland 1,864,304 612,717
Massachusetts 2,916,915 1,508,830
Michigan 9,364,998 1,210,388
Minnesota 7,045,520 1,335,146
Missouri 1,946,471 357,347
New Jersey 4,437,341 1,507,397
New York 23,833,344 5,185,550
North Carolina 1,591,685 1,072,369
Ohio 3,635,082 416,095
Oregon 218,713 -
Pennsylvania 7,400,025 4,258,004
South Carolina 3,101,170 957,698
Tennessee 335,367 214,904
Texas 730,630 -
Virginia 1,182,640 532,630
Washington 4,190,632 2,323,660
--------------- -------------
$160,112,640 $43,754,936
=============== =============
</TABLE>
(Continued)
IV-18
<PAGE> 95
Schedule III
Page 15
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Net
State Investment
-------------- ------------
<S> <C>
Alabama $10,442,132
California 14,214,432
Connecticut 24,571,019
Florida 25,524,549
Georgia 5,659,651
Illinois 5,582,313
Indiana 660,868
Iowa 1,440,868
Kentucky 218,831
Louisiana 19,908,683
Maryland 6,714,267
Massachusetts 9,324,902
Michigan 14,507,001
Minnesota 1,868,777
Missouri 5,496,349
Nevada 883,647
New Hampshire 4,688,575
New Jersey 14,444,858
New York 13,044,999
North Carolina 6,705,397
Ohio 8,925,929
Oklahoma 125,713
Oregon 53,486,728
Pennsylvania 13,639,937
Rhode Island 1,079,730
South Carolina 308,267
Texas 3,320,904
Virginia 9,206,882
West Virginia 3,521,376
Wisconsin 2,014,945
------------
$281,532,529
============
</TABLE>
(Continued)
IV-19
<PAGE> 96
Schedule III
Page 16
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Amount at which
Carried at Reserve for
State Close of Year Depreciation
-------------- --------------- ------------
<S> <C> <C>
Alabama $11,459,096 $265,568
Arizona 9,028,875 1,141,233
California 13,574,684 3,861,125
Connecticut 1,549,805 1,070,864
Florida 13,772,389 5,122,422
Georgia 7,750,258 797,977
Illinois 8,850,494 3,065,734
Indiana 8,635,584 2,954,479
Kansas 460,490 -
Kentucky 14,851,240 1,052,938
Louisiana 11,313,683 2,479,819
Maryland 1,864,304 565,688
Massachusetts 2,916,915 1,429,333
Michigan 12,649,448 2,865,957
Minnesota 8,023,299 1,722,126
Missouri 1,946,471 323,448
New Jersey 4,437,341 1,489,539
New York 23,410,097 4,944,535
North Carolina 8,580,112 1,120,666
Ohio 3,635,082 357,702
Oregon 298,451 -
Pennsylvania 10,386,463 6,045,388
South Carolina 3,101,170 907,373
Tennessee 335,367 205,951
Texas 4,302,872 2,810,501
Virginia 1,986,638 975,491
Washington 4,190,631 1,830,477
--------------- ------------
$193,311,259 $49,406,334
=============== ============
</TABLE>
(Continued)
IV-20
<PAGE> 97
Schedule III
Page 17
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE
FINANCING METHOD) DECEMBER 31, 1994
<TABLE>
<CAPTION>
Net
State Investment
-------------- ------------
<S> <C>
Alabama $10,774,730
California 14,865,499
Colorado 403,433
Connecticut 24,956,415
Florida 26,193,440
Georgia 6,611,153
Illinois 5,752,708
Indiana 673,807
Iowa 1,472,651
Kentucky 226,439
Louisiana 20,516,823
Maryland 6,868,375
Massachusetts 29,728,840
Michigan 14,742,376
Minnesota 1,907,837
Missouri 5,605,609
Nevada 903,509
New Hampshire 4,817,099
New Jersey 17,144,885
New York 15,551,206
North Carolina 7,045,840
Ohio 9,184,634
Oklahoma 129,943
Oregon 54,039,101
Pennsylvania 14,088,469
Rhode Island 1,102,181
South Carolina 325,975
Texas 3,391,052
Virginia 9,543,506
West Virginia 3,636,597
Wisconsin 2,056,654
------------
$314,260,786
============
</TABLE>
(Continued)
IV-21
<PAGE> 98
Schedule III
Page 18
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Amount at which
Carried at Reserve for
State Close of Year Depreciation
-------------- --------------- ------------
<S> <C> <C>
Alabama $1,707,913 $ -
Arizona 8,661,230 780,739
California 13,574,684 3,702,517
Connecticut 1,549,805 1,027,553
Florida 14,474,746 5,007,024
Georgia 8,219,782 612,349
Illinois 8,849,567 2,836,885
Indiana 8,635,584 2,645,196
Kansas 460,490 -
Kentucky 14,470,363 691,180
Louisiana 12,638,536 2,975,581
Maryland 1,864,304 518,658
Massachusetts 2,916,915 1,349,837
Michigan 19,225,223 3,394,696
Minnesota 7,072,018 1,474,020
Missouri 1,946,471 289,549
New Jersey 4,293,403 1,471,681
New York 22,393,357 5,858,402
North Carolina 3,191,685 1,030,096
Ohio 3,635,192 299,308
Oregon 298,451 -
Pennsylvania 10,273,909 5,843,239
South Carolina 3,101,170 857,047
Tennessee 335,368 196,998
Texas 4,302,872 2,730,561
Virginia 1,986,638 948,210
Washington 4,190,632 1,337,294
Canada 1,057,300 356,102
------------ -----------
$185,327,608 $48,234,722
============ ===========
</TABLE>
IV-22
<PAGE> 99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, AREP has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of March,
1997.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: AMERICAN PROPERTY INVESTORS, INC.
General Partner
By: /s/ Carl C. Icahn
----------------------------------
Carl C. Icahn
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of AREP and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Carl C. Icahn Chairman of the Board March 31, 1997
- ------------------------ (Principal Executive
Carl C. Icahn Officer)
/s/ Alfred Kingsley Director March 31, 1997
- ------------------------
Alfred Kingsley
/s/ William A. Leidesdorf Director March 31, 1997
- ------------------------
William A. Leidesdorf
/s/ Jack G. Wasserman Director March 31, 1997
- ------------------------
Jack G. Wasserman
/s/ John P. Saldarelli Treasurer March 31, 1997
- ------------------------ (Principal Financial
John P. Saldarelli Officer and Principal
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 105,543
<SECURITIES> 106,172
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 413,894
<DEPRECIATION> 43,755
<TOTAL-ASSETS> 641,310
<CURRENT-LIABILITIES> 0
<BONDS> 138,527
0
0
<COMMON> 0
<OTHER-SE> 485,559
<TOTAL-LIABILITY-AND-EQUITY> 641,310
<SALES> 0
<TOTAL-REVENUES> 71,773
<CGS> 0
<TOTAL-COSTS> 17,752
<OTHER-EXPENSES> 2,939
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,351
<INCOME-PRETAX> 57,822
<INCOME-TAX> 0
<INCOME-CONTINUING> 58,314
<DISCONTINUED> 0
<EXTRAORDINARY> (492)
<CHANGES> 0
<NET-INCOME> 57,822
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.02
</TABLE>
