UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THEx
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17691
Krupp Insured Plus-III Limited Partnership
Massachusetts 04 - 3007489
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
470 Atlantic Avenue, Boston, Massachusetts 02210
(Address of principal executive offices) (Zip Code)
(617) 423-2233
(Registrant's telephone number, including area code)
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
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of
factors, including those identified herein.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
<TABLE>
BALANCE SHEETS
<PAGE>
ASSETS
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Participating Insured Mortgages ("PIMs")
(Note 2) $151,043,449 $151,465,652
Mortgage-Backed Securities and insured
mortgages ("MBS")(Note 3) 34,185,042 36,693,963
Total mortgage investments 185,228,491 188,159,615
Cash and cash equivalents 4,511,531 3,433,885
Interest receivable and other assets 1,284,605 1,924,402
Prepaid acquisition expenses and fees, net of
accumulated amortization of $6,681,531 and
$6,091,012, respectively 5,649,532 6,240,051
Prepaid participation servicing fees, net of
accumulated amortization of $2,270,498 and
$2,084,200, respectively 1,816,034 2,002,332
Total assets $198,490,193 $201,760,285
LIABILITIES AND PARTNERS' EQUITY
Liabilities $ 9,019 $ 14,756
Partners' equity (deficit) (Note 4):
Limited Partners 198,448,621 200,575,459
(12,770,261 Limited Partner interests
outstanding)
General Partners (131,618) (102,556)
Unrealized gain on MBS 164,171 1,272,626
Total Partners' equity 198,481,174 201,745,529
Total liabilities and Partners' equity $198,490,193 $201,760,285
</TABLE>
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
<TABLE>
STATEMENTS OF INCOME
For the Three Months For the Six Months
<CAPTION>
Ended June 30, Ended June 30,
1996 1995 1996 1995
Revenues:
Interest income - PIMs:
<S> <C> <C> <C>
Base interest $2,916,924 $3,095,380 $5,837,998 $6,139,329
Participation interest - 435,077 - 435,077
Interest income - MBS 684,368 727,278 1,382,770 1,444,302
<PAGE>
Interest income - other 55,176 53,329 102,346 100,333
Total revenues 3,656,468 4,311,064 7,323,114 8,119,041
Expenses:
Asset management fee to
an affiliate 345,779 352,879 693,281 703,117
Expense reimbursements to
affiliates 38,912 50,142 85,897 100,916
Amortization of prepaid expenses
and fees 388,408 405,609 776,817 811,219
General and administrative 22,534 49,588 60,666 79,823
Total expenses 795,633 858,218 1,616,661 1,695,075
Net income $2,860,835 $3,452,846 $5,706,453 $6,423,966
Allocation of net income (Note 4):
Limited Partners $2,775,010 $3,349,261 $5,535,25 $6,231,247
Average net income per Limited
Partner interest (12,770,261
Limited Partner interests
outstanding) $ .21 $ .26 $ .43 $
.49
General Partners $ 85,825 $ 103,585 $ 171,194 $ 192,719
</TABLE>
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Six Months
Ended June 30,
1996 1995
Operating activities:
<S> <C> <C>
Net income $ 5,706,453 $ 6,423,966
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of prepaid expenses and fees 776,817 811,219
Changes in assets and liabilities:
Decrease in interest receivable and other assets 639,797 118,939
<PAGE>
Increase (decrease) in liabilities (5,737) 8,308
Net cash provided by operating activities 7,117,330 7,362,432
Investing activities:
Principal collections on PIMs 422,203 447,829
Principal collections on MBS 1,400,466 855,780
Investment in MBS - (312,391)
Net cash provided by investing activities 1,822,669 991,218
Financing activity:
Distributions (7,862,353) (7,864,182)
Net increase in cash and cash equivalents 1,077,646 489,468
Cash and cash equivalents, beginning of period 3,433,885 3,257,180
Cash and cash equivalents, end of period $ 4,511,531 $ 3,746,648
</TABLE>
The accompanying notes are an integral
part of the financial statements.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on
Form 10-Q pursuant to the Rules and Regulations of the Securities and
Exchange Commission. However, in the opinion of the general partners,
Krupp Plus Corporation and Mortgage Services Partners Limited
Partnership, (collectively the "General Partners") of Krupp Insured
Plus-III Limited Partnership (the "Partnership"), the disclosures
contained in this report are adequate to make the information presented
not misleading. See Notes to Financial Statements included in the
Partnership's Form 10-K for the year ended December 31, 1995 for
additional information relevant to significant accounting policies
followed by the Partnership.
In the opinion of the General Partners of the Partnership, the
accompanying unaudited financial statements reflect all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the Partnership's financial position as of June 30, 1996, its
results of operations for the three and six months ended June 30, 1996
and 1995, and its cash flows for the six months ended June 30, 1996 and
1995.
The results of operations for the three and six months ended June 30,
1996 are not necessarily indicative of the results which may be expected
for the full year. See Management's Discussion and Analysis of
Financial Condition and Results of Operations included in this report.
2. PIMs
During May 1996, the Partnership entered into an agreement with the
borrower of the Sundance Apartments PIM that reduces the interest paid
monthly by the borrower by 1% per annum and modifies the participation
features. In addition, under the modified terms, the borrower may
<PAGE>
prepay the first mortgage loan without incurring any prepayment penalty
and will not have to pay any additional interest accumulated prior to
the modification date. Under the agreement, the Partnership will be
entitled to 25% of the surplus cash generated by the operations of the
property on an annual basis beginning with the surplus cash calculation
for the year ended December 31, 1997. In the event of a sale or
refinancing, the Partnership will be entitled to 25% of the net sale
proceeds or, in the case of a refinancing, the greater of: (i) 25% of
the net refinancing proceeds or (ii) a payment equal to 1% of the then-
outstanding first mortgage loan balance. Net sale proceeds and net
refinancing proceeds are net of certain amounts due the borrower or
affiliates of the borrower. Upon the maturity or accelerated maturity
of the PIM the Partnership will be entitled to 25% of the difference
between the value of the property less: (i) the unpaid balance of the
first mortgage loan and (ii) certain amounts due the borrower or
affiliates of the borrower.
At June 30, 1996, the Partnership s PIM portfolio has a fair value of
approximately $150,011,000 and gross unrealized gains and losses of
approximately $910,000 and $1,942,000, respectively. The PIM
portfolio has maturities ranging from 1999 to 2032.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
3. MBS
At June 30, 1996, the Partnership's MBS portfolio has an amortized
cost of approximately $34,020,871 and gross unrealized gains and
losses of approximately $514,404 and $350,233, respectively. The
Partnership's MBS have maturities ranging from 2010 to 2035.
4. Changes in Partners' Equity
A summary of changes in Partners' Equity for the six months ended June
30, 1996 is as follows:
<TABLE>
<CAPTION>
Total
Limited General Unrealized Partners'
Partners Partners Gain Equity
<S> <C> <C> <C> <C>
Balance at December 31,
1995 $200,575,459 $(102,556) $1,272,626 $201,745,529
Net income 5,535,259 171,194 - 5,706,453
Distributions (7,662,097) (200,256) - (7,862,353)
Decrease in unrealized
gain on MBS - - (1,108,455) (1,108,455)
Balance at June 30, 1996 $198,448,621 $(131,618) $ 164,171 $198,481,174
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management s expectations regarding the future financial performance and
<PAGE>
future events. These forward-looking statements involve significant risk
and uncertainties, including those described herein. Actual results may
differ materially from those anticipated by such forward-looking
statements.
Liquidity and Capital Resources
The most significant demand on the Partnership's liquidity is
quarterly distributions paid to investors of approximately $3.9 million.
Funds used for investor distributions come from interest received on the
PIMs, MBS, cash and cash equivalents net of operating expenses, and certain
principal collections received on the PIMs and MBS. The Partnership funds a
portion of the distribution from principal collections causing the capital
resources of the Partnership to continually decrease. As the capital
resources decrease, the total cash inflows to the Partnership will also
decrease which will result in periodic downward adjustments to the
quarterly distributions paid to investors.
The General Partners periodically review the distribution rate
to determine whether an adjustment to the distribution rate is necessary
based on projected future cash flows. In general, the General Partners try
to set a distribution rate that provides for level quarterly distributions
of cash available for distribution. To the extent quarterly distributions
differ from the cash available for distribution the General Partners may
adjust the distribution rate or distribute funds through a special
distribution.
During May 1996, the Partnership entered into an agreement with
the borrower of the Sundance Apartments PIM that reduces the monthly
interest paid by the borrower by 1% per annum and modifies the
participation features. The modification will reduce the monthly cash flow
of the Partnership, but will not materially affect the Partnership s
liquidity.
During the second quarter, the borrower of the Friendly Hills
PIM notified the Partnership of its intention to prepay that PIM in August
1996. In addition to the outstanding principal balance of approximately
$11.3 million, the Partnership will receive a prepayment penalty of
approximately $1,013,000 and all Shared Income and Minimum Additional
interest due. The Partnership will use the proceeds from this prepayment
to fund a special distribution of $.97 per Limited Partner interest during
August 1996.
Based on current projections, the General Partners believe the
Partnership can maintain the current distribution rate for the foreseeable
future following the prepayment of the Friendly Hills PIM and the
subsequent special distribution to investors.
For the first five years of the PIMs the borrowers are
prohibited from prepaying. For the second five years, the borrower can
prepay the loan incurring a prepayment penalty. The Partnership has the
option of calling certain PIMs by accelerating their maturity if the loans
are not prepaid by the tenth year after permanent funding. The Partnership
will determine the merits of exercising the call option for each PIM as
economic conditions warrant. Such factors as the condition of the asset,
local market conditions, interest rates and available financing will have
an impact on this decision.
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or
insured by the Federal National Mortgage Association ( FNMA ), the Federal
Home Loan Mortgage Corporation ( FHLMC ), the Government National Mortgage
<PAGE>
Association ( GNMA ) and the Department of Housing and Urban Development
( HUD ) and therefore the certainty of their cash flows and the risk of
material loss of the amounts invested depends on the creditworthiness of
these entities.
FNMA is a federally chartered private corporation that
guarantees obligations originated under its programs. FHLMC is a federally
chartered corporation that guarantees obligations originated under its
programs and is wholly-owned by the twelve Federal Home Loan Banks. These
obligations are not guaranteed by the U.S. Government or the Federal Home
Loan Bank Board. GNMA guarantees the full and timely payment of principal
and basic interest on the securities it issues, which represent interests
in pooled mortgages insured by HUD. Obligations insured by HUD, an agency
of the U.S. Government, are backed by the full faith and credit of the U.S.
Government.
Distributable Cash Flow and Net Cash Proceeds from Capital Transactions
Shown below is the calculation of Distributable Cash Flow and
Net Cash Proceeds from Capital Transactions as defined in Section 17 of the
Partnership Agreement and the source of cash distributions for the six
months ended June 30, 1996 and the period from inception through June 30,
1996. The General Partners provide certain of the information below to
meet requirements of the Partnership Agreement and because they believe
that it is an appropriate supplemental measure of operating performance.
However, Distributable Cash Flow and Net Cash Proceeds from Capital
Transactions should not be considered by the reader as a substitute to net
income as an indicator of the Partnership's operating performance or to
cash flows as a measure of liquidity.
<TABLE>
<CAPTION>
(Amounts in thousands except
per Unit amounts)
Six Months Ended Inception to
June 30, 1996 June 30, 1996
Distributable Cash Flow:
<S> <C> <C>
Income for tax purposes $ 6,626 $103,721
Items not requiring or (not providing)
the use of operating funds:
Amortization of prepaid expenses, fees
and organization costs 409 6,478
Acquisition expenses paid from offering
proceeds charged to operations - 184
Shared appreciation income - (800)
Gain on sale of MBS - (253)
Total Distributable Cash Flow ("DCF") $ 7,035 $109,330
Limited Partners Share of DCF $ 6,824 $106,050
Limited Partners Share of DCF per Limited
Partner interests ( Unit ) $ .53 8.30 (b)
General Partners Share of DCF $ 211 $ 3,280
Net Proceeds from Capital Transactions:
Principal collections and prepayments
(including Shared Appreciation Income)
on PIMs $ 422 $ 18,260
Principal collections and sales proceeds
<PAGE>
on MBS (including gain on sale) 1,400 61,944
Reinvestment of MBS and PIM principal
collections - (41,960)
Total Net Proceeds from Capital
Transactions $ 1,822 $ 38,244
Cash available for distribution
(DCF plus proceeds from Capital
transactions) $ 8,857 $147,574
Distributions:
Limited Partners $ 7,662 (a) $142,422 (a)
Limited Partners Average per Unit $ .60 (a) $ 11.15
(a)(b)
General Partners $ 211 (a) $ 3,280 (a)
Total Distributions $ 7,873 $145,702
</TABLE>
(a) Includes an estimate of the distribution to be paid in August
1996.
(b) Limited Partners average per Unit return of capital as of August
1996 is $2.85 [$11.15 - $8.30]. Return of capital represents
that portion of distribution which is not funded from DCF such
as proceeds from the sale of assets and substantially all of the
principal collections received from MBS and PIMs.
Operations
The following discussion relates to the operations of the Partnership
during the three and six months ended June 30, 1996 and 1995 (Amounts in
thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Interest income on PIMs:
<S> <C> <C> <C> <C>
Base interest $2,917 $3,095 $5,838 $6,139
Participation interest 393 435 552 435
Interest income on MBS 685 727 1,383 1,444
Other interest income 55 53 102 100
Partnership expenses (408) (452) (840) (883)
Distributable Cash Flow 3,642 3,858 7,035 7,235
Decrease in accrued
participation income (393) - (552) -
Amortization of prepaid fees
and expenses (389) (405) (777) (811)
Net income $2,860 $3,453 $5,706 $6,424
</TABLE>
Operations, Continued
Net income decreased by approximately $593,000 and $718,000 for the
three and six months ended June 30, 1996, respectively, as compared to the
corresponding periods in 1995 due primarily to lower interest income on
PIMs. Base interest income on PIMs decreased in 1996 as compared to 1995
due primarily to the interest rate reduction on the Royal Palm Apartments
<PAGE>
PIM in December 1995. Although participation interest income earned
decreased $435,000 for the three and six months ended June 30, 1996 as
compared to the three and six months ended June 30, 1995, participation
interest income accrued for 1996 will improve as a result of the Friendly
Hills Apartments PIM prepayment expected in August.
KRUPP INSURED PLUS-III LIMITED PARTNERSHIP
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote Security Holders
Response: None
Item 5. Other information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(10.1) Modification agreement dated May 23, 1996 by and between
Sundance Associates II, Ltd. and Krupp Insured Plus-III Limited
Partnership.
Reports on Form 8-K
Response: None
SIGNATURE
Pursuant to the requirements 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.
Krupp Insured Plus-III Limited Partnership
(Registrant)
BY: /s/Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer of Krupp
Plus Corporation, a General Partner.
DATE: July 25, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Balance
Sheet and Statement of Income and is qualified in its entirety by reference to
such financial statements
</LEGEND>
<CIK> 0000832091
<NAME> KRUPP INSURED PLUS III LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,511,531
<SECURITIES> 185,228,491<F1>
<RECEIVABLES> 1,284,605
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,465,566<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 198,490,193
<CURRENT-LIABILITIES> 9,019
<BONDS> 0
0
0
<COMMON> 198,317,003<F3>
<OTHER-SE> 164,171
<TOTAL-LIABILITY-AND-EQUITY> 198,490,193
<SALES> 0
<TOTAL-REVENUES> 7,323,114<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,616,661<F5>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,706,453
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,706,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,706,453
<EPS-PRIMARY> 0<F6>
<EPS-DILUTED> 0<F6>
<FN>
<F1>Includes the following investments: Participating Insured Mortgages ("PIMs")
$151,043,449 & Mortgage-Backed Securities ("MBS") $34,185,042
<F2>Includes the following prepaid acquisition fees & expenses of $5,649,532 net of
accumulated amortization of $6,681,531 and prepaid participating servicing of
$1,816,034 net of accumulated amortization of $2,270,498
<F3>Represents total equity of General Partners & Limited Partners of $(131,618)
and $198,448,621
<F4>Represents interest income on investments in mortgages & cash
<F5>Includes $776,817 of amortization related to prepaid fees & expenses
<F6>Net income allocated $171,194 to the General Partners & $5,535,259 to the
Limited Partners. Average net income per unit of Limited Partners interest is
$.43 on 12,770,261 units outstanding.
</FN>
</TABLE>
MODIFICATION AGREEMENT
This Modification Agreement (the "Agreement") is made and entered into
as of this ___ day of May, 1996 by and between Sundance Associates II, LTD
("Borrower") and Krupp Insured Plus - III Limited Partnership ("KIP").
W I T N E S S E T H:
WHEREAS, the Borrower has obtained from Krupp Mortgage Corporation, now
known as Berkshire Mortgage Finance Corporation (the "First Mortgagee"), a
loan in the original amount of Seven Million Four Hundred Thousand Dollars
($7,400,000) (the "First Mortgage Loan").
WHEREAS, the First Mortgage Loan was made with respect to Sundance
Village Apartments, Phase II (the "Project") located in Miami, Florida upon
certain real property more particularly described in Exhibit A attached
hereto and the terms of the following First Mortgage Loan documents:
A. The First Mortgage Loan is evidenced by a certain Mortgage Note
(the "First Mortgage Note") dated July 26, 1989 from the
Borrower to the First Mortgagee in the original principal sum
of $7,400,000; and
B. The repayment of the indebtedness evidenced by the First
Mortgage Note is secured by, among other things, (a) a Mortgage
dated July 26, 1989 and recorded in the Official Records Book
of Dade County, Florida in Book 14194, Page 1906 (the "First
Mortgage"); and (b) a Regulatory Agreement dated July 26, 1989
and recorded in the Official Records Book of Dade County,
Florida in Book 14194, Page 1918 (the "Regulatory Agreement").
(The First Mortgage Note, First Mortgage and the Regulatory
Agreement are collectively referred to as the "First Mortgage
Loan Documents".)
WHEREAS, the First Mortgage Loan is coinsured by the First Mortgagee
and the Secretary of Housing and Urban Development ("HUD"), as of July 26,
1989 ("HUD Endorsement"), under Section 221(d) (4) pursuant to Section 244
of the National Housing Act. Accordingly, the First Mortgage Loan is
subject to the regulations and requirements of HUD.
WHEREAS, the First Mortgagee obtained the funding for the First
Mortgage Loan through the sale to KIP of a Government National Mortgage
Association Mortgaged Backed Security (the "GNMA MBS") as evidenced by the
GNMA Purchase Agreement dated July 26, 1989. The interest rates on the
First Mortgage Loan and the GNMA MBS were below prevailing rates for
comparable loans and securities, and the lower interest rates inured to the
benefit of the Borrower. KIP was unwilling to acquire the GNMA MBS unless
the Borrower agreed to pay additional interest to KIP through a
participation arrangement.
WHEREAS, the Borrower agreed to pay additional interest to KIP pursuant
to a subordinated promissory note (the "Subordinated Note") made by the
Borrower in favor of KIP which is secured by a subordinated multifamily
mortgage (the "Subordinated Mortgage") dated July 26, 1989 and recorded in
the Official Records Book of Dade County, Florida in Book 14196, Page 2627
(collectively, the Subordinated Loan Documents").
Modification Agreement
May 19, 1996
A:\051996.WPD
1
<PAGE>
WHEREAS, the Project has experienced financial difficulties and
Borrower has requested assistance from KIP in regards to the Borrower's
obligations under the First Mortgage Loan Documents and the Subordinated
Loan Documents.
WHEREAS, the Borrower and KIP have agreed to modify the Subordinated
Note in certain respects based on KIP's willingness to provide the
financial assistance described herein. The Borrower and KIP have reached
an agreement to the terms and conditions of which agreement are set forth
below.
WHEREAS, the Borrower and KIP have agreed to modify the Subordinated
Note in certain respects to clarify the intent of the parties as to the
manner in which certain participation payments are to be calculated and
made by Borrower to KIP under this Modification Agreement. The Borrower
and KIP have reached an agreement to the terms and conditions of which
agreement are set forth below.
NOW, THEREFORE, in consideration of the foregoing and one dollar and
other good and valuable consideration in hand paid, the receipt and
sufficiency of which is hereby acknowledged, intending to be legally bound,
Borrower and KIP hereby agree as follows:
I. KIP Funding. Borrower shall continue to make full monthly debt service
payments in accordance with the First Mortgage Note. Upon receipt of the
full monthly payment then due, commencing with the payment due June 1,
1996 and continuing until the principal balance of the First Mortgage Loan
is paid in full, KIP agrees to rebate to the Borrower an amount equal to
1/12 of 1% per annum of the then-outstanding principal balance.
II. Waiver of Prepayment Penalties. The First Mortgage Note stipulates
that the Borrower must pay a penalty to exercise its right to prepay the
debt evidenced by the First Mortgage Note under specified conditions: a
penalty equal to 9% of the original principal amount for a prepayment that
occurs during the sixth, seventh, eighth or ninth year from the HUD
Endorsement (July 26, 1994 through July 25, 1998) and a penalty equal to 1%
of the original principal amount for a prepayment that occurs during the
tenth year from the HUD Endorsement (July 26, 1998 through July 25, 1999).
Under the GNMA Purchase Agreement, any prepayment penalties imposed under
the First Mortgage Note are for the benefit of KIP. KIP hereby waives its
right to collect a prepayment penalty if the Borrower exercises its right
to prepay the First Mortgage Loan in full prior to July 25, 1999 as a
result of a Sale of the Project or a Refinancing of the Project.
III. Substitution of Shared Participation for Additional Interest.
Section 1, Payment of Additional Interest, appearing on pages two, three,
four and five of the Subordinated Note, is hereby deleted in its entirety.
The following is substituted in lieu thereof:
1. Payment of Shared Participation. The Borrower covenants and agrees to
pay KIP "Shared Participation" which shall mean and include "Shared Cash
Participation" and "Shared Appreciation Participation".
A. "Shared Cash Participation" shall mean twenty-five percent (25%)
of all Surplus Cash generated by the Project, as that term is defined in
the Regulatory Agreement. Shared Cash Participation shall be deemed earned
by KIP in years in which the Project generates Surplus Cash as calculated
Modification Agreement
May 19, 1996
A:\051996.WPD
2
<PAGE>
under the Regulatory Agreement definition of Surplus Cash. Such Shared
Cash Participation shall be deemed earned beginning with the calculation
for the fiscal year ending December 31, 1997 and for each fiscal year
thereafter until the entire principal balance of the First Mortgage Loan
has been paid. All Shared Cash Participation is due and payable to KIP
within 120 days of the end of the fiscal year in which there is Surplus
Cash and Surplus Cash may only be distributed at the end of a fiscal year.
B. "Shared Appreciation Participation" shall mean the following.
(i) In the event of a Sale of the Project, Borrower shall pay KIP
twenty-five percent ( 25%) of the "Net Sale Proceeds." Net Sale Proceeds
shall mean all consideration paid in connection with a Sale of the Project
or a beneficial interest in the Project or the Borrower whether direct or
indirect less
(a) prorations and selling expenses, including reasonable
independent third party brokers' commissions, title
searches, survey costs, recording costs, escrowed charges,
transfer taxes and reasonable attorneys' fees incurred by
the Borrower in connection with the Sale;
(b) the unpaid principal balance of the First Mortgage Loan
and all accrued and unpaid interest thereon;
(c) accrued and unpaid management fees due the Borrower or any
Affiliate of the Borrower as described more fully in
Sections IV and V of this Modification Agreement; and
(d) accrued and unpaid operating advances due the Borrower or
any Affiliate of the Borrower as described more fully in
Sections IV and V of this Modification Agreement.
All Shared Appreciation Participation under this Section III,
Paragraph B(i) shall be due and payable to KIP on the date of the Sale of
the Project.
(ii) In the event of a Refinancing of the Project, Borrower
shall pay KIP either twenty-five percent ( 25%) of the "Net Refinancing
Proceeds" or a payment equal to 1% of the then-outstanding First Mortgage
Loan principal balance at the time of the Refinancing, whichever is
greater. A Refinancing of the Project shall mean the payment in full of
the First Mortgage Loan prior to the Maturity Date under the First Mortgage
Loan Documents from the proceeds of a loan or loans secured by the Property
or loans secured by a pledge of any beneficial interest in the Project or
the Borrower. Net Refinancing Proceeds shall mean the difference between
the new debt placed on the Project as a result of such a Refinancing less
(a) the unpaid principal balance of the First Mortgage Loan
and all accrued and unpaid interest thereon;
(b) usual and reasonable costs to obtain the new debt; and
(c) accrued and unpaid management fees due the Borrower or any
Affiliate of the Borrower as described more fully in
Sections IV and V of this Modification Agreement; and
(d) accrued and unpaid operating advances due the Borrower or
any Affiliate of the Borrower as described more fully in
Sections IV and V of this Modification Agreement.
All Shared Appreciation Participation under this Section III,
Paragraph B(ii) shall be due and payable to KIP on the date of the
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Refinancing of the Project.
(iii) On the Maturity Date of the First Mortgage Loan under the
First Mortgage Loan Documents or the Accelerated Maturity Date under the
Subordinated Loan Documents, Borrower shall pay KIP twenty-five percent (
25%) of the difference resulting from the "Value" of the Project less
(a) the unpaid principal balance of the First Mortgage Loan;
(b) accrued and unpaid management fees due the Borrower or any
Affiliate of the Borrower as described more fully in
Sections IV and V of this Modification Agreement; and
(c) accrued and unpaid operating advances due the Borrower or
any Affiliate of the Borrower as described more fully
in Sections IV and V of this Modification Agreement.
"Value" shall be determined by an appraisal of the Project,
prepared at least sixty (60) days prior to the Maturity Date or the
Accelerated Maturity Date. The appraisal shall be prepared by a qualified
M.A.I. appraiser selected by the Maker from a list of three M.A.I.
appraisers selected by the Holder. The determination of appraised value
shall be based, in part, upon the assumption that the rental income from or
with respect to the Project is based on the then prevailing market rates
for comparable rental space in the same vicinity of the Project even if the
actual rent then being paid by lessees is more or less. The appraisal
shall specify:
(a) The Value of the Project assuming the First Mortgage Loan
may be assumed by a purchaser of the Project without
financing charge or expenses imposed by the Holder of the
First Mortgage in connection with such assumption (other
than fees permitted by the Secretary of HUD for approving
a transfer of physical assets); and
(b) the Value of the Project assuming the First Mortgage Loan
may not be assumed.
The Value established under (a) above may be utilized only if
the Holder has not elected to direct the First Mortgagee to declare the
principal sum owing with respect to the First Mortgage Loan to be due and
payable.
In the event the Maker does not agree with the appraisal, the
Maker must notify the Holder within three (3) business days after receipt
thereof, and it may arrange for another appraisal of the Project by a
qualified M.A.I. appraiser, which appraisal must be completed within thirty
(30) days of receipt of the first appraisal.
In the event the Holder does not agree with the appraisal which
is obtained by the Maker, and the Holder and the Maker are unable to agree
upon the Value, the Holder must notify the Maker within three (3) business
cays after the receipt thereof, and the Holder may arrange for another
appraisal of the Project by a qualified M.A.I. appraiser to be selected
jointly by the two appraisers who made the prior appraisals, which
appraisals must be completed within thirty (30) days. The Value
established pursuant to this third appraisal shall be binding upon the
Maker and the Holder.
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The cost of all appraisals shall be borne by the Maker.
Any such Shared Appreciation Participation earned under this
Section II, Paragraph B(iii) shall be payable to KIP on the earlier of the
Accelerated Maturity Date or the Maturity Date.
C. Notwithstanding the foregoing, in the event of a default by the
Borrower under the Subordinated Loan Documents, and upon KIP's election, in
its sole discretion, to accelerate all amounts owing under this Agreement,
KIP shall obtain the appraisal described in Section III, Paragraph B(iii)
above within one hundred twenty (120) days after KIP's election to
accelerate and the Shared Appreciation Participation, if any, owing to KIP
as a result of such appraisal shall be due and payable within ten (10) days
after a copy of the completed appraisal is delivered to Borrower.
D. Notwithstanding the provisions contained in this Section III of
this Modification Agreement for the payments of Shared Participation, on
(i) the date of the Sale of the Project; (ii) the date of a Refinancing of
the Project; or (iii) the Maturity Date under the First Mortgage Loan
Documents or the Accelerated Maturity Date under the Subordinated Loan
Documents, the Borrower expressly understands and agrees to pay to KIP all
Shared Participation which has accrued, but has not been paid, and, if the
Secretary of HUD or his successors or assigns is no longer the coinsurer of
the First Mortgage Note, the principal and accrued interest thereunder.
IV. Affiliate Advances, Loans and Unpaid Management Fees. Due to the
Project's financial difficulties, the Borrower, through various affiliates,
has advanced funds for operations. As of the Project's December 31, 1995
Audited Financial Statements, the Borrower is carrying a total of $624,095
in liabilities due to affiliates, including Eurodevelopment Corporation
("EDC"), the Borrower's general partner; CASCH, S.A., an affiliate of the
Borrower's general partner; and Sundance Associates I, LTD, the ownership
entity of the companion phase of the Project (together collectively,
"Affiliates"). These liabilities are comprised of the following.
A. Advances made by Borrower after First Mortgage Loan closing:
Loan Payable to EDC $20,000
Payable for Payroll Share to EDC $23
Loan Payable to Sundance Associates I 35,000
Payable for Payroll Share to Sundance Associates I 21,971
B. Accrued and Unpaid Management Fees:
Payable for Management Fees to EDC 146,084
C. Advances made by Borrower affiliate after First Mortgage Loan
closing (see Exhibit B):
1991 through 1995 Payable for Advances from CASCH, S.A. 120,766
D. Advances made by Borrower affiliate prior to First Mortgage Loan
closing (see Exhibit B):
1989 Loan and accrued Interest thereon to CASCH, S.A. 182,400
1989 Payable for Advances from CASCH, S.A. 98,278
Should the Project fail to generate sufficient funds to meet all the
Project's operating expenses and its First Mortgage Loan debt service, and
it is necessary for the Borrower or its Affiliates to advance funds in
addition to the amounts listed immediately above in this Section IV,
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Paragraphs A, B and C, Borrower is required to notify KIP as to the
purpose, the amount, and the source of each such advance of additional
funds.
V. Repayment of Affiliate Advances, Loans and Unpaid Management Fees.
Borrower agrees to abide by the following.
A. Prior to the payment in full of the First Mortgage Loan, any
reduction in liabilities due an Affiliate shall be limited to
reimbursements for liabilities listed above in Section IV as they made be
adjusted in amount from time to time for previous reductions or subsequent
increases. Such liabilities may be repaid out of funds generated by the
Project in excess of First Mortgage Loan debt service payments and Project
expenses in any fiscal year in which such funds are available. KIP
acknowledges that the repayment of these specified liabilities may be made
prior to any calculation of Surplus Cash.
B. In the event of a Sale of the Project, Refinancing of the Project,
or on the Maturity Date under the First Mortgage Loan Documents or the
Accelerated Maturity Date under the Subordinated Loan Documents, any
reimbursement of outstanding liabilities due the Borrower or any Affiliate
used in the determination of (a) Net Sale Proceeds under Paragraph III,
Section 1 B (i), (b) Net Refinancing Proceeds under Section III, Paragraph
1 B (ii), or (c) the calculation specified in Section III, Paragraph 1 B
(iii) of this Modification Agreement shall be limited to those liabilities
listed in Section IV of this Modification Agreement.
VI. Other Deletions and Substitutions.
A. References to "Additional Interest" in Sections 3, 4 and 5 of the
Subordinated Note shall be deleted. "Shared Participation" as it is
defined in Section III of this Modification Agreement shall be inserted.
B. Reference to net proceeds of a Sale of the Project in Section 4 B
(iii) of the Subordinated Note shall take the meaning expressed in this
Modification Agreement in Section III, Paragraph B (i).
C. Reference to net proceeds of a refinancing in Section 4 B (iv) of
the Subordinated Note shall take the meaning expressed in this Modification
Agreement in Section III, Paragraph B (ii).
D. The last two full sentences in Section 4 B of the Subordinated Note
shall be deleted in their entirety.
E. Sections 4 D and 4 E of the Subordinated Note shall be deleted in
their entirety.
VII. Notice Requirements.
A. All notices and other communications required or permitted under
this Modification Agreement shall be in writing and, if mailed by prepaid
United States first-class, certified mail, return receipt requested, at any
time other than a general discontinuance of postal service due to strike,
lockout or otherwise, shall be deemed to be received on the earlier of the
date shown on the return receipt or three (3) business days after the post-
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marked day thereof. In addition, notices hereunder may be delivered by
hand or by overnight courier, in which event the notice shall be deemed
effective when delivered. All notices and other communications under this
Modification Agreement shall be given to the parties hereto at the
following addresses:
If to the Borrower:
Sundance Associates II, LTD
3162 Commodore Plaza, No. 2
Coconut Grove, Florida 33133
Attention: Mr. Jose Camprubi
If to KIP:
Berkshire Mortgage Finance Corporation
Harbor Plaza
470 Atlantic Avenue
Boston, Massachusetts 02210
Attention: Ms. Peggy DeMuth
with a copy to:
Powell, Goldstein, Frazer & Murphy
Suite 600
1001 Pennsylvania Avenue, NW
Washington, D.C. 20004
Attention: George L. Daves, Esquire
B. Any party hereto may change the address to which notices shall be
directed under this Section V by giving ten (10) days written notice of
such change to the other parties.
VIII. Loan Documents Not Impaired. Except as expressly set forth herein
with respect to the Subordinated Note, the agreements set forth herein are
not intended to affect or alter the obligations of Borrower under the First
Mortgage Loan Documents or the Subordinated Loan Documents and this
Modification Agreement shall not be construed as a novation, renegotiation
or release under any of these documents.
IX. Representations of Borrower. Borrower hereby acknowledges and confirms
with KIP that:
A. Borrower has no offsets, counterclaims or defenses with respect to
the obligations under the First Mortgage Loan Documents or the Subordinated
Loan Documents and to the extent that Borrower has any offsets,
counterclaims or defenses with respect to the obligations thereunder,
Borrower hereby waives and releases such offsets, counterclaims and
defenses.
B. Borrower ratifies and affirms all obligations under the First
Mortgage Loan Documents and Subordinated Loan Documents.
C. Except for the matters expressly set forth herein, Borrower hereby
releases and forever discharges KIP and all its directors, officers,
employees, administrators, agents, subsidiaries, affiliates, appraisers,
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inspectors, accountants, attorneys, successors and assigns from any and all
present existing causes of action, demands, claims, debts, accounts,
liabilities, costs, expenses, contract, promises, agreements, and damages
whatsoever (hereinafter referred to individually and collectively as the
"Claims") which relate to the First Mortgage Loan Documents and the
Subordinated Loan Documents and also including without limitation any and
all Claims arising out of or relating to the exercise by KIP of any rights
pursuant thereto.
X. Representation of KIP. KIP hereby acknowledges that all payment
obligations identified in this Modification Agreement, First Mortgage Loan
Documents and the Subordinated Loan Documents are nonrecourse.
XI. Binding Effect. The terms and provisions of this Modification
Agreement shall be binding upon the parties hereto and their heirs,
successors and assigns.
XII. Governing Law. This Modification Agreement shall be construed
under the laws of the state in which the Project is located and if any
provisions of this Modification Agreement are held by a court of competent
jurisdiction to be illegal, invalid or unenforceable, then such illegality,
invalidity or unenforceability shall not affect the legality, validity or
enforceablility of the other provisions of this Modification Agreement.
IN WITNESS WHEREOF, the undersigned parties have caused this instrument
to be executed as the of day, month and year first written above.
KIP:
Krupp Insured Plus - III Limited
Partnership, a Massachusetts limited
partnership
By: Krupp Plus Corporation, a
general partner
By:
Ronald Halpern
Its: Senior Vice President Borrower:
Sundance Associates II, LTD, a
Florida limited partnership
By: Eurodevelopment Corporation,
a Florida corporation, a
general partner
By:
Jose Camprubi
Its: President
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