ITEM 1. BUSINESS
General. The registrant, EREIM LP Associates (the "Partnership"), is a general partnership formed on December 18, 1986 under the Partnership Law of the State of New York.
The Partnership's two general partners are EREIM LP Corp., a Delaware corporation ("LP Corp."), and The Equitable Life Assurance Society of the United States, a New York mutual life insurance company ("Equitable", and, together with LP Corp., the "General Partners"). LP Corp. is an indirect, wholly-owned subsidiary of Equitable.
The Partnership has issued an investment guaranty agreement dated as of March 10, 1988 (the "Guaranty Agreement") to EML Associates (the "Venture"), a joint venture formed in March 1988, between the Partnership and ML/EQ Real Estate Portfolio, L.P. ("ML/EQ"), a Delaware limited partnership of which an indirect, wholly-owned subsidiary of Equitable, EREIM Managers Corp., is the Managing General Partner and an affiliate of Merrill Lynch & Co., Inc., MLH Real Estate Associates Limited Partnership, is the Associate General Partner (the "Associate General Partner"). The Guaranty Agreement has been assigned to ML/EQ. Capitalized terms used in this annual report that are not defined herein have the same meaning as in the Partnership Agreement of ML/EQ dated as of February 9, 1988, which is included as an exhibit to this annual report.
ML/EQ offered to the public $150,000,000 of Beneficial Assignee Certificates (the "BACs"), which evidence the economic rights attributable to limited partnership interests in ML/EQ (the "Interests"), in an offering (the "Offering") which commenced in 1987. The Offering was made pursuant to a Prospectus dated April 23, 1987, as supplemented by Supplements dated December 29, 1987 (the "December Supplement"), March 3, 1988 (the "March 3 Supplement") and March 17, 1988 (the "March 17 Supplement"), filed with the Securities and Exchange Commission (the "SEC") in connection with a Registration Statement on Form S-11 (No. 33-11064). The Prospectus as supplemented is hereinafter referred to as the "Prospectus." The Offering terminated on March 29, 1988. On March 10, 1988, ML/EQ's initial investor closing occurred at which time ML/EQ received $92,190,120, representing the proceeds from the sale of 4,609,506 BACs. On May 3, 1988, ML/EQ's final investor closing occurred at which time ML/EQ received $16,294,380, representing the proceeds from the sale of an additional 814,719 BACs. In total, ML/EQ realized gross proceeds of $108,484,500 from the Offering, representing the sale of 5,424,225 BACs.
Effective as of January 1, 1997, ML/EQ entered into an amendment to the Joint Venture Agreement of the Venture between ML/EQ and the Partnership pursuant to which the Partnership agreed to defer, without interest, its rights to receive 20% of the Venture's distributions of Sale or Financing Proceeds until ML/EQ has received aggregate distributions from the Venture in an amount equal to the capital contributions made to ML/EQ by the BAC holders plus a noncompounded cumulative return computed at the rate of 9.75% per annum on contributions outstanding from time to time. Prior to the amendment, the Partnership had a right to receive 20%
of all of the Venture's distributions of Sale or Financing Proceeds on a pari passu basis with ML/EQ. The amendment will have the effect of accelerating the return of original contributions to BAC holders to the extent that Sale and Financing Proceeds are realized prior to the dissolution of ML/EQ.
Business of the Partnership. The Partnership was formed to invest in a diversified portfolio of properties and mortgage loans. The Partnership considers its business to represent one industry segment, investment in real property. The Partnership has, however, developed a concentration of real estate investments with the inclusion of the Venture's interests in Northland Center and Brookdale Center. Such properties were transferred to the Venture and Equitable on July 22, 1994 and December 16, 1996, respectively. The Venture's interest in Northland Center represented approximately 31% and 30% of the real estate investments owned by the Venture as of December 31, 1996 and 1995, respectively, and approximately 46% and 54% of total revenues of the Venture for the years ended December 31, 1996 and 1995, respectively. The Venture's interest in Brookdale Center represented approximately 12% of the real estate investments owned by the Venture as of December 31, 1996 and approximately 15.3% of total revenues of the Venture in the year ended December 31, 1996. Combined retail real estate investments represented approximately 50% and 53% of real estate investments owned by the Venture as of December 31, 1996 and 1995, respectively, and approximately 67% and 66% of total revenues of the Venture for the years ended December 31, 1996 and 1995, respectively. The Partnership conducts its real estate investment business through the Venture. The capital of the Venture was provided approximately 20% by the Partnership through the contribution of interests in two zero coupon mortgage notes (see Item 2.
ITEM 2. PROPERTIES
At December 31, 1996, approximately 85.5% of the aggregate rentable square feet of the Venture's Properties was leased. Leases covering approximately 8.7%, 8.4% and 8.6% of the Properties rentable square feet are scheduled to expire in 1997, 1998 and 1999, respectively.
Set forth below is a brief description of each of the Venture's investments at December 31, 1996. Reference is made to Notes 3, 4, 5 and 9 of the Notes to Consolidated Financial Statements in Item 8. FINANCIAL STATEMENTS. The Venture has fee ownership of the land and improvements relating to each of the Properties.
_____________ (1) Excludes square feet of properties owned by certain anchor stores.
Projected Annual Aggregate Lease Payments to be Received (in dollars)(1)
_____________ (1) Lease payments to be received under noncancelable operating leases in effect as of December 31, 1996.
Range of Lease Expirations
Major Tenants
The following list sets forth major tenants for certain Properties together with percentage of space used by such tenants:
(A) Hudson's Department Store, J.C. Penney, Montgomery Ward, and Target independently constructed and operate their stores at Northland Center and each contributes common area maintenance payments for operating expenses and real estate taxes under separate agreements. These stores covering 511,509 square feet, 283,534 square feet, 117,750 square feet, and 116,222 square feet, respectively, are not included in the gross leasable area of the mall.
(B) Sears and Mervyn's owns their stores, the underlying land, and the parking fields adjacent to their stores. Dayton's, J.C. Penney and Kohl's ground lease the land underlying their stores, but own their buildings. Contributions by the stores for common area maintenance, real estate taxes, and HVAC costs are covered under separate agreements. These stores, covering 211,004 square feet, 138,279 square feet, 195,368 square feet, 150,589 square feet and 75,000 square feet, respectively, are not included in the gross leasable area of the mall.
All of the remaining Properties are leased in their entirety to their respective tenants.
Description of Properties
1200 Whipple Road is a one-story warehouse/distribution property located in the Hayward-Fremont market area, approximately 25 miles southeast of San Francisco. At December 31, 1996, the property was 100% leased to Broadway Stores, Inc., under a lease which runs through August 2003. The property is described in the March 17 Supplement, which is included as an exhibit to this annual report.
Richland Mall is a one-level enclosed mall located in Richland Township, Pennsylvania. Tenants include Bon Ton Department Store, Redner's Market Footlocker, and Radio Shack. At December 31, 1996, the Mall was approximately 95.0% leased with 9,062 square feet vacant. Excluding Bon Ton Department stores and Redner's Market, the two anchor stores, the Mall was 79.3% leased. Leases covering approximately 1.5%, 5.9% and 3.6% of the space are scheduled to expire in 1997, 1998 and 1999, respectively. Richland Mall is described in the Partnership's Current Report on Form 8-K dated July 19, 1988 (the "July Report"), which is included as an exhibit to this annual report.
Richland Mall has suffered from the continued weakness of the retail sector. Additionally, the current design, which is essentially an enclosed community center, has been unsuccessful in this market. Over the past year, due to a decrease in mall traffic caused by this outdated design, a number of retailers have vacated the center. Additionally, the Clemens Market (25,988 square feet) vacated in November 1996, their lease having expired and their new store having been completed approximately 1 1/2 miles north of Richland. Wal-Mart, which has been attempting to enter this market for the past few years, has received zoning approval and intends to begin construction in April 1997. The Wal-Mart store is expected to open in November 1997.
In an effort to strengthen Richland Mall's position in this market, management has embarked on a plan that will (i) address the physical drawbacks of the center and (ii) enhance tenant mix. Both of these goals, if achieved, are expected to increase the consumer appeal of the center, and thus, sales. The plan consists of three separate parts. The first part consists of releasing the vacant grocery store to a new tenant. This has been accomplished and a lease has been signed with Redner's Market ("Redner's"), a regional grocer. Redner's will take the Clemens space of approximately 26,000 square feet and also will take additional mall store space as well as common area, for a total store size of approximately 55,000 square feet. In order to accommodate Redner's, CVS and Radio Shack will be moved to the front of the center. In doing this the remaining tenants will be terminated, leaving the center with two vacant spaces, measuring approximately 28,000 square feet and 19,000 square feet each. The larger space,
located at the front of the center, is currently in lease negotiations with Ross Dress for Less, a national discount clothes retailer. The remaining smaller space is located generally behind the proposed Ross store. This space would only be attractive to a service type user, due to its poor visibility and access. Although a lease has been signed with Redner's, the lease is terminable by either Redner's or the landlord if the landlord does not obtain the required permit from the health department. The landlord believes it will obtain the required permit in the near future and that the lease will be binding on both parties.
Upon completion of this project, Richland will no longer be an enclosed community center, as the mall common area will be converted to leased space. The tenant roster is expected to consist of Redner's, Bon-Ton, CVS, Radio Shack and Ross Dress for Less, all of which are strong, credit-worthy tenants with a proven ability to draw customers. The expenses associated with the property are expected to drop substantially upon completion of the project, as there will be no "mall" to clean, heat, and cool. Management believes that this is the best strategy for repositioning the center. The entire project is expected to be completed by the end of 1997.
16/18 Sentry Park West are two four-story office buildings that together contain 186,243 rentable square feet. Tenants include Liberty Mutual Insurance Company and The Prudential Insurance Company. At December 31, 1996, the property was approximately 97.6% leased. Leases covering approximately 5.9%, 18.0% and 42.5% of the space are scheduled to expire in 1997, 1998 and 1999, respectively. The 16/18 Sentry Park West Property is described in the Partnership's Current Report on Form 8-K dated December 2, 1988, which is included as an exhibit to this annual report.
701 Maple Lane, 733 Maple Lane and 7550 Plaza Court are three one-story office/warehouse buildings located in the Chicago metropolitan area. At December 31, 1996, the buildings were 100% leased. Tenants include Triangle Engineered Products, Co., Acme Window Covers and Hi Performance, Inc. These properties are described in the Partnership's Current Report on Form 8-K dated December 27, 1988 (the "December Report"), which is included as an exhibit to this annual report. One lease covering approximately 44.4% of the space is scheduled to expire in 1998.
1850 Westfork Drive is a one-story warehouse/distribution facility located approximately 15 miles west of the Atlanta central business district. At December 31, 1996 the Property was 100% leased to Treadway Exports Limited ("Treadway"). The lease with Treadway commenced on September 1, 1992 and is for an initial term of three years with two renewal options for a total of an additional three years. On August 30, 1995, Treadway exercised the first renewal option for a term of two years. This lease will expire on August 30, 1997. The 1850 Westfork Drive Property is described in the December Report, which is included as an exhibit to this annual report.
1345 Doolittle Drive is a one-story warehouse/distribution property located in San Leandro, California approximately one mile south of Oakland International Airport. At December 31, 1996, the property was 100% leased. Tenants include Gruner & Jahr Printing and Publishing, Stericycle, Inc., National Distribution Agency, Jay-N Company, and OKI Supply Company.
Leases covering approximately 25.5% of the property expire in 1999. The 1345 Doolittle Drive Property is described in the Partnership's Current Report on Form 8-K dated May 18, 1989, which is included as an exhibit to the annual report.
800 Hollywood Avenue is a one-story warehouse/office building located in Itasca, Illinois. The building contains 2,500 rentable square feet of office space and 47,837 rentable square feet of warehouse space. The property is 100% leased to Concentric, Inc. through May 31, 2002. The lease requires the tenant to pay 100% of real estate taxes, insurance, and certain maintenance costs.
Northland Center, which was transferred to the Venture and Equitable by a deed in lieu of foreclosure on July 22, 1994, is a regional enclosed mall located in Southfield, Michigan. Tenants include Hudsons Department Store, J.C. Penney, Montgomery Ward and Target. As of December 31, 1996, the Center was approximately 79.9% leased (excluding the anchor stores). Leases covering approximately 2.3%, 15.6% and 2.2% of the space (excluding the anchor stores) are scheduled to expire in 1997, 1998 and 1999, respectively.
On March 17, 1995, Equitable, the Venture and Dayton Hudson Corporation signed an agreement allowing Target to locate a store at Northland. Target is a division of Dayton Hudson, which currently operates a Hudson's Department Store at Northland. Equitable and the Venture agreed to expend funds in the amount of $1,700,000 (of which the Venture's share was approximately $1,200,000) to ready a site for the Target store and to partially demolish the Kohl's store and redemise the remaining portion of Kohl's into mall shops. Target built its own store, which opened in April 1996.
Competitive conditions in the retail industry in general and shopping malls in particular have remained difficult. The Venture has tried to reposition its shopping malls to take advantage of the changing demographics of retail customers. However, given the continuing competitive difficulties in the retail industry, the Venture may be unable to sell its shopping malls at a favorable price within the next few years.
The Bank of Delaware Building, which was transferred to the Venture by deed in lieu of foreclosure on November 15, 1994, is a seventeen story office building in Wilmington, Delaware. PNC Bank, a major tenant, occupies 102,808 square feet, or 32.7% of the building. PNC's lease expires in May 2005 and contains an option to renew. PNC's rent is substantially below market rates. As of December 31, 1996, the building was approximately 52.3% leased. Over the past year, management has removed asbestos from a number of the vacant floors in the building. Currently, approximately 34,000 square feet of the 149,802 square feet of vacant space still contain asbestos, removal of which is scheduled for 1997. The majority of deferred maintenance has been corrected, and thus contemplated capital expenditures in 1997 will generally be for asbestos abatement, tenant improvements in connection with actual leasing and leasing commissions. Leases covering approximately 1.0%, 0.2% and 3.7% are scheduled to expire in 1997, 1998 and 1999, respectively.
Management has established an enhancement/stabilization and renovation program for the Bank of Delaware building. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for further information regarding this renovation program.
Brookdale Center, which was transferred to the Venture and Equitable on December 16, 1996, is a regional shopping mall located approximately five miles northwest of the central business district of Minneapolis, Minnesota. Anchor stores include J.C. Penney, Sears, Mervyn's, Dayton's and Kohl's. As of December 31, 1996, Brookdale Center was approximately 69.5% leased (excluding the anchor stores). Leases covering approximately 4.5%, 5.1% and 4.5% of the space are scheduled to expire in 1997, 1998 and 1999, respectively. See "-- Mortgage Loans Pursuant to Which the Venture Acquired Properties" for a discussion of the events leading to Equitable and the Venture's acquisition of Brookdale Center.
Management took possession of Brookdale Center on December 16, 1996, and is currently evaluating future strategies with respect to the mall. The ground lease and operating covenant for Dayton's, a major department store and one of the mall anchors, has expired. The operating covenant for Sears, another anchor tenant, expires in May 1997. While neither of these tenants has indicated a desire to leave the center, substantial capital expenditures could be required to obtain new ground leases/covenants from these tenants. Management is also evaluating a renovation of the mall common area and a plan to retenant the approximately 30% mall store vacancy. No definitive course of action has been decided upon. A comprehensive plan for this property should be complete in the second or third quarter of 1997.
Outstanding Mortgage Loan
Jericho Village Loan is a first mortgage loan to the Wilcon Company secured by an apartment complex in Weston, Massachusetts. Interest-only payments on the loan in the amount of $51,250 are due monthly in arrears during the term of the loan, with the full principal amount of the loan due upon maturity of the loan on February 1, 1999. The borrower may prepay the loan in full subject to a prepayment penalty based on a yield maintenance formula, but not less than 2% of the principal balance of the loan. The property which secures the loan consists of 22 free-standing one and two-story apartment buildings, containing a total of 99 apartment units. At December 31, 1996 the property was approximately 99% leased. The Jericho Village Loan and the property which secures it are described in the December Report, which is included as an exhibit to this annual report.
Mortgage Loans Pursuant to which the Venture Acquired Properties
Northland Zero Note was a first mortgage note secured by Northland Center, a regional enclosed mall which is located outside of Detroit, Michigan. The Venture acquired its 71.66% participation interest in 1988 from Equitable which held the remaining 28.34% interest. The Venture's participation interest had an estimated fair market value (including accrued interest) at the time of acquisition of $20,774,985. The borrower was Midwest. The note had an implicit interest rate of 10.2 % compounded semiannually with the Venture's portion of the principal and accrued interest totaling $42,882,504 due June 30, 1995. The note provided that the borrower could elect to pay interest currently; however, no interest was paid through July 22, 1994.
Management discontinued the accrual of interest on the Northland note during the quarter ended June 30, 1993 as the accreted value of the mortgage approximated the estimated fair market value of the Northland Center. The Northland mortgage note and first mortgage were accounted for as an in-substance foreclosure at December 31, 1993, and the zero mortgage note was reclassified as an other real estate asset. The Venture recognized a loss of $7,628,000 as of December 31, 1993 to record Northland Center at its estimated fair market value. This amount included $4,730,000 reserved by the Venture as its share of the $6.6 million to be paid to Midwest on the transfer of Northland Center.
On July 22, 1994, Midwest transferred Northland Center to the Venture and Equitable in proportion to their respective undivided interests in the Northland mortgage. Following the transfer which was retroactive as of January 1, 1994, Northland Center was reclassified from other real estate assets to rental properties and income and expenses were recorded from that date. The Venture records its proportionate share of the assets, liabilities, revenues, and expenses of the undivided interests in the Northland Center in accordance with the tenancy in common arrangements set forth in the Participation Agreement dated September 27, 1988 between the Venture and Equitable, which is included as an exhibit to this annual report. The Venture and Equitable paid the owner $6.6 million at the time of transfer (an amount which was determined to approximate the net present value of the anticipated cash flow from Northland Center, subject to closing adjustments, for the period from January 1, 1994 through June 30, 1995, the date the Northland mortgage would have matured).
For additional information concerning the Northland Note, reference is made to the information under "REAL PROPERTY INVESTMENTS--The Zero Notes" and "REAL PROPERTY INVESTMENT--Brookdale and Northland Zero Notes" in the Prospectus, "REAL PROPERTY INVESTMENTS - The Zero Notes" in the March 17 Supplement, and Note 1 to Notes to Financial Statements to ML/EQ's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1988, all of which information are included as exhibits to this annual report.
Bank of Delaware Building Loan was a first mortgage loan secured by a 17-story office building in the Wilmington central business district. The owners of The Bank of Delaware Building defaulted on the mortgage loan receivable and the Venture accounted for the transaction as an in-substance foreclosure at December 31, 1993. Accordingly, the mortgage loan receivable was reclassified to other real estate assets at its estimated fair market value as of that date, and the Venture began recording operating revenues and expenses of the building. In the third quarter of 1994, the Venture recognized a loss of $1,000,000 due to valuing The Bank of Delaware Building at the most recent estimated fair market value. Subsequently, on November 15, 1994, the Venture acquired title to The Bank of Delaware Building by a deed in lieu of foreclosure. In connection with the deed in lieu transaction, the Venture received a $350,000 cash payment plus the property's operating cash account, which reduced the loss on the transaction to approximately $380,000.
Brookdale Zero Note was a first mortgage note secured by Brookdale Center, a regional shopping mall located approximately five miles northwest of the central business district of Minneapolis, Minnesota. The Venture acquired its 71.66% participation interest in 1988 from Equitable which held the remaining 28.34% interest. The Venture's participation interest had a fair value (including accrued interest) at the time of acquisition of $12,278,885. The borrower was Midwest. The note had an implicit interest rate of 10.2% compounded semiannually, with the Venture's portion of the principal and accrued interest totaling $25,345,353 due June 30, 1995.
Management discontinued the accrual of interest relating to the Brookdale note beginning with the second quarter of 1995 as the accreted value of the mortgage approximated the estimated fair market value of the Brookdale Center. The Venture's share of the note plus accrued interest at the time was $24,730,409.
An internal review of the property, performed for the Venture as of September 30, 1995, estimated the fair market value of Brookdale Center to be $30,000,000. The Venture recorded a valuation allowance of $3,232,210 to value its interest in the Brookdale Zero Note at an amount equal to the Venture's participation interest in the note multiplied by the estimated fair market value of the Center, or $21,498,199. This valuation allowance was presented on the consolidated balance sheets as a decrease in assets and partners' capital and on the consolidated statements of operations as a provision for impairment on zero coupon mortgage. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
On December 16, 1996, Brookdale Center was transferred to the Venture and Equitable, as tenants in common pursuant to a Chapter 11 bankruptcy plan for Midwest that was approved by the Bankruptcy Court on November 25, 1996. The consideration for this transfer was (i) release of Midwest from its obligations under the Brookdale zero coupon note and (ii) payment to Midwest of $500,000, of which the Venture's portion was $358,303.
An internal review of the property, performed for the Venture as of the date of transfer, estimated the fair market value of Brookdale Center to be $21,700,000, of which Venture's portion was $15,550,364. Following the transfer, Brookdale Center was reclassified from zero coupon mortgage note receivable to rental properties and income and expenses were recorded from that date. The Venture recognized a loss of $6,211,644 to record Brookdale Center at its estimated fair market value. The Venture records its proportionate share of the assets, liabilities, revenues, and expenses of the undivided interest in Brookdale Center in accordance with the Participation Agreement dated March 3, 1988 between the Venture and Equitable, as amended on March 10, 1988, which is included as an exhibit to this annual report.
For additional information concerning the Brookdale Note and the Brookdale Center, see "REAL PROPERTY INVESTMENTS--The Zero Notes" and "REAL PROPERTY INVESTMENTS--Brookdale and Northland Zero Notes" in the Prospectus, "REAL PROPERTY INVESTMENTS -- The Zero Notes" in the March 17 Supplement, and Note 1 to Notes to Financial Statements to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, all of which information is included as exhibits to this annual report.
Midwest is subject to the informational requirements under the Exchange Act, and in accordance therewith files reports and other information, including financial statements, with the Securities Exchange Commission under Commission File No. 1-9331. Such reports and other information filed by Midwest can be inspected and copied at the public reference facilities maintained by the SEC in Washington, D.C. and at certain of its Regional Offices, and copies may be obtained from the Public Reference Section of the SEC, Washington, D.C. 20549, at prescribed rates.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On November 29, 1995, a class action suit was filed in the Superior Court of the State of California, County of San Diego (No. 694936), against ML/EQ, Merrill Lynch, the principal operating subsidiary of Merrill Lynch, and certain subsidiaries and limited partnerships affiliated with Merrill Lynch. The complaint alleges, among other things, that defendants breached their fiduciary duties, committed fraud and violated California business practice laws in connection with the sale of certain limited partner interests. The suit has been removed to the United States District Court for the Southern District of California and transferred to the Southern District of New York. The case has been dismissed with respect to ML/EQ on the grounds that the statute of limitations be tolled through November 27, 1996.
Several class action suits have been filed against Midwest, the general partner of Midwest, certain officers of such general partner, Lehman Brothers, Inc., Equitable and Equitable Real Estate. The complaints allege, among other things, that defendants breached their fiduciary duties and violated federal securities laws in connection with the initial sale of BACs the operation of Midwest, and Midwest's sale of Northland Center to the Venture and Equitable. Neither the Venture, ML/EQ, or the Partnership has been named as a party to the lawsuit.
On October 30, 1996, the plaintiffs in one of the class action suits previously filed against Midwest, Equitable and others filed a claim for equitable subordination against Equitable in the Midwest bankruptcy proceeding. The claim alleges, among other things, that Equitable breached a fiduciary duty to Midwest's investors and violated federal securities laws in connection with the initial sale of interests in Midwest and, as such, that Equitable should not be entitled to preferential treatment in bankruptcy court. On December 16, 1996, Brookdale Center was transferred to the Venture and Equitable in a bankruptcy court proceeding free and clear of any claims that Midwest or any other creditors may have. Ultimate resolution of this claim is expected to have no effect on Brookdale Center or the Venture.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
There is no market for the Guaranty Agreement and it is not expected that one will develop. No public trading market for BACs or Interests exists nor is it expected that one will develop. BACs are transferable as provided in Article Seven of the Partnership Agreement. Subject to certain restrictions, the General Partners of ML/EQ are authorized to impose restrictions on the transfer of BACs or Interests (or take such other action as they deem necessary or appropriate) so that ML/EQ is not treated as a "publicly-traded partnership" as defined in Section 7704(b) of the Internal Revenue Code of 1986 (or any similar provision of succeeding law) which could result in adverse tax consequences.
BAC Holders will receive cash distributions, allocations of taxable income and tax loss and guaranty proceeds as provided in Article Four of the Partnership Agreement. For additional information regarding the Guaranty Agreement, see Item 1. BUSINESS.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth a summary of the selected financial data for the Partnership for the years ended December 31, 1996, 1995, 1994, 1993 and 1992.
The above selected financial data for the years 1994 through 1996 should be read in conjunction with the financial statements and the related notes appearing elsewhere in this annual report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership has not established working capital reserves at any level. The Partnership may establish and maintain such working capital reserves as the General Partners, from time to time, determine are appropriate in light of the Venture's investments and other considerations. The
Partnership owns a 20% interest in the Venture. At December 31, 1996, the Venture owned interests in ten real properties, undivided interests in two real properties as a tenant in common with Equitable and one Mortgage Loan on a real property. Nine of the Properties were purchased at an aggregate cost of approximately $68.1 million. Two of the Properties, Northland Center and The Bank of Delaware Building (originally properties that secured a Zero Note and a Fixed-Rate Mortgage Loan, respectively), were transferred to the Venture during 1994 in separate deed in lieu of foreclosure transactions. The estimated fair market value of the Venture's undivided interest in the Northland Center Zero Coupon Mortgage Note Receivable immediately preceding the transfer was approximately $32.2 million and the estimated fair market value of the Bank of Delaware Building Mortgage Loan immediately preceding the transfer was approximately $8.5 million. Brookdale Center (originally a property that secured a Zero Note) was transferred to the Venture during December 1996 pursuant to a Chapter 11 bankruptcy plan for Midwest Real Estate Shopping Center, L.P. ("Midwest"), a publicly traded limited partnership (formerly Equitable Real Estate Shopping Centers, L.P.), the borrower. The estimated fair market value of the Venture's undivided interest in the Brookdale Loan immediately preceding the transfer was approximately $15.6 million. At December 31, 1996, the Venture also had approximately $25.3 million in cash and cash equivalents which is intended to be utilized primarily to fund the renovation work on the Bank of Delaware Building, to fund possible costs incurred to increase occupancy at Richland Mall, to fund capital improvements at the Venture's other Properties, to cover general working capital requirements, and to make distributions to the Venture's partners. These funds, in addition to reserves from future operations, may also be used to fund improvements deemed to be necessary on the Brookdale Center.
All of the Venture's properties and the Mortgage Loan were acquired without mortgage indebtedness, and neither the Venture nor the Partnership has incurred any borrowings. All of the Venture's Properties and its Mortgage Loans are currently producing operating cash flow to the Venture which, net of expenses of the Venture and the establishment or increase of reserves, is distributable 20% to the Partnership and 80% to ML/EQ.
Under the terms of the Brookdale Zero Note, which was secured by Brookdale Center, principal and interest in the aggregate amount of $35,368,572 was due on June 30, 1995, of which the Venture's portion was $25,345,353. Midwest defaulted on its obligation to repay the Brookdale Zero Note in full on the maturity date. Notice of default was given to Midwest. For book purposes, beginning the second quarter of 1995, the Venture discontinued the accrual of interest on the Brookdale Zero Note as the accreted value of the mortgage approximated the estimated fair market value of Brookdale Center. Under the terms of the mortgage agreement, however, the Venture continued to accrue interest off the books at the effective implicit rate of 10.2% until June 30, 1995. On July 1, 1995, the Venture began to accrue interest off the books at the default rate of 19.0%.
Additionally, Equitable and the Venture commenced foreclosure proceedings and a court-appointed receiver was named. The receiver was responsible for collecting rent proceeds from the tenants at Brookdale Center and applying the proceeds to payments of operating costs at Brookdale Center. Any remaining funds were paid to Equitable and the Venture on account of the Zero Note. The Venture recorded cash received from the operations of Brookdale Center as interest income.
During 1996 and 1995, approximately $1,975,000 and $700,000, respectively were remitted under the terms of the receivership. The Venture's portion of these payments was approximately $1,415,000 and $502,000, respectively.
As of September 30, 1995, an internal review of the Brookdale Center was performed for the Venture. Based on this review, the estimated fair market value of Brookdale Center was $30,000,000 at that date. The Venture recorded a valuation allowance of $3,232,210 to value the note at an amount equal to the Venture's participation interest in the note multiplied by the estimated fair market value of Brookdale Center, or $21,498,199. The valuation allowance is presented on the consolidated balance sheets as a decrease in assets and partners' capital and on the consolidated statements of operations as a loss on write-down of zero coupon mortgage.
In April, 1996 the Lender agreed in principal to a workout arrangement with Midwest on the Brookdale zero note under which Midwest filed for Chapter 11 bankruptcy protection and, with the support of Lender, submitted a plan or reorganization to the Bankruptcy Court for approval. The workout arrangement was memorialized in a nonbinding letter agreement dated April 11, 1996 (the "Letter Agreement") between Midwest and Equitable and approved by the Board of Directors of EREIM Managers Corp., the general partner of the Partnership, on behalf of the Venture.
On June 20, 1996 Midwest filed a voluntary petition for Chapter 11 bankruptcy protection, as contemplated by the Letter Agreement, staying the Brookdale foreclosure proceeding and terminating the receivership arrangement. However, as further contemplated by the Letter Agreement, Midwest subsequently obtained Bankruptcy Court approval to retain the management company that had served as receiver prior to the bankruptcy filing as Brookdale's property manager.
In addition, the Bankruptcy Court, with the agreement of Midwest and Lender, entered a cash collateral order as contemplated by the Letter Agreement, pursuant to which all positive cash flows from the property in excess of property- related expenses and certain administrative costs of the bankruptcy, not to exceed $25,000, were paid to the Lender during the bankruptcy. The Venture recorded cash received from the operation of Brookdale Center as interest income. During 1996, approximately $2,890,000 was remitted under the terms of the cash collateral order. The Venture's portion of these payments was approximately $2,071,000.
On December 16, 1996, Brookdale Center was transferred to the Venture and Equitable as tenants in common, pursuant to a Chapter 11 bankruptcy plan for Midwest that was approved by the Bankruptcy Court on November 25, 1996. The consideration for this transfer was (i) release of Midwest from its obligations under the Brookdale Zero Note and (ii) payment to Midwest of $500,000, of which the Venture's portion was $358,303. Following the purchase, Brookdale Center was reclassified from zero coupon mortgage note receivable to rental properties and income and expenses were recorded from that date. The Venture recognized a loss of $6,211,644 to record Brookdale Center at the estimated fair market value. An internal review of the property, performed for the Venture as of the date of transfer, estimated the fair market value of Brookdale Center to be $21,700,000, of which Venture's portion was $15,550,364. Following the transfer, Brookdale Center was reclassified from zero coupon mortgage note receivable to rental properties and income
and expenses were recorded from that date. The Venture recognized a loss of $6,211,644 to record Brookdale Center at its estimated fair market value.
Management of the Venture has established an enhancement/stabilization and renovation program for the Bank of Delaware Building which was transferred to the Venture by deed in lieu of foreclosure on November 15, 1994. Estimated costs for this program total $4.3 million, of which $1.6 million was incurred in 1995, $1.2 million was incurred in 1996, and approximately $800,000, $530,000 and $260,000 is expected to be incurred in 1997, 1998 and 1999, respectively. As of December 31, 1996, approximately $2.6 million of these costs had been expended. Approximately $159,000 in capital costs at the Bank of Delaware Building have been accrued but not paid as of December 31, 1996.
Included in the estimated $4.3 million of renovation expenditures is approximately $2.3 million for asbestos abatement, of which approximately $1.6 million has been expended. Also included in the $4.3 million is $400,000 for sprinkler installation and $400,000 for exterior deferred maintenance and $600,000 for interior and exterior common area cosmetic upgrades. To date, approximately $170,000 remains to be expended for sprinkler installation, and approximately $150,000 remains to be spent on the interior portion of the common area upgrades. Management expects these upgrades to give the building a fresher, more inviting look. Additional costs not included in the above figures are estimated tenant improvements of $3.0 million. The tenant improvement costs are directly associated with actual leasing and will only be expended as leasing transactions occur in the building. As of December 31, 1996, approximately $190,000 had been expended for tenant improvements. Tenant improvement costs of $2.8 million (excluding the $190,000 spent to date) are expected to be expended over the next few years to tenant the currently vacant space.
For 1996, the Partnership's distributions received from the Venture totaled $600,000. In addition, the Partnership received payments totaling $368,002 in respect of the fee for providing the guarantee of minimum return pursuant to the Guarantee Agreement. The Partnership will continue to be entitled to the recurring portion of the Guarantee Fee at the rate of .35% of average annual adjusted capital contributions of BAC Holders. The Partnership currently distributes all or substantially all of its share of cash distributions from the Venture (as well as payments of the Guarantee Fee) to its partners and expects to continue to do so.
Under the terms of the Guaranty Agreement which has been assigned to ML/EQ, following the earlier of the sale or other disposition of the Properties and Mortgage Loans or the liquidation of ML/EQ, the Partnership has guaranteed to pay an amount which, when added to all distributions from ML/EQ to the BAC Holders, will enable ML/EQ to provide the BAC Holders with a minimum return equal to their original capital contributions plus a simple annual return equal to 9.75% simple interest per annum multiplied by their adjusted capital contributions, calculated from the investor closing at which an investor acquired his or her BACs, subject to certain limitations. Since inception, ML/EQ has made the following distributions:
The distribution made on August 31, 1992 to holders of record as of June 30, 1992 includes a $0.162 distribution of Sale or Financing Proceeds associated with the termination of the lease with Saab-Scania of America, Inc. ("Saab") at 1850 Westfork Drive. ML/EQ withheld the distribution for the semiannual period that would have been made in August 1993. All of the distributions made in 1994, 1995, and 1996 constitute distributions of Sale or Financing Proceeds derived from a portion of the proceeds from the pay-off of the Mortgage Loan to the Second Merritt Seven Joint Venture (the "201 Merritt Seven Loan") on November 22, 1993. There were no distributions of Distributable Cash from operations during 1994, 1995 and 1996. The determination to withhold the 1994 distributions was based upon the then anticipated needs of the Venture to fund capital improvements to Northland Center in order to preserve the Venture's equity in the Northland Zero Note in addition to other working capital needs of the Venture. The determination to withhold the 1995 distributions was based on the likelihood of significant capital expenditures for the renovation of The Bank of Delaware Building as well as uncertainty regarding the level and timing of any expenditures relating to Brookdale Center. The determination to withhold the 1996 distributions was based on the needs of the Venture to fund significant capital expenditures for the renovation of The Bank of Delaware Building, costs incurred at Richland Mall to increase tenancy, and the Venture's pro rata share of costs incurred in connection with the Brookdale zero coupon mortgage note. The amounts of Distributable Cash will be dependent on the results of the Venture's and ML/EQ's operations.
The levels of cash distributions from the Venture to the Partnership and ML/EQ principally will be dependent on returns from the Venture's investments, after taking account of capital expenditures and future reserve requirements. These amounts are expected to fluctuate from time to time based on changes in occupancy, rental and expense rates at the Venture's properties, mortgage loan payment and maturity schedules, and other factors.
During 1994, 1995 and 1996, the Venture received approximately $499,000, $1,502,000, and $179,000 respectively, for early lease termination payments. These early lease termination payments are classified as Sale or Financing Proceeds and are being held as reserve for future
improvements on the Properties. The amount and timing of distributions from Sale or Financing Proceeds depend upon payments of the Mortgage Loan and maturity schedules, the timing of disposition of Properties, as well as the need to allocate such funds to increase reserves.
The Venture, ML/EQ, and the Partnership are all intended to be self-liquidating in nature, meaning that proceeds from the sale of properties or principal repayments of loans will not be reinvested but instead will be distributed to BAC Holders and partners, subject to certain limitations.
The obligations of the Partnership under the Guaranty Agreement are nonrecourse as to Equitable but are recourse as to LP Corp. Equitable has entered into a Keep Well Agreement with LP Corp. which provides that Equitable will make capital contributions to LP Corp. in such amounts as to permit LP Corp. to pay its obligations with respect to the Guaranty Agreement as they become due; provided, however, that the maximum liability of Equitable under the Keep Well Agreement is an amount equal to the lesser of (i) two percent of the total admitted assets of Equitable (as determined in accordance with New York Insurance Law) or (ii) $271,211,250. Subject to the foregoing, the obligations of Equitable under the Keep Well Agreement as of December 31, 1996 are $244,905,999. The Keep Well Agreement provides that only LP Corp. and its successors will have the right to enforce Equitable's obligation thereunder. See "INVESTMENT GUARANTY AGREEMENT AND RELATED MATTERS."
As of December 31, 1996, the cumulative minimum return (computed at 9.75% simple interest per annum on ML/EQ's Limited Partners' Adjusted Capital Contributions) was $92,031,083 plus the Limited Partners' Adjusted Capital Contributions. The guarantee amount is the Minimum Return reduced by the semiannual distributions of cash to the Limited Partners of ML/EQ, other than cash distributed to the Limited Partners as a result of Sale or Financing Proceeds, Guaranty Proceeds, and Liquidation Proceeds, as defined in ML/EQ's Partnership Agreement. As of December 31, 1996, the cumulative amount of cash distributions paid other than cash distributions paid as a result of Sale or Financing Proceeds to the BAC Holders and limited partners was $11,662,084. As of December 31, 1996, the cumulative amount of cash distributions paid as a result of Sale or Financing Proceeds received by the Venture was $4,675,667. Distributions constituting Sale or Financing Proceeds declared as of December 31, 1996, paid in February 1997, totaled $813,634. Assuming that the last property is sold on December 31, 2002, upon expiration of ML/EQ, the Partnership's maximum liability under the Guarantee Agreement as of December 31, 1996 is $244,905,999.
Financial Condition
The Partnership's financial statements reflect its proportional ownership interest in, and its share of the results of operations of, the Venture, through which the Partnership conducts its business of investment in real property and first mortgages. Although the Partnership was formed in 1986, it did not commence operations until March 1988, following ML/EQ's receipt of the first proceeds of the offering of BACs. Thereafter, utilizing the net proceeds of the Offering, the Partnership and ML/EQ (through the Venture) began the acquisition of real estate investments. The Venture substantially completed its acquisition phase in 1989.
The increase in investment in joint venture at December 31, 1996 as compared to December 31, 1995, resulted from the excess of equity in net income of the Venture over actual cash distributions from the Venture.
The increase in EREIM LP Corp.'s and Equitable's capital accounts at December 31, 1996 as compared to December 31, 1995 is attributable to the respective shares of net income of the Partnership in excess of cash distributions by the Partnership to EREIM LP Corp. and Equitable.
Inflation has been at relatively low levels during the periods presented in the financial statements and, as a result, has not had a significant effect on the operations of the Partnership, the Venture or their investments. Over the past several years, the rate of inflation has exceeded the rate of rental rate growth in many of the Venture's properties. During the recent real estate downturn, rental rated dropped, indicating a negative growth rate. This negative growth appears to have ceased, and rental rates have stabilized in many of the Properties' markets. Real recovery in rental rates, if achieved at all, will likely occur over an extended period of time.
Results of Operations
Equity in net income of the Venture decreased approximately $632,000 from 1996 to 1995 due to a decrease in the Venture's net income. The Venture's net income decreased as a result of a loss of approximately $6.2 million that was recorded during 1996 to record the Venture's undivided interest in Brookdale Center at its estimated fair market value compared to a valuation allowance of approximately $3.2 million that was recorded during 1995 to value the Brookdale Zero Note at an amount equal to the Venture's participation interest on the note multiplied by the estimated fair market value of Brookdale Center. Equity in net income of the Venture decreased approximately $693,000 from 1994 to 1995 due to a decrease in the Venture's net income. The Venture's net income decreased approximately $3.5 million primarily as a result of the valuation allowance of approximately $3.2 million established on the Brookdale Note.
General and Administrative expenses decreased approximately $25,000 from 1995 to 1996 and increased approximately $21,000 from 1994 to 1995 due to the timing of the accrual and payment of audit and tax fees in 1996 compared to 1995 and 1995 compared to 1994, respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included in Item 14 of this annual report:
EREIM LP ASSOCIATES
Independent Auditors' Report
Balance Sheets, December 31, 1996 and 1995
Statements of Income for the years ended December 31, 1996, 1995 and 1994
Statements of Partners' Capital for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
EML ASSOCIATES
Independent Auditor's Report
Balance Sheets, December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995, and 1994
Statements of Partners' Capital for the years ended December 31, 1996, 1995, and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994
Notes to Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is a general partnership and has no directors or officers.
For informational purposes only, certain information regarding LP Corp. and its directors and officers is set forth below.
The names and titles of the directors and officers of LP Corp. as of March 15, 1997 are as follows:
All of the directors have been elected to serve until the next annual meeting of the shareholder of LP Corp. or until their successors are elected and qualify. All of the officers have been elected to serve until their successors are elected and qualify.
The business experience of the directors and executive officers of LP Corp. is set forth below.
Harry D. Pierandri has been Chairman of the Board, President, Chief Executive Officer and a director of LP Corp. since June 1987. Mr. Pierandri joined Equitable in 1972 and is a Senior
Executive Vice President of Equitable Real Estate Investment Management, Inc. ("Equitable Real Estate"), a wholly-owned subsidiary of Equitable, responsible for managing the $3 billion Prime Property Fund, an open-end fund comprised of all major property types. He has also been a Vice President of Equitable since 1981.
Joyce R. Frater has been Vice President and a director of LP Corp. since June 1987. Ms. Frater joined Equitable in 1969, was elected Executive Vice President in 1990 and was elected Senior Vice President of Equitable Real Estate in 1984. Ms. Frater is responsible for institutional marketing and communications.
B. Stanton Breon has been a Director of LP Corp. since March 1996. He joined Equitable Real Estate in 1982 and was elected a Vice President in 1993. He is currently responsible for the management of portfolios aggregating approximately $1 billion of assets. Prior thereto, Mr. Breon was a Director of Appraisal for the Philadelphia regional office of Equitable Real Estate, responsible for valuation of real estate portfolios as well as coordination of the Commercial Loan Restructuring/Workout division of the office.
Janet Hannon has been Secretary of LP Corp. since June 1987. Ms. Hannon joined Equitable in 1986 and was elected Assistant Secretary of Equitable in 1989. Ms. Hannon performs the function of Corporate Secretary to numerous investment and insurance subsidiaries of Equitable.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
All of the directors and officers of the LP Corp. are employees of Equitable Real Estate. Neither they, nor any officer or director of Equitable or Equitable Real Estate is separately compensated for services provided to the General Partners or, on behalf of the General Partners or the Partnership, to the Venture.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Partnership has not issued any voting securities. There are no arrangements known to the Partnership, the operation of which may, at a subsequent date, result in change in control of the Partnership. Certain information regarding ownership of BACs is set forth under Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Annual Report on Form 10-K of ML/EQ for the fiscal year ended December 31, 1996, which is filed as an exhibit to this annual report and incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to Item 2. PROPERTIES (and the relevant portions of the Prospectus and Supplements thereto incorporated therein) for information relating to the acquisition by the Venture of the Notes from Equitable.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are filed with this report on the pages indicated:
2. The following audited financial statement schedules are filed with this report on the pages indicated:
Schedules Not Filed:
All schedules except those indicated above have been omitted as the required information is not applicable or the information is shown in the financial statements or notes thereto.
3. Exhibits
See Item 14(c) below.
(b) The Partnership filed no current Reports on Form 8-K during the last quarter of the period covered by this Report.
(c) Exhibits.
4. (a) Amended and Restated Agreement of Limited Partnership of ML/EQ Estate Portfolio, L.P. dated April 23, 1987. Included as an Exhibit to the Prospectus (see Exhibit 99(a)).
(b) Amendment to Amended and Restated Agreement of Limited Partnership dated February 9, 1988 (incorporated by reference to Exhibit 4(b) to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1987 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064) (the "1987 10-K")).
10. Material Contracts.
(a) Form of Beneficial Assignee Certificate (incorporated by reference to Exhibit 10(a) to Pre- Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33- 11064)).
(b) Agreement Between General Partners of ML/EQ (incorporated by reference to Exhibit 10(c) to the 1987 10-K).
(c) Joint Venture Agreement of EML Associates (incorporated by reference to Exhibit 10(d) to the 1987 10-K).
(d) Investment Guaranty Agreement between the Venture and the Partnership (incorporated by reference to Exhibit 10(e) to the 1987 10-K).
(e) Assignment Agreement between ML/EQ and Venture (incorporated by reference to Exhibit 10(f) to the 1987 10-K).
(f) Keep Well Agreement between The Equitable Life Assurance Society of the United States and EREIM LP Corp. (incorporated by reference to Exhibit 10(g) to the 1987 10-K).
(g) Amended and Restated Agreement of General Partnership of EREIM LP Associates (incorporated by reference to Exhibit 10(h) to the 1987 10-K).
(h) Promissory Notes and Mortgages Relating to Brookdale and Northland (incorporated by reference to Exhibit 10(i) to Pre-Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33-11064)).
(i) Contract to Purchase 1200 Whipple Road, Union City, California (incorporated by reference to Exhibit 10(j)) to Post-Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33-11064)).
(j) Lease Agreement Pertaining to 1200 Whipple Road, Union City, California (incorporated by reference to Exhibit 10(k) to Post-Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33-11064)).
(k) Participation Agreements relating to Brookdale and Northland Notes (incorporated by reference to Exhibit 10(1) to the 1987 10-K).
(l) Amendments to Participation Agreements relating to Brookdale and Northland Notes (incorporated by reference to Exhibit 10(1) to Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064) (the "1988 10-K").
(m) Agreement of Sale between Richland Mall Associates and EML Associates dated July 19, 1988 (incorporated by reference to Exhibit No. 1 to Form 8-K dated July 19, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(n) Note and Mortgage dated September 27, 1988 relating to the loan by EML to Second Merritt Seven (incorporated by reference to Exhibit No. 1 to Form 8-K dated September 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(o) Form of Participation Agreement between The Equitable Life Assurance Society of The United States and EML Associates dated September 27, 1988 (incorporated by reference to Exhibit No. 2 to Form 8-K dated September 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(p) Agreement of Sale among EML, Blue Bell Office Campus Associates, a Pennsylvania limited partnership, E. F. Hansen Jr. and G. Eileen Hansen dated December 2, 1988 (incorporated by reference to Exhibit No. 1 to Form 8-K dated December 2, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(q) Agreement of Sale between Provident Mutual Life Insurance Company of Philadelphia and EML Associates dated December 27, 1988 (incorporated by reference to Exhibit No. 1 to Form 8-K dated December 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(r) Agreement of Sale between Anderson Partners (Southside/Corporate Lakes) L.P., Gene Anderson, Auerbach Associates Ltd. and EML Associates dated as of December 31, 1988 (incorporated by reference to Exhibit No. 2 to Form 8-K dated December 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(s) Note and Mortgage and Security Agreement dated January 31, 1989 relating to loan by EML to The Wilcon Company (incorporated by reference to Exhibit No. 4 to Form 8-K dated December 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(t) Note and Mortgage dated February 28, 1989 relating to the loan by EML to 300 Delaware Avenue Associates (incorporated by reference to Exhibit 10(u) to the 1988 10-K.)
(u) Agreement of Sale among Lincoln San Leandro IV Limited Partnership, Patrician Associates, Inc. and EML Associates dated April 21, 1989
(incorporated by reference to Exhibit (c)1 to Form 8-K dated May 18, 1989 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(v) Agreement dated March 25,1994 between The Equitable Life Assurance Society of the United States and Midwest Real Estate Shopping Center L.P. (formerly Equitable Real Estate Shopping Centers L.P.) (incorporated by reference to Exhibit 10(v) to Form 10-K for the year ended December 31, 1994 of EREIM LP Associates) (the "1994 Form 10-K").
(w) Deed in Lieu of Foreclosure Agreement dated November 15, 1994 by and between Three Hundred Delaware Avenue Associates, L.P. and EML Associates (incorporated by reference to Exhibit 10(w) to the 1994 Form 10-K).
(x) Lease Termination Agreement dated as of January 27, 1995 by and between The Equitable Life Assurance Society of the United States and Kohl's Department Stores (incorporated by reference to Exhibit 10(x) to the 1994 Form 10-K).
(y) Amendment to Lease Termination Agreement dated as of February 17, 1995 by and between The Equitable Life Assurance Society of the United States and Kohl's Department Stores, Inc. (incorporated by reference to Exhibit 10(y) to the 1994 Form 10-K).
(z) Purchase Agreement dated as of March 10, 1995 by and among The Equitable Life Assurance Society of the United States, the Venture and Dayton Hudson Corporation (incorporated by reference to Exhibit 10(z) to the 1994 Form 10-K).
27. Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only.
99. Additional Exhibits.
(a) Prospectus dated April 23, 1987, as supplemented by supplements dated March 3, 1988 and March 17, 1988 (incorporated by reference to Exhibit 28 to the 1987 10-K).
(b) Quarterly Report on Form 10-Q of ML/EQ Real Estate Portfolio, L.P. for the quarter ended June 30, 1988 (incorporated by reference to File No. 33-11064)
(c) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P dated July 19, 1988 (incorporated by reference to File No. 33-11064).
(d) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated September 27, 1988 (incorporated by reference to File No. 33-11064).
(e) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated December 2, 1988 (incorporated by reference to File No. 33-11064).
(f) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated December 27, 1988 (incorporated by reference to File No. 33-11064).
(g) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated May 18, 1989 (incorporated by reference to File No. 33-11064).
(h) Audited Financial Statements of Midwest Shopping Centers, L.P. (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995, of Midwest Shopping Centers L.P. File No. 1-9331)
(i) Amendment to Joint Venture Agreement dated as of January 1, 1997 between ML/EQ Real Estate Portfolio, L.P. and EREIM LP Associates
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 behalf by the undersigned, thereunto duly authorized on the 28th day of March, 1997.
EREIM LP ASSOCIATES
By: EREIM LP CORP. (General Partner)
By: /s/ Harry D. Pierandri ---------------------------- HARRY D. PIERANDRI President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 28, 1997.
Chairman of the Board of, President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Harry D. Pierandri of EREIM LP Corp. - ----------------------------------- HARRY D. PIERANDRI
Vice President and Director /s/ Joyce R. Frater of EREIM LP Corp. - ----------------------------------- JOYCE R. FRATER
/s/ B. Stanton Breon Director of EREIM LP Corp. - ----------------------------------- B. STANTON BREON
EREIM LP ASSOCIATES
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
EREIM LP Associates:
We have audited the accompanying balance sheets of EREIM LP Associates (the "Partnership") as of December 31, 1996 and 1995 and the related statements of income, partners' capital, and cash flows for each of the three years in the period ended December 31, 1996. 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, such financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Atlanta, Georgia February 6, 1997
EREIM LP ASSOCIATES
BALANCE SHEETS DECEMBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------
See notes to financial statements.
EREIM LP ASSOCIATES
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - -----------------------------------------------------------------------------
See notes to financial statements.
EREIM LP ASSOCIATES
STATEMENTS OF PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - -------------------------------------------------------------------------------
See notes to financial statements.
EREIM LP ASSOCIATES
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - ------------------------------------------------------------------------------
See notes to financial statements.
EREIM LP ASSOCIATES
NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - -------------------------------------------------------------------------------- 1. ORGANIZATION
EREIM LP Associates (the "Partnership") was formed on December 18, 1986 for the primary purpose of serving as a general partner of EML Associates (the "Venture"), a joint venture with ML/EQ Real Estate Portfolio, L.P. ("ML/EQ"). The Venture was formed to invest in existing income-producing real properties, zero coupon or similar mortgage notes, and fixed rate mortgage loans. The Partnership owns a 20% interest in the Venture.
The Partnership is a New York general partnership between The Equitable Life Assurance Society of the United States ("Equitable") and EREIM LP Corp., a wholly owned subsidiary of Equitable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Partnership Allocations - In accordance with the provisions of the Amended and Restated Agreement of General Partnership of EREIM LP Associates, all income, gains, losses, deductions, credits, and distributions are allocated to each partner in proportion to their respective capital contributions (99% to Equitable and 1% to EREIM LP Corp.) except for fees received under the Guaranty Agreement which are to be distributed entirely to the 1% partner, EREIM LP Corp. Accordingly, all guarantee fee income is allocated to EREIM LP Corp.
Investment in Joint Venture - The Partnership's investment in the Venture is accounted for using the equity method.
Guaranty Fees - Guaranty fees are recognized as income ratably over the 15-year estimated life of the Partnership.
Income Taxes - No provisions for income taxes have been made since all income and losses are allocated to the partners for inclusion in their respective tax returns.
3. GUARANTY AGREEMENT
The Partnership has entered into a guaranty agreement with the Venture to provide a minimum return to ML/EQ's limited partners on their capital contributions. Payments on the guaranty are due 90 days following the earlier of the sale or other disposition of all the properties and mortgage loans and notes or the liquidation of ML/EQ. The minimum return will be an amount which, when added to the cumulative distributions from ML/EQ to its limited partners, will enable ML/EQ to provide its limited partners with a
minimum return equal to their capital contributions plus a simple annual return of 9.75% on their adjusted capital contributions, calculated from the dates of ML/EQ's investor closings at which investors acquired their Beneficial Assignee Certificates ("BACs"). Adjusted capital contributions are the limited partners' original cash contributions reduced by distributions of sale or financing proceeds and by distributions of certain funds in reserves, as more particularly described in ML/EQ's Partnership Agreement. The limited partners' original cash contributions have been adjusted by that portion of distributions paid through December 31, 1996, resulting from cash available to ML/EQ as a result of sale or financing proceeds paid to the Venture. The minimum return is subject to reduction in the event that certain taxes, other than local property taxes, are imposed on ML/EQ or the Venture, and is also subject to certain other limitations. Based upon the assumption that the last property is sold on December 31, 2002, upon expiration of the term of ML/EQ, the maximum liability of the Partnership to the Venture under the guaranty agreement as of December 31, 1996 is limited to $244,905,999 plus the value of the Partnership's interest in the Venture less any amounts contributed by the Partnership to fund cash deficits. The Venture has assigned its rights under the guaranty agreement to ML/EQ. ML/EQ will have recourse under the guaranty agreement only to the Partnership and EREIM LP Corp. as a general partner of the Partnership but not to Equitable. Equitable has entered into a Keep Well Agreement with EREIM LP Corp. to permit EREIM LP Corp. to pay its obligations with respect to the guaranty agreement as they become due; provided, however, that the maximum liability of Equitable under the Keep Well Agreement is an amount equal to the lesser of (i) 2% of the total admitted assets of Equitable (as determined in accordance with New York Insurance Law) or (ii) $271,211,250. The Keep Well Agreement provides that only EREIM LP Corp. and its successors will have the right to enforce Equitable's obligations to make capital contributions to EREIM LP Corp. to pay its obligation with respect to the guaranty agreement.
Capital contributions by the BAC Holders totaled $108,484,500. As of December 31, 1996, the cumulative 9.75% simple annual return was $92,031,083. As of December 31, 1996, cumulative distributions by ML/EQ to the BAC Holders totaled $16,337,751 of which $11,662,084 is attributable to income from operations and $4,675,667 is attributable to sales of Venture assets, principal payments on Mortgage Loans and other capital events. Another $813,634 in capital proceeds was distributed to the BAC Holders in February 1997. To the extent that future cash distributions to the limited partners of ML/EQ are insufficient to meet the specified minimum return, any shortfall will be funded by the guaranty.
Effective as of January 1, 1997, ML/EQ entered into an amendment to the Joint Venture Agreement of the Venture between ML/EQ and the Partnership pursuant to which the Partnership agreed to defer, without interest, its rights to receive 20% of the Venture's distributions of Sale or Financing Proceeds until ML/EQ has received aggregate distributions from the Venture in an amount equal to the capital contributions made to ML/EQ by the BAC holders plus a noncompounded cumulative return computed at the rate of 9.75% per annum on contributions outstanding from time to time. Prior to the amendment, the Partnership had a right to receive 20% of all of the Venture's distribution of Sale or Financing Proceeds on a pari passu basis with ML/EQ. The amendment will have the effect of accelerating the return of original contributions to BAC holders to the extent that Sale and Financing Proceeds are realized prior to the dissolution of ML/EQ.
4. GUARANTY FEE
The guaranty fee was initially paid by ML/EQ to the Partnership in six semiannual installments, which commenced on June 30, 1988 and ended on December 31, 1990, at an annual rate of 1.15% of gross proceeds from ML/EQ's offering of BACs plus .35% of average annual adjusted capital contributions of ML/EQ's limited partners. Subsequent to December 31, 1990, the fee is payable on a semiannual basis at an annual rate of .35% of the average annual adjusted capital contributions of ML/EQ's limited partners.
5. INVESTMENT IN JOINT VENTURE
On March 10, 1988, ML/EQ had its initial investor closing. ML/EQ contributed $90,807,268 to the Venture. The Partnership contributed zero coupon mortgage notes to the Venture in the amount of $22,701,817. The Venture purchased an additional $5,675,453 of zero coupon mortgage notes from Equitable.
On May 3, 1988, ML/EQ had its second and final investor closing. ML/EQ contributed $14,965,119 to the Venture. The Partnership contributed zero coupon mortgage notes to the Venture in the amount of $3,741,280 including accrued interest. The Venture purchased an additional $935,320 of zero coupon mortgage notes from Equitable to bring the total amount of zero coupon mortgage notes owned by the Venture to $33,053,870 including accrued interest as of the dates of acquisition. One of the zero notes was accounted for as a deed in lieu of foreclosure by the Venture on July 22, 1994. The remaining note was due on June 30, 1995. The borrower defaulted on its obligation to repay the loan, and the collateral, Brookdale Center, was transferred to Equitable and the Venture on December 16, 1996 as tenants in common, pursuant to a Chapter 11 bankruptcy plan of reorganization filed with the Bankruptcy Court by the borrower.
The financial position and results of operations of the Venture are summarized as follows:
SUMMARY OF FINANCIAL POSITION DECEMBER 31, 1996 AND 1995:
SUMMARY STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994:
6. TAXABLE NET INCOME AND TAX NET WORTH
The following is a reconciliation of the Partnership's financial net income to taxable net income and a reconciliation of partner's capital for financial reporting purposes to net worth on a tax basis:
EML ASSOCIATES
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Balance Sheets
Statements of Operations
Statements of Partners' Capital
Statements of Cash Flows
Notes to Financial Statements
SUPPLEMENTAL SCHEDULES AS OF DECEMBER 31, 1996 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994:
Schedule III - Real Estate and Accumulated Depreciation
Schedule IV - Mortgage Loans on Real Estate
INDEPENDENT AUDITORS' REPORT
EML Associates:
We have audited the accompanying balance sheets of EML Associates (the "Venture") as of December 31, 1996 and 1995 and the related statements of operations, partners' capital, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the table of contents as supplemental schedules. These financial statements and the supplemental schedules discussed below are the responsibility of the Venture's management. Our responsibility is to express an opinion on these financial statements and supplemental schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of EML Associates at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such supplemental schedules, when considered in relation to the basic financial statements, present fairly in all material respects the information shown therein.
February 6, 1997
Deloitte & Touche LLP
EML ASSOCIATES
BALANCE SHEETS DECEMBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
See notes to financial statements.
EML ASSOCIATES
STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - ------------------------------------------------------------------------------
See notes to financial statements.
EML ASSOCIATES
STATEMENTS OF PARTNERS CAPITAL YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - -----------------------------------------------------------------------------
See notes to financial statements.
EML ASSOCIATES
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - --------------------------------------------------------------------------------
(Continued)
EML ASSOCIATES
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - ----------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION REGARDING NONCASH INVESTING ACTIVITIES: The Venture accrued $1,120,796 and $2,647,092 in capital expenditures that were not paid before December 31, 1996 and 1995, respectively.
The Venture reclassified $15,550,364 relating to Brookdale Center from zero coupon mortgage note receivable to rental properties as a result of Brookdale Center being conveyed to the Venture and Equitable on December 16, 1996.
The Venture reclassified $27,517,363 relating to Northland Center from other real estate assets to rental properties as a result of the deed in lieu of foreclosure transaction executed on July 22, 1994.
During 1994, the Venture took a $1,000,000 write-down on other real estate assets which reduced other real estate assets relating to The Bank of Building to $8,500,000. On November 15, 1994, a deed in lieu of foreclosure was executed resulting in a reclassification of the remaining $8,500,000 from other real estate assets to rental properties.
See notes to financial statements.
(Concluded)
EML ASSOCIATES
NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - --------------------------------------------------------------------------------
1. ORGANIZATION
EML Associates (the "Venture") is a New York general partnership formed March 10, 1988 between EREIM LP Associates, an affiliate of The Equitable Life Assurance Society of the United States ("Equitable") and ML/EQ Real Estate Portfolio, L.P., a Delaware limited partnership ("ML/EQ"). The Venture was formed to invest in existing income-producing real properties, zero coupon or similar mortgage notes, and fixed-rate mortgage loans. EREIM LP Associates and ML/EQ own 20% and 80% interests in the Venture, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Pro-rata Consolidation - The Venture records its proportionate share of the assets, liabilities, revenues, and expenses of the undivided interests in Northland Center and Brookdale Center.
Rental Properties - Rental properties are stated at cost. Cost is allocated between land and buildings based upon preacquisition appraisals of each property. The Venture has adopted Statement of Financial Accounting Standards ("SFAS") 121, "Impairment of Long-Lived Assets." Impairment is determined by calculating the sum of the estimated undiscounted future cash flows including the projected undiscounted future net proceeds from sale of property. In the event such sum is less than the depreciated cost of the property, the property will be written down to estimated fair market value.
Depreciation - Depreciation of buildings and building improvements is provided using the straight-line method over estimated useful lives of five to forty years. Tenant improvements are amortized using the straight-line method over the life of the related lease.
Rental Income - Rental income is recognized on a straight-line basis over the terms of the leases.
Zero Coupon Mortgage Note Receivable - During 1995, the Venture adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118. The Venture measures impairment of the zero coupon mortgage note receivable based upon the estimated fair market value of the underlying collateral. If the Venture's portion of the estimated fair market value of the collateral declines below the recorded investment in the loans, impairment will be recognized through the creation of a valuation allowance. The Venture records interest received on the cash method (Note 4).
Mortgage Loan Receivable - The mortgage loan receivable is stated at cost (Note 5).
Cash and Cash Equivalents - Cash equivalents include cash, demand deposits, money market accounts and highly liquid short-term investments purchased with original maturities of three months or less.
Income Taxes - No provisions for income taxes have been made since all income and losses are allocated to the partners for inclusion in their respective tax returns.
Reclassifications - Certain prior year amounts have been reclassified to conform with the 1996 presentation.
Fair Value of Financial Instruments - Management has reviewed the various assets and liabilities of the Venture in accordance with the SFAS 107, "Disclosures about Fair Value of Financial Instruments," (which is not applicable to real estate assets). Management has concluded that the estimated fair market value of the Venture's financial instruments, including the mortgage loan receivable, have terms such that the carrying value approximates the estimated fair market value.
3 . RENTAL PROPERTIES
As of December 31, 1996, the Venture's rental properties consisted of the following:
The costs related to the rental properties are summarized below.
4. ZERO COUPON MORTGAGE NOTES RECEIVABLE
Brookdale Center
The Venture held a 71.66% participation interest in a zero coupon mortgage note. The property which secured this first mortgage note is Brookdale Center which is located outside of Minneapolis, Minnesota. The Venture acquired its participation interest in 1988 from Equitable which held the remaining 28.34% interest. The Venture's participation interest had an estimated fair market value (including accrued interest) at the time of acquisition of $12,278,885. The borrower was Midwest Real Estate Shopping Center L.P. ("Midwest"), a publicly traded limited partnership, (formerly Equitable Real Estate Shopping Centers, L.P.). The note had an implicit interest rate of 10.2% compounded semiannually with the Venture's portion of the entire amount of principal and accrued interest totaling $25,345,353 due on June 30, 1995.
Midwest defaulted on its obligation to repay the Brookdale zero note in full on the maturity date. Notice of default was given to Midwest. For book purposes, beginning with the second quarter of 1995, Management discontinued the accrual of interest on the Brookdale zero note as the accreted value of the mortgage approximated the estimated fair market value of the Brookdale Center. Under the terms of the mortgage agreement, however, the Venture continued to accrue interest off the books at the effective implicit rate of 10.2% until June 30, 1995. On July 1, 1995, the Venture began to accrue interest off the books on the Brookdale zero note at the default rate of 19.0%. Equitable and the Venture (collectively referred to as "Lender") commenced foreclosure by advertisement proceedings and a court-appointed receiver was named. The receiver was responsible for collecting rent proceeds from the tenants at Brookdale Center and applying the proceeds to payments of operating costs at Brookdale Center. Any remaining funds were paid to Lender on account of the Brookdale zero note. The Venture recorded cash received from the operation of Brookdale Center on a cash basis as interest income. During 1996 and 1995, approximately $1,975,000 and $700,000, respectively, was remitted under the terms of the
receivership. The Venture's portion of these payments was approximately $1,415,000 and $502,000, respectively.
As of September 30, 1995, an internal review of the Brookdale Center was performed for the Venture. Based on this review, the estimated fair market value of Brookdale Center was $30,000,000. The Venture recorded a valuation allowance of $3,232,210 to value the note at an amount equal to the Venture's participation interest in the note multiplied by the estimated fair market value of Brookdale Center, or $21,498,199.
In April 1996, the Lender agreed in principle to a workout arrangement with Midwest on the Brookdale zero note under which Midwest would file for Chapter 11 bankruptcy protection and, with the support of Lender, submit a plan of reorganization to Bankruptcy Court for approval. The workout arrangement was memorialized in a nonbinding letter agreement dated April 11, 1996 (the "Letter Agreement") between Midwest and Equitable and approved by the Board of Directors of EREIM Managers Corp., the general partner of the Partnership, on behalf of the Venture.
On June 20, 1996 Midwest filed a voluntary petition for Chapter 11 bankruptcy protection, as contemplated by the Letter Agreement, staying the Brookdale foreclosure proceeding and terminating the receivership arrangement. As further contemplated by the Letter Agreement, Midwest subsequently obtained Bankruptcy Court approval to retain the management company that had served as receiver prior to the bankruptcy filing as Brookdale's property manager.
In addition, the Bankruptcy Court, with the agreement of Midwest and Lender, entered a cash collateral order as contemplated by the Letter Agreement, pursuant to which all positive cash flow generated by the property in excess of property-related expenses and certain administrative costs of the bankruptcy, not to exceed $25,000, was paid to the Lender during the bankruptcy. The Venture recorded cash received from the operation of Brookdale Center as interest income. During 1996, approximately $2,890,000 was remitted under the terms of the cash collateral order. The Venture's portion of these payments was approximately $2,071,000.
On December 16, 1996, Brookdale Center was transferred to the Venture and Equitable, as tenants in common, pursuant to a Chapter 11 bankruptcy plan for Midwest that was approved by the Bankruptcy Court on November 25, 1996. The consideration for this transfer was (i) release of Midwest from its obligations under the Brookdale Zero Note and (ii) payment to Midwest of $500,000, of which the Venture's portion was $358,303. An internal review of the property, performed for the Venture as of the date of transfer, estimated the fair market value of the Brookdale Center to be $21,700,000, of which the Venture's portion was $15,550,364. Following the transfer, Brookdale Center was reclassified from zero coupon mortgage note receivable to rental properties and income and expenses were recorded from that date. The Venture recognized a loss of $6,211,644 to record Brookdale Center at its estimated fair market value.
Northland Center
Until July 22, 1994, the Venture also held a 71.66% participation interest in a zero coupon mortgage note and the first mortgage on Northland Center which is located outside of Detroit, Michigan. The Venture acquired its participation interest in 1988 from Equitable which held the remaining 28.34% interest. The Venture's participation interest had an estimated fair market value (including accrued interest) at the time of acquisition of $20,774,985. The borrower was Midwest. The note had an implicit interest rate of 10.2% compounded semiannually with the Venture's portion of the entire amount of principal and accrued
interest totaling $42,882,504 due on June 30, 1995. The note provided that the borrower could elect to pay interest currently; however, no interest was paid through July 22, 1994.
On July 22, 1994, Midwest transferred Northland Center to the Venture and Equitable in proportion to their respective undivided interests in the Northland Center mortgage. Following the transfer, which was retroactive as of January 1, 1994, Northland Center was reclassified from other real estate assets to rental properties and income and expenses were adjusted as of that date. The Venture records its proportionate share of the assets, liabilities, revenues, and expenses of the undivided interests in Northland Center in accordance with the tenancy in common arrangements in the Participation Agreement between the Venture and Equitable. The Venture and Equitable paid the owner $6.6 million at the time of transfer (an amount which was determined to approximate the net present value of the anticipated cash flow from Northland Center, subject to closing adjustments, for the period from January 1, 1994 through June 30, 1995, the date the Northland Center mortgage would have matured).
In connection with the transfer of Northland Center, the Venture and Equitable modified the agreement with Dayton Hudson, which operates one of the anchor stores at Northland Center, and entered into an agreement to add Montgomery Ward as an additional anchor. The Venture and Equitable also commenced a renovation program at Northland Center. The renovations were completed during the second quarter of 1995 at a total cost of approximately $11.0 million, of which the Venture's share was approximately $7.9 million.
5. MORTGAGE LOANS RECEIVABLE
In 1989, the Venture made a $6,000,000 nonrecourse first mortgage loan to the Wilcon Company. The loan is collateralized by an apartment complex in Weston, Massachusetts. The loan bears interest at 10.25% per annum with interest only of $51,250 due monthly to the maturity date of February 1999.
In 1989, the Venture made a $9,500,000 nonrecourse first mortgage loan to Three Hundred Delaware Avenue Associates. This loan was collateralized by a 17-story office building in Wilmington, Delaware. The owners of The Bank of Delaware Building defaulted on the mortgage loan receivable and the Venture accounted for this transaction as an in-substance foreclosure at December 31, 1993. Accordingly, the mortgage loan receivable was reclassified to other real estate assets at its estimated fair market value as of that date and the Venture began recording operating revenues and expenses of the building. In the third quarter of 1994, the Venture recognized a loss of $1,000,000 due to valuing The Bank of Delaware Building to the most recent estimated fair market value. Subsequently, on November 15, 1994, the Venture acquired title to The Bank of Delaware Building by a deed in lieu of foreclosure. In connection with the deed in lieu transaction, the Venture received a $350,000 cash payment plus the property's operating cash account which reduced the loss on the transaction to approximately $380,000.
6. GUARANTY AGREEMENT
EREIM LP Associates has entered into a guaranty agreement with the Venture to provide a minimum return to ML/EQ's limited partners on their capital contributions. The Venture has assigned its rights under the guaranty agreement to ML/EQ. Payments on the guaranty are due 90 days following the earlier of the sale or other disposition of all the properties and mortgage loans and notes or the liquidation of ML/EQ. The minimum return will be an amount which, when added to the cumulative distributions to the limited partners of ML/EQ, will enable ML/EQ to provide their limited partners with a minimum return equal to their capital contributions plus a simple annual return of 9.75% on their adjusted capital contributions, calculated from the dates of ML/EQ's investor closings at which investors acquired their
Beneficial Assignee Certificates ("BACs"). The BACs evidence the economic rights attributable to limited partnership interests in ML/EQ. Adjusted capital contributions are the limited partners' original cash contributions reduced by distributions of sale or financing proceeds and by distributions of certain funds in reserves, as more particularly described in ML/EQ's Partnership Agreement. The limited partners' original cash contributions have been adjusted by that portion of distributions paid through December 31, 1996, resulting from cash available to ML/EQ as a result of sale or financing proceeds paid to the Venture. The minimum return is subject to reduction in the event that certain taxes, other than local property taxes, are imposed on ML/EQ or the Venture and is also subject to certain other limitations set forth in ML/EQ's prospectus. Based upon the assumption that the last property is sold on December 31, 2002, upon expiration of the term of ML/EQ, the maximum liability of EREIM LP Associates under the guaranty agreement as of December 31, 1996 is limited to $244,905,999, plus the value of EREIM LP Associates' interest in the Venture less any amounts contributed by EREIM LP Associates to the Venture to fund cash deficits.
Capital contributions by the BAC holders totaled $108,484,500. As of December 31, 1996, the cumulative 9.75% simple annual return was $92,031,083. As of December 31, 1996, cumulative distributions by ML/EQ to the BAC holders totaled $16,337,751, of which $11,662,084 is attributable to income from operations and $4,675,667 is attributable to sales of Venture assets, principal payments on mortgage loans and other capital events. Another $813,634 in capital proceeds was distributed to the BAC holders in February 1997. To the extent that future cash distributions to the limited partners are insufficient to provide the specified minimum return, any shortfall will be funded by the guarantor, up to the above described maximum.
Effective as of January 1, 1997, ML/EQ entered into an amendment to the Joint Venture Agreement of the Venture between ML/EQ and EREIM LP Associates pursuant to which EREIM LP Associates agreed to defer, without interest, its rights to receive 20% of the Venture's distributions of Sale or Financing Proceeds until ML/EQ has received aggregate distributions from the Venture in an amount equal to the capital contributions made to ML/EQ by the BAC holders plus a noncompounded cumulative return computed at the rate of 9.75% per annum on contributions outstanding from time to time. Prior to the amendment, EREIM LP Associates had a right to receive 20% of all of the Venture's distribution of Sales or Financing Proceeds on a pari passu basis with ML/EQ. The amendment will have the effect of accelerating the return of original contributions to BAC holders to the extent that Sale and Financing Proceeds are realized prior to the dissolution of ML/EQ.
7. PROPERTY MANAGEMENT FEES
Properties are managed and leased by either third-party managing and leasing agents or by affiliates of Equitable Real Estate, Compass Management and Leasing, Inc. ("Compass"), and Compass Retail, Inc. ("Compass Retail"). Property management fees are generally established at specified percentages of 1% to 5% of the gross receipts of the properties as defined in the management agreements. Property management fees for properties managed by Compass and Compass Retail were $406,995, $442,906, and $217,513 in 1996, 1995, and 1994, respectively.
Leasing commissions are based on a percentage of the rent payable during the term of the lease as specified in each lease agreement. Leasing commissions paid by the Venture to Compass and Compass Retail were $123,611, $93,519, and $0, in 1996, 1995, and 1994, respectively. Leasing commissions are capitalized in deferred leasing costs on the balance sheet or expensed in real estate operating expenses on the statement of operations in accordance with the Venture's capitalization policy. The Venture has reimbursed Compass and Compass Retail for payroll incurred of $1,678,348, $1,974,425, and $763,727
in 1996, 1995, and 1994 respectively. Payroll reimbursements are included in real estate operating expenses on the statement of operations. Additionally, the Venture has paid construction management fees to Compass and Compass Retail of $92,024 and $167,861 in 1996 and 1995, respectively. The construction management fees have been capitalized as a portion of the construction projects to which they relate.
Compass Retail performed certain due diligence work with regard to the workout arrangement with Midwest on the Brookdale zero note. Consulting fees paid to Compass Retail during 1996 for due diligence work were $72,047, of which the Venture's portion was $51,630. The consulting fees are included in the statements of operations as a component of real estate operating expenses.
8. LEASES
Future minimum rentals to be received for the properties under noncancelable operating leases in effect as of December 31, 1996 are as follows:
Year Ending December 31, ----------
1997 $ 13,398,308 1998 12,939,355 1999 12,098,091 2000 10,355,994 2001 7,897,163 Thereafter 26,860,355 -------------
Total $ 83,549,266 =============
In addition to the minimum lease amounts, certain leases provide for escalation charges to tenants for common area maintenance and real estate taxes. The amount of escalation charges included in rental income totaled $7,686,606, $7,792,848, and $9,007,436 for the years ended December 31, 1996, 1995, and 1994, respectively.
In the case of retail tenants, certain leases provide for percentage rents. Contingent rentals which include percentage rents included in rental income for the years ended December 31, 1996, 1995, and 1994 totaled $615,400, $601,316, and $525,673, respectively.
Information with respect to significant individual leases is as follows:
Gruner & Jahr Printing Company occupies approximately 44.1% (143,852 square feet) of Doolittle Drive at an annual base rent of $478,104 under a lease which expires in August 2000.
Hudson's Department Store, J.C. Penney, Montgomery Ward, and Target operate stores at Northland Center and each contributes common area maintenance payments for operating expenses and real estate taxes under separate agreements. These stores, covering 511,509 square feet, 283,534 square feet, 117,750 square feet, and 116,222 square feet, respectively, are not included in the gross leasable area of the mall.
Pursuant to an agreement with Kohl's Department Stores, Inc. ("Kohl's") finalized on February 17, 1995, Equitable agreed to accept $1,750,000 in connection with the termination of the Kohl's lease at Northland Center on behalf of the tenancy in common arrangement between the Venture and
Equitable. The Venture's portion of the termination payment was approximately $1,254,062. Upon termination of the lease, Kohl's was released from any remaining lease obligation under the original lease agreement.
PNC Bank occupies approximately 32.7% of The Bank of Delaware Building at an annual rent of $400,715. The majority of the lease commitment expires in May 2005.
Broadway Stores, Inc. occupies the entire Whipple Road property (257,500 square feet) at an annual rent of $1,026,156 under a lease which expires August 24, 2003.
Dayton's, Sears, J.C. Penney, Mervyn's California, and Kohl's each operate stores at Brookdale Center and each contributes common area maintenance payments for operating expenses and real estate taxes under separate agreements. These stores, covering 195,368 square feet, 211,004 square feet, 150,589 square feet, 138,279 square feet, and 75,000 square feet, respectively, are not included in the gross leasable area of the mall. In addition, Kohl's and J.C. Penney pay annual ground rent of $175,000 and $20,930, respectively.
EML ASSOCIATES SECTION III SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
EML ASSOCIATES
SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE SCHEDULE IV AS OF 'DECEMBER 31, 1996 AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 - --------------------------------------------------------------------------------
NOTES:
(a) This loan is not subject to any delinquencies. (b) EREIM LP Associates, an affiliate, contributed a total of $9,823,108 of zero coupon mortgage notes to the Venture, including principal plus interest at the contribution date. The Venture recorded a valuation allowance of $3,232,210 at September 30, 1995 to value the note at an amount equal to the Venture's participation interest in the note multiplied by the estimated fair market value of the underlying collateral. On December 16, 1996, upon acquiring its undivided interest in the shopping mall securing the zero coupon mortgage, the Venture recorded a loss of $6,211,644 and recorded the property on its balance sheet at an amount equal to the Venture's participation in the property multiplied by the property's estimated fair market value. (c) The aggregate tax basis is $6,000,000. (d) Payments of interest only of $51,250 are due monthly until the maturity date of February 1999.
EXHIBIT INDEX
4. (a) Amended and Restated Agreement of Limited Partnership of ML/EQ Estate Portfolio, L.P. dated April 23, 1987. Included as an Exhibit to the Prospectus (see Exhibit 99(a)).
(b) Amendment to Amended and Restated Agreement of Limited Partnership dated February 9, 1988 (incorporated by reference to Exhibit 4(b) to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1987 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064) (the "1987 10-K")).
10. Material Contracts.
(a) Form of Beneficial Assignee Certificate (incorporated by reference to Exhibit 10(a) to Pre-Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33-11064)).
(b) Agreement Between General Partners of ML/EQ (incorporated by reference to Exhibit 10(c) to the 1987 10-K).
(c) Joint Venture Agreement of EML Associates (incorporated by reference to Exhibit 10(d) to the 1987 10-K).
(d) Investment Guaranty Agreement between the Venture and the Partnership (incorporated by reference to Exhibit 10(e) to the 1987 10-K).
(e) Assignment Agreement between ML/EQ and Venture (incorporated by reference to Exhibit 10(f) to the 1987 10- K).
(f) Keep Well Agreement between The Equitable Life Assurance Society of the United States and EREIM LP Corp. (incorporated by reference to Exhibit 10(g) to the 1987 10-K).
(g) Amended and Restated Agreement of General Partnership of EREIM LP Associates (incorporated by reference to Exhibit 10(h) to the 1987 10-K).
(h) Promissory Notes and Mortgages Relating to Brookdale and Northland (incorporated by reference to Exhibit 10(i) to Pre-Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33- 11064)).
(i) Contract to Purchase 1200 Whipple Road, Union City, California (incorporated by reference to Exhibit 10(j)) to Post-Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33-11064)).
(j) Lease Agreement Pertaining to 1200 Whipple Road, Union City, California (incorporated by reference to Exhibit 10(k) to Post-Effective Amendment No. 1 to the Registration Statement of the Partnership (File No. 33-11064)).
(k) Participation Agreements relating to Brookdale and Northland Notes (incorporated by reference to Exhibit 10(1) to the 1987 10-K).
(l) Amendments to Participation Agreements relating to Brookdale and Northland Notes (incorporated by reference to Exhibit 10(1) to Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064) (the "1988 10-K").
(m) Agreement of Sale between Richland Mall Associates and EML Associates dated July 19, 1988 (incorporated by reference to Exhibit No. 1 to Form 8-K dated July 19, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(n) Note and Mortgage dated September 27, 1988 relating to the loan by EML to Second Merritt Seven (incorporated by reference to Exhibit No. 1 to Form 8-K dated September 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(o) Form of Participation Agreement between The Equitable Life Assurance Society of The United States and EML Associates dated September 27, 1988 (incorporated by reference to Exhibit No. 2 to Form 8-K dated September 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(p) Agreement of Sale among EML, Blue Bell Office Campus Associates, a Pennsylvania limited partnership, E. F. Hansen Jr. and G. Eileen Hansen dated December 2, 1988 (incorporated by reference to Exhibit No. 1 to Form 8-K dated December 2, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(q) Agreement of Sale between Provident Mutual Life Insurance Company of Philadelphia and EML Associates dated December 27, 1988 (incorporated by reference to Exhibit No. 1 to Form 8-K dated
December 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(r) Agreement of Sale between Anderson Partners (Southside/Corporate Lakes) L.P., Gene Anderson, Auerbach Associates Ltd. and EML Associates dated as of December 31, 1988 (incorporated by reference to Exhibit No. 2 to Form 8-K dated December 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(s) Note and Mortgage and Security Agreement dated January 31, 1989 relating to loan by EML to The Wilcon Company (incorporated by reference to Exhibit No. 4 to Form 8-K dated December 27, 1988 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(t) Note and Mortgage dated February 28, 1989 relating to the loan by EML to 300 Delaware Avenue Associates (incorporated by reference to Exhibit 10(u) to the 1988 10-K.)
(u) Agreement of Sale among Lincoln San Leandro IV Limited Partnership, Patrician Associates, Inc. and EML Associates dated April 21, 1989 (incorporated by reference to Exhibit (c)1 to Form 8-K dated May 18, 1989 of ML/EQ Real Estate Portfolio, L.P. (File No. 33-11064)).
(v) Agreement dated March 25,1994 between The Equitable Life Assurance Society of the United States and Midwest Real Estate Shopping Center L.P. (formerly Equitable Real Estate Shopping Centers L.P.) (incorporated by reference to Exhibit 10(v) to Form 10-K for the year ended December 31, 1994 of EREIM LP Associates) (the "1994 Form 10-K").
(w) Deed in Lieu of Foreclosure Agreement dated November 15, 1994 by and between Three Hundred Delaware Avenue Associates, L.P. and EML Associates (incorporated by reference to Exhibit 10(w) to the 1994 Form 10-K).
(x) Lease Termination Agreement dated as of January 27, 1995 by and between The Equitable Life Assurance Society of the United States and Kohl's Department Stores (incorporated by reference to Exhibit 10(x) to the 1994 Form 10-K).
(y) Amendment to Lease Termination Agreement dated as of February 17, 1995 by and between The Equitable Life Assurance Society of the
United States and Kohl's Department Stores, Inc. (incorporated by reference to Exhibit 10(y) to the 1994 Form 10-K).
(z) Purchase Agreement dated as of March 10, 1995 by and among The Equitable Life Assurance Society of the United States, the Venture and Dayton Hudson Corporation (incorporated by reference to Exhibit 10(z) to the 1994 Form 10-K).
27. Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only.
99. Additional Exhibits.
(a) Prospectus dated April 23, 1987, as supplemented by supplements dated March 3, 1988 and March 17, 1988 (incorporated by reference to Exhibit 28 to the 1987 10-K).
(b) Quarterly Report on Form 10-Q of ML/EQ Real Estate Portfolio, L.P. for the quarter ended June 30, 1988 (incorporated by reference to File No. 33-11064)
(c) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P dated July 19, 1988 (incorporated by reference to File No. 33-11064).
(d) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated September 27, 1988 (incorporated by reference to File No. 33-11064).
(e) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated December 2, 1988 (incorporated by reference to File No. 33-11064).
(f) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated December 27, 1988 (incorporated by reference to File No. 33-11064).
(g) Current Report on Form 8-K of ML/EQ Real Estate Portfolio, L.P. dated May 18, 1989 (incorporated by reference to File No. 33-11064).
(h) Audited Financial Statements of Midwest Shopping Centers, L.P. (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995, of Midwest Shopping Centers, L.P. File No. 1-9331)
(i) Amendment to Joint Venture Agreement dated as of January 1, 1997 between ML/EQ Real Estate Portfolio, L.P. and EREIM LP Associates