ITEM 1. BUSINESS - ------ --------
ORGANIZATION - ------------
McNeil Real Estate Fund XXVII, L.P. (the "Partnership"), formerly known as Southmark Prime Plus, L.P., was organized by affiliates of Southmark Corporation ("Southmark") on January 16, 1987 as a limited partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act to make short-term loans to affiliates of the general partner. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 30, 1992, the general partner of the Partnership was Prime Plus Corp. (the "Original General Partner"), a wholly-owned subsidiary of McNeil. The Original General Partner was purchased from Southmark by McNeil on March 13, 1991, as discussed further below. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 700, Dallas, Texas 75240.
The sole limited partner of the Partnership was initially Southmark Depositary Corp. (the "Depositary"), a wholly-owned subsidiary of Southmark. On August 14, 1987, the Partnership registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 33-11824) and commenced a public offering for sale of $100,000,000 of Depositary units. The sale of Depositary units closed on August 14, 1988, with 5,548,888 units sold at $10 each, or gross proceeds of $55,488,880 to the Partnership. The Partnership subsequently filed a Form 8-A Registration Statement with the SEC and registered its Depositary units under the Securities Exchange Act of 1934 (File No. 0-17173). The Depositary assigned the principal attributes of its aggregate limited partner interest in the Partnership to the Depositary unit holders. As further discussed, the Depositary units were subsequently converted to limited partnership units. The Depositary, Depositary units or limited partnership units are referred to herein as "Units" and the holders thereof as "Unitholders." The Units represent equity interests in the Partnership and entitle the Unitholders to participate in certain allocations and distributions of the Partnership. As of December 31, 1995, 275,003 of the Units have been repurchased pursuant to the terms of the Amended Partnership Agreement.
SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - --------------------------------------------------
On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General Partner nor the Original General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Original General Partner, are being sold or liquidated for the benefit of creditors.
In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio.
On February 14, 1991, pursuant to the asset purchase agreement as amended on that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates. On March 13, 1991, McREMI commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates.
On March 30, 1992, the Unitholders approved a restructuring proposal that provided for (i) the replacement of the Original General Partner with the General Partner; (ii) the adoption of the Amended Partnership Agreement which (a) substantially alters the provisions of the original Partnership Agreement relating to, among other things, compensation, reimbursements of expenses, and voting rights and (b) makes Depositary unit holders direct limited partners of the Partnership; (iii) the approval of an amended property management agreement with McREMI, the Partnership's property manager; and (iv) the approval to change the Partnership's name to McNeil Real Estate Fund XXVII, L.P. Under the Amended Partnership Agreement, the Partnership began accruing an asset management fee,
retroactive to March 13, 1991, which is payable to the General Partner. For a discussion of the methodology for calculating the asset management fee, see Item 13 - Certain Relationships and Related Transactions. The proposals approved at the March 30, 1992 meeting were implemented as of that date.
Settlement of Claims:
The Partnership filed claims with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court") against Southmark for damages relating to improper overcharges, breach of contract and breach of fiduciary duty. The Partnership settled these claims in 1991, which totaled approximately $17,024,326, for the full amount claimed and such settlement was approved by the Bankruptcy Court.
Pursuant to the settlement agreement, the Partnership released Southmark and its affiliates and the Original General Partner from any further liability in connection with the claims made with the Bankruptcy Court. In return, an affiliate of McNeil agreed to waive payment on a dollar for dollar basis in an amount equal to the settled claims against Partnership advances owed at that time. In addition, the Partnership received Southmark bankruptcy plan assets in respect to its claims which were not offset against the Partnership advances. Because the Partnership's claims against Southmark were settled for $17,024,326, the Partnership advances of $223,800 owed at that time were reduced in their entirety and the claims had a remaining balance of $16,800,526. Although the Partnership settled the claims against Southmark for the full amount claimed, the settlement agreement provided that the Partnership receive a distribution of Southmark bankruptcy plan assets based on a claim amount of approximately $9,157,000.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April 14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in May 1995, the Partnership received in full satisfaction of its claims, $984,649 in cash, and common and preferred stock in the reorganized Southmark which was subsequently sold for $317,675. These amounts represent the Partnership's pro-rata share of Southmark assets available for Class 8 Claimants.
CURRENT OPERATIONS - ------------------
General:
Under the original partnership agreement, the Partnership's primary business was to make short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring income-producing real properties. Due to borrower defaults and foreclosures on the properties securing all but one of these mortgages, the Partnership's business also includes ownership and operation of real estate. Since the beginning of operations and prior to the restructuring, the Partnership funded twelve mortgage loans, seven in 1987 and five in 1988, which completed the Partnership's investment of the proceeds from the sale of Units.
The borrowers on the mortgage loan investments held by the Partnership were all affiliates of Southmark. During the early part of the terms of the loans, to the extent that property operations were insufficient to pay required interest, Southmark supported the borrowers with cash and the Partnership's loans were kept current. On July 14, 1989, Southmark filed for bankruptcy protection, and such support ceased and all loans went into default.
In 1994, the remaining mortgage loan investment, which is secured by a mini-storage warehouse in Stone Mountain, Georgia that was sold to an unaffiliated borrower, was modified. Principal and interest payments under the modified terms have been received by the Partnership. See Item 8 - Note 5 - "Mortgage Loan Investment."
In 1992, the Partnership received the proceeds from a $7,000,000 mortgage note payable secured by five of the Partnership's mini-storage warehouses located in Florida. A portion of the proceeds from the loan was used to make nonrecourse mortgage loans to affiliates of the General Partner in accordance with the Amended Partnership Agreement. The loans were secured by income-producing real estate and were either junior or senior to other indebtedness as more fully described in Item 8 - Note 6 - "Mortgage Loan Investments - Affiliates." The mortgage note payable was repaid by the Partnership in 1995 and a $5 million line of credit was obtained that will be used to fund any future loans made to affiliates of the General Partner. See Item 8 - Note 7 - "Long-Term Debt."
The Partnership is engaged in the ownership, operation and management of commercial real estate and other real estate related assets. At December 31, 1995, the Partnership owned one mortgage loan investment to an unaffiliated borrower, three mortgage loan investments to affiliates of the General Partner, and ten income-producing properties as described in Item 2
ITEM 2. PROPERTIES - ------ ----------
The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1995. All of the buildings and the land on which they are located are owned in fee. The two office buildings and Kendall Sunset Mini-Storage secure a $5 million line of credit as described more fully in Item 8 - Note 7 - "Long-Term Debt." No borrowings were outstanding under the line of credit as of December 31, 1995. The remaining properties are unencumbered by mortgage indebtedness. See also Item 8 - Note 4 - "Real Estate Investments" and Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization. In the opinion of management, the properties are adequately covered by insurance.
- ----------------------------------------- Total: Office Buildings - 222,398 sq. ft. Mini-storage and self-storage warehouses - 6,074 units
The following table sets forth the properties' occupancy rate and rent per square foot for the last five years:
Occupancy rate represents all units leased divided by the total number of units for mini-storage properties and square footage leased divided by total square footage for other properties as of December 31 of the given year. Rent per square foot represents all revenue, except interest, derived from the property's operations divided by the leasable square footage of the property.
Competitive conditions: - ----------------------
AAA Century Airport - -------------------
AAA Century Airport Self-Storage consists of three, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 567 units, including 10 recreational vehicle parking spaces. Each unit is individually alarmed for additional security. The property does not offer climate-controlled units.
The property is located approximately two miles from the Los Angeles International Airport in Inglewood, California. Inglewood is a relatively mature area with growth to the west generated by development around the airport. There is little competition which represents a threat to the property. The property raised rental rates in 1995 and plans to increase rental rates slightly in 1996. The Partnership expects to maintain occupancy in the low to middle 90% range in 1996.
AAA Sentry - ----------
AAA Sentry Mini-Storage consists of five, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 803 units, with 85% of these units air conditioned.
The property is located in a predominately commercial area, with a mixture of single and multi-family residential properties. The property's rental rates and occupancy are currently higher than the competition in the immediate area. A rental rate increase is not planned until late 1996 since a new competing facility was recently built that may affect occupancy. Management anticipates maintaining occupancy in the middle 90% range in 1996.
Burbank - -------
Burbank Mini-Storage consists of two, two-story and one, three-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 986 units, with 10 of these units being recreational
vehicle parking spaces. All of the buildings have fire sprinklers, but do not offer climate-controlled environments.
The property is located in the eastern quadrant of Burbank, California, just west of Interstate 5 and approximately twenty miles north of downtown Los Angeles and seven miles south of the Burbank Airport. There are two competing self-storage properties with superior visibility and highway access. Another competing property has recently been built closer to the airport that may have a negative effect on Burbank's occupancy. Due to the property's lack of air conditioning and third floor units that are far away from stairwells or elevators, an increase in occupancy is not likely. The Partnership expects to maintain occupancy in the low 80% range in 1996.
Forest Hill - -----------
Forest Hill Mini-Storage consists of nine, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 679 units, with 20 of these units being recreational vehicle parking spaces. 35% of the units are air conditioned.
The property is located in a predominately residential neighborhood in West Palm Beach, Florida consisting of single family homes and small businesses to the east and multi-family apartment communities to the south and west. The property's rental rates and occupancy are currently higher than the competition in the immediate area.
Construction of two competing facilities within one mile of Forest Hill is currently being considered, which could have a negative impact on the property. The Partnership expects to maintain occupancy in the middle 90% range. An increase in rental rates is anticipated in 1996.
Fountainbleau - -------------
Fountainbleau Mini-Storage consists of three, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 769 units. 56% of the units are air conditioned.
The property is located in the central western quadrant of the Miami metroplex and is in close proximity to the Miami International Airport. The immediate neighborhood is predominately industrial with single family residential and multi-family communities further to the south and north. The tenant profile consists of local businesses and a major international moving company that leases more than 90 of the units and receives a 5% discount. The Partnership expects to maintain occupancy in the high 90% range in 1996. Surrounding vacant property is currently being marketed for future mini-storage development. If facilities are built, it could have an impact on the property's performance.
Kendall Sunset - --------------
Kendall Sunset Mini-Storage consists of ten, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 940 units. 35% of the units are air conditioned.
The property is located in a residential neighborhood at the southwestern edge of the Miami metroplex. The area is tropical in nature and is in close proximity to the Everglades and Key West. The property's rental rates and occupancy are currently higher than the competition in the immediate area. The Partnership expects to maintain occupancy in the middle 90% range in 1996. Margate
Margate Mini-Storage consists of four, one-story and one, three-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 642 units, with 11 of the units being recreational vehicle parking spaces. 52% of the units are air conditioned.
The property is located in a predominately commercial/retail neighborhood with single family homes and multi-family communities along the secondary streets. The property's rental rates and occupancy are currently higher than the competition in the immediate area. The development of a new self-storage facility near the property had an adverse effect on the property's occupancy at the end of 1995. However, the Partnership expects to increase occupancy slightly in 1996.
Military Trail - --------------
Military Trail Mini-Storage consists of eight, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 688 units, with 16 of the units being recreational vehicle parking spaces. 35% of the units are air conditioned.
The property is located in a predominately commercial/retail neighborhood. The majority of the apartment complexes in the area are to the north with single family residences to the west. The location is the most positive feature with direct access on Military Trail, a major thoroughfare. There are two competitors in the immediate area with similar access and appearance but inferior management. The Partnership expects to maintain occupancy in the low 90% range throughout 1996.
One Corporate Center I and One Corporate Center III - ---------------------------------------------------
One Corporate Center I and III are six-story class "B" office buildings located in the southwest suburban Minneapolis/St. Paul metropolitan area. The buildings are two of four identical buildings located in a commercial development identified as One Corporate Center.
There has been no new office development in the past three years and no new speculative construction is currently underway, so there has been a continued demand for a decreasing supply of space. Developers are currently actively seeking tenants for potential competing construction. Management will concentrate on retaining existing tenants in 1996. The properties will continue to perform capital improvements in 1996 in order to replace aging building systems and to upgrade common areas to remain competitive in the marketplace. The Partnership will continue to lease up vacancies with few concessions and higher rental rates. The Partnership expects to maintain occupancy in the middle 90% range.
The following schedule shows lease expirations for each of the Partnership's commercial properties for 1996 through 2005:
No mini-storage tenant leases 10% or more of the available rental space except for a moving company that leases approximately 12% of the units at Fountainbleau Mini-Storage on a month-to-month basis. The following schedule reflects information on commercial tenants occupying 10% or more of the leasable square feet for each property:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------ -----------------
The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following:
1) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership and other affiliated partnerships (the "Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District Court of Dallas County. The petition sought recovery against the Partnership's former auditors, Ernst & Young, for negligence and fraud in failing to detect and/or report overcharges of fees/expenses by Southmark, the former general partner. The former auditors initially asserted counterclaims against the Affiliated Partnerships based on alleged fraudulent misrepresentations made to the auditors by the former management of the Affiliated Partnerships (Southmark) in the form of client representation letters executed and delivered to the auditors by Southmark management. The counterclaims sought recovery of attorneys' fees and costs incurred in defending this action. The counterclaims were later dismissed on appeal, as discussed below.
The trial court granted summary judgment against the Partnership based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Affiliated Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 1996. The Partnership is continuing to pursue vigorously its claims against Ernst & Young; however, the final outcome of this litigation cannot be determined at this time.
2) Robert Lewis v. McNeil Real Estate Fund XXVII, L.P. and McNeil Partners, L.P., Civil Action No. 13287 (Del. Ch.). This complaint alleged, among other things, that the General Partner caused the Partnership to loan money to affiliated partnerships at rates lower than the Partnership's cost of borrowing, which the plaintiff alleged constituted a breach of the General Partner's fiduciary duties. The complaint alleged that the affiliate loans were designed to enable the affiliated partnerships to continue in business so as to enable the General Partner to continue collecting fees from them. An answer to the complaint was filed on February 3, 1994, denying the material averments of wrongdoing and asserting affirmative defenses. In 1995, the plaintiff and the Partnership executed a Stipulation and Order of Dismissal, which dismissed the action without prejudice.
3) Helen Pasco v. McNeil Real Estate Fund XXVII, L.P., Southmark Prime Plus Corp., et al. and Does 1-50 Inclusive. This complaint alleges that several limited partnerships and funds, including the Partnership, along with McMachen, Prudential Securities, Inc. and other unidentified defendants, transmitted false and misleading information to the plaintiff which was used to entice the plaintiff into investing her money with the defendants. The complaint also alleges that the defendants misrepresented speculative, illiquid limited partnerships as safe, income-producing investments suitable for safety-conscious and conservative investors. Although the Partnership is included as a defendant, the plaintiff's allegations do not specify in what way the Partnership was involved in improper conduct. The complaint does not state, other than by broad allegations, that the Partnership acted in an improper manner with regard to the operation or management of the limited partnership. An answer was filed on behalf of the Partnership in February 1994, and there has been no further action in this matter. The ultimate outcome of this case cannot be determined at this time.
For a discussion of the Southmark bankruptcy, see Item 1 - Business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ ---------------------------------------------------
None. PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP - ------ -------------------------------------------------------- AND RELATED SECURITY HOLDER MATTERS -----------------------------------
(A) There is no established public trading market for limited partnership units, nor is one expected to develop.
(B) Title of Class Number of Record Unit Holders -------------- -----------------------------
Limited partnership units 2,715 as of February 16, 1996
(C) No distributions were paid to the partners in 1995 or 1994. Distributions have been suspended since the first quarter of 1992. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies - Distributions."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------ -----------------------
The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------ ----------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------
FINANCIAL CONDITION - -------------------
Under the original partnership agreement, the Partnership was formed to engage in the business of making short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring income-producing real properties and reinvesting the proceeds from repayment of such loans in additional affiliate loans. In 1989, the Partnership initiated foreclosure proceedings on the collateral securing each of its mortgage loan investments. The Partnership acquired two office buildings in 1989 and eight mini-storage warehouses in 1990 as a result of the foreclosures. Also in 1990, one loan was collected in full when the borrower sold the mini-storage warehouse securing the loan. The remaining mortgage loan investment, secured by a mini-storage warehouse owned by an unaffiliated limited partnership, was modified in 1994.
In October 1992, the Partnership received approximately $6.5 million of net proceeds from a $7 million loan secured by five of the Partnership's mini-storage warehouses located in Florida. A portion of the proceeds were used for working capital and for general partnership purposes. The loan proceeds were also used to make such loans to affiliates in accordance with the Amended
Partnership Agreement as more fully described in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ -------------------------------------------
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of McNeil Real Estate Fund XXVII, L.P.:
We have audited the accompanying balance sheets of McNeil Real Estate Fund XXVII, L.P. (a Delaware limited partnership) as of December 31, 1995 and 1994, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XXVII, L.P. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen, LLP
Dallas, Texas March 21, 1996
MCNEIL REAL ESTATE FUND XXVII, L.P.
BALANCE SHEETS
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXVII, L.P.
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995, 1994 and 1993
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXVII, L.P.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXVII, L.P.
STATEMENTS OF CASH FLOWS
Reconciliation of Net Income to Net Cash Provided by Operating Activities
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXVII, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------ -----------------------------------------------------------
Organization - ------------
McNeil Real Estate Fund XXVII, L.P. (the "Partnership"), formerly known as Southmark Prime Plus, L.P., was organized by affiliates of Southmark Corporation ("Southmark") on January 16, 1987, as a limited partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act to make short-term loans to affiliates of the general partner. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 30, 1992, the general partner of the Partnership was Prime Plus Corp. (the "Original General Partner"), a wholly-owned subsidiary of McNeil. The Original General Partner was purchased from Southmark by McNeil on March 13, 1991. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 700, Dallas, Texas 75240.
The sole limited partner of the Partnership was initially Southmark Depositary Corp. (the "Depositary"), a wholly-owned subsidiary of Southmark. The Depositary assigned the principal attributes of its aggregate limited partner interest in the Partnership to the Depositary unit holders. The Depositary units were subsequently converted to limited partnership units. The Depositary, Depositary units or limited partnership units are referred to herein as "Units" and the holders thereof as "Unitholders."
Under the original partnership agreement, the Partnership's primary business was to make short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring income-producing real properties. Due to borrower defaults and foreclosures on the properties securing all but one of these mortgages, the Partnership's business also includes ownership and operation of real estate.
In 1992, the Partnership received the proceeds from a $7 million mortgage note payable secured by five of the Partnership's mini-storage warehouses located in Florida. A portion of the proceeds from the loan was used to make nonrecourse mortgage loans to affiliates of the General Partner in accordance with the Amended Partnership Agreement. The loans were secured by income-producing real estate and were either junior or senior to other indebtedness as more fully described in Note 6 - "Mortgage Loan Investments - Affiliates." The mortgage note payable was repaid by the Partnership in 1995 and a $5 million line of credit was obtained that will be used to fund any future loans made to affiliates of the General Partner. See Note 7 - "Long-Term Debt."
The Partnership is engaged in the ownership, operation and management of commercial real estate and other real estate related assets. At December 31, 1995, the Partnership owned one mortgage loan investment to an unaffiliated borrower, three mortgage loan investments to affiliates of the General Partner, and ten income-producing properties as described in Note 4 - "Real Estate Investments."
Basis of Presentation - ---------------------
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Investments - -----------------------
Real estate investments are generally stated at the lower of cost or net realizable value. Real estate investments are monitored on an ongoing basis to determine if the property has sustained a permanent impairment in value. At such time, a write-down is recorded to reduce the basis of the property to its net realizable value. A permanent impairment is determined to have occurred when a decline in property value is considered to be other than temporary based upon management's expectations with respect to projected cash flows and prevailing economic conditions.
Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement is effective for financial statements for fiscal years beginning after December 15, 1995. The Partnership has not adopted the principles of this statement within the accompanying financial statements; however, it is not anticipated that adoption will have a material effect on the carrying value of the Partnership's long-lived assets.
Depreciation and Amortization - -----------------------------
Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant improvements are capitalized and are amortized over the terms of the related tenant lease, using the straight-line method.
Mortgage Loan Investments - -------------------------
Mortgage loan investments are recorded at their original basis, net of any allowance for uncollectible amounts. Interest income is recognized as it is earned. Interest accrual is ceased at such time as management determines collection is doubtful.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents include cash on hand and cash on deposit in financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value.
Deferred Borrowing Costs - ------------------------
Loan fees and other related costs incurred to obtain long-term financing on real property are capitalized and amortized using a method that approximates the effective interest method over the term of the related mortgage note payable or line of credit agreement. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations.
Rental Revenue - --------------
The Partnership leases its mini-storage warehouses under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned.
The Partnership leases its commercial properties under non-cancelable operating leases. Certain leases provide concessions and/or periods of escalating or free rent. Rental revenue is recognized on a straight-line basis over the term of the related leases. The excess of the rental revenue recognized over the contractual rental payments is recorded as accrued rent receivable and is included in accounts receivable on the Balance Sheets.
Income Taxes - ------------
No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax and the tax effect of its activities accrues to the partners.
Allocation of Net Income and Net Loss - -------------------------------------
The Amended Partnership Agreement provides for net income and net losses of the Partnership to be allocated 99% to the Unitholders and 1% to the General Partner.
Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocation of Partnership deductions attributable to debt. The Partnership's tax allocations for 1995, 1994, and 1993 have been made in accordance with these provisions.
Distributions - -------------
At the discretion of the General Partner, distributions to the partners are paid from cash from operations available after payment of affiliate compensation. Under the terms of the Amended Partnership Agreement, the General Partner is not entitled to distributions from operations.
Cash from operations available for distribution is determined by provisions of the Amended Partnership Agreement, and differs from the amount reported as net cash provided by operating activities in the accompanying Statements of Cash Flows. Cash from operations available for distribution consists of cash received from operations of the Partnership during a given period of time less (1) operational cash disbursements during the same period of time including capital improvements, unscheduled mortgage principal reductions and repayment of Partnership advances from affiliates, (2) a reasonable allowance for reserves, contingencies and anticipated obligations as determined at the discretion of the General Partner, (3) proceeds held pending investment in affiliate loans, and (4) any monies reserved for repurchase of Units.
Liquidation proceeds will be distributed when the Partnership is dissolved and wound up after taking into account all items of income, gain, loss or deduction. Distribution of liquidation proceeds will then be made to the partners with positive capital account balances.
No distributions were paid to the partners in 1995, 1994 or 1993. In March 1996, the Partnership distributed $3,000,000 to the limited partners.
Net Income Per Hundred Limited Partnership Units - ------------------------------------------------
Net income per one hundred Units is computed by dividing net income allocated to the limited partners by the weighted average number of Units outstanding expressed in hundreds. Per unit information has been computed based on 53,109, 53,483 and 53,914 (in hundreds) Units outstanding in 1995, 1994 and 1993, respectively.
NOTE 2 - TRANSACTIONS WITH AFFILIATES - ------ ----------------------------
The Partnership pays property management fees equal to 5% of the gross rental receipts for its mini-storage warehouses and 6% of gross rental receipts for its commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management services for the Partnership's mini-storage warehouses and commercial properties and leasing services for its mini-storage warehouses. McREMI may also choose to provide leasing services for the Partnership's commercial properties, in which case McREMI will receive property management fees from such commercial properties equal to 3% of the property's gross rental receipts plus leasing commissions based on the prevailing market rate for such services where the property is located.
The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs.
Under the terms of the Amended Partnership Agreement, the Partnership is paying an asset management fee to the General Partner. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $30 per gross square foot for mini-storage warehouses and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases subsequent to 1999.
Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows:
Until March 13, 1991, the Original General Partner was entitled to receive, out of cash from operations, a performance incentive fee equal to 20% of all points received by the Partnership on mortgage loans if the Unitholders received distributions of cash from operations equal to a 10% cumulative noncompounding annual return on their original capital investment. Such fees were cumulative, were accrued in the years earned and are to be paid when conditions were met. Conditions for payment have not yet been met and, at December 31, 1995 and 1994, $141,647 of amounts accrued in prior years are included in payable to affiliates on the Balance Sheets.
Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make loans to affiliates of the General Partner, so long as such loans meet certain conditions. See Note 6 - "Mortgage Loan Investments - Affiliates" for a discussion of these transactions.
Payable to affiliates at December 31, 1995 and 1994 consisted primarily of the performance incentive fee of $141,647 accrued in prior years, property management fees, Partnership general and administrative expenses, asset management fees and prepaid interest as further discussed in Note 6 - "Mortgage Loan Investments - Affiliates." Except for the performance incentive fee and prepaid interest, all accrued fees are due and payable from current operations.
NOTE 3 - TAXABLE INCOME - ------ --------------
McNeil Real Estate Fund XXVII, L.P. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly.
The Partnership's net assets and liabilities for financial reporting purposes exceeded the net assets and liabilities for tax purposes by $11,258,459 in 1995, $10,569,292 in 1994 and $10,682,379 in 1993.
NOTE 4 - REAL ESTATE INVESTMENTS - ------ -----------------------
The basis and accumulated depreciation of the Partnership's real estate investments at December 31, 1995 and 1994 are set forth in the following tables:
The Partnership leases its office buildings under non-cancelable operating leases. Future minimum rents to be received as of December 31, 1995 are as follows:
1996.................................... $2,242,000 1997.................................... 1,968,000 1998.................................... 1,157,000 1999.................................... 436,000 2000.................................... 232,000 Thereafter.............................. 125,000 --------- Total $6,160,000
Future minimum rents do not include expense reimbursements for common area maintenance, property taxes and other expenses. These expense reimbursements amounted to $130,560, $127,069 and $74,999 for the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE 5 - MORTGAGE LOAN INVESTMENT - ------ ------------------------
In 1987, the Partnership made a nonrecourse mortgage loan to an affiliate of Southmark secured by A-Quality Mini-Storage. The property was subsequently sold to an unaffiliated borrower subject to the Partnership's first priority mortgage loan. On August 6, 1990, the Partnership was advised that Southmark Storage Associates, the borrower on the A-Quality mortgage loan, had filed a petition for bankruptcy in the United States Bankruptcy Court of Connecticut. This action served to automatically stay foreclosure proceedings.
In April 1994, the borrower and the Partnership reached a settlement concerning the loan. Under the settlement, the borrower paid the Partnership $150,000 in cash and the loan was renewed for $1,453,194 (representing the original $2,100,000 principal balance less all post bankruptcy petition payments made by the borrower) effective January 1, 1994. An additional second lien loan was executed in the amount of $134,397 at an interest rate of 6%, which was paid in full in the third quarter of 1995. Principal and interest at a rate of prime plus 2% are payable monthly on the first lien loan which matures in January 1997.
Effective January 1, 1994, the Partnership adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). The impact of adopting SFAS 114 was immaterial to the Partnership's financial statements. In accordance with SFAS 114, the measure of impairment for a loan restructured in a troubled debt restructuring is based on the present value of expected future cash flows discounted at the original contractual rate. Accordingly, upon the April 1994 modification, the Partnership measured the impairment of the mortgage loan investment and determined that an allowance for impairment was still required. For the year ended December 31, 1993, there were no changes in the balance of the allowance for impairment. For the years ended December 31, 1995 and 1994, the allowance for impairment decreased by $172,164 and $83,257, respectively. The 1995 decrease in the allowance was due to the passage of time (the allowance is measured based on discounted cash flows) and the 1994 decrease was primarily due to the April 1994 modification which changed the expected future cash flows.
Since the April 1994 modification, interest income has been recorded at an interest rate that equates the expected future cash flows to the mortgage loan investment balance. The expected cash flows change slightly from year to year. Additionally, any changes in the allowance for impairment that result from changes in the discount rate or passage of time are also recorded as interest income. This accounting treatment resulted in the recognition of $149,334 and $159,337 of interest income for the years ended December 31, 1995 and 1994, respectively. The effective interest rate of this interest income was 10.4% and 10.3% for 1995 and 1994, respectively. Interest income of $154,909 and $136,417 would have been recognized under the terms of the modification agreement for the years ended December 31, 1995 and 1994, respectively, if the Partnership had not adopted SFAS 114.
The following sets forth the Partnership's mortgage loan investment to an unaffiliated borrower at December 31, 1995 and 1994.
(a) Under the modification terms, interest accrues on the first mortgage loan at a rate equal to the prime lending rate of Bank of America in effect as of the first day of each calendar month plus 2%. The prime lending rate at December 31, 1995 and 1994 was 8.5%. The monthly payment is based on a 240 month amortization, which changes as the interest rate changes.
(b) One half of the net cash flow of the property (after payments on the first lien loan) was payable monthly on the second lien loan. The second lien loan was paid in full in the third quarter of 1995.
Based on market lending rates for mortgage loan investments with similar terms, risks and average maturities, the fair value of the mortgage loan investment was approximately $1,407,000 at December 31, 1995.
The cost of the mortgage loan investment for Federal income tax purposes was $1,416,547 at December 31, 1995.
On March 21, 1996, the mortgage loan investment plus accrued interest was paid in full by the borrower.
NOTE 6 - MORTGAGE LOAN INVESTMENTS - AFFILIATES - ------ --------------------------------------
Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make nonrecourse mortgage loans to affiliates of the General Partner so long as such loans meet certain conditions, including that such loans bear interest at a rate equal to the prime lending rate of Bank of America plus 2.5%, or plus 3.5% if the loan is junior to other indebtedness. These loans are secured by income-producing real estate and may be either junior or senior to other indebtedness secured by such property. At December 31, 1995, the Partnership had outstanding loans receivable of $2,235,902, of which $1,435,902 were first priority loans and $800,000 were junior priority loans. For the year ended December 31, 1995, the Partnership recognized $291,324 of interest income related to these loans. The following sets forth the Partnership's mortgage loan investments to affiliates of the General Partner at December 31, 1995 and 1994. Loans were funded by the proceeds from the mortgage note payable entered into in October 1992 (see Note 7 - "Long-Term Debt") or other available funds. Interest only is due monthly. The monthly payment varies according to the prime lending rate.
(a) The loans bear interest at the prime lending rate of Bank of America plus 2.5% for senior priority loans and prime plus 3.5% for junior priority loans. The prime lending rate was 8.5% at December 31, 1995 and 1994.
On May 1, 1992, the Partnership agreed to loan an aggregate of $1.115 million to McNeil Pension Investment Fund, Ltd. ("McPIF"), an affiliate of the General Partner, at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). In 1994, 1993 and 1992, $88,000, $330,364 and $65,000, respectively, was borrowed by McPIF pursuant to this commitment. This loan is secured by a first lien on Brice Road Office Building located in Reynoldsburg, Ohio. The original loan matured in May 1995, at which time a new loan under substantially the same terms was executed. Interest on the loan is payable monthly. Principal is payable on the third anniversary date of issuance.
On August 15, 1994, the Partnership agreed to loan an aggregate of $1 million to McNeil Real Estate Fund X, Ltd. ("Fund X"), at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). In 1994, $800,000 was borrowed by Fund X pursuant to this commitment. This loan is secured by a second lien on Lakeview Plaza Shopping Center located in Lexington, Kentucky. Interest on the loan is payable monthly, with principal payable on the third anniversary date of issuance.
On May 1, 1992, the Partnership agreed to loan an aggregate of $972,000 at an interest rate of prime plus 3.5% to McNeil Real Estate Fund XXI, L.P. ("Fund XXI"). In 1992, $972,000 was borrowed by Fund XXI pursuant to this commitment. This loan was secured by a third lien on Suburban Plaza Shopping Center located in Knoxville, Tennessee. Interest on the loan was payable monthly. The loan was repaid in full in 1995.
On March 1, 1993, the Partnership agreed to loan an aggregate of $1.536 million at an interest rate of prime plus 2.5% to McNeil Real Estate Fund XXVI, L.P. ("Fund XXVI"). In 1993, $952,538 was borrowed by Fund XXVI pursuant to this commitment. This loan was secured by a first lien on Continental Plaza Office Building located in Scottsdale, Arizona. Interest on the loan was payable monthly, with principal payable on the third anniversary date of issuance. The loan was paid in full in January 1996.
In order to induce the Partnership to lend funds to the foregoing affiliates of the General Partner, the General Partner entered into agreements with the Partnership whereby the General Partner agreed to pay: (i) the difference between the interest rate required by the Partnership's Amended Partnership Agreement to be charged to affiliates (either prime plus 2.5% or prime plus 3.5%) and the interest rate actually paid by Fund X and McPIF to the Partnership (prime plus 1%), and (ii) all points (1.5% of the principal amount if a first priority security interest is obtained and 2% of the principal amount if a junior priority security interest is obtained), closing costs and expenses required to be received by the Partnership pursuant to the Partnership's Amended Partnership Agreement in connection with such affiliated financing arrangements. At December 31, 1994 and 1993, the General Partner had paid, net of repayments, $27,250 and $88,509, respectively, representing the aggregate amount of interest which would be owed for one year pursuant to this arrangement. No such interest was prepaid in 1995 since no funds were borrowed by Fund X or McPIF in 1995. In addition, the General Partner paid $27,193, $28,249 and $114,889 of interest, points, closing costs and expenses required to be received by the Partnership on all affiliate loans during 1995, 1994 and 1993, respectively. All other requirements for affiliated loans, as specified in the Partnership's Amended Partnership Agreement, were met at December 31, 1995, 1994 and 1993, in connection with these loans.
A summary of activity for the mortgage loan investments from affiliates is as follows:
Based on the lending rates prescribed by the Amended Partnership Agreement for affiliate mortgage loan investments, the fair value of mortgage loan investments-affiliates approximated book value at December 31, 1995.
The cost of the mortgage loan investments for Federal income tax purposes is the same as the carrying amount for financial statement purposes.
NOTE 7 - LONG-TERM DEBT - ------ --------------
As more fully described below, the long-term debt of the Partnership was converted from a mortgage note payable to a revolving credit agreement during 1995.
The following sets forth the mortgage note payable of the Partnership at December 31, 1995 and 1994. The mortgage note payable was secured by the related real estate investments.
(a) In October 1992, the Partnership entered into a loan agreement to borrow an aggregate of $7 million. Principal on this loan was due and payable seven years following issuance, with interest payable annually at a rate of 10.5% per annum for the first three years and prime plus 2% thereafter. The loan was secured by certain mini-storage warehouses owned by the Partnership. McNeil personally guaranteed up to $1.75 million of the aggregate loan amount. The Partnership received net proceeds of approximately $6.5 million from the loan, the balance of the loan amount being used to defray certain closing costs and to establish an escrow account for real estate taxes. The net loan proceeds were used to make loans to various affiliates of the General Partner and to fund working capital needs. The balance of the proceeds was invested, in accordance with the terms of the Amended Partnership Agreement, in short-term interest-bearing accounts.
In May 1995, the Partnership paid down its mortgage note payable by $4,628,250. In June 1995, the Partnership secured a $5 million line of credit that may be used to fund any loans made to affiliates of the General Partner as well as for working capital and general partnership purposes. In connection with obtaining the line of credit, the Partnership paid off the remaining $2,019,844 balance of its mortgage note payable. In connection with the repayments, the Partnership paid prepayment penalties of $66,949 and wrote off $185,453 of deferred borrowing costs, resulting in an extraordinary loss of $252,402 in 1995.
No amounts had been received by the Partnership under the $5 million line of credit agreement as of December 31, 1995. Any borrowings under the line of credit would bear interest at prime plus one half of one percent or a LIBOR-based rate, if so elected by the Partnership. The Partnership is required to pay a commitment fee equal to one quarter of one percent per annum on any unused portion of the line of credit. Total commitment fees paid during 1995 were $3,542. The Partnership incurred loan costs of $195,059 related to the line of credit. The line of credit expires in July 1997 and is secured by One Corporate Center I and III office buildings and Kendall Sunset Mini-Storage.
NOTE 8 - GAIN ON INVOLUNTARY CONVERSION - ------ ------------------------------
In September 1992, extensive hurricane damage occurred at Fountainbleau and Kendall Sunset Mini-Storage warehouses. Although repairs were substantially complete at the end of the year, reimbursements from the insurance company had not yet been fully received. In 1993, the Partnership received $398,034 from the insurance company and recognized a $229,147 gain on involuntary conversion, which represents the amount of insurance reimbursements received in excess of the basis of the properties damaged.
NOTE 9 - REPURCHASE OF LIMITED PARTNERSHIP UNITS - ------ ---------------------------------------
Under the provisions of both the original partnership agreement and the Amended Partnership Agreement, the Partnership is required to repurchase Units in amounts totaling up to .6% of gross proceeds per year. The repurchase amount is equal to the lesser of 90% of adjusted invested capital, or $9 per Unit. Repurchase is based on written requests from Unitholders submitted between October 1 and October 20 of each year. The requirement was first effective in 1989. In January 1996, $332,928 was used to repurchase 36,992 Units for requests submitted in 1995. In January 1995, $332,931 was used to repurchase 37,408 Units for requests submitted in 1994. In January 1994, $332,933 was used to repurchase 43,126 Units for requests submitted in 1993.
NOTE 10 - GAIN ON LEGAL SETTLEMENT - ------- ------------------------
The Partnership filed claims with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court") against Southmark Corporation ("Southmark") for damages relating to improper overcharges, breach of contract and breach of fiduciary duty. The Partnership settled these claims in 1991, which totaled approximately $17,024,326, for the full amount claimed and such settlement was approved by the Bankruptcy Court.
Pursuant to the settlement agreement, the Partnership released Southmark and its affiliates and the Original General Partner from any further liability in connection with the claims made with the Bankruptcy Court. In return, an affiliate of McNeil agreed to waive payment on a dollar for dollar basis in an amount equal to the settled claims against Partnership advances owed at that time. In addition, the Partnership received Southmark bankruptcy plan assets in respect to its claims which were not offset against the Partnership advances. Because the Partnership's claims against Southmark were settled for $17,024,326, the Partnership advances of $223,800 owed at that time were reduced in their entirety and the claims had a remaining balance of $16,800,526. Although the Partnership settled the claims against Southmark for the full amount claimed, the settlement agreement provided that the Partnership receive a distribution of Southmark bankruptcy plan assets based on a claim amount of approximately $9,157,000.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April 14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in May 1995, the Partnership received in full satisfaction of its claims, $984,649 in cash, and common and preferred stock in the reorganized Southmark which was subsequently sold for $317,675. These amounts represent the Partnership's pro-rata share of Southmark assets available for Class 8 Claimants and were recorded as a gain on legal settlement on the Statements of Operations.
NOTE 11 - LEGAL PROCEEDINGS - ------- -----------------
The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following:
1) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership and other affiliated partnerships (the "Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District Court of Dallas County. The petition sought recovery against the Partnership's former auditors, Ernst & Young, for negligence and fraud in failing to detect and/or report overcharges of fees/expenses by Southmark, the former general partner. The former auditors initially asserted counterclaims against the Affiliated Partnerships based on alleged fraudulent misrepresentations made to the auditors by the former management of the Affiliated Partnerships (Southmark) in the form of client representation letters executed and delivered to the auditors by Southmark management. The counterclaims sought recovery of attorneys' fees and costs incurred in defending this action. The counterclaims were later dismissed on appeal, as discussed below.
The trial court granted summary judgment against the Partnership based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Affiliated Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 1996. The Partnership is continuing to pursue vigorously its claims against Ernst & Young; however, the final outcome of this litigation cannot be determined at this time.
2) Robert Lewis v. McNeil Real Estate Fund XXVII, L.P. and McNeil Partners, L.P., Civil Action No. 13287 (Del. Ch.). This complaint alleges, among other things, that the General Partner caused the Partnership to loan money to affiliated partnerships at rates lower than the Partnership's cost of borrowing, which the plaintiff alleges constitutes a breach of the General Partner's fiduciary duties. The complaint alleges that the affiliate loans are designed to enable the affiliated partnerships to continue in business so as to enable the General Partner to continue collecting fees from them. An answer to the complaint was filed on February 3, 1994, denying the material averments of wrongdoing and asserting affirmative defenses. In 1995, the plaintiff and the Partnership executed a Stipulation and Order of Dismissal, which dismissed the action without prejudice.
3) Helen Pasco v. McNeil Real Estate Fund XXVII, L.P., Southmark Prime Plus Corp., et al. and Does 1-50 Inclusive. This complaint alleges that several limited partnerships and funds, including the Partnership, along with McMachen, Prudential Securities, Inc. and other unidentified defendants, transmitted false and misleading information to the plaintiff which was used to entice the plaintiff into investing her money with the defendants. The complaint also alleges that the defendants misrepresented speculative, illiquid limited partnerships as safe, income-producing investments suitable for safety-conscious and conservative investors. Although the Partnership is included as a defendant, the plaintiff's allegations do not specify in what way the Partnership was involved in improper conduct. The complaint does not state, other than by broad allegations, that the Partnership acted in an improper manner with regard to the operation or management of the limited partnership. An answer was filed on behalf of the Partnership in February 1994, and there has been no further action in this matter. The ultimate outcome of this case cannot be determined at this time.
McNEIL REAL ESTATE FUND XXVII, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1995
See accompanying notes to Schedule III.
McNEIL REAL ESTATE FUND XXVII, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1995
(a) For Federal Income tax purposes, the properties are depreciated over lives ranging from 15-25 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $34,399,151 and accumulated depreciation was $4,896,484 at December 31, 1995.
(b) The carrying values of One Corporate Center I and III Office Buildings were each reduced by $1,300,000 in 1991.
(c) These properties secure a $5 million line of credit; however, no borrowings were outstanding under the line of credit at December 31, 1995.
See accompanying notes to Schedule III.
McNEIL REAL ESTATE FUND XXVII, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1995
McNEIL REAL ESTATE FUND XXVII, L.P.
Notes to Schedule III
Real Estate Investments and Accumulated Depreciation and Amortization
A summary of activity for the Partnership's real estate investments and accumulated depreciation and amortization is as follows:
PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURES ---------------------
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- --------------------------------------------------
Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows:
Each director shall serve until his successor shall have been duly elected and qualified.
Section 16 (a) of the Securities Exchange Act of 1934 requires the Partnership's General Partner and the directors and executive offers of the General Partner (Including McNeil Investors, Inc. as the general partner of the General Partner and the officers and directors of McNeil Investors, Inc.) to file, with the Securities and Exchange Commission, reports of ownership and changes in ownership of the Partnership's Units. The Partnership is required to identify any of those persons who failed to file such reports on a timely basis.
During 1995, Mrs. McNeil inadvertently failed to file on a timely basis one report relating to one transaction. In making this disclosure, the Partnership has relied solely on written representations of these and other individuals and on copies of the reports that they have filed with the Securities and Exchange Commission.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - ------- ----------------------
No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1995, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1995. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future.
See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- --------------------------------------------------------------
(A) Security ownership of certain beneficial owners.
No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, was known by the Partnership to own more than 5% of the Units, other than the General Partner, as noted in (B) below.
(B) Security ownership of management.
The General Partner and the officers and directors of its general partner, collectively own 410,300 limited partnership units, which represents approximately 7.78% of the outstanding limited partnership units as of February 29, 1996.
(C) Change in control.
None
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ----------------------------------------------
The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of general partner compensation other than property management fees and reimbursements of certain costs. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $30 per gross square foot for mini-storage warehouses and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases subsequent to 1999. For the year ended December 31, 1995, the Partnership paid or accrued $572,631 of such asset management fees.
Until March 13, 1991, the Original General Partner was entitled to receive, out of cash from operations, a performance incentive fee equal to 20% of all points received by the Partnership on mortgage loans if the Unit holders receive distributions of cash from operations equal to a 10% cumulative noncompounding annual return on their original capital investment. Such fees were cumulative and were accrued in the years earned and are to be paid when conditions are met. Conditions for payment have not yet been met and, at December 31, 1995, $141,647 of amounts accrued in prior years are included in payable to affiliates on the Balance Sheets.
The Partnership pays property management fees equal to 5% of the gross rental receipts of mini-storage properties (6% for commercial) to McREMI, an affiliate of the General Partner, for providing property management services. Additionally, the Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1995, the Partnership paid or accrued $859,201 of such property management fees and reimbursements. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Note 2 - "Transactions With Affiliates."
Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make loans to affiliates of the General Partner, so long as such loans meet certain conditions, including that such loans bear interest at a rate of either prime of Bank of America plus 2.5% or prime plus 3.5%, depending on whether the security for such loans is first priority or junior priority.
On May 1, 1992, the Partnership agreed to loan an aggregate of $1.115 million to McNeil Pension Investment Fund, Ltd. ("McPIF"), an affiliate of the General Partner, at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). In 1994, 1993 and 1992, $88,000, $330,364 and $65,000, respectively, was borrowed by McPIF pursuant to this commitment. This loan is secured by a first lien on Brice Road Office Building located in Reynoldsburg, Ohio. The original loan matured in May 1995, at which time a new loan under substantially the same terms was executed. Interest on the loan is payable monthly. Principal is payable on the third anniversary date of issuance.
On August 15, 1994, the Partnership agreed to loan an aggregate of $1 million to McNeil Real Estate Fund X, Ltd. ("Fund X"), at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). In 1994, $800,000 was borrowed by Fund X pursuant to this commitment. This loan is secured by a second lien on Lakeview Plaza Shopping Center located in Lexington, Kentucky. Interest on the loan is payable monthly, with principal payable on the third anniversary date of issuance.
On May 1, 1992, the Partnership agreed to loan an aggregate of $972,000 at an interest rate of prime plus 3.5% to McNeil Real Estate Fund XXI, L.P. ("Fund XXI"). In 1992, $972,000 was borrowed by Fund XXI pursuant to this commitment. This loan was secured by a third lien on Suburban Plaza Shopping Center located in Knoxville, Tennessee. Interest on the loan was payable monthly. The loan was repaid in full in 1995.
On March 1, 1993, the Partnership agreed to loan an aggregate of $1.536 million at an interest rate of prime plus 2.5% to McNeil Real Estate Fund XXVI, L.P. ("Fund XXVI"). In 1993, $952,538 was borrowed by Fund XXVI pursuant to this commitment. This loan was secured by a first lien on Continental Plaza Office Building located in Scottsdale, Arizona. Interest on the loan was payable monthly, with principal payable on the third anniversary date of issuance. The loan was paid in full in January 1996.
In order to induce the Partnership to lend funds to affiliates of the General Partner, the General Partner entered into agreements with the Partnership whereby the General Partner agreed to pay: (i) the difference between the interest rate required by the Partnership's Amended Partnership Agreement to be charged to affiliates (either prime of Bank of America plus 2.5% or 3.5%) and the interest rate actually paid by Fund X and McPIF to the Partnership (prime plus 1%), and (ii) all points (1.5% of the principal amount if a first priority security interest is obtained and 2% of the principal amount if a junior priority security interest is obtained), closing costs and expenses required to be received by the Partnership pursuant to the Partnership's Amended Partnership Agreement in connection with such affiliated financing arrangements. In 1995, the General Partner paid $27,193 of interest, points, closing costs and expenses required to be received by the Partnership on all affiliate loans during 1995. In connection with these loans, all other requirements for affiliated loans, as specified in the Partnership's Amended Partnership Agreement, were met.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - ------- -----------------------------------------------------------------
See accompanying Index to Financial Statements at Item 8.
(A) Exhibits --------
Exhibit Number Description ------- -----------
4.2 Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXVII, L.P. (incorporated by reference to the Current Report of the registrant on Form 8-K dated March 30, 1992, as filed on April 10, 1992).
10. Mutual Release and Settlement Agreement between Southmark Storage Associates Limited Partnership and McNeil Real Estate Fund XXVII, L.P. (incorporated by reference to the Quarterly Report of the registrant on form 10-Q for the period ended March 31, 1995, as filed on May 15, 1995).
10.1 Assignment of Partnership Advances dated March 13, 1991 between Prime Plus Corp. and McNeil Partners, L.P. (1)
10.2 Revolving Credit Agreement dated August 6, 1991, between McNeil Partners, L.P. and various selected partnerships, including the registrant (incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1993, as filed on March 30, 1994).
10.5 Property Management Agreement dated March 30, 1992, between McNeil Real Estate Fund XXVII, L.P. and McNeil Real Estate Management, Inc. (2)
10.6 Amendment of Property Management Agreement dated March 5, 1993, by McNeil Real Estate Fund XXVII, L.P. and McNeil Real Estate Management, Inc. (2)
10.7 Promissory Note dated October 23, 1992, between Community Bank, N.A. and McNeil Real Estate Fund XXVII, L.P. (2)
10.8 Loan Agreement dated October 23, 1992, between Community Bank, N.A. and McNeil Real Estate Fund XXVII, L.P. (2)
10.9 Guaranty Agreement dated October 23, 1992, between Community Bank, N.A. and Robert A. McNeil. (2)
10.10 Revolving Credit Loan Agreement dated June 21, 1995, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P.
10.11 Consolidated, Amended and Restated Revolving Credit Note dated June 21, 1995, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P.
11. Statement regarding computation of Net Income (Loss) per Hundred Limited Partnership Units (see Note 1 to Financial Statements).
(1) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1990, as filed on March 29, 1991.
(2) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1992, as filed on March 30, 1993.
(B) Reports on Form 8-K. There were no reports on Form 8-K filed by the Partnership during the quarter ended December 31, 1995.
McNEIL REAL ESTATE FUND XXVII, L.P. A Limited Partnership
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.