Item 1. Business - ----------------
Balcor Pension Investors-III (the "Registrant") is a limited partnership formed in 1982 under the laws of the State of Illinois. The Registrant raised $118,738,000 from sales of Limited Partnership Interests. The Registrant's operations consisted of investment in wrap-around mortgage loans and, to a lesser extent, other junior mortgage loans and first mortgage loans. The Registrant also currently operates two properties acquired through foreclosure, and holds minority joint venture interests in two additional properties. All financial information included in this report relates to this industry segment.
The Registrant originally funded thirty-two loans collateralized by twenty-eight properties. A portion of Mortgage Reductions generated by repayments was reinvested in five additional loans. The remainder was added to working capital reserves. As a result of repayments, foreclosures and wrap-around notes received as a portion of the sale price for three property dispositions, the Registrant has five loans in its portfolio as of December 31, 1995. Eleven properties were acquired through foreclosures and two loans were reclassified to investment in joint ventures with affiliates. The Registrant sold nine of these properties and has two properties and two investments in joint ventures with affiliates in its portfolio as of December 31, 1995. See Item 2.
Item 2. Properties for additional information.
Operationally, existing apartment properties continued to register occupancy percentages in the 90s, with average rents rising at an annual rate of between 3 and 4 percent. Apartments are still considered one of the top real estate asset classes in terms of performance. However, some markets are experiencing new construction of rental units which, if unrestrained, could impact the performance of existing properties. Most of the new construction is aimed at the two segments of the rental market which are growing the fastest: low-income households and upper-income households who prefer to rent rather than own. Of all the major asset classes, apartments typically display the least volatility in terms of property values.
Shopping centers are the most troubled asset class in real estate currently. Unlike other asset classes, construction of power shopping centers, those with a preponderance of "big box" retailers, occurred at a brisk pace during the early 1990s, and now a shake-out of retailers is taking place. Retailers posted lackluster sales in 1995, particularly in the latter half of the year, and similar results are expected for 1996. The slight rise in interest rates in 1995 also contributed to low sales growth in interest rate sensitive sectors such as automobiles and home furnishings. Nevertheless, retail properties are particularly unique, and those with strong tenant alignments should better weather the current slowdown. In the long-term, however, retail real estate is also vulnerable to technological changes (e.g. home shopping) which could drastically alter the retail distribution system.
With virtually no new construction over the past few years, the national office market has experienced consistently rising occupancy rates and, recently, rising rental rates. Investor interest has also returned, typically preferring suburban buildings over their downtown counterparts. Except for properties built for a specific tenant, the economic feasibility of new construction in most markets is still several years away. Build-to-suit construction for large companies currently in leased space could restrict office appreciation rates
over the next few years. In addition, increased vacancies could result from companies who restructure their workforce in order to reduce their occupancy costs.
The General Partner believes that the market for multifamily housing properties has become increasingly favorable to sellers of these properties. As a result the General Partner is exploring an acceleration of its strategy to sell the Registrant's residential property. Additionally, the General Partner will explore the sale of its commercial properties over the next year if market conditions are favorable.
Activity for the purchase of limited partnership interests ("tender offers") has increased in real estate limited partnerships generally. Many of these tender offers have been made by investors seeking to make a profit from the purchase of the interests. In the event a tender offer is made for interests in the Registrant, the General Partner will issue a response to Limited Partners expressing the General Partner's opinion regarding the offer. Certain administrative costs will be incurred to respond to a tender offer. The General Partner cannot predict with any certainty what impact a tender offer will have on the operations or management of the Registrant.
In November 1993, the Registrant placed the Bannockburn Executive Plaza loan in default and the borrower filed for protection under the U.S. Bankruptcy Code. In February 1995, a plan of reorganization related to this loan was confirmed by the Bankruptcy Court. See Item 7. Liquidity and Capital Resources for additional information.
During 1995, the Registrant received repayments on two loans receivable. See Item 7. Liquidity and Capital Resources for additional information.
During 1995, the Registrant sold two properties. See Item 7. Liquidity and Capital Resources for additional information.
The Registrant, by virtue of its ownership of real estate acquired through foreclosure, is subject to federal and state laws and regulations covering various environmental issues. Management of the Registrant utilizes the services of environmental consultants to assess a wide range of environmental issues and to conduct tests for environmental contamination as appropriate. The General Partner is not aware of any potential liability due to environmental issues or conditions that would be material to the Registrant.
The officers and employees of Balcor Mortgage Advisors-II, the General Partner of the Registrant, and its affiliates perform services for the Registrant. The Registrant currently has no employees engaged in its operations.
Item 2. Properties - ------------------
As of December 31, 1995, the Registrant owns the two properties described below:
Location Description of Property - -------- -----------------------
Loveland, Colorado * Orchards Shopping Center: a shopping center containing 167,779 square feet located on 24.01 acres.
Austin, Texas The Woods Apartments: a 278-unit apartment complex located on 13 acres.
* This property is held subject to a mortgage loan.
The Registrant also holds minority joint venture interests in the Brookhollow/Stemmons Office Building located in Dallas, Texas, and the Perimeter 400 Center Office Building located in Fulton County, Georgia. See Note 9 of Notes to Financial Statements for additional information.
In the opinion of the General Partner, the Registrant has provided for adequate insurance coverage for its real estate investment properties.
See Notes to Financial Statements for other information regarding real property investments.
Item 3.
Item 3. Legal Proceedings - -------------------------
Williams class action - -------------------------
In February 1990, a proposed class-action complaint was filed, Paul Williams and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al., Case No.: 90-C-0726 (U.S. District Court, Northern District of Illinois). The Registrant, the General Partner, seven affiliated limited partnerships (together with the Registrant, the "Related Partnerships") and other affiliates are the defendants. The complaint alleges violations of Federal securities laws as to the adequacy and accuracy of disclosure of information in the offering of limited partnership interests in the Related Partnerships and alleges breach of fiduciary duty, fraud, negligence and violations under the Racketeer Influenced and Corrupt Organizations Act. The complaint seeks compensatory and punitive damages. The defendants subsequently filed a counterclaim asserting claims of fraud and breach of warranty against certain plaintiffs, as well as a request for declaratory relief regarding the defendants' rights to be indemnified for their expenses incurred in defending the litigation. The defendants seek to recover for damage to their reputations and business as well as costs and attorneys' fees in defending the claims.
In May 1993, the Court issued an order denying the plaintiffs' motion for class certification based principally on the inadequacy of the individual plaintiffs representing the proposed class. However, the Court gave plaintiffs leave to propose new individual class representatives. Upon the defendants' motion, the Court ordered plaintiffs' counsel to pay $75,000 to the defendants and $25,000 to the Court for costs incurred with the class certification motion, which amounts continue to be outstanding.
In July 1994, the Court granted plaintiffs' motion certifying a class relating to the Federal securities fraud claims. The class certified by the Court includes only the original investors in the Related Partnerships. The defendants filed a motion for reconsideration in opposition to the class certification, which was denied in December 1994. The Court approved the Notice of Class Action in August 1995 which was sent to potential members of the class in September 1995.
The defendants intend to continue vigorously contesting this action. Management of each of the defendants believes they have meritorious defenses to contest
the claims. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the Registrant.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant during 1995.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------------------------------------------------------------------------- Matters - -------
There has not been an established public market for Limited Partnership Interests and it is not anticipated that one will develop. For information regarding previous distributions, see Financial Statements, Statements of Partners' Capital, and Item 7. - Liquidity and Capital Resources, below.
As of December 31, 1995, the number of record holders of Limited Partnership Interests of the Registrant was 10,640.
Item 6.
Item 6. Selected Financial Data - ------------------------------- Year ended December 31, ----------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Total income $7,464,674 $7,904,391 $6,125,896 $6,728,618 $8,254,515 Recovery of losses on loans, real estate and accrued interest receivable 756,370 None None None None Provision for losses on loans, real estate and accrued inter- est receivable 756,370 600,000 2,720,000 3,750,000 3,215,500 Income before net gains on sales of assets 6,001,706 6,379,013 2,541,797 2,166,157 4,458,722 Net income 8,542,352 6,498,855 3,141,300 2,166,157 4,458,722 Net income per average number of Limited Partner- ship Interests outstanding 34.90 26.35 12.68 8.72 17.87 Total assets 48,074,826 77,868,675 81,568,277 86,628,240 87,612,905 Mortgage notes payable 1,666,291 7,153,074 8,436,279 10,997,864 9,234,008 Distributions per Limited Partner- ship Interest(A) 132.12 34.35 20.00 22.50 30.00
(A) These amounts include distributions of original capital of $109.12 and $16.85 per Limited Partnership Interest for the years 1995 and 1994, respectively.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ----------------------------------------------------------------------- Results of Operations - --------------------- Operations - ----------
Summary of Operations - ---------------------
During 1995 and 1994, Balcor Pension Investors-III (the "Partnership") sold two properties and received repayments on four loans. The Partnership also acquired The Woods Apartments through foreclosure in July 1994. The combined effect of these events, especially the recognition of gains on the sales of the properties, resulted in an increase in net income during 1995 as compared to 1994.
The provision for potential losses on loans, real estate and accrued interest receivable was lower during 1994 as compared to 1993. In addition, during 1993, the Partnership recognized its share of a loss provision related to a decline in the fair value of a property in which it holds a minority joint venture interest. The combined effect of these events resulted in an increase in net income during 1994 as compared to 1993. Further discussion of the Partnership's operations is summarized below.
1995 Compared to 1994 - ---------------------
The repayment of the Colony Apartments loan in August 1995, the prepayment of the Continental Park and North Morris Estates loans in June and November 1994, respectively, and the foreclosure of The Woods Apartments in July 1994 resulted in a decrease in net interest income on loans receivable during 1995 as compared to 1994.
The Partnership has two non-accrual loans at December 31, 1995 which are collateralized by Carmel on Providence Apartments and Bannockburn Executive Plaza. For non-accrual loans, income is recorded only as cash payments are received from the borrower. The funds advanced by the Partnership for these two loans total approximately $6,200,000, representing approximately 6% of original funds advanced. During 1995, the Partnership received cash payments of net interest income totaling approximately $346,000 on the Carmel on Providence loan. The Partnership would have received approximately $295,000 of net interest income under the terms of the original loan agreement. Of the net interest income received, $48,000 relates to costs incurred by the Partnership prior to the borrower's bankruptcy filing, which have been added to the principal of the loan and which accrue interest, payable by the borrower on a quarterly basis. In addition, $564,000 was received on the Bannockburn Executive Plaza loan in 1995. This loan originally matured in January 1994 but was subsequently extended to December 1997.
Provisions are charged to income when the General Partner believes an impairment has occurred, either in a borrower's ability to repay the loan or in the value of the collateral property. Determinations of fair value are made
periodically on the basis of performance under the terms of the loan agreement and assessments of property operations. Determinations of fair value represent estimations based on many variables which affect the value of real estate, including economic and demographic conditions. See Note 2(d) of Notes to Financial Statements for further information regarding the Partnership's accounting policies related to the determination of the fair value of its loans and real estate held for sale. The Partnership recognized provisions of $756,370 and $600,000 in 1995 and 1994, respectively, related to certain of its loans. In addition, during 1995, the Partnership recognized recoveries of $756,370 related to certain other loans to provide for changes in the estimate of their fair value. During 1995, allowances of $1,070,329 related to the Colony loan were written off in connection with the repayment of the loan and during 1994 allowances of $3,715,406 related to the Continental Park loan were written off in connection with the repayment of the loan at a discount.
Operations of real estate held for sale represent the net operations of those properties acquired by the Partnership through foreclosure. At December 31, 1995, the Partnership was operating The Woods Apartments and the Orchards Shopping Center. Original funds advanced by the Partnership total approximately $6,678,000 for these properties. The Partnership acquired The Woods Apartments in July 1994, and this property generated income during 1995. In addition, operations improved at the Orchards Shopping Center during 1995 due to increased occupancy levels and decreased interest expense resulting from the paydown of the first mortgage loan in connection with the sale of the Orchards Office Building in September 1994. The combined effect of these events resulted in an increase in income from real estate held for sale during 1995 as compared to 1994. The 1995 sales of the Crossings Shopping Center and the Candlewyck Apartments, which were generating income, partially offset the above increase.
Participation in income of joint ventures with affiliates represents the Partnership's 27.5% and 12.68% shares of income from the Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively. During 1995, the Partnership recognized $247,500 and $84,322 as its share of the recovery of provisions related to the change in the estimates of the fair values of the Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively, which resulted in an increase in the participation in income during 1995 as compared to 1994. Increased reimbursements from tenants for real estate taxes, common area maintenance and tenant construction at the Brookhollow/Stemmons Office Building also contributed to the increase in income.
Proceeds received in connection with the 1995 and 1994 loan repayments and property sales were invested when received and resulted in an increase in interest income on short-term investments during 1995 as compared to 1994. Higher average interest rates earned on short-term investments also contributed to the increase. Portions of these proceeds were distributed to Limited Partners in 1995 and January 1996.
The Partnership's loans generally bear interest at contractually-fixed interest rates. Some loans also provide for additional interest in the form of participations, usually consisting of either a share in the capital appreciation of the property securing the Partnership's loan and/or a share in the increase of the gross income of the property above a certain level. Participation income was recognized during 1994 in connection with the North Morris Estates and Carmel on Providence loans.
Decreases in legal expenses and reduced mortgage servicing fees due to the repayment of four loans during 1995 and 1994 and the foreclosure of The Woods
Apartments in 1994 resulted in a decrease in administrative expenses during 1995 as compared to 1994.
During 1995, the Partnership recognized gains of $717,900 and $1,822,746 in connection with the sales of the Crossings Shopping Center and the Candlewyck Apartments, respectively. During 1994, the Partnership recognized a gain of $119,842 on the sale of the Orchards Office Building.
1994 Compared to 1993 - ---------------------
Increased interest income was received from the borrowers of the Bannockburn Executive Plaza, Carmel on Providence and The Woods loans during 1994. In addition, the Partnership purchased The Woods underlying loan in December 1993 which reduced interest expense on loans payable. Finally, the Partnership received additional interest and a prepayment fee in connection with the North Morris Estates loan repayment in November 1994. As a result, net interest income on loans receivable increased during 1994 as compared to 1993. The prepayment of the Airport III Industrial Park and the Continental Park loans in November 1993 and June 1994, respectively, reduced interest income which partially offset this increase.
The Partnership had two non-accrual loans at December 31, 1994 which are collateralized by Carmel on Providence Apartments and Bannockburn Executive Plaza. The funds advanced by the Partnership for these two loans total approximately $6,200,000, representing approximately 6% of original funds advanced. During 1994, the Partnership received cash payments of net interest income totaling approximately $244,000 on the Carmel on Providence loan. The Partnership would have received approximately $288,000 of net interest income under the terms of the original loan agreement. In addition, $585,000 was received on the Bannockburn Executive Plaza loan. This loan originally matured in January 1994 but was subsequently extended to December 1997.
The Partnership recognized a provision of $2,000,000 related to its loans in 1993. In addition, during 1993, the Partnership recognized a provision of $720,000 related to the Partnership's real estate held for sale to provide for changes in the estimate of the fair value of the Riverview Office Building.
At December 31, 1994, the Partnership was operating the Candlewyck and The Woods apartment complexes and the Crossings and Orchards shopping centers. Original funds advanced by the Partnership totaled approximately $14,378,000 for these properties. Operating expenses decreased at the Crossings Shopping Center due to decreased maintenance and repair expense and decreased real estate tax expense resulting from a reduction in the assessed property value. Operating expenses also decreased at the Orchards Shopping Center due to the completion of roof repairs during 1993. In addition, the Partnership acquired The Woods Apartments in July 1994, which generated income. Finally, the Riverview Office Building and the Villa Verde Apartments, which generated income, were sold in September and November 1993, respectively. The combined effect of these events resulted in an increase in income from real estate held for sale during 1994 as compared to 1993.
Participation in income (loss) of joint ventures with affiliates represents the Partnership's 27.5% and 12.68% shares of income (loss) from the Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively. During 1993, the Partnership recognized its share of a loss provision related to a decline in the fair value of the Brookhollow/Stemmons Office Building.
This, combined with decreased leasing costs and increased average occupancy levels and rental rates at the Perimeter 400 Center Office Building during 1994, were the primary reasons for the recognition of income during 1994 as compared to a loss in 1993.
Proceeds were received in 1993 in connection with the settlement of the Kensington loan, the refinancing of the Villa Verde loan and the sales of the Riverview Office Building, Villa Verde Apartments and vacant land adjacent to the Orchards Shopping Center. A portion of these proceeds were distributed in April 1994. The remainder of these proceeds, along with the proceeds received in 1994 from the prepayment of the Continental Park and North Morris Estates loans and the sale of the Orchards Office Building, were invested in short-term interest-bearing instruments. This, along with higher interest rates resulted in an increase in interest income on short-term investments during 1994 as compared to 1993.
Participation income was recognized during 1993 in connection with the Airport III Industrial Park, North Morris Estates and Carmel on Providence loans.
An increase in accounting and portfolio management fees resulted in an increase in administrative expenses during 1994 as compared to 1993. This increase was partially offset by a decrease in legal fees and mortgage servicing fees resulting from the prepayment of the Airport III Industrial Park, Continental Park and North Morris Estates loans and the foreclosure of The Woods Apartments
During 1993, the Partnership recognized a net gain totaling $599,503 on the sales of the vacant land adjacent to the Orchards Shopping Center, the Riverview Office Building and the Villa Verde Apartments.
Liquidity and Capital Resources - -------------------------------
The cash position of the Partnership decreased as of December 31, 1995 when compared to December 31, 1994 primarily due to special distributions made to Limited Partners in April, July and October 1995. The Partnership generated cash flow totaling approximately $5,256,000 from its operating activities primarily as a result of the net interest income earned on its loans receivable, the operations of its properties, and the interest received on its short-term investments, net of the payment of administrative expenses. The Partnership received funds from investing activities primarily due to the receipt of proceeds of approximately $13,591,000 related to the repayment of the Colony and Rivergate loans and proceeds of approximately $10,394,000 related to the sales of the Crossings Shopping Center and Candlewyck Apartments. The Partnership's financing activities consist of the payment of distributions totaling approximately $30,292,000 to the Partners, the repayment of the mortgage notes payable of approximately $3,546,000 related to the sale of Candlewyck Apartments, repurchases of Limited Partnership Interests at a cost of approximately $1,426,000 and principal payments on underlying loans and mortgage notes payable totaling approximately $1,135,000. The Partnership also made a special distribution to Limited Partners from Mortgage Reductions in January 1996 as described below.
The Partnership classifies the cash flow performance of its properties as either positive, a marginal deficit or a significant deficit, each after consideration of debt service payments unless otherwise indicated. The Partnership defines cash flow generated from its properties as an amount equal to the property's revenue receipts less property related expenditures, which
include debt service payments. During 1995 and 1994, the Orchards Shopping Center and The Woods Apartments generated positive cash flow. The Crossings Shopping Center, which was sold in January 1995, generated positive cash flow during 1994 and prior to its sale in 1995. However, the Candlewyck Apartments, which was sold in August 1995, generated positive cash flow in 1994 and a marginal deficit prior to its sale in 1995. The Brookhollow/Stemmons and Perimeter 400 Center office complexes, properties in which the Partnership holds minority joint venture interests, generated positive cash flow during 1995 and 1994.
As of December 31, 1995, The Woods Apartments and the Orchards Shopping Center have occupancy rates of 93% and 83%, respectively. Many rental markets continue to remain extremely competitive; therefore, the General Partner's goals are to maintain high occupancy levels, while increasing rents where possible, and to monitor and control operating expenses and capital improvement requirements at the properties. The General Partner will also examine the terms of the mortgage loan collateralized by one of its properties, and may refinance or, in certain instances, use Partnership reserves to repay the loan.
The General Partner believes that the market for multifamily housing properties has become increasingly favorable to sellers of these properties. As a result, the General Partner is exploring an acceleration of its strategy to sell the Partnership's residential property. Additionally, the General Partner will explore the sale of its commercial properties over the next year if market conditions are favorable.
Changing interest rates can impact real estate values in several ways. Generally, declining interest rates may lower the cost of capital allowing buyers to pay more for a property whereas rising interest rates may increase the cost of capital and lower the price of real estate. Lower interest rates may increase the probability that borrowers may seek prepayment of the Partnership's loans whereas rising interest rates decrease the yields on the loans and make prepayment less likely.
Certain borrowers have failed to make payments when due to the Partnership for more than ninety days and, accordingly, these loans have been placed on non-accrual status (income is recorded only as cash payments are received). The General Partner has negotiated with some of these borrowers regarding modifications of the loan terms and has instituted foreclosure proceedings under certain circumstances. Such foreclosure proceedings may be delayed by factors beyond the General Partner's control such as bankruptcy filings by borrowers and state law procedures regarding foreclosures. Further, certain loans made by the Partnership have been restructured to defer and/or reduce interest payments where the properties collateralizing the loans were generating insufficient cash flow to support property operations and debt service.
During February 1995, a plan of reorganization related to the Bannockburn Executive Plaza loan was confirmed by the Bankruptcy Court effective March 1995. Pursuant to the plan, the maturity date of the loan was extended to December 1, 1997 and the loan will continue to bear interest at 14.5% per annum with a pay rate of 9% per annum. The maturity of the underlying loan was also extended to December 1, 1997, and the borrower was required to pay $232,031 directly to the holder of the underlying loan to reduce the principal balance of the loan. In addition, the borrower is required to remit all excess cash flow from property operations on a monthly basis directly to the holder of the underlying loan to further reduce the principal balance of the loan. Excess
cash flow of $189,628 was remitted to the holder of the underlying loan during 1995.
In August 1995, the borrower of the $16,750,000 Colony Apartments wrap-around loan repaid the loan. The Partnership received proceeds of approximately $8,301,516 which is comprised of the funds advanced on the loan ($6,501,516) and the amount representing the difference between the funds advanced by the Partnership and the outstanding principal balance on the underlying loan in accordance with the original loan terms. In addition, the borrower repaid the underlying mortgage note payable which had a balance of $7,378,155. Allowances in the amount of $1,070,329 were written off in connection with the repayment of the loan.
In October 1995, the Rivergate Apartments first mortgage loan matured and in December 1995, the borrower repaid the loan. The Partnership received proceeds of $5,255,154 which represented the outstanding principal balance of the loan.
In January and August 1995, the Partnership sold the Crossings Shopping Center and the Candlewyck Apartments in all cash sales for $2,650,000 and $10,000,000, respectively. The purchaser of the Crossings Shopping Center took title to the property subject to the existing $1,793,760 first mortgage loan. From the proceeds of the Candlewyck sale, the Partnership repaid the outstanding amounts due under the first, second, and third mortgage loans, which totaled $3,545,699. See Note 12 of Notes to Financial Statements for additional information.
Distributions to Limited Partners can be expected to fluctuate for various reasons. Generally, distributions are made from Cash Flow generated by interest and other payments made by borrowers under the Partnership's mortgage loans. Loan prepayments and repayments can initially cause Cash Flow to increase as prepayment premiums and participations are paid; however, thereafter prepayments and repayments will have the effect of reducing Cash Flow. If such proceeds are distributed, Limited Partners will have received a return of capital and the dollar amount of Cash Flow available for distribution thereafter can be expected to decrease. Distribution levels can also vary as loans are placed on non-accrual status, modified or restructured and, if the Partnership has taken title to properties through foreclosure or otherwise, as a result of property operations.
The Partnership made four distributions totaling $132.12, $34.35 and $20.00 per Interest in 1995, 1994 and 1993, respectively. See Statement of Partners' Capital for additional information. Distributions were comprised of $23.00 of Cash Flow and $109.12 of Mortgage Reductions in 1995 and $17.50 of Cash Flow and $16.85 of Mortgage Reductions in 1994 and $20.00 of Cash Flow in 1993. The distribution of Mortgage Reductions in 1995 and 1994 resulted from loan repayments and property sales. Cash Flow distributions increased between 1995 and 1994 due to the payment of a special distribution of $7.00 per Interest from Cash Flow reserves in October 1995. Cash Flow distributions decreased in 1994 from 1993 due to the loan repayments and property sales.
In January 1996, the Partnership paid $6,402,354 to Limited Partners representing the quarterly distribution for the fourth quarter of 1995 of $4.00 of Cash Flow per Interest and a special distribution of $22.96 per Interest, representing Mortgage Reductions received primarily from the Rivergate loan repayment. The Partnership also paid $79,159 to the General Partner as its distributive share of the Cash Flow distributed for the fourth quarter of 1995 and $26,386 as its contribution to the Early Investment Incentive Fund.
Including the January 1996 distribution, the Partnership has distributed $667.88 per $500 Interest, of which $450.80 represents Cash Flow from operations and $217.08 represents a return of Original Capital.
The Partnership expects to continue making cash distributions from the Cash Flow generated by the receipt of mortgage payments and from property operations, less payments on the underlying loans and administrative expenses. The General Partner believes the Partnership has retained an appropriate amount of working capital to meet cash or liquidity requirements which may occur.
During 1995, the General Partner on behalf of the Partnership used amounts placed in the Early Investment Incentive Fund to repurchase 5,882 Interests from Limited Partners at a total cost of $1,426,239.
In 1995, the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which establishes accounting standards for impairment of long lived assets and long lived assets to be disposed of. This statement has been adopted by the Partnership as of January 1, 1995, and did not have a material impact on the financial position or results of operations of the Partnership.
Inflation has several types of potentially conflicting impacts on real estate investments. Short-term inflation can increase real estate operating costs which may or may not be recovered through increased rents and/or sale prices depending on general or local economic conditions. In the long-term, inflation can be expected to increase operating costs and replacement costs and may lead to increased rental revenues and real estate values.
Item 8.
Item 8. Financial Statements and Financial Statement Schedules and - ------------------------------------------------------------------ Supplementary Data - ------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K is not applicable.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - --------------------
On September 14, 1995 the Registrant approved the engagement of Coopers & Lybrand L.L.P. as its independent auditors for the fiscal year ending December 31, 1995 to replace the firm of Ernst & Young LLP, who were dismissed as auditors of the Registrant effective September 14, 1995. The General Partner of the Registrant approved the change in auditors.
The reports of Ernst & Young LLP on the Registrant's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Registrant's financial statements for each of the two fiscal years ended December 31, 1994, and in the subsequent interim
period, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the matter in their report.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Mortgage Advisors-II, its General Partner, has a Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers and significant employees of the General Partner of the Registrant are as follows:
TITLE OFFICERS ----- -------- Chairman, President and Chief Thomas E. Meador Executive Officer Senior Vice President Alexander J. Darragh Senior Vice President Josette V. Goldberg Senior Vice President Alan G. Lieberman Senior Vice President, Chief Brian D. Parker Financial Officer, Treasurer and Assistant Secretary Senior Vice President John K. Powell, Jr.
Thomas E. Meador (July 1947) joined Balcor in July 1979. He is Chairman, President and Chief Executive Officer and has responsibility for all ongoing day-to-day activities at Balcor. He is a Director of The Balcor Company. He is also Senior Vice President of American Express Company and is responsible for its real estate operations worldwide. Prior to joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in the commercial real estate division where he was involved in various lending activities. Mr. Meador received his M.B.A. degree from the Indiana University Graduate School of Business.
Alexander J. Darragh (February 1955) joined Balcor in September 1988 and is responsible for due diligence analysis and real estate advisory services for Balcor and American Express Company. He also has supervisory responsibility for Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban Geography from Queen's University and in Urban Planning from Northwestern University.
Josette V. Goldberg (April 1957) joined Balcor in January 1985 and has primary responsibility for all human resources matters. In addition, she has supervisory responsibility for Balcor's MIS functions. Ms. Goldberg has been designated as a Senior Human Resources Professional (SHRP).
Alan G. Lieberman (June 1959) joined Balcor in May 1983 and is responsible for Balcor's property sales and capital markets functions. Mr. Lieberman is a Certified Public Accountant.
Brian D. Parker (June 1951) joined Balcor in March 1986 and, as Chief Financial Officer and Chief Accounting Officer, is responsible for Balcor's financial, legal and treasury functions. He is a Director of The Balcor Company. Mr. Parker is a Certified Public Accountant and holds an M.S. degree in Accountancy from DePaul University.
John K. Powell Jr. (June 1950) joined Balcor in September 1985 and is responsible for portfolio and asset management matters relating to Balcor's partnerships. Mr. Powell also has supervisory responsibility for Balcor's risk management and investor services functions. He received a Master of Planning degree from the University of Virginia. Mr. Powell has been designated a Certified Real Estate Financier by the National Society for Real Estate Finance and is a full member of the Urban Land Institute.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any material legal proceedings nor were any such proceedings terminated during the fourth quarter of 1995.
Item 11.
Item 11. Executive Compensation - -------------------------------
The Registrant has not paid and does not propose to pay any remuneration to the executive officers and directors of the General Partner. Certain of these officers receive compensation from The Balcor Company (but not from the Registrant) for services performed for various affiliated entities, which may include services performed for the Registrant. However, the General Partner believes that any such compensation attributable to services performed for the Registrant is immaterial to the Registrant. See Note 8 of Notes to Financial Statements for the information relating to transactions with affiliates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(a) No person owns of record or is known by the Registrant to own beneficially more than 5% of the outstanding Limited Partnership Interests of the Registrant.
(b) Balcor Mortgage Advisors-II and its officers own as a group or individually the following Limited Partnership Interests of the Registrant:
Amount Beneficially Title of Class Owned Percent of Class -------------- ------------- ----------------
Limited Partnership Interest 5 Interests Less than 1%
Relatives and affiliates of the officers and partners of the General Partner do not own any additional interests.
(c) The Registrant is not aware of any arrangement, the operation of which may result in a change of control of the Registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
(a, b) See Note 3 of Notes to Financial Statements for information relating to the Partnership Agreement and the allocation of distributions and profits and losses.
See Note 8 of Notes to Financial Statements for information relating to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements and Financial Statement Schedules, - -------------------------------------------------------------------------- and Reports on Form 8-K - -----------------------
(a) (1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement of Limited Partnership, and the Amended and Restated Certificate of Limited Partnership of Balcor Pension Investors-III, previously filed as Exhibits 3(a) and 3(b), respectively, to Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated May 20, 1982 (Registration No. 2-75938), and as Exhibits 3(a) and 3(b), respectively, to the Registrant's Registration Statement on Form S-11 dated November 2, 1982 (Registration No. 2-80123), are hereby incorporated herein by reference.
(4) Form of Subscription Agreement, previously filed as Exhibit 4(a) to Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated May 20, 1982 (Registration Statement No. 2-75938) and as previously filed as Exhibit 4(a) to Registrant's Registration Statement on Form S-11 dated November 2, 1982 (Registration No. 2-80123), and Form of Confirmation regarding Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-11129) are incorporated herein by reference.
(16) Letter from Ernst & Young LLP dated September 19, 1995 regarding the change in the Registrant's certifying accountant previously filed as Exhibit 16 to the Registrant's Report on Form 8-K/A dated October 27, 1995 (Commission File No. 0-11129) is hereby incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1995 is attached hereto.
(b) Reports on Form 8-K: A Current Report on Form 8-K/A dated October 27, 1995, amending the Current Report on Form 8-K dated September 19, 1995 reporting a
change in the Registrant's certifying accountant, was filed (Commission File No. 0-11129).
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BALCOR PENSION INVESTORS-III
By: /s/Brian D. Parker ------------------------------------- Brian D. Parker Senior Vice President, and Chief Financial Officer (Principal Accounting and Financial Officer) of Balcor Mortgage Advisors-II, the General Partner
Date: March 29, 1996 -------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------------------- ------------------------------------------------
President and Chief Executive Officer (Principal Executive Officer) of Balcor Mortgage /s/Thomas E. Meador Advisors-II, the General Partner March 29, 1996 -------------------- -------------- Thomas E. Meador Senior Vice President, and Chief Financial Officer (Principal Accounting and Financial Officer) of Balcor Mortgage /s/Brian D. Parker Advisors-II, the General Partner March 29, 1996 - -------------------- -------------- Brian D. Parker
Report of Independent Accountants
Report of Independent Auditors
Financial Statements:
Balance Sheets, December 31, 1995 and 1994
Statements of Partners' Capital, for the years ended December 31, 1995, 1994 and 1993
Statements of Income and Expenses, for the years ended December 31, 1995, 1994 and 1993
Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Balcor Pension Investors-III:
We have audited the accompanying balance sheet of Balcor Pension Investors-III (An Illinois Limited Partnership) as of December 31, 1995 and the related statements of partners' capital, income and expenses, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 also 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 audit provides 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 Balcor Pension Investors-III at December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois March 27, 1996
REPORT OF INDEPENDENT AUDITORS
To the Partners of Balcor Pension Investors-III:
We have audited the accompanying balance sheet of Balcor Pension Investors-III (An Illinois Limited Partnership) as of December 31, 1994 and the related statements of partners' capital, income and expenses, and cash flows for each of the two years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Balcor Pension Investors-III at December 31, 1994, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois March 6, 1995
BALCOR PENSION INVESTORS-III (AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS December 31, 1995 and 1994
ASSETS
1995 1994 ------------- ------------- Cash and cash equivalents $ 11,344,948 $ 18,445,509 Cash and cash equivalents - Early Investment Incentive Fund 302,437 21,171 Escrow deposits 127,004 427,562 Escrow deposits - restricted 899,929 Accounts and accrued interest receivable 222,417 286,756 Prepaid expenses 31,897 Deferred expenses, net of accumulated amortization of $40,618 in 1995 and $28,120 in 1994 21,870 34,368 ------------- ------------- 12,050,573 20,115,295 ------------- ------------- Investment in loans receivable: Loans receivable - wrap-around and first mortgages 53,030,966 75,491,676
Less: Loans payable - underlying mortgages 33,761,548 42,548,988 Allowance for potential loan losses 3,943,630 5,013,959 ------------- ------------- Net investment in loans receivable 15,325,788 27,928,729
Real estate held for sale 14,214,705 23,801,567
Investment in joint ventures with affiliates 6,483,760 6,023,084 ------------- ------------- 36,024,253 57,753,380 ------------- ------------- $ 48,074,826 $ 77,868,675 ============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 101,455 $ 119,483 Due to affiliates 36,011 110,862 Other liablilities, principally real estate taxes and escrow deposits 534,113 1,541,327 Security deposits 89,848 120,870 Mortgage notes payable 1,666,291 7,153,074 ------------- ------------- Total liabilities 2,427,718 9,045,616 ------------- ------------- Limited Partners' capital (237,476 Interests issued) 52,908,205 74,843,430 Less Interests held by Early Investment Incentive Fund (16,090 at December 31,1995 and 10,208 at December 31,1994) (6,040,849) (4,614,610) ------------- ------------- 46,867,356 70,228,820 General Partner's deficit (1,220,248) (1,405,761) ------------- ------------- Total partners' capital 45,647,108 68,823,059 ------------- ------------- $ 48,074,826 $ 77,868,675 ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III (AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL for the years ended December 31, 1995, 1994 and 1993
Partners' Capital (Deficit) Accounts -------------- -------------- ------------- General Limited Total Partner Partners -------------- -------------- -------------
Balance at December 31, 1992 $ 73,140,058 $ (1,386,661) $ 74,526,719
Repurchase of 956 Limited Partnership Interests (351,782) (351,782) Cash distributions to: Limited Partners (A) (4,584,286) (4,584,286) General Partner (395,792) (395,792) Net income for the year ended December 31, 1993 3,141,300 235,598 2,905,702 -------------- -------------- ------------- Balance at December 31, 1993 70,949,498 (1,546,855) 72,496,353
Repurchase of 1,316 Limited Partnership Interests (434,007) (434,007) Cash distributions to: Limited Partners (A) (7,844,967) (7,844,967) General Partner (346,320) (346,320) Net income for the year ended December 31, 1994 6,498,855 487,414 6,011,441 -------------- -------------- ------------- Balance at December 31, 1994 68,823,059 (1,405,761) 70,228,820
Repurchase of 5,882 Limited Partnership Interests (1,426,239) (1,426,239) Cash distributions to: Limited Partners (A) (29,836,901) (29,836,901) General Partner (455,163) (455,163) Net income for the year ended December 31, 1995 8,542,352 640,676 7,901,676 -------------- -------------- ------------- Balance at December 31, 1995 $ 45,647,108 $ (1,220,248) $ 46,867,356 ============== ============== =============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1995 1994 1993 -------------- -------------- -------------
First Quarter $ 4.00 $ 5.50 $ 5.00 Second Quarter 29.00 20.85 5.00 Third Quarter 35.94 4.00 5.00 Fourth Quarter 63.18 4.00 5.00
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III (AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993 -------------- -------------- ------------- Income: Interest on loans receivable $ 7,163,288 $ 10,162,922 $ 10,535,990 Less interest on loans payable - underlying mortgages 3,700,302 4,280,261 4,916,217 -------------- -------------- ------------- Net interest income on loans receivable 3,462,986 5,882,661 5,619,773 Income from operations of real estate held for sale 1,478,073 804,434 599,785 Participation in income (loss) of joint ventures with affiliates 859,887 438,608 (482,783) Interest on short-term investments 907,358 543,293 283,425 Participation income 235,395 105,696 Recovery of losses on loans, real estate and accrued interest receivable 756,370 -------------- -------------- ------------- Total income 7,464,674 7,904,391 6,125,896 -------------- -------------- -------------
Expenses: Provision for potential losses on loans, real estate and accrued interest receivable 756,370 600,000 2,720,000 Administrative 706,598 925,378 864,099 -------------- -------------- ------------- Total expenses 1,462,968 1,525,378 3,584,099 -------------- -------------- -------------
Income before gain on sales of real estate 6,001,706 6,379,013 2,541,797 Gain on sales of real estate 2,540,646 119,842 599,503 -------------- -------------- ------------- Net income $ 8,542,352 $ 6,498,855 $ 3,141,300 ============== ============== =============
Net income allocated to General Partner $ 640,676 $ 487,414 $ 235,598 ============== ============== ============= Net income allocated to Limited Partners $ 7,901,676 $ 6,011,441 $ 2,905,702 ============== ============== ============= Net income per average number of Limited Partnership Interests outstanding (226,389 in 1995, 228,132 in 1994 and 229,084 in 1993) $ 34.90 $ 26.35 $ 12.68 ============== ============== =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III (AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993 -------------- -------------- ------------- Operating activities: Net income $ 8,542,352 $ 6,498,855 $ 3,141,300 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sales of real estate (2,540,646) (119,842) (599,503) Participation in (income) loss of joint ventures with affiliates (859,887) (438,608) 482,783 Recovery of losses on loans, real estate and accrued interest receivable (756,370) Provision for potential losses on loans, real estate and accrued interest receivable 756,370 600,000 2,720,000 Amortization of deferred expenses 12,498 12,498 254,853 Accrued interest income due at maturity (201,260) Collection of accrued interest income due at maturity 449,978 Net change in: Escrow deposits 300,558 (52,534) 309,617 Escrow deposits - restricted 899,929 338,709 (300,814) Accounts and accrued interest receivable 64,339 203,867 258,361 Prepaid expenses (31,897) Accounts payable (18,028) (103,000) (628,108) Due to affiliates (74,851) 48,261 7,298 Other liabilities (1,007,214) (178,291) 352,786 Security deposits (31,022) 47,120 (39,794) -------------- -------------- ------------- Net cash provided by operating activities 5,256,131 6,857,035 6,207,497 -------------- -------------- -------------
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III (AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1995, 1994 and 1993 (Continued)
1995 1994 1993 -------------- -------------- ------------- Investing activities: Capital contributions to joint venture partners - affiliates $ (78,147) $ (316,577) Distributions from joint venture partners - affiliates $ 399,211 227,855 4,294 Loan fundings (12,379) Collection of principal payments on loans receivable 13,590,567 11,511,219 2,045,070 Additions to real estate (60,698) (256,770) (107,172) Proceeds from sales of real estate 10,856,240 1,200,000 3,736,019 Costs incurred in connection with sales of real estate (461,794) (49,586) (325,277) Costs incurred in connection with real estate acquired through foreclosure (40,471) -------------- -------------- ------------- Net cash provided by investing activities 24,323,526 12,514,100 5,023,978 -------------- -------------- -------------
Financing activities: Distributions to Limited Partners (29,836,901) (7,844,967) (4,584,286) Distributions to General Partner (455,163) (346,320) (395,792) (Increase) decrease in cash and cash equivalents - Early Investment Incentive Fund (281,266) 4,612 54,553 Payment of deferred expenses (172,580) Repurchase of Limited Partnership Interests (1,426,239) (434,007) (351,782) Principal payments on underlying loans payable (987,626) (1,178,094) (1,369,417) Repayment of mortgage notes payable (3,545,699) (4,798,550) Proceeds from issuance of mortgage note payable 4,298,400 Principal payments on mortgage notes payable (147,324) (1,283,205) (334,887) -------------- -------------- ------------- Net cash used in financing activities (36,680,218) (11,081,981) (7,654,341) -------------- -------------- -------------
Net change in cash and cash equivalents (7,100,561) 8,289,154 3,577,134 Cash and cash equivalents at beginning of year 18,445,509 10,156,355 6,579,221 -------------- -------------- ------------- Cash and cash equivalents at end of year $ 11,344,948 $ 18,445,509 $ 10,156,355 ============== ============== =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-III (An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Pension Investors-III is engaged principally in the operation of residential and retail real estate and investment in wrap-around and first mortgage loans located in various markets within the United States.
2. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
(b) The Partnership records wrap-around mortgage loans at the face amount of the mortgage instrument which includes the outstanding indebtedness of the borrower under the terms of the underlying mortgage obligations. The underlying mortgage obligations are recorded as a reduction of the wrap-around mortgage loan and the resulting balance represents the Partnership's net advance to the borrower. The Partnership is responsible for making periodic payments to the underlying mortgage lenders only to the extent that payments as required by the wrap-around mortgage agreement are received by the Partnership from the borrower.
(c) Income on loans is recorded as earned in accordance with the terms of the related loan agreements. The accrual of interest is discontinued when a loan becomes ninety days contractually delinquent or sooner when, in the opinion of the General Partner, an impairment has occurred in the value of the collateral property securing the loan. Income on non-accrual loans or loans which are otherwise not performing in accordance with their terms is recorded on a cash basis.
Various loan agreements provide for participation by the Partnership in increases in value of the collateral property when the loan is repaid or refinanced. In addition, certain loan agreements allow the Partnership to receive a percentage of rental income exceeding a base amount. Participation income is reflected in the accompanying Statements of Income and Expenses when received.
Income from operations of real estate held for sale is reflected in the accompanying Statements of Income and Expenses net of related direct operating expenses.
(d) Loan losses on mortgage notes receivable are charged to income and an allowance account is established when the General Partner believes the loan balance will not be recovered. The General Partner assesses the collectibility of each loan on a periodic basis through a review of the collateral property operations, the property value and the borrower's ability to repay the loan. Upon foreclosure, the loan, net of the allowance, is transferred to real estate held for sale after the fair value of the property, less costs of disposal is
assessed. Upon the transfer to real estate held for sale, a new basis in the property is established.
Effective January 1, 1995 the Partnership adopted Statement of Financial Accounting Standards, No. 121 (SFAS 121), ("Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"). Under SFAS 121, the General Partner periodically assesses, but not less than on an annual basis, the fair value of its real estate properties held for sale. The General Partner estimates the fair value of its properties by dividing the property's expected net operating income by a risk adjusted rate of return or by applying a discounted cash flow analysis both of which consider economic and demographic conditions in the market. Changes in the property's fair value is recorded by an adjustment to the property allowance account and is recognized in the income statement as an increase or decrease through recovery income or a provision for loss in the period the change in fair value is determined. The General Partner considers the methods referred to above to result in a reasonable measurement of a property's fair value, unless other factors affecting the property's value indicate otherwise.
(e) Investment in joint ventures with affiliates represents the Partnership's percentage interests, under the equity method of accounting, in joint ventures with affiliated partnerships. Under the equity method of accounting, the Partnership records its initial investment at cost and adjusts its investment account for additional capital contributions, distributions and its share of income or loss.
(f) Deferred expenses consist of leasing commissions which are amortized over the life of each respective lease, and financing fees which are amortized over the terms of the respective loan agreements.
(g) Revenue is recognized on an accrual basis in accordance with generally accepted accounting principles. Income from operating leases with significant abatements and/or scheduled rent increases is recognized on a straight line basis over the respective lease term. Service income includes reimbursements from operating costs such as real estate taxes, maintenance and insurance and is recognized as revenue in the period the applicable costs are incurred.
(h) The Financial Accounting Standard Board's Statement No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. Since quoted market prices are not available for the Partnership's financial instruments, fair values have been based on estimates using present value techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Statement No. 107 does not apply to all balance sheet items and excludes certain financial instruments and all non-financial instruments such as real estate and investment in joint ventures from its disclosure requirements.
(i) The Partnership records repurchases of Interests by the Early Investment Incentive Fund as a reduction of Limited Partners' Capital (see Note 3 of Notes to Financial Statements). Cash and cash equivalents not yet utilized to repurchase Interests, but which are part of the Early Investment Incentive Fund, are classified as restricted assets of the Partnership.
(j) Cash and cash equivalents include all unrestricted, highly liquid investments with an original maturity of three months or less. Cash and cash equivalents are held or invested primarily in one issuer of commercial paper.
(k) The Partnership is not liable for Federal income taxes as each partner recognizes his proportionate share of the Partnership income or loss in his tax return; therefore, no provision for income taxes is made in the financial statements of the Partnership.
(l) Mortgage servicing fees have been reclassified and are included in administrative expenses during 1995. This reclassification has also been made to the previously reported 1994 and 1993 financial statements to conform with the classification used in 1995. This reclassification has not changed the 1994 and 1993 results.
3. Partnership Agreement:
The Partnership was organized on January 22, 1982. The Partnership Agreement provides for Balcor Mortgage Advisors-II to be the General Partner and for the admission of Limited Partners through the sale of Limited Partnership Interests at $500 per Interest, 237,476 of which were sold on or prior to November 10, 1982, the termination date of the offering.
For financial statement purposes, profits and losses are allocated 92.5% to the Limited Partners, of which 2.5% relates to the Early Investment Incentive Fund, and 7.5% to the General Partner.
To the extent that Cash Flow is distributed, distributions will be made as follows: (i) 90% of such Cash Flow will be distributed to the Limited Partners, (ii) 7.5% of such Cash Flow will be distributed to the General Partner, and (iii) 2.5% of such Cash Flow will be set aside in a separate account for repurchase of Interests and for payment on dissolution of the Partnership to investors who subscribed prior to December 31, 1982 ("Early Investors") if necessary for them to receive an amount equal to their Original Capital plus a specified cumulative return based on the date of investment. Amounts, if any, remaining in the account after the Early Investors have received their cumulative return will be distributed 90% to all Limited Partners and 10% to the General Partner.
Amounts placed in the Early Investment Incentive Fund may, at the sole discretion of the General Partner and subject to certain limitations as set forth in the Partnership Agreement, be used to repurchase Interests from existing Limited Partners. During 1995, 5,882 Interests were repurchased at a cost of $1,426,239. All repurchases of Interests have been made at 95% of the then current valuation of such Limited Partnership Interests at the previous quarter end less any distributions made after the previous quarter end. Distributions of Cash Flow and Mortgage Reductions pertaining to any repurchased Interests are paid to the Early Investment Incentive Fund. To the extent that amounts in the Early Investment Incentive Fund are not utilized to repurchase Interests, such amounts are invested in short-term interest-bearing instruments with earnings thereon credited to this account.
4. Investment in Loans Receivable:
Loans receivable and loans payable at December 31, 1995 consisted of the following: Loans Receivable ------------------------------------------------- Current Current Original Final Mortgage Monthly Interest Funding Maturity Property Balances(A) Payments Rate Date Date - -------------- ----------- -------- -------- ------- --------- Wrap-around Mortgages: Apartments: Carmel on Providence(B) $ 3,200,000 $ 34,333 12.875% 1982 1997 Pepper Square 3,300,000 27,500 10.00 1989 1996 Office Buildings: Bannockburn Executive Plaza (B)(C) 8,305,966 75,750 9.00 1982 1997 Seafirst Financial Center 32,425,000 268,955 9.95 1982 1997 Corporate Campus I 5,800,000 44,467 9.20 1988 1998 ----------- Total $53,030,966 ===========
Loans Payable --------------------------------------- Underlying Current Current Due Mortgage Monthly Interest Date Property Balances Payments Rate Loan - -------------- ----------- -------- -------- ------- Apartments: Carmel on Providence $1,243,826 $17,777 9.50% 1997 Pepper Square 1,827,184 19,760 9.25 1996 Office Buildings: Bannockburn Executive Plaza 3,485,138 44,677 9.75 1997 Seafirst Financial Center 24,601,470 231,196 9.75 1997 Corporate Campus I 2,603,930 29,934 9.50 1998 ----------- Total $33,761,548 ===========
(A) All loans are wrap-around mortgage loans.
(B) This loan is on non-accrual status; therefore income is recorded only as cash payments are received from the borrower.
(C) During February 1995, a plan of reorganization was confirmed by the Bankruptcy Court effective March 1995 which extended the maturity date of this loan and the underlying mortgage loan payable to December 1997. This loan will continue to bear interest at 14.5% per annum with a pay rate of 9% per annum based on the outstanding principal. Unpaid interest will be waived by the Partnership if this loan is repaid on or prior to maturity assuming no previous
uncured defaults. In addition, the borrower was required to pay $232,031 directly to the holder of the underlying loan. The borrower is also required to remit all excess cash flow from property operations on a monthly basis directly to the holder of the underlying loan to further reduce the principal balance of the loan. Excess cash flow of $189,628 was remitted to the holder of the underlying loan during 1995.
Loans which have been classified as non-accrual as a result of delinquency or other noncompliance with terms of loan agreements aggregated $11,505,966 and $11,927,625 at December 31, 1995 and 1994, respectively.
Under certain circumstances, the General Partner has entered into negotiations with borrowers which resulted in a reduction of interest rates, periodic payments or the modification of other loan terms. Loans whose monetary terms have been restructured amounted to $38,225,000 at December 31, 1995 and 1994. Non-accrual loans and loans which have been restructured are hereinafter referred to as impaired loans.
Net interest income relating to all of the impaired loans except for The Woods Apartments loan would have been approximately $2,025,000 in 1995, $1,915,000 in 1994 and $3,787,000 in 1993. Net interest income from impaired loans included in the accompanying Statements of Income and Expenses amounted to approximately $2,001,000 ($2,002,000 cash basis) in 1995, $1,958,000 ($1,877,000 cash basis) in 1994 and $2,375,000 in 1993.
The Woods Apartments loan was placed on non-accrual status in 1988. During May 1992, an extension of the maturity of the loan receivable and underlying loan was completed. The maturity dates were extended to June 1993 and July 1993, respectively. The borrower failed to repay either of the loans and the Partnership obtained title to the property through a non-judicial foreclosure in July 1994. The Partnership received net interest income of approximately $653,000 and $301,000 in 1994 and 1993, respectively.
Impaired loans totaled $49,730,966 and $50,152,625 at December 31, 1995 and 1994, respectively. Impaired loans of $41,425,000 had related allowances for losses of $3,943,630, and the $8,305,966 impaired loan had no allowance for losses in 1995. The impaired loan of $38,225,000 had a related allowance for losses of $3,654,000 in 1994 and $11,927,625 of impaired loans had no allowances for losses in 1994.
The average recorded investments in impaired loans during the years ended December 31, 1995 and December 31, 1994 were approximately $49,942,000 and $60,136,000, respectively.
5. Allowances for Losses on Loans and Real Estate Held for Sale:
Activity recorded in the allowances for losses on loans and real estate held for sale during the three years ended December 31, 1995 is described in the table below.
1995 1994 1993 ------------ ------------- ------------ Loans: Balance at beginning of year $5,013,959 $ 8,129,365 $ 8,129,365
Recovery of provision previously charged to income (756,370) None None Provision charged to income 756,370 600,000 2,000,000 Direct write-off of loans against allowance (1,070,329) (3,715,406) (2,000,000) ------------- ------------ ------------ Balance at the end of the year $3,943,630 $ 5,013,959 $ 8,129,365 ============= ============ ============
Real Estate Held for Sale: Balance at beginning of year None None None Provision charged to income None None $ 720,000 Direct write-off of real estate held for sale against allowance None None (720,000) ------------ ------------- ------------ Balance at the end of the year None None None ============ ============= ============
6. Mortgage Notes Payable:
The mortgage notes payable at December 31, 1995 and 1994 consisted of the following:
Carrying Carrying Amounts Amounts of Notes of Notes Current Current Final Estimated at at Monthly Interest Maturity Balloon Property 12/31/95 12/31/94 Payments Rate Date Payment - ---------------- ---------- --------- -------- -------- ------ --------- Apartments: Candlewyck (A) $1,313,768 1,065,228 1,274,175 Shopping Centers: Crossings (B) 1,793,760 Orchards $1,666,291 1,706,143 $16,334 9.25% 1997 $1,587,000 ---------- ----------
Total $1,666,291 $7,153,074 ========== ==========
(A) In August 1995, this property was sold. See Note 12 of Notes to Financial Statements for additional information.
(B) In January 1995, this mortgage note payable was assumed by the purchaser in connection with the sale of this property. See Note 12 of Notes to Financial Statements for additional information.
The Partnership's loan described above requires current monthly payments of principal and interest.
Real estate held for sale with an aggregate carrying value of $6,691,000 at December 31, 1995 was pledged as collateral for repayment of the mortgage note.
During the years ended December 31, 1995, 1994 and 1993, the Partnership incurred interest expense on mortgage notes payable of $463,817, $780,047, and $1,531,785, respectively, and paid interest of $463,817, $780,047, and $1,526,182, respectively.
Future annual maturities of the above mortgage note payable are approximately as follows:
1996 $ 44,000 1997 1,622,000
7. Management Agreements:
As of December 31, 1995, both properties owned by the Partnership are under management agreements with a third-party management company. These management agreements provide for annual fees of 5% of gross operating receipts for the residential property and 3% to 6% of gross operating receipts for the commercial property.
8. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended 12/31/95 12/31/94 12/31/93 -------------- -------------- -------------- Paid Payable Paid Payable Paid Payable ------ ------- ------ ------- ------ -------
Mortgage servicing fees $ 52,651 $ 2,392 $ 88,396 $ 4,839 $104,581 $ 8,437 Property management fees None None 238,090 None 333,195 18,262 Reimbursement of expenses to the General Partner at cost: Accounting 61,773 8,041 74,803 30,698 71,203 5,880 Data processing 23,072 2,369 41,023 9,216 41,726 10,010 Investor communica- tion 10,247 None 27,664 8,893 20,499 1,693 Legal 20,531 2,751 16,094 9,316 14,911 1,231 Portfolio management 116,877 20,400 84,441 38,103 62,738 16,384 Other 12,555 58 26,381 9,797 8,518 704
The Partnership participates in an insurance deductible program with other affiliated partnerships in which the program pays claims up to the amount of the deductible under the master insurance policies for its properties. The program is administered by an affiliate of the General Partner who receives no fee for administering the program; however, the General Partner is reimbursed for program expenses. The Partnership paid premiums to the deductible insurance program of $32,357, $46,538, and $31,861 for 1995, 1994 and 1993, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed all of the Partnership's properties until the affiliate was sold to a third-party in November 1994.
9. Investments in Joint Ventures with Affiliates:
In 1990 and 1991, the Partnership and certain affiliates acquired title to the Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively. Profits and losses, all capital contributions and distributions are allocated in accordance with the participants' original funding percentages. The Partnership's sharing percentages for the Brookhollow/Stemmons and Perimeter 400 Center office buildings are 27.5% and 12.68%, respectively. During 1993, the Partnership recognized a loss of $771,873 as its share of the reduction in the carrying values of the properties. During 1995, the Partnership recognized $331,822 as its share of the recoveries of provisions related to the change in the estimates of the fair value of the properties. These amounts are included in the Partnership's participation in income (loss) of joint ventures with affiliates. In addition, during 1995, 1994, and 1993 the Partnership received distributions from these joint ventures totaling $399,111, $227,855, and $4,294, respectively, and made contributions of $78,147 and $316,577 in 1994 and 1993, respectively.
The following information has been summarized from the financial statements of the joint ventures:
1995 1994 1993 ----------- ---------- ------------ Net investment in real estate as of December 31 $36,015,862 $34,174,946 $34,008,955 Total liabilities as of December 31 451,150 391,765 510,366 Total income 7,588,538 7,319,405 6,834,797 Net income before recovery (provision) 3,052,398 2,733,148 1,295,097 Recovery (provision) for potential loss 1,565,000 None (3,165,000) Net income (loss) 4,617,398 2,733,148 (1,869,903)
10. Real Estate Held for Sale:
The Partnership acquired The Woods Apartments through foreclosure in July 1994. The Partnership recorded the cost of the property at $7,198,171. This amount represented the outstanding loan balance plus accrued interest receivable. In 1994 the Partnership increased the basis of The Woods Apartments by $8,066 for certain receivables, escrows and costs incurred in connection with the foreclosure. At the date of foreclosure, the property was transferred to real estate held for sale at its fair value, net of allowances previously recorded.
11. Discounted Prepayments of Loans Receivable:
(a) In August 1995, the borrower of the $16,750,000 Colony Apartments wrap-around loan repaid the loan. The Partnership received proceeds of approximately $8,301,516 and the borrower repaid the $7,378,155 underlying mortgage loan. The remaining wrap-around loan receivable balance, net of the underlying mortgage payable balance, were written off against the previously established allowance for losses in connection with the prepayment of the loan.
(b) In June 1994, the borrower of the $12,767,949 Continental Park wrap-around loan prepaid the loan at a discount. The Partnership received proceeds of approximately $4,873,085 and the borrower repaid the $4,143,890 underlying mortgage loan. The remaining wrap-around loan receivable balance, net of the underlying mortgage payable balance, and escrow liabilities of $35,568 were written off against the previously established allowance for potential loan losses in connection with the prepayment of the loan.
12. Sale of Real Estate:
The Partnership sold the Crossings Shopping Center and Candlewyck Apartments during 1995, the Orchards Office Building during 1994, and the Villa Verde Apartments, Riverview Office Building and vacant land adjacent to the Orchards Shopping Center during 1993 in separate all cash sales for $12,650,000, $1,200,000 and $8,025,000, respectively. From the proceeds of the Candlewyck Apartments sale, the Partnership paid $3,545,699 to the third party mortgage holders in full satisfaction of the property's mortgage loans. From the proceeds of the 1994 Orchards Office Building sale, the Partnership repaid $1,000,000 of the first mortgage loan. The Partnership continues to own the Orchards Shopping Center. The purchasers of the Crossings Shopping Center and the Villa Verde Apartments took title subject to the existing first mortgage loans which had balances of $1,793,760 and $4,288,981, respectively. The carrying value of the real estate sold during 1995, 1994 and 1993 totaled $9,647,560, $1,030,572 and $7,100,220, respectively. For financial statement purposes, the Partnership recognized net gains of $2,540,646, $119,842 and $599,503 from the sale of the real estate during 1995, 1994 and 1993, respectively.
13. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership, the General Partner and certain affiliates have been named as defendants alleging certain federal securities law violations with regard to the adequacy and accuracy of disclosures of information concerning the offering of the Limited Partnership Interests of the Partnership. The defendants continue to vigorously contest this action. While a plaintiff class has been certified, no determination of the merits have been made. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the Partnership. Management of each of the defendants believes that they have meritorious defenses to contest the claims.
14. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments at December 31, 1995 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest receivable and accounts and accrued interest payable approximates fair value.
Based on borrowing rates available to the Partnership at the end of 1995 for loans receivable and mortgage loans with similar terms and maturities, the fair value of the loans receivable and mortgage notes payable approximates the carrying value.
The fair value for the Partnership's investments in loans receivable and mortgage notes payable was estimated using discounted cash flow analyses. The discount rates were based upon rates at the end of 1995 comparable to those the
Partnership could receive or charge in the commercial real estate lending market with terms and maturities comparable to the Partnership's loans receivable and mortgage notes it presently holds.
15. Subsequent Event:
In January 1996, the Partnership paid $6,402,354 to Limited Partners representing the regular quarterly distribution of available Cash Flow of $4.00 per Interest for the fourth quarter of 1995 and a special distribution of $22.96 per Interest representing Mortgage Reductions received primarily from the Rivergate loan repayment.