Item 1. Business - ----------------
Balcor Realty Investors 86-Series I A Real Estate Limited Partnership (the "Registrant") is a limited partnership formed in 1984 under the laws of the State of Illinois. The Registrant raised $59,791,000 from sales of Limited Partnership Interests. The Registrant's operations consisted exclusively of investment in and operation of income-producing real property, and all financial information included in this report relates to this industry segment.
The Registrant utilized the net offering proceeds to acquire eight real property investments and a minority joint venture interest in one additional real property. As of December 31, 1996, the Registrant had disposed of seven properties and the property in which it held a minority joint venture interest. The Registrant's one remaining property described under "Item 2.
Item 2. Properties - ------------------
As of December 31, 1996, the Registrant owned in fee simple the Lake Ridge Apartments located in Fresno, California. This property, a 200-unit apartment complex located on approximately 11 acres, was sold during January 1997. See Note 14 of Notes to Financial Statements for additional information.
The average occupancy rate and effective average rent per unit for each of the last five years for the remaining property owned by the Registrant at December 31, 1996, is described below.
1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Lake Ridge Apartments* Occupancy Rate 91% 90% 93% 97% 96% Effective Rate $494 $484 $484 $484 $474
*This property was sold during 1997. See Note 14 of Notes to Financial Statements for additional information.
Apartment units in the above property are rented with leases of one year or less, with no tenant occupying greater than ten percent of the property.
The above property was held subject to two mortgages as described in more detail in Note 5 of Notes to the Financial Statements.
Real estate taxes incurred in 1996 for the above property totaled $76,212.
The Federal tax basis of the Registrant's property totaled $7,714,522 as of December 31, 1996. For Federal income tax purposes, the acquisition costs of the property are depreciated over a useful life of 19 years, using the ACRS method. Other minor assets are depreciated over their applicable recovery periods.
In the opinion of the General Partner, the Registrant has provided for adequate insurance coverage for its real estate investment property.
See Notes to Financial Statements for other information regarding real property investments.
Item 3.
Item 3. Legal Proceedings - -------------------------
Proposed class action - ---------------------
On February 29, 1996, a proposed class action complaint was filed, Raymond Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of the State of New York, County of New York). The Registrant, additional limited partnerships which were sponsored by The Balcor Company, three limited partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together with the Registrant and the affiliated partnerships, the "Defendant Partnerships"), Lehman Brothers, Inc. and Smith Barney Holdings, Inc. are defendants. The complaint alleges, among other things, common law fraud and deceit, negligent misrepresentation and breach of fiduciary duty relating to the disclosure of information in the offering of limited partnership interests in the Defendant Partnerships. The complaint seeks judgment for compensatory damages equal to the amount invested in the Defendant Partnerships by the proposed class plus interest accrued thereon; general damages for injuries arising from the defendants' alleged actions; recovery from the defendants of all profits received by them as a result of their alleged actions relating to the Defendant Partnerships; exemplary damages; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been certified as of this date. The Registrant believes it has meritorious defenses to contest the claims. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the Registrant.
Proposed class action - ---------------------
On August 30, 1996, a proposed class action complaint was filed, Lenore Klein vs. Lehman Brothers, Inc., et al., Superior Court of New Jersey, Law Division, Union County, Docket No. Unn-L-5162-96). The Registrant, additional limited partnerships which were sponsored by The Balcor Company (together with the Partnership, the "Affiliated Partnerships"), American Express Company, Lehman Brothers, Inc., additional limited partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together with the Registrant and the Affiliated Partnerships, the "Defendant Partnerships") and Smith Barney Holdings, Inc. are the named defendants in the action. The complaint was amended on October 18, 1996 to add additional plaintiffs. The amended complaint alleges, among other things, common law fraud and deceit, negligent misrepresentation, breach of contract, breach of fiduciary duty and violation of certain New Jersey statutes relating to the disclosure of information in the offering of limited partnership interests in the Defendant Partnerships. The amended complaint seeks judgment for compensatory damages equal to the amount invested in the Defendant Partnerships by the proposed class plus interest; general damages for injuries arising from the defendants' alleged actions; equitable relief, including rescission, on certain counts; punitive damages; treble damages on certain counts; recovery from the defendants of all profits received by them as a result of their alleged actions relating to the Defendant Partnerships; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been certified as of this date. The Registrant believes it has meritorious defenses to contest the claims. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the Registrant.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant during 1996.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------------------------------------------------------------------------- Matters - -------
There has not been an established public market for Limited Partnership Interests and it is not anticipated that one will develop. For information regarding distributions, see "Item 7. Liquidity and Capital Resources - Management's Discussion and Analysis of Financial Condition and Results of Operations."
As of December 31, 1996, the number of record holders of Limited Partnership Interests of the Registrant was approximately 5,037.
Item 6.
Item 6. Selected Financial Data - -------------------------------
Year ended December 31, ----------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------
Total income $9,793,385 $16,504,017 $16,104,170 $15,556,850 $14,850,044 Loss before gain on sale of assets and extraordinary items (925,551) (1,270,329) (1,284,604) (1,466,532) (2,805,340) Net income (loss)29,092,474 (1,357,201) (1,284,604) (185,093) (2,805,340) Net income (loss) per Limited Partnership Interest 481.70 (22.47) (21.27) (3.06) (46.45) Total assets 17,991,055 64,231,391 64,717,186 67,387,602 70,842,488 Mortgage notes payable 4,210,138 74,196,579 73,208,295 74,429,557 77,183,221 Distributions per per Limited Partnership Interest (A) 119.00 2.50 None None None
(A) These amounts include distributions of Original Capital of $114.00 per Limited Partnership Interest in 1996.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ----------------------------------------------------------------------- Results of Operations - ---------------------
Operations - ----------
Summary of Operations - ---------------------
Balcor Realty Investors 86 - Series I (the "Partnership") sold five properties during 1996 and recognized significant gains on these sales. These events resulted in the recognition of net income during 1996 as compared to a net loss during 1995. No material events occurred during 1995 or 1994 which significantly impacted the net loss of the Partnership. Further discussion of the Partnership's operations is summarized below.
1996 Compared to 1995 - ---------------------
Rental and service income decreased in 1996 as compared to 1995 primarily due to the 1996 sales of the Pines of Cloverlane, Lakeside, Brighton Townhomes, Lakeville Resort and Cedar Crest apartment complexes.
Higher average cash balances due to the investment of the proceeds from the property sales prior to distribution to Limited Partners in April and October 1996, resulted in an increase in interest income on short-term investments during 1996 as compared to 1995.
Interest expense on mortgage notes payable decreased in 1996 as compared to 1995, primarily due to the repayment of mortgage loans with proceeds from the 1996 property sales.
The Partnership paid lenders' participations of $1,844,713 in connection with the sales of the Lakeside and Brighton Townhomes apartment complexes during 1996.
Depreciation expense decreased in 1996 as compared to 1995 due to the 1996 property sales.
Amortization of deferred expenses decreased in 1996 as compared to 1995 due to the 1996 property sales.
Property operating expenses decreased during 1996 as compared to 1995 due to the 1996 property sales.
Real estate tax expense decreased in 1996 as compared to 1995 due to the 1996 property sales.
Property management fees decreased in 1996 as compared to 1995 due to the 1996 property sales.
The Partnership incurred higher legal and consulting costs in connection with a response to a tender offer during the fourth quarter of 1995. During 1995 the Partnership also reimbursed the General Partner for legal fees previously advanced by the General Partner with respect to a lawsuit which was dismissed. As a result, administrative expenses decreased during 1996 as compared to 1995.
The Partnership sold the Pines of Cloverlane, Lakeside, Brighton Townhomes, Lakeville Resort and Cedar Crest apartment complexes during 1996 and recognized gains totaling $37,198,777.
The Lakeville Resort and Cedar Crest apartment complexes were owned through joint ventures with affiliates. As a result of the affiliates' share of the gain recognized from the property sales during 1996, affiliates' participation in income from joint ventures increased during 1996 as compared to 1995.
As a result of the 1996 property sales, the Partnership wrote off the remaining unamortized deferred expenses in the amount of $531,135. This amount has been classified as debt extinguishment expense, with $195,204 representing the affiliates' share. As a result of the 1995 Lakeville Resort Apartments refinancing, the Partnership recognized an extraordinary debt extinguishment expense of $145,393 relating to the write off of the remaining unamortized deferred expenses on the former mortgage note, of which $58,521 represented the affiliate's share.
1995 Compared to 1994 - ---------------------
Higher rental and occupancy rates at the Cedar Crest, Lakeville Resort and Brighton Townhomes apartment complexes resulted in an increase in rental and service income during 1995 as compared to 1994.
Higher interest rates resulted in an increase in interest income on short-term investments during 1995 as compared to 1994.
The Lakeville Resort Apartments was owned by a joint venture consisting of the Partnership and an affiliate. In June 1995, the mortgage note was refinanced with a new lender. The former mortgage note carried an interest rate based on a market index and increases in this index had caused an increase in interest expense during 1995 as compared to 1994. In connection with this transaction, the Partnership also recognized an extraordinary debt extinguishment expense of $145,393 relating to the write off of the remaining unamortized deferred loan fees on the former mortgage note, of which $58,521 represented the affiliate's share.
The amortization of deferred loan fees on the new Lakeville mortgage note was less than the amortization related to the former mortgage note, resulting in a decrease in amortization expense for 1995 as compared to 1994.
Higher expenditures in 1994 at the Lakeville Resort apartment complex relating to exterior painting and carpeting expenses, resulted in a decrease in property operating expense during 1995 as compared to 1994.
The Partnership incurred legal, consulting, printing and postage costs in connection with a tender offer during the fourth quarter of 1995. The Partnership also reimbursed the General Partner for legal fees previously advanced by the General Partner with respect to a lawsuit which was dismissed. These events resulted in an increase in administrative expenses during 1995 as compared to 1994.
Improved operations of approximately $561,000 at the Lakeville Resort Apartments, which were partially offset by higher interest expense on the mortgage note of approximately $195,000, resulted in affiliates' participation in income from joint ventures during 1995 as compared to affiliates participation in losses during 1994.
Liquidity and Capital Resources - -------------------------------
The Partnership's cash position increased by approximately $11,765,000 as of December 31, 1996 when compared to December 31, 1995 primarily as a result of the proceeds received in connection with the sales of the Lakeville Resort and Cedar Crest apartment complexes in 1996. In January 1997, the Partnership made a special distribution of $9,566,560 from sales proceeds to Limited Partners. The Partnership's cash flow used in operating activities of approximately $591,000 was generated from the operations of its properties and interest income on short-term investments, which were offset by the payment of administrative expenses and lender participations. Cash provided by investing activities of approximately $70,268,000 consisted primarily of proceeds received from the five property sales, net of closing costs, of approximately $70,602,000. Cash used in financing activities of approximately $57,912,000 consisted primarily of the repayment of mortgage notes payable of approximately $48,345,000, distributions to Limited Partners of approximately $7,115,000, and distributions to the joint venture partner - affiliate of approximately $2,671,000.
The Partnership classifies the cash flow performance of its properties as either positive, a marginal deficit or a significant deficit, each after consideration of debt service payments unless otherwise indicated. A deficit is considered significant if it exceeds $250,000 annually or 20% of the property's rental and service income. The Partnership defines cash flow generated from its properties as an amount equal to the property's revenue receipts less property related expenditures, which include debt service payments. During 1996 and 1995, the Partnership's remaining property, the Lake Ridge Apartments, generated positive cash flow and had an occupancy rate of 92% as of December 31, 1996.
The Lakeside Apartments was sold in March 1996 and generated a marginal cash flow deficit prior to its sale in 1996 as compared to positive cash flow in 1995. The Pines of Cloverlane Apartments was sold in March 1996 and generated a significant cash flow deficit prior to its sale in 1996 as compared to positive cash flow in 1995. The Brighton Townhomes Apartments was sold in August 1996, the Lakeville Apartments was sold in October 1996 and the Cedar Crest Apartments was sold in November 1996. Each of these properties generated positive cash flow prior to its sale in 1996 and during 1995.
Lake Ridge Apartments is located in northeast Fresno, California and, because of its proximity to major thoroughfares and the airport, it is considered to be one of the better properties in the market. The Fresno/Clovis multi-family market, which consists of approximately 35,000 units, has been either flat or declining through much of the 1990's and averaged 90 percent occupancy in 1996. Average occupancy at the property in 1996 was 91 percent, while the sub-market occupancy for similar product type averaged 92 percent. Fresno is an agricultural based city with a migratory population. Although much of California appears to be pulling out of the recession it has been in for much of the last several years, Fresno continues to maintain a stagnant economy with few prospects for significant growth in the near term.
During 1996, the Partnership sold the Pines of Cloverlane, Lakeside, Brighton Townhomes, Lakeville Resort and Cedar Crest apartment complexes. During January 1997, the Partnership sold the Lake Ridge Apartments. A majority of the proceeds from the sales was distributed to Limited Partners during 1996 and January 1997. The Partnership has retained a portion of the cash to satisfy obligations of the Partnership as well as establish a reserve for contingencies. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Partnership including, but not limited to, the lawsuits discussed in "Item 3. Legal Proceedings." In the absence of any contingency, the reserves will be paid within twelve months of the last property sale. In the event a contingency continues to exist or arises, reserves may be held by the Partnership for a longer period of time.
In March 1996, the Partnership sold the Pines of Cloverlane Apartments in an all cash sale for $18,974,000. From the proceeds of the sale, the Partnership paid $14,208,240 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $288,460 in selling costs and also funded an escrow of $335,000 required in connection with the sale. The remaining proceeds were distributed as a special distribution to the Limited Partners in April 1996. See Note 10 of Notes to Financial Statements for additional information.
In March 1996, the Partnership sold the Lakeside Apartments in an all cash sale for $14,100,000. From the proceeds of the sale, the Partnership paid $12,426,799 to the third party mortgage holder in full satisfaction of the first mortgage loan and paid $299,150 in selling costs and $467,557 in lender participation. Lender participation represents additional interest paid to the lender calculated as a percentage of the sales price in excess of amounts specified in the loan agreement. The remaining proceeds were distributed as a special distribution to the Limited Partners in April 1996. See Note 10 of Notes to Financial Statements for additional information.
In August 1996, the Partnership sold the Brighton Townhomes Apartments in an all cash sale for $11,150,000. From the proceeds of the sale, the Partnership paid $6,858,644 to the third party mortgage holder in full satisfaction of the first mortgage loan and paid $221,925 in selling costs and $1,377,156 in lender participation. Lender participation represents additional interest paid to the lender calculated as a percentage of the sales price in excess of amounts specified in the loan agreement. The remaining proceeds were distributed as a special distribution to the Limited Partners in October 1996. See Note 10 of Notes to Financial Statements for additional information.
The Lakeville Resort Apartments was owned by a joint venture consisting of the Partnership and an affiliate. In October 1996, the joint venture sold the property in an all cash sale for $27,200,000. The purchaser took title subject to the existing first mortgage loan in the amount of $20,795,872. From the proceeds of the sale, the joint venture paid $355,000 in selling costs. The net proceeds of the sale were $6,049,128 of which $3,614,354 was the Partnership's share. Pursuant to the terms of the sale, $500,000 of the proceeds were retained by the joint venture until February 1997. The full amount of the holdback was released in February 1997. The Partnership's share of the remaining proceeds received by the joint venture were distributed to the Limited Partners in January 1997. See Note 10 of Notes to Financial Statements for additional information.
The Cedar Crest Apartments was owned by a joint venture consisting of the Partnership and an affiliate. In November 1996, the joint venture sold the property in an all cash sale for $21,550,000. From the proceeds of the sale, the joint venture paid $14,851,661 to the third party mortgage holder in full satisfaction of the first mortgage loan and paid $411,239 in selling costs. The net proceeds of the sale were $6,287,100, of which $6,058,250 was the Partnership's share. Pursuant to the terms of the sale, $500,000 of the proceeds were retained by the joint venture until March 1997. The full amount of the holdback was released in March 1997. The Partnership's share of the remaining proceeds received by the joint venture were distributed to the Limited Partners in January 1997. See Note 10 of Notes to Financial Statements for additional information.
In January 1997, the Partnership sold the Lake Ridge Apartments in an all cash sale for $5,400,000. From the proceeds of the sale, the Partnership paid $4,123,938 and $86,200 to the third party mortgage holder in full satisfaction of the first mortgage and second mortgage loans, respectively, and paid $196,656 in selling costs and $126,222 in prepayment penalties. The remaining available proceeds are expected to be distributed to the Limited Partners in 1997. See Note 14 of Notes to Financial Statements for additional information.
The Partnership commenced distributions in October 1995 and made distributions totaling $119.00 and $2.50 per interest in 1996 and 1995, respectively. See Statement of Partners' Capital for additional information. Distributions were comprised of $5.00 of Net Cash Receipts and $114.00 of Net Cash Proceeds consisting of Net Cash Proceeds from the sales of the Lakeside, Pines of Cloverlane, and Brighton Townhomes apartment complexes in 1996 and $2.50 of Net Cash Receipts in 1995.
In January 1997, the Partnership paid a distribution of $9,865,515 ($165.00 per Interest) to holders of Limited Partnership Interests. This distribution represents a distribution of Net Cash Receipts for the fourth quarter of 1996 of $5.00 per Interest, and a special distribution of Net Cash Proceeds of $160.00 per Interest, of Net Cash Proceeds received in connection with the sales of the Lakeville Resort and Cedar Crest apartment complexes. Including the January 1997 distribution, Limited Partners have received cumulative distributions of Net Cash Receipts of $12.50 per $1,000 Interest and Net Cash Proceeds of $274.00 per $1,000 Interest, totaling $286.50 per $1,000 Interest,
as well as certain tax benefits. Future distributions will be made from available Net Cash Proceeds, as to which there can be no assurances. In light of results to date, investors will not recover a substantial portion of their original investment.
Inflation has several types of potentially conflicting impacts on real estate investments. Short-term inflation can increase real estate operating costs which may or may not be recovered through increased rents and/or sales prices, depending on general or local economic conditions. In the long-term, inflation will increase operating costs and replacement costs and may lead to increased rental revenues and real estate values.
Certain statements in this Form 10-K constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may include projections of revenues, income or losses, capital expenditures, plans for future operations, financing plans or requirements, and plans relating to property of the Partnership, as well as assumptions relating to the foregoing.
The forward-looking statements made by the Partnership are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
See Index to Financial Statements and Financial Statement Schedule in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K is not applicable.
The net effect of the differences between the financial statements and the tax returns is summarized as follows:
December 31, 1996 December 31, 1995 ----------------------- ------------------------- Financial Tax Financial Tax Statements Returns Statements Returns ---------- --------- ---------- ---------
Total assets $17,991,055 $25,183,206 $64,231,391 $51,295,140 Partners' capital (deficit) accounts: General Partner (326,247) (54,002) (617,172) (966,767) Limited Partners 12,723,428 19,418,332 (8,962,989) (17,708,648) Net income (loss): General Partner 290,925 912,765 (13,572) (17,469) Limited Partners 28,801,549 44,242,112 (1,343,629) (1,922,539) Per Limited Part- nership Interest 481.70 739.95 (22.47) (32.15)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - --------------------
There have been no changes in or disagreements with accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Partners-XIX, its General Partner, has a Board of Directors.
(b, c & e) The names, ages and business experience of the executive officers and significant employees of the General Partner of the Registrant are as follows:
TITLE OFFICERS ------- ----------
Chairman, President and Chief Thomas E. Meador Executive Officer Senior Vice President Alexander J. Darragh Senior Vice President James E. Mendelson Senior Vice President John K. Powell, Jr. Managing Director, Chief Jayne A. Kosik Financial Officer, Treasurer and Assistant Secretary
Thomas E. Meador (age 49) joined Balcor in July 1979. He is Chairman, President and Chief Executive Officer and has responsibility for all ongoing day-to-day activities at Balcor. He is a Director of The Balcor Company. He is also Senior Vice President of American Express Company and is responsible for its real estate operations worldwide. Prior to joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in the commercial real estate division where he was involved in various lending activities. Mr. Meador received his M.B.A. degree from the Indiana University Graduate School of Business.
Alexander J. Darragh (age 42) joined Balcor in September 1988 and is responsible for due diligence analysis and real estate advisory services for Balcor and American Express Company. He also has supervisory responsibility for Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban Geography from Queen's University and in Urban Planning from Northwestern University.
James E. Mendelson (age 34) joined Balcor in July 1984 and is responsible for Balcor's property sales activities. He also has supervisory responsibility for Balcor's accounting, financial, treasury, investor services and investment
administrative functions. From 1989 to 1995, Mr. Mendelson was Vice President - Transaction Management and Vice President - Senior Transaction Manager and had responsibility for various asset management matters relating to real estate investments made by Balcor, including negotiations for the restructuring of mortgage loan investments. Mr. Mendelson received his M.B.A. degree from the University of Chicago.
John K. Powell, Jr. (age 46) joined Balcor in September 1985 and is responsible for portfolio and asset management matters relating to Balcor's partnerships. Mr. Powell also has supervisory responsibility for Balcor's risk management function. He received a Master of Planning degree from the University of Virginia. Mr. Powell has been designated a Certified Real Estate Financier by the National Society for Real Estate Finance and is a full member of the Urban Land Institute.
Jayne A. Kosik (age 39) joined Balcor in August 1982 and, as Chief Financial Officer, is responsible for Balcor's financial, human resources and treasury functions. From June 1989 until October 1996, Ms. Kosik had supervisory responsibility for accounting functions relating to Balcor's public and private partnerships. She is also Treasurer and a Managing Director of The Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any material legal proceedings nor were any such proceedings terminated during the fourth quarter of 1996.
Item 11.
Item 11. Executive Compensation - -------------------------------
The Registrant paid $2,119 in 1996 with respect to one of the executive officers and directors of Balcor Partners - XIX, the General Partner. The Registrant has not paid and does not propose to pay any remuneration to the remaining executive officers and directors of the General Partner. Certain of these remaining officers receive compensation from The Balcor Company (but not from the Registrant) for services performed for various affiliated entities, which may include services performed for the Registrant. However, the General Partner believes that any such compensation attributable to services performed for the Registrant is immaterial to the Registrant. See Note 9 of Notes to Financial Statements for the information relating to transactions with affiliates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(a) The following entity is the sole Limited Partner which owns beneficially more than 5% of the outstanding Limited Partnership Interests of the Registrant:
Name and Amount and Address of Nature of Beneficial Beneficial Percent Title of Class Owner Ownership of Class - -------------- ---------------- ---------------- ---------------- Limited WIG 86-I 1,996 3.30% Partnership Partners Limited Interests Chicago, Partnership Illinois Interests
Limited Metropolitan 1,526 2.53% Partnership Acquisition VII, L.L.C. Limited Interests Greenville, Partnership South Carolina Interests
While WIG 86-I Partners and Metropolitan Acquisition VII, L.L.C. individually own less than 5% of the Interests, for purposes of this Item 12, WIG 86-I Partners is an affiliate of Metropolitan Acquisition VII, L.L.C. and, collectively, they own 5.83% of the Interests.
(b) Balcor Partners-XIX and its officers and partners own as a group the following Limited Partnership Interests of the Registrant:
Amount Beneficially Title of Class Owned Percent of Class -------------- ------------- ----------------
Limited Partnership Interests 230 Interests Less than 1%
Relatives and affiliates of the officers and partners of the General Partner own an additional 5 Interests.
(c) The Registrant is not aware of any arrangements, the operation of which may result in a change of control of the Registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
(a & b) See Note 4 of Notes to Financial Statements for information relating to the Partnership Agreement and the allocation of distributions and profits and losses.
See Note 9 of Notes to Financial Statements for additional information relating to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K - ------------------------------------------------------------------------
(a) (1 & 2) See Index to Financial Statements and Financial Statement Schedule in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership is set forth as Exhibit 3 to Amendment No. 1 to Registrant's Registration Statement on Form S-11 dated December 16, 1985 (Registration No. 33-361), and said Agreement and Certificate is incorporated herein by reference.
(4) Form of Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1 of the Registrant's Registration Statement on Form S-11 dated December 16, 1985 (Registration No. 33-361), and Form of Confirmation regarding Interests in the Partnership set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1992 are incorporated herein by reference.
(10) Material Contracts:
(a)(i) The Agreement of Sale and attachment thereto relating to the sale of Pines of Cloverlane Apartments previously filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated January 25, 1996 is incorporated herein by reference.
(ii) First, Second and Third Amendments to Agreement of Sale relating to the sale of Pines of Cloverlane Apartments previously filed as Exhibits (10)(ii), (10)(iii) and (10)(iv), respectively, to the Registrant's Report on Form 10-K for the year ended December 31, 1995 is incorporated herein by reference.
(b)(i) The Agreement of Sale and attachment thereto relating to the sale of the Lakeside Apartments previously filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated February 21, 1996 is incorporated herein by reference.
(c)(i) The Agreement of Sale and attachment thereto relating to the sale of the Lakeville Resort Apartments previously filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated April 23, 1996 is incorporated herein by reference.
(ii) Master Amendment and Agreement dated May 22, 1996 relating to the sale of Lakeville Resort Apartments, Petaluma, California, previously filed as Exhibit (10)(c)(ii) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the sale of Lakeville Resort Apartments, Petaluma, California, previously filed as Exhibit (10)(c)(iii) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(iv) Letter Agreements dated May 22, 1996 and July 8, 1996 relating to the sale of Lakeville Resort Apartments, Petaluma, California, previously filed as Exhibit (10)(c)(iv) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(v) Letter Agreements dated August 20, 1996, September 19, 1996 and September 30, 1996 relating to the sale of Lakeville Resort Apartments, Petaluma, California, previously filed as Exhibit (99)(a) to the Registrant's Report on Form 8-K dated August 16, 1996 are incorporated herein by reference.
(d)(i) The Agreement of Sale relating to the sale of Brighton Townhomes Apartments previously filed as Exhibit (10)(v) to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1996 is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale and Escrow Agreement dated May 31, 1996 relating to the sale of Brighton Townhomes, Washington County, Oregon, previously filed as Exhibit (10)(d)(ii) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(iii) Letter of Termination dated June 12, 1996 relating to the sale of Brighton Townhomes, Washington County, Oregon, previously filed as Exhibit (10)(d)(iii) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(iv) Reinstatement and Second Amendment to Agreement of Sale and Escrow Agreement June 13, 1996 relating to the sale of Brighton Townhomes, Washington County, Oregon, previously filed as Exhibit (10)(d)(iv) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(v) Letter of Extension dated July 8, 1996 relating to the sale of Brighton Townhomes, Washington County, Oregon, previously filed as Exhibit (10)(d)(v) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(e) Agreement of Sale and attachment thereto relating to the sale of Cedar Crest Apartments, Overland Park, Kansas, previously filed as Exhibit (2) to the Registrant's Current Report on Form 8-K dated August 16, 1996 incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1996 is attached hereto.
(b) Reports on Form 8-K: A Current Report on Form 8-K dated August 16, 1996 was filed reporting the contract to sell the Cedar Crest Apartments, Overland Park, Kansas and Lake Ridge Apartments, Fresno, California, the closing of the sale of Brighton Townhomes, Washington County, Oregon and the extension of the closing of the sale of Lakeville Resort Apartments, Petaluma, California.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: See Index to Financial Statements and Financial Statement Schedule in this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BALCOR REALTY INVESTORS 86-SERIES I A REAL ESTATE LIMITED PARTNERSHIP
By: /s/Jayne A. Kosik ------------------------------- Jayne A. Kosik Managing Director and Chief Financial Officer (Principal Accounting Officer) of Balcor Partners-XIX, the General Partner
Date: March 27, 1997 ---------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------- --------------------------------- --------------
President and Chief Executive Officer (Principal Executive Officer) of Balcor Partners-XIX, /s/Thomas E. Meador the General Partner March 27, 1997 - -------------------- -------------- Thomas E. Meador Managing Director and Chief Financial Officer (Principal Accounting Officer) of Balcor Partners-XIX, /s/Jayne A. Kosik the General Partner March 27, 1997 - -------------------- -------------- Jayne A. Kosik
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1996 and 1995
Statements of Partners' Capital (Deficit), for the years ended December 31, 1996, 1995 and 1994
Statements of Income and Expenses, 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
Financial Statement Schedule:
III - Real Estate and Accumulated Depreciation, as of December 31, 1996
Financial Statement Schedules, other than that listed, are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Balcor Realty Investors 86-Series I A Real Estate Limited Partnership:
We have audited the financial statements and the financial statement schedule of Balcor Realty Investors 86-Series I A Real Estate Limited Partnership (An Illinois Limited Partnership) as listed in the index of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Balcor Realty Investors 86-Series I A Real Estate Limited 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. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As described in Note 2 to the financial statements, the partnership agreement provides for the dissolution of the Partnership upon disposition of all its interests in real estate. In January 1997, the Partnership disposed of its remaining real estate assets. Upon resolution of the litigation described in Note 12 to the financial statements, the Partnership intends to cease operations and dissolve.
/s/Coopers & Lybrand, LLP COOPERS & LYBRAND L.L.P.
Chicago, Illinois March 26,1997
BALCOR REALTY INVESTORS 86 - SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALANCE SHEETS December 31, 1996 and 1995
ASSETS
1996 1995 ------------- ------------- Cash and cash equivalents $ 12,857,731 $ 1,093,098 Escrow deposits 533,283 2,246,696 Accounts and accrued interest receivable 171,078 5,857 Prepaid expenses 14,178 229,129 Deferred expenses, net of accumulated amortization of $39,380 in 1996 and $378,475 in 1995 35,799 619,028 ------------- ------------- 13,612,069 4,193,808 ------------- ------------- Investment in real estate: Land 1,045,776 11,137,023 Buildings and improvements 5,789,366 83,187,367 ------------- ------------- 6,835,142 94,324,390 Less accumulated depreciation 2,456,156 34,286,807 ------------- ------------- Investment in real estate, net of accumulated depreciation 4,378,986 60,037,583 ------------- ------------- $ 17,991,055 $ 64,231,391 ============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable $ 133,372 $ 119,006 Due to affiliates 117,361 28,823 Accrued liabilities, principally real estate taxes 35,921 330,070 Security deposits 32,222 420,724 Mortgage notes payable 4,210,138 74,196,579 ------------- ------------- Total liabilities 4,529,014 75,095,202 ------------- ------------- Affiliates' participation in joint ventures 1,064,860 (1,283,650) ------------- -------------
BALCOR REALTY INVESTORS 86 - SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALANCE SHEETS December 31, 1996 and 1995 (Continued)
Commitments and contingencies
Limited Partners' capital (deficit) (59,791 Interests issued and outstanding) 12,723,428 (8,962,989) General Partner's capital (326,247) (617,172) ------------- ------------- Total partners' capital (deficit) 12,397,181 (9,580,161) ------------- ------------- $ 17,991,055 $ 64,231,391 ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) for the years ended December 31, 1996, 1995 and 1994
Partners' Capital (Deficit) Accounts ----------------------------------------- General Limited Total Partner Partners -------------- ------------- ------------
Balance at December 31, 1993 $ (6,788,878)$ (590,754)$ (6,198,124)
Net loss for the year ended December 31, 1994 (1,284,604) (12,846) (1,271,758) -------------- ------------- ------------ Balance at December 31, 1994 (8,073,482) (603,600) (7,469,882)
Cash distribution to Limited Partners (A) (149,478) (149,478)
Net loss for the year ended December 31, 1995 (1,357,201) (13,572) (1,343,629) -------------- ------------- ------------ Balance at December 31, 1995 (9,580,161) (617,172) (8,962,989)
Cash distributions to Limited Partners (A) (7,115,132) (7,115,132)
Net income for the year ended December 31, 1996 29,092,474 290,925 28,801,549 -------------- ------------- ------------ Balance at December 31, 1996 $ 12,397,181 $ (326,247)$ 12,723,428 ============== ============= ============
(A) Summary of distributions per Limited Partnership Interest:
1996 1995 1994 -------------- ------------- ------------ First Quarter $ 2.50 None None Second Quarter 74.00 None None Third Quarter 2.50 None None Fourth Quarter 40.00 $ 2.50 None
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 -------------- ------------- ------------ Income: Rental and service $ 9,578,314 $ 16,418,264 $ 16,036,758 Interest on short-term investments 215,071 85,753 67,412 -------------- ------------- ------------ Total income 9,793,385 16,504,017 16,104,170 -------------- ------------- ------------
Expenses: Interest on mortgage notes payable 3,512,383 6,558,223 6,287,058 Lender participations 1,844,713 Depreciation 1,459,148 2,791,655 2,791,654 Amortization of deferred expenses 52,094 117,694 150,206 Property operating 3,698,151 5,350,302 5,698,854 Real estate taxes 683,574 1,422,161 1,391,861 Property management fees 501,502 816,124 800,216 Administrative 597,871 718,055 373,708 -------------- ------------- ------------ Total expenses 12,349,436 17,774,214 17,493,557 -------------- ------------- ------------ Loss before gain on sales of properties, affiliates' participation in joint ventures and extraordinary item (2,556,051) (1,270,197) (1,389,387) Gain on sales of properties 37,198,777 Affiliates' participation in (income) loss from joint ventures (5,214,321) (132) 104,783 -------------- ------------- ------------ Income (loss) before extraordinary item 29,428,405 (1,270,329) (1,284,604) -------------- ------------- ------------ Extraordinary item: Debt extinguishment expense (531,135) (145,393) Affiliates' participation in debt extinguishment expense 195,204 58,521 -------------- ------------ Total extraordinary item (335,931) (86,872) -------------- ------------- ------------ Net income (loss) $ 29,092,474 $ (1,357,201)$ (1,284,604) ============== ============= ============
BALCOR REALTY INVESTORS 86 - SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1996, 1995 and 1994 (Continued)
1996 1995 1994 -------------- ------------- ------------
Income (loss) before extraordinary item allocated to the General Parnter $ 294,284 $ (12,703)$ (12,846) ============== ============= ============ Income (loss) before extraordinary item allocated to the Limited Partners $ 29,134,121 $ (1,257,626)$ (1,271,758) ============== ============= ============ Income (loss) before extraordinary item per Limited Partnership Interest (59,791 issued and outstanding) $ 487.26 $ (21.03)$ (21.27) ============== ============= ============
Extraordinary item allocated to General Partner $ (3,359)$ (869) None ============== ============= ============ Extraordinary item allocated to Limited Partners $ (332,572)$ (86,003) None ============== ============= ============ Extraordinary item per Limited Partnership Interest (59,791 issued and outstanding) $ (5.56)$ (1.44) None ============== ============= ============ Net income (loss) allocated to General Partner $ 290,925 $ (13,572)$ (12,846) ============== ============= ============ Net income (loss) allocated to Limited Partners $ 28,801,549 $ (1,343,629)$ (1,271,758) ============== ============= ============ Net income (loss) per Limited Partnership Interest (59,791 issued and outstanding) $ 481.70 $ (22.47)$ (21.27) ============== ============= ============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 -------------- ------------- ------------ Operating activities: Net income (loss) $ 29,092,474 $ (1,357,201)$ (1,284,604) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Gain on sales of properties (37,198,777) Debt extinguishment expense 531,135 145,393 Affiliates' participation in debt extinguishment expense (195,204) (58,521) Affiliates' participation in income (losses) from joint ventures 5,214,321 132 (104,783) Depreciation of properties 1,459,148 2,791,655 2,791,654 Amortization of deferred expenses 52,094 117,694 150,206 Collection of insurance proceeds 94,425 Net change in: Escrow deposits 983,862 (262,415) 127,029 Accounts and accrued interest receivable (165,221) 61,179 9,312 Prepaid expenses 214,951 (229,129) Accounts payable 14,366 (50,354) (33,523) Due to affiliates 88,538 (45,644) (5,674) Accrued liabilities (294,149) 160,196 43,222 Security deposits (388,502) (19,490) 20,725 -------------- ------------- ------------ Net cash (used in) provided by operating activities (590,964) 1,253,495 1,807,989 -------------- ------------- ------------ Investing activities: Proceeds from sales of properties 72,178,128 Payment of selling costs (1,575,774) Funding of escrow in connection with sale of property (335,000) ------------- Net cash provided by investing activities 70,267,354 -------------
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86 - SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994 (Continued)
1996 1995 1994 -------------- ------------- ------------ Financing activities: Distributions to Limited Partners $ (7,115,132)$ (149,478) Capital contributions by joint venture partner - affiliate 374,657 $ 47,039 Distributions to joint venture partners - affiliates (2,670,607) (328,376) (131,556) Issuance of mortgage notes payable 20,932,600 Repayment of mortgage notes payable (48,345,344) (18,728,280) Principal payments on mortgage notes payable (845,225) (1,216,036) (1,221,262) Payment of deferred expenses (499,868) Funding of improvement escrows (1,604,551) Release of improvement escrows 1,064,551 -------------- ------------- ------------ Net cash used in financing activities (57,911,757) (1,219,332) (1,305,779) -------------- ------------- ------------ Net change in cash and cash equivalents 11,764,633 34,163 502,210 Cash and cash equivalents at beginning of year 1,093,098 1,058,935 556,725 -------------- ------------- ------------ Cash and cash equivalents at end of year $ 12,857,731 $ 1,093,098 $ 1,058,935 ============== ============= ============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 86-SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Realty Investors 86-Series I A Real Estate Limited Partnership (the "Partnership") was engaged principally in the operation of residential real estate investments located in various markets within the United States. The Partnership sold its remaining property in January 1997.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon the occurrence of certain events, including the disposition of all interests in real estate. During 1996, the Partnership sold the Pines of Cloverlane, Lakeside, Brighton Townhomes, Lakeville Resort and Cedar Crest apartment complexes. During January 1997, the Partnership sold the Lake Ridge Apartments. A majority of the proceeds from the sales were distributed to Limited Partners during 1996 and January 1997. The Partnership has retained a portion of the cash to satisfy obligations of the Partnership as well as establish a reserve for contingencies. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Partnership including, but not limited to, the lawsuits discussed in Note 12 of Notes to Financial Statements. In the absence of any contingency, the reserves will be paid within twelve months of the last property sale. In the event a contingency continues to exist or arises, reserves may be held by the Partnership for a longer period of time.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
(b) Depreciation expense was computed using the straight-line and accelerated methods. Rates used in the determination of depreciation were based upon the following estimated useful lives:
Years -----
Buildings and improvements 20 to 30 Furniture and fixtures 5
Maintenance and repairs were charged to expense when incurred. Expenditures for improvements were charged to the related asset account.
As properties are sold, the related costs and accumulated depreciation are removed from the repective accounts. Any gain or loss on dispostion is recognized in accordance with generally accepted accounting principles.
(c) Effective January 1, 1995 the Partnership adopted Statement of Financial Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". Under SFAS 121, the Partnership records its investments in real estate at the lower of cost or fair value, and periodically assesses, but not less than on an annual basis, possible impairment to the value of its properties. The General Partner estimates the fair value of its properties based on the current sale price less estimated closing costs. In the event the General Partner determines an impairment in value has occurred, and the carrying amount of the real estate asset will not be recovered, a provision is recorded to reduce the carrying basis of the property to its estimated fair value. The General Partner considers the method referred to above to result in a reasonable measurement of a property's fair value, unless other factors affecting the property's value indicate otherwise.
(d) Deferred expenses consist of financing fees which are amortized over the terms of the respective loan agreements. Upon sale, any remaining balance is recognized as debt extinguishment expense and classified as an extraordinary item.
(e) The Financial Accounting Standard Board's Statement No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. Since quoted market prices are not available for the Partnership's financial instruments, fair values have been based on estimates using present value techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Statement No. 107 does not apply to all balance sheet items and excludes certain financial instruments and all non-financial instruments such as real estate and investment in joint ventures from its disclosure requirements.
(f) Cash and cash equivalents include all unrestricted, highly liquid investments with an original maturity of three months or less. Cash is invested or held primarily in one financial institution.
(g) The Partnership is not liable for Federal income taxes and each partner recognizes his proportionate share of the Partnership income or loss in his tax return; therefore, no provision for income taxes is made in the financial statements of the Partnership.
(h) Revenue is recognized on an accrual basis in accordance with generally accepted accounting principles.
4. Partnership Agreement:
The Partnership was organized on October 1, 1984. The Partnership Agreement provides for Balcor Partners-XIX to be the General Partner and for the admission of Limited Partners through the sale of up to 250,000 Limited Partnership Interests at $1,000 per Interest, 59,791 of which were sold on or prior to July 31, 1986, the termination date of the offering.
The Partnership Agreement provides that the General Partner will be allocated 1% of all profits and losses. One hundred percent of Net Cash Receipts available for distribution will be distributed to the holders of Interests in proportion to their Participating Percentages as of the record date for such distributions. There will, however, be accrued for the benefit of the General Partner as its distributive share from operations, an amount equivalent to approximately 1% of the total Net Cash Receipts being distributed. The accrued amount will be paid as a part of the General Partner's share of distributed Net Cash Proceeds. Under certain circumstances, the General Partner may participate in the Net Cash Proceeds of the sale or refinancing of Partnership properties. The General Partner's participation is limited to 15% of remaining Net Cash Proceeds after the return of Original Capital plus any deficiency in the Cumulative Distribution of 6% on Adjusted Original Capital to the holders of Interests. Based on the amount of Net Cash Proceeds received by the Partnership from the sales of its properties and the amount of Net Cash Receipts received by the Partnership, the General Partner will not receive any distributions of Net Cash Receipts or Net Cash Proceeds.
5. Mortgage Notes Payable:
Mortgage notes payable at December 31, 1996 and 1995 consisted of the following:
Carrying Carrying Current Final Property Amount of Amount of In- Matur- Current Estimated Pledged as Notes at Notes at terest ity Monthly Balloon Collateral 12/31/96 12/31/95 Rate % Date Payment Payment - -------------- ---------- ---------- -------- ------ ------- ---------- Apartment Complexes:
Brighton Townhomes(A) None $ 7,069,078 Cedar Crest(A) None 15,294,576 Lakeside (A) None 12,445,156 Lakeville Resort(A)(B) None 20,879,579 Lake Ridge(C) $ 4,210,138 4,241,100 10.05% 2000 $37,983 $3,999,000 Pines of Cloverlane (A) None 14,267,090 ----------- -----------
Total $ 4,210,138 $74,196,579 =========== ===========
(A) This property was sold in 1996. See Note 10 of Notes to Financial Statements for additional information.
(B) In June 1995, the mortgage note was refinanced with a new lender. The interest rate decreased from a variable rate of approximately 10.4% to a fixed rate of 8.2%. The maturity date was extended from April 1997 to July 2030 and the monthly payment of principal and interest decreased from a variable payment (of approximately $209,000) to a fixed payment of $151,727. A portion of the proceeds from the new $20,932,600 first mortgage loan was used to repay the existing mortgage note of $18,728,280 as well as to pay deferred loan fees of $499,868 and fund an improvement escrow of $1,604,551.
The Lakeville Resort Apartments was owned by a joint venture consisting of the Partnership and an affiliate. In connection with this refinancing, the Partnership recognized an extraordinary debt extinguishment expense of $145,393 relating to the write off of the remaining unamortized deferred loan fees on the former mortgage note, of which $58,521 represents the affiliate's share.
(C) In January 1997, this property was sold. See Note 14 of Notes to Financial Statements for additional information.
The Lake Ridge Apartments first and second mortgage loans described above required current monthly payments of principal and interest.
Real estate with an aggregate carrying value of $4,378,986 at December 31, 1996 was pledged as collateral for repayment of the remaining mortgage loan.
During 1996, 1995 and 1994, the Partnership incurred and paid interest expense on mortgage notes payable of $3,726,596, $6,558,223 and $6,287,058, respectively.
6. Management Agreements:
As of December 31, 1996, the Partnership's remaining property was under a management agreement with a third-party management company. The management agreement provides for annual fees of 5% of gross operating receipts.
7. Affiliates' Participations in Joint Ventures:
The Cedar Crest and Lakeville Resort apartment complexes were each owned by the Partnership and an affiliate. Both properties were sold in 1996. Profits and losses were allocated 96.36% to the Partnership and 3.64% to the affiliate for Cedar Crest Apartments, and 59.75% to the Partnership and 40.25% to the affiliate for Lakeville Resort Apartments. All assets, liabilities, income and expenses of the joint ventures are included in the financial statements of the Partnership with the appropriate adjustment to profit or loss for each affiliate's participation. Net contributions (distributions) of $(2,670,607), $46,281 and $(84,517) were made to joint venture partners during 1996, 1995 and 1994, respectively. In addition, joint venture partners were allocated their pro rata share of the gain on the sales of the Lakeville and Cedar Crest apartment complexes of $4,877,854 and $334,258, respectively, in 1996.
8. Tax Accounting:
The Partnership keeps its books in accordance with the Internal Revenue Code, rules and regulations promulgated thereunder, and existing interpretations
thereof. The accompanying financial statements, which are prepared in accordance with generally accepted accounting principles, will differ from the tax returns due to the different treatment of various items as specified in the Internal Revenue Code. The net effect of these accounting differences is that the net income for 1996 in the financial statements is $16,062,403 less than the tax income of the Partnership for the same period.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended 12/31/96 12/31/95 12/31/94 -------------- -------------- -------------- Paid Payable Paid Payable Paid Payable ------ ------- ------ ------- ------ -------
Property management fees None None None None $734,296 None Reimbursement of expenses to General Partner, at cost: Accounting $13,192 $18,021 $42,252 $2,280 60,490 $29,580 Data processing 5,403 3,195 28,190 2,113 44,397 10,161 Investor communica- tions None None 5,112 None 12,506 6,116 Legal 12,364 16,499 27,962 2,944 12,847 6,283 Portfolio management 52,663 71,103 105,436 12,199 28,114 13,749 Property sales admin- istration 28,393 8,543 11,838 9,169 None None Other 118 None 10,960 118 17,542 8,578
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed all of the Partnership's properties until the affiliate was sold to a third party in November 1994.
The Partnership participates in an insurance deductible program with other affiliated partnerships in which the program pays claims up to the amount of the deductible under the master insurance policies for its properties. The program is administered by an affiliate of the General Partner who receives no fee for administering the program; however, the General Partner is reimbursed for program expenses. The Partnership paid premiums to the deductible insurance program of $12,750, $97,161 and $149,324 for 1996, 1995 and 1994, respectively.
10. Property Sales:
(a) In March 1996, the Partnership sold the Pines of Cloverlane Apartments in an all cash sale for $18,974,000. From the proceeds of the sale, the Partnership paid $14,208,240 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $288,460 in selling costs. The Partnership also funded an escrow of $335,000 required in connection with the sale. The basis of the property was $12,369,952, which is net of accumulated depreciation of $10,441,365. For financial statement purposes, the Partnership recognized a gain of $6,315,588 from the sale of this property.
(b) In March 1996, the Partnership sold the Lakeside Apartments in an all cash sale for $14,100,000. From the proceeds of the sale, the Partnership paid $12,426,799 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $299,150 in selling costs and $467,557 in lender participation. Lender participation represents additional interest paid to the lender calculated as a percentage of the sales price in excess of amounts specified in the loan agreement. The basis of the property was $9,316,152, which is net of accumulated depreciation of $4,876,088. For financial statement purposes, the Partnership recognized a gain of $4,484,698 from the sale of this property.
(c) In August 1996, the Partnership sold the Brighton Townhomes Apartments in an all cash sale for $11,150,000. From the proceeds of the sale, the Partnership paid $6,858,644 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $221,925 in selling costs and $1,377,156 in lender participation. Lender participation represents additional interest paid to the lender calculated as a percentage of the sales price in excess of amounts specified in the loan agreement. The basis of the property was $5,575,515, which is net of accumulated depreciation of $3,326,131. For financial statement purposes, the Partnership recognized a gain of $5,352,560 from the sale of this property.
(d) The Lakeville Resort Apartments was owned by a joint venture consisting of the Partnership and an affiliate. The Partnership and the affiliate hold participating percentages in the joint venture of 59.75% and 40.25%, respectively. In October 1996, the joint venture sold the property in an all cash sale for $27,200,000. The purchaser took title subject to the existing first mortgage loan in the amount of $20,795,872. From the proceeds of the sale, the joint venture paid $355,000 in selling costs. The basis of the property was $15,083,209, which is net of accumulated depreciation of $8,320,036. For financial statement purposes, the Partnership recognized a gain of $11,761,791 from the sale of this property, of which $4,877,854 is the minority joint venture partner's share.
(e) The Cedar Crest Apartments was owned by a joint venture consisting of the Partnership and an affiliate. The Partnership and the affiliate hold participating percentages in the joint venture of 96.36% and 3.64%, respectively. In November 1996, the joint venture sold the property in an all cash sale for $21,550,000. From the proceeds of the sale, the joint venture paid $14,851,661 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $411,239 in selling costs. The basis of the property was $11,854,621 which is net of accumulated depreciation of $6,326,179. For financial statement purposes, the Partnership recognized a gain of $9,284,140 from the sale of this property, of which $334,258 is the minority joint venture partner's share.
11. Extraordinary Item:
The Partnership wrote off the remaining unamortized deferred financing fees in the amount of $531,135 as a result of the sales of the Pines of Cloverlane, Cedar Crest and Lakeville Resort apartment complexes during 1996. This amount was recognized as an extraordinary item and classified as debt extinguishment expense, of which $195,204 represents the affiliates' share.
12. Contingency:
The Partnership is currently involved in two lawsuits whereby the Partnership and certain affiliates have been named as defendants alleging substantially similar claims involving certain federal securities law violations with regard to the adequacy and accuracy of disclosures of information concerning, as well as marketing efforts related to, the offering of the Limited Partnership Interests of the Partnership. The defendants continue to vigorously contest these actions. A plaintiff class has not been certified in either action and, no determinations of the merits have been made. It is not determinable at this time whether or not an unfavorable decision in either action would have a material adverse impact on the financial position, operations and liquidity of the Partnership. The Partnership believes it has meritorious defenses to contest the claims.
13. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments at December 31, 1996 and 1995 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest receivable and accounts payable approximates fair value.
Mortgage Notes Payable: Based on borrowing rates available to the Partnership at the end of 1996 and 1995 for mortgage loans with similar terms and maturities, the fair value of the mortgage notes payable approximates the carrying value.
14. Subsequent Events:
(a) In January 1997, the Partnership paid a distribution of $9,865,515 ($165.00 per Interest) to the holders of Limited Partnership Interests. This distribution represents a distribution of Net Cash Receipts for the fourth quarter of 1996 of $5.00 per Interest and a special distribution of $160.00 per Interest of Net Cash Proceeds received in connection with the sales of the Cedar Crest and Lakeville Resort apartment complexes.
(b) In January 1997, the Partnership sold the Lake Ridge Apartments in an all cash sale for $5,400,000. From the proceeds of the sale, the Partnership paid $4,123,938 and $86,200 to the third party mortgage holder in full satisfaction of the first and second mortgage loans, respectively, and paid $196,656 in selling costs and $126,222 in prepayment penalties. For financial statement purposes, the Partnership will recognize a gain during the first quarter of 1997 of approximately $829,000 from the sale of this property.
BALCOR REALTY INVESTORS 86-SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALCOR REALTY INVESTORS 86-SERIES I A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALCOR REALTY INVESTORS 86-SERIES I A Real Estate Limited Partnership (An Illinois Limited Partnership)
NOTES TO SCHEDULE III
(a) Consists of legal fees, appraisal fees, title costs, other related professional fees and capitalized construction period interest.
(b) The aggregate cost of land for Federal income tax purposes is $1,180,321 and the aggregate cost of buildings and improvements for Federal income tax purposes is $6,534,201. The total of these is $7,714,522.
(c) Reconciliation of Accumulated Depreciation -------------------------------------------
1996 1995 1994 ----------- ----------- -----------
Balance at beginning of year $ 34,286,807 $31,495,152 $28,703,498
Accumulated depreciation of properties sold (33,289,799) Depreciation expense for the year 1,459,148 2,791,655 2,791,654 ----------- ----------- -----------
Balance at end of year $2,456,156 $34,286,807 $31,495,152 =========== =========== ===========
(d) See description of Mortgage Notes Payable in Note 5 of Notes to Financial Statements.
(e) Lake Ridge Apartments had a reduction of basis due to an impairment of the asset value in 1988.
(f) In January 1997, this property was sold. See Note 14 of Notes to the Financial Statements for additional information.
(g) Depreciation expense is computed based upon the following estimated useful lives: Years -----
Buildings and improvements 20 to 30 Furniture and fixtures 5