THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO
RULE 901(d) OF REGULATION S-T
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
0-17633
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its Certificate
of Limited Partnership)
Maryland 75-2228850
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Light Street
Tenth Floor
Baltimore, Maryland 21202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 625-5500
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 and 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 over the past 90 days.
Yes X No _____
-------
<PAGE>
INDEX
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -- September 30, 1996 and December 31, 1995
Statements of Operations -- For the three months ended September
30, 1996 and September 30, 1995 and for the nine months ended
September 30, 1996 and September 30, 1995
Statements of Cash Flows -- For the nine months ended September
30, 1996 and September 30, 1995
Notes to Financial Statements -- September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Partnership did not file any reports on Form 8-K during the
nine months ended September 30, 1996.
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
BALANCE SHEETS
<S> <C> <C>
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS
Real Estate Investments:
Income Producing Properties -- Note B $27,988,177 $28,612,932
Cash and Cash Equivalents (including temporary
investments at September 30, 1996 and Dec. 31, 1995
of $263,412 and $515,389, respectively) -- Note C 995,425 887,555
Restricted Cash Escrow -- Note E 85,490 192,402
Accounts Receivable, net 72,006 68,776
Other Assets 241,606 259,462
---------- ----------
Total Assets $29,382,704 $30,021,127
========== ==========
LIABILITIES
Mortgages Payable -- Note E $20,546,581 $20,595,531
Accounts Payable and Other Liabilities 1,305,138 1,406,228
St. Andrews Construction Loan - Note J 2,790,000 0
Due to General Partners and Affiliates -- Note D 2,142,640 1,886,808
Cash Flow Protector Loan -- Note G 4,849,734 4,849,734
---------- ----------
$31,634,093 $28,738,301
========== ==========
PARTNERS' (DEFICIT) EQUITY
General Partners (266,927) (231,585)
Assignor and Assignee Limited Partners
1,094,283 Units Issued and Outstanding (1,984,462) 1,514,411
---------- ----------
(2,251,389) 1,282,826
---------- ----------
Total Liabilities and Partners' (Deficit) Equity $29,382,704 $30,021,127
========== ==========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
REVENUE:
Rental $1,189,896 $1,149,755 $ 3,512,747 $3,431,056
Interest 4,040 16,844 15,712 39,103
--------- --------- ---------- ---------
Total Revenue 1,193,936 1,166,599 3,528,459 3,470,159
EXPENSES:
Property Operating - Note D 516,046 477,870 1,522,519 1,375,847
St. Andrews Repair and Legal Costs,
Net of Recoveries - Note J 117,759 57,196 2,802,706 221,645
General and Administrative 35,132 38,491 102,462 110,844
Interest - Notes D and E 594,627 535,812 1,704,139 1,606,102
Depreciation and Amortization 314,662 304,697 930,848 905,698
--------- --------- ---------- ---------
Total Expenses 1,578,226 1,414,066 7,062,674 4,220,136
--------- --------- ---------- ---------
NET LOSS $ (384,290) $ (247,467) $(3,534,215) $ (749,977)
========= ========= ========== =========
Net Loss Allocated to:
General Partners $ (3,843) $ (2,475) $ (35,342) $ (7,500)
Assignor and Assignee Limited Partners (380,447) (244,992) (3,498,873) (742,477)
--------- --------- ---------- ---------
$ (384,290) $ (247,467) $(3,534,215) $ (749,977)
========= ========= ========== =========
Net Loss per Unit -- Note A $ (.35) $ (.22) $ (3.20) $ (.68)
========= ========= ========== =========
Cash Distributions per Unit -- Note A $ 0 $ 0 $ 0 $ 0
========= ========= ========== =========
Weighted Average Number of Units 1,094,283 1,094,283 1,094,283 1,094,283
========= ========= ========== =========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
USF&G LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
Operating Activities
Net Loss $(3,534,215) $ (749,977)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 930,848 905,698
Change in net assets and liabilities related to
operating activities:
Decrease in restricted cash escrow 106,912 2,139
Increase in due to general partners and affiliates 255,832 228,489
(Decrease) increase in accounts payable and other
liabilities (101,090) 481,909
Increase in deferred recoveries 0 257,302
(Decrease) increase in accounts receivable (3,230) 49,138
Increase in other assets (58,682) (75,377)
---------- ---------
Net Cash (Used in) Provided by Operating Activities (2,403,625) 1,099,321
---------- ---------
Investing Activity
Investment in income producing properties (229,555) (243,845)
---------- ---------
Net Cash Used in Investing Activity (229,555) (243,845)
---------- ---------
Financing Activities
Mortgage principal payments (48,950) (44,586)
St. Andrews Construction Loan Advances 2,790,000 0
---------- ---------
Net Cash Provided by (Used in) Financing Activities 2,741,050 (44,586)
---------- ---------
Increase in Cash and Cash Equivalents 107,870 810,890
Cash and Cash Equivalents, Beginning of Period 887,555 623,032
---------- ---------
Cash and Cash Equivalents, End of Period $ 995,425 $1,433,922
========== =========
See accompanying notes to the financial statements.
</TABLE>
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements
September 30, 1996
(Unaudited)
NOTE A - Organization, Basis of Presentation and Summary of Significant
Accounting Policies
USF&G/Legg Mason Realty Partners Limited Partnership (the "Partnership") was
organized under the laws of the state of Maryland on April 12, 1988. The
Partnership was formed to acquire, hold, lease and ultimately dispose of income
producing commercial and multi-family residential properties located primarily
in the Eastern half of the United States.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the financial statements
and footnotes thereto included in the Partnership's annual report on Form 10-K
for the year ended December 31, 1995.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of", which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the asset's
carrying amount. SFAS No. 121 also addressed the accounting for long-lived
assets that are to be disposed of.
The Partnership adopted the standard in the first quarter of 1996. The standard
includes a requirement that impairments in the value of real estate investments
be recorded as direct reductions in the carrying value of those investments. The
Partnership's prior practice has been to reduce the carrying value for
impairments to specific investments where impairment is deemed other than
temporary. At September 30, 1996, none of the Partnership's long-lived assets
was determined to be impaired under the provision of SFAS No. 121.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1996
(Unaudited)
NOTE A - Organization, Basis of Presentation and Summary of Significant
Accounting Policies (Continued)
Allocation of Net (Loss) Income from Operations
Net (loss) income from operations is allocated first among the partners in
proportion to cash distributions and second, if there have been no cash
distributions, 99% to the assignee limited partners ("Unitholders") and 1% to
General Partners. Net (loss) income and cash distributions per Unit were
computed based upon net (loss) income allocated to and cash distributions paid
to Unitholders divided by the weighted average number of Units outstanding
during the periods indicated. The allocated 1% net (loss) income from
operations to the General Partners is prorated for net (loss) on the basis of
80% to USF&G Realty Partners, Inc. (the "USF&G General Partner") and 20% to Legg
Mason Realty Partners, Inc. (collectively, the "General Partners") while net
income is allocable on the basis of 50% to the USF&G General Partner and 50% to
Legg Mason Realty Partners, Inc.
Reclassifications
Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
NOTE B - Income Producing Properties
The following table sets forth summarized financial information for Northeast
Business Campus, St. Andrews Apartments at Westwood and Shadeland Retail
Center, the three properties owned directly by the Partnership, as of the dates
indicated:
September 30, 1996 December 31, 1995
------------------ -----------------
Buildings and improvements $29,348,537 $29,118,982
Land 5,444,913 5,444,913
---------- ----------
34,793,450 34,563,895
Less: Accumulated depreciation (6,805,273) (5,950,963)
---------- ----------
$27,988,177 $28,612,932
========== ==========
NOTE C - Cash and Cash Equivalents
Cash and cash equivalents include temporary investments in money market funds
with maturities of three months or less.
<PAGE>
<TABLE>
<CAPTION>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1996
(Unaudited)
NOTE D - Related Party Transactions
The following is a summary of compensation and reimbursable expenses incurred to
the General Partners and their affiliates for the periods indicated:
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
Charged to expenses:
Interest Expense $138,106 $77,802 $333,429 $231,027
Operating Expenses 22,028 19,158 65,958 67,661
</TABLE>
Due to General Partners and affiliates consists of the following as of the dates
indicated:
September 30, 1996 December 31, 1995
------------------ -----------------
General Partner Loans $ 200,000 $ 200,000
Accrued Interest on General Partner
Loans 31,920 19,503
Accrued Interest on the St. Andrews
Construction Loan 21,038 0
Operating Expenses 14,000 10,060
--------- ---------
266,958 229,563
--------- ---------
Asset Management Fees 423,990 423,990
Accrued Interest on the Cash Flow
Protector Loan 1,451,692 1,233,255
--------- ---------
Amounts Subordinate to the return of
Unitholder contributions 1,875,682 1,657,245
--------- ---------
$2,142,640 $1,886,808
========= =========
In connection with the loan modification at NEBC executed in the fourth quarter
of 1994 discussed in Note E, the General Partners provided equally a total of
$200,000 to the Partnership toward establishing the required reserves and
escrows at NEBC. The amounts provided by the General Partners are in the form of
loans from each General Partner which accrue interest at the prime rate and
mature on August 15, 1999. The Partnership's obligation to make interest and
principal payments under the loans is limited to the extent of available NEBC
reserves and escrows and sale or refinancing proceeds (as defined in the
Partnership Agreement) attributable to the NEBC property.
See Note J - St. Andrews Repair and Legal Costs for a discussion of the St.
Andrews Construction Loan and Note G for a discussion of the Cash Flow Protector
Loan from the USF&G General Partner.
The subordinated amount identified above is subordinate under Section 4.4 of the
Partnership Agreement.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1996
(Unaudited)
NOTE E - Mortgages Payable
Mortgages payable consists of the following as of the dates indicated:
September 30, 1996 December 31, 1995
------------------ -----------------
Mortgage loan, secured by Northeast
Business Campus, due August 15, 1999,
interest at 8.00% $ 7,975,000 $ 7,975,000
Mortgage loan, secured by St. Andrews
at Westwood, due September 1, 1997,
interest at 9.65% 8,500,000 8,500,000
Mortgage loan, secured by a portion of
Shadeland Retail Center, due January
1, 1997, interest at 9.375% 4,071,581 4,120,531
---------- ----------
$20,546,581 $20,595,531
========== ==========
The mortgage loans are non-recourse obligations except under certain defined
circumstances. Interest expense of $1,370,710 and $1,375,075 was incurred on
these mortgages for the nine months ended September 30, 1996, and 1995,
respectively. Interest payments of $1,381,906 and $1,348,808 were made for the
nine months ended September 30, 1996, and 1995, respectively.
In connection with the 1994 NEBC loan modification, the Partnership was
required to establish with the lender a reserve for future tenant improvements
and lease commissions and escrows for taxes and insurance. At September 30,
1996, the lender held $85,490 in reserves and escrows and the Partnership held
$381,413 in segregated funds subject to the lien and for the benefit of the
lender which was included in the Partnership's cash and cash equivalents
balance. All future cash flow generated by the NEBC property will be held in a
reserve account which may be used only for the benefit of NEBC or to meet
obligations to the lender. See Note D - Related Party Transactions and Note I
- - Commitment and Contingencies.
NOTE F - Distributions to Partners
The Partnership Agreement provides for quarterly cash distributions to the
partners no later than 45 days after the close of each quarter. The quarterly
cash distributions are allocated 99% to Unitholders and 1% to the General
Partners.
As of September 30, 1996, cumulative cash distributions of $10,545,983 and
$106,517 had been made to the Unitholders and General Partners, respectively.
These cash distributions represent a cumulative return of 2% on invested capital
through the period ended July 13, 1993. The last distribution to Unitholders
was made November 12, 1993.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1996
(Unaudited)
NOTE G - Cash Flow Protector Loan
Pursuant to the Cash Flow Protector Loan, the USF&G General Partner agreed to
lend to the Partnership an amount up to $5,471,415, representing 20% of the
gross proceeds of the offering, to the extent that the Partnership's
distributable cash flow was insufficient to pay a 2% cumulative quarterly return
(8% annual return) to Unitholders. In connection with cumulative cash
distributions, as of September 30, 1996, the USF&G General Partner had funded
$4,849,734 pursuant to the Cash Flow Protector Loan. The last distribution to
Unitholders was made November 12, 1993.
The USF&G General Partner's commitment to lend amounts pursuant to the Cash Flow
Protector Loan expired on July 13, 1993. The Cash Flow Protector Loan currently
accrues interest at an annual simple rate of 6%, a reduction in the rate from 8%
by the USF&G General Partner effective January 1, 1993. The Cash Flow Protector
Loan is due and payable on December 31, 2003 or earlier, from sale or
refinancing proceeds. The related aggregate accrued interest of $1,451,692 as
of September 30, 1996 is subordinate to the return of Unitholder capital
contributions as discussed in Note D.
NOTE H - Right of Presentment
The Third Amendment to the Partnership Agreement which modified the Right of
Presentment procedures was executed during the second quarter of 1996. This
Program now provides that if in a year Units are presented in excess of the
amount required to be purchased by the USF&G General Partner then the General
Partners may elect to purchase such excess presented Units, provided that the
total number of Units repurchased shall not exceed 50% of the Units outstanding.
This modification was made as a result of the enactment of certain changes to
the proposed tax regulations that were pending at the time the Second Amendment
to the Partnership Agreement was executed.
On June 30, 1996, the General Partners purchased all of the 83,816 Units
presented under the 1996 Right of Presentment Program. The Units were purchased
at a price per unit of $4.39 from all Unitholders that presented. The USF&G
General Partner purchased 13,886 of the Units. The remaining 69,930 Units were
purchased by Legg Mason Realty Partners, Inc.
As of September 30, 1996, the General Partners have repurchased 168,858 Units
under the Right of Presentment Program.
NOTE I - Commitments and Contingencies
In order to obtain the NEBC loan modification during 1994 discussed in Note E,
the Partnership agreed to permit the NEBC mortgage lender to participate in
the NEBC sales proceeds above the outstanding debt and closing costs. Upon sale
of NEBC, the lender will be entitled to receive 60% of the first $1,500,000,
40% of the next $500,000 and 10% thereafter of the remaining proceeds.
<PAGE>
USF&G/LEGG MASON REALTY PARTNERS LIMITED PARTNERSHIP
Notes to Financial Statements (Continued)
September 30, 1996
(Unaudited)
NOTE J - St. Andrews Repair and Legal Costs
During the second quarter of 1995, the Partnership entered into a $3.0 million
contract to complete the necessary repairs at St. Andrews. Repairs began during
the third quarter of 1995 and were substantially complete by the end of the
third quarter of 1996. During 1995, modifications to the original construction
contract were made to install new windows, replace the roofs and repair and
replace the underlying wooden structures as necessary on all the buildings. The
1995 modifications resulted in a $617,600 increase in the $3.0 million base
contract. Additional modifications to repair damaged drywall and make
miscellaneous exterior repairs were made during 1996 which increased the total
construction contract modifications by $208,900 to $826,500. During the third
quarter of 1996, a $113,000 credit was issued to adjust the unit pricing on
select items of a 1995 modification. This decreased the construction contract
modifications to $713,500. The total estimated completed contract cost is now
approximately $3.7 million.
The Partnership has incurred significant costs to date, including construction
and engineering expenses, in connection with assessing and repairing the
construction problems and pursuing legal remedies. The Partnership has
recovered $672,500 to date in settlements from responsible parties, including
$45,000 during the second quarter of 1996, $565,000 during 1995 and $62,500
during 1994. Settlement payments received are used to offset construction costs
incurred.
During 1996, the Partnership has incurred approximately $3,097,000 and $251,000
of St. Andrews repair and legal costs, respectively, $500,000 of which were
offset by an insurance recovery and a $45,000 settlement payment received during
the year.
The Partnership executed an agreement for a construction loan with the USF&G
General Partner during the third quarter of 1995 which permitted the Partnership
to borrow up to $3.5 million to complete the necessary repairs. Under its
term, the loan will mature September 1, 1997 and pay interest monthly on
advanced funds at 9.0% per annum. The terms also provide for early repayment
from additional recoveries from the Partnership's lawsuit, net operating income
after reserves or sale or refinancing proceeds. As of September 30, 1996,
advances of $2,790,000 had been made. Interest expense of $102,575 was incurred
and interest payments totaling $81,537 were made on this loan for the nine
months ended September 30, 1996 (see Note D).
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Because the Partnership desires to take advantage of new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the
Partnership cautions readers regarding certain forward-looking statements in the
following discussion and elsewhere in the Form 10-Q and in any other statement
made by the Partnership, whether or not in future filings with the Securities
and Exchange Commission. Forward-looking statements are statements which relate
to future operations, strategies, financial results, or other developments.
Forward-looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Partnership's
control and many of which, with respect to future business decisions, are
subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by the Partnership.
General
On June 28, 1988, the Partnership's Registration Statement registering 1,400,000
Units at an offering price of $25 per Unit was declared effective by the
Securities and Exchange Commission. As of December 31, 1989, at the termination
of the offering, 1,094,283 Units had been sold for aggregate gross proceeds of
$27,357,075.
After deducting rebates to Unitholders of $835,001 and offering and
organizational costs and selling commissions totaling $2,174,276, approximately
$24,348,000 was available for investment in income producing properties.
Substantially all of the proceeds available for investment were invested in four
income producing properties meeting the investment criteria of the Partnership.
Northeast Business Campus ("NEBC"), St. Andrews Apartments at Westwood ("St.
Andrews"), and Shadeland Retail Center ("Shadeland") are owned directly by the
Partnership (collectively, the "Properties") and the Partnership owned a fifty
percent general partnership interest in the Greenbrier Towers General
Partnership (the "Joint Venture"). The Joint Venture's sole property,
Greenbrier Towers, was purchased by the lender at foreclosure on April 26, 1995.
Liquidity and Capital Resources
The cash and cash equivalents position of the Partnership at September 30, 1996
increased $107,870 from December 31, 1995. The increase was primarily due to
the additional borrowings under the St. Andrews construction loan as well as St.
Andrews settlements and insurance recoveries received during the year offset
in part by increased repair and legal costs. The Partnership's cash and cash
equivalents position will continue to fluctuate during each quarter as follows:
(1) decreasing with the funding of lease-up costs and capital improvements at
Shadeland and St. Andrews; (2) increasing as net rental income and interest
income are received; and (3) decreasing as expenses (including debt service
requirements) are paid. Under the 1994 NEBC loan modification, all future cash
flow generated by the NEBC property must be used only for the benefit of NEBC or
to meet obligations to the lender. At September 30, 1996, the lender held
$85,490 in reserves and escrows and the Partnership held $381,413 in segregated
funds subject to the lien and for the benefit of the lender which was included
in the Partnership's cash and cash equivalents balance.
<PAGE>
The Partnership's ability to compete in each market is affected by the level of
cash provided by operations since the level of tenant improvement is limited to
the cash available for investment in income producing properties. In connection
with the acquisition of the Properties, the Partnership established cumulative
working capital reserves of approximately 3% of gross offering proceeds. For
the foreseeable future, the Partnership expects to apply cash flow from
operations to increase Partnership working capital reserves and to provide for
St. Andrews and Shadeland maintenance and improvements, and consequently, there
is no expectation that Distributable Cash Flow will be available to make
distributions to Unitholders. This policy reflects the commitment by the
General Partners to maintain adequate working capital reserves. The General
Partners believe that such a policy is prudent and is consistent with the
Partnership's objective to maintain and increase the value of the Properties.
During the second quarter of 1995, the Partnership entered into a $3.0 million
contract to complete the necessary repairs at St. Andrews. Repairs began during
the third quarter of 1995 and were substantially complete at September 30, 1996.
During 1995, modifications to the original construction contract were made to
install new windows, replace the roofs and repair and replace the underlying
wooden structures as necessary on all the buildings. The 1995 modifications
resulted in a $617,600 increase in the $3.0 million base contract. Additional
modifications to repair damaged drywall and make miscellaneous exterior repairs
were made during 1996 which increased the total construction contract
modifications by $208,900 to $826,500. During the third quarter of 1996, a
$113,000 credit was issued to adjust the unit pricing on select items of a 1995
modification. This decreased the total construction contract modifications to
$713,500. The total estimated completed contract cost is now approximately
$3.7 million.
During the first nine months of 1996, the Partnership incurred approximately
$3,097,000 and $251,000 of St. Andrews repair and legal costs, respectively,
$500,000 of which were offset by an insurance recovery and a $45,000 settlement
payment received during the year. The Partnership executed an agreement for a
construction loan with the USF&G General Partner during the third quarter of
1995 which will permit the Partnership to borrow up to $3.5 million to complete
the necessary repairs. Under its terms, the loan will mature on September 1,
1997 and interest is payable monthly on advanced funds at 9.0%. The terms also
provide for early repayment from additional settlements from the Partnership's
lawsuit, net operating income after reserves, or sale of refinancing proceeds.
As of September 30, 1996, advances of $2,790,000 had been made. No additional
advances on the loan are expected.
The Partnership filed suit in 1994 in state court in Orlando, Florida against
various parties involved in the St. Andrews project seeking recovery for the
costs of the anticipated repairs as well as other consequential damages. The
Partnership continues to assert its claims vigorously in the litigation against
the remaining potentially responsible parties and entered into settlement
discussions with several responsible parties during the third quarter of 1996.
However, there can be no assurance that it will recover its damages in full. The
Partnership has negotiated and received settlements of $672,500 through
September 30, 1996, including $45,000 from the insurer of the painting
consultant during the second quarter of 1996. During the second quarter of 1995,
the Partnership received $465,000 from the architect and $100,000 during the
third quarter of 1995 from United States Fidelity and Guaranty Company, the
insurer of the painting and reconstruction contractor. The settlement with
United States Fidelity and Guaranty Company, an affiliate of the USF&G General
Partner, was negotiated at arms length between counsel for the Partnership and
the claims representative. The remaining $62,500 settlement payment was
received in 1994 and used to offset certain construction costs incurred during
1994.
<PAGE>
At September 30, 1996, occupancy at St. Andrews was 95%. The apartment market in
the area continues to be very strong and occupancies of St. Andrews' main
competitors range from 90% to 99%. A new apartment community, The Mission Club,
was completed during the second quarter of 1996 and has not yet reached
stabilized occupancy. This 352-unit luxury complex is located within one mile
of the St. Andrews complex. The Partnership will closely monitor its impact
on occupancy and rental rates.
The St. Andrews mortgage matures September 1, 1997. The Partnership intends to
refinance the mortgage loan prior to that date. The Partnership also
anticipates that the refinancing rate will be lower than the current mortgage
rate based on the Shadeland refinancing discussed below. However, there can be
no assurance that the actual refinancing rate will be lower than the current
rate.
Occupancy at Shadeland remained stable at 89% as of September 30, 1996 as
compared to June 30, 1996. During October 1995, Ace Hardware vacated its 8,000
square foot space at the end of its lease due to increased competition in the
immediate area. The Partnership is currently evaluating subdividing this still
vacant space and releasing it in smaller portions to several tenants. The
Shadeland mortgage, presently in the amount of $4,071,581, matures on January 1,
1997. The Partnership intends to refinance the mortgage loan with a three-year
floating rate loan with a 15-year amortization. The interest rate would be
based on the London Interbank Offering Rate (LIBOR) plus 2.25%, currently
resulting in a loan rate of 7.75%, with an option to lock the rate for a 6 or
12-month term at no cost. The loan application contemplated provides the
Partnership with the right to borrow up to 60% of Shadeland's value based on a
new appraisal after execution of a lease renewal by both Marsh and Osco. This
may provide total cash proceeds in excess of the current mortgage of as much as
$2,700,000. The Partnership anticipates receiving an initial funding in the
amount of $700,000 in excess of the loan balance at closing. A portion of these
excess proceeds will be used to fund certain tenant improvement and leasing
commission costs related to the Shadeland expansion discussed below. The
remaining initial proceeds as well as any subsequent proceeds will be used to
increase working capital reserves or repay a portion of the St. Andrews
Construction Loan.
During the third quarter, the Partnership continued discussions with Marsh
Supermarkets and Osco Drugstores regarding Marsh's expansion desires. Osco has
not yet responded to an expansion proposal submitted to them during the quarter.
Marsh's current plans, which include expanding into the parking lot as well as
towards the road to the north of the shopping center, may not proceed until Osco
approves the expansion proposal. The expansion proposal would increase Marsh's
space by approximately 14,000 square feet. In addition, Osco may expand into the
parking lot and increase its space by approximately 3,000 square feet. The
expansion alternatives include a potential increase in the net rentable square
feet of the shopping center by 17,000 square feet to approximately 122,000
square feet. The Partnership is seeking finalization of the expansion plans
during 1996. However, to date, there has been no formal commitments from Marsh
and Osco regarding such plans.
<PAGE>
Results of Operations
Net Income (Loss) Net Income (Loss)
for the Nine Months for the Nine Months
Ended Sept. 30, 1996 Ended Sept. 30, 1995
-------------------- --------------------
NEBC $ (82,677) $(134,326)
St. Andrews (283,619) (270,940)
St. Andrews Repair and Legal Costs,
Net (2,802,706) (221,645)
Shadeland 59,919 194,634
---------- --------
(3,109,083) (432,277)
Partnership Expense (425,132) (317,700)
---------- --------
$(3,534,215) $(749,977)
========== ========
Nine Months Ended September 30, 1996 ("Current Period")
as compared to September 30, 1995 ("Comparable Period")
The Partnership incurred a net loss of $(3,534,215) for the nine months ended
September 30, 1996 ("current period"). The increased net loss was due to the
increased St. Andrews repair and legal costs. Rental revenue for the current
period was $3,512,747 as compared to $3,431,056 for the nine month period ended
September 30, 1995 ("the comparable period"). The increase in rental revenue
of $81,691 was primarily due to higher average occupancy at NEBC during the
current period and higher occupancy at St. Andrews partly offset by reduced
occupancy at Shadeland. Property operating expenses increased $146,672 to
$1,522,519 for the current period from $1,375,847 for the comparable period.
The increase is the result of increased operating expenses at each property.
Rental revenue at NEBC increased $103,840 to $1,304,761 for the current period
as compared to $1,200,921 for the comparable period due to increased average
occupancy during the current period and higher lease termination fees. Average
occupancy was higher due to the 14,589 square foot Electronic Data Systems
Corporation lease in Building 5 executed during July 1995. Lease termination
fees were higher due to the departure of two tenants prior to lease expiration.
The actual overall occupancy at September 30, 1996 at NEBC decreased to 86% as
compared to 88% at September 30, 1995. The actual occupancy for office and
service center space at September 30, 1996 was 82% and 100% respectively, as
compared to 88% and 87% respectively, at September 30, 1995. The decreased
actual office occupancy at September 30, 1996 was due primarily to the departure
of five tenants at or before lease expiration offset in part by the addition of
two new tenants during the current period. The net increase in service center
space was due to the signing of two new tenant leases during the fourth quarter
of 1995. The average rental rate at September 30, 1996 decreased to $8.64 per
square foot for office space and increased to $6.96 per square foot for service
center space as compared to $8.76 and $6.84, respectively, at September 30,
1995. The decrease in the office space average rental rate is due to new tenant
leases at lower rental rates as a result of having lower tenant improvement
allowances. The increase in service center average rental rates is due
primarily to a tenant renewal at a higher rental rate.
<PAGE>
Operating expenses at NEBC increased $14,284 to $561,002 for the current period
as compared to $546,718 for the comparable period. The increase was primarily
due to increased cleaning and grounds and landscaping costs offset in part by
lower real estate taxes. Cleaning costs were up due to the higher occupancy at
Building 5 during 1996. The real estate taxes are lower in the current period
since the current period included a refund received as a result of the
successful tax appeal. Grounds and landscaping costs are higher due to snow
removal costs associated with the severe winter weather and higher parking lot
surface repairs.
Rental revenue at St. Andrews increased $49,735 to $1,355,217 for the current
period as compared to $1,305,482 for the comparable period. The increase in
rental revenue was due to an increase in occupancy. The average occupancy at
St. Andrews increased to 94% for the current period as compared to 91% for the
comparable period. The average monthly non-corporate rental rate during the
current period increased to $603 per unit as compared to $599 during the
comparable period due to increased market rental rates. The number of corporate
units increased from three at September 30, 1995 to thirty at September 30,
996. The increase in corporate units is the result of greater marketing efforts
by the property manager geared towards local employers with current employee
housing needs. Operating expenses at St. Andrews, excluding the repair and
legal costs discussed below, increased $53,448 to $685,470 for the current
period as compared to $632,022 for the comparable period. This increase is
primarily due to higher payroll, corporate unit expenses, and on-site
third-party property management fees offset in part by lower real estate tax
expenses. Payroll costs are higher due to the addition of a part time
groundskeeper. Corporate unit expenses were higher during the current period
due to the increased number of corporate units. On-site third-party property
management fees are higher due to the payment of the 1995 incentive fee during
the current period. Real estate tax expenses are lower due to a receipt in
1996 for a successful appeal of the Property's 1995 assessed value.
The St. Andrews repair and legal costs related to the construction problems
have been reclassified to that category from property operating expenses.
During the current period, the Partnership has incurred approximately $3,097,000
and $251,000 of repair and legal costs, respectively at St. Andrews. The
Partnership has negotiated and received settlements from several of the
responsible parties including $45,000 during the current period and $565,000
during the comparable period. All of the amounts received during the current
period were used to offset repair costs incurred during the current period. A
$500,000 insurance recovery was also received during the first quarter of 1996
and used to offset repair costs incurred during 1996. Approximately $308,000
of the settlements received during 1995 were used to offset certain engineering
and construction costs incurred during 1995. The remaining settlement proceeds
of approximately $257,000 received during 1995 were deferred and included in
liabilities as deferred recoveries to offset future construction costs.
Rental revenue at Shadeland decreased $71,884 to $852,769 for the current period
as compared to $924,653 for the comparable period. The decrease is primarily
due to decreased occupancy. The average rental rate was $10.44 per square foot
at September 30, 1996 and $10.43 at September 30, 1995. Occupancy at Shadeland
declined to 89% as of September 30, 1996 as compared to 96% as of September 30,
1995. The decrease in occupancy is primarily due to Ace Hardware, a Shadeland
tenant, vacating its 8,000 square foot space at the end of its lease in the
fourth quarter of 1995. Expense reimbursements declined due to the Ace Hardware
vacancy and a lower level of reimbursable expenses. Operating expenses at
Shadeland increased $78,940 to $276,047 for the current period as compared to
$197,107 for the comparable period. The increase is due to higher snow removal
costs during 1996 associated with the severe winter weather and higher real
estate taxes. The increased real estate taxes were due to a tax assessment in
excess of the amount anticipated and previously accrued in the current tax year.
<PAGE>
Partnership expense is comprised of general and administrative expenses and the
interest expense related to the Cash Flow Protector and General Partner loans
offset by interest earned on temporary investments. The increase of $107,432 to
$425,132 for the current period as compared to $317,700 is primarily due to the
interest expense related to the St. Andrews construction loan from the USF&G
General Partner which was initially drawn upon in February 1996.
Total general and administrative expenses decreased by $8,382 to $102,462 for
the current period as compared to $110,844 for the comparable period. General
and administrative expenses include various costs required for the
administration of the Partnership. The decrease is primarily due to lower
professional fees.
Interest expense includes interest incurred in connection with the mortgages
secured by NEBC, St. Andrews and Shadeland and interest on the Cash Flow
Protector Loan and St. Andrews construction loans from the USF&G General Partner
and the General Partner loans. Interest expense increased $98,037 to $1,704,139
for the current period as compared to $1,606,102 for the comparable period. The
increase is due to interest incurred on the St. Andrews construction loan as
mentioned above.
Depreciation and amortization expense increased by $25,150 to $930,848 for the
current period as compared to $905,698 for the comparable period. The increase
was primarily due to the amortization of leasing commission and tenant
improvement additions at NEBC.
Results of Operations
Net Income (Loss) Net Income (Loss)
for the Three for the Three
Months Ended Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
NEBC $ (32,634) $ (24,988)
St. Andrews (104,676) (106,710)
St. Andrews Repair and Legal Costs, Net (117,759) (57,196)
Shadeland 40,948 46,127
-------- --------
(214,121) (142,767)
Partnership Expense (170,169) (104,700)
-------- --------
$(384,290) $(247,467)
======== ========
Three Months Ended September 30, 1996 ("Current Period")
as compared to September 30, 1995 ("Comparable Period")
The Partnership incurred a net loss of $(384,290) for the three months ended
September 30, 1996 ("current period"). The increased net loss was due to the
increased St. Andrews repair and legal costs and increased interest on the St.
Andrews construction loan. Rental revenue for the current period was $1,189,896
as compared to $1,149,755 for the three month period ended September 30, 1995
("the comparable period"). The increase in rental revenue of $40,141 was
primarily due to higher average occupancy at NEBC during the current period and
higher occupancy at St. Andrews. Property operating expenses increased $38,176
to $516,046 for the current period from $477,870 for the comparable period due
primarily to increased operating expenses at NEBC and St. Andrews.
<PAGE>
Rental revenue at NEBC increased $28,212 to $451,038 for the current period as
compared to $422,826 for the comparable period due to increased average
occupancy during the current period and higher lease termination fees. Average
occupancy was higher due to the 14,589 square foot Electronic Data Systems
Corporation lease in Building 5 executed during July 1995. Lease termination
fees were higher due to the departure of one tenant prior to lease expiration.
The actual overall occupancy at September 30, 1996 at NEBC decreased to 86% as
compared to 88% as of September 30, 1995. The actual occupancy for office and
service center space at September 30, 1996 was 82% and 100% respectively, as
compared to 88% and 87% respectively, at September 30, 1995. The decreased
actual office occupancy at September 30, 1996 was due primarily to the departure
of five tenants at or before lease expiration offset in part by the addition
of two new tenants during the current period. The net increase in service
center space was due to the signing of two new tenant leases during the fourth
quarter of 1995. The average rental rate at September 30, 1996 decreased to
$8.64 per square foot for office space and increased to $6.96 per square foot
for service center space as compared to $8.76 and $6.84, respectively, at
September 30, 1995. The decrease in the office space average rental rate is due
to new tenant leases at lower rental rates as a result of having lower tenant
improvement allowances. The increase in service center average rental rates is
due primarily to a tenant renewal at a higher rental rate.
Operating expenses at NEBC increased $23,200 to $205,141 for the current period
as compared to $181,941 for the comparable period. The increase was primarily
due to increased grounds and landscaping costs offset in part by lower
utilities. Utilities are lower due to the increased office vacancies. Grounds
and landscaping costs are higher due primarily to higher parking lot surface
repairs.
Rental revenue at St. Andrews increased $24,602 to $461,302 for the current
period as compared to $436,700 for the comparable period. The increase in
rental revenue was due to the increased occupancy. The average occupancy at St.
Andrews for the current period was 96% as compared to 92% for the comparable
period. The average monthly non-corporate rental rate during the current period
increased to $603 per unit as compared to $596 during the comparable period
due to increased market rental rates. The number of corporate units increased
to thirty at September 30, 1996 from three at September 30, 1995. The increase
in corporate units is the result of greater marketing efforts by the property
manager geared towards local employers with current employee housing needs.
Operating expenses at St. Andrews increased $19,135 to $246,967 for the current
period as compared to $227,832 for the comparable period. The increase in
operating expenses is primarily due to an increase in payroll and real estate
tax expense offset in part by lower security costs. Payroll costs are higher
due to the addition of a part time groundskeeper. Real estate taxes are higher
due to an anticipated increase in the tax assessment. Security costs were
higher during the comparable period due to the replacement of locks on
apartments. In addition, operating expenses in general were up due to the
increased occupancy.
The St. Andrews repair and legal costs related to the construction problems have
been reclassified to that category from property operating expenses. During the
current period, the Partnership has incurred approximately $25,000 and $93,000
of repairs and legal costs, respectively at St. Andrews. The Partnership has
negotiated and received settlements from several of the responsible parties
including $45,000 during 1996 and $565,000 during 1995. No settlements were
received during the current period and $100,000 of the $565,000 received during
1995 was received during the comparable period.
<PAGE>
Rental revenue at Shadeland decreased $12,673 to $277,556 for the current
period as compared to $290,229 for the comparable period. The decrease is
primarily due to lower occupancy. The average rental rate was $10.44 per square
foot at September 30, 1996 and $10.43 at September 30, 1995. Occupancy at
Shadeland declined to 89% as of September 30, 1996 as compared to 96% as of
September 30, 1995. Operating expenses at Shadeland decreased $4,159 to $63,938
for the current period as compared to $68,097 for the comparable period. The
decrease is primarily due to a decrease in bad debt expense and maintenance
costs offset in part by higher real estate taxes. Bad debt expense was higher
in the comparable period due to a write-off of rental charges from a tenant in
bankruptcy. Maintenance costs declined due to a decrease in roof repairs and
electric repairs. Real estate taxes are higher due to an increased tax
assessment.
Partnership expense is comprised of general and administrative expenses and the
interest expense related to the Cash Flow Protector, General Partner, and St.
Andrews construction loans offset in part by interest earned on temporary
investments. The increase of $65,469 to $170,169 for the current period as
compared to $104,700 is due to the interest expense related to the St. Andrews
construction loan from the USF&G General Partner which was initially drawn upon
in February 1996.
Total general and administrative expenses decreased by $3,359 to $35,132 for the
current period as compared to $38,491 for the comparable period. General and
administrative expenses include various costs required for the administration of
the Partnership. The decrease is primarily due to lower professional fees.
Interest expense includes interest incurred in connection with the mortgages
secured by NEBC, St. Andrews and Shadeland and interest on the Cash Flow
Protector and St. Andrews construction loans from the USF&G General Partner and
the General Partner loans. Interest expense increased $58,815 to $594,627 for
the current period as compared to $535,812 for the comparable period. The
increase is due to interest incurred on the St. Andrews construction loan as
mentioned above.
Depreciation and amortization expense increased by $9,965 to $314,662 for the
current period as compared to $304,697 for the comparable period primarily due
to the amortization of leasing commissions and tenant improvement additions at
NEBC.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits
None
<PAGE>
SIGNATURES
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, and in the capacity and on the date
indicated.
USF&G/LEGG MASON REALTY PARTNERS
LIMITED PARTNERSHIP
(Registrant)
By: USF&G Realty Partners, Inc.,
A General Partner
Date: __________ _________________________________
Joseph A. Wesolowski
Vice President and Chief
Accounting Officer
<PAGE>
SIGNATURES
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, and in the capacity and on the date
indicated.
USF&G/LEGG MASON REALTY PARTNERS
LIMITED PARTNERSHIP
(Registrant)
By: USF&G Realty Partners, Inc.,
A General Partner
Date: __________ /s/ Joseph A. Wesolowski
Joseph A. Wesolowski
Vice President and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 995425
<SECURITIES> 0
<RECEIVABLES> 72006
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 34793450
<DEPRECIATION> 6805273
<TOTAL-ASSETS> 29382704
<CURRENT-LIABILITIES> 0
<BONDS> 20546581
0
0
<COMMON> (2251389)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29382704
<SALES> 0
<TOTAL-REVENUES> 3528459
<CGS> 0
<TOTAL-COSTS> 5358535
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<INCOME-PRETAX> (3534215)
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REGISTRANT REPORTS AN UNCLASSIFIED BALANCE SHEET
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