As filed with the SEC on____________________. Registration No. 33-20083
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-1
Post-Effective Amendment No. 7
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
in respect of
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(Exact Name of Registrant)
c/o THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
(800) 445-4571
(Address and telephone number of principal executive offices)
----------
Thomas C. Castano
Assistant Secretary
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
(800) 445-4571
(Name, address, and telephone number of agent for service)
Copy to:
Jeffrey C. Martin
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
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<PAGE>
CROSS REFERENCE SHEET
(as required by Form S-1)
S-1 Item Number and Caption Location
- --------------------------- --------
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus ................ Cover
2. Inside Front and Outside Back
Cover Pages of Prospectus ......... Inside Front Cover
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges ........................... Prospectus Cover; Summary; Risk
Factors
4. Use of Proceeds ................... Investment Policies; Current Real
Estate-Related Investments;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations
5. Determination of Offering Price ... Not Applicable
6. Dilution .......................... Not Applicable
7. Selling Security Holders .......... Not Applicable
8. Plan of Distribution .............. Distribution of the Contracts
9. Description of Securities to be
Registered ........................ Prospectus Cover; General Information
about The Prudential Insurance Company
of America, The Prudential Variable
Contract Real Property Account, The
Prudential Variable Contract Real
Property Partnership, and The
Investment Manager; The Real Property
Account's Unavailability to Certain
Contracts; Valuation of Contract
Owners' Participating Interests;
Charges; Restrictions on Withdrawals;
Restrictions on Contract Owners'
Investment in the Real Property
Account
10. Interests of Named Experts and
Counsel ........................... Not Applicable
11. Information With Respect to the
Registrant ........................ General Information about The
Prudential Insurance Company of
America, The Prudential Variable
Contract Real Property Account, The
Prudential Variable Contract Real
Property Partnership, and The
Investment Manager; Investment
Policies; Current Real Estate-Related
Investments; Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Per Share
Investment Income and Capital Changes;
Investment Restrictions; Conflicts of
Interest; Valuation of Contract
Owners' Participating Interests;
Financial Statements; Litigation;
State Regulation; Federal Income Tax
Considerations
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities ................... Not Applicable
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PROSPECTUS
May 1, 1995
THE PRUDENTIAL
VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
This prospectus describes the real estate investment option that The Prudential
Insurance Company of America ("The Prudential") offers in connection with the
funding of benefits under certain variable life insurance and variable annuity
contracts (the "Contracts") it issues. These Contracts are described in
different prospectuses, and this prospectus is attached to the prospectus for
the type of Contract selected. Although the Contracts vary in their terms, each
provides that owners may allocate all or part of their net premiums or purchase
payments to The Prudential Variable Contract Real Property Account (the "Real
Property Account"), a separate account of The Prudential. The assets of the Real
Property Account are invested entirely through The Prudential Variable Contract
Real Property Partnership (the "Partnership") which is a general partnership
established by The Prudential and two of its subsidiaries, Pruco Life Insurance
Company ("Pruco Life") and Pruco Life Insurance Company of New Jersey ("Pruco
Life of New Jersey"), to provide for investment of assets allocated to the real
property investment option under variable contracts issued by those companies.
Through the Partnership, the assets of the Real Property Account will be
invested primarily (at least 65%) in direct ownership interests in
income-producing real property such as office buildings, shopping centers,
apartments, industrial properties, agricultural land or hotels, participating
mortgage loans originated by the Partnership, and real property sale-leaseback
transactions negotiated on behalf of the Partnership. It is expected that
typically the large majority of these real estate investments will be in direct
ownership interests in real estate, including but not limited to fee interests,
general partnership interests, leaseholds, and tenancies in common. Apart from a
portion of the Partnership's assets (normally 10-15%) invested in short-term or
intermediate-term debt instruments for liquidity purposes, the remainder of the
Partnership's assets may be invested in other types of real estate-related
investments, including primarily conventional, non-participating mortgage loans
and real estate investment trusts. Values under the Contracts, with respect to
the portion of the Contract owner's Contract fund allocated to the Real Property
Account, will vary with the performance of the Real Property Account's
investments through the Partnership.
The investment objectives of the Real Property Account and Partnership are to:
(i) preserve and protect capital; (ii) provide for compounding of income as a
result of reinvestment of cash flow from investments; and (iii) provide for
increases over time in the amount of such income through appreciation in the
value of assets. There can be no assurance, of course, that these investment
objectives will be met.
--------------------------------
THIS OFFERING INVOLVES CERTAIN RISK FACTORS. Investment in the Real Property
Account involves a significant degree of risk, attributable in part to the fact
that the assets held in the Partnership may not be readily salable on
commercially reasonable terms. See RISK FACTORS, page 10. The assets of the Real
Property Account and Partnership will not be as liquid as the investments
generally made by variable life insurance and variable annuity separate accounts
(see Liquidity of Investments, page 10) and the ability of the Contract owner to
withdraw or transfer portions of his or her Contract fund allocated to the Real
Property Account may be subject to certain restrictions. See RESTRICTIONS ON
WITHDRAWALS, page 16. Moreover, the investments and operation of the Real
Property Account and Partnership may be subject to certain conflicts of
interest. See CONFLICTS OF INTEREST, page 12.
--------------------------------
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE RELATED VARIABLE CONTRACT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
PRPA-3 Ed 5-95
<PAGE>
PROSPECTUS CONTENTS
Page
PER SHARE INVESTMENT INCOME, CAPITAL
CHANGES, AND SELECTED RATIOS ......................................... 1
SUMMARY ................................................................... 2
GENERAL INFORMATION ABOUT THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA, THE
PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY ACCOUNT, THE PRUDENTIAL
VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP, AND THE INVESTMENT
MANAGER .............................................................. 3
The Prudential Insurance Company of
America ......................................................... 3
The Prudential Variable Contract Real Property
Account ......................................................... 3
The Prudential Variable Contract Real Property
Partnership ..................................................... 3
The Investment Manager ............................................... 4
INVESTMENT POLICIES ....................................................... 5
Overview ............................................................. 5
Investment in Direct Ownership Interests in Real
Estate .......................................................... 5
Investments in Mortgage Loans ........................................ 6
Investments in Sale-Leasebacks ....................................... 7
General Investment and Operating Policies ............................ 8
CURRENT REAL ESTATE-RELATED INVESTMENTS ................................... 9
Properties ........................................................... 9
RISK FACTORS .............................................................. 10
Liquidity of Investments ............................................. 10
General Risks of Real Property Investments ........................... 10
Reliance on The Partners and The Investment
Manager ......................................................... 11
INVESTMENT RESTRICTIONS ................................................... 12
CONFLICTS OF INTEREST ..................................................... 12
THE REAL PROPERTY ACCOUNT'S
UNAVAILABILITY TO CERTAIN CONTRACTS .................................. 14
VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS .............................................. 14
BORROWING BY THE PARTNERSHIP ......................................... 15
CHARGES .............................................................. 16
RESTRICTIONS ON WITHDRAWALS .......................................... 16
RESTRICTIONS ON CONTRACT OWNERS'
INVESTMENT IN THE REAL PROPERTY
ACCOUNT .............................................................. 17
FEDERAL INCOME TAX CONSIDERATIONS .................................... 17
DISTRIBUTION OF THE CONTRACTS ........................................ 18
STATE REGULATION ..................................................... 18
ADDITIONAL INFORMATION ............................................... 18
EXPERTS .............................................................. 18
LITIGATION ........................................................... 18
FINANCIAL STATEMENTS ................................................. 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ........................................................... 18
FINANCIAL STATEMENTS OF THE PRUDENTIAL
VARIABLE CONTRACT REAL PROPERTY
ACCOUNT ................................................................... A1
FINANCIAL STATEMENTS OF THE PRUDENTIAL
VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP ............................................................... B1
<PAGE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
The Registrant is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission. All reports and
information filed by the Registrant can be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at certain of its regional offices: 500 West Madison Street, Suite
1400, Chicago, IL 60661- 2511; 7 World Trade Center, Suite 1300, New York, NY
10048.
REPORTS TO CONTRACT OWNERS
The Prudential will mail to each Contract owner who elects to allocate a portion
of his or her Contract fund to the Real Property Account an annual report
containing audited financial statements for the Real Property Account and the
Partnership and an annual statement showing the status of his or her Contract
fund and such other information as may be required by applicable regulation or
law.
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES, AND SELECTED RATIOS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
The following information on per share investment income, capital changes, and selected ratios has been audited by Deloitte & Touche
LLP, independent auditors. Their report is included with the financial statements and notes thereto of The Prudential Variable
Contract Real Property Partnership.
01/01/94 01/01/93 01/01/92 01/01/91 01/01/90
to to to to to
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Rent from properties $ 1.2754 $ 1.1659 $ 1.0727 $ 0.9899 $ 0.9479
Income from interest in properties $ 0.1838 $ 0.2139 $ 0.1970 $ 0.1791 $ 0.1533
Interest on mortgage loans $ 0.0082 $ 0.0755 $ 0.0711 $ 0.0663 $ 0.0654
Interest from short-term investments $ 0.1226 $ 0.0549 $ 0.0653 $ 0.1151 $ 0.1202
---------- ---------- ---------- ---------- ----------
INVESTMENT INCOME $ 1.5900 $ 1.5102 $ 1.4061 $ 1.3504 $ 1.2868
---------- ---------- ---------- ---------- ----------
Investment management fee $ 0.1786 $ 0.1673 $ 0.1642 $ 0.1669 $ 0.1591
Real estate tax expense $ 0.1399 $ 0.1465 $ 0.1488 $ 0.1168 $ 0.1010
Administrative expenses $ 0.1103 $ 0.1187 $ 0.1046 $ 0.0946 $ 0.0910
Operating expenses $ 0.1332 $ 0.1209 $ 0.1241 $ 0.0948 $ 0.0776
Interest expense $ 0.0255 $ 0.0236 $ 0.0215 $ 0.0193 $ 0.0186
---------- ---------- ---------- ---------- ----------
EXPENSES $ 0.5875 $ 0.5770 $ 0.5632 $ 0.4924 $ 0.4473
---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME $ 1.0025 $ 0.9332 $ 0.8429 $ 0.8580 $ 0.8395
---------- ---------- ---------- ---------- ----------
Net realized loss on investments sold $ (0.0966) $ (0.1816) $ 0.0000 $ 0.0000 $ 0.0000
Net unrealized gain/(loss) on investments $ 0.2169 $ 0.0152 $ (1.1359) $ (0.7770) $ (0.1543)
---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS $ 0.1203 $ (0.1664) $ (1.1359) $ (0.7770) $ (0.1543)
========== ========== ========== ========== ==========
Net increase/(decrease) in share value $ 1.1228 $ 0.7668 $ (0.2930) $ 0.0810 $ 0.6852
Share Value at beginning of period $ 13.3564 $ 12.5896 $ 12.8826 $ 12.8016 $ 12.1164
---------- ---------- ---------- ---------- ----------
Share Value at end of period $ 14.4792 $ 13.3564 $ 12.5896 $ 12.8826 $ 12.8016
========== ========== ========== ========== ==========
Ratio of expenses to average net assets 4.27% 4.44% 4.47% 3.81% 3.58%
Ratio of net investment income to
average net assets 7.29% 7.17% 6.69% 6.63% 6.72%
Number of shares outstanding at
end of period (000's) 12,241 13,031 14,189 14,993 16,175
</TABLE>
All calculations are based on average month-end shares outstanding, where
applicable.
Per share information presented herein is shown on a basis consistent with the
financial statements as discussed in Note 1G.
1 - Real Property
<PAGE>
SUMMARY
This prospectus describes The Prudential Variable Contract Real Property Account
(the "Real Property Account"), a separate account of The Prudential Insurance
Company of America ("The Prudential") created pursuant to New Jersey insurance
law. See The Prudential Insurance Company of America, page 3 and The Prudential
Variable Contract Real Property Account, page 3. Under that law, the assets of
the Real Property Account are not chargeable with liabilities arising out of any
other business of The Prudential. Owners of certain variable life insurance and
variable annuity contracts issued by The Prudential may allocate a portion of
their net premiums or purchase payments, or transfer a portion of the total
amount invested under their Contracts (known as the "Contract fund"), to the
Real Property Account, and values and benefits under the Contracts will
thereafter reflect the investment experience of the Real Property Account.
Contract owners, not The Prudential, bear the risks and rewards of the
investment performance of the Real Property Account to the extent of the
Contract owner's Contract fund invested in the Real Property Account. This
prospectus is attached to and should be read in conjunction with the prospectus
for the type of Contract selected.
The assets of the Real Property Account are invested through The Prudential
Variable Contract Real Property Partnership (the "Partnership"), which invests
primarily in income-producing real estate. See The Prudential Variable Contract
Real Property Partnership, page 3. The Prudential is the investment manager of
the Partnership. See The Investment Manager, page 4. The Partnership invests at
least 65% of its assets in direct ownership interests in income-producing real
estate, participating mortgage loans (mortgages providing for participation in
the revenues generated by, or the appreciation of, the underlying property, or
both) originated for the Partnership, and real property sale-leasebacks
negotiated by The Prudential on behalf of the Partnership. It is expected that
typically the large majority of these real estate investments will be in direct
ownership interests in income producing real estate, such as office buildings,
shopping centers, apartments, industrial properties or hotels. The Partnership
may also invest up to 5% of its assets in direct ownership interests in
agricultural land. A small portion of the Partnership's assets (ordinarily
10-15%) will be invested in short-term or intermediate-term marketable debt
securities. The remainder of the Partnership's assets may be invested in other
types of real estate-related investments, including conventional,
non-participating mortgage loans and real estate investment trusts. The
investment objectives of the Partnership are to: (i) preserve and protect the
Partnership's capital; (ii) provide for compounding of income as a result of
reinvestment of cash flow from investments; and (iii) provide for increases over
time in the amount of such income through appreciation in the value of acquired
real property and, to a lesser extent, through mortgage loans and sale-leaseback
transactions. See INVESTMENT POLICIES, page 5. There is no assurance that
sufficient suitable investments will be found or that the Partnership's
objectives will be attained.
Investment in the Real Property Account, and thereby, participation in the
investment experience of the Partnership, involves significant risks. See RISK
FACTORS, page 10. These include the risk of fluctuating real estate values and
the risk that the appraised or estimated values of the Partnership's real
property investments will not be realized upon their disposition. Many of the
Partnership's real estate investments will not be quickly convertible into cash
through disposition on commercially reasonable terms. The Real Property Account
should therefore be viewed only as a long-term investment. See RESTRICTIONS ON
WITHDRAWALS, page 16. For certain other risk factors associated with the Real
Property Account, see RISK FACTORS, page 10.
The Prudential has taken steps to ensure that the Real Property Account and
Partnership will be sufficiently liquid to satisfy all withdrawal or loan
requests promptly (within 7 days). The Partnership will normally maintain 10-15%
of its assets in short-term and intermediate-term marketable debt instruments
and will have income streams from its real property investments, mortgage loans,
and leasebacks. Moreover, the Partnership may borrow funds for liquidity
purposes, if necessary. See BORROWING BY THE PARTNERSHIP, page 15. There are
currently in force limitations on transfers out of the Real Property Account.
See RESTRICTIONS ON WITHDRAWALS, page 16.
The Prudential's management of the Partnership is subject to certain conflicts
of interest, including the possible acquisition of properties from affiliates.
See CONFLICTS OF INTEREST, page 12.
The Prudential generally charges the Partnership a daily fee for investment
management which amounts to 1.25% per year of the average daily gross assets of
the Partnership. The Partnership also compensates The Prudential for providing
certain accounting and administrative services to the Partnership. See CHARGES,
page 16.
Contract owners who select the real property investment option will also be
subject to the same Contract charges with respect to the portion of their
Contract fund allocated to the Real Property Account as they are with respect to
the portion of their Contract fund allocated to a separate account that invests
in The Prudential Series Fund, Inc. (the "Series Fund"), the underlying funding
vehicle for the other variable investment options available to Contract owners.
The particular Contract prospectus should be consulted for a description of
those charges. The Real Property Account is currently available to purchasers of
Prudential's Variable Investment Plan(R) Contracts, The Prudential's Discovery
(SM) Plus Contracts, The Prudential's Variable Appreciable Life(R) Insurance
Contracts, and The
2 - Real Property
<PAGE>
Prudential's Custom VAL(SM) Life Insurance Contracts, except for Contracts, such
as those purchased in connection with IRAs, Section 403(b) annuities, and other
tax-qualified plans, that are subject to the Employee Retirement Income Security
Act of 1974 ("ERISA") or to the prohibited transaction excise tax provisions of
the Internal Revenue Code. See THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO
CERTAIN CONTRACTS, page 14. A Variable Appreciable Life Contract owner, for
example, who elects to invest part of his or her net premiums in The Prudential
Variable Appreciable Account and part in the Real Property Account will be
subject to the same monthly sales load charges, the same risk charges, the same
administrative charges, the same insurance charges, and the same contingent
deferred sales load charges without regard to what portion is invested in The
Prudential Variable Appreciable Account and what portion is invested in the Real
Property Account. The Real Property Account has established different
subaccounts, relating to the different types of variable Contracts that may
participate in the Real Property Account, and these subaccounts provide the
mechanism and maintain the records whereby these different Contract charges are
made.
GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY ACCOUNT, THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY PARTNERSHIP, AND THE INVESTMENT MANAGER
The Prudential Insurance Company of America. The Prudential Insurance Company of
America ("The Prudential") is a mutual insurance company, founded in 1875 under
the laws of the State of New Jersey. It is licensed to sell life insurance and
annuities in the District of Columbia, Guam, and in all states. These Contracts
are not offered in any state in which the necessary approvals have not yet been
obtained.
The Prudential's consolidated financial statements appear in either the attached
Contract prospectus or in the statement of additional information for the
Contract prospectus, which is available upon request.
The Prudential Variable Contract Real Property Account. The Prudential Variable
Contract Real Property Account (the "Real Property Account") was established on
November 20, 1986 under New Jersey law as a separate investment account. The
account meets the definition of a "separate account" under the federal
securities laws. The Real Property Account holds assets that are segregated from
all the other assets of The Prudential. The Real Property Account is used only
to support those variable benefits payable under the Contracts that are funded
by the real estate investment option.
The obligations to Contract owners and beneficiaries arising under the Contracts
are general corporate obligations of The Prudential. The Prudential is also the
legal owner of the assets in the Real Property Account. The Prudential will at
all times maintain assets in the Real Property Account with a total market value
at least equal to the amounts credited under the real estate option to all the
Contracts participating in the Real Property Account. These assets may not be
charged with liabilities which arise from any other business The Prudential
conducts. In addition to these assets, the Real Property Account's assets may
include funds contributed by The Prudential, and may include accumulations of
the charges The Prudential makes against the Real Property Account.
The Prudential will bear the risks and rewards of the Real Property Account's
investment experience to the extent of its investment in the Real Property
Account. After the Real Property Account has been in operation for some time,
The Prudential may withdraw or redeem its investment in the Real Property
Account, but will not make any such redemption unless it is satisfied that the
redemption will not have a materially adverse impact on the Real Property
Account. Accumulations of charges will be withdrawn on a regular periodic basis.
Unlike the other separate accounts funding the Contracts, the Real Property
Account is not registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 as an investment company. For state law
purposes, the Real Property Account is treated as a part or division of The
Prudential. Contract owners have no voting rights with respect to the Real
Property Account. The Real Property Account is under the control and management
of The Prudential, and the Board of Directors and officers of The Prudential are
responsible for the management of the Real Property Account. No salaries of The
Prudential personnel are paid by the Real Property Account. Information
regarding the directors and officers of The Prudential is contained in the
attached prospectus for the Contract. The financial statements of the Real
Property Account begin on page A1.
The Prudential Variable Contract Real Property Partnership. All amounts
allocated to the Real Property Account are invested through The Prudential
Variable Contract Real Property Partnership (the "Partnership"), a general
partnership organized under New Jersey law on April 29, 1988. The only partners
in the Partnership (collectively, the "Partners") are The Prudential and two of
its subsidiaries, Pruco Life Insurance Company ("Pruco Life") and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established to provide a means for assets allocated to the real estate
investment options under variable life insurance and variable
3 - Real Property
<PAGE>
annuity contracts issued by these three companies to be invested in a commingled
pool, so as to provide greater diversification of investments and lower
transaction costs than would be possible if such assets were separately invested
by each company. All amounts allocated to the Real Property Account are
contributed by The Prudential to the Partnership. The Prudential's general
partnership interest in the Partnership is held in the Real Property Account.
The initial contributions to the Partnership were made on April 29, 1988. The
Prudential contributed $100,000 in cash to the Partnership; Pruco Life of New
Jersey contributed $100,000 in cash to the Partnership; and Pruco Life
contributed the real estate and other assets held in its real estate separate
account, which had been actively investing in real estate for more than a year.
Those assets had an estimated market value of $91,538,737 on that date. Each
Partner is entitled to its prospective proportionate share of all income, gains,
and losses of the Partnership.
The assets of the Partnership are valued on each business day and the value of
each Partner's interest will fluctuate with the investment performance of the
Partnership. In addition, the interests of the Partners are proportionately
readjusted, at the then current value, on each day when a Partner makes a
contribution to, or withdrawal from, the Partnership. When a Contract owner
chooses to allocate a portion of his or her net premiums or purchase payments,
or transfer a portion of his or her Contract fund, to the Real Property Account,
The Prudential will contribute that amount to the Partnership as a capital
contribution, which will correspondingly increase the Real Property Account's
interest in the Partnership. Values and benefits under the Contract will
thereafter vary with the performance of the Partnership's investments. For
further discussion on how the value of a Contract owner's interest in the Real
Property Account and the value of the Partnership's investments are calculated,
see VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS, page 14.
Contract owners have no voting rights with respect to the operations of the
Partnership. The financial statements of the Partnership begin on page B1.
The Investment Manager. Pursuant to an investment management agreement, the
Partnership has retained The Prudential to act as investment manager of the
Partnership. The Prudential is one of the largest real estate investors in North
America. The Prudential has been making mortgage loans since before 1900 and is
one of the most experienced real estate mortgage lenders in the United States.
The Prudential, through its affiliates, has a nationwide staff to underwrite,
originate, and service such loan activity. Its network of field offices has
direct working relationships with regional and national real estate developers,
brokers, managers, and investors providing The Prudential with mortgage
investment opportunities on a national basis. Since the early 1970's, The
Prudential's mortgage lending has been concentrated in the commercial and
agricultural markets. The urban commercial lending activities include loans
secured by apartment, office, and industrial buildings, hotels and motels, and
shopping centers.
In the late 1940's, The Prudential began to acquire real estate equities. Today,
The Prudential and its affiliates continue to make equity investments in
investment properties and develop income-producing real estate.
At present, The Prudential directly and through affiliates invests in and
manages real estate equities and mortgages for its general account and for
several separate accounts. The Prudential and its affiliates also participate in
real estate ventures through public and private partnerships and an affiliate
advises a publicly owned real estate investment trust. As of December 31, 1994,
The Prudential owned or controlled $34.2 billion of net real estate mortgages
and equities of which $27.4 billion is in the general account, $3.5 billion is
in separate accounts and $3.3 billion is in subsidiaries. Statement value for
general account assets is recorded at depreciated cost and for separate account
assets at market value. For a discussion of how the Partnership's real
estate-related investments are valued, see VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14.
The Prudential has organized its real estate activities into separate business
units. Those business units are: Prudential Real Estate Investors (PREI) and the
Prudential Realty Group (PRG). The latter business unit focuses primarily on The
Prudential's General Account real estate investment needs. However, PREI is
responsible for the investments of the Real Property Account.
PREI provides investment management services on a domestic basis and also acts
as part of a global team providing these services to institutional investors
worldwide. PREI is headquartered in Short Hills, New Jersey and has 7 regional
realty group offices (RGOs) across the United States. As of December 31, 1994,
PREI had under management approximately 15.4 million net rentable square feet of
office real estate, 24.3 million net rentable square feet of industrial real
estate, 7.6 million net rentable square feet of retail real estate, 6,000 hotel
rooms, 14,300 multifamily residential units, and 772 acres of unimproved land.
The PRG may provide PREI with such services as may be required in connection
with the investment management agreement regarding the Partnership. PRG is
headquartered in Newark, New Jersey, and has 5 regional offices across the
United States. As of December 31, 1994, PRG had under management approximately
42.3 million net rentable square feet of office real estate, 10.8 million net
rentable square feet of industrial real estate, 3.9 million
4 - Real Property
<PAGE>
net rentable square feet of retail real estate, 13,760 hotel rooms, 4,543
multifamily residential units, and manages a portfolio of mortgage loans
totalling approximately $22.7 billion.
Proposals to acquire properties for the Partnership will generally be originated
by the RGOs and reviewed and approved by the Investment Committee of PREI.
Depending upon the size of the acquisition and other factors, a proposed real
estate investment may also be submitted for review to the Finance Committee of
the Board of Directors of The Prudential.
INVESTMENT POLICIES
Overview. The Partnership has an investment policy of investing at least 65% of
its assets in direct ownership interests in income-producing real estate,
participating mortgage loans originated for the Partnership, and real property
sale-leasebacks negotiated by The Prudential on behalf of the Partnership. It is
expected that the largest portion of these real estate investments will be in
direct ownership interests (including fee interests, general partnership
interests, leaseholds, and tenancies in common) in income-producing real estate,
such as office buildings, shopping centers, apartments, industrial properties or
hotels. The Partnership may also invest up to 5% of its assets in direct
ownership interests in agricultural land. From 10-15% of the Partnership's
assets will ordinarily be invested in short-term debt obligations of the type
purchased by the Money Market Portfolio of the Series Fund or in
intermediate-term bonds of the type invested in by the Bond Portfolio of the
Series Fund. The Partners reserve the right to increase this amount up to 30% of
the Partnership's assets. Such an increase in the portion invested in debt
obligations could occur, for example, because of property sales, a rapid influx
of Contract owners' funds or because of a perceived need to increase the
Partnership's liquidity. The remainder of the Partnership's assets may be
invested in other types of real estate-related investments, including primarily
conventional, non-participating mortgage loans and real estate investment
trusts.
Investment in Direct Ownership Interests in Real Estate.
Acquisition. The Partnership's principal investment policy involves acquiring
primarily direct ownership interests in existing (including newly constructed)
income-producing real estate, including office buildings, shopping centers,
apartments, industrial properties, and hotels. The Partnership may also invest
up to 5% of its assets in direct ownership interests in agricultural land.
Property acquisitions will generally be carried out by the real estate
acquisition offices in PREI's network of RGOs located throughout the continental
United States. The RGOs or an affiliate of The Prudential also supervise the
management of properties in all of The Prudential's accounts. Proposed
investments identified by an RGO are reviewed and approved by the Investment
Committee of PREI, and in the case of larger proposals, by the Finance Committee
of the Board of Directors of The Prudential.
Although it has not been deemed appropriate to establish percentage limitations
on the type and location of properties that may be acquired by the Partnership,
the Partnership plans to diversify its investments both as to the type of
property acquired and its geographic location. Moreover, the Partnership's
investments will be maintained to meet the diversification requirements of the
Internal Revenue Code and the regulations thereunder. See General Investment and
Operating Policies, page 8.
In order to attain the Partnership's stated objectives, it will be necessary for
the Partnership to acquire properties which will generate cash in excess of that
required to meet the gross operating expenses of the Partnership. To do this, a
substantial portion of the Partnership's assets will be invested in properties
with operating histories that include established rent and expense schedules.
However, the Partnership may also acquire recently constructed properties that
may be subject to agreements with sellers providing for certain minimum levels
of income. Upon the expiration of or default under these agreements, there can
be no assurance that the Partnership will be able to maintain the level of
operating income which is necessary to produce the return it was previously
experiencing. The Partnership may under certain conditions purchase real
property from The Prudential or its affiliates. See CONFLICTS OF INTEREST, page
12.
The property acquired by the Partnership will generally be real estate which is
ready for use. Accordingly, the Partnership will not usually be subject to the
risks of development or construction inherent in the purchase of unimproved real
estate. From time to time, however, the Partnership may invest in a
developmental real estate project deemed consistent with the Partnership's
objectives, and the Partnership will then be subject to those risks.
While the Partnership will often own the entire fee interest in an acquired
property, it may also hold other direct ownership interests, including, but not
limited to, general partnership interests, limited liability company interests,
leaseholds, and tenancies in common.
Property Management and Leasing Services. It is anticipated that the Partnership
generally will retain a management company operating in the area of a property
to perform local property management services. Generally, an RGO or other
affiliate of The Prudential will supervise and monitor the performance of the
local management company, determine and establish the required accounting
information to be supplied, periodically
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inspect the property, review and approve property operating budgets, and review
actual operations to ensure compliance with budgets. In addition to day-to-day
management of the property, the local management company will have
responsibility for supervision of any on-site personnel, negotiation of
maintenance and service contracts, advice regarding major repairs, replacements
and capital improvements, the review of market conditions to recommend desirable
changes in rent schedules, and the formulation of marketing and advertising
programs to obtain and maintain good occupancy rates by responsible tenants. The
fees of the local management company will reduce the cash flow from the property
to the Partnership. Certain of the Partnership's properties are expected to be
managed by PREMISYS Real Estate Services, Inc., a wholly-owned property
management company of The Prudential.
It is anticipated that the Partnership will retain a leasing company to perform
leasing services on any property with actual or projected vacancies. The leasing
company will coordinate with the property management company to provide
marketing and leasing services with respect to the property. In some cases, the
property management company will be qualified to handle leasing and in those
cases a separate leasing company will not be hired. Leasing commissions and
expenses will reduce the cash flow from the property to the Partnership.
The Prudential may, on behalf of the Partnership, hire an affiliate to perform
property management or leasing services, so long as the affiliate's services are
provided on terms competitive with those available from unaffiliated entities
performing comparable services in the same geographic area. See CONFLICTS OF
INTEREST, page 12.
Annually, the RGO which oversees the management of each property owned by the
Partnership will, together with the local property management firm, formulate a
business plan and budget for each property. This plan and budget will consider,
among other things, the projected rollover of individual leases, necessary
capital expenditures and any expansion or modification of the use of the
property and will require the approval of an officer of PREI. The RGO will also
report periodically to PREI regarding the operating performance of the property.
Investments in Mortgage Loans.
Types of Mortgage Loans. One of the Partnership's investment policies is the
making of mortgage loans. These will include conventional mortgage loans that
may pay fixed or variable rates of interest and, to the extent available,
mortgage loans that have a "participation" (as defined below). The Partnership
will not make mortgage loans to affiliates of The Prudential.
The properties to be subject to the Partnership's mortgage loans are intended to
consist of commercial properties (such as office buildings, shopping centers,
hotels, industrial properties, and office showrooms), agricultural properties,
and residential properties (such as garden apartment complexes and high-rise
apartment buildings). The Partnership's mortgage loans will generally be secured
by properties with a demonstrable income-producing potential based on historical
or projected data. Such mortgage loans will generally not be personal
obligations of the borrower and will generally not be insured or guaranteed by
government agencies or otherwise.
1. First Mortgage Loans. It is expected that the Partnership will primarily make
first mortgage loans secured by mortgages on existing income-producing property.
Such first mortgage loans may provide for interest-only payments and a balloon
payment at maturity.
The yield on a traditional first mortgage loan has historically been less than
that of a wraparound mortgage loan on the same property. However, because of
recent innovations involving the terms and conditions of first mortgage loans,
such as the use of variable interest rates, equity participations and similar
devices, the yield on a first mortgage loan may, in certain instances, be
greater than that of a wraparound mortgage on the same property.
2. Wraparound Mortgage Loans. The Partnership also may make wraparound mortgage
loans on income-producing real properties which are already subject to prior
mortgage indebtedness to unaffiliated entities. A wraparound mortgage loan is a
mortgage having a principal amount equal to the outstanding balance under the
prior existing mortgage loan plus the amount actually to be advanced by the
lender under the wraparound mortgage loan, thereby providing the owner of a
property with additional funds without disturbing the existing loan. The terms
of any wraparound mortgage loans made by the Partnership will require the
borrower to make all principal and interest payments on the underlying loan to
the Partnership, which will in turn pay the holder of the prior loan. Because
the existing first mortgage loan is preserved, the lien of the wraparound
mortgage loan is necessarily junior to it. The Partnership will make wraparound
mortgage loans only in states where local applicable foreclosure laws permit a
lender, in the event of the borrower's default, to obtain possession of the
property which secures the loan, and it will be the policy of the Partnership to
file notices of default and attempt to obtain a court-appointed receiver where
appropriate as quickly as possible after any default.
3. Junior Mortgage Loans. The Partnership may also invest in other junior
mortgage loans. Junior mortgage loans will be secured by mortgages which are
subordinate to one or more prior liens on the real property and generally, but
not in all cases, will provide for repayment in full prior to the end of the
amortization period of the senior
6 - Real Property
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mortgages. Recourse on such loans will include the real property encumbered by
the Partnership's mortgage and additionally may include other collateral or
personal guarantees by the borrower.
The Partnership will generally make junior or wraparound mortgage loans only if
the senior mortgage, when combined with the amount of the Partnership's mortgage
loan, would not exceed the maximum amount which the Partnership would be willing
to commit to a first mortgage loan and only under such circumstances and on such
property as to which the Partnership would otherwise make a first mortgage loan.
4. Participations. The Partnership may seek to make mortgage loans which, in
addition to charging a base rate of interest, will include provisions permitting
the Partnership to participate (a "participation") in the economic benefits of
the underlying property through the receipt of additional interest in the form
of a percentage of the gross or net revenues derived from operation of the
property and/or of the increase in the value of the property realized by the
borrower, such as through sale or refinancing of the property. Such arrangements
may also involve the grant to the Partnership of an option to acquire the
property or an undivided interest in the property securing the loan. To the
extent that the Partnership negotiates the right to receive additional interest
in the form of a percentage of the gross revenues or otherwise, the fixed cash
return to the Partnership from such an investment will generally be less than
would otherwise be the case. It is expected that the Partnership generally will
be entitled to such percentage participations when the gross or net revenues
derived from operation of the property exceed a certain base amount, which may
be subject to adjustment upon an increase in real estate taxes or similar
charges. The form and extent of such additional interest to be received by the
Partnership will vary with each transaction depending on such factors as the
equity investment of the owner or developer of the property, other financing or
credit obtained by the owner or developer, the fixed base interest rate on the
mortgage loan by the Partnership, any other security arrangement, the cash flow
and pro forma cash flow from the property, and market conditions.
The Partnership intends to utilize such additional interest as a hedge against
inflation on the assumption that as prices increase in the economy generally,
the rental prices obtained by properties, such as shopping centers or office
buildings, will increase and that there should be a corresponding increase in
the value of such properties. There can be no assurance that such additional
interest or increased values will in fact be received. In that event, the
Partnership would be entitled to receive only the fixed portion of its return.
Standards for Mortgage Loan Investments. In making mortgage loans, the
investment manager will consider relevant real property and financial factors,
including the location, condition, and use of the underlying property, its
operating history, its future income-producing capacity and the quality,
experience, and creditworthiness of the unaffiliated borrower.
Prior to the Partnership's making any mortgage loan, the investment manager will
analyze the fair market value of the underlying real estate. In general, the
amount of each mortgage loan made by the Partnership will not exceed, when added
to the amount of any existing indebtedness, 80% of the estimated or appraised
value of the property mortgaged.
Dealing With Outstanding Loans. The Partnership may sell its mortgage loans
prior to maturity if such action is deemed advisable by the investment manager
and consistent with the Partnership's investment objectives. The investment
manager may also extend the maturity of any mortgage loan made by the
Partnership, consent to a sale of the property subject to a mortgage loan or
finance the purchase of a property by making a new mortgage loan in connection
with the sale of a property (either with or without requiring the repayment of
the mortgage loan), renegotiate the terms of a mortgage loan, and otherwise deal
with the mortgage loans of the Partnership.
Investments in Sale-Leasebacks. A portion of the Partnership's investments may
consist of real property sale-leaseback transactions ("leasebacks"). In a
transaction of this type, the Partnership will typically purchase land and
income-producing improvements on the land and simultaneously lease the land and
improvements, generally to the seller, under a long-term lease. Leasebacks may
be for very long terms and may provide for payments from the lessee in
escalating amounts.
Generally, under the terms of the leaseback, the tenant will operate, or provide
for the operation of, the property and be responsible for the payment of all
costs, including taxes, mortgage debt service, maintenance and repair of the
improvements, and insurance. The Partnership may also, in some cases, grant to
the lessee an option to acquire the land and improvements from the Partnership
after a period of years. The option exercise price would generally be based upon
such factors as the fair market value of the property, as encumbered by the
lease, the increase in the gross revenues from the property or other objective
criteria reflecting the increased value of the property.
In some leaseback transactions, the Partnership may only purchase the land under
an income-producing building and lease the land to the owner of the building. In
such cases, the Partnership may seek, in addition to base rents in its
leasebacks, participations in the gross revenues from the building in a form
such as a percentage of the gross revenues of the lessee above a base amount
(which may be subject to adjustment upon an increase in real property
7 - Real Property
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taxes or upon other events). The Partnership may invest in leasebacks which are
subordinated to other interests in the land, buildings, and improvements, such
as a first mortgage, other mortgage or lien. In those situations, the
Partnership's leaseback interest will be subject to greater risks.
The Partnership will only acquire a property for a leaseback transaction if the
purchase price is equal to not more than 100% of the estimated or appraised
value of the property. The Partnership may dispose of its leasebacks when deemed
advisable by the investment manager and consistent with the Partnership's
investment objectives.
General Investment and Operating Policies. The Partnership does not intend to
invest in any direct ownership interests in properties, mortgage loans,
leasebacks or other real estate investments with a view to making short-term
profits from their sale. However, the Partnership may dispose of its investments
to the extent such disposition is necessary to meet its cash requirements or
where it is deemed to be desirable by the investment manager because of market
conditions or otherwise. Any proceeds from the disposition of assets (and any
cash flow from operations) which are not necessary for the Partnership's
operations and which are not withdrawn by the Partners in order to make
distributions pursuant to the variable contracts issued by the Partners will be
reinvested by the Partnership in investments consistent with the Partnership's
investment objectives and policies.
In making investments in properties, mortgage loans, leasebacks or other real
estate investments, the Partnership will rely on the investment manager's own
analysis of the investment and will not receive an independent appraisal prior
to acquisition. The Partnership expects, however, that all properties owned by
the Partnership, and most mortgage loans held by the Partnership, will be
appraised or valued on an annual basis by an independent appraiser who is a
member of a nationally recognized society of appraisers. Each such appraisal
shall be maintained in the records of the Partnership for at least 5 years. It
should be noted that appraised values are opinions and, as such, may not
represent the true worth or realizable value of the property being appraised.
The Partnership will ordinarily purchase properties on an unleveraged basis and
the properties acquired will typically be free and clear of mortgage
indebtedness immediately after their acquisition. The Partnership may, however,
acquire properties subject to existing mortgage loans. In addition, while the
Partnership will generally not mortgage its properties or acquire properties
partly with the proceeds of purchase money mortgage loans, it may do so up to
75% of the value of the property where the investment manager deems such action
consistent with the Partnership's investment objectives. Where the Partnership
does mortgage its properties, it will, of course, bear the expense of mortgage
payments. See BORROWING BY THE PARTNERSHIP, page 15.
In addition to the types of real estate investments previously discussed, the
Partnership may also invest a portion of its assets in real estate limited
partnerships and shares of real estate investment trusts.
The Partnership's investments will be maintained so as to meet the
diversification requirements set forth in Treasury Regulations issued pursuant
to Section 817(h) of the Internal Revenue Code (the "Code") relating to the
investments of variable life insurance and variable annuity separate accounts.
In order to meet the diversification requirements under the regulations, the
Partnership will meet the following test: no more than 55% of the assets will be
invested in any one investment, no more than 70% of the assets will be invested
in any two investments, no more than 80% of the assets will be invested in any
three investments, and no more than 90% of the assets will be invested in any
four investments. All interests in the same real property project are treated as
a single investment. The Partnership must meet the above test within 30 days of
the end of each calendar quarter. To comply with the diversification
requirements of the State of Arizona, the Partnership will limit additional
investments in any one parcel or related parcels to an amount not exceeding 10%
of Partnership assets.
In managing the assets of the Partnership, The Prudential will use its
discretion in determining whether to foreclose on defaulting borrowers or to
evict defaulting tenants. Such determination will depend on the course of action
The Prudential concludes will be in the best interests of the Partnership in
maintaining the value of the investment.
Property management services generally will be required in connection with the
Partnership's investments in properties which are owned and operated by the
Partnership but usually will not be needed with respect to mortgage loans owned
by the Partnership, except for mortgage servicing. It is possible, however, that
such services will be necessary or desirable in exercising default remedies
under a foreclosure on a mortgage loan. The Prudential may engage on behalf of
the Partnership affiliated or unaffiliated entities to provide such additional
services to the Partnership. The Prudential may engage its affiliates to provide
property management, property development services, loan servicing or other
services if and only if the fees paid to an affiliate do not exceed the amount
that would be paid to an independent party for similar services rendered in the
same geographic area. See CONFLICTS OF INTEREST, page 12.
Finally, The Prudential will manage the Partnership so that the Real Property
Account will not be subject to registration under the Investment Company Act of
1940 (the "1940 Act"). This will require monitoring the proportion of the
Partnership's assets to be placed in various investments so that the Real
Property Account does not become subject to the 1940 Act.
8 - Real Property
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CURRENT REAL ESTATE-RELATED INVESTMENTS
The current principal real estate-related investments held by the Partnership
are described below. Many of these investments were originated by, and
previously held in, The Prudential Real Property Account of Pruco Life Insurance
Company (the "Pruco Life Account"), a separate account established to fund the
real estate investment option under variable contracts issued by Pruco Life.
Prior to the formation of the Partnership, the Pruco Life Account followed the
same investment policies as those followed by the Partnership. Pruco Life
contributed the assets held in the Pruco Life Account to the Partnership as its
initial capital contribution to the Partnership.
Properties
1. Warehouse Facility in Azusa, California. This facility consists of three
one-story warehouse buildings in Azusa, California, approximately 20 miles east
of downtown Los Angeles. The buildings were constructed in 1986. They contain
approximately 432,000 rentable square feet and were 100% leased to four tenants
at December 31, 1994.
2. Office Facility in Lisle, Illinois. The property is a four-story office
building on 5.6 acres of land. It was constructed in 1985 and contains
approximately 102,000 square feet of leasable space. R.R. Donnelley & Sons
Company currently leases the entire building under a renewable lease expiring in
1997. The facility is located at 750 Warrenville Road in the Corporetum Office
Park in Lisle, Illinois. Corporetum Office Park is a 75 acre planned office
development located 25 miles west of downtown Chicago.
3. Apartment Complex in Atlanta, Georgia. Brookwood Valley Apartments is a
garden apartment complex located approximately 3 miles north of downtown
Atlanta. It consists of eight three-story buildings containing a total of 240
units and is situated on a 7.1 acre site. The buildings were constructed in
1987. At December 31, 1994, the property was 97% occupied.
4. Warehouse Facility in Pomona, California. The Partnership owns a leasehold
estate in six industrial buildings on approximately 28 acres in Pomona,
California. The site is approximately 30 miles east of downtown Los Angeles. The
buildings were constructed between 1982 and 1984 and contain approximately
531,000 square feet of leasable space. The property was 83% occupied by six
tenants at December 31, 1994.
Land under the leasehold estate was capitalized upon the assignment of a ground
lease from the previous owner. The lease term extends until November 2078 with
no renewal options. The annual ground lease payments were $250,000 through
November 1994, and, for each ten year increment thereafter, are subject to
increase by 50% of the increase in the Consumer Price Index during the previous
period. For 1995, the annual ground lease payment will increase by $126,450 to
$376,450. The ground lease agreement contains a purchase option from November
1994 to November 1997 at a fixed price of $4,000,000.
5. Office Facility in Morristown, New Jersey. This four-story suburban office
building was constructed in 1981 and contains 85,000 rentable square feet. It is
located on a 5.1 acre site, approximately 30 miles west of New York City. At
December 31, 1994, it was 93% leased to 13 tenants.
6. Shopping Center in Roswell, Georgia. King's Market shopping center was
constructed in 1988. It is located approximately 22 miles north of downtown
Atlanta on a thirty acre site. It contains approximately 301,700 square feet of
rentable space. At December 31, 1994, it was 99% leased to 31 tenants.
7. Apartment Complex in Farmington Hills, Michigan. Indian Creek Apartments
consists of fifteen two-story buildings containing 156 two-bedroom and 40
one-bedroom units. It was constructed in 1988 and is located approximately 20
miles northwest of Detroit. At December 31, 1994, the property was 99% occupied.
8. Warehouse Facilities. The Partnership owns a 50% interest in four
single-story warehouse/distribution buildings located in Jacksonville, FL. The
remaining 50% is owned by The Prudential and one of its subsidiaries. The
buildings aggregate approximately 502,000 rentable square feet and were 92%
occupied at December 31, 1994. Associated Unit Companies (Unit) or its
affiliates lease approximately 328,000 square feet, Angelo Brothers leases
84,000 square feet and Biaggi Brothers signed a two-year lease for 90,000 square
feet, effective February 1995, which will bring the occupancy of the four
warehouses to 100%.
9. Warehouse Facility in Bolingbrook, Illinois. This single-story warehouse was
completed in 1989. It contains 224,640 rentable square feet. It is located
approximately 20 miles southwest of downtown Chicago. The entire facility is
leased to the Gillette Company under a lease expiring in October 2000.
10. Office Park in Flint, Michigan. This investment consists of twelve
single-story buildings located in an office park in Flint, Michigan. The
property contains 113,393 rentable square feet. It is currently 89% occupied by
50 tenants.
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The property was obtained by the Partnership on July 1, 1994 through foreclosure
on the mortgage loan made to Oak Creek Associates. The Partnership took title to
the property at the end of the redemption period on January 3, 1995. During this
period, the Partnership received all income generated by the property.
RISK FACTORS
There are certain risk factors that a Contract owner should consider before
allocating a portion of his or her net premiums or purchase payments, or
transferring a portion of his or her Contract fund, to the Real Property
Account, so as to participate in the real estate-related investments held by the
Partnership. These include valuation risks, see VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14, certain conflicts of interest, see CONFLICTS
OF INTEREST, page 12, as well as the following risks:
Liquidity of Investments. Because the Real Property Account will, through the
Partnership, invest primarily in real estate, its assets will not be as liquid
as the investments generally made by separate accounts of life insurance
companies funding variable life insurance and variable annuity contracts. The
Partnership will, however, hold 10-15% of its assets in the form of marketable
short-term or intermediate-term debt securities. The primary purposes for such
investments are to meet the expenses involved in the operation of the
Partnership and to allow it to have sufficient liquid assets to meet any
requests for withdrawals from the Real Property Account to meet requested or
required payments under the Contracts. The Partnership may also borrow funds to
meet liquidity needs and has established a line of credit for that purpose. See
BORROWING BY THE PARTNERSHIP, page 15.
The Prudential has taken steps to ensure that the Partnership will be
sufficiently liquid to meet all anticipated withdrawals by the Partners to meet
the separate accounts' liquidity requirements, but it is nonetheless possible
that the Partnership may need to dispose of a real property or mortgage loan
investment promptly in order to meet such withdrawal requests.
General Risks of Real Property Investments. By participating in the Real
Property Account and thereby in the investment performance of the Partnership, a
Contract owner will be subject to many of the risks of real property
investments. These include:
1. Risks of Ownership of Real Properties. The Partnership will be subject to the
risks inherent in the ownership of real property such as fluctuations in
occupancy rates and operating expenses and variations in rental schedules, which
in turn may be adversely affected by general and local economic conditions, the
supply of and demand for properties of the type in which the Partnership
invests, zoning laws, and real property tax rates. Operation of property in
which the Partnership invests will primarily involve rental of that property to
tenants. The financial failure of a tenant resulting in the termination of such
tenant's lease might cause a reduction in the cash flow to the Partnership. In
the event of termination of any lease, there can be no assurance that the
Partnership would be able to find a new tenant for the property on terms as
favorable to the Partnership as obtained from the prior tenant. Investments in
hotels are subject to additional risk inherent in the daily turnover and
fluctuating occupancy rates of hotel rooms and the absence of long-term tenants.
The Partnership's properties will also be subject to the risk of loss due to
certain types of property damage (such as that resulting from nuclear power
plant accidents and wars) which are either uninsurable or not economically
insurable.
2. Risks of Mortgage Loan Investments. The Partnership's mortgage loan
investments will be subject to the risk of default by the borrowers, in which
event the Partnership would have the added responsibility of foreclosing on or
pursuing other remedies on the underlying properties to protect the value of its
mortgage loans. A borrower's ability to meet its mortgage loan payments will be
dependent upon the risks generally incident to the ownership of real property.
Mortgage loans made by the Partnership will generally not be personal
obligations of the borrowers, and the Partnership will accordingly be relying
solely on the value of the underlying property for its security. Mechanics',
materialmen's, government, and other liens may have or obtain priority over the
Partnership's security interest in the property.
In addition, the Partnership's mortgage loan investments will generally be
subject to prepayment risks. If the terms of the mortgage loans so permit,
mortgagors may prepay the loans, thus possibly changing the Partnership's
return.
Junior mortgage loans (including wraparound mortgage loans) will be subject to
greater risk than first mortgage loans, since they will be subordinate to liens
of senior mortgagees. In the event a default occurs on a senior mortgage, the
Partnership may be required to make payments or take other actions to cure the
default (if it has the right to do so) in order to prevent foreclosure on the
senior mortgage and possible loss of all or portions of the Partnership's
investment. "Due on sale" clauses included in some senior mortgages,
accelerating the amount due under the senior mortgage in the case of sale of the
property, may be deemed to apply to the sale of the property upon foreclosure by
the Partnership of its junior mortgage loan.
10 - Real Property
<PAGE>
The risk of lending on real estate increases as the proportion which the amount
of the mortgage loans bears to the fair market value of the real estate
increases. The Partnership will generally not make mortgage loans in excess of
80% of the estimated or appraised value of the property that secures the loan.
There can be no assurance, however, that in the event of a default, the
Partnership will realize an amount equal to the estimated or appraised value of
the property on which a mortgage loan was made.
Mortgage loans made by the Partnership may be subject to state usury laws
imposing limits on interest charges and possible penalties for violation of
those limits, including restitution of excess interest, unenforceability of
debt, and treble damages. The Partnership does not intend to make mortgage loans
at usurious rates of interest, but uncertainties in determining the legality of
rates of interest and other borrowing charges under some statutes could result
in inadvertent violations, in which case the Partnership could incur the
penalties mentioned above.
3. Risks with Participations. The Partnership may seek to invest in mortgage
loans and leasebacks with participations, which will provide the Partnership
with both fixed interest and additional interest based upon gross revenues, sale
proceeds, and/or other variable amounts. To the extent that the interest income
received by the Partnership is based, in part, on a percentage of the gross
revenues or sale proceeds of the underlying property, the Partnership's income
will be dependent upon the success in the leasing of the underlying property,
the management, and operation of such property by the borrower or lessee and
upon the market value of the property upon ultimate disposition. If the
Partnership negotiates a mortgage loan with a lower fixed interest rate and an
additional percentage of the gross revenues or eventual sale proceeds of the
underlying property, and the underlying property fails to generate increased
revenues or to appreciate, the Partnership will have foregone a potentially
greater fixed return without receiving the benefit of appreciation. In addition,
there may be limitations on participations as a result of applicable state law.
It is also possible that as a result of the Partnership's interest in the gross
revenues or sale proceeds, a court in the event of the borrower's bankruptcy
could possibly treat the Partnership as a partner or joint venturer with the
borrower, and the Partnership could, accordingly, lose the priority its security
interest would otherwise have been given, or be liable for the debts of the
borrower. The Partnership will seek to structure its participations to avoid
being characterized as a partner or joint venturer with the borrower.
4. Risks with Sale-Leaseback Transactions. In leaseback transactions, which
typically involve the acquisition of land and improvements thereon and the
leaseback of such land and improvements to the seller or another party, the
value of the land and improvements will depend, in large part, on the
performance and financial stability of the lessee and its tenants, if any. The
lessee's leases with its tenants may have shorter terms than the leaseback and,
accordingly, the lessee's future ability to meet payment obligations to the
Partnership will depend on its ability to obtain renewals of such leases or new
leases upon satisfactory terms and the ability of the tenants to meet their
rental payments to the lessee.
PREI investigates the stability and creditworthiness of lessees in all
commercial properties it may acquire, including leaseback transactions. However,
a lessee in a leaseback transaction may have few, if any assets. The Partnership
will therefore be required to rely on the value of the land and the improvements
for its security. When the Partnership's leaseback interest is subordinate to
other interests in the land or improvements, such as a first mortgage or other
lien, the Partnership's leaseback will be subject to greater risk. A default by
a lessee or other premature termination of the leaseback may result in the
Partnership being unable to recover its investment unless the property is sold
or leased on favorable terms. The ability of the lessee to meet its obligations
under the leaseback, and the value of a property, may be affected by a number of
factors inherent in the ownership of real property which are described above.
Furthermore, the long-term nature of a leaseback may, in the future, result in
the Partnership receiving annual rentals below what it might then be receiving
under prevailing market conditions. However, such risk may be materially reduced
to the extent the Partnership is able to obtain participations in connection
with its leasebacks.
Reliance on The Partners and The Investment Manager. A Contract owner does not
have a vote in determining the policies of the Partnership or the Real Property
Account and will have no right or power to take part in the management of the
Partnership or the Real Property Account. The investment manager alone, subject
to the supervision of the Partners, will make all decisions with respect to the
management of the Partnership, including the determination as to what properties
to acquire, subject to the investment policies and restrictions. Although the
Partners have the right to replace The Prudential as the investment manager, it
should be noted that Pruco Life is a direct wholly-owned subsidiary of The
Prudential, and Pruco Life of New Jersey is an indirect wholly-owned subsidiary
of The Prudential.
The Partnership will compete in the acquisition of its investments with many
other individuals and entities engaged in real estate activities, including the
investment manager and its affiliates. See CONFLICTS OF INTEREST, page 12. There
may be intense competition in obtaining properties or mortgages of the type in
which the Partnership intends to invest and competition may result in increases
in the costs of suitable investments.
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Since the Partnership will continuously look for new investments, Contract
owners will be unable to evaluate for themselves the economic merit of many of
the investments which may be acquired by the Partnership and must depend solely
upon the ability of the investment manager to select investments.
INVESTMENT RESTRICTIONS
The Partnership has adopted certain restrictions relating to its investment
activities. These restrictions may be changed, if the law permits, by the
Partners. Pursuant to these restrictions, the Partnership will not:
1. Make any investments not related to real estate, other than short-term or
intermediate-term debt instruments.
2. Engage in underwriting of securities issued by others.
3. Invest in securities issued by any investment company.
4. Sell securities short.
5. Purchase or sell oil, gas or other mineral exploration or development
programs.
6. Make loans to the Partners or any of their affiliates or any investment
program sponsored by such parties.
7. Enter into leaseback transactions in which the lessee is The Prudential,
Pruco Life, Pruco Life of New Jersey or their affiliates or any investment
program sponsored by such parties.
8. Borrow more than 50% of the value of the assets of the Partnership (based
upon periodic valuations and appraisals). See VALUATION OF CONTRACT OWNERS'
PARTICIPATING INTERESTS, page 14.
CONFLICTS OF INTEREST
The Prudential, as the investment manager, will be subject to various conflicts
of interest in managing the Partnership. The Prudential invests in real estate
equities and mortgages for its own general account and for a number of separate
accounts for qualified pension and profit-sharing plans. The Prudential also
manages, or advises in the management of, real estate equities and mortgages
owned by other persons. In addition, affiliates of The Prudential are general
partners in publicly offered limited partnerships that invest in real estate
equities and mortgage loans. The Prudential and its affiliates may engage in
additional business activities which will be competitive with the Partnership.
Moreover, the Partnership may purchase properties from The Prudential or its
affiliates.
The conflicts involved in managing the Partnership include:
1. Lack of Independent Negotiations between the Partnership and The Prudential.
All agreements and arrangements relating to compensation between the Partnership
and The Prudential or any affiliate of The Prudential will not be the result of
arm's-length negotiations.
2. Competition by the Partnership with The Prudential's Affiliates for
Acquisition and Disposition of Investments. The Prudential and its affiliates
are involved in numerous real estate investment activities for Prudential's own
general account, its separate accounts, and other entities, many of which may
involve investment policies comparable to those of the Partnership and thus may
compete with the Partnership for the acquisition and disposition of investments.
Moreover, additional accounts or affiliated entities may be formed in the future
with investment objectives similar, in whole or part, to those of the
Partnership. In short, existing or future real estate investment accounts or
entities managed or advised by The Prudential or its affiliates may have the
same management as the Partnership and may be in competition with the
Partnership regarding real property investments, mortgage loan investments,
leasebacks, and the management and sale of such investments. The Prudential and
its affiliates are not obligated to present to the Partnership any particular
investment opportunity, regardless of whether such opportunity is of a character
that might be suitable for investment by the Partnership.
The Prudential and its affiliates have, however, adopted certain procedures for
the purpose of distinguishing between equity investments available for the
Partnership as opposed to the other programs and entities described above. To
the extent that investment accounts or entities managed by The Prudential or its
affiliates have investment objectives and policies similar to the Partnership
and are in the market to acquire properties or make investments at the same time
as the Partnership, the following procedures will be followed to resolve any
conflict of interest. The Prudential will seek to locate through its contacts
and business relationships an adequate supply of equity investments for all of
the accounts and other entities which are managed by The Prudential and its
affiliates and to allocate such investments equitably among such accounts and
entities based upon their respective investment goals and requirements. In those
situations where the aggregate demand by all such accounts and entities exceeds
the amount of equity investments then available, allocations will be made based
upon such factors as currently available cash flow of particular portfolios,
existing financing on the property, estimated future cash
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flow of such portfolios, the effect of the acquisition on diversification of
each portfolio, and other relevant legal or investment policy factors. If
consideration of the foregoing factors does not result in a decision of which
investment to match with which account or entity, a rotation system will be used
to allocate equity investments. The rotation system designates which of those
accounts or entities has the next opportunity to make an equity investment for
which it is eligible. The use of such a system is monitored to ensure that
equitable treatment of all investment accounts and entities is achieved.
3. Competition with the Partnership from Affiliates for the Time and Services of
Common Officers, Directors, and Management Personnel. As noted above, The
Prudential and its affiliates are involved in numerous real estate investment
activities. Accordingly, many of the personnel of The Prudential and its
affiliates who will be involved in performing services for the Partnership have
competing demands on their time. Thus, conflicts of interest may arise with
respect to allocating time among such entities and the Partnership. The
directors, officers, and other personnel of The Prudential and affiliates will
devote such time to the affairs of the Partnership as the officers and directors
determine in their sole discretion, exercised in good faith. The Prudential
believes it has sufficient personnel to discharge its responsibilities to all
entities to which it is responsible.
4. Competitive Properties. Some properties of affiliated entities may be
competitive with properties in which the Partnership has an interest. Among
other things, such properties could be in competition with the Partnership's
properties for prospective tenants.
5. Lessee Position. It is possible that The Prudential or its affiliates may
have a lessee's position in one or more of the properties owned by the
Partnership. In the case of any such lease, however, the terms of such lease
will be competitive with leases of space in such properties entered into with
non-affiliated third parties, and the Partnership currently follows a practice
of limiting the amount of space that an affiliate of The Prudential may rent in
a property owned by the Partnership.
6. Use of Affiliates to Perform Additional Services for the Partnership. The
Partnership may engage entities affiliated with The Prudential to provide
additional services to the Partnership, such as real estate brokerage, mortgage
servicing, property management, leasing, property development, and other real
estate-related services. The Partnership may utilize the services of such
affiliates and pay their fees, so long as the fees paid to an affiliate do not
exceed the amount that would be paid to an independent party for similar
services rendered in the same geographic area.
7. Joint Ventures with Affiliates. The Partnership may enter into investments
through joint ventures with The Prudential or its affiliates or investment
programs they sponsor. The Partnership may enter into such a joint venture
investment with an affiliate only if the following conditions are met: (i) such
affiliate must have investment objectives substantially identical to those of
the Partnership; (ii) there must be no duplicative property management fee,
mortgage servicing fee or other fees; (iii) the compensation payable to the
sponsor of such affiliate must be no greater than that payable to the
Partnership's investment manager; (iv) the Partnership must have a right of
first refusal to buy if such affiliate wishes to sell the property held in the
joint venture; and (v) the investment of the Partnership and the affiliate in
the joint venture must be made on substantially the same terms and conditions
(although not the same percentage). In connection with such an investment, both
affiliated parties would be required to approve any decision concerning the
investment. Thus, an impasse may result in the event the affiliated joint
venture partners disagree. However, in the event of a disagreement regarding a
proposed sale or other disposition of the investment, the party not desiring to
sell would have a right of first refusal to purchase the affiliated joint
venture partner's interest in the investment. In the event of such an
investment, there exists the possibility under limited circumstances that at
some future time the joint venture partners would no longer be affiliated. In
such a case, in the event of a proposed sale initiated by the joint venture
partner, the Partnership would also have a right of first refusal to purchase
the joint venture partner's interest in the investment. The exercise of a right
of first refusal would be subject to the Partnership's having the financial
resources to effectuate such a purchase, and there can be no assurance that it
would have such resources.
The investment by the Partnership in joint venture partnerships which own
properties, instead of investing directly in the properties themselves, may
under certain circumstances involve risks not otherwise present, including, for
example, risks associated with the possible bankruptcy of the Partnership's
co-venturer or such co-venturer at any time having economic or business
interests or goals which are inconsistent with the business interests or goals
of the Partnership.
8. Purchase of Real Property From The Prudential or Affiliates. The Partnership
may acquire properties owned by The Prudential or its affiliates, subject to
compliance with special conditions designed to minimize the conflicts of
interests. The Partnership may purchase property satisfying the Partnership's
investment objectives and policies from an affiliate only if: (i) the applicable
insurance regulators approve the principle of permitting the Partnership to
acquire real property from The Prudential or affiliates; (ii) the Partnership
acquires the property at a price not greater than the appraised value, with the
appraisal being conducted by a qualified, unaffiliated appraiser; (iii) the
affiliate has owned the property at least 2 years, the cost paid by the
affiliate is established, and any increase in
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the proposed purchase price over the cost to the affiliate is, in the opinion of
the independent real estate advisor mentioned in the next provision, explicable
by reference to material factors (including the passage of time) that have in
fact increased the value of the property; and (iv) a qualified and independent
real estate advisor (other than the appraiser) reviews the proposed acquisition
and provides a letter of opinion that the transaction is fair to the
Partnership.
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS
The Prudential has determined that it is in the best interest of Contract owners
participating in the Real Property Account to provide the Real Property Account
with the flexibility to engage in transactions that may be prohibited if the
Real Property Account accepts funds under Contracts subject to ERISA or the
prohibited transaction excise tax provisions of the Internal Revenue Code.
Accordingly, owners of The Prudential Contracts that are purchased in connection
with IRAs, tax deferred annuities subject to Section 403(b) of the Code, or
other employee benefit plans which are subject to ERISA or to the prohibited
transaction excise tax provisions of the Code, may not select the Real Property
Account as one of the investment options under their Contract. By not offering
the Real Property Account as an investment option under such contracts,
Prudential is able to comply with state insurance law requirements that policy
loans be made available to Contract owners.
VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS
A Contract owner's interest in the Real Property Account will initially be the
amount allocated to the Real Property Account in accordance with the Contract
owner's instructions. Thereafter, that value will change daily. The value of a
Contract owner's interest in the Real Property Account at the close of any day
is equal to its amount at the close of the preceding day, multiplied by the "net
investment factor" for that day arising from the Real Property Account's
participation in the Partnership, plus any additional amounts allocated to the
Real Property Account by the Contract owner, and reduced by any withdrawals by
the Contract owner from the Real Property Account and by the applicable Contract
charges recorded in that Contract's subaccount. Some of the charges will be made
daily, some on the Contract's monthly anniversary date, some at the end of each
Contract year, and some upon withdrawal or annuitization. Periodically The
Prudential will withdraw from the Real Property Account an amount equal to the
aggregate charges recorded in the subaccounts.
The "net investment factor" is calculated on each business day by dividing the
value of the net assets of the Partnership at the end of that day (ignoring, for
this purpose, changes resulting from new contributions to or withdrawals from
the Partnership) by the value of the net assets of the Partnership at the end of
the preceding business day. The value of the net assets of the Partnership at
the end of any business day is equal to the sum of the value of the
Partnership's short-term and intermediate-term debt instruments, the value of
the individual real properties and other real estate-related investments owned
by the Partnership, determined in the manner described below, and an estimate of
the accrued net operating income earned by the Partnership from properties and
other real estate-related investments, reduced by the liabilities of the
Partnership, including the daily investment management fee and certain other
expenses attributable to the operation of the Partnership. See CHARGES, page 16.
The Partnership's short-term debt investments (obligations of 1 year's maturity
or less) will be of the type that may be held by the Series Fund's Money Market
Portfolio and will be valued on an amortized cost basis. This means that each
obligation will be valued initially at its purchase price and thereafter by
amortizing any discount or premium uniformly to maturity. This method of
valuation almost always results in a value that is extremely close to market
value. In the event of a sizable change in interest rates, the value determined
by this method may be more or less than market value. If this should occur, the
Partners will consider whether an appropriate adjustment should be made in the
valuation of these obligations. The Partnership's intermediate-term bonds will
be of the type that may be held by the Series Fund's Bond Portfolio and will be
valued utilizing an independent pricing service to determine valuations for
normal institutional size trading units of such securities. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings, and developments relating to specific securities in arriving at
securities valuations.
The value of the individual real properties and other real estate-related
investments, including mortgages, acquired by the Partnership will be determined
as follows. Each property or other real estate-related investment acquired by
the Partnership will initially be valued at its purchase price. In acquiring a
property or other real estate-related investment, The Prudential will not obtain
an independent appraisal but will instead rely on its own analysis of the
investment's fair market value. Thereafter, all properties and most real
estate-related investments will ordinarily be appraised by an independent
appraiser no less frequently than annually. At least every 3 months, The
Prudential will make internal reviews of each property or other real
estate-related investments and make an adjustment to its
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valuation if there is reason to conclude that there has been a change in the
value of the property or other real estate-related investment since the last
valuation. The revised value will remain in effect and will be used in each
day's calculation of the value of the Partnership's assets until the next review
or appraisal. It should be noted that appraisals are only estimates and do not
necessarily reflect the realizable value of an investment.
The estimated amount of the net operating income of the Partnership from
properties and other real estate-related investments will be based on estimates
of revenues and expenses for each property and other real estate-related
investments. Annually The Prudential will prepare a month-by-month estimate of
the revenues and expenses ("estimated net operating income") for each property
and other real estate-related investments owned by the Partnership. Each day The
Prudential will add to the value of the assets as determined above a
proportionate part of the estimated net operating income for the month. In
effect, The Prudential will establish a daily accrued receivable of the
estimated net operating income from each property and other real estate-related
investments owned by the Partnership (the "daily accrued receivable"). On a
monthly basis, the Partnership will receive a report of actual operating results
for each property and other real estate-related investments ("actual net
operating income"). Such actual net operating income will be recognized on the
books of the Partnership and the amount of the then-outstanding daily accrued
receivable will be correspondingly adjusted. In addition, as cash from a
property or other real estate-related investment is actually received by the
Partnership, receivables and other accounts will be appropriately adjusted.
Periodically, but at least every 3 months, The Prudential will review its
prospective estimates of net operating income in light of actual experience and
make an adjustment to such estimates if circumstances indicate that such an
adjustment is warranted. The Prudential follows this practice of accruing
estimated net operating income from properties and other real estate-related
investments because net operating income from such investments is generally
received on an intermittent rather than daily basis, and the Partners believe it
is more equitable to participating Contract owners if such net operating income
is estimated and a proportionate amount thereof recognized daily. Because the
daily accrual of estimated net operating income is based on estimates that may
not turn out to reflect actual revenue and expenses, Contract owners will bear
the risk that this practice will result in the undervaluing or overvaluing of
the Partnership's assets.
The value of any asset held by the Partnership may be adjusted by The Prudential
at any time based upon events which come to the attention of The Prudential
affecting a property or other real estate-related investment that The Prudential
believes has increased or decreased its realizable value. For example,
adjustments may be made for events indicating an impairment of a borrower's or a
lessee's ability to pay any amounts due or events which affect the property
values of the surrounding area. There can be no assurance that the factors for
which an adjustment may be made will immediately come to the attention of The
Prudential. Additionally, because the evaluation of such factors may be
subjective, there can be no assurance that such adjustments will be timely made
in all cases where the value of the Partnership's investments may be affected.
All adjustments made to the valuation of the Partnership's investments,
including adjustments to estimated net operating income, the daily accrued
receivable, and adjustments to the valuation of properties and other real
estate-related investments, will be on a prospective basis only.
The above method of valuation of the Partnership's assets may be changed,
without the consent of Contract owners, should the Partners determine that
another method would more accurately reflect the value of the Partnership's
investments. Changes in the method of valuation could result in a change in the
Contract fund values which may have either an adverse or beneficial effect on
both existing Contract owners and new purchasers of Contracts. Information
concerning any material change in the valuation method will be given to all
Contract owners in the annual report of the operations of the Real Property
Account.
Although the above-described valuation methods have been adopted because the
Partners believe they will provide a reasonable way to determine the fair market
value of the Partnership's investments, there may well be variations between the
amount realizable upon disposition and the Partnership's valuation of such
assets. Contract owners may be either favorably or adversely affected if the
valuation method results in either overvaluing or undervaluing the Partnership's
investments. If a Contract owner invests in the Real Property Account at a time
in which the Partnership's investments are overvalued, the Contract owner will
be credited with less of an interest than if the value had been correctly
stated. A Contract owner withdrawing from the Real Property Account during such
time will receive more than he or she would if the value had been correctly
stated, to the detriment of other Contract owners. The converse situation will
exist if the Partnership's assets are undervalued.
BORROWING BY THE PARTNERSHIP
The Partnership may borrow to meet its liquidity requirements, and the
Partnership will bear the cost of all such borrowings. Thus, the Real Property
Account, and Contract owners participating in it, will bear a portion of any
such borrowing costs equal to their percentage interest in the Partnership.
Moreover, although the Partnership will generally make unleveraged investments,
it reserves the right to borrow up to 75% of the value of a property (with
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the value of a property determined as explained under VALUATION OF CONTRACT
OWNERS' PARTICIPATING INTERESTS, page 14). Increasing the Partnership's assets
through leveraged investments would result in increasing the compensation paid
to The Prudential since its investment management fee is calculated as a
percentage of the Partnership's gross assets. Moreover, any borrowing by the
Partnership would increase the Partnership's risk of loss and could inhibit the
Partnership from achieving its investment objectives because the Partnership's
payments on any loans would have to be made regardless of the profitability of
the Partnership's investments. The aggregate indebtedness of the Partnership for
all purposes will not exceed 50% of the value of the Partnership's assets.
CHARGES
Pursuant to an investment management agreement, The Prudential charges the
Partnership a daily investment management fee which is equal to an effective
annual rate of 1.25% of the average daily gross assets of the Partnership.
Certain other expenses and charges attributable to the operation of the
Partnership are also charged against the Partnership. Thus, in acquiring an
investment, the Partnership may incur various types of expenses paid to third
parties, including but not limited to, brokerage fees, attorneys' fees,
architects' fees, engineers' fees, and accounting fees. After acquisition of an
investment, the Partnership will incur recurring expenses for such things as the
preparation of annual reports, periodic appraisal costs, mortgage servicing
fees, annual audit charges, accounting and legal fees, and various
administrative expenses. These expenses will be charged against the
Partnership's assets. Some of these operating expenses represent reimbursement
of The Prudential for the cost of providing certain services necessary to the
operation of the Partnership, such as daily accounting services, preparation of
annual reports, and various administrative services. Moreover, The Prudential
charges the Partnership mortgage loan servicing fees pursuant to the standards
outlined in item 6 under CONFLICTS OF INTEREST, page 12. In addition to the
various expenses charged against the Partnership's assets, other expenses such
as insurance costs, taxes, and property management fees will ordinarily be
deducted from rental income, thereby reducing the gross income of the
Partnership.
As explained above, charges made pursuant to the Contracts will be recorded in
the corresponding subaccounts of the Real Property Account. From time to time,
The Prudential will withdraw from the Real Property Account an amount equal to
the aggregate amount of such charges. Aside from these charges pursuant to the
Contracts, The Prudential makes no charges to the Real Property Account for the
expenses involved in operation of the Real Property Account, although the Real
Property Account will, of course, bear its proportionate share of the charges
made to the Partnership which are described above.
The Partnership is not a taxable entity under the provisions of the Internal
Revenue Code. Rather, the income, gains, and losses of the Partnership are
attributed, for federal income tax purposes to the Partners in the Partnership,
including The Prudential with respect to the Real Property Account. The earnings
of the Real Property Account are, in turn, taxed as part of the operations of
The Prudential. Under the current provisions of the Internal Revenue Code, The
Prudential does not expect to incur federal income taxes on earnings of the Real
Property Account to the extent the earnings are credited under the Contracts.
Based on this, no charge is being made currently to the Real Property Account
for Company federal income taxes paid by The Prudential. The Prudential will
review the question of a charge to the Real Property Account for federal income
taxes periodically. Such a charge may be made in future years for any federal
income taxes that would be attributable to the Contracts.
Under current laws The Prudential may incur state and local taxes (in addition
to premium taxes) in several states. At present, these taxes are not significant
and they are not charged against the Contracts or the Real Property Account. If
there is a material change in applicable state or local tax laws, the imposition
of any such taxes upon The Prudential that are attributable to the Real Property
Account may result in a corresponding charge against the Real Property Account.
RESTRICTIONS ON WITHDRAWALS
Before allocating any portion of his or her net premium or purchase payments, or
transferring any portion of his or her Contract fund, to the Real Property
Account, a Contract owner should be aware that withdrawal of an investment in
the Real Property Account may be subject to greater restrictions than an
investment in the other variable investment options available under the
Contracts. The Prudential reserves the right to restrict transfers into or out
of the Real Property Account. Apart from the routine limitations on transfers
out of the Real Property Account described below, The Prudential will exercise
its right to restrict transfers out of the Real Property Account only if there
appears to be insufficient cash available to meet Contract owners' requests and
prompt disposition of the Partnership's investments to meet such requests could
not be made on commercially reasonable terms.
The Prudential will pay any death benefit, cash surrender value, withdrawal or
loan proceeds within 7 days after receipt at a Prudential Home Office of all the
documents required for such a payment. Other than the death
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benefit, which is determined as of the date of death for life insurance
products, the amount will be determined as of the date of receipt of the
request.
The funds necessary to pay any death benefit, cash surrender value, withdrawal
or loan proceeds funded by the Real Property Account will normally be obtained,
first, from any cash flows into the Real Property Account on the day such funds
are required. If, on the day such funds are required, cash flows into the Real
Property Account are less than the amount of funds required, The Prudential will
seek to obtain such funds by withdrawing a portion of its interest in the
Partnership. The Partnership will normally obtain funds to meet such a
withdrawal request from its net operating income and from the short-term and
intermediate-term debt obligations it holds. If the Partners determine that
these sources are insufficient to meet anticipated withdrawals from the
Partnership, the Partnership may use a line of credit or otherwise borrow up to
50% of the value of the Partnership's assets. See BORROWING BY THE PARTNERSHIP,
page 15. In the event that The Prudential and the other Partners in the
Partnership determine that such a borrowing by the Partnership would not best
serve the interests of Contract owners, The Prudential may, in the event of a
Contract loan or withdrawal, rather than taking the amount of any loan or
withdrawal request proportionately from all investment options under the
Contract (including the Real Property Account), take any such loan or withdrawal
first from the other investment options under the Contract.
Transfers from the Real Property Account to the other investment options
available under the Contract are currently permitted only during the 30-day
period beginning on the Contract anniversary. The maximum amount that may be
transferred out of the Real Property Account each year is the greater of: (a)
50% of the amount invested in the Real Property Account or (b) $10,000. Such
transfer requests received prior to the Contract anniversary will be effected on
the Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper written request or authorized telephone
request is received. The "valuation period" means the period of time from one
determination of the value of the amount invested in the Real Property Account
to the next. Such determinations are made when the value of the assets and
liabilities of the Partnership is calculated, which is generally at 4:15 p.m.
New York City time on each day during which the New York Stock Exchange is open.
Transfers into or out of the Real Property Account are also subject to the
general limits under the Contracts regarding transfers.
RESTRICTIONS ON CONTRACT OWNERS' INVESTMENT IN THE REAL
PROPERTY ACCOUNT
As noted earlier, identification and acquisition of real estate investments
meeting the Partnership's investment objectives is a time-consuming process.
Moreover, because the Real Property Account and the Partnership are managed so
as to ensure that they will not become investment companies subject to the
Investment Company Act of 1940, the portion of the Partnership's assets that may
be invested in securities, as opposed to non-securities real estate investments,
is strictly limited. For these reasons, The Prudential reserves the right to
restrict or limit Contract owners' allocation of funds to the Real Property
Account. Any such restrictions are likely to take the form of restricting the
timing, amount and/or frequency of transfers into the Real Property Account
and/or precluding Contract owners who have not previously selected the Real
Property Account from allocating a portion of their net premiums or purchase
payments to the Real Property Account.
FEDERAL INCOME TAX CONSIDERATIONS
The tax treatment of variable Contract owners is described briefly in the
attached prospectus for the particular variable life insurance or variable
annuity Contract selected. The Prudential believes that the same principles will
apply with respect to Contracts funded in whole or part by the Real Property
Account. The Partnership's conformity with the diversification standards for the
investments of variable life insurance and variable annuity separate accounts is
essential to ensure that treatment. See General Investment and Operating
Policies, page 8. Each individual is urged to consult a qualified tax advisor.
Under the Internal Revenue Code, the Partnership is not a taxable entity and any
income, gains or losses of the Partnership are passed through to the Partners,
including The Prudential, with respect to the Real Property Account. The Real
Property Account is not a separate taxpayer for purposes of the Internal Revenue
Code. Its investment income is included in the gross income of The Prudential,
but The Prudential is not expected to have any income tax payable as a result of
such investment income credited to Contracts. If The Prudential does in the
future incur federal income taxes attributable to the Real Property Account or
the Partnership, it may make a corresponding charge against the Real Property
Account, see CHARGES, page 16.
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DISTRIBUTION OF THE CONTRACTS
As explained in the attached prospectus for the Contracts, Pruco Securities
Corporation, an indirect, wholly-owned subsidiary of The Prudential, acts as the
principal underwriter of the Contracts. Consult that prospectus for information
about commission scales and other facts relating to sale of the Contracts.
STATE REGULATION
The Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
The Prudential is required to submit annual statements of its operations,
including financial statements, to the insurance departments of the various
jurisdictions in which it does business to determine solvency and compliance
with local insurance laws and regulations.
In addition to the annual statements referred to above, The Prudential is
required to file with New Jersey and other jurisdictions a separate statement
with respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus
does not include all of the information set forth in the registration statement.
Certain portions have been omitted pursuant to the rules and regulations of the
SEC. The omitted information may, however, be obtained from the SEC's principal
office in Washington, D.C., upon payment of a prescribed fee.
Further information may also be obtained from The Prudential's office. The
address and telephone number are set forth on the cover of this prospectus.
EXPERTS
The financial statements of the Real Property Account and the Partnership
included in this prospectus, the per share information included on page 1 of
this prospectus, and the related financial statement schedules included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement. Such financial statements, per share
information, and financial statement schedules have been included herein and
elsewhere in the registration statement in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing. Deloitte
& Touche LLP's principal business address is Two Hilton Court, Parsippany, New
Jersey 07054-0319.
LITIGATION
No litigation is pending, and no litigation is known to be contemplated by
governmental authorities, that would have an adverse material effect upon the
Real Property Account or the Partnership.
FINANCIAL STATEMENTS
Following are financial statements and independent auditors' report of the Real
Property Account, as well as financial statements and independent auditors'
report of the Partnership.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion covers the operations of The Prudential Variable
Contract Real Property Partnership and should be considered in conjunction with
the PER SHARE TABLE appearing on page 1 - Real Property and the financial
statements and notes thereto, commencing on page B1 - Real Property.
18 - Real Property
<PAGE>
Liquidity and Capital Resources.
At December 31, 1994, the Partnership's liquid assets consisting of cash and
cash equivalents and marketable securities totalled $48,917,436. This is an
increase of $23,086,195 from liquid assets at December 31, 1993 of $25,831,241.
The increase is due primarily to the sale of the Partnership's 50% interest in
seven warehouses for approximately $19,020,000 and the receipt of $3,513,704 in
cash upon the maturing of the Lincoln, NE mortgage loan. Sources of liquidity
also include net cash flow from property operations and interest from short-term
investments.
The Partnership has established a $10 million annually renewable unsecured
revolving line of credit with First Fidelity Bank National Association to be
drawn upon as needed for potential liquidity needs. As of December 31, 1994, no
drawdowns had occurred. Management does not anticipate the need to draw upon
this resource in the near future. In addition, The Prudential has also committed
to fund up to $100 million to enable the Partnership to acquire real estate
investments. Contributions to the Partnership under this commitment are utilized
for property acquisitions and returned to The Prudential on an ongoing basis
from Contract owners' net contributions. The amount of the commitment is reduced
by $10 million for every $100 million in current value net assets of the
Partnership. The amount available for future investments is approximately $51.6
million as of December 31, 1994.
The Partnership will ordinarily invest 10-15% of its assets in cash and
short-term obligations to maintain liquidity, however its investment policy
allows up to 30% investment in cash and short-term obligations. At December 31,
1994, 26.7% of the Partnership's assets consisted of cash and cash equivalents
and marketable securities. The Partnership has retained a portion of the cash
generated by operations as well as from the sale of properties and the maturing
of the mortgage loans in 1994 pending anticipated reinvestment of these funds.
The Partnership has entered into a commitment to acquire an apartment property
for up to $16 million during 1995. This acquisition will be funded from cash
held by the Partnership.
During 1994, the partners withdrew $11.0 million. Withdrawals may be made during
1995 based upon the percentage of assets invested in short-term obligations and
taking into consideration anticipated cash needs of the Partnership including
potential property acquisitions and dispositions and capital expenditures. At
December 31, 1994, and currently, the Partnership has adequate liquidity.
Management anticipates that ongoing cashflow from operations will satisfy the
Partnership's needs over the next twelve months and the foreseeable future.
The Partnership's two mortgage loans receivable matured in May 1994. The
mortgagor on the Lincoln, NE loan paid the full amount due of $3,513,704. As
previously reported, the mortgagor on the Flint, MI loan notified the
Partnership that it would not make any of the payments due in 1994 on the loan.
These payments totalled $8,094,271 including principal and interest. On July 1,
1994, the Partnership foreclosed on the property under a voluntary conveyance
from the mortgagor. The Partnership took title to the property on January 3,
1995 upon expiration of the redemption period. Upon foreclosure, the Partnership
received approximately $400,000 from the mortgagor representing operating cash
flow from the property for the first six months of 1994. This amount was applied
against the amount due from the mortgagor.
The Partnership received the cash flow generated by the property's operation
during the redemption period. This totalled approximately $375,000 and is
included with cash provided by operating activities in the statement of cash
flows.
During 1994, the Partnership expended approximately $1,173,000 in capital
expenditures, of which approximately $838,000 was for tenant alterations and
leasing commissions. Approximately $427,000 in tenant improvements and leasing
commissions was spent at the Azusa, CA warehouse related to a new tenant, Best
Buy. This is the first installment of such costs related to this tenant.
Approximately $214,000 was expended at the Pomona, CA warehouse related to the
expansion of space by Ashley Furniture (approximately $114,000), a new tenant,
JB Engineering (approximately $72,000), and a lease renewal by Performance
Engineered (nearly $28,000). Approximately $164,000 was expended at the
Bolingbrook, IL warehouse for the extension of Gillette's lease.
Other major capital expenditures in 1994 included approximately $118,000 for
HVAC upgrades, installation of an energy management system and expenditures
related to the Americans with Disabilities Act at the Morristown, NJ office
center; approximately $51,000 for improvements in the flooring at the
Bolingbrook warehouse and approximately $103,000 for exterior improvements,
signage and landscaping at the Pomona and Azusa, CA warehouses, the Farmington
Hills, MI apartments and the Morristown office building. An additional $54,000
was expended at the Partnership's apartment complexes for various projects
including remodeling the clubhouse and model apartments.
Previously, the Partnership reported that it expected to exercise its option to
purchase the land on which the Pomona warehouse is located during the fourth
quarter of 1994 for $4,000,000. However, after comparing the option price of the
land to the additional benefits that the Partnership may receive from owning the
land rather than leasing it, the Partnership decided not to exercise the option
at the present time. The option is available until
19 - Real Property
<PAGE>
November 1997. The Partnership will continue to evaluate the relevant factors
during the option period before deciding whether to exercise the option.
Projected capital expenditures for 1995 total approximately $1,319,000. Of this,
approximately $1,089,000 consists of leasing commission and tenant alterations.
The largest of these is the final installment of costs related to the lease with
Best Buy at the Azusa property ($300,000). At the Morristown office building,
Kodak is expected to sign a new lease for which approximately $142,000 in tenant
improvements and leasing commissions are anticipated. Kodak has been occupying
their space on a month-to-month basis since their lease expired in 1994. An
additional $284,000 in tenant improvements and commissions are projected for
Morristown in 1995 as well as $202,000 for Pomona, $131,000 for the Unit
warehouses and $30,000 for the Roswell, GA shopping center. Except for the Best
Buy lease, all of these projected expenditures relate to prospective leases. The
actual amount of such expenditures will depend on the number of new leases
signed, the needs of the particular tenants and the timing of lease executions.
Other major capital projects planned for 1995 include $57,000 for fencing and
entrance gates at the Azusa warehouse and Atlanta, GA apartments; $51,000 for
sprinklers, electric transformers and climate control units at Morristown;
$45,000 for exterior lighting at the Lisle, IL office building; $44,000 for
irrigation and drainage upgrades and landscaping at Farmington Hills,
Bolingbrook and the four Jacksonville, FL warehouses (the Unit warehouses) and
approximately $33,000 for smaller projects among the various properties
including improvements to common areas and carpet replacements at the
apartments.
Neither of the Partnership's California properties, which are covered by
earthquake insurance, suffered damage in the January 1994 Los Angeles
earthquake.
The Partnership has entered into a commitment to purchase a garden apartment
complex currently under construction in Raleigh, NC. The property consists of
fourteen two and three-story buildings with a total of 250 units. The property
is expected to be completed in June 1995. The initial funding will be
approximately $14 million. A second funding will be made during 1995 based upon
the property's achieving certain income and occupancy levels. The maximum amount
of the second funding is $1,950,000. This investment will be funded from cash
held by the Partnership.
Results of Operations.
The following is a brief discussion of a comparison of the results of operations
for the three years ended December 31, 1994, 1993 and 1992.
1994 vs 1993
The Partnership's net investment income for 1994 was $12,848,199, an increase of
$193,568 (1.5%) from net investment income for 1993 of $12,654,631. The increase
was primarily the result of higher interest income from short-term investments
($827,470) and income from property operations ($270,620) partially offset by
lower interest income on mortgage loans ($917,598).
Income from property operations, including income from interest in properties,
was $14,023,251 for 1994. This is an increase of $270,620 (2.0%) from
$13,752,631 for 1993. This was due primarily to increased rent from properties
(approximately $533,000) and lower real estate taxes (approximately $193,000)
and property administrative expenses (approximately $157,000). These were
partially offset by lower income from interest in properties (approximately
$546,000) and increased property operating expenses (approximately $67,000).
Rent from properties for 1994 increased by $533,265 (3.4%) to $16,344,259 from
$15,810,994 for 1993. Higher occupancy in 1994 at the Roswell shopping center
and the Partnership's two apartment properties resulted in approximately
$430,000 in additional rental income. Percentage rent at the shopping center
also increased nearly $198,000 primarily as a result of the property now billing
tenants for such rent throughout the current year rather than in arrears.
Rental income at the Morristown office building increased by approximately
$139,000 in 1994 due to a retroactive rent adjustment for Midlantic Bank and
scheduled rent step-ups and the ending of free rent periods for various tenants.
Beginning July 1, 1994, the Partnership is receiving all of the revenue from the
property related to the foreclosed Flint mortgage loan. This amounted to
approximately $675,000 for the last six months of 1994.
These additional revenues were partially offset by lower rental income from the
Azusa warehouse (approximately $582,000) due to lower occupancy in 1994, rent no
longer received on the Denver warehouse sold in 1993 (approximately $67,000), a
lower rental rate and concessions granted to Gillette in 1994 related to their
early lease renewal (approximately $90,000) and lower recoveries of real estate
taxes at the net leased properties in Lisle and Bolingbrook (approximately
$47,000). Expense recoveries also declined by approximately $159,000 at Pomona
20 - Real Property
<PAGE>
in 1994. This was the result of lower recoverable expenses at the property.
Revenue in 1993 included recoveries for parking lot and roof repairs for which
there were no corresponding amounts in 1994.
Income from interest in properties relates to the Partnership's 50%
co-investment in the Unit warehouses. Income from this source decreased $546,273
(18.8%) from $2,901,477 for 1993 to $2,355,204 for 1994. The Partnership sold
its investments in two of these warehouses in 1993 and in seven warehouses in
1994. This resulted in a reduction of income of approximately $476,000 in 1994.
Lower occupancy at one of the remaining warehouses also reduced income by
approximately $75,000.
Administrative expenses on the statement of operations includes both those
related to property operations and the administration of the Partnership.
Property administrative expenses for 1994 were $1,176,398. This is $157,368
(11.8%) lower than the $1,333,766 for 1993. Most of the decrease was the result
of non-recurring expenses in 1993. In 1993, the Roswell shopping center reported
approximately $46,000 in bad debt expense related to a bankrupt tenant, Lionel
Playworld. No such charge was incurred in 1994. A casualty loss of approximately
$53,000 was also incurred at the shopping center in 1993. At the Azusa
warehouse, a tenant vacated its space in 1993, before the expiration of its
lease resulting in a bad debt expense of nearly $156,000 in 1993. No such charge
was incurred in 1994. In addition, the 1994 application of a security deposit to
amounts owed by that tenant reduced 1994 bad debt expense by approximately
$33,000.
These reductions were partially offset by an increase in insurance premiums of
nearly $63,000, primarily at the Azusa, Pomona and Roswell properties and
approximately $22,000 in higher advertising and promotional expenses at these
same properties. In addition, approximately $59,000 in administrative expenses
were incurred at the Flint property acquired through foreclosure in 1994.
Property operating expenses for 1994 were $1,707,039 compared to $1,639,828 for
1993, an increase of $67,211 (4.1%). The increase was the result of
approximately $64,000 in operating expenses related to the Flint property for
the last six months of 1994 and nearly $37,000 in higher repairs and maintenance
expenses, particularly at the Azusa warehouse related to the painting of
building exteriors. These were partially offset by a reduction of almost $34,000
due to the sale of the Denver property in 1993.
Real estate taxes for 1994 were $1,792,775, a reduction of $193,471 (9.7%) from
$1,986,246 for 1993. Approximately $110,000 of this decrease was the result of
appealing the assessed values of the Azusa, Pomona and Morristown properties.
The sale of the Denver warehouse reduced real estate taxes by approximately
$32,000. Real estate taxes at the net lease properties in Bolingbrook and Lisle
also decreased nearly $47,000. As net leased properties, the tenants absorb
almost all operating costs, so this decrease also reduced rental income as noted
above.
Interest income on the mortgage loans decreased $917,598 (89.7%) from $1,023,292
for 1993 to $105,694 for 1994. This was due to the maturing of the Lincoln, NE
loan in May 1994 and the default of the mortgagor on the Flint loan. These are
discussed further in the Liquidity and Capital Resources section.
Interest income from short-term investments increased $827,470 (111.2%) from
$743,924 for 1993 to $1,571,394 for 1994. This was the result of increased
amounts invested and higher interest rates in 1994. As noted above, the
Partnership is retaining increased cash balances in anticipation of acquiring
properties in 1995.
Administrative expenses related to the Partnership totalled $237,324 for 1994.
This is a reduction of $38,202 (13.9%) from $275,526 for 1993. The decrease
resulted primarily from lower professional fees for 1994.
The investment management fee for 1994 was $2,287,816. This is $18,610 (0.8%)
higher than the fee for 1993 of $2,269,206. The fee is computed as 1.25% of
gross assets. During 1994, gross assets were slightly higher than the prior year
due to cash flow retained by the Partnership and increased market values of the
real estate investments.
Interest expense relates to the obligation under capital lease. For 1994,
interest expense was $327,000. This is $6,516 (2.0%) higher than interest
expense for 1993 of $320,484.
During 1994, the Partnership sold its 50% interest in the two Unit warehouses
located in Atlanta and the ones located in Desoto, TX; Fort Worth, TX;
Shreveport, LA; Bedford Park, IL; and Normal, IL. The proceeds, net of related
costs, were approximately $19,020,000, resulting in a realized loss of
approximately $1,237,000. Realized loss is the difference between net sales
proceeds and the cost of the properties. The Partnership had already recognized
decreases in the properties' market values in prior periods, so the net sales
proceeds actually exceeded the values at which the properties were carried on
the sale date by approximately $445,000. The proceeds from the sale are expected
to be reinvested during 1995. The Partnership still owns a 50% interest in the
four warehouses located in Jacksonville, FL. These are not currently being
marketed for sale.
21 - Real Property
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Market values of invested assets: 1994 vs 1993
During 1994, the Partnership experienced an unrealized gain of $2,576,828 on its
real estate investments. Of this, $1,502,226 represents decreases in the market
values of the Unit warehouses, sold in October 1994, which had already been
reported as unrealized losses in prior years. With the sale of the properties,
these unrealized losses were reclassified as unrealized gains on the statement
of operations. These unrealized gains revert the property value back to its
historical cost, which is used to calculate the $1,237,000 realized loss
described above. The remaining $1,074,602 is the net increase in the current
values of the investments owned by the Partnership at the end of 1994. This
represents 0.8% of the investments' December 31, 1993 value.
The office buildings experienced the largest increase, approximately $1,145,000.
The apartments increased by about $945,000. The warehouses experienced an
unrealized loss of approximately $184,000 and the retail property, an unrealized
loss of about $832,000.
The office property acquired through the foreclosure of the Flint mortgage loan
experienced the largest increase in current value, $2,423,739 (42.6% of the
investment's December 31, 1993 value). After foreclosure the Partnership
reviewed detailed operating information on the property. Based on current market
conditions and property performance, an appraisal resulted in an increase in the
estimated market value.
This increase in value was partially offset by decreases in the values of the
Lisle office building of $1,200,000 (9% of the property's December 31, 1993
value) and the Morristown property of $78,321 (0.8% of its December 31, 1993
value). The former was caused by reduced expectations that the current tenant,
R.R. Donnelley, will remain in the building when their current lease expires in
1997. This would result in downtime while a new tenant was found and necessitate
incurring additional tenant improvements and leasing commissions. It is also
likely that the rental rate on any new lease would be lower than that currently
paid by Donnelley. The decline in the value of the Morristown property was the
result of projected increases in tenant improvements and leasing commissions
which will be necessary to lease the remaining vacant space.
The Partnership's apartment complex in Atlanta had an unrealized gain of
$671,245 (6.0% of the property's December 31, 1993 value) while the Farmington
Hills apartments experienced an increase of $274,134 (2.1% of its year-end 1993
value). These increases were primarily the result of higher rental rates,
occupancy and tenant retention than previously projected for these properties.
The Partnership's sole retail property, King's Market Shopping Center in
Roswell, GA, experienced an unrealized loss of $832,405 (2.5% of its December
31, 1993 value). This was due both to capital expenditures at the property
during 1994, which did not result in a corresponding increase in the shopping
center's value, and to reduced expectations concerning future rental rates when
current leases expire.
The warehouses experienced an unrealized loss of almost $184,000 during 1994.
The Pomona property had the largest loss, $1,679,740 (9.4% of its year-end 1993
value). This change was due primarily to the increased cost of a planned roof
replacement program and an acceleration in the timing of that work. The market
values of the four Unit warehouses in which the Partnership owns a 50% interest
at the end of 1994 increased $214,364 (3.9% of their December 31, 1993 value).
This resulted from leasing the vacant space at one of the warehouses effective
February 1995 as well the improved potential for higher rental rates on new and
renewal leases on these properties.
The warehouse in Bolingbrook experienced an unrealized loss of $80,303 (1.2% of
the property's December 31, 1993 value) due to capital expenditures which did
not increase the property's value.
The decreases in the market values of these warehouses were partially offset by
an increase of $1,361,890 (10.0% of the property's December 31, 1993 value) in
the market value of the Azusa warehouse. This was the result of the new lease
with Best Buy bringing the property's occupancy to 100% as well as improved
conditions in the local market.
Property leasing activity
Occupancy at the Partnership's properties at December 31, 1994 is generally
higher than at December 31, 1993, especially for the industrial properties.
During the fourth quarter of 1994, a lease covering the vacant 215,000 square
feet (50% of the property) was executed at the Azusa warehouse making the
property 100% leased as of the end of 1994. The tenant is Best Buy, a
distributor of home appliances and electronics. The lease term is seven years
and provides that the tenant will take an additional 145,000 square feet of
space in 1996 when another lease expires. No leases are scheduled to expire at
the property until 1996.
Occupancy at Pomona increased from 78% at December 31, 1993 to 83% at the end of
1994. During the first quarter of 1994, Ashley Furniture expanded its space by
30,000 square feet (5% of the property). Two leases totalling 92,000 square feet
expired during 1994. One tenant vacated upon lease termination, but the space
was quickly leased to a new tenant, JB Engineering. The lease covers 50,000
square feet (9% of the property) and expires in 1997. The tenant on the other
lease, Performance Engineered, Inc. exercised a renewal option to
22 - Real Property
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continue to lease the space for an additional five years. The rental rate under
the option is slightly lower than the original rate. This lease covers 42,000
square feet (8% of the property). The Partnership is currently discussing lease
terms with two potential tenants for the remaining vacant space. No leases are
scheduled to expire until 1996.
After the sale of the Unit warehouses noted above, the Partnership now owns an
interest in only the four properties located in Jacksonville, FL. These total
approximately 502,000 square feet. At December 31, 1994, the warehouses were 92%
occupied, although one tenant occupying 40,000 square feet (8% of the four
warehouses) on a month-to-month basis vacated effective January 1, 1995. A
two-year lease has since been signed with a new tenant, Biaggi Brothers,
covering 90,000 square feet (18% of the four buildings). This brings occupancy
of the four warehouses to 100%. One lease covering 102,000 square feet (20% of
the warehouses) expires on April 30, 1995. The tenant is expected to renew,
although no agreement has been reached.
The warehouse in Bolingbrook continues to be fully occupied by Gillette under a
lease expiring in 2000.
The Morristown office building was 93% occupied at December 31, 1994 as it was
at the end of 1993. One lease, covering 6,600 square feet (8% of the property)
expired on March 31, 1994. The tenant, Kodak, has continued to occupy the space
on a month-to-month basis. The Partnership is negotiating with the tenant on a
new lease and expects that an agreement will be reached during the first quarter
of 1995. During the fourth quarter of 1994, a 2,000 square foot expansion was
executed with Smith Barney, effective January 16, 1995. This represents 2% of
the property and brings occupancy to 95%. The Partnership is also discussing
expansions with other tenants in the property. No leases are scheduled to expire
in 1995.
The office building in Lisle continues to be fully leased to R.R. Donnelley
under a lease expiring in September 1997. The lease contains two five-year
renewal options at the lower of the current rate or 85% of the then market
rental rate. No discussions are currently being held with the tenant and they
have not indicated whether they are considering exercising the option.
King's Market Shopping Center in Roswell, GA was 99% leased at December 31, 1994
as compared to 100% at the end of 1993. Two tenants whose leases totalled 2,140
square feet (less than 1% of the center) vacated at the expiration of their
leases during the fourth quarter 1994. The Partnership is marketing the space
and expects to lease the space during the first quarter of 1995. Four leases
totalling approximately 8,800 square feet (3% of the property) are scheduled to
expire in 1995. The Partnership is discussing potential renewal terms with the
current tenants. Leases covering the major tenants at the shopping center, Home
Depot, CompUSA and A&P, are not scheduled to expire until after 2003.
As of December 31, 1994, the Partnership's residential properties located in
Atlanta, GA and Farmington Hills, MI were approximately 98% leased. Occupancy at
these properties has been at about this level for most of 1994. At December 31,
1993, these properties were approximately 96% leased. Rental rates rose
approximately 4%-5% during 1994 and tenant retention at these properties remains
high. Market rental rates are expected to continue to increase slightly in 1995
in the residential markets in which the Partnership's apartments are located.
Occupancy at these properties is not expected to change significantly over the
upcoming year.
1993 vs 1992
The Partnership's net investment income for the year ended December 31, 1993,
was $12,654,631, an increase of $311,016 (2.5%) from net investment income for
the corresponding period of 1992 of $12,343,615. The increase was the result of
higher income from property operations ($438,239) and lower investment
management fees ($135,818) offset by lower interest from short-term investments
and mortgage loans ($229,679) and higher Partnership administrative expenses
($27,393) and interest expense ($5,969).
Income from property operations, including income from interest in properties,
for the year ended December 31, 1993, was $13,752,631. This is an increase of
$438,239 (3.3%) over the $13,314,392 for the corresponding period of 1992.
Property revenues increased by $118,543 (0.6%) from $18,593,928 for 1992 to
$18,712,471 for 1993. Property revenues at the Morristown office building
increased approximately $400,000 due to higher occupancy and the expiration of
free rent periods during 1993. The office building in Lisle generated
approximately $200,000 in higher revenues as a result of a scheduled increase in
the rental rate. These increases were partially offset by a reduction in
revenues of approximately $450,000 due the sale of three properties in 1993.
Property operating expenses for 1993 were $4,959,840. This is a decrease of
$319,696 (6.0%) from $5,279,536 for 1992. The decrease was primarily the result
of lower real estate taxes at Pomona as well as the 1993 sale of the Denver
warehouse and the Partnership's 50% interest in the warehouses located in
Hightstown, NJ and one of the Jacksonville, FL warehouses.
Mortgage loans generated interest income for the year ended December 31, 1993,
of $1,023,292 as compared to $1,040,803 for the corresponding period of 1992.
Interest income from short-term investments decreased by
23 - Real Property
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$212,168 (22.2%) from $956,092 for 1992 to $743,924 for 1993. This was due to
lower interest rates and decreased amounts invested.
The investment management fee incurred for the year ended December 31, 1993 were
$2,269,206 and for the same period in 1992, $2,405,024. This is a decrease of
$135,818 (5.6%) which is due to a decline in the assets upon which the fee is
calculated due primarily to the sale of the three properties described below.
Administrative expenses on the statement of operations includes both property
and Partnership administrative expenses. Partnership administrative expenses for
1993 were $275,526 and, for 1992, $248,133. This increase of $27,393 (11.0%) was
primarily the result of higher appraisal fees.
Due to a capitalized lease, the Partnership incurred $320,484 of interest
expense during 1993. This change is a $5,969 (1.9%) increase from the $314,515
of interest expense incurred during 1992.
During 1993, the Partnership sold its warehouse in Denver, CO and its 50%
interest in warehouses located in Hightstown, NJ and Jacksonville, FL. The sale
proceeds, net of related costs, totalled approximately $4,727,000, resulting in
a realized loss of approximately $2,463,000 based on cost and a gain of
approximately $72,700 based on the properties' carrying values on the date of
the sale.
The Denver warehouse was sold on August 6, 1993 for $2,650,000. The net sales
proceeds were approximately $2,561,000. This resulted in a loss of approximately
$1,451,000 based on cost and a gain of approximately $206,500 based on the
property's carrying value on the date of sale.
On September 2, 1993, the Partnership sold its 50% interest in one of the Unit
warehouses located in Jacksonville, FL for $1,450,000. The net sales proceeds
were approximately $1,380,000. This resulted in a realized loss of approximately
$220,000 based on cost and a gain of approximately $29,800 based on the
investment's carrying value on the date of sale.
The Partnership sold its 50% interest in the Unit warehouse located in
Hightstown, NJ on October 29, 1993, for $825,000. Net sales proceeds were
approximately $786,000. This resulted in a realized loss of approximately
$792,000 based on cost and a loss of approximately $163,600 based on the
investment's carrying value on the date of sale.
Market values of invested assets: 1993 vs 1992
The market values of the properties and interest in properties declined
approximately $1,300,000 (0.8% of the investments' December 31, 1992 values)
between December 31, 1992 and 1993. The market values of the Partnership's
industrial properties decreased by approximately $3,400,000 (4.9% of the
properties December 31, 1992 value) in 1993. The warehouses in Azusa and Pomona
experienced the largest declines totalling approximately $3,000,000. This was
due to the continuing soft warehouse real estate market in southern California
as well as a major tenant vacating before the expiration of its lease at Azusa.
The tenant, citing a decline in its business and financial difficulties, vacated
its 160,000 square foot space (37% of the property) during the fourth quarter of
1993. The lease was scheduled to expire in 1997.
The Partnership's office buildings declined approximately $1,400,000 (5.9% of
their December 31, 1992 value) during 1993. The Morristown property experienced
the larger decrease, approximately $850,000. This was due to continuing soft
market conditions in the northern New Jersey office market and an expected
increase in the cost of leasing and operating the property. The value of the
Lisle office building decreased $600,000. This property is entirely leased to
R.R. Donnelley through 1997. The decline in value is due to the expectation that
rental rates on the property upon expiration of the current lease will be lower
than the current rate.
The market value of Kings Market Shopping Center in Roswell, GA increased
approximately $2,300,000 (7.4% of its December 31, 1992 value) during 1993 as a
result of securing CompUSA to occupy the space vacated by Lionel Playworld
earlier in 1993.
The Partnership's two apartment complexes increased in value by approximately
$1,200,000 (5.3% of their December 31, 1992 values). All of the increase was at
the Farmington Hills property. This was the result of higher actual and
projected rental rates and higher retention of tenants by the property. The
value of the apartments in Atlanta did not change from its December 31, 1992
value.
The only change in the current values of the mortgage loans during 1993 resulted
from the repayments of principal.
Effects of Inflation.
The Partnership has not experienced any significant effects from inflation
during recent years. To the extent that inflation in future periods may have an
adverse impact on property operating expenses, the Partnership has structured
its leases to require the tenant to pay some portion of a property's operating
expenses. As a result of these lease provisions, increases due to inflation
generally do not have a significant adverse effect upon the
24 - Real Property
<PAGE>
Partnership's operating results. However, since no expenses are recovered on
unrented space, the Partnership will be exposed to the effects of inflation on
such space.
25 - Real Property
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1994 1993
------------------- --------------------
<S> <C> <C>
Investment in shares of The Prudential Variable Contract
Real Property Partnership $ 79,136,103 $ 75,841,656
=================== ====================
NET ASSETS, representing:
Equity of Contract owners $ 51,545,161 $ 46,780,975
Equity of The Prudential Insurance Company of America 27,590,942 29,060,681
------------------- --------------------
$ 79,136,103 $ 75,841,656
=================== ====================
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1994 1993 1992
------------------- ------------------- --------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Net Investment Income from Partnership Operations $ 5,659,786 $ 5,289,403 $ 4,779,595
EXPENSES:
Asset Based Charges to Contract owners (Note 3) 407,310 382,567 383,355
------------------ ------------------ -------------------
NET INVESTMENT INCOME 5,252,476 4,906,836 4,396,240
------------------ ------------------ -------------------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS
Net realized loss on investments sold (Note 6) (545,083) (1,029,669) 0
Net unrealized gain/(loss) on investments 1,179,744 93,915 (6,443,108)
------------------ ------------------ -------------------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS IN PARTNERSHIP 634,661 (935,754) (6,443,108)
------------------ ------------------ -------------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,887,137 $ 3,971,082 $ (2,046,868)
================== ================== ===================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A3 THROUGH A4.
A1 - Real Property
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1994 1993 1992
------------------- ------------------- ------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 5,252,476 $ 4,906,836 $ 4,396,240
Net Realized and Unrealized
Gain/(Loss) on Investments in Partnership 634,661 (935,754) (6,443,108)
------------------ ------------------ ------------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 5,887,137 3,971,082 (2,046,868)
------------------ ------------------ ------------------
CAPITAL TRANSACTIONS:
Net Contributions by Contract owners 1,195,248 3,927 954,411
Net Contributions/(Withdrawals) by The Prudential
Insurance Company of America (3,787,938) 378,640 (571,056)
------------------ ------------------ ------------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (2,592,690) 382,567 383,355
------------------ ------------------ ------------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS 3,294,447 4,353,649 (1,663,513)
NET ASSETS:
Beginning of year 75,841,656 71,488,007 73,151,520
------------------ ------------------ ------------------
End of year $ 79,136,103 $ 75,841,656 $ 71,488,007
================== ================== ==================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A3 THROUGH A4.
A2 - Real Property
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
For Years Ended December 31, 1994, 1993 and 1992
Note 1: General
The Prudential Variable Contract Real Property Account (the "Real Property
Account") was established on November 20, 1986 by resolution of the Board of
Directors of The Prudential Insurance Company of America ("The Prudential"), as
a separate investment account pursuant to New Jersey law. The assets of the Real
Property Account are segregated from The Prudential's other assets. The Real
Property Account is used to fund benefits under certain variable life insurance
and variable annuity contracts issued by The Prudential. On April 29, 1988, The
Prudential contributed $100,000 to commence operations of the Real Property
Account.
The assets of the Real Property Account are invested in The Prudential Variable
Contract Real Property Partnership (the "Partnership"). The Partnership is a
general partnership organized under New Jersey law on April 29, 1988, through
agreement among The Prudential, Pruco Life Insurance Company, and Pruco Life
Insurance Company of New Jersey to provide a means for assets allocated to the
real property option under certain variable life insurance and variable annuity
contracts issued by the respective companies to be invested in a commingled
pool. On April 29, 1988, the Real Property Account initially contributed
$100,000 to the Partnership.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
Note 2: Summary of Significant Accounting Policies
A. Change in Accounting Policy
The financial statements are prepared on a current value basis.
This represents a change in accounting policy from financial
statements issued prior to the year ended December 31, 1991 which
utilized the historical cost basis of accounting and provided
only supplementary information on current values. Since the unit
values under Contracts participating in the Partnership are
determined using the current value basis of investments (see
General Note to the Partnership financials), this basis is deemed
more meaningful to the investor than a historical cost basis.
B. Investment in Partnership Interest
The investment in the Partnership is based on the Real Property
Account's proportionate interest of the Partnership's current
value, as discussed in Note 1 to the Partnership's financial
statements. At December 31, 1994 and 1993 the Real Property
Account's interest in the Partnership, based on current value
equity was 44.6% or 5,465,515 shares and 43.6% or 5,678,320
shares, respectively.
C. Income Recognition
The Real Property Account recognizes its proportionate share of
the Partnership's net investment income on a daily basis, as
consistent with the Partnership Agreement. The Net Gain/(Loss) on
Investment in Partnership reflected on the Statements of
Operations represents the Real Property Account's proportionate
share of the Net Gain/(Loss) on Investments recognized by the
Partnership.
A3 - Real Property
<PAGE>
Note 3: Asset Based Charges
Mortality risk and expense risk charges and charges for administration are
applied daily against the net assets representing equity of Contract owners
investing in the Real Property Account, at an effective annual rate as shown
below for each of The Prudential's separate accounts investing in the Real
Property Account:
- -------------------------------------------------------------------------------
Variable Appreciable Account
- Contracts with face amounts of less than $100,000 0.90%
- Contracts with face amounts of $100,000 or more 0.60%
Individual Variable Contract Account 1.20%
- -------------------------------------------------------------------------------
Note 4: Taxes
Income and capital gains and losses of the Partnership are attributed, for
federal income tax purposes, to the Partners in the Partnership, including The
Prudential, in respect of the Real Property Account. The operations of the Real
Property Account form a part of, and are taxed with, the operations of The
Prudential. Under the Internal Revenue Code, all ordinary income and capital
gains allocated to the Contract owners are not taxable to The Prudential. As a
result, the net asset values of the Real Property Account are not affected by
federal income taxes on the ordinary income and capital gains and losses
attributable to the Real Property Account.
Note 5: Commitment from Partner
On January 9, 1990, The Prudential committed to fund up to $100 million to
enable the Partnership to take advantage of opportunities to acquire attractive
real property investments whose cost is greater than the Partnership's available
cash. Contributions to the Partnership under this commitment are utilized for
property acquisitions and returned to Prudential on an ongoing basis from
Contract owners' net contributions. Also, the amount of the commitment is
reduced by $10 million for every $100 million in current value net assets of the
Partnership. The amount available under this commitment as of December 31, 1994
is approximately $51.6 million.
Note 6: Net Realized Loss on Investment
The Net Realized Loss on Investment reflected on the Statement of Operations
represents the Real Property Account's proportionate share of the loss realized
by the Partnership upon the sale of certain properties. For further information,
please refer to Note 8 of the Partnership's December 31, 1994 financial
statements.
A4 - Real Property
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
The Prudential Variable Contract Real Property Account
Newark, New Jersey
We have audited the accompanying statements of net assets of The Prudential
Variable Contract Real Property Account ("Real Property Account") as of December
31, 1994 and 1993, and the related statements of operations and changes in net
assets for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Real Property Account's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Prudential Variable Contract Real
Property Account as of December 31, 1994 and 1993, and the results of its
operations and the changes in net assets for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
Investment in shares of The Prudential Variable Contract Real Property
Partnership is stated at current value at December 31, 1994 and 1993, as
discussed in Note 2 to the financial statements. Determination of current value
involves subjective judgment because the actual market value of such shares can
be determined only by negotiation between the parties in a sales transaction.
Deloitte & Touche LLP
Parsippany, New Jersey
March 6, 1995
A5 - Real Property
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1994 1993
------------------ ------------------
<S> <C> <C>
ASSETS:
Properties at current value
(cost $154,157,068 and $145,532,430
respectively) (Note 1) $ 126,258,004 $ 118,960,280
Interest in properties at current value
(cost $6,108,742 and $26,348,882
respectively) (Note 1) 5,726,451 24,250,000
Mortgage loans at current value
(cost $0 and $11,410,944
respectively) (Notes 1 and 3) 0 9,223,791
Cash and cash equivalents 33,093,237 23,852,233
Marketable securities 15,824,199 1,979,008
Other assets and accounts receivable
(net of allowance for uncollectible
amounts of $128,336 and $161,203 respectively) 2,218,095 1,490,274
--------------------- ---------------------
Total Assets $ 183,119,986 $ 179,755,586
===================== =====================
LIABILITIES:
Obligation under capital lease $ 3,804,836 $ 3,798,565
Accounts payable and accrued expenses 805,066 729,190
Due to affiliates (Note 5) 624,206 694,644
Other liabilities 645,913 480,864
--------------------- ---------------------
Total liabilities 5,880,021 5,703,263
--------------------- ---------------------
NET ASSETS:
Partners' Equity 177,239,965 174,052,323
--------------------- ---------------------
$ 183,119,986 $ 179,755,586
===================== =====================
Number of shares outstanding at end of year 12,241,034 13,031,424
===================== =====================
Share Value at end of year $14.48 $13.36
====== ======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11.
B1 - Real Property
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1994 1993 1992
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Rent from properties $ 16,344,259 $ 15,810,994 $ 15,707,807
Income from interest in properties 2,355,204 2,901,477 2,886,121
Interest on mortgage loans 105,694 1,023,292 1,040,803
Interest from short-term investments 1,571,394 743,924 956,092
--------------------- --------------------- ---------------------
20,376,551 20,479,687 20,590,823
--------------------- --------------------- ---------------------
EXPENSES:
Investment management fee (Note 2) 2,287,816 2,269,206 2,405,024
Real estate tax expense 1,792,775 1,986,246 2,179,044
Administrative expenses 1,413,722 1,609,292 1,531,149
Operating expenses 1,707,039 1,639,828 1,817,476
Interest expense 327,000 320,484 314,515
--------------------- --------------------- ---------------------
7,528,352 7,825,056 8,247,208
--------------------- --------------------- ---------------------
NET INVESTMENT INCOME 12,848,199 12,654,631 12,343,615
--------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on
investments sold (Note 8) (1,237,385) (2,463,431) 0
Net unrealized gain/(loss)
on investments 2,576,828 223,714 (16,855,857)
--------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS 1,339,443 (2,239,717) (16,855,857)
--------------------- --------------------- ---------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 14,187,642 $ 10,414,914 $ (4,512,242)
===================== ===================== =====================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11.
B2 - Real Property
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1994 1993 1992
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
OPERATIONS:
Net Investment Income $ 12,848,199 $ 12,654,631 $ 12,343,615
Net Realized and Unrealized
Gain/(Loss) on Investments 1,339,443 (2,239,717) (16,855,857)
--------------------- --------------------- ---------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 14,187,642 10,414,914 (4,512,242)
--------------------- --------------------- ---------------------
CAPITAL TRANSACTIONS:
Withdrawals by partners
(790,390; 1,157,814 and 803,827
shares respectively) (11,000,000) (15,000,000) (10,000,000)
--------------------- --------------------- ---------------------
NET DECREASE IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS (11,000,000) (15,000,000) (10,000,000)
--------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE)
IN NET ASSETS 3,187,642 (4,585,086) (14,512,242)
NET ASSETS:
Beginning of Year 174,052,323 178,637,409 193,149,651
--------------------- --------------------- ---------------------
End of Year $ 177,239,965 $ 174,052,323 $ 178,637,409
===================== ===================== =====================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11.
B3 - Real Property
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase/(decrease) in net assets resulting from operations $ 14,187,642 $ 10,414,914 $ (4,512,242)
Adjustments to reconcile net increase/(decrease) in net assets
resulting from operations to net cash provided by
operating activities:
Net unrealized (gain)/loss on investments (2,576,828) (223,714) 16,855,857
Net realized loss on investments sold 1,237,385 2,463,431 0
Changes in assets and liabilities:
Increase/(Decrease) in other assets and accounts receivable (727,821) 115,982 (827,171)
Increase in marketable securities (13,845,191) (1,979,008) 0
Increase in obligation under capital lease 6,271 5,743 64,515
Increase/(Decrease) in accounts payable
and accrued expenses 75,876 99,524 (235,228)
Decrease in due to affiliates (70,438) (19,529) (73,875)
Increase/(Decrease) in other liabilities 165,049 (9,006) 19,830
------------ ------------ ------------
Net cash (used in)/provided by operating activities (1,548,055) 10,868,337 11,291,686
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital improvements on real estate owned (1,161,224) (1,044,906) (2,085,113)
Capital improvements on interest in properties (12,087) (34,237) (469,617)
Principal repayments received on mortgage loans 3,947,528 202,959 186,564
Proceeds from sale of investments 19,014,842 4,726,705 0
------------ ------------ ------------
Net cash provided by/(used in) investing activities 21,789,059 3,850,521 (2,368,166)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals (11,000,000) (15,000,000) (10,000,000)
------------ ------------ ------------
Net cash used in financing activities (11,000,000) (15,000,000) (10,000,000)
------------ ------------ ------------
Net increase/(decrease) in cash and cash equivalents 9,241,004 (281,142) (1,076,480)
CASH AND CASH EQUIVALENTS - Beginning of year 23,852,233 24,133,375 25,209,855
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - End of year $ 33,093,237 $ 23,852,233 $ 24,133,375
============ ============ ============
SUPPLEMENTAL SCHEDULE
OF NONCASH INVESTING ACTIVITIES:
Foreclosure on mortgage loan (Note 3) $ 5,276,262 $ 0 $ 0
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 250,000 $ 250,000 $ 250,000
============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11.
B4 - Real Property
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT IN PROPERTIES
(Percent of Net Assets) 71.2% 68.4%
Current Current
Location Description Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Azusa, CA Warehouse $ 18,219,245 $ 15,426,651 $ 17,756,211 $ 13,601,727
Lisle, IL Office Building 17,524,421 12,000,000 17,524,421 13,200,000
Atlanta, GA Garden Apartments 15,309,193 11,903,533 15,276,905 11,200,000
Pomona, CA (a) Warehouse 23,115,589 16,353,556 22,887,053 17,804,760
Roswell, GA Retail Shopping Center 31,605,970 32,500,000 31,565,548 33,291,983
Morristown, NJ Office Building 18,443,689 9,825,401 18,316,191 9,776,224
Bolingbrook, IL Warehouse 8,915,498 7,009,907 8,695,288 6,870,000
Farmington Hills, MI Garden Apartments 13,560,049 13,538,956 13,510,813 13,215,586
Flint, MI Office Building 7,463,414 7,700,000 0 0
---------------- ---------------- ---------------- ----------------
$ 154,157,068 $ 126,258,004 $ 145,532,430 $ 118,960,280
================ ================ ================ ================
(a) Includes land under capital lease of $3,412,636 representing the present
value of minimum future lease payments at the inception of the lease.
<CAPTION>
INVESTMENT IN INTEREST IN PROPERTIES
(Percent of Net Assets) 3.2% 13.9%
Current Current
Location Description Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlanta, GA Warehouse/Distribution $ 0 $ 0 $ 2,830,350 $ 2,300,000
Jacksonville, FL Warehouse/Distribution 1,304,979 1,150,000 1,304,979 1,100,000
Jacksonville, FL Warehouse/Distribution 1,002,448 1,000,000 1,002,448 950,000
Jacksonville, FL Warehouse/Distribution 1,442,894 1,375,000 1,442,894 1,375,000
Jacksonville, FL Warehouse/Distribution 2,358,421 2,201,451 2,346,334 2,075,000
Desoto, TX Warehouse/Distribution 0 0 2,450,273 2,150,000
Fort Worth. TX Warehouse/Distribution 0 0 1,351,646 1,250,000
Shreveport, LA Warehouse/Distribution 0 0 3,231,436 2,900,000
Bedford Park, IL Warehouse/Distribution 0 0 3,911,638 4,100,000
Normal, IL Warehouse/Distribution 0 0 2,714,833 3,000,000
Atlanta, GA Warehouse/Distribution 0 0 3,762,051 3,050,000
--------------- --------------- --------------- ---------------
$ 6,108,742 $ 5,726,451 $ 26,348,882 $ 24,250,000
=============== =============== =============== ===============
<CAPTION>
INVESTMENT IN MORTGAGE LOANS
(Percent of Net Assets) 0.0% 5.3%
Principal Current Principal Current
Description Outstanding Value Outstanding Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Flint, MI, First Mortgage, Office $ 0 $ 0 $ 7,878,490 $ 5,691,337
Building, 8.875%
Lincoln, NE, First Mortgage, Office 0 0 3,532,454 3,532,454
Building, 9.000%
--------------- --------------- --------------- ---------------
$ 0 $ 0 $ 11,410,944 $ 9,223,791
=============== =============== =============== ===============
<CAPTION>
CASH AND CASH EQUIVALENTS
(Percent of Net Assets) 18.7% 13.7%
(see pages F-14 and F-15 for detail) Face Current Face Current
Description Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Paper and Cash $ 33,456,969 $ 33,093,237 $ 23,889,343 $ 23,852,233
=============== --------------- =============== ---------------
<CAPTION>
MARKETABLE SECURITIES
(Percent of Net Assets) 8.9% 1.1%
(see pages F-14 and F-15 for detail) Face Current Face Current
Description Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable Securities $ 16,100,000 $ 15,824,199 $ 2,000,000 $ 1,979,008
=============== =============== =============== ===============
OTHER ASSETS (2.0%) (2.4%)
(net of liabilities) $ (3,661,926) $ (4,212,989)
--------------- ---------------
TOTAL NET ASSETS $ 177,239,965 $ 174,052,323
=============== ===============
</TABLE>
B5 - Real Property
(Continued)
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1994
---------------------------
CASH AND CASH EQUIVALENTS (Percent of Net Assets) 18.7%
Face Current
Description Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial Paper (with stated rate and maturity date)
Chemical Bank, 6.25%, January 3, 1995 $ 90,000 $ 90,000
Amoco Corp., 5.754%, January 3, 1995 2,104,000 2,102,656
Pacificorp, 6.125%, January 12, 1995 2,000,000 1,991,867
Gateway Fuel Corp., 5.571%, January 17, 1995 1,925,000 1,900,590
Norwest Financial Inc., 5.499%, January 17, 1995 1,660,000 1,636,007
Greyhound Financial Corp., 6.215%, January 18, 1995 1,944,000 1,932,987
PHH Corp Note, 5.928%, January 19, 1995 2,400,000 2,388,593
Merrill Lynch & Company Inc., 6.056%, January 25, 1995 706,000 699,528
Associates Corp. of North Am., 5.828%, January 30, 1995 2,300,000 2,277,144
Duracell Inc., 6.310%, January 30, 1995 2,396,000 2,373,122
Ford Motor Credit Corp., 5.841%, February 1, 1995 2,300,000 2,275,997
Goldman Sachs Group, 5 .705%, February 2, 1995 1,685,000 1,654,071
Sears Roebuck Acceptance Corp., 6.120%, February 7, 1995 1,000,000 988,572
Morgan Stanley Group Inc., 6.363%, March 1, 1995 1,000,000 985,370
Beneficial Corp, 6.349%, March 14, 1995 2,400,000 2,362,500
John Deere Capital Corp., 6.349%, March 14, 1995 2,400,000 2,362,500
American General Financial Corp., 6.350%, March 15, 1995 2,400,000 2,362,084
Toronto Dominion Holdings, 6.318%, March 15, 1995 2,400,000 2,362,680
----------- -----------
Total Commercial Paper 33,110,000 32,746,268
Total Cash 346,969 346,969
----------- -----------
Total Cash and Cash Equivalents $33,456,969 $33,093,237
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARKETABLE SECURITIES (Percent of Net Assets) 8.9%
Face Current
Description Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial Paper (with stated rate and maturity date)
Bankers Trust NY Corp, 5.250%, January 16, 1995 $ 1,400,000 $ 1,401,680
Republic National Bank of NY, 4.300%, March 8, 1995 1,000,000 998,546
Golden Peanut Co., 6.455%, April 5, 1995 2,000,000 1,958,218
General Electric Capital Corp, 6.592%, April 18, 1995 2,400,000 2,348,400
PNC Bank N.A., 5.820%, April 21, 1995 1,400,000 1,398,775
Nationsbank North Carolina, 5.400%, May 19, 1995 1,500,000 1,511,807
Corporate Receivables Corp., 6.760%, May 23, 1995 2,400,000 2,332,548
Province of Quebec, 6.887%, June 1, 1995 2,000,000 1,937,005
Bank of America NT & SA, 6.783%, June 5, 1995 2,000,000 1,937,220
----------- -----------
Total Commercial Paper $16,100,000 $15,824,199
=========== ===========
</TABLE>
B6 - Real Property
(Continued)
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1994
---------------------------
CASH AND CASH EQUIVALENTS (Percent of Net Assets) 13.7%
Face Current
Description Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial Paper (with stated rate and maturity date)
Rite Aid Corp., 3.350%, January 3, 1994 $ 760,000 $ 758,161
US West Communications, 3.500%, January 3, 1994 1,230,000 1,229,522
Merrill Lynch & Company Inc., 3.300%, January 5, 1994 205,000 204,718
Merrill Lynch & Company Inc., 3.350%, January 6, 1994 500,000 498,651
AT&T Capital Corp., 3.450%, January 7, 1994 242,000 241,791
CIESCO, 3.250%, January 7, 1994 1,215,000 1,212,587
Asset Securitization Coop. Corp., 3.500%, January 10, 1994 250,000 249,757
Merrill Lynch & Company Inc., 3.300%, January 10, 1994 385,000 383,906
Pennsylvania Power & Light Energy Trust, 3.250%, January 10, 1994 935,000 933,227
International Lease Finance Corp., 3.250%, January 11, 1994 1,000,000 997,562
Xerox Credit Corp., 3.400%, January 12, 1994 1,218,000 1,216,159
Weyerhauser Mortgage Company, 3.280%, January 13, 1994 1,260,000 1,256,097
Falcon Asset Securitization Corp., 3.450%, January 14, 1994 550,000 546,996
Kmart Corp., 3.350%, January 18, 1994 1,000,000 998,139
Province of Quebec, 3.250%, January 21, 1994 1,215,000 1,211,051
General Electric Capital Corp., 3.400%, January 24, 1994 200,000 198,716
International Lease Finance Corp., 3.450%, January 24, 1994 130,000 129,689
PHH Corp., 3.250%, January 24, 1994 1,260,000 1,255,223
PREFCO, 3.330%, January 24, 1994 925,000 921,064
Smith Barney Shearson Inc., 3.280%, January 24, 1994 1,215,000 1,210,572
Corporate Asset Funding Co. Inc., 3.340%, January 26, 1994 436,000 433,128
Pepsico Inc., 3.180%, January 28, 1994 1,220,000 1,215,797
Corporate Asset Funding Co., 3.220%, February 1, 1994 780,000 776,721
Goldman Sachs Group, L.P., 3.350%, February 10, 1994 1,000,000 993,207
Student Loan Marketing Assoc., 3.125%, February 10, 1994 3,000,000 3,029,128
Beneficial Corp. Note, 3.220%, February 17, 1994 1,215,000 1,208,697
Asset Securitization Coop Corp., 3.300%, February 25, 1994 268,000 266,624
----------- -----------
Total Commercial Paper 23,614,000 23,576,890
Total Cash 275,343 275,343
----------- -----------
Total Cash and Cash Equivalents $23,889,343 $23,852,233
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARKETABLE SECURITIES (Percent of Net Assets) 1.1%
Face Current
Description Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial Paper (with stated rate and maturity date)
Ford Motor Credit Corp., 3.340%, March 2, 1994 $ 1,000,000 $ 990,815
General Electric Capital Corp., 3.220%, February 14, 1994 1,000,000 988,193
----------- -----------
Total Commercial Paper $ 2,000,000 $ 1,979,008
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B8 THROUGH B11.
B7 - Real Property
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
For Years Ended December 31, 1994, 1993, 1992
General
On April 29, 1988, The Prudential Variable Contract Real Property Partnership
(the "Partnership"), a general partnership organized under New Jersey law, was
formed through an agreement among The Prudential Insurance Company of America
("The Prudential"), Pruco Life Insurance Company ("Pruco Life"), and Pruco Life
Insurance Company of New Jersey ("Pruco Life of New Jersey"). The Partnership
was established as a means by which assets allocated to the real estate
investment option under certain variable life insurance and variable annuity
contracts issued by the respective companies could be invested in a commingled
pool. The partners in the Partnership are The Prudential, Pruco Life and Pruco
Life of New Jersey.
The Partnership has a policy of investing at least 65% of its assets in direct
ownership interests in income-producing real estate and participating mortgage
loans.
The Partnership's investments are valued on a daily basis, consistent with the
Partnership Agreement. On each day during which the New York Stock Exchange is
open for business, the net assets of the Partnership are valued using the
current value of its investments as described in Notes 1A and 1B below, plus an
estimate of net income from operations reduced by any liabilities of the
Partnership.
The periodic adjustments to property and mortgage loan values described in Notes
1A and 1B below and the corrections of previous estimates of net income are made
on a prospective basis. There can be no assurance that all such adjustments and
estimates will be made timely.
Shares of the Partnership are sold to The Prudential Variable Contract Real
Property Account, Pruco Life Variable Contract Real Property Account, and Pruco
Life of New Jersey Variable Contract Real Property Account, (the "Real Property
Accounts") at the current share value of the Partnership's net assets. Share
value is calculated by dividing the current value of net assets of the
Partnership as determined below by the number of shares outstanding. A Contract
owner participates in the Partnership through interests in the Real Property
Accounts.
Note 1: Summary Of Significant Accounting Policies
A: Real Estate Owned and Interest in Properties - The
Partnership's investments in real estate owned and interests
in properties are initially valued at their purchase price.
Thereafter, current values are based upon appraisal reports
prepared by independent real estate appraisers (members of the
Appraisal Institute or an equivalent organization) which are
ordinarily obtained on an annual basis.
The Chief Appraiser of the Prudential Comptroller's Department
Valuation Unit is responsible to assure that the valuation
process provides independent and accurate current value
estimates. In the interest of maintaining and monitoring the
independence and the accuracy of the appraisal process, the
Comptroller of The Prudential has appointed a third party firm
to act as the Appraisal Management Firm. The Appraisal
Management Firm, among other responsibilities, approves the
selection and scheduling of external appraisals; develops a
standard package of information to be supplied to the
appraisers; reviews and provides comments on all external
appraisals and a sample of internal appraisals; assists in
developing policy and procedures and assists in the evaluation
of the performance and competency of external appraisers. The
property valuations are reviewed quarterly by The Prudential
Comptroller's Department Valuation Unit and the Chief
Appraiser and adjusted if there has been any significant
changes related to the property since the most recent
independent appraisal.
B8 - Real Property
<PAGE>
The purpose of an appraisal is to estimate the current value of a property as of
a specific date. Current value has been defined as the most probable price for
which the appraised property will sell in a competitive market under all
conditions requisite to fair sale, with the buyer and seller each acting
prudently, knowledgeably, and for self interest, and assuming that neither is
under undue duress. This estimate of current value generally is a correlation of
three approaches, all of which require the exercise of subjective judgement. The
three approaches are: (1) current cost of reproducing a property less
deterioration and functional and economic obsolescence; (2) discounting of a
series of income streams and reversion at a specified yield or by directly
capitalizing a single - year income estimate by an appropriate factor; and (3)
value indicated by recent sales of comparable properties in the market. In the
reconciliation of these three approaches, the one most heavily relied upon is
the one generally most appropriate for the type of property in the market.
B: Mortgage Loans - Investment in mortgage loans which mature in
the current year are carried at the amount of unpaid
principal. Impaired loans are valued at the lower of the
current value as described above or the current value of the
underlying property determined as described in Note 1A.
C: Revenue Recognition - Rent from properties consists of all
amounts earned under tenant operating leases including base
rent, recoveries of real estate taxes and other expenses and
charges for miscellaneous services provided to tenants.
Revenue from leases which provide for scheduled rent increases
is recognized as billed.
D: Cash and Cash Equivalents - The Partnership considers all
highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents
are carried at market value.
E: Marketable Securities - Marketable securities are highly
liquid investments with maturities of more than three months
when purchased and are carried at market value.
F: Federal Income Taxes - The Partnership is not a taxable entity
under the provisions of the Internal Revenue Code. The income
and capital gains and losses of the Partnership are
attributed, for federal income tax purposes, to the Partners
in the Partnership. The Partnership may be subject to state
and local taxes in jurisdictions in which it operates.
The bases of the Partnership's assets and liabilities for
federal income tax purposes are the same as the amounts
reported on the statements of assets and liabilities except
for the investment in properties. The tax basis of the
properties is $148,001,027 at December 31, 1994 and
$146,917,984 at December 31, 1993.
G: Change in Accounting Policy - As of December 31, 1991, the
financial statements are prepared on a current value basis.
This represents a change in accounting policy from financial
statements prior to the year ended December 31, 1991 which
utilized the historical cost basis of accounting and provided
only supplementary information on current values. Since the
unit values under Contracts participating in the Partnership
are determined using the current value basis of investments
(see General Note), this basis is deemed more meaningful to
the investor than a historical cost basis.
H: Reclassifications - Certain reclassifications have been made
to the 1992 and 1993 financial statements to conform to those
used in 1994.
B9 - Real Property
<PAGE>
Note 2: Obligation Under Capital Lease
The Partnership maintains an interest in a leasehold estate consisting of six
one-story industrial warehouse buildings located in Pomona, California. In
conjunction with this interest, the Partnership assumed assignment of a ground
lease agreement which expires in November 2078, with no renewal options. The
annual ground lease payments after November 1994, and for each 10 year increment
thereafter, are subject to increase 50% of the increase in the Consumer Price
Index during the previous period. For 1995, the annual ground lease payment will
increase $126,450 to $376,450. The ground lease contains a purchase option
exercisable from November 1994 to November 1997 at a fixed price of $4,000,000.
Future minimum ground lease payments under capital lease at December 31, 1994
are as follows:
1995 $ 376,450
1996 376,450
Thereafter 4,062,742
----------
Total minimum ground lease payments 4,815,642
Less amount representing interest 1,010,816
----------
Present value of minimum ground lease payments $3,804,826
==========
Note 3: Investment In Mortgage Loans
At December 31, 1993, the Partnership had an investment in two mortgage loans
with a current value totalling $9,223,791 with interest rates of 8.875% and 9%.
Both loans were scheduled to mature in 1994. The Partnership received a final
payment in May 1994 of $3,543,892 which satisfied the terms of the loan on the
property in Lincoln, NE. On July 1, 1994, the Partnership foreclosed on the
Flint, MI mortgage loan under a voluntary conveyance of the property by the
mortgagor. The Partnership took title to the property at the expiration of the
redemption period on January 3, 1995. The property is reported as investment in
property in the December 31, 1994 financial statements and is carried at its
current value.
Note 4: Leasing Activity
The Partnership leases space to tenants under various operating lease
agreements. These agreements, without giving effect to renewal options, have
expiration dates ranging from 1995 to 2009. At December 31, 1994, future minimum
base rental income under non-cancelable operating leases by year, and in the
aggregate are shown below. Although these are non-cancelable leases, there is no
assurance that all amounts will be received.
Year Ending
December 31,
------------
1995 $ 10,791,000
1996 9,562,000
1997 7,667,000
1998 5,869,000
1999 5,189,000
Thereafter 20,877,000
------------
Total $ 59,955,000
============
Note 5: Transactions with affiliates
Pursuant to an investment management agreement, The Prudential charges the
Partnership a daily investment management fee at an annual rate of 1.25% of the
average daily gross asset valuation of the Partnership. For the years ended
December 31, 1994, 1993 and 1992 management fees incurred by the Partnership
were $2,287,816; $2,269,206 and $2,405,024, respectively.
The Partnership also reimburses The Prudential for certain administrative
services rendered by The Prudential. The amounts incurred for the years ended
December 31, 1994, 1993 and 1992 were $95,015; $119,467 and $147,254,
respectively and are classified as administrative expenses in the statements of
operations.
B10 - Real Property
<PAGE>
The Partnership owns a 50% interest in four warehouse/distribution buildings in
Jacksonville, Florida (the Unit warehouses) . The remaining 50% interest is
owned by The Prudential and one of its subsidiaries. At December 31, 1994 and
1993, these properties had total assets of $11,748,222 and $46,911,411 and
liabilities of $150,964 and $33,306, respectively. For the years ended December
31, 1994, 1993 and 1992, these properties had revenues of $4,939,354, $5,931,236
and $5,909,188 and expenses of $1,611,108, $1,847,049 and $1,913,997,
respectively.
The Partnership has contracted with PREMISYS Real Estate Services, Inc.
(PREMISYS), an affiliate of The Prudential to provide property management
services at the Unit warehouses, the Bolingbrook, IL warehouse, and through
August, 1993 at the Azusa and Pomona warehouses. The property management fee
earned by PREMISYS for the years ended December 31, 1994, 1993 and 1992 were
$92,382; $89,684 and $105,664 respectively.
Note 6: Line Of Credit
The Partnership established a $10 million unsecured revolving line of credit
with First Fidelity Bank, N.A., which will be drawn upon as needed for potential
liquidity needs. The annual cost of maintaining the line of credit is 0.1875% of
the total line of credit. As of December 31, 1994, no drawdowns had occurred.
Note 7: Commitment from Partner
On January 9, 1990, The Prudential committed to fund up to $100 million to
enable the Partnership to take advantage of opportunities to acquire attractive
real property investments whose cost is greater than the Partnership's then
available cash. Contributions to the Partnership under this commitment are
utilized for property acquisitions and returned to Prudential on an ongoing
basis from Contract owners' net contributions. Also, the amount of the
committment is reduced by $10 million for every $100 million in current value
net assets of the Partnership. The amount available under this committment for
property purchases as of December 31, 1994 is approximately $51.6 million.
Note 8: Net Realized Loss on Investments
On October 7, 1994, the Partnership sold its 50% ownership interest in the two
warehouses located in Atlanta, GA and the warehouses located in Desoto, TX; Fort
Worth, TX; Shreveport, LA; Bedford Park, IL; and Normal, IL. The net proceeds on
the sale were $19,014,872 resulting in a realized loss of $1,237,385.
On August 9, 1993, the Partnership sold its Denver, Colorado warehouse facility.
The proceeds, net of related costs, amounted to approximately $2,561,000. The
sale of the warehouse resulted in a realized loss of approximately $1,451,000.
On September 2, 1993, the Partnership sold one of the Jacksonville, Florida
warehouse/distribution buildings in which the Partnership owned a 50% interest.
The proceeds, net of related costs, amounted to approximately $1,380,000,
resulting in a realized loss of approximately $220,000.
On October 29, 1993, the Partnership sold its interest in the Unit warehouse
located in Hightstown, New Jersey. The proceeds, net of related costs, were
approximately $786,000, resulting in a realized loss of approximately $792,000.
Note 9: Committment to Purchase
The Partnership has a committment to purchase a 250 - unit garden apartment
community located in Raleigh, North Carolina at a purchase price of
approximately $14 million. The apartment community which is currently under
construction is expected to be completed in June, 1995. In conjunction with the
purchase of the property, the Partnership will enter into an agreement to make a
second funding for not more than $1,950,000 should the property meet certain
income and occupancy requirements. This would increase the Partnership's total
committment to approximately $16 million.
B11 - Real Property
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
The Prudential Variable Contract
Real Property Partnership
Newark, New Jersey
We have audited the accompanying statements of assets and liabilities including
the schedules of investments of The Prudential Variable Contract Real Property
Partnership as of December 31, 1994 and 1993 and the related statements of
operations, changes in net assets and cash flows to each of the three years in
the period ended December 31, 1994 (collectively referred to as the financial
statements) and the per share data and ratios appearing on the page 1 of the
prospectus for each of the five years in the period ended December 31, 1994.
These financial statements and the per share data and ratios are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and the per share data and ratios based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and per share data and ratios present
fairly, in all material respects, the financial position of The Prudential
Variable Contract Real Property Partnership as of December 31, 1994 and 1993,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1994 and the per share data and ratios for each
of the five years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
Investment in properties, interest in properties and mortgage loans are stated
at current value at December 31, 1994 and 1993, as discussed in Note 1 to the
financial statements. Determination of current value involves subjective
judgment because the actual market value of real estate and mortgage loans can
be determined only by negotiation between the parties in a sales transaction.
Deloitte & Touche LLP
Parsippany, New Jersey
March 6, 1995
B12 - Real Property
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Prudential Directors' and Officers' Liability and Corporation Reimbursement
Program, purchased by The Prudential from Aetna Casualty & Surety Company, CNA
Insurance Company, Lloyds of London, Great American Insurance Company, Reliance
Insurance Company, Corporate Officers & Directors Assurance Ltd., A.C.E.
Insurance Company, Ltd., XL Insurance Company, Ltd., and Zurich-American
Insurance Company, provides coverage for "Loss" (as defined in the policies)
arising from any claim or claims by reason of any actual or alleged act, error,
misstatement, misleading statement, omission, or breach of duty by persons in
the discharge of their duties solely in their capacities as directors or
officers of The Prudential, any of its subsidiaries, or certain investment
companies affiliated with The Prudential. Coverage is also provided to the
individual directors or officers for such Loss, for which they shall not be
indemnified. Loss essentially is the legal liability on claims against a
director or officer, including adjudicated damages, settlements and reasonable
and necessary legal fees and expenses incurred in defense of adjudicatory
proceedings and appeals therefrom. Loss does not include punitive or exemplary
damages or the multiplied portion of any multiplied damage award, criminal or
civil fines or penalties imposed by law, taxes or wages, or matters which are
insurable under the law pursuant to which the policies are construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal or deliberate fraudulent acts of a director or officer, and (2)
claims arising from actual or alleged performance of, or failure to perform,
services as, or in any capacity similar to, an investment adviser, investment
banker, underwriter, broker or dealer, as those terms are defined in the
Securities Act of 1933, the Securities Exchange Act of 1934, the Investment
Advisers Act of 1940, the Investment Company Act of 1940, any rules or
regulations thereunder, or any similar federal, state or local statute, rule or
regulation.
The limit of coverage under the Program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of The Prudential,
can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text
of The Prudential's by-law 27, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 3B to this Registration
Statement.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 15. NOT APPLICABLE
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
(1A) Distribution Agreement between Incorporated by reference to
Pruco Securities Corporation and Registrant's Form S-1, Registration
The Prudential Insurance Company of Statement No. 33-20083, filed
America with respect to the February 10, 1988.
Prudential Individual Variable
Contract Account.
(1B) Distribution Agreement between Incorporated by reference to
Pruco Securities Corporation and Post-Effective Amendment No. 4 to
The Prudential Insurance Form S-6, Registration
II-1
<PAGE>
Company of America with respect to Statement No. 33-20000, filed March
The Prudential Variable Appreciable 2, 1990, on behalf of The
Account. Prudential Variable Appreciable
Account.
(3A) Charter of The Prudential Incorporated by reference to
Insurance Company of America, as Post-Effective Amendment No. 2 to
amended February 26, 1988. Form S-6, Registration Statement
No. 33-20000, filed March 2, 1989,
on behalf of The Prudential
Variable Appreciable Account.
(3B) By-Laws of The Prudential Incorporated by reference to
Insurance Company of America, as Post-Effective Amendment No. 4 to
amended November 14, 1989. Form S-6, Registration Statement
No. 33-20000, filed March 2, 1990,
on behalf of The Prudential
Variable Appreciable Account.
(3C) Resolution of the Board of Incorporated by reference to
Directors establishing The Registrant's Form S-1, Registration
Prudential Variable Contract Real Statement No. 33-20083, filed
Property Account. February 10, 1988.
(4A)(i) Revised Individual Variable Incorporated by reference to
Annuity Contract. Post-Effective Amendment No. 8 to
Form N-4, Registration Statement
No. 2-80897, filed October 23,
1986, on behalf of The Prudential
Individual Variable Contract
Account.
(4A)(ii) Discovery Plus Contract. Incorporated by reference to Form
N-4, Registration Statement No.
33-25434, filed November 8, 1988,
on behalf of The Prudential
Individual Variable Contract
Account.
(4B)(i) Variable Appreciable Life Incorporated by reference to
Insurance Contract with fixed death Pre-Effective Amendment No. 1 to
benefit. Form S-6, Registration Statement
No. 33-20000, filed June 15, 1988,
on behalf of The Prudential
Variable Appreciable Account.
(4B)(ii) Variable Appreciable Life Incorporated by reference to
Insurance Contract with variable Pre-Effective Amendment No. 1 to
death benefit. Form S-6, Registration Statement
No. 33-20000, filed June 15, 1988,
on behalf of The Prudential
Variable Appreciable Account.
(4C)(i) Custom VAL Life Insurance Incorporated by reference to Form
Contract with fixed death benefit. S-6, Registration Statement No.
33-25372, filed November 4, 1988,
on behalf of The Prudential
Variable Appreciable Account.
(4C)(ii) Custom VAL Life Insurance Incorporated by reference to Form
Contract with variable death S-6, Registration Statement No.
benefit. 33-25372, filed November 4, 1988,
on behalf of The Prudential
Variable Appreciable Account.
II-2
<PAGE>
(5) Opinion and Consent of John P. Filed herewith.
Gualtieri, Jr., Esq. as to the
legality of the securities being
registered.
(10A) Investment Management Incorporated by reference to
Agreement between The Prudential Pre-Effective Amendment No. 1 to
Insurance Company of America and Registrant's Form S-1, Registration
The Prudential Variable Contract Statement No. 33-20083, filed May
Real Property Partnership. 2, 1988.
(10B) Service Agreement between The Incorporated by reference to Form
Prudential Insurance Company of S-1, Registration Statement No.
America and The Prudential 33-8698, filed September 12, 1986,
Investment Corporation. on behalf of The Prudential Real
Property Account of Pruco Life
Insurance Company.
(10C) Partnership Agreement of The Incorporated by reference to
Prudential Variable Contract Real Pre-Effective Amendment No. 1 to
Property Partnership. Registrant's Form S-1, Registration
Statement No. 33-20083, filed May
2, 1988.
(22) Subsidiaries of The Prudential Incorporated by reference to
and short descriptions of each. Post-Effective Amendment No. 28 to
Form N-1A, Registration Statement
No. 2-80896, filed February 1,
1995, on behalf of The Prudential
Series Fund, Inc.
(23) Written consent of Deloitte & Filed herewith.
Touche LLP, independent auditors.
(24B) Written consent of John P. Incorporated by reference to
Gualtieri, Jr., Esq. Exhibit (5) hereto.
(25A) Powers of Attorney: W. Incorporated by reference to
Boeschenstein, L. Carter, Jr., J. Post-Effective Amendment No. 13 to
Cullen, C. Davis, R. Enrico, W. Form S-6, Registration Statement
Gray, III, J. Hanson, C. Horner, A. No. 33-20000, filed April 26, 1994,
Jacobson, G. Keith, Jr., B. on behalf of The Prudential
Malkiel, E. O'Hara, J. Opel, R. Variable Appreciable Account.
Thomson, P. Vagelos, S. Van Ness,
P. Volcker, J. Williams.
(25B) Powers of Attorney: F. Agnew, Incorporated by reference to
F. Becker, A. Ryan. Post-Effective Amendment No. 14 to
Form S-6, Registration Statement
No. 33-20000, filed February 15,
1995, on behalf of The Prudential
Variable Appreciable Account.
(27) Financial Data Schedules Filed herewith.
(b) Financial Statement Schedules
Schedule III-Real Estate Owned by Filed herewith.
The Prudential Variable Contract
Real Property Partnership.
Schedule IV-Mortgage Loans on Real Filed herewith.
Estate for The Prudential Variable
Contract Real Property Partnership.
ITEM 17. UNDERTAKINGS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that Section.
The undersigned Registrant hereby undertakes (a) to file any prospectuses
required by Section 10(a) (3) of the Securities Act of 1933 as Post-Effective
Amendments to this Registration Statement, (b) that for the purposes of
determining any liability under the 1933 Act, each such Post-Effective Amendment
may be deemed to be a new Registration Statement relating to the securities
offered therein and the offering of such securities at that time may be deemed
to be in the initial bona fide offering thereof, (c) to reflect in the
prospectus any facts or events after
II-3
<PAGE>
the effective date of the registration statement (or the most recent
Post-Effective Amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement, (d) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement, (e) to remove
from registration by means of a Post-Effective Amendment any of the securities
being registered which remain unsold at such time as the offering of such
securities may be terminated.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The Prudential
Insurance Company of America has duly caused this Post-Effective Amendment No. 7
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Newark, State of New Jersey on the 4th
day of April, 1995.
The Prudential Insurance Company of America
In Respect of
The Prudential
Variable Contract Real Property Account
By: /s/ Esther H. Milnes
-----------------------
Esther H. Milnes
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 7 to the Registration Statement has been signed below by the
following Directors and Officers of The Prudential Insurance Company of America
in the capacities indicated on this 4th day of April, 1995.
Signature and Title
/s/ *
- -------------------------------------
Arthur F. Ryan
Chairman of the Board, President,
and Chief Executive Officer
/s/ *
- -------------------------------------
Garnett L. Keith, Jr.
Vice Chairman and Director
/s/ *
- -------------------------------------
Eugene M. O'Hara
Senior Vice President and Comptroller,
and Chief Financial Officer
/s/ *
- ------------------------------------- *By: /s/ Thomas C. Castano
Franklin E. Agnew -------------------------------------
Director Thomas C. Castano
(Attorney-in-Fact)
/s/ *
- -------------------------------------
Frederic K. Becker
Director
/s/ *
- -------------------------------------
William W. Boeschenstein
Director
/s/ *
- -------------------------------------
Lisle C. Carter, Jr.
Director
/s/ *
- -------------------------------------
James G. Cullen
Director
II-5
<PAGE>
/s/ *
- -------------------------------------
Carolyne K. Davis
Director
/s/ *
- -------------------------------------
Roger A. Enrico
Director
- -------------------------------------
Allan D. Gilmour
Director
/s/ *
- -------------------------------------
William H. Gray, III
Director
/s/ *
- -------------------------------------
Jon F. Hanson
Director
/s/ *
- -------------------------------------
Constance J. Horner
Director
/s/ *
- -------------------------------------
Allen F. Jacobson
Director
/s/ *
- ------------------------------------- *By: /s/ Thomas C. Castano
Burton G. Malkiel -------------------------------------
Director Thomas C. Castano
(Attorney-in-Fact)
/s/ * John R. Opel
- -------------------------------------
Director
- -------------------------------------
Charles R. Sitter
Director
- -------------------------------------
Donald L. Staheli
Director
/s/ *
- -------------------------------------
Richard M. Thomson
Director
/s/ *
- -------------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- -------------------------------------
Stanley C. Van Ness
Director
/s/ *
- -------------------------------------
Paul A. Volcker
Director
II-6
<PAGE>
/s/ * *By: /s/ Thomas C. Castano
- ------------------------------------- -------------------------------------
Joseph H. Williams Thomas C. Castano
Director (Attorney-in-Fact)
II-7
<PAGE>
EXHIBIT INDEX
(a)(5) Opinion and Consent of John P. Gualtieri, Jr., Esq. as Page II-9
to the legality of the securities being registered.
(a)(23) Written consent of Deloitte & Touche LLP, independent Page II-10
auditors.
(b) Financial Statement Schedules Page II-11
Schedule III-Real Estate Owned by The Prudential
Variable Contract Real Property Partnership.
Schedule IV-Mortgage Loans on Real Estate for The
Prudential Variable Contract Real Property Partnership.
(27.1) Financial Data Schedule for The Prudential Real Property
Account. Page II-15
(27.2) Financial Data Schedule for The Prudential Real Property
Partnership. Page II-16
II-8
Exhibit 5
April 3, 1995
The Prudential Insurance Company
of America
Prudential Plaza
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Vice President and Insurance Counsel of The Prudential
Insurance Company of America, I have reviewed the establishment of The
Prudential Variable Contract Real Property Account (the "Account") on November
25, 1986 by the Finance Committee of the Board of Directors of The Prudential
Insurance Company of America ("The Prudential") as a separate account for assets
applicable to certain variable life insurance contracts and variable annuity
contracts, pursuant to the provisions of Section 17B:28-7 of the Revised
Statutes of New Jersey. I was responsible for oversight of the preparation and
review of the Registration Statement on Form S-1, as amended, filed by The
Prudential with the Securities and Exchange Commission (Registration No.
33-20083) under the Securities Act of 1933 for the registration of the Account.
I am of the following opinion:
(1) The Prudential was duly organized under the laws of New Jersey and is
a validly existing corporation.
(2) The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New Jersey
law.
(3) The portion of the assets held in the Account equal to the reserve and
other liabilities for variable benefits under the variable life
insurance contracts and variable annuity contracts is not chargeable
with liabilities arising out of any other business The Prudential may
conduct.
(4) The variable life insurance contracts and variable annuity contracts
are legal and binding obligations of The Prudential in accordance with
their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
John P. Gualtieri, Jr.
II-9
Exhibit (a)(23)
INDEPENDENT AUDITORS' CONSENT
We consent to (a) the use in this Post-Effective Amendment No. 7 on Form S-1 to
Registration Statement No. 33-20083 of the Prudential Variable Contract Real
Property Account of our report dated March 6, 1995, relating to the financial
statements of The Prudential Variable Contract Real Property Account, and of our
report dated March 6, 1995 relating to the financial statements of The
Prudential Variable Contract Real Property Partnership appearing in the
Prospectus, which is a part of such Registration Statement, (b) the use in Part
II of this Registration Statement of our report dated March 6, 1995 relating to
the financial statement schedules listed in Item 16(b), and (c) the reference to
us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 7, 1995
II-10
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 1994
Initial Costs to Partnership Costs
---------------------------------------- Capitalized
Buildings & Subsequent to
Description Encumbrances Land Improvements Acquisition
- ----------- ----------------------------------------------------------
Properties:
Warehouse
Azusa, CA None $6,638,694 $10,741,233 $839,318(b)
Office Building
Lisle, IL None 1,780,000 15,743,881 541
Garden Apartments
Atlanta, GA None 3,631,212 11,168,904 509,077(e)
Warehouse
Pomona, CA None 3,412,636(d) 19,091,210 611,743
Retail Shopping Center
Roswell, GA None 9,454,622 21,513,677 637,671
Office Building
Morristown, NJ None 2,868,660 12,958,451 2,616,577
Office/Warehouse
Bolingbrook, IL None 1,373,199 7,302,518 239,781
Garden Apartments
Farmington Hills, MI None 1,550,000 11,744,571 265,478
Office Park
Flint, MI None 1,119,512 6,343,902 0
--------- ----------- ------------ ----------
$0 $31,828,535 $116,608,347 $5,720,186
========= =========== ============ ==========
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: PROPERTIES
DECEMBER 31, 1994 (Continued)
<TABLE>
<CAPTION>
Gross Amount at Which
Carried at Close of Period
-----------------------------------------------
Buildings & Year of Date
Description Land Improvements Total (a)(b)(c) Construction Acquired
- ----------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Properties:
Warehouse
Azusa, CA $6,478,884 $11,740,361 $18,219,245 1986 Apr., 1988
Office Building
Lisle, IL 1,780,000 15,744,422 17,524,422 1985 Apr., 1988
Garden Apartments
Atlanta, GA 3,631,212 11,677,981 15,309,193 1987 Apr., 1988
Warehouse
Pomona, CA 3,412,636 19,702,953 23,115,589 1984 Apr., 1988
Retail Shopping Center
Roswell, GA 9,462,951 22,143,019 31,605,970 1988 Jan., 1989
Office Building
Morristown, NJ 2,868,660 15,575,028 18,443,688 1981 Aug., 1988
Office/Warehouse
Bolingbrook, IL 1,373,199 7,542,299 8,915,498 1989 Feb., 1990
Garden Apartments
Farmington Hills, MI 1,583,320 11,976,729 13,560,049 1988 Jan., 1990
Office Park
Flint, MI 1,119,512 6,343,902 7,463,414 1986 Jan., 1995
----------- ------------ ------------
$31,710,374 $122,446,694 $154,157,068
=========== ============ ============
(a) Balance at December 31,
1993, 1992, 1991,
respectively $145,532,430 $148,499,390 $146,414,277
Additions:
Acquisition 7,463,414 0 0
Improvements, etc. 1,161,224 1,044,906 2,085,113
------------ ------------ ------------
Deletions:
Sale 0 (4,011,866) 0
Balance at December 31,
1994, 1993, 1992,
respectively $154,157,068 $145,532,430 $148,499,390
============ ============ ============
</TABLE>
(b) Net of payments received from seller under guarantees of occupancy rates and
operating income of $(421,663).
(c) Balance of real estate owned on a tax basis at December 31, 1994 is
$148,001,027.
(d) Represents land under capital lease.
(e) Net of $1,000,000 settlement received from lawsuit.
II - 11
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: INTEREST IN PROPERTIES
DECEMBER 31, 1994
Initial Costs to Partnership Costs
---------------------------------------- Capitalized
Buildings & Subsequent to
Description Encumbrances Land Improvements Acquisition
- ----------- ----------------------------------------------------------
Interest in Properties:
Warehouse/Distribution
Jacksonville, FL None $ 231,119 $1,073,849 $11
Warehouse/Distribution
Jacksonville, FL None 176,256 818,935 7,257
Warehouse/Distribution
Jacksonville, FL None 255,545 1,187,335 14
Warehouse/Distribution
Jacksonville, FL None 415,548 1,930,761 12,112
---- ---------- ---------- -------
$0 $1,078,468 $5,010,880 $19,394
==== ========== ========== =======
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE III - REAL ESTATE OWNED: INTEREST IN PROPERTIES
DECEMBER 31, 1994 (Continued)
<TABLE>
<CAPTION>
Gross Amount at Which
Carried at Close of Period
--------------------------------------------
Buildings & Year of Date
Description Land Improvements Total (a)(b) Construction Acquired
- ----------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest in Properties:
Warehouse/Distribution
Jacksonville, FL $231,119 $1,073,860 $1,304,979 1988 Jan., 1990
Warehouse/Distribution
Jacksonville, FL 176,256 826,192 1,002,448 1986 Jan., 1990
Warehouse/Distribution
Jacksonville, FL 255,545 1,187,349 1,442,894 1982 Jan., 1990
Warehouse/Distribution
Jacksonville, FL 415,548 1,942,873 2,358,421 1979 Jan., 1990
---------- ---------- ----------
$1,078,468 $5,030,274 $6,108,742
========== ========== ==========
(a) Balance at December 31,
1993, 1992, 1991,
respectively $26,348,882 $29,492,913 $29,023,296
Additions:
Improvements 12,087 34,237 469,617
Deletions:
Sale (20,252,227) (3,178,268) 0
----------- ----------- -----------
Balance at December 31,
1994, 1993, 1992,
respectively $6,108,742 $26,348,882 $29,492,913
=========== =========== ===========
(b) Balance of real estate owned on a tax basis at December 31, 1994 is
$6,108,742.
</TABLE>
II - 12
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Principal
Periodic Face Principal Amount of Loans
Interest Final Payment Prior Amount of Outstanding Subject to Delinquent
Description Rate Maturity Terms (1) Liens Mortgages 12/31/94 (2)(3) Principal or Interest
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Mortgages
Office Buildings:
Flint, MI 8.875% May, 1994 (a) None $ 8,700,000 $0 (4) $0
Lincoln, NE 9.000% May, 1994 (b) None 3,750,000 0 0
-------------- ---------------- --------------------
$12,450,000 $0 $0
============== ================ ====================
(1) Periodic Payment Terms-Mortgage loans are payable at level amounts over life to maturity, with balloon
payments due and payable at maturity.
(a) The balance due at maturity is $7,796,520. There is no provision for prepayment or extension of
the loan.
(b) The balance due at maturity is $3,515,332. The loan may be prepaid subject to conditions designed
to maintain the yield on the investment.
(2) Balance at December 31, 1993, 1992,
1991, respectively $11,410,944 $11,613,903 $11,800,467
Deductions:
Collections of Principal (3,947,530) (202,959) (186,564)
Foreclosure (7,463,414) 0 0
----------- ----------- -----------
Balance at December 31, 1994, 1993,
1992, respectively $0 $11,410,944 $11,613,903
=========== =========== ===========
(3) Balance of mortgage loans on a tax basis at December 31, 1994 is $0.
(4) See Note 3 to financial statements.
</TABLE>
II - 13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
The Prudential Variable Contract
Real Property Partnership
Newark, New Jersey
We have audited the financial statements of The Prudential Variable Contract
Real Property Partnershiop as of December 31, 1994 and 1993, and for each of the
three years in the period ended December 31, 1994, and have issued our report
thereon dated March 8, 1995 (included elsewhere in this Registration Statement.)
Our audits also included the financial statement schedules listed in Item 16 of
this Registration Statement. These financial statement schedules are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schuedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, New Jersey
March 6, 1995
II - 14
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE PRUDENTIAL VARABLE CONTRACT REAL PROPERTY ACCOUNT
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 5,465,515
<SHARES-COMMON-PRIOR> 5,678,320
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> $79,136,103
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> $407,310
<NET-INVESTMENT-INCOME> $5,252,476
<REALIZED-GAINS-CURRENT> $(545,083)
<APPREC-INCREASE-CURRENT> $1,179,744
<NET-CHANGE-FROM-OPS> $5,887,137
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> $3,294,447
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> $ 160,265,810
<INVESTMENTS-AT-VALUE> $ 131,984,455
<RECEIVABLES> $ 2,218,095
<ASSETS-OTHER> $ 48,917,436
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> $ 183,119,986
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> $ 5,880,021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 12,241,034
<SHARES-COMMON-PRIOR> 13,031,424
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> $ 177,239,965
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> $ 1,677,088
<OTHER-INCOME> 0
<EXPENSES-NET> $ 7,528,352
<NET-INVESTMENT-INCOME> $12,848,199
<REALIZED-GAINS-CURRENT> $ (1,237,385)
<APPREC-INCREASE-CURRENT> $ 2,576,828
<NET-CHANGE-FROM-OPS> $ 14,187,642
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 790,390
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> $ 3,187,642
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> $ 327,000
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> $ 13.356
<PER-SHARE-NII> $ 1.003
<PER-SHARE-GAIN-APPREC> $ .120
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> $ 14.479
<EXPENSE-RATIO> .043
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
