UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number 0-18149
DEAN WITTER REALTY YIELD PLUS II, L.P.
(Exact name of registrant as specified in governing instrument)
Delaware 13-3469111
(State of organization) (IRS Employer Identification No.)
2 World Trade Center, New York, NY 10048
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (212)
392-1054
Securities registered pursuant to Section 12(b) of the Act:
Title of each className of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of 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 ]
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. N/A
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I.
ITEM 1. BUSINESS
The Registrant, Dean Witter Realty Yield Plus II, L.P. (the
"Partnership"), is a limited partnership formed in February
1988 under the laws of the State of Delaware for the purpose
of investing in income- producing commercial and industrial
properties.
The Managing General Partner of the Partnership is Dean
Witter Realty Yield Plus II Inc. (the "Managing General
Partner"), a Delaware corporation which is wholly-owned by
Dean Witter Realty Inc. ("Realty"). The Associate General
Partner is Dean Witter Realty Yield Plus Associates II, L.P.
(the "Associate General Partner"), a Delaware limited
partnership, the general partner of which is the Managing
General Partner. The Managing General Partner manages and
controls all aspects of the business of the Partnership.
The terms of transactions between the Partnership and its
affiliates are set forth below in the financial statements
in Item 8 and in Item 13.
The Partnership issued 173,164 units of limited partnership
interest (the "Units") for $86,582,000. The offering has
been terminated and no additional Units will be sold.
The proceeds from the offering were used to make investments
in three participating mortgage loans and land leases
secured by interests in three office buildings, one
industrial property, and an office and parking garage
complex. The Partnership subsequently acquired the real
estate securing all of the foregoing loans through
foreclosure or transfers of ownership in lieu of
foreclosure. In December 1997, the partnership which owns
the Michelson office property agreed to sell the property;
closing is expected to occur in April 1998. The
Partnership's properties are described in Item 2 below.
The Partnership currently plans to market for sale its
remaining real estate interests in 1998, with the objective
of completing sales of such properties by the end of 1998.
There is no assurance that the Partnership will be able to
achieve this objective.
The Partnership considers its business to include one
industry segment, investment in real property. Financial
information regarding the Partnership is in the
Partnership's financial statements in Item 8 below.
The Partnership's real property investments are subject to
competition from similar types of properties in the
vicinities in which they are located. Further information
regarding competition and market conditions where the
Partnership's properties are located is set forth in Item 7
below.
The Partnership has no employees.
All of the Partnership's business is conducted in the United
States.
ITEM 2. PROPERTIES
The Partnership's principal offices are located at Two World
Trade Center, New York, New York 10048. The Partnership has
no other offices.
As of December 31, 1997, the Partnership owned directly or
through subsidiaries the following three interests in real
estate. Generally, the leases pertaining to the properties
provide for pass-throughs to the tenants of their pro-rata
share of certain operating expenses. In the opinion of the
Managing General Partner, all of the properties are
adequately covered by insurance.
<TABLE>
<CAPTION>
Year(s) Initial Net Rentable
Property, Completion/ Investment Area
Location and Type Acquisition1 ($000) 2
(000 sq. ft.) Type of Investment
<S> <C> <C> <C> <C>
Michelson, 1986-89/1990 $34,300 390 49.19%
general
Irvine, CA partnership
interest.3
Three office buildings
Century Alameda 1989,90/1991 $12,400 473 Fee
interest in building
Distribution Center, and
leasehold interest
Lynwood, CA in land.
Industrial building
One Congress Street,4 1990,91/1997 $13,900
office-246 42% general partner-
Boston, MA retail-37 ship
interest.5
Office building and
garage
________________________
</TABLE>
1.Acquisition date is date of foreclosure or in-substance
foreclosure.
2.The lower of estimated fair value of property or net
carrying value of loan at acquisition date.
3.Dean Witter Realty Yield Plus, L.P. ("Yield Plus"), an
affiliate of the Partnership, owns the remaining 50.81%
general partnership interest. The total initial
investment in the property was approximately $71 million.
4.Property is subject to a mortgage loan. In 1997, the
Partnership acquired an equity interest in the property.
See Note 4 to the financial statements.
5.Yield Plus owns the remaining 58% general partnership
interest. The total net carrying value of the general
partnership interest at the acquisition date was
approximately $33.4 million.
Each property was built with on-site parking facilities.
An affiliate of Realty is the property manager for the
Michelson and Century Alameda Distribution Center
properties.
In December 1997, the partnership which owns the Michelson
property (which is owned 49.19% by the Partnership) agreed
to sell the property; closing is expected to occur in April
1998.
In 1997, the Partnership acquired an equity interest in the
One Congress Street property. Approximately 70% of the
office space is leased to the Government Services
Administration ("GSA"); the remaining office space is
vacant. GSA has leased its space through July 31, 2006.
The lease does not include any renewal options; however,
after July 31, 2002, GSA may terminate the lease on all or a
portion of its space. The 1997 rent per annum was
approximately $5,495,000 ($31.85 per square foot), and rents
will increase periodically, to a maximum of approximately
$8,180,000 ($47.42 per square foot) effective August 1,
2005. All of the parking space is leased to Kinney Systems
Inc. through December 31, 2003, subject to two successive
five year renewal options at market rental rates (but in no
event, less than 105% of the rent payable in 2003). The
1997 rent per annum on this lease was approximately
$3,976,713, and rents will increase annually to a maximum
rent per annum of $4,498,252 in 2003. The retail space,
which is not a significant portion of the overall space,
remains substantially vacant.
Average occupancy and effective annual rent per square foot
at the remaining properties in which the Partnership has an
ownership interest were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Century Alameda
Average occupancy 100% 100%
100% 72% 100%
Effective annual rent per square foot $ 3.31 $
3.12 $ 3.46 $ 2.94 $
3.01
Michelson
Average occupancy 93% 92%
92% 72% 83%
Effective annual rent per square foot $17.36
$16.82 $15.75 $13.75
$16.21
</TABLE>
Future lease expiration data are as follows (dollar amounts
and square footage in thousands):
<TABLE>
<CAPTION>
Century Alameda
No. of Tenant Square Annual Base % of
Total
Year Leases Expiring Footage Expiring Rent Expiring1 Base Rent
<S> <C> <C> <C> <C>
1998 - - - -
1999 - - - -
2000 - - - -
2001 - - - -
2002 - - - -
2003 1 103 $388 27
2004 - - - -
2005 1 309 854 81
2006 - - - -
2007 1 61 196 100
______________________
</TABLE>
1. Represents annualized base rent amount at the time of
lease expiration.
Three tenants occupy the Century Alameda property.
Goldenberg Plywood, a manufacturer and distributor of home
improvement products, occupies approximately 309,000 square
feet (65% of the property) under a lease which expires in
2005, subject to extension at the tenant's option for 5
years at the then-current market rent. Rent per annum is
approximately $854,000. Tools Exchange, a tools
distributor, occupies approximately 103,000 square feet (22%
of the property) under a lease which expires in 2003. The
1997 rent per annum is approximately $347,000, and will
increase to $388,000 over the remaining life of the lease.
California Feather & Down, a home furnishings distributor,
occupies approximately 61,000 square feet (13% of the
property) under a lease which expires in 2007. Rent per
annum is approximately $196,000.
Leases at the properties generally provide for fixed minimum
rents with rental escalation and/or expense reimbursement
clauses.
The Federal tax basis of the Century Alameda property is
approximately $13.5 million. The building is depreciated on
the straight-line method over a period of 31.5 years. Real
estate taxes in 1997 totaled approximately $91,000 and were
assessed at a rate of $1.38 per $100 of assessed valuation.
The property owner's Federal tax basis of the Michelson
property is approximately $55.9 million. The building is
depreciated on the straight-line method over a period of
31.5 years. The property owner's real estate taxes in 1997
totaled approximately $544,000 and were assessed at a rate
of $1.06 per $100 of assessed valuation.
The property owner's Federal tax basis of the One Congress
Street property is $76.3 million. The building is
depreciated using an accelerated method over a period of 15
years. The property owner's real estate taxes in 1997
totaled approximately $2.8 million and were assessed at a
rate of $4.14 per $100 of assessed valuation.
Further information relating to the Partnership's properties
is included in Item 7 and Notes 4 and 5 to the financial
statements in Item 8 below.
ITEM 3. LEGAL PROCEEDINGS
On December 27, 1995, a purported class action lawsuit (the
"Grigsby Action") naming various public real estate
partnerships sponsored by Realty (including the Partnership
and its Managing General Partner and Associate General
Partner), Realty, Dean Witter Reynolds Inc. ("DWR") and
others as defendants was filed in Superior Court in
California. The complaint alleged fraud, negligent
misrepresentation, intentional and negligent breach of
fiduciary duty, unjust enrichment and related claims and
sought compensatory and punitive damages in unspecified
amounts and injunctive and other equitable relief. The
defendants removed the case to the United States District
Court for the Southern District of California. Pursuant to
an order of the U.S. District Court for the Southern
District of California entered May 24, 1996, the Grigsby
Action was transferred to the U.S. District Court for the
Southern District of New York. The case was dismissed by
stipulation of the parties dated March 6, 1997 and refiled
and consolidated with the Consolidated Action (as defined
below).
On February 14, 1996, a purported class action lawsuit (the
"Schectman Action") naming various public real estate
partnerships sponsored by Realty (including the Partnership
and its Managing General Partner), Realty, Dean Witter,
Discover & Co. ("DWD") and DWR as defendants was filed in
the Chancery Court of Delaware for New Castle County (the
"Delaware Chancery Court"). On February 23, 1996, a
purported class action lawsuit (the "Dosky Action") naming
various public real estate partnerships sponsored by Realty
(including the Partnership and its Managing General
Partner), Realty, DWD, DWR and others as defendants was
filed in the Delaware Chancery Court. On February 29, 1996,
a purported class action lawsuit (the "Segal Action") naming
various public real estate partnerships sponsored by Realty
(including the Partnership and its Managing General
Partner), Realty, DWR, DWD and others as defendants was
filed in the Delaware Chancery Court. On March 13, 1996, a
purported class action lawsuit (the "Young Action") naming
the Partnership, other unidentified limited partnerships,
DWD, DWR and others as defendants was filed in the Circuit
Court for Baltimore City in Baltimore, Maryland. The
defendants removed the Young Action to the United States
District Court for the District of Maryland.
Thereafter, the Schectman Action, the Dosky Action and the
Segal Action were consolidated in a single action (the
"Consolidated Action") in the Delaware Chancery Court. The
Young Action was dismissed without prejudice. The
plaintiffs in the Young Action joined the Consolidated
Action.
On October 7, 1996, the plaintiffs in the Consolidated
Action filed a First Consolidated and Amended Class Action
Complaint naming various public real estate partnerships
sponsored by Realty (including the Partnership and its
Managing General Partner), Realty, DWD, DWR and others as
defendants. This complaint alleges breach of fiduciary duty
and seeks an accounting of profits, compensatory damages in
an unspecified amount, possible liquidation of the
Partnership under a receiver's supervision and other
equitable relief. The defendants filed a motion to dismiss
this complaint on December 10, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the
fiscal year to a vote of Unit holders.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
An established public trading market for the Units does not
exist, and it is not anticipated that such a market will
develop in the future. Accordingly, information as to the
market value of a Unit at any given date is not available.
However, the Partnership does allow limited partners (the
"Limited Partners") to transfer their Units if a suitable
buyer can be located.
As of March 17, 1998, there were 7,733 holders of limited
partnership interests.
The Partnership is a limited partnership and, accordingly,
does not pay dividends. It does, however, make quarterly
distributions of cash to its partners. Pursuant to the
Partnership Agreement, distributable cash, as defined, is
paid 90% to the Limited Partners and 10% to the general
partners (the "General Partners").
The Managing General Partner was obligated to (a) defer
receipt of its share of distributable net cash flow, and (b)
contribute additional capital to the Partnership, sufficient
to fund any shortfalls between cash flow and a 7.5% annual
distribution rate to Limited Partners during the offering
period (which ended March 1990) and the twelve quarters
thereafter. During the offering period, the Managing
General Partner deferred receipt of distributions totalling
$3,713,000, but was not required to make any additional
capital contributions. Thereafter, the Managing General
Partner contributed a total of $4,807,069 with respect to
the twelve quarters ended March 31, 1993.
During each of the years ended December 31, 1997 and 1996,
the Partnership paid quarterly cash distributions
aggregating $12.50 per Unit to Limited Partners. The total
distribution in each year was $2,405,056, with $2,164,550
distributed to the Limited Partners and $240,506 distributed
to the General Partners.
On January 28, 1998, the Partnership paid the fourth quarter
distribution of $3.125 per Unit to the Limited Partners.
The cash distribution aggregated $601,264 with $541,138
distributed to the Limited Partners and $60,126 distributed
to the General Partners.
The Partnership anticipates making regular distributions to
its partners in the future. Future cash distribution levels
will fluctuate based on cash flow generated by the
Partnership's remaining property interests and proceeds
received from property sales.
Sale or financing proceeds will be distributed, to the
extent available: first, 97% to the Limited Partners and 3%
to the General Partners until each Limited Partner has
received a return of their invested capital plus an amount
sufficient to provide a 10% cumulative annual return
thereon; second, 100% to the General Partners until they
have received an amount equal to (i) any portion of their
share of net cash flow previously deferred and not
distributed, and (ii) any additional capital contributions
made by the Managing General Partner to fund distributions
to the Limited Partners in respect of the 7.5% minimum
annual return described above; and third, 85% to the Limited
Partners and 15% to the General Partners. To date, the
Partnership has not distributed any sale or financing
proceeds.
Taxable income (subject to certain adjustments) will be
allocated to the partners in proportion to the distribution
of distributable cash or sale or financing proceeds, as the
case may be (or 90% to the Limited Partners and 10% to the
General Partners if there is no distributable cash or sale
or financing proceeds). Tax losses, if any, will be
allocated 90% to the Limited Partners and 10% to the General
Partners.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of selected financial
data for the Partnership:
<TABLE>
<CAPTION>
DEAN WITTER REALTY YIELD PLUS II, L.P.
Years ended December 31, 1997, 1996, 1995, 1994 and 1993
19971 19962 1995
1994 19932
<S> <C> <C> <C> <C>
<C>
Total revenues $ 3,359,076 $ 4,073,429 $
4,790,945 $ 4,232,379 $ 5,104,420
Net income (loss) $ 1,741,253 $ 1,013,115 $
3,445,931 $ 2,396,809 $(6,602,459)
Net income (loss) per
Unit of limited
partnership interest $ 9.05 $ 5.27 $
17.91 $ 12.46 $ (33.75)
Cash distribution paid
per Unit of limited
partnership interest3 $ 12.50 $ 12.50 $
16.25 $ 20.00 $ 28.75
Total assets at
December 31 $42,328,088 $43,004,012
$44,487,504 $44,411,118 $45,659,620
_________________________
</TABLE>
1.Total revenues and net income include reserves of $1.1
million of accrued but unpaid interest on the
participating mortgage loan.
2.Net income (loss) is net of a $1.5 million and $9.8
million loss on impairment in 1996 and 1993,
respectively, on the One Congress Street participating
mortgage loan. 1996 revenues and net income are also net
of reserves of $.5 million of accrued but unpaid interest
on the loan.
3.Distributions paid to Limited Partners represent returns
of capital, calculated as the excess of cash distributed
per Unit over accumulated earnings per Unit not
previously distributed.
The above financial data should be read in conjunction with
the financial statements and the related notes appearing in
Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership raised $86,582,000 through a public offering
which terminated in 1990. The Partnership has no plans to
raise additional capital.
The Partnership committed the gross proceeds raised in the
offering to three investments. No additional investments
are planned.
As described in Note 4 to the financial statements, on
October 27, 1997, the Partnership and Dean Witter Realty
Yield Plus, L.P. ("Yield Plus"), an affiliate, jointly
acquired the controlling ownership interest in the
owner/borrower on the One Congress Street property, and
began accounting for their interests in the property on the
equity method. The Partnership and Yield Plus continue to
receive 100% of the cash flow and economic benefits from the
property.
In December 1997, partnership which owns the Michelson
property (in which the Partnership is a 49.19% general
partner) has entered into an agreement to sell the property,
for $64 million, of which the Partnership's share is
approximately $31.5 million. Closing is expected to occur
in April 1998. Partnership cash flow from this property was
approximately $1,885,000 and $2,297,000 in 1997 and 1996,
respectively.
The Managing General Partner has engaged a real estate
broker to market for sale the Century Alameda Distribution
Center and believes that, barring a change in circumstances,
it will market for sale the One Congress Street property in
1998. However, there can be no assurance that these
properties will be sold.
Employment growth, especially in the communications,
technology and financial services industries, has increased
demand for space in many office markets. Such increasing
demand and a controlled amount of speculative construction
has resulted in falling vacancies and rising rents.
Improved property performance along with an influx of
capital from REITs, pension funds and foreign investors are
increasing property values. Some office markets, especially
suburban markets, are faring better than others and, in
certain areas, improved market conditions can support new
construction. In 1997, the office vacancy rate in the
downtown financial markets and government center of Boston
(the location of One Congress Street) decreased to 5% and
rental rates in this market increased. In Orange County, CA
(the location of the Michelson property), the strong demand
for quality office space combined with a lack of new
construction increased rental rates significantly in 1997.
The industrial property market in the South Bay area of Los
Angeles (the location of the Century Alameda Distribution
Center) remains strong, and is experiencing increasing
rental rates and a limited supply of large vacant blocks of
Class A space.
In 1998, the Partnership's liquidity will be primarily
affected by sales of the Partnership's properties; when
properties are sold, the Partnership will have fewer income-
producing investments, Partnership cash from operations will
decrease and Partnership distributions will decline. Future
cash distribution levels will fluctuate based on cash flow
generated by the Partnership's remaining properties and
proceeds received from property sales.
The Partnership's liquidity also depends upon the cash flow
from operations of its real estate, distributions from its
investments in unconsolidated partnerships and expenditures
for building improvements, tenant improvements and leasing
commissions in connection with the leasing of space. During
1997, all of the Partnership's properties, except for the
One Congress Street property, generated positive cash flow
from operations, and it is anticipated that they will
continue to so in 1998. As described in Note 4 to the
financial statements, GCGA did not pay approximately
$1,130,000 of its 1997 minimum debt service to the
Partnership while in bankruptcy.
Subsequent to October 27, 1997, GCGA renewed the lease of
the Government Services Administration ("GSA"), the sole
tenant of the office space at the One Congress Street
property. The lease, which is effective August 1, 1997 and
covers approximately 70% of the office space at the
property, expires on July 31, 2006, subject to GSA's right
to terminate the lease, in whole or in part, after July 31,
2002. The rental rates during the first four years of the
new lease are less than the rental rates received in the
last two years of the expired lease. The new lease requires
the Partnership and Yield Plus to fund tenant improvements
aggregating between $862,500 and $1,687,500; any amount
funded over $862,500 will be repaid monthly by GSA over five
years plus interest at 8%. In addition, the Partnership and
Yield Plus will be required to fund leasing commissions
relating to the new lease of up to $1,125,000. The
Partnership's 42% share of the maximum amount of the above-
mentioned tenant-related expenditures is approximately
$1,181,000 (of which $346,500 would be repaid by GSA, as
discussed above); the Partnership did not pay any of these
expenditures in 1997.
As of December 31, 1997, the Partnership has commitments to
fund approximately $194,000 to DW Michelson Associates for
lease-related capital expenditures.
During 1997, Partnership cash flows from operations,
interest on the participating mortgage loan and
distributions from DW Michelson Associates exceeded
distributions to investors. The contributions to the
Michelson partnership ($330,000) were funded from cash flow
from operations and cash reserves.
In 1998, the Partnership expects that cash flow from
operations of its real estate and distributions from the
unconsolidated partnerships will exceed distributions to
investors (other than distributions of cash reserves and net
proceeds from property sales). The Partnership expects to
fund contributions to the unconsolidated partnerships from
operating cash flows and cash reserves. In 1998, the
Partnership expects to distribute a portion of its cash
reserves to investors.
On January 28, 1998, the Partnership paid the fourth quarter
cash distribution of $3.125 per Unit to the Limited
Partners. The cash distribution aggregated $601,264, with
$541,138 distributed to the Limited Partners and $60,126
distributed to the General Partners.
Except as discussed above and in the financial statements,
the Managing General Partner is not aware of any trends or
events, commitments or uncertainties that may have a
material impact on liquidity.
Operations
Fluctuations in the Partnership's operating results for the
year ended December 31, 1997 compared to 1996 and 1996
compared to 1995 are primarily attributable to the
following:
In 1995, Goldenberg Plywood leased an additional 28% of the
space at Century Alameda Distribution Center, which had been
vacant from April 1994 until July 1995. Lease terms on all
of the space leased by Goldenberg were changed requiring a
one-time adjustment to the straight-line rent accrual, which
increased rental revenue in 1995. Rental income decreased
in 1996 compared to 1995 primarily because of the absence of
the above-described adjustment, partially offset by an
increase in revenues because of Goldenberg's 65% occupancy
of the property during all of 1996.
Equity in earnings of unconsolidated partnerships increased
in 1997 because of the inclusion of earnings of
approximately $192,000 from GCGA in 1997. Equity in earnings
of unconsolidated partnership decreased in 1996 compared to
1995 primarily because the real estate tax refund received
by the Michelson partnership in 1995 was greater than that
received in 1996.
Interest on the One Congress Street participating mortgage
loan decreased in 1997 compared to 1996 because $1,130,000
of reserves of accrued but uncollected interest were
recognized from January 1, 1997 to October 27, 1997 (when
the Partnership obtained control of the property) compared
to $470,000 in 1996. Effective October 27, 1997, the
Partnership stopped accruing interest on the participating
mortgage loan and began recognizing its share of income from
the property using the equity method of accounting.
The decrease in interest income from the participating
mortgage loan in 1996 compared to 1995 resulted from
reserves of accrued but uncollected interest of $470,000 in
1996.
General and administrative expenses decreased by
approximately $120,000 in the fourth quarter of 1997
because, as part of the settlement with GCGA, GCGA
reimbursed the Partnership for approximately $83,000 of
legal fees the Partnership had previously paid relating to
the settlement.
The loss on impairment of the investment in the One Congress
Street participating mortgage loan was incurred in 1996.
See Note 4 to the financial statements.
The were no other indivdually significant factors which
caused changes in revenues or expenses.
A summary of the markets where the Partnership's properties
are located, and the performance of each property, is as
follows:
There has been no significant new construction in the
industrial building market in Lynwood, California, the
location of the Century Alameda Distribution Center. The
demand for space in industrial properties remained strong in
1997 and the vacancy rate in this market decreased from 9.5%
in 1996 to 7% in 1997. Also, in 1997, rental rates
increased in this market as a result of a limited supply of
large vacant blocks of class A space. During the years
ended December 31, 1997 and 1996, the property remained 100%
leased to 3 tenants. In 1997, the Partnership renewed its
lease with Tools Exchange Inc. (for approximately 22% of the
property's space) through 2003 at a higher rental rate than
was received under the expired lease. The leases of the
other two tenants at the property, Goldenberg Plywood (for
approximately 65% of the space) and California Feather and
Down (for approximately 13% of the space) expire in 2005 and
2007, respectively.
During 1997, the market vacancy rate for class A office
space in Irvine, California, the location of 2600 Michelson
Drive, decreased from 16% to below 14%. Rental rates
increased in this market in 1997 because of the continued
strong demand and a lack of significant new construction.
During 1997, average occupancy at the property was 93%, and,
at December 31, 1997, occupancy was 94% compared to 93% at
the prior year-end. The lease of AVCO Financial (for
approximately 22% of the property's space) expires in 2002;
however, the tenant has a one-time option to terminate its
lease in 1999. The property is leased to 42 other tenants,
none of which individually occupy more than 10% of the
property's space. Leases covering approximately 27% and 14%
of the space expire in 1998 and 1999, respectively. The
Partnership has agreed to sell this property; see Note 4 to
the financial statements.
During 1997, the downtown Boston office market, the location
of One Congress Street, continued to strengthen and rental
rates increased. There is no significant new construction in
this market. Effective August 1, 1997, GSA renewed its
lease (for approximately 70% of the office space) through at
least July 31, 2002. The remaining 30% of the office space
has been vacant since GSA terminated a portion of its
expired lease in August 1996. The lease for 100% of the
parking lot space at the property with Kinney Systems, Inc.
expires in 2003. In both 1997 and 1996, the retail space,
which is not a significant portion of the overall space,
remained substantially vacant.
Inflation
Inflation has been consistently low during the periods
presented in the financial statements and, as a result, has
not had a significant effect on the operations of the
Partnership or its properties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
DEAN WITTER REALTY YIELD PLUS II, L.P.
INDEX
Page
(a) Financial statements
Independent Auditors' Report 17
Balance Sheets at December 31, 1997 and 1996 18
Statements of Income for the years ended December 31,
1997, 1996 and 1995 19
Statements of Partners' Capital for the years
ended December 31, 1997, 1996 and 1995 20
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 21
Notes to Financial Statements 22-31
(b) Financial statement schedule
Real Estate and Accumulated Depreciation III 39-40
All schedules other than those indicated above have been
omitted because either the required information is not
applicable or the information is shown in the financial
statements or notes thereto.
Independent Auditors' Report
The Partners
Dean Witter Realty Yield Plus II, L.P.
We have audited the accompanying balance sheets of Dean
Witter Realty Yield Plus II, L.P. (the "Partnership") as of
December 31, 1997 and 1996, and the related statements of
income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. Our
audits also included financial statement schedule III.
These financial statements and the financial statement
schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on
these 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, such financial statements present fairly, in
all material respects, the financial position of Dean Witter
Realty Yield Plus II, L.P. as of December 31, 1997 and 1996,
and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting
principles. Also, in our opinion, financial statement
schedule III, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
Deloitte & Touche LLP
/s/Deloitte & Touche LLP
New York, New York
March 24, 1998
<TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
1997 1996
<S> <C>
<C>
ASSETS
Investment in unconsolidated partnerships $32,650,908
$19,166,087
Building, at cost, net of accumulated depreciation of
$1,211,289 and $1,012,772 6,093,337
6,291,854
Investment in participating mortgage loan, net of
allowance of $11,264,750 in 1996 -
13,755,767
Cash and cash equivalents 2,680,667
2,963,298
Deferred expenses, net 292,703
561,626
Other assets 610,473
265,380
$42,328,088
$43,004,012
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and other liabilities $ 193,555 $
205,676
Security deposits 97,919
97,919
291,474
303,595
Partners' capital:
General partners 3,539,365
3,605,746
Limited partners ($500 per Unit, 173,164 Units issued)
38,497,249 39,094,671
Total partners' capital 42,036,614
42,700,417
$42,328,088
$43,004,012
See accompanying notes to financial statements.
</TABLE>
<TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
<S> <C> <C>
<C>
Revenues:
Rental $1,564,070 $1,475,990
$1,635,640
Equity in earnings of unconsolidated
partnerships 1,125,625 946,761
1,064,862
Interest on participating mortgage loan 503,707
1,520,481 1,988,000
Interest on short-term investments and other 165,674
130,197 102,443
3,359,076 4,073,429
4,790,945
Expenses:
Property operating 922,107 817,877
662,219
Depreciation and amortization 392,618 402,256
377,320
General and administrative 303,098 363,181
305,475
Loss on impairment of participating mortgage
loan - 1,477,000
- -
1,617,823 3,060,314
1,345,014
Net income $1,741,253 $1,013,115
$3,445,931
Net income allocated to:
Limited partners $1,567,128 $ 911,804
$3,101,338
General partners 174,125 101,311
344,593
$1,741,253 $1,013,115
$3,445,931
Net income per Unit of limited partnership
interest $ 9.05 $ 5.27
$ 17.91
See accompanying notes to financial statements.
</TABLE>
<TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
Limited General
Partners Partners Total
<S> <C> <C>
<C>
Partners' capital at January 1, 1995 $40,059,994
$3,713,005 $43,772,999
Net income 3,101,338 344,593
3,445,931
Cash distributions (2,813,915)
(312,657) (3,126,572)
Partners' capital at December 31, 1995 40,347,417
3,744,941 44,092,358
Net income 911,804 101,311
1,013,115
Cash distributions (2,164,550)
(240,506) (2,405,056)
Partners' capital at December 31, 1996 39,094,671
3,605,746 42,700,417
Net income 1,567,128 174,125
1,741,253
Cash distributions (2,164,550)
(240,506) (2,405,056)
Partners' capital at December 31, 1997 $38,497,249
$3,539,365 $42,036,614
See accompanying notes to financial statements.
</TABLE>
<TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
<S> <C>
<C> <C>
Cash flows from operating activities:
Net income $ 1,741,253 $
1,013,115 $ 3,445,931
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of unconsolidated partnerships
(1,125,625) (946,761)
(1,064,862)
Depreciation and amortization 392,618
402,256 377,320
Loss on impairment of participating mortgage loan -
1,477,000 -
(Increase) decrease in operating assets:
Other assets (345,093)
145,217 (334,773)
Deferred expenses - -
(210,272)
Decrease in operating liabilities:
Accounts payable and other liabilities (12,121)
(91,551) (240,224)
Security deposits - -
(2,749)
Net cash provided by operating activities
651,032 1,999,276
1,970,371
Cash flows from investing activities:
Distributions from unconsolidated partnerships
1,884,766 2,297,113
1,821,753
Contributions to unconsolidated partnerships (413,373)
(949,484) (489,992)
Additions to building and improvements -
(212,002) -
Net cash provided by investing activities
1,471,393 1,135,627
1,331,761
Cash flows from financing activities:
Cash distributions (2,405,056)
(2,405,056) (3,126,572)
(Decrease) increase in cash and cash equivalents
(282,631) 729,847
175,560
Cash and cash equivalents at beginning of year 2,963,298
2,233,451 2,057,891
Cash and cash equivalents at end of year $ 2,680,667 $
2,963,298 $ 2,233,451
Supplemental disclosure of non-cash investing activities:
Reclassification of investment in participating mortgage
loan to investment in unconsolidated partnership:
Investment in participating mortgage loan, net $
13,755,767 $ - $ -
Deferred expenses, net 74,822 -
- -
Addition to investment in unconsolidated
partnership $ 13,830,589 $ -
$ -
See accompanying notes to financial statements.
</TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
Notes to Financial Statements
1. The Partnership
Dean Witter Realty Yield Plus II, L.P. (the "Partnership")
is a limited partnership organized under the laws of the
State of Delaware in 1988 to invest in participating
mortgage loans collateralized by income-producing commercial
and industrial properties. The Managing General Partner of
the Partnership is Dean Witter Realty Yield Plus II Inc.,
which is wholly-owned by Dean Witter Realty Inc. ("Realty").
The Partnership issued 173,164 units of limited partnership
interest (the "Units") for $86,582,000. No additional Units
will be sold.
2. Summary of Significant Accounting Policies
The Partnership's records are maintained on the accrual
basis of accounting for financial reporting and tax
purposes. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Partnership's 49.19% general partnership interest in DW
Michelson Associates ("DW Michelson") and, effective October
27, 1997, the Partnership's 42% general partnership interest
in GCGA Limited Partnership ("GCGA"), the owner/borrower of
the One Congress Street property, are accounted for on the
equity method. See Note 4.
Real estate and the investments in unconsolidated
partnerships, all of which were acquired in settlement of
loans, were recorded at the lower of the carrying value of
the original participating mortgage loan or estimated fair
value of the real estate investment at the date of
foreclosure or in-substance foreclosure. Costs of
improvements to real estate are capitalized and repairs are
expensed. Depreciation is recorded on the straight-line
method.
Cash and cash equivalents consist of cash and highly liquid
investments with maturities, when purchased, of three months
or less.
At least annually, and more often if circumstances dictate,
the Partnership evaluates the recoverability of the net
carrying value of its real estate and any related assets,
including the real estate and related assets owned by the
unconsolidated partnerships. As part of this evaluation,
the Partnership assesses, among other things, whether there
has been a significant decrease in the market value of any
of its properties. If events or circumstances indicate that
the net carrying value of a property may not be recoverable,
the expected future net cash flows from the property are
estimated for a period of approximately five years (or a
shorter period if the Partnership expects that the property
may be disposed of sooner), along with estimated sales
proceeds at the end of the period. If the total of these
future undiscounted cash flows were less than the carrying
amount of the property, the property would be written down
to its fair value as determined (in some cases with the
assistance of outside real estate consultants) based on
discounted cash flows, and a loss on impairment recognized
by a charge to earnings.
The Partnership also periodically evaluated the
collectibility of both interest and principal of its
investment in the participating mortgage loan to determine
whether it was impaired. The mortgage loan was considered
to be impaired when, based on then-current information and
events, it was probable that the Partnership would be unable
to collect all amounts due according to the existing
contractual terms of the loan. When the mortgage loan was
considered to be impaired, the Partnership established a
valuation allowance which was equal to the difference
between a) the carrying value of the loan, and b) the
present value of the expected cash flows from the loan at
its effective interest rate, or, for practical purposes, at
the estimated fair value of the real estate collateralizing
the loan.
Because the determination of fair value is based upon
projections of future economic events such as property
occupancy rates, rental rates, operating cost inflation and
market capitalization rates which are inherently subjective,
the amounts ultimately realized at disposition may differ
materially from the net carrying value as of December 31,
1997. The cash flows used to evaluate the recoverability of
the assets and to determine fair value are based on good
faith estimates and assumptions developed by the Managing
General Partner. Unanticipated events and circumstances may
occur and some assumptions may not materialize; therefore
actual results may vary from the estimates and the variances
may be material. The Partnership may provide additional
write-downs, which could be material, in subsequent years if
real estate markets or local economic conditions change.
Deferred expenses consist of leasing commissions and, prior
to October 27, 1997, origination fees in connection with the
participating mortgage loan. Leasing commissions are
amortized over the applicable lease terms. Origination fees
were amortized over the loan term, which approximated the
effective yield method.
Rental income is accrued on a straight-line basis over the
terms of the leases. Accruals in excess of amounts payable
by tenants pursuant to their leases (resulting from rent
concessions or rents which periodically increase over the
term of a lease) are recorded as receivables and included in
other assets.
Net income per Unit amounts are calculated by dividing net
income allocated to Limited Partners, in accordance with the
Partnership Agreement, by the weighted average number of
Units outstanding.
No provision for income taxes has been made in the financial
statements, since the liability for such taxes is that of
the partners rather than the Partnership.
The accounting policies used for tax reporting purposes
differ from those used for financial reporting as follows:
(a) depreciation is calculated using accelerated methods,
(b) rental income is recognized based on the payment terms
in the applicable leases, and (c) write-downs for
impairments of real estate and the participating mortgage
loan are not deductible. For tax purposes, the Partnership
continues to recognize taxable interest income on its loans
secured by the Michelson and One Congress Street properties.
The Partnership recognizes its share of the unconsolidated
partnerships' taxable income (which is net of interest
expense on the participating mortgage loans which are still
outstanding). In addition, offering costs are treated
differently for tax and financial reporting purposes. The
tax basis of the Partnership's assets and liabilities is
approximately $42.3 million higher than the amounts reported
for financial statement purposes at December 31, 1997.
The Financial Accounting Standards Board ("FASB") has
recently issued several new accounting pronouncements.
Statement No. 130, "Reporting Comprehensive Income"
establishes standards for reporting and display of
comprehensive income and its components. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public
business enterprises report information about operating
segments in annual financial statements and requires that
those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosure about products and services, geographic areas,
and major customers. These two standards are effective for
the Partnership's 1998 financial statements, but the
Partnership does not believe that they will have any effect
on the Partnership's computation or presentation of net
income or other disclosures.
The implementation in 1997 of FASB Statement No. 128,
"Earnings per Share" and Statement No. 129, "Disclosure of
Information about Capital Structure" effective for the
Partnership's 1997 year-end financial statements did not
have any impact on the Partnership's financial statements.
3. Partnership Agreement
The Partnership Agreement provides that net cash flow, as
defined, will be paid 90% to the Limited Partners and 10% to
the General Partners. However, during the offering period
(which ended in March 1990) and the twelve quarters
thereafter, the Managing General Partner was obligated to
(a) defer receipt of its share of distributable net cash
flow, which totaled $3,713,000; and (b) contribute
additional capital to the Partnership sufficient to fund the
difference between cash flow and a 7.5% annual distribution
rate to Limited Partners, a total of $4,807,069.
Sale or financing proceeds will be distributed, to the
extent available: first, 97% to the Limited Partners and 3%
to the General Partners until each Limited Partner has
received a return of their invested capital plus an amount
sufficient to provide a 10% cumulative annual return
thereon; second, 100% to the General Partners until they
have received an amount equal to (i) any portion of their
share of net cash flow previously deferred and not
distributed, and (ii) any additional capital contributions
made by the Managing General Partner to fund distributions
to the Limited Partners in respect of the 7.5% minimum
annual return described above; and third, 85% to the Limited
Partners and 15% to the General Partners.
Taxable income (subject to certain adjustments) will be
allocated to the partners in proportion to the distribution
of distributable cash or sale or financing proceeds, as the
case may be (or 90% to the Limited Partners and 10% to the
General Partners if there is no distributable cash or sale
or financing proceeds). Tax losses, if any, will be
allocated 90% to the Limited Partners and 10% to the General
Partners.
Distributions paid to Limited Partners for the years ended
December 31, 1997, 1996 and 1995 represent returns of
capital, calculated as the excess of cash distributed over
accumulated earnings not previously distributed.
4. Investments in Participating Mortgage Loan and
Unconsolidated Partnerships
One Congress Street, Boston, Massachusetts
The Partnership and Dean Witter Realty Yield Plus, L.P.
("Yield Plus"; and collectively, with the Partnership, the
"Lender"), an affiliate, made a $59.2 million participating
second mortgage loan on the One Congress Street building
(the "Loan") to GCGA. The loan is due in 2001. Base
interest was originally payable at 8% and the first $250,000
of net revenues in any calendar year from the property was
payable as additional interest. The Lender also owned a 58%
interest in adjusted net revenue and capital proceeds
generated by the property. The property is subject to a
first mortgage loan.
In 1991, one of the general partners of the general partner
of GCGA filed a voluntary petition under Chapter 11 of the
Bankruptcy Code. In 1996, as part of a reorganization,
control over this general partner's interest in the property
was transferred to a trustee in bankruptcy.
In October 1996, GCGA defaulted on the Loan by failing to
timely pay its debt service. Thereafter, the Lender
accelerated the Loan and attempted to take possession of the
property. On October 15, 1996, GCGA filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code.
During the bankruptcy period, GCGA remained current on its
debt service payments to its first mortgage lender and the
property's real estate taxes were paid.
On October 27, 1997, the Lender entered into a settlement
agreement with GCGA (the "Agreement"). As part of the
Agreement, a new corporation which is jointly owned by the
Partnership (42%) and Yield Plus (58%) became the sole
general partner of GCGA (the "New General Partner") (with an
aggregate 19.81% ownership interest in the property). The
Partnership and Yield Plus have agreed to make all decisions
concerning the property jointly. The Lender has retained an
affiliate of GCGA's original general partner as property
manager.
The Agreement also provides the following:
(a) as a result of their interests in the New General
Partner, the Partnership and Yield Plus are required to
make additional loans to fund future tenant
improvements and leasing commissions at the property
(the "New Loans") in proportion to their ownership of
the New General Partner. Any New Loans will bear
interest at 12%, payable monthly from available cash
flow generated by the property after payment of debt
service on the first mortgage loan and certain
operating escrows;
(b) the interest rate on the principal of the Loan and past
due interest thereon (aggregating approximately $12.3
million) has been increased to 10%, payable monthly
from available cash flow generated by the property
after payment of debt service on the New Loans;
(c) any future unpaid debt service will accrue interest at
10%; and
(d) the Partnership's and Yield Plus' interest in adjusted
net revenue and capital proceeds generated by the
property was increased to 80%.
The Agreement has effectively changed the Lender from a
participating lender to GCGA into the general partner in a
partnership which owns the One Congress Street property.
The Partnership, through the New General Partner, owns an
8.3% partnership interest in GCGA and, accordingly, at
October 27, 1997, the Partnership recorded its investment at
an amount equal to the net carrying value of its investment
in the participating mortgage loan and related assets (which
carrying value was less than the estimated fair value of the
property at that date). The Partnership began, effective
October 27, 1997, to account for its investment on the
equity method (and stopped recognizing interest income from
its participating mortgage loan). Because the Partnership
and Yield Plus control GCGA and are entitled to receive
substantially all the cash flow and other economic benefits
from the property, the Partnership recognizes its share of
the operations of GCGA.
The Partnership believed that during the period of the
bankruptcy it would be unable to collect its interest on the
Loan in full and that the bankruptcy could adversely impact
future leasing at the property. Accordingly, in 1996, the
Partnership determined that the Loan was impaired and
recorded an additional valuation allowance of $1,477,000 to
reduce the carrying value of the Loan to its estimated fair
value. The Partnership had previously recognized an
impairment allowance of $9.8 million in 1993.
In 1997 (prior to the Agreement) and 1996, the Partnership
reserved accrued but unpaid interest on the Loan of
$1,130,000 and $470,000, respectively. At October 27, 1997,
the Partnership's total reserves against accrued but unpaid
interest approximated $1,600,000.
Summarized financial information of GCGA is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C>
<C>
ASSETS
Land and building, net $ 59,921,306 $
61,695,354
Other
8,333,385 6,836,432
Total assets $ 68,254,691 $
68,531,786
LIABILITIES AND PARTNERS' CAPITAL DEFICIENCY
First mortgage loan $ 37,750,000 $
37,750,000
Second mortgage loan and accrued interest
72,148,266 65,292,000
Other liabilities 3,036,017
3,208,965
Partners' capital deficiency (44,679,592)
(37,719,179)
Total liabilities and partners' capital deficiency $
68,254,691 $ 68,531,786
STATEMENT OF OPERATIONS
Years ended December
31,
1997 1996 1995
Revenues:
Rental $ 11,498,722 $
13,380,683 $ 13,302,513
Other 238,937
63,455 102,906
11,737,659
13,444,138 13,405,419
Expenses:
Interest on second mortgage loan 8,036,377
9,357,983 4,734,619
Other interest 3,768,876
3,816,304 3,824,393
Property operating 5,075,676
4,874,545 4,994,295
Depreciation and amortization 1,940,143
2,226,861 2,232,693
18,821,072
20,275,693 15,786,000
Net loss $ (7,083,413) $
(6,831,555) $ (2,380,581)
</TABLE>
GCGA's second mortgage loan consists of the Loan. The
accounting policies of GCGA are consistent with those of the
Partnership.
Michelson, Irvine, California
The property, which consists of three office buildings, is
owned by a subsidiary partnership of DW Michelson, a general
partnership owned 49.19% by the Partnership and 50.81% by
Yield Plus.
An affiliate of the developer of the property is obligated
to DW Michelson on two promissory notes which originated in
1991 totaling approximately $1.1 million. The notes are due
December 31, 1999, bear interest at 8.5% per annum and
require monthly payments of approximately $15,000. Because
of the uncertainty of their realization, the principal
amounts of these notes were not recognized in the financial
statements. Payment of the promissory notes are included in
other income when received.
In December 1997, DW Michelson entered into an agreement
with an affiliate of the property's developer to sell the
property and the two promissory notes, for approximately $64
million, the Partnership's share of which is approximately
$31.5 million. Subsequently, the developer assigned its
right to purchase the property to an unaffiliated party.
Closing is expected to occur in April 1998. At December 31,
1997, the Partnership's carrying value of this investment
was approximately $18.5 million.
The Partnership's share of net income and cash flow from
operations from this property for the year ended December
31, 1997 were approximately $934,000 and $1,885,000,
respectively.
An affiliate of Realty manages the property.
Summarized financial information of DW Michelson is as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C>
<C>
ASSETS
Real estate held for sale $36,917,242 $
- -
Land and building, net -
38,390,110
Other
1,662,502 1,500,829
Total assets $38,579,744
$39,890,939
LIABILITIES AND PARTNERS' CAPITAL
Liabilities $ 350,749 $
398,490
Partners' capital 38,228,995
39,492,449
Total liabilities and partners' capital $38,579,744
$39,890,939
</TABLE>
<TABLE>
INCOME STATEMENT
<CAPTION>
Years ended December
31,
1997 1996 1995
<S> <C> <C>
<C>
Revenues:
Rental $6,814,131 $6,600,303
$6,181,349
Other 110,244 41,640
289,477
6,924,375 6,641,943
6,470,826
Expenses:
Property operating 2,917,322 2,506,666
2,154,797
Depreciation and amortization 2,108,642
2,210,576 2,151,236
5,025,964 4,717,242
4,306,033
Net income $1,898,411 $1,924,701
$2,164,793
</TABLE>
The accounting policies of DW Michelson are consistent with
those of the Partnership.
5. Building
Century Alameda Distribution Center, Lynwood, CA
The building was acquired by deed-in-lieu of foreclosure in
1992. The land underlying the building is leased from an
unaffiliated party. The current ground rent is
approximately $547,000 a year, subject to graduated
increases until expiration of the lease in 2043. An
affiliate of Realty manages the property.
6. Leases
Minimum future rental income under noncancellable operating
leases of the Century Alameda property as of December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
1998 $ 1,397,431
1999 1,417,882
2000 1,417,882
2001 1,438,333
2002 1,438,333
Thereafter 3,075,982
$10,185,843
</TABLE>
The Partnership has determined that all leases relating to
its properties are operating leases. Lease terms range from
five to eleven years, and generally provide for fixed
minimum rents with rental escalation and/or expense
reimbursement clauses.
7. Related Party Transactions
An affiliate of Realty provides property management services
for the Michelson and the Century Alameda Distribution
Center properties. For the years ended December 31, 1997,
1996 and 1995, the affiliate received property management
fees of $126,267, $129,896 and $106,543, respectively.
These amounts are included in property operating expenses.
Realty performs administrative functions and processes
certain investor tax information for the Partnership. For
each of the three years in the period ended December 31,
1997, the Partnership incurred approximately $212,000, for
these services. These amounts are included in general and
administrative expenses.
As of December 31, 1997, the affiliates were owed a total of
approximately $28,000 for these services.
8. Litigation
Various public partnerships sponsored by Realty (including
the Partnership and its Managing General Partner) are
defendants in purported class action lawsuits pending in
state and federal courts. The complaints allege a number of
claims, including breach of fiduciary duty, fraud,
misrepresentation and related claims, and seek compensatory
and other damages and equitable relief. The defendants
intend to vigorously defend against these actions. It is
impossible to predict the effect, if any, the outcome of
these actions might have on the Partnership's financial
statements.
9. Subsequent Event
On January 28, 1998, the Partnership paid a cash
distribution of $3.125 per Unit to Limited Partners. The
cash distribution aggregated $601,264 with $541,138
distributed to the Limited Partners and $60,126 distributed
to the General Partners.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is a limited partnership which has no
directors or officers.
The directors and executive officers of the Managing General
Partner are as follows:
Position with the
Name Managing General Partner
William B. Smith Chairman of the Board of Directors
E. Davisson Hardman, Jr. President and Director
Lawrence Volpe Controller and Director
Ronald T. Carman Secretary and Director
All of the directors have been elected to serve until the
next annual meeting of the shareholder of the Managing
General Partner or until their successors are elected and
qualify. Each of the officers has been elected to serve
until his successor is elected and qualifies.
William B. Smith, age 54, has been a Managing Director of
Morgan Stanley and co-head of Morgan Stanley Realty
Incorporated since 1997, and a Managing Director of Dean
Witter Realty Inc., which he joined in 1982. He is an
Executive Vice President of Dean Witter Reynolds Inc.
E. Davisson Hardman, Jr., age 48, has been a Managing
Director of Morgan Stanley Asia, Ltd. since 1997, and is a
Managing Director of Dean Witter Realty Inc., which he
joined in 1982.
Lawrence Volpe, age 50, is a Director and the Controller of
Dean Witter Realty Inc. He is a Senior Vice President and
Controller of Dean Witter Reynolds Inc., which he joined in
1983.
Ronald T. Carman, age 46, is a Director and the Secretary of
Dean Witter Realty Inc. He is an Assistant Secretary of MWD
and a Senior Vice President and Associate General Counsel of
Dean Witter Reynolds Inc., which he joined in 1984.
There is no family relationship among any of the foregoing
persons.
ITEM 11. EXECUTIVE COMPENSATION
The General Partners are entitled to receive cash
distributions, when and as cash distributions are made to
the Limited Partners, and a share of taxable income or tax
loss. Descriptions of such distributions and allocations
are contained in Item 5 above. The General Partners
received cash distributions of $240,506, $240,506 and
$312,652 during the years ended December 31, 1997, 1996 and
1995, respectively.
The General Partners and their affiliates were paid certain
fees and reimbursed for certain expenses. Information
concerning such fees and reimbursements is contained in Note
7 to the Financial Statements in Item 8 above.
The directors and officers of the Partnership's Managing
General Partner received no renumeration from the
Partnership.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND
MANAGEMENT
(a) No person is known to the Partnership to be the
beneficial owner of more than five percent of the Units.
(b) The directors and executive officers of the Managing
General Partner own the following Units as of March 17,
1998:
Amount and
Nature of
Title of ClassName of Beneficial Owner Beneficial Ownership
Limited All directors and executive *
Partnership officers of the Managing
Interests General Partner, as a group
*Own, by virtue of ownership of limited partnership
interests in the Associate General Partner, less than 1% of
the Units of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of their being partners of a limited partnership
which is the limited partner of the Associate General
Partner, certain current and former officers and directors
of the Managing General Partner also own indirect
partnership interests in the Partnership. The Partnership
Agreement of the Partnership provides that cash
distributions and allocations of income and loss to the
general partners shall be distributed or allocated 50% to
the Managing General Partner and 50% to the Associate
General Partner. The General Partners' share of cash
distributions and income or loss is described in Item 5
above.
All of the outstanding shares of common stock of the
Managing General Partner are owned by Dean Witter Realty
Inc., a Delaware corporation which is a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The general
partner of the Associate General Partner is the Managing
General Partner. The limited partner of the Associate
General Partner is LSYP 88, L.P., a Delaware limited
partnership. Realty and certain current and former officers
and directors of the Managing General Partner are partners
of LSYP 88, L.P. Additional information with respect to the
directors and executive officers and compensation of the
Managing General Partner and affiliates is contained in
Items 10 and 11 above.
The One Congress Street property was developed by a
partnership between a Maryland-based developer and an entity
comprised of former Realty executives, some of whom were
formerly executive officers of the Managing General Partner.
This entity withdrew as a partner of the borrower in
September 1993, so the borrower partnership was controlled
solely by the Maryland-based developer until control of the
borrower was transferred to the Partnership and Yield Plus
in 1997.
The General Partners and their affiliates were paid certain
fees and reimbursed for certain expenses. Information
concerning such fees and reimbursements is contained in Note
7 to the Financial Statements in Item 8 above. The
Partnership believes that the payment of fees and the
reimbursement of expenses to the General Partners and their
affiliates are on terms as favorable as would be obtained
from unrelated third parties.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of
this Annual Report:
1. Financial Statements (see Index to
Financial Statements filed as part of Item 8 of
this Annual Report).
2. Financial Statement Schedules (see Index
to Financial Statements filed as part of Item 8 of
this Annual Report).
3. Exhibits
(3)(a) Amended and Restated Agreement
of Limited Partnership dated as of June 24, 1988
set forth in Exhibit A to the Prospectus included
in Registration Statement Number 33-20475 is
incorporated herein by reference.
(3)(b) Certificate of Limited
Partnership dated as of June 24, 1988 set forth in
Registration Statement Number 33-20475 is
incorporated herein by reference.
(4)(a) Amended and Restated Agreement
of Limited Partnership dated as of June 24, 1988
set forth in Exhibit A to the Prospectus included
in Registration Statement Number 33-20475 is
incorporated herein by reference.
(4)(b) Certificate of Limited
Partnership dated as of June 24, 1988 set forth in
Registration Statement Number 33-20475 is
incorporated herein by reference.
(10)(a) Partnership Agreement for DW
Michelson Associates dated March 14, 1988 was
filed as Exhibit 10.1 (a) to Amendment No. 1 to
Registrant's Registration Statement on Form S-11
and is incorporated herein by reference.
(10)(b) First Mortgage Promissory
Note, dated April 26, 1989, between the Government
Center Garage Realty Trust (Maker) and Dean Witter
Realty Yield Plus II, L.P.(Holder) was filed as
Exhibit to Amendment No. 2 to Current Report on
Form 8-K on April 26, 1989 and is incorporated
herein by reference.
(10)(c) Construction Loan Agreement,
dated April 26, 1989, between Government Center
Garage Realty Trust, as Borrower and Dean Witter
Realty Yield Plus, L.P. and Dean Witter Realty
Yield Plus II, L.P., as Lender was filed as
Exhibit to Amendment No. 2 to Current Report on
Form 8-K on April 26, 1989 and is incorporated
herein by reference.
(10)(d) Intercreditor Agreement among
Dean Witter Realty Yield Plus, L.P., Dean Witter
Realty Yield Plus II, L.P., and Realty Management
Services Inc. dated as of April 26, 1989 was filed
as Exhibit to Amendment No. 2 to Current Report on
Form 8-K on April 26, 1989 and is incorporated
herein by reference.
(10)(e) First Amendment to
Construction Loan Agreement dated October 12, 1989
between Government Center Garage Realty Trust, as
Borrower and Dean Witter Realty Yield Plus, L.P.
and Dean Witter Realty Yield Plus II, L.P., as
Lender. Filed as Exhibit 10(e) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated by reference
herein.
(10)(f) Amended and Restated
Construction Loan/Office Loan Promissory Note
dated October 12, 1989 between Government Center
Garage Realty Trust (Maker) and Dean Witter Realty
Yield Plus II, L.P. (Holder). Filed as Exhibit
10(f) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 and
incorporated by reference herein.
(10)(g) Second Amendment to Construction Loan
Agreement dated June 22, 1990 between Government
Center Garage Realty Trust, as Borrower and Dean
Witter Realty Yield Plus, L.P. and Dean Witter
Realty Yield Plus II, L.P., as Lender. Filed as
Exhibit 10(g) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 and
incorporated by reference herein.
(10)(h) First Amendment to Amended and Restated
Construction Loan/Office Loan Promissory Note
dated June 22, 1990 between Government Center
Garage Realty Trust (Maker) and Dean Witter Realty
Yield Plus II, L.P. (Holder). Filed as Exhibit
10(h) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 and
incorporated by reference herein.
(10)(i) Supplemental Loan Agreement dated September
20, 1993 between Government Center Garage Realty
Trust, as Borrower and Dean Witter Realty Yield
Plus, L.P. and Dean Witter Realty Yield Plus II,
L.P., as Lender. Filed as Exhibit 10(i) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated by
reference herein.
(10)(j) Second Amendment to Notes dated September 20,
1993 between Government Center Garage Realty Trust
(Maker) and Dean Witter Realty Yield Plus, L.P.
and Dean Witter Realty Yield Plus II, L.P.,
(Holders). Filed as Exhibit 10(j) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated by reference
herein.
(10)(k)Supplement and Amendment to Construction Loan Agreement dated
October 27, 1997 between Government Center Garage Realty Trust
(Borrower) and Dean Witter Realty Yield Plus, L.P. and Dean Witter
Realty Yield Plus II, L.P. (Lenders) was filed as an Exhibit to Form
8-K on October 27, 1997 and is incorporated herein by reference.
(10)(l)Third Amendment to Notes dated October 27, 1997 between
Government Center Garage Realty Trust (Maker) and Dean Witter Realty
Yield Plus, L.P. and Dean Witter Realty Yield Plus II, L.P. (Holder)
was filed as an Exhibit to Form 8-K on October 27, 1997 and is
incorporated herein by reference.
(27) Financial Data Schedule
(d) 1. Financial statements of GCGA Limited
Partnership, owner of an office building/parking
garage complex located in Boston, Massachusetts.
(d) 2. Financial statements of DW Michelson
Associates, owner of the Michelson office
buildings located in Irvine, California.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEAN WITTER REALTY YIELD PLUS II, L.P.
By: Dean Witter Realty
Yield Plus II Inc.
Managing General Partner
By: /s/E. Davisson Hardman,
Jr. Date: March 27, 1998
E. Davisson Hardman, Jr.
President
By: /s/Lawrence Volpe
Date: March 27, 1998
Lawrence Volpe
Controller
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
and on the dates indicated.
DEAN WITTER REALTY YIELD PLUS II INC.
Managing General Partner
/s/William B. Smith Date: March 27, 1998
William B. Smith
Chairman of the Board of Directors
/s/E. Davisson Hardman, Jr. Date: March 27, 1998
E. Davisson Hardman, Jr.
Director
/s/Lawrence Volpe Date: March 27, 1998
Lawrence Volpe
Director
/s/Ronald T. Carman Date: March 27, 1998
Ronald T. Carman
Director
<TABLE>
SCHEDULE III
DEAN WITTER REALTY YIELD PLUS II, L.P.
Real Estate and Accumulated Depreciation
December 31, 1997
Initial Cost to Partnership (A)
<CAPTION>
Costs
Capitalized
Building and
Susbsquent to
Description Land Improvements Total
Acquisition
<S> <C> <C> <C>
<C>
Lynwood, CA $ - $ 9,321,476 $ 9,321,476 $
212,002
Carried at End of
Period (B)
Loss
on Impairment Buildings
and
Description of Real Estate Land
Improvements Total
Lynwood, CA $(2,228,852) $ - $
7,304,626 $ 7,304,626
Life on
which
Deprecia-
tion in
Latest
Income
Accumulated Date of Date
Statement
Description Depreciation(C) Construction
Acquired is Computed
Lynwood, CA $1,211,289 1989 October 1991 40
years
</TABLE>
Notes:
(A) The property is not encumbered by long term
debt. The basis in the property for financial reporting
purposes is net of loss on foreclosure of real estate. The
loss on foreclosure does not reduce the basis for federal
income tax purposes.
(B) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of period $7,304,626 $7,092,624
$7,092,624
Additions during period:
Improvements - 212,002
- -
Balance at end of period $7,304,626 $7,304,626
$7,092,624
SCHEDULE III (continued)
DEAN WITTER REALTY YIELD PLUS II, L.P.
Real Estate and Accumulated Depreciation
December 31, 1997
(C) Reconciliation of accumulated depreciation:
Balance at beginning of period $1,012,772 $ 824,572
$ 647,256
Depreciation expense 198,517 188,200
177,316
Balance end of period $1,211,289 $1,012,772
$ 824,572
</TABLE>
DEAN WITTER REALTY YIELD PLUS II, L.P.
Year ended December 31, 1997
Exhibit Index
Exhibit No. Description
(3)(a) Amended and Restated Agreement of
Limited Partnership dated as of June 24, 1988
set forth in Exhibit A to the Prospectus
included in Registration Statement Number 33-
20475 is incorporated herein by reference.
(3)(b) Certificate of Limited
Partnership dated as of June 24, 1988 set forth
in Registration Statement Number 33-20475 is
incorporated herein by reference.
(4)(a) Amended and Restated Agreement of
Limited Partnership dated as of June 24, 1988
set forth in Exhibit A to the Prospectus
included in Registration Statement Number 33-
20475 is incorporated herein by reference.
(4)(b) Certificate of Limited
Partnership dated as of June 24, 1988 set forth
in Registration Statement Number 33-20475 is
incorporated herein by reference.
(10)(a) Partnership Agreement for DW
Michelson Associates dated March 14, 1988 was
filed as Exhibit 10.1 (a) to Amendment No. 1 to
Registrant's Registration Statement on Form S-
11 and is incorporated herein by reference.
(10)(b) First Mortgage Promissory Note, dated April 26,
1989, between the Government Center Garage
Realty Trust (Maker) and Dean Witter Realty
Yield Plus II, L.P. (Holder) was filed as
Exhibit to Amendment No. 2 to Current Report on
Form 8-K on April 26, 1989 and is incorporated
herein by reference.
E-1
(10)(c) Construction Loan Agreement, dated April 26,
1989, between Government Center Garage Realty
Trust, as Borrower and Dean Witter Realty Yield
Plus, L.P. and Dean Witter Realty Yield Plus
II, L.P., as Lender was filed as Exhibit to
Amendment No. 2 to Current Report on Form 8-K
on April 26, 1989 and is incorporated herein by
reference.
(10)(d) Intercreditor Agreement among Dean Witter
Realty Yield Plus, L.P., Dean Witter Realty
Yield Plus II, L.P., and Realty Management
Services Inc. dated as of April 26, 1989 was
filed as Exhibit to Amendment No. 2 to Current
Report on Form 8-K on April 26, 1989 and is
incorporated herein by reference
(10)(e) First Amendment to Construction Loan Agreement
dated October 12, 1989 between Government
Center Garage Realty Trust, as Borrower and
Dean Witter Realty Yield Plus, L.P. and Dean
Witter Realty Yield Plus II, L.P., as Lender.
Filed as Exhibit 10(e) Registrant's Annual
Report on Form 10-K for the year ended December
31, 1995 and incorporated by reference herein.
(10)(f) Amended and Restated Construction Loan/Office
Loan Promissory Note dated October 12, 1989
between Government Center Garage Realty Trust
(Maker) and Dean Witter Realty Yield Plus II,
L.P. (Holder). Filed as Exhibit 10(f) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated
by reference herein.
(10)(g) Second Amendment to Construction Loan Agreement
dated June 22, 1990 between Government Center
Garage Realty Trust, as Borrower and Dean
Witter Realty Yield Plus, L.P. and Dean Witter
Realty Yield Plus II, L.P., as Lender. Filed
as Exhibit 10(g) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1995 and incorporated by reference herein.
(10)(h) First Amendment to Amended and Restated
Construction Loan/Office Loan Promissory Note
dated June 22, 1990 between Government Center
Garage Realty Trust (Maker) and Dean Witter
Realty Yield Plus II, L.P. (Holder). Filed as
Exhibit 10(h) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995
and incorporated by reference herein.
E-2
(10)(i) Supplemental Loan Agreement dated September 20,
1993 between Government Center Garage Realty
Trust, as Borrower and Dean Witter Realty Yield
Plus, L.P. and Dean Witter Realty Yield Plus
II, L.P., as Lender. Filed as Exhibit 10(i) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated
by reference herein.
(10)(j) Second Amendment to Notes dated September 20,
1993 between Government Center Garage Realty
Trust (Maker) and Dean Witter Realty Yield
Plus, L.P. and Dean Witter Realty Yield Plus
II, L.P., (Holders). Filed as Exhibit 10(j)
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated
by reference herein.
(10)(k)Supplement and Amendment to Construction Loan Agreement
dated October 27, 1997 between Government Center Garage Realty
Trust (Borrower) and Dean Witter Realty Yield Plus, L.P. and Dean
Witter Realty Yield Plus II, L.P. (Lenders) was filed as an Exhibit
to Form 8-K on October 27, 1997 and is incorporated herein by
reference.
(10)(l)Third Amendment to Notes dated October 27, 1997 between
Government Center Garage Realty Trust (Maker) and Dean Witter
Realty Yield Plus, L.P. and Dean Witter Realty Yield Plus II, L.P.
(Holder) was filed as an Exhibit to Form 8-K on October 27, 1997
and is incorporated herein by reference.
(27) Financial Data Schedule
(99)(a) Financial
Statements of GCGA Limited Partnership, owner
of an office building/parking garage complex
located in Boston, Massachusettes.
(99)(b) Financial Statements of DW
Michelson Associates, owner of the Michelson
office buildings located in Irvine, California.
E-3
[ARTICLE] 5
[LEGEND]
Registrant is a limited partnership which invests in real estate,
participating mortgage loans, and real estate joint ventures. In
accordance with industry practice, its balance sheet is unclassified. For
full information, refer to the accompanying audited financial statements.
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] DEC-31-1997
[CASH] 2,680,667
[SECURITIES] 0
[RECEIVABLES] 610,473
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 0
[DEPRECIATION] 0
[TOTAL-ASSETS] 42,328,088<F1>
[CURRENT-LIABILITIES] 0
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 0
[OTHER-SE] 42,036,614<F2>
[TOTAL-LIABILITY-AND-EQUITY] 42,328,088<F3>
[SALES] 0
[TOTAL-REVENUES] 3,359,076<F4>
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 1,617,823
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 1,741,253
[INCOME-TAX] 0
[INCOME-CONTINUING] 1,741,253
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1,741,253
[EPS-PRIMARY] 9.05<F5>
[EPS-DILUTED] 0
<FN>
<F1>In addition to cash and receivables, total assets include net investments
in building and improvements of $6,093,337, investment in unconsolidated
partnerships of $32,650,908 and net deferred expenses of $292,703.
<F2>Represents partners' capital.
<F3>Liabilities include accounts payable and other liabilities of $193,555 and
security deposits of $97,919.
<F4>Total revenue includes rent of $1,564,070, interest on participating
mortgage loan of $503,707, equity in earnings of unconsolidated partnerships
of $1,125,625 and other revenue of $165,674.
<F5>Represents net income per Unit of limited partnership interest.
</FN>
</TABLE>
5
GCGA LIMITED PARTNERSHIP
Financial Statements
For the year ended December 31, 1997
Independent Auditors' Report
Independent Auditors' Report
To the Partners of
GCGA Limited Partnership
We have audited the accompanying balance sheet of GCGA
Limited Partnership (the "Partnership") as of December 31,
1997 and the related statements of operations, changes in
partners' capital deficiency, and cash flows for the year
then ended. These financial statements are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in
all material respects, the financial position of GCGA
Limited Partnership as of December 31, 1997 and the results
of its operations and its cash flows for the year then ended
in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
/s/ Deloitte & Touche,
LLP
New York, New York
March 24, 1998
<TABLE>
GCGA LIMITED PARTNERSHIP
Balance Sheet
December 31, 1997
<CAPTION>
Assets
<S> <C>
Real estate, at cost:
Land $
4,892,336
Building and improvements
70,951,977
75,844,313
Accumulated depreciation
(15,923,007)
59,921,306
Cash
2,117,296
Escrow deposits
772,378
Accounts receivable
4,975,179
Deferred costs, net of accumulated amortization of $465,584
258,342
Other assets
210,190
$
68,254,691
Liabilities and Partners' Capital Deficiency
Liabilities:
First mortgage loan $
37,750,000
Second mortgage loan and accrued interest
72,148,266
Note payable
2,514,255
Accounts payable and other liabilities
521,762
112,934,283
Partners' capital deficiency
(44,679,592)
$
68,254,691
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GCGA LIMITED PARTNERSHIP
Statement of Operations
Year ended December 31, 1997
<CAPTION>
<S>
<C>
Revenue:
Rental
$11,498,722
Interest and other
238,937
11,737,659
Expenses:
Interest
11,805,253
Property operating
3,638,939
Depreciation
1,774,048
Amortization
166,095
General and administrative
1,436,737
18,821,072
Net loss
$(7,083,413)
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GCGA LIMITED PARTNERSHIP
Statement of Changes in Partners' Capital Deficiency
Year ended December 31, 1997
<CAPTION>
<S>
<C>
Partners' capital deficiency at December 31, 1996
$(37,719,179)
Contributions
200,000
Distributions
(77,000)
Net loss
(7,083,413)
Partners' capital deficiency at December 31, 1997
$(44,679,592)
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GCGA LIMITED PARTNERSHIP
Statement of Cash Flows
Year ended December 31, 1997
<CAPTION>
<S>
<C>
Cash flows from operating activities:
Net loss
$(7,083,413)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Interest accrual on second mortgage loan in excess of cash
payments 6,856,266
Depreciation and amortization
1,940,143
Increase in operating assets:
Escrow deposits
(188,802)
Other assets
(98,627)
Accounts receivable
(36,403)
Deferred costs
(29,417)
Decrease in accounts payable and other liabilities
(92,377)
Net cash provided by operating activities
1,267,370
Cash flows from financing activities:
Partner contributions
200,000
Repayment of note payable
(80,571)
Partner distributions
(77,000)
Net cash provided by financing activities
42,429
Increase in cash
1,309,799
Cash at beginning of year
807,497
Cash at end of year $
2,117,296
Supplemental disclosure of cash paid during the year for interest
$ 4,948,987
See accompanying notes to financial statements.
</TABLE>
GCGA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997
1. Organization
GCGA Limited Partnership (the "Partnership") is a limited
partnership organized under the laws of the Commonwealth of
Massachusetts. The Partnership is the sole beneficiary of
the Government Center Garage Realty Trust (the "Trust")
which owns One Congress Street (the "Property"), an 11-story
structure containing approximately 246,000 square feet of
office space, 37,000 square feet of retail space and a
2,200-space parking garage, located in Boston,
Massachusetts.
Prior to October 27, 1997, the partners of the Partnership
were Government Center Garage Associates Limited Partnership
("GCA"), which owned a 1% general partnership interest and a
98% limited partnership interest, and an individual
affiliated with the developer of the Property who owned a 1%
limited partnership interest.
In October 1996, the Partnership defaulted on its second
mortgage loan by failing to timely pay its debt service.
Thereafter, the second mortgage lender (Dean Witter Realty
Yield Plus, L.P. ("Yield Plus") and Dean Witter Yield Realty
Plus II, L.P. ("Yield Plus II"), collectively, the "Lender")
accelerated the loan and attempted to take possession of the
property. On October 15, 1996, the Partnership and the
Trust filed a voluntary petition for relief under Chapter 11
of Title 11 of the United States Code in the United States
Bankruptcy Court for the District of Maryland (the
"Bankruptcy Court"). While in bankruptcy, the Partnership
operated as a debtor-in-possession, whereby the Partnership
could not engage in transactions outside of the ordinary
course of business without approval of the Bankruptcy Court,
after notice and hearing.
On October 27, 1997, the Partnership entered into a
settlement agreement with the Lender (the "Agreement"). As
part of the Agreement, two new corporations, each of which
are jointly owned by Yield Plus (58%) and Yield Plus II
(42%), became the sole general partners (the "New General
Partners") of the Partnership (with an aggregate 19%
ownership interest) and GCA (with an aggregate 1% ownership
interest). Yield Plus and Yield Plus II have agreed to make
all decisions concerning the Partnership and its property
jointly, and retain an affiliate of the Partnership's
GCGA LIMITED PARTNERSHIP
Notes to Financial Statements
1. Organization (continued)
original general partner as property manager. As part of
the Agreement, the second mortgage loan was also
restructured (see Note 4).
Pursuant to the Agreement, GCA's limited partnership
interest in the Partnership was reduced to 81%.
2. Summary of Significant Accounting Policies
The Partnership's records are maintained on the accrual
basis of accounting for financial reporting and tax
purposes. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Real estate and related improvements are recorded at cost
less accumulated depreciation. Cost includes land and
improvements, direct construction costs, indirect project
costs, and carrying costs, including real estate taxes,
interest and loan costs incurred during the construction
period. Depreciation is recorded on the straight-line
method. Repairs are expensed.
Cash and cash equivalents consist of cash and highly liquid
investments with maturities, when purchased, of three months
or less.
At least annually, and more often if circumstances dictate,
the Partnership evaluates the recoverability of the net
carrying value of the Property and any related assets. As
part of this evaluation, the Partnership assesses, among
other things, whether there has been a significant decrease
in the market value of the Property. If events or
circumstances indicate that the net carrying value of the
Property may not be recoverable, the expected future net
cash flows from the Property are estimated for a period of
approximately five years (or a shorter period if the
Partnership expects that the Property may be disposed of
sooner), along with estimated sales proceeds at the end of
the period.
GCGA LIMITED PARTNERSHIP
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
If the total of these future undiscounted cash flows were
less than the carrying amount of the Property, the Property
would be written down to its fair value as determined (in
some cases with the assistance of outside real estate
consultants) based on discounted cash flows, and a loss on
impairment recognized by a charge to earnings.
Because the determination of fair value is based upon
projections of future economic events such as property
occupancy rates, rental rates, operating cost inflation and
market capitalization rates which are inherently subjective,
the amounts ultimately realized at disposition may differ
materially from the net carrying value as of December 31,
1997. The cash flows used to evaluate the recoverability of
the assets and to determine fair value are based on good
faith estimates and assumptions developed by the New General
Partners. Unanticipated events and circumstances may occur
and some assumptions may not materialize; therefore actual
results may vary from the estimates and the variances may be
material. The Partnership may provide write-downs, which
could be material, in subsequent years if real estate
markets or local economic conditions change.
Deferred expenses primarily consist of origination fees in
connection with the mortgage loans which are amortized over
the applicable loan terms. In 1997, a fully amortized
leasing commission (with an original cost of $2,300,726) was
written off.
Rental income is accrued on a straight-line basis over the
terms of the leases. Accruals in excess of amounts payable
by tenants pursuant to their leases (resulting from rent
concessions or rents which periodically increase over the
term of a lease) are recorded as receivables and included in
other assets.
No provision for income taxes has been made in the financial
statements, since the liability for such taxes is that of
the partners rather than the Partnership.
GCGA LIMITED PARTNERSHIP
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
The accounting policies used for tax reporting purposes
differ from those used for financial reporting as follows:
(a) depreciation is calculated using accelerated methods and
(b) rental income is recognized based on the payment terms
in the applicable leases. The tax basis of the
Partnership's assets and liabilities is approximately $11.9
million lower than the amounts reported for financial
statement purposes at December 31, 1997.
The Financial Accounting Standards Board ("FASB") has
recently issued several new accounting pronouncements.
Statement No. 130, "Reporting Comprehensive Income"
establishes standards for reporting and display of
comprehensive income and its components. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public
business enterprises report information about operating
segments in annual financial statements and requires that
those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosure about products and services, geographic areas,
and major customers. These two standards are effective for
the Partnership's 1998 financial statements, but the
Partnership does not believe that they will have any effect
on the Partnership's computation or presentation of net
income or other disclosures.
The implementation in 1997 of FASB Statement No. 128,
"Earnings per Share" and Statement No. 129, "Disclosure of
Information about Capital Structure" effective for the
Partnership's 1997 year-end financial statements did not
have any impact on the Partnership's financial statements.
3. Partnership Agreement
The Partnership Agreement and subsequent amendments
(the "Agreement") provide that net cash flow, as defined,
generally will be paid to the partners pro rata, in
accordance with their partnership interests.
GCGA LIMITED PARTNERSHIP
Notes to Financial Statements
3. Partnership Agreement (continued)
Net capital proceeds arising from a transaction involving
the disposition of all or substantially all the beneficial
interest in the Trust or property or involving the
liquidation of the Partnership shall be distributed in
accordance with the partners capital accounts, as adjusted,
pursuant to the Agreement.
4. Mortgage Loans Payable
The Trust has a $37,750,000 first mortgage loan payable to a
major insurance company. The loan requires monthly payments
of interest only, payable at 9.39% and matures November 1,
2001. The Partnership incurred and paid interest expense on
this loan of $3,544,725 in 1997.
The Trust also has a participating second mortgage loan
payable to the Lender which is due in 2001. Prior to
October 27, 1997, principal of the loan was $59,200,000,
base interest was payable monthly at 8% and the first
$250,000 of net revenues in any calendar year from the
property was payable as additional interest. The Lender
also owned a 58% interest in adjusted net revenues and
capital proceeds generated by the property.
The Agreement restructured the second mortgage loan as
follows:
(a) Any New Loans (the "New Loans") made by the New General
Partners will bear interest at 12%, payable monthly
from available cash flow generated by the property
after payment of debt service on the first mortgage
loan and certain operating escrows;
(b) the interest rate on the principal and past due
interest on the second mortgage loan (aggregating
approximately $12.3 million) has been increased to 10%,
payable monthly from available cash flow generated by
the property after payment of debt service on any New
Loans;
(c) any future past due debt service will accrue
interest at 10%; and
GCGA LIMITED PARTNERSHIP
Notes to Financial Statements
4. Mortgage Loans Payable (continued)
(d) Yield Plus' and Yield Plus II's interest in adjusted
net revenue and capital proceeds generated by the
property was increased to 80%.
The Partnership incurred interest expense on the second
mortgage loan of $8,036,377 in 1997.
The fair values of the first and second mortgage loans
payable are approximately equal to their carrying values.
The fair values are estimated by discounting future
principal and interest payments using current lending rates
and market conditions for instruments with similar
maturities and credit quality.
5. Note Payable
At the inception of the parking garage lease with Kinney
System of Sudbury St., Inc., a wholly-owned subsidiary of
Kinney System, Inc., the lessee granted a $3,000,000 loan to
the Partnership, which is payable in monthly payments of
$26,350, which includes interest at 10 percent per annum.
The lease provides for supplemental rental payments to the
Partnership of $26,350 per month to cover loan principal and
interest payments. These amounts are included in rental
income. The lease also provides that the unpaid principal
of the loan may be forgiven if certain conditions described
in the note agreement are met. Interest expense incurred on
this loan in 1997 was approximately $204,000.
6. Leases
Minimum future rental income under noncancelable operating
leases as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Year ended December 31 Future minimum rentals
<S> <C> <C>
1998 8,953,590
1999 9,450,442
2000 9,514,015
2001 9,891,276
2002 9,956,770
Thereafter 13,223,129
$60,989,222
</TABLE>
GCGA LIMITED PARTNERSHIP
Notes to Financial Statements
6. Leases (continued)
The Partnership has determined that all leases relating to
its properties are operating leases. Lease terms range from
nine to twenty years.
7. Related-Party Transactions
The Property is managed by an affiliate of its developer.
During 1997, the affiliate earned $123,597 in management
fees. This expense is included in property operating
expenses.
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Financial Statements
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Partners
GCGA Limited Partnership (Debtor-in-Possession):
We have audited the accompanying balance sheets of GCGA
Limited Partnership (debtor-in-possession) as of
December 31, 1996 and 1995, and the related statements of
operations, changes in partners' deficit, and cash flows for
each of the years in the three-year period ended
December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of GCGA Limited Partnership (debtor-in-possession)
as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Partnership will continue as a going
concern. As discussed in note 1, the Partnership filed a
voluntary petition for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States
Bankruptcy Court (the Bankruptcy Court) on October 15, 1996.
As discussed in note 4 to the financial statements, the
Partnership's first and second mortgage loans are in
default. As discussed in note 5 to the financial
statements, substantially all of the leases on office and
retail space will expire in 1997. These matters raise
substantial doubt about the Partnership's ability to
continue as a going concern. The Partnership is currently
operating its business as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court, and continuation of
the Partnership as a going concern is contingent upon its
ability to formulate a plan of reorganization that will be
confirmed by the Bankruptcy Court, including restructuring
its existing long-term debt arrangements. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
KPMG Peat Marwick, LLP
/s/KPMG Peat Marwick, LLP
Wasington, D.C.
April 18, 1997 except for note 7
which is dated October 27, 1997
<TABLE>
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Balance Sheets
December 31, 1996 and 1995
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Real estate, at cost (notes 4 and 5):
Land $
4,892,336 $ 4,892,336
Building and improvements 70,946,012
70,934,457
Furniture and equipment 5,965
5,965
75,844,313
75,832,758
Accumulated depreciation 14,148,959
12,369,304
61,695,354
63,463,454
Cash
807,497 435,732
Escrow deposits (note 1) 583,576
75,673
Accounts receivable - tenants (note 2) 4,938,776
5,432,364
Deferred costs, net of accumulated amortization of
$2,600,215 in 1996 and $2,153,009 in 1995 395,020
838,803
Due from general partner 97,379
119,976
Other assets 14,184
17,625
$ 68,531,786 $
70,383,627
Liabilities and Partners' Deficit
Liabilities:
First mortgage loan (note 4) $ 37,750,000 $
37,750,000
Second mortgage loan (note 4) 59,200,000
59,200,000
Note payable - Kinney System of Sudbury St., Inc. (note 5)
2,594,826 2,631,260
Related party loan (note 6) -
219,094
Deferred rental revenue 102,981
257,454
Accounts payable and accrued expenses 6,603,158
813,443
Total liabilities 106,250,965
100,871,251
Partners' deficit (note 3) (37,719,179)
(30,487,624)
Contingencies (notes 4 and 5)
$ 68,531,786 $
70,383,627
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C>
<C>
Revenue:
Rental (including escalation income of
$1,844,629 in 1996, $1,846,475 in 1995,
and $2,065,462 in 1994 $13,064,483
$12,986,313 $12,425,230
Supplemental rent (note 5) 316,200
316,200 316,200
Interest and other 63,455
102,906 27,595
Total revenue 13,444,138
13,405,419 12,769,025
Expenses:
Interest (notes 4 and 5) 13,174,287
8,559,012 8,430,761
Depreciation 1,779,655
1,779,558 1,779,558
Amortization 447,206
453,135 476,211
Real estate taxes 2,846,875
2,821,441 2,782,248
Utilities 734,805
737,485 656,224
General and administrative 941,627
1,081,944 1,309,469
Management fee (note 6) 351,238
353,425 282,607
Total expenses 20,275,693
15,786,000 15,717,078
Net loss $(6,831,555)
$(2,380,581) $(2,948,053)
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Statements of Changes in Partners' Deficit
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
General Limited
Partners Partners Total
<S> <C> <C>
<C>
Partners' deficit at December 31, 1994 $(2,270,416)
$(25,836,627) $(28,107,043)
Net loss (23,806)
(2,356,775) (2,380,581)
Partners' deficit at December 31, 1995 (2,294,222)
(28,193,402) (30,487,624)
Partner distributions (4,000)
(396,000) (400,000)
Net loss (68,316)
(6,763,239) (6,831,555)
Partners' deficit at December 31, 1996 $(2,366,538)
$(35,352,641) $(37,719,179)
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
1996
1995 1994
<S> <C> <C>
<C>
Cash flows from operating activities:
Net loss $(6,831,555)
$(2,380,581) $(2,948,053)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,226,861
2,232,693 2,255,769
Decrease (increase) in:
Escrow deposits (507,903)
21,375 196,630
Accounts receivable-tenants 493,588
377,720 (357,888)
Deferred costs (3,423)
(22,342) (434,528)
Due from general partner 22,597
(20,793) (8,293)
Other assets 3,441
(4,415) (1,148)
Increase (decrease) in:
Accounts payable and accrued expenses 5,789,715
(187,478) (89,150)
Deferred rental revenue (154,473)
(154,473) (652,010)
Net cash provided by (used in) operating
activities 1,038,848
(138,294) (2,038,671)
Cash flows from investing activities - investment in
real estate (11,555) -
(151,103)
Cash flows from financing activities:
Proceeds of second mortgage loan - 393,258
1,319,809
Proceeds of related party loan - 139,094
80,000
Repayment of related party loan (219,094) -
- -
Partner distributions (400,000) -
- -
Repayment of notes payable to Kinney Systems (36,434)
(50,310) (45,542)
Net cash provided by (used in) financing
activities (655,528)
482,042 1,354,267
Increase (decrease) in cash 371,765
343,748 (835,507)
Cash at beginning of year 435,732
91,984 927,491
Cash at end of year $ 807,497 $
435,732 $ 91,984
Supplemental disclosure of cash paid during the year
for interest $ 7,398,731 $
8,548,352 $ 8,416,486
See accompanying notes to financial statements.
</TABLE>
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
December 31, 1996, 1995, and 1994
1. Organization
GCGA Limited Partnership (the Partnership) is a limited
partnership organized under the laws of the Commonwealth of
Massachusetts. Since September 20, 1993, the partners of
the Partnership are Government Center Garage Associates
Limited Partnership (GCA), which owns a 1 percent general
partnership interest and a 98 percent limited partnership
interest, and Richard Rubin, who owns a 1 percent limited
partnership interest.
The Partnership is the sole beneficiary of Government Center
Garage Realty Trust (the Trust) which owns One Congress
Street (the Property), an 11-story structure containing
approximately 260,000 square feet of office and retail space
in addition to a 2,200-space parking garage, located in
Boston, Massachusetts.
On October 15, 1996, the Partnership and the Trust filed a
voluntary petition for relief under Chapter 11 ("Chapter
11") of Title 11 of the United States Code in the United
States Bankruptcy Court for the District of Maryland (the
Bankruptcy Court). The Partnership is presently operating
its business as debtor-in-possession under the jurisdiction
of the Bankruptcy Court and intends to propose a plan of
reorganization pursuant to Chapter 11. As
debtor-in-possession, the Partnership may not engage in
transactions outside of the ordinary course of business
without approval of the Bankruptcy Court, after notice and
hearing. Since the Chapter 11 filing on October 15, 1996,
the Partnership continued discussions with the holder of its
second mortgage loan relating to restructuring alternatives.
As described in note 4, the general partner in GCA filed a
voluntary petition under Chapter 11 of the Bankruptcy Code.
This constitutes a technical event of default under the
first and second mortgage loans. The lenders' remedies
include accelerating the maturity date and demanding
immediate payment of the loans.
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
1. Organization (continued)
At December 31, 1996, 62 percent of the office building and
retail rental space and 100 percent of the garage space is
under lease. The current occupancy level has caused a
significant decrease in the Partnership's cash flow from
operations. As a result of the decrease in cash flow, the
Partnership was delinquent in making the October 1, 1996
payment on its second mortgage loan. Due to this
delinquency, the second mortgagor filed for receivership of
the assets of the Partnership on October 15, 1996. These
events led to the Partnership's decision to file for
protection under Chapter 11 to enable the Partnership to
restructure its financial arrangements under the
jurisdiction of the Bankruptcy Court.
The liabilities subject to compromise at October 15, 1996
are comprised primarily of the second mortgage loan and
related accrued interest. These liabilities and other
operating liabilities are subject to adjustment in the
reorganization process. Under Chapter 11, actions to
enforce certain claims against the Partnership are stayed if
the claims arose, or are based on events that occurred, on
or before the petition date of October 15, 1996. The
ultimate terms of settlement of these liabilities and claims
will be determined in accordance with a plan of
reorganization which requires the approval of impaired
prepetition creditors and confirmation by the Bankruptcy
Court. Other liabilities may arise or be subject to
resolution of claims for contingencies and other disputed
amounts. The ultimate resolution of such liabilities will
be part of reorganization.
In conjunction with the Partnership's bankruptcy filing,
certain utility companies required cash deposits for
continued service to the building. Escrow deposits as of
December 31, 1996 include $70,310 in funds held by these
utility companies.
The accompanying financial statements have been presented on
the basis that the Partnership is a going concern, which
contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As a
result of the Chapter 11 filing and circumstances relating
to this event, realization of assets and
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
1. Organization (continued)
satisfaction of liabilities is subject to uncertainty. A
plan of reorganization could materially change the amounts
reported in the accompanying financial statements, which may
be necessary as a consequence of a plan of reorganization.
The ability of the Partnership to continue as a going
concern is dependent on, among other things, confirmation of
an acceptable plan of reorganization.
See the subsequent event in note 7.
2. Summary of Significant Accounting Policies
Basis of Accounting
The Partnership uses the accrual basis of accounting for
financial reporting purposes in conformity with generally
accepted accounting principles. The preparation of
financial statements in conformity with generally accepted
accounting principles requires the use of management
estimates that affect certain reported amounts and
disclosures. Actual results could differ from those
estimates.
Real Estate
Real estate and related improvements are recorded at cost
less accumulated depreciation and amortization. Cost
includes land and improvements, direct construction costs,
indirect project costs, and carrying costs, including real
estate taxes, interest and loan costs incurred during the
construction period.
Depreciation is recorded on the straight-line basis over the
estimated useful lives of the assets: building and building
improvements, 40 years; furniture and equipment, 15 years.
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Rental Revenue
Rental revenue is recognized on a straight-line basis over
the life of the respective leases. The cumulative excess of
rental revenue recognized on a straight-line basis over
contract rents is included in accounts receivable. As of
December 31, 1996 and 1995, such amounts included in
accounts receivable were $4,434,976 and $4,722,299,
respectively. The cumulative excess of contract rents over
rental revenue recognized on a straight-line basis is
recorded as deferred rental revenue.
Deferred Costs
Loan costs related to the mortgage payable have been
capitalized and are being amortized over the term of the
mortgage.
Lease commission expenses incurred have been capitalized and
are amortized on a straight-line basis over the lives of the
respective leases.
Leasehold improvements have been capitalized and are
amortized on a straight-line basis over the lives of their
respective leases.
Income Taxes
No provision for income taxes has been made in the financial
statements because the partners report any income or loss
for tax purposes on their tax returns.
3. Partnership Agreement
The Partnership Agreement and subsequent amendments
(the Agreement) provide that net cash flow, as defined in
the Agreement, generally will be paid to the partners
prorata, in accordance with each of their partnership
interests.
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
3. Partnership Agreement (continued)
Net capital proceeds, as defined in the agreement, generally
will be distributed to the partners prorata in accordance
with each of their partnership interests. However, net
capital proceeds arising from a transaction involving the
disposition of all or substantially all the beneficial
interest in the Trust or property or involving the
liquidation of the Partnership shall be distributed in
accordance with the partners capital accounts, as adjusted,
pursuant to the Agreement.
4. Mortgage Loans Payable
In October 1989, the Trust obtained a 9.39 percent fixed
rate first mortgage loan for $37,750,000 from a major
insurance company. The loan requires monthly payments of
interest only and matures November 1, 2001. Interest
expense incurred on this loan was $3,544,725 in 1996, 1995
and 1994.
In April 1989, the Trust also obtained a $57.7 million
second mortgage construction and permanent loan commitment
from Dean Witter Realty Yield Plus, L. P. and Dean Witter
Realty Yield Plus II, L.P. (the Lenders). Subsequently, the
commitment was increased to $59.2 million to fund certain
costs incurred to accelerate the completion of the
construction.
In August 1990, the second mortgage construction and
permanent loan commitment was converted to a permanent
second mortgage loan. Base interest is payable monthly at
8 percent. The second mortgage loan matures November 1,
2001. The Partnership is delinquent on its October 1, 1996
and subsequent months interest payments. As a result, the
Partnership incurred a one-time default interest charge of
7 percent. In addition, interest is accruing at the default
rate of 13 percent beginning September 1, 1996. At
December 31, 1996 accrued interest on the second mortgage
loan amounted to $6,092,000. Interest expense incurred on
this loan for 1996, 1995 and 1994 was $9,357,983, $4,734,619
and $4,614,996, respectively.
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
4. Mortgage Loans Payable (continued)
The second mortgage loan was modified on September 20, 1993.
Under the loan modification, the Lenders and the Trust
agreed to increase the amount of "Additional Interest"
payable to the Lenders under the second mortgage loan by
(i) providing for the payment of the first $250,000 of
adjusted gross receipts in any calendar year as additional
interest, and (ii) increasing the additional interest from
adjusted gross receipts and net capital proceeds of the
Property, after payment of the first $250,000, from
37 percent to 58 percent. No additional interest was due to
the Lenders at December 31, 1996, 1995 and 1994.
In conjunction with the loan modification and changes in
partnership interests on September 20, 1993, an existing
operating deficit guaranty of the former general partners
was released by the Lenders.
In August 1991, the general partner of GCA filed a voluntary
petition under Chapter 11 of the Bankruptcy Code. In
September 1993, this general partner's interest was
converted to a limited partnership interest. In June 1996,
this limited partnership interest was placed in a trust for
the benefit of the partner's creditors. The above matter
constitutes a technical event of default under the first and
second mortgage loans. Therefore, the loans may be called
at any time. See notes 1 and 7.
As a result of the partnership's reorganization proceedings,
the repayment terms of the mortgage loans payable will be
determined pursuant to a plan of reorganization confirmed by
the Bankruptcy Court. See note 7.
5. Leases
The Partnership's rental real estate consists of an 11-story
structure containing a 2,200 space parking garage and
approximately 260,000 square feet of office and retail space
available for lease. As of December 31, 1996, approximately
62 percent of the office and retail rental space and
100 percent of the garage space is under lease. The
following table
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
5. Leases (continued)
summarizes future minimum rents under noncancelable
operating leases as of December 31, 1996:
<TABLE>
<CAPTION>
Year ended December 31 Future minimum rentals
<S> <C> <C>
1997 $ 7,991,683
1998 4,130,449
1999 4,335,515
2000 4,402,455
2001 4,457,757
Thereafter 8,948,779
$34,266,638
</TABLE>
The building has one tenant that comprises approximately 61
percent of the total leaseable office and retail space and
60 percent of total building cash rents paid during 1996.
This tenant's lease is scheduled to expire in 1997.
The parking garage is master-leased to Kenney System of
Sudbury St., Inc., a wholly owned subsidiary of Kinney
System, Inc., under a lease agreement which expires in
December 2003. The lease is a triple-net lease with two
five-year options at fair market value.
At the inception of the lease, the lessee granted a
$3,000,000 loan to the Partnership, which is payable in
monthly payments of $26,350, which include interest at
10 percent per annum. As of December 31, 1996 and 1995, the
balance outstanding was $2,594,826 and $2,631,260,
respectively. The lease provides for supplemental rental
payments to the Partnership of $26,350 per month to cover
loan principal and interest payments. These amounts are
recorded as supplemental rent. The lease also provides that
the unpaid principal of the loan may be forgiven if certain
conditions, as more fully described in the note agreement,
are met. Interest expense incurred on this loan for 1996,
1995, and 1994 was $271,579, $266,785, and $271,040,
respectively.
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
6. Related-Party Transactions
The Property is managed by an affiliate of the Partnership.
During 1996, 1995 and 1994, the affiliate earned $351,238,
$353,425, and $282,607, respectively, in management fees.
In November 1994, the Partnership obtained an $80,000 short-
term loan from an affiliate. This non-interest bearing loan
was repaid in January 1995. In March 1995, the Partnership
obtained a $205,000 loan from another affiliate. This loan
accrued interest at a fixed rate of 9 percent. Principal and
accrued interest on this loan were repaid in July 1996.
7. Subsequent Event
On October 27, 1997, Bankruptcy Court authorized the
dismissal of the Partnership's and the Trust's (the Debtors)
bankruptcy cases upon implementation of a Settlement
Agreement among the Debtors, the Lenders and the limited
partners of GCA. Under the terms of the Settlement
Agreement the above parties agreed to restructure the
Partnership as follows:
GCA shall withdraw as the sole general partner of the
Partnership and Richard Rubin shall withdraw as the
sole general partner of GCA.
The Lenders shall become the new general partner of the
Partnership and GCA.
The Lenders shall receive 19 percent partnership
interest in the Partnership and a one percent
partnership interest in GCA (which shall receive the
remaining 81 percent interest in the Partnership).
GCGA LIMITED PARTNERSHIP
(Debtor-in-Possession)
Notes to Financial Statements
7. Subsequent Event
Also under the terms of the Settlement Agreement, the above
parties agreed to modify the second mortgage loan as
follows:
The Lenders shall provide the Trust with an additional
$3,000,000 for costs in connection with leasing space
in the Property. Any advances would be added to the
second mortgage balance, bear interest at the fixed
rate of 12 percent per annum and be repaid out of the
first funds available from the Property's cash flows as
defined in the Settlement Agreement.
The interest rate on the existing second mortgage
balance will be changed to a fixed rate of 10 percent
per annum, but cash payments would be limited to the
available cash flow as defined in the Settlement
Agreement. Accrued but unpaid interest will be added
to principal on a monthly basis.
The Lender's interest in the cash flow of the Property
will be increased to 80 percent and the Partnership's
interest in the cash flow of the Property will be
reduced to 20 percent.
The Settlement Agreement also provides for the payment, in
full, of certain pre-petition and post-petition claims
against various debtors.
9
DW MICHELSON ASSOCIATES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
To the Partners of
DW Michelson Associates
We have audited the accompanying consolidated balance sheets of
DW Michelson Associates and consolidated partnership (the
"Partnership") as of December 31, 1997 and 1996, and the related
consolidated statements of income, partners' capital, and cash
flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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, such consolidated financial statements present
fairly, in all material respects, the financial position of DW
Michelson Associates and consolidated partnership as of December
31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted
accounting principles.
New York, New York
March 24, 1998
<TABLE>
DW MICHELSON ASSOCIATES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
1997 1996
<S> <C>
<C>
ASSETS
Cash and cash equivalents $ 394,740 $
107,262
Real estate held for sale 36,917,242
- -
Real estate, at cost:
Land -
4,080,416
Buildings and improvements -
44,603,252
-
48,683,668
Accumulated depreciation -
10,293,558
-
38,390,110
Deferred leasing commissions, net 797,701
763,736
Other assets 470,061
629,831
$38,579,744
$39,890,939
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities $ 350,749 $
398,490
Partners' capital 38,228,995
39,492,449
$38,579,744
$39,890,939
See accompanying notes to financial statements.
</TABLE>
<TABLE>
DW MICHELSON ASSOCIATES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
<S> <C> <C>
<C>
Revenue:
Rental $6,814,131 $6,600,303
$6,181,349
Interest and other 110,244 41,640
289,477
6,924,375 6,641,943
6,470,826
Expenses:
Property operating 2,531,246 2,128,564
1,641,804
Depreciation 1,883,379 2,022,826
1,928,929
Amortization 225,263 187,750
222,307
General and administrative 290,837 286,382
271,690
Other 95,239
91,720 241,303
5,025,964 4,717,242
4,306,033
Net income $1,898,411 $1,924,701
$2,164,793
See accompanying notes to financial statements.
</TABLE>
<TABLE>
DW MICHELSON ASSOCIATES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
Dean Witter Dean Witter
Realty Yield Realty
Yield
Plus, L.P. Plus II, L.P.
Total
<S> <C> <C>
<C>
Partners' capital at January 1, 1995 $21,012,719
$19,833,854 $40,846,573
Net income 1,099,931 1,064,862
2,164,793
Capital contributions 499,720 489,992
989,712
Distributions (1,874,089)
(1,821,753) (3,695,842)
Partners' capital at December 31, 1995 20,738,281
19,566,955 40,305,236
Net income 977,940 946,761
1,924,701
Capital contributions 982,906 949,483
1,932,389
Distributions (2,372,764)
(2,297,113) (4,669,877)
Partners' capital at December 31, 1996 20,326,363
19,166,086 39,492,449
Net income 964,583 933,828
1,898,411
Capital contributions 340,294 329,445
669,739
Distributions (1,946,838)
(1,884,766) (3,831,604)
Partners' capital at December 31, 1997 $19,684,402
$18,544,593 $38,228,995
See accompanying notes to financial statements.
</TABLE>
<TABLE>
DW MICHELSON ASSOCIATES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
<S> <C> <C>
<C>
Cash flows from operating activities:
Net income $ 1,898,411 $
1,924,701 $ 2,164,793
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,883,379
2,022,826 1,928,929
Amortization 225,263
187,750 222,307
(Increase) decrease in operating assets:
Deferred expenses (259,228)
(57,531) (567,380)
Other assets 159,770
139,762 (320,224)
(Decrease) increase in accounts payable
and accrued liabilities (47,741)
149,162 25,954
Net cash provided by operating
activities 3,859,854
4,366,670 3,454,379
Cash flows from investing activities:
Additions to real estate (410,511)
(1,871,747) (421,083)
Cash flows from financing activities:
Cash distributions (3,831,604)
(4,669,877) (3,695,842)
Capital contributions 669,739
1,932,389 989,712
Net cash used in financing activities (3,161,865)
(2,737,488) (2,706,130)
Increase (decrease) in cash and cash equivalents
287,478 (242,565) 327,166
Cash and cash equivalents at beginning of year
107,262 349,827 22,661
Cash and cash equivalents at end of year $ 394,740 $
107,262 $ 349,827
Supplement disclosure of non-cash investing
activities:
Reclassification of real estate held for sale
Decrease in real estate, at cost:
Land $ 4,080,416 $
- - $ -
Building and improvments 45,013,763 -
- -
Accumulated depreciation (12,176,937) -
- -
Increase in real estate held for sale $ 36,917,242 $
- - $ -
See accompanying notes to financial statements.
</TABLE>
DW MICHELSON ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Organization
DW Michelson Associates (the "Partnership") was formed in March
1988 as a General Partnership under the laws of the state of
California to make a participating mortgage loan to Michelson
Company Limited Partnership (the "Company"), the owner of three
office buildings and underlying land located in Irvine, CA (the
"Property"). In 1990, the Company defaulted on the loan, and, in
1991, the Partnership acquired a 90% general partnership interest
in the Company; the remaining 10% limited partnership interest is
owned by SC Enterprises ("SC"), an affiliate of the developer of
the Property. After a preferred return to the Partnership,
profits and cash flow shall be allocated 90% to the Partnership
and 10% to SC. Losses are allocated 100% to the Partnership.
Through December 31, 1997, the Company has not generated cash
flow and profits to satisfy the preferred return to the
Partnership; accordingly, no profits or cash flow have been
allocated to SC.
The General Partners of the Partnership are Dean Witter Realty
Yield Plus, L.P. (50.81%) and Dean Witter Realty Yield Plus II,
L.P. (49.19%).
The Partnership Agreement provides that all cash flow, profits,
losses and credits of the Partnership shall be allocated to the
Partners' in proportion to their interests.
Subsequent to December 31, 1997, the Partnership entered into an
agreement with SC to sell the Property and two promissory notes
totaling approximately $1.1 million (see Note 3), for a sales
price of approximately $64 million. Subsequently, SC assigned
its right to purchase the Property to an unaffiliated party.
2. Summary of Significant Accounting Policies
The financial statements include the accounts of the Partnership
and the Company on a consolidated basis.
The Partnership's records are maintained on the accrual basis of
accounting for financial reporting and tax purposes. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date
DW MICHELSON ASSOCIATES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
2. Summary of Significant Accounting Policies (continued)
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Real estate, which was acquired in settlement of the loan, was
recorded at the estimated fair value of the property at the date
of foreclosure. Costs of improvements to the Property are
capitalized and repairs are expensed. Depreciation is recorded
on the straight-line method.
Cash and cash equivalents consist of cash and highly liquid
investments with maturities, when purchased, of three months or
less.
At least annually, and more often if circumstances dictate, the
Partnership evaluates the recoverability of the net carrying
value of the Property and any related assets. As part of this
evaluation, the Partnership assesses, among other things, whether
there has been a significant decrease in the market value of the
Property. If events or circumstances indicate that the net
carrying value of the Property may not be recoverable, the
expected future net cash flows from the Property are estimated
for a period of approximately five years (or a shorter period if
the Partnership expects that the Property may be disposed of
sooner), along with estimated sales proceeds at the end of the
period. If the total of these future undiscounted cash flows
were less than the carrying amount of the Property, the Property
would be written down to its fair value as determined (in some
cases with the assistance of outside real estate consultants)
based on discounted cash flows, and a loss on impairment
recognized by a charge to earnings.
Because the determination of fair value is based upon projections
of future economic events such as property occupancy rates,
rental rates, operating cost inflation and market capitalization
rates which are inherently subjective, the amounts ultimately
realized at disposition may differ materially from the net
carrying value as of December 31, 1997. The cash flows used to
evaluate the recoverability of the assets and to determine fair
value are based on good faith estimates and assumptions developed
by the partners.
Unanticipated events and circumstances may occur and some
assumptions may not materialize; therefore actual results may
vary from the estimates and the variances may be material. The
Partnership may provide write-downs, which
DW MICHELSON ASSOCIATES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
2. Summary of Significant Accounting Policies (continued)
could be material, in subsequent years if real estate markets or
local economic conditions change.
Deferred leasing commissions are amortized over the applicable
lease terms.
Rental income is accrued on a straight-line basis over the terms
of the leases. Accruals in excess of amounts payable by tenants
pursuant to their leases (resulting from rent concessions or
rents which periodically increase over the term of a lease) are
recorded as receivables and included in other assets.
No provision for income taxes has been made in the financial
statements since the liability for such taxes is that of the
partners rather than the Partnership.
The accounting policies used for tax reporting purposes differ
from those used for financial reporting purposes. For tax
purposes, the Company is not consolidated, and the Property is
not treated as real estate owned by the Partnership. The
Partnership recognizes its share of the Company's taxable income
(which is net of interest expense on the participating mortgage
loan which is still outstanding). For tax purposes, the
Partnership also continues to recognize taxable interest income
on its loan. The policies used by the Company to account for
property operations for tax reporting purposes differ from those
used by the Partnership for financial reporting purposes as
follows: (a) depreciation is calculated using accelerated
methods, (b) rental income is recognized based on the payment
terms in the applicable leases, and (c) write-downs for
impairments of real estate and the participating mortgage loan
are not deductible. The tax basis of the Partnership's assets
and liabilities is approximately $27.5 million higher than the
amounts reported for financial statement purposes at December 31,
1997.
The Financial Accounting Standards Board ("FASB") has recently
issued several new accounting pronouncements. Statement 130,
"Reporting comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components.
Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" establishes standards for the way that
public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information
DW MICHELSON ASSOCIATES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
2. Summary of Significant Accounting Policies (continued)
about operating segments in interim financial reports issued to
shareholders. It also establishes standards of related disclosure
about products and services, geographic areas, and major
customers. These two standards are effective for the
Partnership's 1998 financial statements, but the Partnership does
not believe that they will have any effect on the Partnership's
computation or presentation of net income or other disclosures.
The implementation in 1997 of FASB Statement No. 128, "Earnings
per Share" and Statement No. 129, "Disclosure of Information
about Capital Structure" effective for the Partnership's 1997
year-end financial statements did not have any impact on the
Partnership's financial statements.
3. Related Party Transactions
An affiliate of the partners provides property management
services to the Property. For the years ended December 31, 1997,
1996 and 1995, the affiliate received property management fees of
$183,647, $188,428 and $161,258, respectively. These amounts are
included in property operating expenses. As of December 31,
1997, the affiliate was owed a total of approximately $17,000 for
these services.
The general partners of SC are obligated to the Partnership on
two promissory notes totaling approximately $1.1 million. The
notes (which originated in 1991) are due December 31, 1999, bear
interest at 8.5% per annum and require monthly payments of
approximately $15,000. Because of the uncertainty of their
realization, the principal amounts of these notes were not
recognized in the financial statements. Payments of the
promissory notes are included in other income when received.
4. Contingency
The Property may have certain soil and water contamination. The
Partnership believes that any such contamination is minor and
that liability for cleanup if any, will be minimal.
