ITEM 1. BUSINESS
Development and Description of Business - --------------------------------------- Information concerning the business of American Insured Mortgage Investors L.P.-Series 86 (the Partnership) is contained in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and in Notes 1 and 4 of the notes to the financial statements of the Partnership (filed in response to Item 8 hereof), which is incorporated herein by reference. Also see Schedule IV-Mortgage Loans on Real Estate, for the table of the Insured Mortgages (as defined below), invested in by the Partnership as of December 31, 1995.
Employees - --------- The Partnership has no employees. The business of the Partnership is managed by CRIIMI, Inc. (the General Partner), while its portfolio of mortgages is managed by AIM Acquisition Partners, L.P. (the Advisor) pursuant to an advisory agreement (the Advisory Agreement). CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. (CRIIMI MAE).
Effective September 6, 1991, CRIIMI, Inc. (the General Partner) succeeded the former general partners to become the sole general partner of the Partnership. CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. (CRIIMI MAE). From inception through June 30, 1995, CRIIMI MAE was managed by an adviser whose general partner is C.R.I., Inc. (CRI). However, effective June 30, 1995, CRIIMI MAE became a self-managed and self-administered real estate investment trust (REIT) and, as a result, the adviser no longer advises CRIIMI MAE. In addition, the General Partner acquired the shares of the company which acted as the assignor limited partner in the Partnership. The interest of the former associate general partner (0.1%) was purchased by the Partnership on September 6, 1991, pursuant to the terms of the Partnership Agreement.
Also on September 6, 1991, AIM Acquisition Partners, L.P., (the Advisor) succeeded Integrated Funding, Inc. (IFI) as the advisor to the Partnership. AIM Acquisition Corporation (AIM Acquisition) is the general partner of the Advisor, and the limited partners include, but are not limited to, AIM Acquisition, The Goldman Sachs Group, L.P., Broad, Inc., and CRIIMI MAE.
Pursuant to the terms of certain amendments to the Partnership Agreement as discussed below, the General Partner is required to receive the consent of the Advisor prior to taking certain significant actions which affect the management and policies of the Partnership.
Effective September 6, 1991 and through June 30, 1995, a sub-advisory agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc., an affiliate of CRI, managed the Partnership's portfolio. On June 30, 1995, in connection with a merger transaction approved by CRIIMI MAE's shareholders, an affiliate of CRIIMI MAE acquired the Sub-advisory Agreement, and, as a result, CRIIMI MAE Services Limited Partnership acts as the sub-advisor to the Partnership effective June 30, 1995.
Competition - ----------- In disposing of Insured Mortgages, the Partnership competes with private investors, mortgage banking companies, mortgage brokers, state and local government agencies, lending institutions, trust funds, pension funds, and other entities, some with similar objectives to those of the Partnership and some of which are or may be affiliates of the Partnership, its General Partner, the Advisor or their respective affiliates. Some of these entities may have substantially greater capital resources and experience in disposing of Insured Mortgages than the Partnership.
PART I
ITEM 1. BUSINESS - Continued
CRIIMI MAE and its affiliates also may serve as general partners, sponsors or managers of real estate limited partnerships, REITs or other entities in the future. The Partnership may attempt to dispose of mortgages at or about the same time that one or more of the other AIM Partnerships and/or other entities sponsored or managed by CRIIMI MAE, including CRI Liquidating REIT Inc., are attempting to dispose of mortgages. As a result of market conditions that could limit dispositions, CRIIMI MAE Services Limited Partnership and its affiliates could be faced with conflicts of interest in determining which mortgages would be disposed of. Both CRIIMI MAE Services Limited Partnership and CRIIMI, Inc., however, are subject to their fiduciary duties in evaluating the appropriate action to be taken when faced with such conflicts.
ITEM 2.
ITEM 2. PROPERTIES
Although the Partnership does not own the underlying real estate, the mortgages underlying the Partnership's mortgage investments are non-recourse first liens on the respective multifamily residential developments or retirement homes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 4 of the notes to the financial statements on pages 41 through 46.
PART I
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on during the fourth quarter of 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS
Principal Market and Market Price for Units - ------------------------------------------- Effective January 1, 1994 the United States Congress repealed portions of the Federal tax code which have had an adverse impact on tax-exempt investors in "publicly-traded partnerships." This tax code change cleared away the major impediment standing in the way of listing the Partnership's Depositary Units of Limited Partnership Interest (Units) for trading on a national stock exchange. In an effort to allow pension funds and other tax-exempt organizations to invest in publicly-traded partnerships, the Revenue Reconciliation Act of 1993 repealed the rule that automatically treated income from publicly-traded partnerships as gross income that is derived from an unrelated trade or business. As a result, investments in publicly-traded partnerships such as the Partnership are now treated the same as investments in other partnerships for purposes of the unrelated business taxable income rules. The General Partner listed the Partnership's Units for trading on the American Stock Exchange (AMEX) on January 18, 1994 in order to provide investment liquidity as contemplated in the Partnership's original prospectus. The Units are traded under the symbol "AIJ."
The high and low bid prices for the Units as reported on AMEX for each quarterly period in 1995 and 1994 were as follows:
Quarter Ended High Low ------------------- ------- -------
March 31, $12 1/4 $11 3/8
June 30, 12 7/8 11 3/4
September 30, 13 1/4 12 5/8
December 31, 13 3/8 12 3/4
Period Ended High Low ------------------- ------- ------- January 18 through March 31, $14 $12 1/4 April 1 through June 30, 12 5/8 12 1/8 July 1 through September 30, 12 3/4 12 October 1 through December 31, 12 11 1/8
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS - Continued
Prior to listing the Partnership's Units for trading on AMEX, the Units were only tradable through an informal market called the "secondary market".
Distribution Information - ------------------------ Distributions per Unit, payable out of the cash flow of the Partnership, during 1995 and 1994 were as follows:
Distributions for the Amount of Distribution Quarter Ended Per Unit --------------------- ----------------------
March 31, 1995 $ 0.26(1) June 30, 1995 0.34(1)(2) September 30, 1995 0.31(1) December 31, 1995 0.33(1) -------- $ 1.24 ========
March 31, 1994 $ 0.41 (3)(4) June 30, 1994 0.29 (4) September 30, 1994 0.30 (4) December 31, 1994 0.34 (4) -------- $ 1.34 ========
(1) This amount includes $0.03 per Unit representing previously undistributed accrued interest receivable from St. Charles Place - Phase II and The Villas.
(2) This amount includes $0.08 per Unit representing previously undistributed accrued interest receivable from Carmen Drive Estates (The Forest), Woodland Hills Apartments, and Woodbine at Lakewood Apartments.
(3) This amount includes approximately $0.18 per Unit representing previously undistributed accrued interest received from the disposition of the mortgage on One East Delaware.
(4) This amount includes approximately $0.01, $0.04, $0.03 and $0.03 per Unit representing previously undistributed accrued interest received from St. Charles Place-Phase II and The Villas for the quarters ended March 31, 1994, June 30, 1994, September 30, 1994 and December 31, 1994, respectively.
Approximate Number of Unitholders Title of Class as of December 31, 1995 - --------------------------- ------------------------------- Depositary Units of Limited Partnership Interest 13,400
PART II
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per Unit amounts)
The selected statements of operations data presented above for the years ended December 31, 1995, 1994 and 1993, and the balance sheet data as of December 31, 1995 and 1994, are derived from and are qualified by reference to the Partnership's financial statements which have been included elsewhere in this Form 10-K. The statements of operations data for the years ended December 31, 1992 and 1991 and the balance sheet data as of December 31, 1993, 1992 and 1991 are derived from audited financial statements not included in this Form 10- K. This data should be read in conjunction with the financial statements and the notes thereto.
PART II
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General - -------
American Insured Mortgage Investors L.P. - Series 86 (the Partnership) was formed under the Uniform Limited Partnership Act of the state of Delaware on October 31, 1985. During the period from May 2, 1986 (the initial closing date of the Partnership's public offering) through June 6, 1987 (the termination date of the offering), the Partnership, pursuant to its public offerings of Units, raised a total of $191,523,300 in gross proceeds. In addition, the initial limited partner contributed $2,500 to the capital of the Partnership and received 125 units of limited partnership interest in exchange therefor.
From inception through September 6, 1991, AIM Capital Management Corp. served as managing general partner (with a partnership interest of 4.8%), IRI Properties Capital Corp. served as corporate general partner (with a partnership interest of 0.1%) and Second Group Partners, an affiliate of the former general partners, served as the associate general partner (with a partnership interest of 0.1%). All of the foregoing general partners are sometimes collectively referred to as former general partners.
At a special meeting of the limited partners and Unitholders, as defined in the Partnership Agreement, of the Partnership held on September 4, 1991, a majority of these interests approved, among other items, the assignment of the general partner interests and the shares of the company which acts as the assignor limited partner in the Partnership.
Effective September 6, 1991, CRIIMI, Inc. (the General Partner) succeeded the former general partners to become the sole general partner of the Partnership. In addition, the General Partner acquired the shares of the company which acted as the assignor limited partner in the Partnership. The interest of the former associate general partner (0.1%) was purchased by the Partnership on September 6, 1991, pursuant to the terms of the Partnership Agreement. CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. (CRIIMI MAE). From inception through June 30, 1995, CRIIMI MAE was managed by an adviser whose general partner is C.R.I., Inc. (CRI). However, effective June 30, 1995, CRIIMI MAE became a self-managed and self-administered real estate investment trust (REIT) and, as a result, the adviser no longer advises CRIIMI MAE.
Also on September 6, 1991, AIM Acquisition Partners, L.P., (the Advisor) succeeded Integrated Funding, Inc. (IFI) as the advisor to the Partnership. AIM Acquisition Corporation (AIM Acquisition) is the general partner of the Advisor, and the limited partners include, but are not limited to, AIM Acquisition, The Goldman Sachs Group, L.P., Broad, Inc., and CRIIMI MAE. Pursuant to the terms of certain amendments to the Partnership Agreement, as discussed below, the General Partner is required to receive the consent of the Advisor prior to taking certain significant actions which affect the management and policies of the Partnership.
Effective September 6, 1991 and through June 30, 1995, a sub-advisory agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc., an affiliate of CRI, managed the Partnership's portfolio. On June 30, 1995, in connection with a merger transaction approved by CRIIMI MAE's shareholders, an affiliate of CRIIMI MAE acquired the Sub-advisory Agreement, and, as a result, CRIIMI MAE Services Limited Partnership acts as the sub-advisor to the Partnership effective June 30, 1995.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Prior to the expiration of the Partnership's reinvestment period on December 31, 1994, the Partnership was engaged in the business of originating mortgage loans (Originated Insured Mortgages) and acquiring mortgage loans (Acquired Insured Mortgages and, together with Originated Insured Mortgages, referred to herein as Insured Mortgages). After the expiration of the reinvestment period, the Partnership is required (subject to the conditions set forth in the Partnership Agreement) to distribute such proceeds to its Unitholders. The Partnership Agreement states that the Partnership will terminate on December 31, 2020, unless previously terminated under the provisions of the Partnership Agreement.
As of December 31, 1995, the Partnership had invested in 27 Insured Mortgages, with an aggregate amortized cost of approximately $166 million, a face value of approximately $163 million and a fair value of approximately $162 million, as discussed below.
Results of Operations - ---------------------
1995 versus 1994 - ----------------
Net earnings decreased for 1995 as compared to 1994 primarily as a result of the gain recognized on the disposition of the Insured Mortgage on One East Delaware in January 1994. Also contributing to the decrease in net earnings was a decrease in interest and other income, as discussed below. Partially offsetting these decreases was an increase in mortgage investment income, as discussed below.
Mortgage investment income increased for 1995 as compared to 1994 due to increases in total invested assets throughout 1994, the full benefit which was realized in 1995. The increase in total invested assets is attributable to the reinvestment of net proceeds from the disposition of the Insured Mortgages on One East Delaware and Victoria Pointe Apartments-Phase II, which were received in December 1993 and January 1994 and reinvested during the first three quarters of 1994.
Interest and other income decreased for 1995 as compared to 1994 primarily due to the short-term investment of net disposition proceeds in early 1994 prior to reinvestment in Acquired Insured Mortgages, as previously discussed.
Asset management fees increased for 1995 as compared to 1994 as a result of the increase in total invested assets.
General and administrative expenses increased for 1995 as compared to 1994 primarily due to an increase in legal and professional fees related to litigation involving the transfer of mortgage servicing rights, as discussed in Note 4 to the financial statements. Partially offsetting this increase was a decrease in payroll and payroll-related expenses, as a result of the stabilization of the mortgage portfolio during 1994. Also offsetting this increase was a decrease in fees related to the initial listing of the Partnership's units on the American Stock Exchange.
Interest expense to affiliate decreased for 1995 as compared to 1994 as a result of the paydown of the note payable to the Partnership's affiliate, American Insured Mortgage Investors-L.P. Series 85 (AIM 85) during 1994, partially offset by the execution of a note payable to AIM 88. The note payable to AIM 88 is in the approximate amount of $479,000, at an annual interest rate
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
of 7.25%, as compared to the note payable to AIM 85 of approximately $1.7 million at an annual interest rate of 8%.
1994 versus 1993 - ----------------
Net earnings increased for 1994 as compared to 1993 primarily due to the gain recognized from the disposition of the Insured Mortgage on One East Delaware in January 1994. Also contributing to this increase was an increase in interest and other income as discussed below. Partially offsetting these increases was a decrease in mortgage investment income, as described below.
Mortgage investment income decreased for 1994 as compared to 1993. This decrease was primarily due to the disposition of the mortgages on One East Delaware and Victoria Pointe Apartments, the proceeds of which were not reinvested until the first three quarters of 1994. Also contributing to the decrease in mortgage investment income was a reduction in mortgage interest rates on Acquired Insured Mortgages purchased during 1994 as compared to the mortgage interest rates on those Insured Mortgages which were disposed of in late 1993 and early 1994.
Interest and other income increased for 1994 as compared to 1993 primarily due to the short-term investment of net disposition proceeds prior to reinvestment in Acquired Insured Mortgages, as previously discussed.
Asset management fees decreased for 1994 as compared to 1993 primarily due to the decrease in total invested assets, as discussed above.
General and administrative expenses increased for 1994 as compared to 1993. This increase was due primarily to an increase in payroll and payroll-related expenses incurred in connection with the mortgage dispositions, mortgage acquisitions, and mortgages with performance problems, as described below, and due to the payment in 1994 of a one-time fee in connection with the listing of the Partnership's units on AMEX. Also contributing to the increase in general and administrative expenses was an amendment to the expense reimbursement agreement between the AIM Partnerships and IFI, effective April 1, 1994. The effect of this amendment was to reduce the expense reimbursement the Partnership receives from IFI to reflect the reduction in the Partnership's coinsured loans since the execution of the original reimbursement agreement in 1992. This reimbursement is presented as a reduction of general and administrative expenses on the accompanying statements of operations for the years ended December 31, 1995, 1994 and 1993. The decrease in the expense reimbursement is offset by a decrease in interest expense to affiliate, as discussed below.
Interest expense to affiliate decreased for 1994 as compared to 1993, as a result of the paydown of the note payable to AIM 85 during the second quarter of 1994, offset by the execution of a note payable to AIM 88. The note payable to AIM 88 is in the approximate amount of $479,000, at an annual interest rate of 7.25%, as compared to the note payable to AIM 85 of approximately $1.7 million at an annual interest rate of 8%. The reduction in the principal amount of the notes reflects the reduction in the Partnership's coinsured loans since the initial capitalization of IFI in 1991.
Investment in Insured Mortgages - -------------------------------
The Partnership's investment in Insured Mortgages is comprised of participation certificates evidencing a 100% undivided beneficial interest in
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
government insured multifamily mortgages issued or sold pursuant to programs of the Federal Housing Administration (FHA) (FHA-Insured Certificates), mortgage- backed securities guaranteed by the Government National Mortgage Association (GNMA) (GNMA Mortgage-Backed Securities) and FHA-insured mortgage loans (FHA- Insured Loans). The mortgages underlying the FHA-Insured Certificates, GNMA Mortgage-Backed Securities, and FHA-Insured Loans are non-recourse first liens on multifamily residential developments or retirement homes.
The following is a discussion of the Partnership's mortgage investments, along with the risks related to each type of investment:
A. Fully Insured Originated Insured Mortgages and Acquired Insured Mortgages ---------------------------------------------- The Partnership's investment in fully insured Originated Insured Mortgages consisted of seven and eight FHA-Insured Loans, as of December 31, 1995 and 1994, respectively. As of December 31, 1995, these investments had an aggregate amortized cost of $62,595,492, an aggregate face value of $60,306,932, and an aggregate fair value of $62,183,025. As of December 31, 1994, these investments had an aggregate amortized cost of $69,162,106, an aggregate face value of $66,602,806, and an aggregate fair value of $63,422,100.
The Partnership's investment in fully insured Acquired Insured Mortgages consisted of 10 GNMA Mortgage-Backed Securities, 2 FHA-Insured Certificates and 1 FHA-Insured Loan as of December 31, 1995 and 1994. As of December 31, 1995, these investments had an aggregate amortized cost of $42,122,606, an aggregate face value of $42,066,176, and an aggregate fair value of $42,479,072. As of December 31, 1994, these investments had an aggregate amortized cost of $42,473,748, an aggregate face value of $42,415,356 and an aggregate fair value of $37,875,856. As of March 1, 1996, all of the Partnership's fully insured mortgage investments are current with respect to the payment of principal and interest.
In December, 1995, the Partnership received net proceeds of $6,169,529 from the prepayment of the mortgage on Lakewood Villas, a fully insured FHA-Insured Loan, and recognized a gain of $5,208, as shown on the accompanying statement of operations for the year ended December 31, 1995. The net proceeds are expected to be distributed May 1, 1996.
In addition to base interest payments from fully insured Originated Insured Mortgages, the Partnership is entitled to additional interest based on a percentage of the net cash flow from the underlying development and of the net proceeds from the refinancing, sale or other disposition of the underlying development (referred to as Participations). During the years ended December 31, 1995, 1994 and 1993, the Partnership received additional interest of $73,357, $33,431 and $62,843, respectively, from the fully insured Participations. These amounts are included in mortgage investment income on the accompanying statements of operations.
In the case of fully insured Originated Insured Mortgages and Acquired Insured Mortgages, the Partnership's maximum exposure for purposes of determining loan losses would generally be approximately 1% of the unpaid principal balance of the Originated Insured Mortgage or Acquired Insured Mortgage (an assignment fee charged by FHA) at the date of a default, plus the unamortized balance of acquisition fees and closing costs paid in connection with the acquisition of the Insured Mortgage and the loss of approximately 30-days accrued interest.
Coinsured Mortgages ------------------- Under the HUD coinsurance program, both HUD and the coinsurance lender are responsible for paying a portion of the insurance benefits if a mortgagor defaults and the sale of the development collateralizing the
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
mortgage produces insufficient net proceeds to repay the mortgage obligation. In such case, the coinsurance lender will be liable to the Partnership for the first part of such loss in an amount up to 5% of the outstanding principal balance of the mortgage as of the date foreclosure proceedings are instituted or the deed is acquired in lieu of foreclosure. For any loss greater than 5% of the outstanding principal balance, the responsibility for paying the insurance benefits will be borne on a pro-rata basis, 85% by HUD and 15% by the coinsurance lender.
While the Partnership is due payment of all amounts owed under the mortgage, the coinsurance lender is responsible for the timely payment of principal and interest to the Partnership. The coinsurance lender is prohibited from entering into any workout arrangement with the borrower without the Partnership's consent and must file a claim for coinsurance benefits with HUD, upon default, if the Partnership so directs. As an ongoing HUD-approved coinsurance lender, and under the terms of the participation documents, the coinsurance lender is required to satisfy certain minimum net worth requirements as set forth by HUD. However, it is possible that the coinsurance lender's potential liability for loss on these developments, and others, could exceed its HUD-required minimum net worth. In such case, the Partnership would bear the risk of loss if the coinsurance lenders were unable to meet their coinsurance obligations. In addition, HUD's obligation for the payment of its share of the loss could be diminished under certain conditions, such as the lender not adequately pursuing regulatory violations of the borrower or the failure to comply with other terms of the mortgage. However, the General Partner is not aware of any conditions or actions that would result in HUD diminishing its insurance coverage.
As of December 31, 1995 and 1994, the former managing general partner, on behalf of the Partnership, had invested in seven FHA-Insured Certificates secured by coinsured mortgages. As of December 31, 1995, two of the seven FHA-Insured Certificates secured by coinsured mortgages are coinsured by an unaffiliated third party coinsurance lender under the HUD coinsurance program. The following is a discussion of actual and potential performance problems with respect to the Partnership's coinsured mortgage investments.
1. Coinsured by third party ------------------------ The Originated Insured Mortgages on The Villas and St. Charles Place - Phase II are coinsured by Patrician. As of December 31, 1995 and December 31, 1994, the Partnership's investment in the mortgage on The Villas had an amortized cost of $15,635,379 and $15,732,782, respectively, a face value of $15,869,089 and $15,966,491, respectively, and a fair value of $15,173,465 and $14,012,209, respectively. As of March 1, 1996, the mortgagor has made payments of principal and interest due on the original mortgage through July 1995, and has made payments of principal and interest due under a modification agreement through August 1993. Patrician is litigating the case in bankruptcy court while negotiating a modification agreement with the borrower.
The Partnership's investment in the mortgage on St. Charles Place - Phase II had an amortized cost equal to its face value of $3,068,173 and $3,082,440, as of December 31, 1995 and 1994, respectively. As of December 31, 1995 and 1994, this mortgage had a fair value of $2,933,205 and $2,703,780, respectively. These amounts represent the
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Partnership's approximate 45% ownership interest in the mortgage. The remaining 55% ownership interest is held by American Insured Mortgage Investors L.P. - Series 88 (AIM 88), an affiliate of the Partnership. As of March 1, 1996, the mortgagor has made payments of principal and interest due on the mortgage through May 1995 to the Partnership. Patrician is litigating the case in bankruptcy court while negotiating a modification agreement with the borrower.
The General Partner intends to continue to oversee the Partnership's interests in these mortgages to ensure that Patrician meets its coinsurance obligations. The General Partner's assessment of the realizability of The Villas and St. Charles Place-Phase II mortgages is based on the most recent information available, and to the extent these conditions change or additional information becomes available, then the General Partner's assessment may change. However, the General Partner does not believe that there would be a material adverse impact on the Partnership's financial condition or its results of operations should Patrician be unable to comply with its full coinsurance obligation.
2. Coinsured by affiliate ---------------------- As of December 31, 1995 and 1994, the Partnership held investments in five and two FHA-Insured Certificates secured by coinsured mortgages, respectively, where the coinsurance lender is IFI, an affiliate of the Partnership. Two of these mortgage investments were originated by the former managing general partner. As structured by the former managing general partner, with respect to these mortgages, the Partnership bears the risk of loss upon default for IFI's portion of the coinsurance loss.
The Originated Insured Mortgages on Carmen Drive Estates (The Forest), Woodbine at Lakewood Apartments and Woodland Hills Apartments were previously coinsured by M-West Mortgage Corporation (M-West), a third party coinsurance lender. During the fourth quarter of 1994, the Partnership was informed that M-West was liquidating its assets and intended to assign the mortgage servicing rights related to these mortgages to another coinsurance lender, Whitehall Funding, Inc. (Whitehall). The Partnership successfully contested this transfer and obtained a court order mandating the transfer of the mortgage servicing rights related to these three coinsured loans to IFI. This transfer was completed during the second quarter of 1995. The Partnership bears the risk of loss upon default for IFI's portion of the coinsurance loss. As of December 31, 1995, receivables and other assets, as shown on the accompanying balance sheet, includes approximately $70,000 due from M-West with respect to these loans. As of March 1, 1996, claims for damages against M-West and Whitehall are still pending.
As of March 1, 1996, these five IFI coinsured mortgages, as shown in the table below, were current with respect to the payment of principal and interest, except for the mortgage on Spring Lake Village, for which the Mortgagor has made payments of principal and interest through July 1995. In February 1996, this mortgage was modified a second time to reduce the interest rate to 6% through December 1996, increasing to 6.75% for 1997 and 7.0% for all subsequent years. The General Partner does not anticipate that this modification will have a material adverse impact on the Partnership's financial statements.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The General Partner believes there is adequate collateral value underlying these coinsured mortgages. Accordingly, no loan losses were recognized on these mortgages during the years ended December 31, 1995 and 1994, except as described below in connection with a mortgage modification during the year ended December 31, 1994. As of December 31, 1995 and 1994, these five investments had an aggregate fair value of $39,670,264 and $36,466,663, respectively.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In connection with the FHA-Insured Certificates secured by coinsured mortgages, the Partnership has sought, in addition to base interest payments, additional interest (commonly termed Participations) based on a percentage of the net cash flow from the development and the net proceeds from the refinancing, sale or other disposition of the underlying development. All of the FHA-Insured Certificates secured by coinsured mortgages contain such Participations. During the years ended December 31, 1995, 1994 and 1993, the Partnership received additional interest of $76,431, $7,628 and $50,979, respectively, from the coinsured Participations. These amounts are included in mortgage investment income on the accompanying statements of operations.
b. Asset Held for Sale Under Coinsurance Program
As of December 31, 1993, the former managing general partner, on behalf of the Partnership, had invested in one coinsured mortgage, One East Delaware, which was accounted for as an asset held for sale under coinsurance program (AHFS). In January 1994, the Partnership received net proceeds of $33,233,501 from the prepayment of this mortgage and recognized a gain of $1,129,973, as shown on the accompanying statement of operations for the year ended December 31, 1994. The Partnership reinvested the net disposition proceeds in fully insured Acquired Insured Mortgages during 1994.
Liquidity and Capital Resources - ------------------------------- The Partnership's operating cash receipts, derived from payments of principal and interest on Insured Mortgages, plus cash receipts from interest on short-term investments, were sufficient during 1995 to meet operating requirements.
The basis for paying distributions to Unitholders is net proceeds from mortgage dispositions and cash flow from operations, which includes regular interest income and principal from Insured Mortgages. Although Insured
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Mortgages yield a fixed monthly mortgage payment once purchased, the cash distributions paid to the Unitholders will vary during each quarter due to (1) the fluctuating yields in the short-term money market where the monthly mortgage payments received are temporarily invested prior to the payment of quarterly distributions, (2) the reduction in the asset base and monthly mortgage payments due to monthly mortgage payments received or mortgage dispositions, (3) variations in the cash flow attributable to the delinquency or default of Insured Mortgages and professional fees and foreclosure costs incurred in connection with those Insured Mortgages and (4) variations in the Partnership's operating expenses.
If necessary, the Partnership has the right to establish reserves either from the Net Proceeds of the Offering or from Cash Flow (as defined in the Partnership Agreement). However, the Partnership generally intends to distribute substantially all of its Cash Flow from operations. If any reserves are deemed to be necessary by the Partnership, they will be invested in short-term, interest-bearing investments.
The Partnership anticipates that reserves generally would only be necessary in the event the Partnership elected to foreclose on an Originated Insured Mortgage insured by FHA and take over the operations of the underlying development. In such case, there may be a need for additional capital. Since foreclosure proceedings can be expensive and time-consuming, the Partnership expects that it will generally assign the fully insured Originated Insured Mortgages to HUD for insurance proceeds rather than initiate foreclosure. In the case of an Originated Insured Mortgage insured under the HUD coinsurance program, the likelihood of foreclosure (and the potential need for reserves) exists since these coinsured mortgages generally cannot be assigned to HUD and the coinsurance lender would be required to acquire title to the property and hold the property for 12 months or until an earlier sale in order to realize the benefit of HUD insurance. The determination of whether to assign the mortgage to HUD or institute foreclosure procedures or whether to set aside any reserves will be made on a case-by-case basis by the General Partner, the Advisor and the sub-advisor to the Partnership. As of December 31, 1995 and 1994, the Partnership had not set aside any reserves.
Cash flow - 1995 versus 1994 - ---------------------------- Net cash provided by operating activities decreased for 1995 as compared to 1994. This decrease was primarily due to a reduction in receivables and other assets during 1994 as a result of the receipt in January 1994 of the remaining net disposition proceeds related to the disposition of the mortgage on Victoria Pointe Apartments - Phase II and receipt of accrued interest related to the mortgage on One East Delaware.
Net cash provided by investing activities increased for 1995 as compared to 1994, primarily due to the investment in 1994 of approximately $39.7 million in Insured Mortgages, which was partially offset by the receipt in 1994 of net disposition proceeds of approximately $33.2 million from the disposition of the Insured Mortgage on One East Delaware. No Insured Mortgages were acquired during 1995. Also contributing to the increase in net cash provided by investing activities, was the receipt in 1995 of net proceeds of approximately $6.2 million related to the prepayment of the mortgage on Lakewood Villas during 1995.
Net cash used in financing activities decreased for 1995 as compared to 1994. This decrease was primarily due to the 1994 distribution of accrued, but
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
previously undistributed, interest from the disposition of the mortgage on One East Delaware.
Cash flow - 1994 versus 1993 - ---------------------------- Net cash provided by operating activities increased for 1994 as compared to 1993. This increase was primarily due to the receipt in January 1994 of the remaining net disposition proceeds related to the December 1993 disposition of the insured mortgage on Victoria Pointe Apartments-Phase II and receipt of accrued interest related to the One East Delaware disposition. Also contributing to the increase in 1994 were non-recurring payments made in 1993 on certain loans accounted for as AHFS loans and an increase in interest and other income and a decrease in asset management fees, as previously discussed. These increases were partially offset by a decrease in mortgage investment income and an increase in general and administrative expenses, as discussed above.
Net cash used in investing activities increased for 1994 as compared to 1993 due to the 1994 investment of approximately $39.7 million in Acquired Insured Mortgages, which was partially offset by the receipt of net disposition proceeds of approximately $33.2 million from the disposition of the Insured Mortgage on One East Delaware.
Net cash used in financing activities increased for the year ended December 31, 1994 as compared to 1993 as a result of an increase in distributions paid to Unitholders. This increase was primarily due to the 1994 distribution of proceeds from the disposition of the Insured Mortgage on One East Delaware.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained on pages 29 through 56.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a),(b),(c),(e)
The Partnership has no officers or directors. The affairs of the Partnership are managed by the General Partner, which is wholly owned by CRIIMI MAE, a company whose shares are listed on the New York Stock Exchange. Prior to June 30, 1995, CRIIMI MAE was managed by an adviser whose general partner was CRI. However, effective June 30, 1995, CRIIMI MAE became a self-managed and self-administered REIT and, as a result, the adviser no longer advises CRIIMI MAE.
Effective September 6, 1991, the General Partner succeeded the former general partners to become the sole general partner of the Partnership. CRIIMI, Inc. purchased the interests of the former managing general partner and the former corporate general partner pursuant to the terms of the Partnership Agreement. In addition, the General Partner acquired the shares of the company which acts as the assignor limited partner in the Partnership. The interest of the former associate general partner (0.1%) was purchased by the Partnership on September 6, 1991, pursuant to the terms of the Partnership Agreement.
Also, on September 6, 1991, the Advisor succeeded IFI as the advisor of the Partnership. AIM Acquisition is the general partner of the Advisor and the limited partners include, but are not limited to, AIM Acquisition, The Goldman Sachs Group, L.P, Broad, Inc. and CRIIMI MAE. Pursuant to the terms of certain amendments to the Partnership Agreement, as discussed below, the General Partner is required to receive the consent of the Advisor prior to taking certain significant actions which affect the management and policies of the Partnership.
Effective September 6, 1991, and through June 30, 1995, a sub-advisory agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc., an affiliate of CRI, managed the Partnership's portfolio. In connection with the transaction in which CRIIMI MAE became a self-managed and self-administered REIT, an affiliate of CRIIMI MAE acquired the Sub-advisory Agreement. As a consequence of this transaction, effective June 30, 1995, CRIIMI MAE Services Limited Partnership, an affiliate of CRIIMI MAE, manages the Partnership's portfolio.
The General Partner is also the general partner of AIM 84, AIM 85 and AIM 88, limited partnerships with investment objectives similar to those of the Partnership.
(d) There is no family relationship between any of the officers and directors of the General Partner.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
(h) Based solely on its review of Forms 3 and 4 and amendments thereto furnished to the Partnership, and written representations from certain reporting persons that no Form 5s were required for those persons, the Partnership believes that all reporting persons have filed on a timely basis Forms 3, 4 and 5 as required in the fiscal year ended December 31, 1995.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to Note 7 of the notes to the financial statements of the Partnership.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1995, no person was known by the Partnership to be the beneficial owner of more than five percent (5%) of the outstanding Units of the Partnership.
As of December 31, 1995, neither the officers and directors, as a group, of the General Partner nor any individual director of the General Partner, are known to own more than 1% of the outstanding Units of the Partnership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others.
Note 7 of the notes to the Partnership's financial statements which contains a discussion of the amounts, fees and other compensation paid or accrued by the Partnership to the directors and executive officers of the General Partner and their affiliates, is incorporated herein by reference.
(b) Certain business relationships.
Other than as set forth in Item 11 of this report which is incorporated herein by reference, the Partnership has no business relationship with entities of which the former general partners or the current General Partner of the Partnership are officers, directors or equity owners.
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
Page Description Number - ----------- --------------
Balance Sheets as of December 31, 1995 and 1994 27 Statements of Operations for the years ended December 31, 1995, 1994 and 1993 28
Statements of Changes in Partners' Equity for the years ended December 31, 1995, 1994 and 1993 29
Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 30
Notes to Financial Statements 31
(a)(2) Financial Statement Schedules:
IV - Mortgage Loans on Real Estate
All other schedules have been omitted because they are inapplicable, not required, or the information is included in the Financial Statements or Notes thereto.
(a)(3) Exhibits:
3. Amended and Restated Certificate of Limited Partnership is incorporated by reference to Exhibit 4(a) to Amendment No. 1 to the Partnership's Registration Statement on Form S-11 (No. 33-1735) dated March 6, 1986 (such Registration Statement, as amended, is referred to herein as the "Amended Registration Statement").
4. Second Amended and Restated Agreement of Limited Partnership is incorporated by reference in Exhibit 3 to the Amended Registration Statement.
4.(a) Material Amendments to the Second Amended and Restated Agreement of Limited Partnership are incorporated by reference to Exhibit 4(a) to the Annual Report on Form 10-K for the year ended December 31, 1987.
4.(b) Amendment to the Second Amended and Restated Agreement of Limited Partnership of the Partnership dated February 12, 1990, incorporated by reference to Exhibit 4(b) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1989.
10.(a) Escrow Agreement is incorporated by reference to Exhibit 10(a) to the Amended Registration Statement.
10.(b) Origination and Acquisition Services Agreement is incorporated by reference to Exhibit 10(b) to the Amended Registration Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - Continued
10.(c) Management Services Agreement is incorporated by reference to Exhibit 10(c) to the Amended Registration Statement.
10.(d) Disposition Services Agreement is incorporated by reference to Exhibit 10(d) to the Amended Registration Statement.
10.(e) Agreement among the former managing general partner, the former associate general partner and Integrated Resources, Inc. is incorporated by reference to Exhibit 10(e) to the Amended Registration Statement.
10.(f) Reinvestment Plan is incorporated by reference to the Prospectus contained in the Amended Registration Statement.
10.(g) Mortgagor-Participant Agreement regarding the One East Delaware Originated Insured Mortgage is incorporated by reference to Exhibit 10(g) to the Annual Report on Form 10-K for the year ended December 31, 1987.
10.(h) Mortgage, Assignment of Rents and Security Agreements regarding One East Delaware Originated Insured Mortgage is incorporated by reference to Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1987.
10.(i) Pages A-1 - A-5 of the Partnership Agreement of Registrant, incorporated by reference to Exhibit 28 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990.
10.(j) Purchase Agreement among AIM Acquisition, the former managing general partner, the former corporate general partner, IFI and Integrated dated as of December 13, 1990, as amended January 9, 1991, incorporated by reference to Exhibit 28(a) to the Partnership's Annual Report on Form 10- K for the year ended December 31, 1990.
10.(k) Purchase Agreement among CRIIMI, Inc., AIM Acquisition, the former managing general partner, the former corporate general partner, IFI and Integrated dated as of December 13, 1990 and executed as of March 1, 1991, incorporated by reference to Exhibit 28(b) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1990.
10.(l) Amendment to Partnership Agreement dated September 4, 1991, incorporated by reference to Exhibit 28(c), to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1991.
10.(m) Non-negotiable promissory note to American Insured Investors - Series 85, L.P. in the amount of $1,737,722 dated December 31, 1991, incorporated by reference to Exhibit 28(d) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1991.
10.(n) Sub-Management Agreement by and between AIM Acquisition and CRI/AIM Management, Inc., dated as of March 1, 1991, incorporated by reference to Exhibit 28(e) to the
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - Continued
Partnership's Annual Report on Form 10-K for the year ended December 31, 1992.
10.(o) Expense Reimbursement Agreement by Integrated Funding Inc. and the AIM Funds, effective December 31, 1992, incorporated by reference to Exhibit 28(f) to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
10.(p) Non-negotiable promissory note to American Insured Mortgage Investors L.P. - Series 88 in the amount of $478,612.00 dated April 1, 1994, incorporated by reference to Exhibit 10(p) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994.
10.(q) Amendment to Reimbursement Agreement by Integrated Funding, Inc. and the AIM Funds, effective April 1, 1994, incorporated by reference to Exhibit 10(q) to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994.
27. Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K filed during the last quarter of the fiscal year: None.
All other items are not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 (Registrant)
By: CRIIMI, Inc. General Partner
March 27, 1996 /s/ William B. Dockser - --------------------------- ------------------------- DATE William B. Dockser Chairman of the Board and Principal Executive Officer
March 27, 1996 /s/ H. William Willoughby - --------------------------- ------------------------- DATE H. William Willoughby President and Director
March 27, 1996 /s/ Cynthia O. Azzara - --------------------------- ------------------------- DATE Cynthia O. Azzara Principal Financial and Accounting Officer
March 27, 1996 /s/ Garrett G. Carlson, Sr. - --------------------------- -------------------------- DATE Garrett G. Carlson, Sr. Director
March 27, 1996 /s/ Larry H. Dale - --------------------------- ------------------------- DATE Larry H. Dale Director
March 27, 1996 /s/ G. Richard Dunnells - --------------------------- ------------------------- DATE G. Richard Dunnells Director
March 27, 1996 /s/ Robert F. Tardio - --------------------------- ------------------------- DATE Robert F. Tardio Director
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
Financial Statements as of December 31, 1995 and 1994
and for the Years Ended December 31, 1995, 1994 and 1993
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of American Insured Mortgage Investors L.P. - Series 86:
We have audited the accompanying balance sheets of American Insured Mortgage Investors L.P. - Series 86 (the Partnership) as of December 31, 1995 and 1994, and the related statements of operations, changes in partners' equity and cash flows for the years ended December 31, 1995, 1994 and 1993. 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 the Partnership as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles.
As explained in Note 2 of the notes to financial statements, effective January 1, 1994, the Partnership changed its method of accounting for its investment in insured mortgages.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule IV-Mortgage Loans on Real Estate as of December 31, 1995 is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and is not a required part of the basic financial statements. The information in this schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C. March 22, 1996
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
BALANCE SHEETS
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
STATEMENTS OF OPERATIONS
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86 STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the years ended December 31, 1995, 1994 and 1993
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
STATEMENTS OF CASH FLOWS
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
American Insured Mortgage Investors L.P. - Series 86 (the Partnership) was formed under the Uniform Limited Partnership Act of the state of Delaware on October 31, 1985.
From inception through September 6, 1991, AIM Capital Management Corp. served as the managing general partner (with a partnership interest of 4.8%), IRI Properties Capital Corp. served as corporate general partner (with a partnership interest of 0.1%) and Second Group Partners, an affiliate of the former general partners, served as the associate general partner (with a partnership interest of 0.1%). All of the foregoing general partners are sometimes collectively referred to as former general partners.
At a special meeting of the limited partners and Unitholders of the Partnership held on September 4, 1991, a majority of these interests approved, among other items, assignment of the general partner interests and the shares of the company which acts as the assignor limited partner in the Partnership.
Effective September 6, 1991, CRIIMI, Inc. (the General Partner) succeeded the former general partners to become the sole general partner of the Partnership. CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. (CRIIMI MAE). From inception through June 30, 1995, CRIIMI MAE was managed by an adviser whose general partner is C.R.I., Inc. (CRI). However, effective June 30, 1995, CRIIMI MAE became a self-managed and self-administered real estate investment trust (REIT) and, as a result, the adviser no longer advises CRIIMI MAE. In addition, the General Partner acquired the shares of the company which acted as the assignor limited partner in the Partnership. The interest of the former associate general partner (0.1%) was purchased by the Partnership on September 6, 1991, pursuant to the terms of the Partnership Agreement.
Also on September 6, 1991, AIM Acquisition Partners, L.P., (the Advisor) succeeded Integrated Funding, Inc. (IFI) as the advisor to the Partnership. AIM Acquisition Corporation (AIM Acquisition) is the general partner of the Advisor, and the limited partners include, but are not limited to, AIM Acquisition, The Goldman Sachs Group, L.P., Broad, Inc., and CRIIMI MAE.
Pursuant to the terms of certain amendments to the Partnership Agreement as discussed below, the General Partner is required to receive the consent of the Advisor prior to taking certain significant actions which affect the management and policies of the Partnership.
Effective September 6, 1991 and through June 30, 1995, a sub-advisory agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc., an affiliate of CRI, managed the Partnership's portfolio.
Until the change in the Partnership's investment policy, as discussed below, and through December 31, 1994, (the expiration of the Partnership's reinvestment period) the Partnership was in the business of originating mortgage loans (Originated Insured Mortgages) and acquiring mortgage loans (Acquired Insured Mortgages, and together with Originated Insured Mortgages, referred to herein as Insured Mortgages). After the expiration of the reinvestment period, the Partnership is required (subject to the conditions set forth in the Partnership Agreement) to distribute such proceeds to its Unitholders. The Partnership Agreement states that the Partnership will terminate on December 31, 2020, unless previously terminated under the provisions of the Partnership Agreement. As of December 31, 1995, the Partnership had invested in either Originated Insured Mortgages which are insured or guaranteed, in whole or in part, by the Federal Housing Administration (FHA) or Acquired Insured Mortgages which are fully insured (as more fully described below).
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION - Continued
Effective September 19, 1991, the General Partner changed, at the Advisor's recommendation, the investment policies of the Partnership to invest only in Acquired Insured Mortgages which are fully insured or guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association (GNMA), FHA or the Federal Home Loan Mortgage Corporation.
Effective January 1, 1994, the United States Congress repealed portions of the Federal tax code which have had an adverse impact on tax-exempt investors in "publicly-traded partnerships." This tax code change cleared away the major impediment standing in the way of listing the Partnership's Depositary Units of Limited Partnership Interest (Units) for trading on a national stock exchange. In an effort to allow pension funds and other tax-exempt organizations to invest in publicly-traded partnerships, the Revenue Reconciliation Act of 1993 repealed the rule that automatically treated income from publicly-traded partnerships as gross income that is derived from an unrelated trade or business. As a result, investments in publicly-traded partnerships such as the Partnership are now treated the same as investments in other partnerships for purposes of the unrelated business taxable income rules. The General Partner listed the Partnership's Units for trading on the American Stock Exchange on January 18, 1994, in order to provide investment liquidity as contemplated in the Partnership's original prospectus. The Units are traded under the symbol "AIJ."
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting -------------------- The Partnership's financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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.
Investment in Insured Mortgages ------------------------------- The Partnership's investment in Insured Mortgages is comprised of participation certificates evidencing a 100% undivided beneficial interest in government insured multifamily mortgages issued or sold pursuant to FHA programs (FHA-Insured Certificates), mortgage-backed securities guaranteed by GNMA (GNMA Mortgage-Backed Securities) and FHA-insured mortgage loans (FHA-Insured Loans). The mortgages underlying the FHA-Insured Certificates, GNMA Mortgage-Backed Securities, and FHA-Insured Loans are non-recourse first liens on multifamily residential developments or retirement homes.
Payments of principal and interest on FHA-Insured Certificates and FHA-Insured Loans are insured by the United States Department of Housing and Urban Development (HUD) pursuant to Title 2 of the National Housing Act. Payments of principal and interest on GNMA Mortgage-Backed Securities are guaranteed by GNMA pursuant to Title 3 of the National Housing Act.
Prior to January 1, 1994, the Partnership accounted for its investment in Insured Mortgages at amortized cost in accordance with Statement of Financial Accounting Standards No. 65 "Accounting for Certain Mortgage Banking Activities" (SFAS 65) since it had the ability and intent to hold these assets for the foreseeable future. The difference between the cost and the unpaid principal balance, at the time of purchase, is carried as a discount or premium and amortized over the remaining contractual life of the mortgage using the effective interest method. The effective interest method provides a constant yield of income over the term of the mortgage. Mortgage investment income is comprised of amortization of the discount plus the stated mortgage interest payments received or accrued, less amortization of the premium.
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), effective for fiscal years beginning after December 15, 1993. The Partnership adopted this statement as of January 1, 1994. This statement requires that investments in debt and equity securities be classified into one of the following investment categories based upon the circumstances under which such securities might be sold: Held to Maturity, Available for Sale, and Trading. Generally, certain debt securities for which an enterprise has both the ability and intent to hold to maturity, should be accounted for using the amortized cost method and all other securities must be recorded at their fair values.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES - Continued
As of December 31, 1995, the weighted average remaining term of the Partnership's investments in GNMA Mortgage-Backed Securities and FHA- Insured Certificates is approximately 28 years. However, the Partnership Agreement states that the Partnership will terminate in approximately 25 years, on December 31, 2020, unless previously terminated under the provisions of the Partnership Agreement. As the Partnership is anticipated to terminate prior to the weighted average remaining term of its investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates, the Partnership does not have the ability, at this time, to hold these investments to maturity. Consequently, the General Partner believes that the Partnership's investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates should be included in the Available for Sale category. Although the Partnership's investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates are classified as Available for Sale for financial statement purposes, the General Partner does not intend to voluntarily sell these assets other than those which may be sold as a result of a default or those which are eligible to be put to FHA at the expiration of 20 years from the date of the final endorsement.
In connection with this classification, as of December 31, 1995, the Partnership's investments in GNMA Mortgage-Backed Securities and FHA- Insured Certificates are recorded at fair value, with the unrealized losses on these assets reported as a separate component of partners' equity. Subsequent increases or decreases in the fair value of GNMA Mortgage-Backed Securities and FHA-Insured Certificates, classified as Available for Sale, will be included as a separate component of partners' equity. Realized gains and losses on GNMA Mortgage-Backed Securities and FHA-Insured Certificates, classified as Available for Sale, will continue to be reported in earnings. The amortized cost of the GNMA Mortgage-Backed Securities and FHA-Insured Certificates in this category is adjusted for amortization of discounts and premiums to maturity. Such amortization is included in mortgage investment income.
Gains from dispositions of mortgage investments are recognized upon the receipt of cash or HUD debentures.
Losses on dispositions of mortgage investments are recognized when it becomes probable that a mortgage will be disposed of and that the disposition will result in a loss. In the case of Insured Mortgages fully insured by HUD, the Partnership's maximum exposure for purposes of determining the loan losses would generally be an assignment fee charged by HUD representing approximately 1% of the unpaid principal balance of the Insured Mortgage at the date of default, plus the unamortized balance of acquisition fees and closing costs paid in connection with the acquisition of the Insured Mortgage and the loss of approximately 30-days accrued interest (see discussion below for losses on mortgages accounted for as AHFS, as defined below).
Cash and Cash Equivalents ------------------------- Cash and cash equivalents consist of time and demand deposits and commercial paper with original maturities of three months or less.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES - Continued
Reclassification ---------------- Certain amounts in the financial statements for the years ended December 31, 1994 and 1993 have been reclassified to conform with the 1995 presentation.
Income Taxes ------------ No provision has been made for Federal, state or local income taxes in the accompanying statements of operations since they are the personal responsibility of the Unitholders.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of the Partnership's financial instruments are presented in accordance with generally accepted accounting principles which define fair value as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. These estimated fair values, however, do not represent the liquidation value or the market value of the Partnership.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
3. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Investment in FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans -------------------------------------------------------- The fair value of the fully insured FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans is based on quoted market prices. In order to determine the fair value of the coinsured FHA-Insured Certificates, the Partnership valued the coinsured FHA-Insured Certificates as though they were fully insured (in the same manner fully insured FHA- Insured Certificates were valued). From this amount, the Partnership deducted a discount factor from the face value of the loan. This discount factor is based on the Partnership's historical analysis of the difference in fair value between coinsured FHA-Insured Certificates and fully insured FHA-Insured Certificates.
Cash and cash equivalents and accrued interest receivable --------------------------------------------------------- The carrying amount approximates fair value because of the short maturity of these instruments.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT IN INSURED MORTGAGES
The following is a discussion of the Partnership's insured mortgage investments, along with the risks related to each type of investment:
A. Fully Insured Originated Insured Mortgages and Acquired Insured Mortgages ---------------------------------------------- The Partnership's investment in fully insured Originated Insured Mortgages consisted of seven and eight FHA-Insured Loans, as of December 31, 1995 and 1994, respectively. As of December 31, 1995, these investments had an aggregate amortized cost of $62,595,492, an aggregate face value of $60,306,932, and an aggregate fair value of $62,183,025. As of December 31, 1994, these investments had an aggregate amortized cost of $69,162,106, an aggregate face value of $66,602,806, and an aggregate fair value of $63,422,100.
The Partnership's investment in fully insured Acquired Insured Mortgages consisted of 10 GNMA Mortgage-Backed Securities, 2 FHA-Insured Certificates and 1 FHA-Insured Loan, as of December 31, 1995 and 1994. As of December 31, 1995, these investments had an aggregate amortized cost of $42,122,606, an aggregate face value of $42,066,176, and an aggregate fair value of $42,479,072. As of December 31, 1994, these investments had an aggregate amortized cost of $42,473,748, an aggregate face value of $42,415,356 and an aggregate fair value of $37,875,856. As of March 1, 1996 all of the Partnership's fully insured mortgage investments are current with respect to the payment of principal and interest.
In December, 1995, the Partnership received net proceeds of $6,169,529 from the prepayment of the mortgage on Lakewood Villas, a fully insured FHA-Insured Loan, and recognized a gain of $5,208, as shown on the accompanying statement of operations for the year ended December 31, 1995. The net proceeds are expected to be distributed May 1, 1996.
In addition to base interest payments from fully insured Originated Insured Mortgages, the Partnership is entitled to additional interest based on a percentage of the net cash flow from the underlying development and of the net proceeds from the refinancing, sale or other disposition of the underlying development (referred to as Participations). During the years ended December 31, 1995, 1994 and 1993, the Partnership received additional interest of $73,357, $33,431 and $62,843, respectively, from the fully insured Participations. These amounts are included in mortgage investment income on the accompanying statements of operations.
Coinsured Mortgages ------------------- Under the HUD coinsurance program, both HUD and the coinsurance lender are responsible for paying a portion of the insurance benefits if a mortgagor defaults and the sale of the development collateralizing the mortgage produces insufficient net proceeds to repay the mortgage obligation. In such case, the coinsurance lender will be liable to the Partnership for the first part of such loss in an amount up to 5% of the outstanding principal balance of the mortgage as of the date foreclosure proceedings are instituted or the deed is acquired in lieu of foreclosure. For any loss greater than 5% of the outstanding principal balance, the responsibility for paying the insurance benefits will be borne on a pro-rata basis, 85% by HUD and 15% by the coinsurance lender.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT IN INSURED MORTGAGES - Continued
While the Partnership is due payment of all amounts owed under the mortgage, the coinsurance lender is responsible for the timely payment of principal and interest to the Partnership. The coinsurance lender is prohibited from entering into any workout arrangement with the borrower without the Partnership's consent and must file a claim for coinsurance benefits with HUD, upon default, if the Partnership so directs. As an ongoing HUD-approved coinsurance lender, and under the terms of the participation documents, the coinsurance lender is required to satisfy certain minimum net worth requirements as set forth by HUD. However, it is possible that the coinsurance lender's potential liability for loss on these developments, and others, could exceed its HUD-required minimum net worth. In such case, the Partnership would bear the risk of loss if the coinsurance lenders were unable to meet their coinsurance obligations. In addition, HUD's obligation for the payment of its share of the loss could be diminished under certain conditions, such as the lender not adequately pursuing regulatory violations of the borrower or the failure to comply with other terms of the mortgage. However, the General Partner is not aware of any conditions or actions that would result in HUD diminishing its insurance coverage.
As of December 31, 1995 and 1994, the former managing general partner, on behalf of the Partnership, had invested in seven FHA-Insured Certificates secured by coinsured mortgages. As of December 31, 1995, two of the seven FHA-Insured Certificates secured by coinsured mortgages are coinsured by an unaffiliated third party coinsurance lender, The Patrician Mortgage Company (Patrician), under the HUD coinsurance program. The two coinsured mortgages which are coinsured by Patrician were delinquent with respect to the payment of principal and interest. The following is a discussion of actual and potential performance problems with respect to the Partnership's coinsured mortgage investments.
1. Coinsured by third party ------------------------ The Originated Insured Mortgages on The Villas and St. Charles Place - Phase II are coinsured by Patrician. As of December 31, 1995 and 1994, the Partnership's investment in the mortgage on The Villas had an amortized cost of $15,635,379 and $15,732,782, respectively, a face value of $15,869,089 and $15,966,491, respectively, and a fair value of $15,173,465 and $14,012,209, respectively. As of March 1, 1996, the mortgagor has made payments of principal and interest due on the original mortgage through July 1995, and has made payments of principal and interest due under a modification agreement through August 1993. Patrician is litigating the case in bankruptcy court while negotiating a modification agreement with the borrower.
The Partnership's investment in the mortgage on St. Charles Place - Phase II had an amortized cost equal to its face value of $3,068,173 and $3,082,440, as of December 31, 1995 and 1994, respectively. As of December 31, 1995 and 1994, this mortgage had a fair value of $2,933,205 and $2,703,780, respectively. These amounts represent the Partnership's approximate 45% ownership interest in the mortgage. The remaining 55% ownership interest is held by American Insured Mortgage Investors L.P. - Series 88 (AIM 88), an affiliate of the Partnership. As of March 1, 1996, the mortgagor has made payments of principal and interest due on the mortgage through May 1995 to the Partnership. Patrician is litigating the case in bankruptcy court while negotiating a modification agreement with the borrower.
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NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT IN INSURED MORTGAGES - Continued
The General Partner intends to continue to oversee the Partnership's interest in these mortgages to ensure that Patrician meets its coinsurance obligations. The General Partner's assessment of the realizability of The Villas and St. Charles Place-Phase II mortgages is based on the most recent information available, and to the extent these conditions change or additional information becomes available, then the General Partners' assessment may change. However, the General Partner does not believe that there would be a material adverse impact on the Partnership's financial condition or its results of operations should Patrician be unable to comply with its full coinsurance obligation.
2. Coinsured by affiliate ---------------------- As of December 31, 1995 and 1994, the Partnership held investments in five and two FHA-Insured Certificates secured by coinsured mortgages, respectively, where the coinsurance lender is Integrated Funding, Inc. (IFI), an affiliate of the Partnership. Two of these mortgage investments were originated by the former managing general partner. As structured by the former managing general partner, with respect to these mortgages, the Partnership bears the risk of loss upon default for IFI's portion of the coinsurance loss.
The Originated Insured Mortgages on Carmen Drive Estates (The Forest), Woodbine at Lakewood Apartments and Woodland Hills Apartments were previously coinsured by M-West Mortgage Corporation (M-West), a third party coinsurance lender. During the fourth quarter of 1994, the Partnership was informed that M-West was liquidating its assets and intended to assign the mortgage servicing rights related to these mortgages to another coinsurance lender, Whitehall Funding, Inc. (Whitehall). The Partnership successfully contested this transfer and obtained a court order mandating the transfer of the mortgage servicing rights related to these three coinsured loans to IFI. This transfer was completed during the second quarter of 1995. The Partnership bears the risk of loss upon default for IFI's portion of the coinsurance loss. As of December 31, 1995, receivables and other assets, as shown on the accompanying balance sheet, includes approximately $70,000 due from M-West with respect to these loans. As of March 1, 1996, claims for damages against M-West and Whitehall are still pending.
As of March 1, 1996, these five IFI coinsured mortgages, as shown in the table below, were current with respect to the payment of principal and interest, except for the mortgage on Spring Lake Village, for which the Mortgagor has made payments of principal and interest through July 1995. In February 1996, this mortgage was modified a
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT IN INSURED MORTGAGES - Continued
second time to reduce the interest rate to 6% through December 1996, increasing to 6.75% for 1997 and 7.0% for all subsequent years. The General Partner does not anticipate that this modification will have a material adverse impact on the Partnership's financial statements.
The General Partner believes there is adequate collateral value underlying these coinsured mortgages. Accordingly, no loan losses were recognized on these mortgages during the years ended December 31, 1995 and 1994, except as described below in connection with a mortgage modification during the year ended December 31, 1994. As of December 31, 1995 and December 31, 1994, these five investments had an aggregate fair value of $39,670,264 and $36,466,663, respectively.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT IN INSURED MORTGAGES - Continued
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT IN INSURED MORTGAGES - Continued
In connection with the FHA-Insured Certificates secured by coinsured mortgages, the Partnership has sought, in addition to base interest payments, additional interest (commonly termed Participations) based on a percentage of the net cash flow from the development and the net proceeds from the refinancing, sale or other disposition of the underlying development. All of the FHA-Insured Certificates secured by coinsured mortgages contain such Participations. During the years ended December 31, 1995, 1994 and 1993, the Partnership received additional interest of $76,431, $7,628 and $50,979, respectively, from the coinsured Participations. These amounts, if any, are included in mortgage investment income on the accompanying statements of operations.
b. Asset Held for Sale Under Coinsurance Program
As of December 31, 1993, the former managing general partner, on behalf of the Partnership, had invested in one coinsured mortgage, One East Delaware, which was accounted for as an asset held for sale under coinsurance program (AHFS). In January 1994, the Partnership received net proceeds of $33,233,501 from the prepayment of this mortgage and recognized a gain of $1,129,973, as shown on the accompanying statement of operations for the year ended December 31, 1994. The Partnership reinvested the net disposition proceeds in fully insured Acquired Insured Mortgages during 1994.
5. DISTRIBUTIONS TO UNITHOLDERS
The distributions paid or accrued to Unitholders on a per Unit basis for the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993 ------ ------ ------
Quarter ended March 31, $ 0.26(1) $ 0.41(3)(4) $ 0.23 Quarter ended June 30, 0.34(1)(2) 0.29(4) 0.21 Quarter ended September 30, 0.31(1) 0.30(4) 0.29(5) Quarter ended December 31, 0.33(1) 0.34(4) 0.28(6) ------ ------ ------ $ 1.24 $ 1.34 $ 1.01 ====== ====== ======
(1) This amount includes $0.03 per Unit representing previously undistributed accrued interest receivable from St. Charles Place - Phase II and The Villas.
(2) This amount includes $0.08 per Unit representing previously undistributed accrued interest receivable from Carmen Drive Estates (The Forest), Woodland Hills Apartments, and Woodbine at Lakewood Apartments.
(3) This amount includes approximately $0.18 per Unit representing previously undistributed accrued interest received from the disposition of the mortgage on One East Delaware.
(4) This amount includes approximately $0.01, $0.04, $0.03 and $0.03 per Unit representing previously undistributed accrued interest received from St. Charles Place-Phase II and The Villas for the quarters ending March 31,
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
5. DISTRIBUTIONS TO UNITHOLDERS - Continued
1994, June 30, 1994, September 30, 1994 and December 31, 1994, respectively.
(5) In September 1993, the Partnership received $591,872 (approximately $0.06 per Unit) from the mortgage on Victoria Pointe Apartments-Phase II, representing mortgage interest from October 1991 through June 1992, and a partial payment for July 1992. The Partnership distributed approximately $0.03 per Unit of this previously undistributed interest and reserved approximately $0.03 per Unit for the continued funding of coinsurance expenses. The Partnership distributed the remaining interest of approximately $0.03 per Unit to Unitholders as part of the fourth quarter distribution, as discussed below.
(6) This includes a special distribution of approximately $0.10 per Unit comprised of (i) $0.03 per Unit of previously undistributed accrued interest from the mortgage on Victoria Pointe Apartments-Phase II which was reserved as part of the third quarter distribution, as described above, and (ii) $0.07 per Unit representing previously undistributed accrued interest received in December 1993 resulting from the disposition of the mortgage on Victoria Pointe Apartments-Phase II.
The basis for paying distributions to Unitholders is net proceeds from mortgage dispositions and cash flow from operations, which includes regular interest income and principal from Insured Mortgages. Although Insured Mortgages yield a fixed monthly mortgage payment once purchased, the cash distributions paid to the Unitholders will vary during each quarter due to (1) the fluctuating yields in the short-term money market where the monthly mortgage payments received are temporarily invested prior to the payment of quarterly distributions, (2) the reduction in the asset base and monthly mortgage payments due to monthly mortgage payments received or mortgage dispositions, (3) variations in the cash flow attributable to the delinquency or default of Insured Mortgages and professional fees and foreclosure costs incurred in connection with those Insured Mortgages and (4) variations in the Partnership's operating expenses.
6. INVESTMENT IN AFFILIATE AND NOTE PAYABLE TO AFFILIATE
Effective December 31, 1991, American Insured Mortgage Investors-Series 85, L.P. (AIM 85), an affiliated entity, transferred a GNMA Mortgage-Backed Security (the GNMA security) in the amount of approximately $4.7 million to IFI in order to capitalize IFI with sufficient net worth under HUD regulations. The Partnership and its affiliate, AIM 88, each issued a demand note payable to AIM 85 and recorded an investment in IFI through an affiliate (AIM Mortgage, Inc.) at an amount proportionate to each entity's coinsured mortgages for which IFI was the mortgagee of record as of December 31, 1991. AIM Mortgage, Inc. is jointly owned by AIM 85, AIM 88 and the Partnership. The Partnership accounts for its investment in IFI under the equity method of accounting. Interest expense on the note payable was based on an interest rate of 8% per annum.
In 1992, IFI entered into an expense reimbursement agreement with the Partnership, AIM 85 and AIM 88 (collectively, the AIM Funds) whereby IFI reimburses the AIM Funds for general and administrative expenses incurred on behalf of IFI. The expense reimbursement is allocated to the AIM Funds based on an amount proportionate to each entity's coinsured mortgage investments. The expense reimbursement, along with the Partnership's equity interest in IFI's net income or loss, substantially equals the Partnership's interest expense on the note payable.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
6. INVESTMENT IN AFFILIATE AND NOTE PAYABLE TO AFFILIATE - Continued
In April 1994, IFI received net proceeds of approximately $4.7 million from the prepayment of the GNMA security, which IFI distributed to the AIM Funds. On June 30, 1994, the Partnership repaid its note payable to AIM 85.
As a result of this distribution, in April 1994, AIM 88 transferred a GNMA Mortgage-Backed Security in the amount of approximately $2.0 million to IFI in order to recapitalize IFI with sufficient net worth under HUD regulations. The Partnership and AIM 85 each issued a demand note payable to AIM 88 and recorded an investment in IFI through AIM Mortgage, Inc., in proportion to each entity's coinsured mortgages for which IFI was the mortgagee of record as of April 1, 1994. Interest expense on the note payable to AIM 88 is based on an annual interest rate of 7.25%
In connection with these transactions, the expense reimbursement agreement was amended as of April 1, 1994 to adjust the allocation of the expense reimbursement to the AIM Funds to an amount proportionate to each entity's coinsured mortgage investments as of April 1, 1994. The expense reimbursement, as amended, along with the Partnership's equity interest in IFI's net income or loss, substantially equals the Partnership's interest expense on the note payable.
7. TRANSACTIONS WITH RELATED PARTIES
In addition to the related party transactions described above in Note 6, the General Partner, and certain affiliated entities, during the years ended December 31, 1995, 1994 and 1993, earned or received compensation or payments for services from the Partnership as follows:
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO FINANCIAL STATEMENTS
7. TRANSACTIONS WITH RELATED PARTIES - Continued
8. PARTNERS' EQUITY
Depositary Units representing economic rights in limited partnership interests (Units) were issued at a stated value of $20. A total of 9,576,165 Units were issued for an aggregate capital contribution of $191,523,300. In addition, the initial limited partner contributed $2,500 to the capital of the Partnership and received 125 Units in exchange therefor and the former general partners contributed a total of $1,000 to the Partnership.
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NOTES TO FINANCIAL STATEMENTS
9. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1995, 1994 and 1993:
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
(1) Under the Section 221 program of the National Housing Act of 1937, as amended, a mortgagee has the right to assign a mortgage (put) to FHA at the expiration of 20 years from the date of final endorsement if the Insured Mortgage is not in default at such time. Any insured mortgagee electing to assign an FHA-insured mortgage to FHA will receive in exchange HUD debentures having a total face value equal to the then outstanding principal balance of the FHA-insured mortgage plus accrued interest to the date of assignment. These HUD debentures will mature 10 years from the date of assignment and will bear interest at the "going Federal rate" at such date. This assignment procedure is applicable to a mortgage which had a firm or conditional FHA commitment for insurance on or before November 30, 1983 and, in the case of insured mortgages sold in a GNMA auction, was sold in an auction prior to February 1984. Certain of the Partnership's mortgages may have the right of assignment under this program. Certain mortgages that do not qualify under this program possess a special assignment option, in certain mortgage documents, which allows the Partnership, anytime after this date, to require payment of the unpaid principal balance of the mortgages. At such time, the borrowers must make payment to the Partnership or the Partnership may cancel the FHA insurance and institute foreclosure proceedings.
(2) Inclusive of closing costs and acquisition fees.
(3) Prepayment of these insured mortgages would be based upon the unpaid principal balance at the time of prepayment.
(4) This represents the base interest rate during the permanent phase of this insured mortgage loan. Additional interest (referred to as Participations) measured as a percentage of the net cash flow from the development and of the net proceeds from sale, refinancing or other disposition of the underlying development (as defined in the participation agreements), will also be due. During the years ended December 31, 1995, 1994 and 1993, the Partnership received additional interest of $149,788, $41,059 and $113,822, respectively, from the Participations.
(5) In addition, the servicer or the sub-servicer of the Insured Mortgage, primarily unaffiliated third parties, is entitled to receive compensation for certain services rendered.
(6) These Insured Mortgages are insured under the HUD coinsurance program, as previously discussed. The HUD-approved coinsurance lender for these mortgages is The Patrician Mortgage Company.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
(7) These mortgages are insured under the HUD coinsurance program, as previously discussed. Integrated Funding, Inc. is the HUD-approved coinsurance lender, and the Partnership bears the risk of any principal loss, as previously discussed.
(8) This amount represents the Partnership's 45% interest in this Insured Mortgage. The remaining 55% interest was acquired by AIM 88.
(9) A reconciliation of the carrying value of the Insured Mortgages and Assets Held for Sale Under Coinsurance Program, for the years ended December 31, 1995 and 1994, is as follows:
1995 1994 ------------ ------------ Beginning balance $160,265,067 $167,145,316
Investment in Acquired Insured Mortgages -- 39,730,658
Principal receipts on Insured Mortgages (1,121,467) (1,019,821)
Loan losses -- (115,301)
Gain on mortgage disposition 5,208 1,129,973
Disposition of mortgage and AHFS (6,169,529) (33,233,501)
Uunrealized losses on investment in Insured Mortgages 9,431,165 (13,372,257)
Unrealized gains on investment in Insured Mortgages 406,534 -- ------------ ------------ Ending balance $162,816,978 $160,265,067 ============ ============
(10) The mortgages underlying the Partnership's investment in FHA-Insured Certificates, GNMA Mortgage-Backed Securities, and FHA-Insured Loans are non-recourse first liens on multifamily residential developments or retirement homes.
AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 86
NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
(11) Principal and interest are payable at level amounts over the life of the Insured Mortgages.
(12) Represents principal amount subject to delinquent principal or interest. See Note 4 to the financial statements.
(13) Annual payment reflects required principal and interest payments for 1995 as per the modification agreement.
(14) As of December 31, 1995 and 1994, the tax basis of the Insured Mortgages was approximately $167.2 million and $174.3 million, respectively.