Item 1. Business
Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is a limited partnership formed in June 1983 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a diversified portfolio of existing income-producing operating properties through land purchase-leaseback transactions and first mortgage loans. The Partnership sold $35,794,000 in Limited Partnership Units (35,794 Units at $1,000 per Unit) from October 14, 1983 to October 13, 1984 pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-85347). Limited Partners will not be required to make any additional capital contributions.
Originally, the Partnership owned land and made first mortgage loans secured by buildings with respect to six operating properties. As of August 31, 1996, the Partnership's mortgage loan and land lease investments on two of the original properties were still outstanding and the Partnership owned one operating property directly as a result of foreclosing on a mortgage loan investment. The Partnership's wholly-owned real estate investment and the security for the Partnership's other investments are described below.
Property Name Type of Property and and Location Date of Investment Size Type of Ownership (1) - ------------------ ------------------ ---- ---------------------
Appletree Apartments Apartments 288 units; Fee ownership of Omaha, NE 5/8/84 16.2 acres land and first of land mortgage lien on improvements
Woodcroft Shopping Shopping Center 85,300 Fee ownership of Center 12/17/84 net land and first Durham, NC leasable mortgage lien on Phase I and Phase II sq. ft.; improvements 12 acres of land
Westside Creek Apartments 142 units; Fee ownership of Apartments (2) 7/1/85 11.4 acres land and improvements Little Rock, AR of land
(1) See Notes to the Financial Statements filed with this Annual Report for a description of the transactions through which the Partnership has acquired these real estate investments.
(2) On March 23, 1989, the Partnership foreclosed under the terms of the mortgage note receivable secured by the Westside Creek Apartments for non-payment of the required monthly payments of interest in accordance with the terms of the mortgage loan. The Partnership has been operating the property utilizing the services of a local management company since the date of the foreclosure. See Note 5 to the Financial Statements accompanying this Annual Report for a further discussion of this investment.
To date, the Partnership has sold or been prepaid on its investments with respect to three of the original operating properties. On September 25, 1989, the Partnership liquidated its investments in a Howard Johnson's Hotel, located in Orlando, Florida. The transaction consisted of a repayment of the Partnership's mortgage loan receivable for $6,400,000 as well as a sale of the related land at an amount equal to the Partnership's original cost of $1,600,000. The repayment resulted in a loss on the mortgage loan investment of $1,799,750 and $750,000 of bad debt expense for previously accrued but uncollectible interest income. On July 31, 1992, the Partnership liquidated its investments in the Exeter Street Theatre Building, when the borrower sold the operating property to a third party. The transaction consisted of a prepayment of the mortgage loan receivable at par, for $5,100,000, and a sale of the related land for $3,000,000 (prior to closing costs). The land had a carrying value of $500,000, equal to the Partnership's original investment, at the time of the sale. On February 20, 1990, an affiliate of the Partnership, which held the mortgage loan and land lease on the Cordova Creek Apartments, foreclosed on the property due to non-payment of the required interest payments. The affiliate operated the property, using the services of a local management company, for more than five years during which time the Partnership received a share of the net cash flow generated from property operations after capital improvements. On April 12, 1995, the affiliate of the Partnership sold the Cordova Creek property. The Partnership, which owned a 3.5% equity interest in the property, received net proceeds of $311,000 and realized a gain of $61,000 on the sale.
The Partnership's investment objectives are to:
(1) preserve and protect the Limited Partners' capital and related buying power; (2) provide the Limited Partners with cash distributions from investment income; and (3) achieve long-term appreciation in the value of the Partnership's investments.
Through August 31, 1996, the Limited Partners had received cumulative cash distributions totalling approximately $40,114,000, or $1,142 per original $1,000 investment for the Partnership's earliest investors. This return includes a distribution of $224 per original $1,000 investment from the liquidation of the Howard Johnson's mortgage loan and land investment in September of 1989, a distribution of $232 per original $1,000 investment in October 1992 from the liquidation of the Exeter Street Theatre Building investment in July 1992, and a $42 distribution following the sale of the Cordova Creek Apartments in June 1995 ($9 from the sale of Cordova Creek and $33 of excess Partnership reserves). At August 31, 1996, the Partnership retains an interest in three of the six properties underlying its original mortgage loan and land investments.
As noted above, to date the Partnership has made distributions of capital proceeds to the Limited Partners totalling $498 per original $1,000 investment. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final liquidation of its remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final liquidation, which cannot presently be determined. The Partnership expects to finance or sell its investments and have its mortgage loans repaid from time to time. Due to the combination of relatively low mortgage interest rates and increased availability of funds for sales and mortgage refinancings which has existed over the past three years, the likelihood of the Partnership's loans being prepaid has increased. During fiscal 1996, the borrowers on both of the outstanding loan investments continued to discuss potential prepayment transactions with the Partnership. See Item 7 for a further discussion of these potential transactions. While there are no assurances that these borrowers will be able to finance prepayment transactions in the near term, if such transactions were to be completed the Partnership would be positioned for a possible liquidation pending the sale of the wholly-owned Westside Creek Apartments for which the Partnership is currently in the process of negotiating a potential sales contract. In determining the appropriate timing for the sale of any of the Partnership's investments, the General Partner will consider such factors as the amount of appreciation in value, if any, to be realized, the risks of continued investment and the anticipated advantages to be gained from continuing to hold the investment.
The property in which the Partnership has an equity interest and the properties securing the Partnership's mortgage loan investments are located in real estate markets in which they face significant competition for the revenues they generate. The apartment complexes compete with numerous projects of similar type generally on the basis of price, location and amenities. Apartment properties in all markets also compete with the local single family home market for prospective tenants. The availability of low home mortgage interest rates over the past several years has generally caused this competition to increase in all areas of the country. The shopping center also competes for long-term commercial tenants with numerous projects of similar type generally on the basis of location, rental rates and tenant improvement allowances. The Partnership has no real estate investments located outside the United States. The Partnership is engaged solely in the business of real estate investment. Therefore, a presentation of information about industry segments is not applicable.
The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Third Qualified Properties, Inc. and Properties Associates. Third Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General Partner of the Partnership. The Associate General Partner is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions.
Item 2.
Item 2. Properties
As of August 31, 1996, the Partnership owns, and has leased back to the sellers, the land related to the two investments referred to under Item 1 above to which reference is made for the name, location and description of each investment. Additionally, the Partnership owns one property directly which was acquired through foreclosure proceedings as noted in Item 1.
Occupancy figures for each fiscal quarter during 1996, along with an average for the year, are presented below for each property:
Percent Occupied At ----------------------------------------------- Fiscal 11/30/95 2/29/96 5/31/96 8/31/96 Average -------- ------- ------- ------- -------
Appletree Apartments 96% 97% 99% 98% 98%
Woodcroft Shopping Center Phase I and Phase II 97% 100% 100% 100% 99%
Westside Creek Apartments 97% 97% 90% 89% 93%
Item 3.
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including Third Qualified Properties, Inc. and Properties Associates ("PA"), which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in Paine Webber Qualified Plan Property Fund Three, LP, PaineWebber, Third Qualified Properties, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in Paine Webber Qualified Plan Property Fund Three, LP, also alleged that following the sale of the partnership interests, PaineWebber, Third Qualified Properties, Inc. and PA misrepresented financial information about the Partnership's value and performance. The amended complaint alleged that PaineWebber, Third Qualified Properties, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties have agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which has been preliminarily approved by the court and provides for the complete resolution of the class action litigation, including releases in favor of the Partnership and the General Partners, and the allocation of the $125 million settlement fund among investors in the various partnerships at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the proposed settlement is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleges, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint seeks compensatory damages of $15 million plus punitive damages against PaineWebber. In September 1996, the court dismissed many of the plaintiffs' claims as barred by applicable securities arbitration regulations. Mediation hearings are currently scheduled to be held in December 1996. The eventual outcome of this litigation and the potential impact, if any, on the Partnership's unitholders cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for any amounts it is required to pay in connection with the settlement of the New York Limited Partnership Actions. At the present time, the General Partners cannot estimate the impact, if any, of the potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements of the Partnership.
The Partnership is not subject to any other material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters
At August 31, 1996, there were 6,055 record holders of Units in the Partnership. There is currently no public market for the resale of Units, and it is not anticipated that a public market for Units will develop. The Managing General Partner will not redeem or repurchase Units.
Item 6.
Item 6. Selected Financial Data
PaineWebber Qualified Plan Property Fund Three, LP For the years ended August 31, 1996, 1995, 1994, 1993 and 1992 (In thousands, except per Unit data)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ----
Revenues $ 1,218 $ 1,315 $1,272 $ 1,296 $ 2,062
Operating income $ 819 $ 831 $ 834 $ 852 $ 1,471
Gain on sale of land $ $ - $ - $ - $ 2,479
Gain on sale of investment in operating property $ - $ 61 $ - $ - $ -
Income from investment property held for sale $ 536 $ 545 $ 551 $ 568 $ 551
Net income $ 1,355 $ 1,437 $ 1,385 $1,420 $ 4,501
Per Limited Partnership Unit:
Net income $ 37.47 $ 39.73 $ 38.31 $ 39.26 $124.48
Cash distributions from operations $ 32.64 $ 35.36 $ 35.36 $ 37.94 $ 45.69
Cash distributions from sale, refinancing and other disposition transactions $ - $ 42.00 $ - $232.00 $ -
Total assets $16,207 $16,030 $17,350 $17,269 $25,529
The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report.
The above net income and cash distributions per Limited Partnership Unit are based upon the 35,794 Limited Partnership Units outstanding during each year.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Partnership offered Limited Partnership Interests to the public from October 1983 to October 1984 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $35,794,000 were received by the Partnership and, after deducting selling expenses and offering costs, approximately $31,410,000 was invested in six operating property investments in the form of mortgage loans and land purchase-leaseback transactions. Since the time that the original investments were made, the Partnership has liquidated its Howard Johnson's Hotel mortgage loan and land investments at a loss and has liquidated its Exeter Street Theatre Building mortgage loan and land investments and the investment in the Cordova Creek Apartments at gains. In addition, the Partnership assumed ownership of the Westside Creek Apartments property after foreclosing under the terms of the first mortgage loan. The Partnership's investment in the Cordova Creek Apartments had also been converted to an equity interest in the operating property as a result of foreclosure proceedings carried out by an affiliated partnership.
Operations of the properties securing the Partnership's two remaining mortgage loan investments remained strong during fiscal 1996 and continue to fully support the debt service and land rent payments owed to the Partnership. During the year ended August 31, 1996, the Partnership received additional rent of $25,000 under the terms of the Woodcroft Shopping Center ground lease because cash flow from the property was in excess of certain base amounts specified in the lease agreement. Leasing levels at the Appletree Apartments and Woodcroft Shopping Center were 98% and 100%, respectively, as of August 31, 1996. The mortgage loans secured by the Appletree Apartments and Woodcroft Shopping Center bear interest at annual rates of 11.00% and 11.25%, respectively. As previously reported, since current market interest rates for first mortgage loans are considerably lower than these rates, and with the continued availability of credit in the capital markets for real estate transactions, the likelihood of the Partnership's mortgage loan investments being prepaid has been high since the time that the terms of such mortgage loans allowed for prepayment. The Appletree loan became prepayable in April 1994. However, the Appletree loan includes a prepayment premium for any prepayment between May 1994 and April 1998 at rates between 5% and 1.25% of the mortgage loan balance. The Woodcroft loan became prepayable without penalty in December 1994. As discussed further below, over the past year the borrowers on both of the outstanding loan investments have approached the Partnership regarding potential prepayment transactions. While there are no assurances that these borrowers will be able to finance such transactions in the near term, if these transactions are completed the Partnership could be positioned for a possible liquidation pending the disposition of the wholly-owned Westside Creek Apartments for which the Partnership is currently in the process of negotiating a potential sales contract, as discussed further below.
During the last quarter of fiscal 1995, the Partnership received notice from the Appletree borrower of its intent to prepay the Partnership's mortgage loan and repurchase the underlying land. The borrower has represented that it has received the necessary financing to complete this transaction. The final issue to be resolved is the amount to be received by the Partnership under the terms of the ground lease as its share of the appreciation of the Appletree property in accordance with the terms of the ground lease. The terms of the ground lease provide for the possible resolution of disputes between the parties over value issues through an arbitration process. Presently, the Partnership and the borrower continue to try to resolve their differences regarding the value of the property. If an agreement cannot be reached, the borrower could force the Partnership to submit to arbitration during fiscal 1997. In addition to the amount to be determined as the Partnership's share of the property's appreciation under the ground lease, the terms of the Appletree mortgage loan require a prepayment penalty which would be equal to 2.5% of the outstanding principal balance of $4,850,000 for any prepayment prior to April 30, 1997. Subsequent to April 1997, the prepayment penalty declines to 1.5% for the next twelve months, after which there would be no prepayment penalty for the remainder of the term until maturity in May 1999. If completed, the proceeds of any prepayment transaction would be distributed to the Limited Partners. However, the transaction remains contingent on, among other things, a resolution of the value issue and the closing of the borrower's financing transaction. Accordingly, there are no assurances that this transaction will be consummated.
During the first quarter of fiscal 1996, the Partnership received notice from the owner of the Woodcroft Shopping Center of its intent to repay the Partnership's first mortgage loan and purchase the underlying land in conjunction with a sale of the operating property to a third party. The proposed terms of the transaction would have resulted in the full repayment of the Partnership's mortgage loan of $4,335,000 and the receipt of $1,220,000 as payment in full for obligations owing under the ground lease, representing the repayment of the $500,000 ground investment and $720,000 as the Partnership's share of the appreciation in value of the underlying property. During the quarter ended February 28, 1996, it was determined that the third-party buyer of Woodcroft was unable to secure the necessary financing required to purchase the property. During the quarter ended May 31, 1996, the Partnership again received notice from the owner of the Woodcroft Shopping Center of its intent to repay the outstanding first mortgage loan and purchase the underlying land in conjunction with a sale of the operating property to a third party. As was the case with the prior proposed transaction, this sale did not close due to problems with the buyer's financing plans. The owner of the Woodcroft Shopping Center has been remarketing the property in an effort to complete a sale before the December 1996 maturity date of the loan. Subsequent to year end, the Woodcroft owner negotiated a contract for the sale of the property to a third party at a lower price than the prior proposed transactions. Based on the terms of the potential sale transaction, the Partnership's share of the property's appreciation would total $650,000. The terms of the Partnership's ground lease require that the Partnership agree with the borrower's determination of value for purposes of calculating the Partnership's share of the appreciation in value due under the lease before a sale of the land can be completed. At the present time, market values for retail shopping centers in many markets are being adversely impacted by overbuilding and consolidations among retailers which have resulted in an oversupply of space. While the operations of the Woodcroft Shopping Center do not appear to have been affected to date by this general trend, such conditions would seem to have impacted the fair market value of the property, as evidenced by the difficulties that the Woodcroft owner has encountered in the prior sale efforts. As a result, the Partnership has agreed to accept the $650,000 premium for its ground lease interest in the event that this transaction can be completed.
At the Partnership's wholly-owned multi-family residential property, Westside Creek Apartments in Little Rock, Arkansas, the occupancy level averaged 93% for the year, compared to 95% for the prior year. This decrease was due to unusually high levels of tenant turnover at Westside Creek in the third and fourth quarters of fiscal 1996 caused by the opening of a nearby apartment property and by several tenants leaving to purchase single-family homes. The construction of this nearby apartment community with 225 units is not expected to have a significant impact on occupancy levels at Westside Creek over the long term; however it is expected to limit the property management team's ability to raise rental rates in the near term. There are two more new properties under construction in the West Little Rock market and one may directly compete with Westside Creek. The property management team has recommended that the Partnership invest funds in capital improvements at the property in order to stay competitive with these new developments. Property improvements completed during the year included purchasing a new computer for the leasing office, adding additional landscaping around the property, exterior painting, and replacing carpeting and appliances in units on an as-needed basis. Subsequent to year end, the Partnership received an offer to purchase the Westside Creek property and entered into negotiations for a potential sales contract. As previously reported, Westside Creek consists of two separately-owned phases. The two phases share their amenities with one another and allocate expenses by agreement through a common management company. The proposed sale transaction would involve both phases, which management believes would maximize the proceeds to the Partnership. The Partnership owns Phase I which includes the common entrance, leasing office and clubhouse, and has negotiated a favorable allocation of the potential sales price with the owner of Phase II based on Phase I's physical advantages. In order to capitalize on this potential for a combined sale of both phases, and in light of the possible near term repayments of the Woodcroft and Appletree mortgage loans and related land sales, management believes that pursuing a current sale of the Westside Creek property would be in the best interests of the Limited Partners.
At August 31, 1996, the Partnership had available cash and cash equivalents of approximately $973,000. Such cash and cash equivalents will be used for working capital requirements and for distributions to the partners. The source of future liquidity and distributions to the partners is expected to be through cash generated from the Partnership's real estate investments, repayment of the mortgage loans receivable and the proceeds from the sales or refinancings of the underlying land and the investment property. Such sources of liquidity are expected to be adequate to meet the Partnership's needs on both a short-term and long-term basis. However, to the extent that the potential loan prepayment and sale transactions discussed above are completed and the net proceeds are returned to the Limited Partners, the Partnership's quarterly distribution rate on remaining invested capital may have to be adjusted downward to reflect the reduction in cash flows which would result from such transactions.
Results of Operations 1996 Compared to 1995
The Partnership's net income decreased by $82,000 for the year ended August 31, 1996, when compared to the prior year. The primary reason for this decrease in net income is the gain realized by the Partnership in the prior year from the sale of the Cordova Creek Apartments on April 12, 1995. As discussed further above, the Partnership held a 3.5% equity interest in Cordova Creek and realized a gain of $61,000 from the sale of the property. In addition, a decrease in the Partnership's operating income of $12,000 contributed to the decline in net income for the current year. Operating income decreased due to a decline in revenues of $97,000. The decline in revenues was attributable to decreases in interest earned on cash equivalents of $51,000, other income of $24,000 and land rent of $22,000. Interest earned on cash equivalents decreased due to a decrease in the Partnership's average outstanding cash reserve balances as a result of the June 1995 distribution to the Limited Partners of reserves that exceeded expected future requirements totalling $1,181,000. Other income of $24,000 in the prior year represented cash flow distributions from the Partnership's interest in the Cordova Creek Apartments prior to the sale transaction. Land rent decreased due to a decline in the additional rent in excess of a specified base amount received from the Woodcroft Shopping Center pursuant to the terms of the ground lease. In addition, the Partnership realized a small decrease in income from investment property held for sale of $9,000 mainly due to an increase in capital improvement expenses incurred at Westside Creek in the current year. Due to the Partnership's policy of accounting for its assets held for sale, capital improvement costs are expensed as incurred. A reduction in general and administrative expenses of $79,000 partially offset the decreases in revenues and income from investment property held for sale. The reduction in general and administrative expenses is mainly attributable to a decline in professional fees of $89,000. Professional fees decreased primarily due to the legal costs incurred in conjunction with the proposed sale of the Westside Creek Apartments in fiscal 1995.
1995 Compared to 1994
The Partnership's net income increased by $52,000 for the year ended August 31, 1995, when compared to the prior year. The primary reason for the increase in net income was the gain realized by the Partnership from the sale of the Cordova Creek Apartments on April 12, 1995. As discussed further above, the Partnership held a 3.5% equity interest in Cordova Creek and realized a gain of $61,000 from the sale of the property. The gain from the sale of Cordova Creek was partially offset by a decrease in the income from the operations of the Westside Creek Apartments of $6,000 and a decrease in the Partnership's operating income of $3,000. Income from the operations of the Westside Creek Apartments decreased primarily due to an increase in capital improvement expenses over the prior year. Capital improvement expenses increased in connection with preparing the property for a possible sale, as discussed further above. Rental revenues at Westside Creek were up slightly compared to fiscal 1994. The Partnership's operating income decreased slightly, despite an increase in revenues of $43,000, due to an increase in professional fees. Professional fees increased mainly as a result of legal expenses incurred in connection with the proposed Westside Creek sale transaction which failed to close during fiscal 1995.
1994 Compared to 1993
The Partnership's net income decreased by $35,000 for the year ended August 31, 1994, when compared to the prior year. The decrease in net income was mainly the result of a decrease in interest earned on invested cash equivalents and a decrease in income from operations of the investment property held for sale. Interest earned on invested cash equivalents decreased by $21,000 during fiscal 1994 as a result of a substantial decrease in the average outstanding balance of cash held by the Partnership. During the quarter ended November 30, 1992, the Partnership held the proceeds from the sale of the Exeter Street Theatre Building investment. These proceeds, of over $8 million, were invested in short-term interest bearing instruments prior to being distributed to the Limited Partners in October 1992. Income from investment property held for sale represents the net operating income of the Westside Creek Apartments property reduced by capital improvement expenses. Net income from the operations of Westside Creek decreased by $17,000, mainly due to an increase in administrative and capital improvement expenses. The increases in administrative and capital improvement expenses were partially offset by a slight increase in rental and other income at Westside Creek. A decline in Partnership general and administrative expenses of $6,000 partially offset the reduction in interest income and income from Westside Creek during fiscal 1994.
Inflation
The Partnership completed its twelfth full year of operations in fiscal 1996 and the effects of inflation and changes in prices on revenues and expenses to date have not been significant.
The impact of inflation in future periods may be offset, in part, by an increase in revenues because the Partnership's land leases provide for additional rent based upon increases in the revenues of the related operating properties, which would tend to rise with inflation. In addition, the Partnership's wholly-owned apartment complex has leases which are short-term; generally 6 to 12 months. Rental rates on such leases could be adjusted to keep pace with inflation, to the extent market conditions allow, as the leases turn over. Such increases in revenues would be expected to at least partially offset the increases in Partnership and property operating expenses resulting from inflation.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14 of this Annual Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Third Qualified Properties, Inc., a Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operations, however, the day-to-day business of the Partnership is managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive officers of the Managing General Partner of the Partnership are as follows: Date elected Name Office Age to Office ---- ------ --- ---------
Bruce J. Rubin President and Director 37 8/22/96 Terrence E. Fancher Director 43 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 49 10/29/85 James A. Snyder Senior Vice President 51 7/6/92 David F. Brooks First Vice President and Assistant Treasurer 54 6/1/83 * Timothy J. Medlock Vice President and Treasurer 35 8/4/89 Thomas W. Boland Vice President 34 12/1/91 Dorothy F. Haughey Secretary 70 6/1/83 *
* The date of incorporation of the Managing General Partner
(c) There are no other significant employees in addition to the directors and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors or executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which PaineWebber Properties Incorporated ("PWPI") serves as the Adviser. The business experience of each of the directors and principal executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real estate workout specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General Partner in October 1996. Mr. Fancher is the Managing Director in charge of PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible for the origination and execution of all of PaineWebber's REIT transactions, advisory assignments for real estate clients and certain of the firm's real estate debt and principal activities. He joined Kidder, Peabody in 1985 and, beginning in 1989, was one of the senior executives responsible for building Kidder, Peabody's real estate department. Mr. Fancher previously worked for a major law firm in New York City. He has a J.D. from Harvard Law School, an M.B.A. from Harvard Graduate School of Business Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and a Senior Vice President and Chief Financial Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice President and Controller since 1978, and where he continued until joining the Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner and a Senior Vice President of the Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously as an officer of PWPI from July 1980 to August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution Trust Corporation where he served as the Vice President of Asset Sales prior to re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am Investors, Inc., a real estate investment company. During the period August 1987 to February 1989, Mr. Snyder was Executive Vice President and Chief Financial Officer of Southeast Regional Management Inc., a real estate development company.
David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and a Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983 and received his Masters in Accounting from New York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and a Vice President and Manager of Financial Reporting of the Adviser which he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University.
Dorothy F. Haughey is Secretary of the Managing General Partner, Assistant Secretary of PaineWebber and Secretary of PWI. Ms. Haughey joined PaineWebber in 1962.
(f) None of the directors and officers was involved in legal proceedings which are material to an evaluation of his or her ability or integrity as a director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Managing General Partner, and persons who own more than ten percent of the Partnership's limited partnership units, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the Partnership believes that, during the year ended August 31, 1996, all filing requirements applicable to the officers and directors of the Managing General Partner and ten-percent beneficial holders were complied with.
Item 11.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the General Partners are entitled to receive a share of cash distributions and a share of profits and losses. These items are described in Item 13.
The Partnership has paid cash distributions to the Unitholders on a quarterly basis at rates ranging from 5.75% to 6.5% per annum on remaining invested capital over the past five years. However, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited Partnership Interest, not voting securities. All the outstanding stock of the Managing General Partner, Third Qualified Properties, Inc., is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, the general partners of which are also officers of the Adviser and the Managing General Partner. Properties Associates was the Initial Limited Partner of the Partnership. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership.
(b) Neither the directors and officers of the Managing General Partner nor the general partners of the Associate General Partner individually own any Units of Limited Partnership Interest of the Partnership. No director or officer of the Managing General Partner nor the general partners of the Associate General Partner possess a right to acquire beneficial ownership of Units of Limited Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Managing General Partner of the Partnership is Third Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber"). The Associate General Partner is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments.
Distributable Cash, as defined, of the Partnership will be distributed 98% to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an asset management fee. Residual proceeds resulting from disposition of Partnership investments will be distributed, generally, 85% to the Limited Partners, 11.99% to the Adviser as an asset management fee and 3.01% to the General Partners after the prior receipt by the Limited Partners of their original capital contributions and a cumulative annual return of 10%-12%, depending upon their date of admission into the Partnership, as defined in the Amended Partnership Agreement.
In connection with investing Partnership capital, the Adviser earned acquisition fees, paid by both the borrowers and sellers and the Partnership, aggregating not more than 3% of the gross proceeds of the offering. The Adviser received total acquisition fees of approximately $1,074,000, of which $306,000 was paid by the Partnership. The Adviser may receive a commission, in an amount not yet determinable, upon the disposition of certain Partnership investments.
Under the advisory contract, the Adviser has specific management responsibilities to administer day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the General Partners. The Adviser is paid a basic management fee (6% of adjusted cash flow distributed to the partners) and an incentive management fee (2% of adjusted cash flow distributed to the partners, subordinated to a non-cumulative annual return to the Limited Partners equal to 9% based upon their adjusted capital contribution), in addition to the asset management fee described above for services rendered. Basic and asset management fees of $83,000 were earned for the year ended August 31, 1996. No incentive management fees have been earned to date.
All taxable income or tax loss (other than from a Capital Transaction) of the Partnership will be allocated 98.989899% to the Limited Partners and 1.010101% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of residual proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no residual proceeds, tax loss or taxable income from a sale or refinancing will be allocated 98.989899% to the Limited Partners and 1.010101% to the General Partners. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
The Managing General Partner and the Adviser are reimbursed for their direct expenses relating to the offering of Units, the administration of the Partnership and the acquisition and operations of the Partnership's real property investments.
An affiliate of the Managing General Partner performs certain accounting, tax preparation, securities law compliance and investor communications and relations services for the Partnership. The total costs incurred by this affiliate in providing such services are allocated among several entities, including the Partnership. Included in general and administrative expenses for the year ended August 31, 1996 is $144,000, representing reimbursements to this affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $5,000 (included in general and administrative expenses) during fiscal 1996 for managing the Partnership's cash assets. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page.
Financial statements for the properties securing the Partnership's mortgage loans have not been included since the Partnership has no contractual right to the information and cannot otherwise practicably obtain the information.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this Report.
(b) No reports on Form 8-K were filed during the last quarter of fiscal 1996.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
By: Third Qualified Properties, Inc. Managing General Partner
By: /s/ Bruce J. Rubin Bruce J. Rubin President and Chief Executive Officer
By: /s/ Walter V. Arnold Walter V. Arnold Senior Vice President and Chief Financial Officer
By: /s/ Thomas W. Boland Thomas W. Boland Vice President Dated: November 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership in the capacity and on the dates indicated.
By: /s/ Bruce J. Rubin Date: November 22, 1996 --------------------- ----------------- Bruce J. Rubin Director
By: /s/ Terrence E. Fancher Date: November 22, 1996 ------------------------ ----------------- Terrence E. Fancher Director
ANNUAL REPORT ON FORM 10-K Item 14(a)(3)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
INDEX TO EXHIBITS
Page Number in the Report Exhibit No. Description of Document or Other Reference - ----------- ----------------------- --------------------------
(3) and (4) Prospectus of the Registrant Filed with the Commission dated October 14, 1983, supplemented, pursuant to Rule 424(c) with particular reference to the and incorporated herein by Restated Certificate and Agreement reference. Limited Partnership.
(10) Material contracts previously filed as Filed with the Commission exhibits to registration statements and pursuant to Section 13 or amendments thereto of the registrant 15(d) of the Securities together with all such contracts filed Exchange Act of 1934 and as exhibits of previously filed Forms incorporated herein by 8-K and Forms 10-K are hereby reference. incorporated herein by reference.
(13) Annual Reports to Limited Partners No Annual Report for the year ended August 31, 1996 has been sent to the Limited Partners. Annual Report will be sent to the Limited Partners subsequent to this filing.
(27) Financial Data Schedule Filed as last page of EDGAR submission following the Financial Statements and Financial Statement Schedule required by Item 14.
ANNUAL REPORT ON FORM 10-K Item 14(a)(1) and (2) and 14(d)
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
Paine Webber Qualified Plan Property Fund Three, LP:
Report of independent auditors
Balance sheets as of August 31, 1996 and 1995
Statements of income for the years ended August 31, 1996, 1995 and 1994
Statements of changes in partners' capital for the years ended August 31, 1996, 1995 and 1994
Statements of cash flows for the years ended August 31, 1996, 1995 and 1994
Notes to financial statements
Financial Statement Schedules:
Schedule - III Real Estate Owned Schedule - IV Investments in Mortgage Loans on Real Estate
Other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners of Paine Webber Qualified Plan Property Fund Three, LP:
We have audited the accompanying balance sheets of Paine Webber Qualified Plan Property Fund Three, LP as of August 31, 1996 and 1995, and the related statements of income, changes in partners' capital and cash flows for each of the three years in the period ended August 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and 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, the financial statements referred to above present fairly, in all material respects, the financial position of Paine Webber Qualified Plan Property Fund Three, LP at August 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP
Boston, Massachusetts November 15, 1996
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
BALANCE SHEETS August 31, 1996 and 1995 (In thousands, except per Unit data)
ASSETS 1996 1995 ---- ----
Real estate investments: Investment property held for sale $ 4,720 $ 4,720 Land 1,150 1,150 Mortgage loans receivable 9,185 9,185 --------- -------- 15,055 15,055
Cash and cash equivalents 973 790 Interest receivable 85 85 Tax and tenant security deposit escrows 71 73 Prepaid expenses 14 14 Deferred expenses, net of accumulated amortization of $433 ($429 in 1995) 9 13 -------- -------- $ 16,207 $ 16,030 ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable - affiliates $ 18 $ 18 Accounts payable and accrued expenses 113 110 Tenant security deposits 13 14 -------- -------- Total liabilities 144 142
Partners' capital General Partners: Capital contributions 1 1 Cumulative net income 339 326 Cumulative cash distributions (329) (317)
Limited Partners ($1,000 per Unit, 35,794 Units issued): Capital contributions, net of offering costs 32,130 32,130 Cumulative net income 24,036 22,694 Cumulative cash distributions (40,114) (38,946) -------- -------- Total partners' capital 16,063 15,888 -------- -------- $ 16,207 $ 16,030 ======== ========
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF INCOME For the years ended August 31, 1996, 1995 and 1994 (In thousands, except per Unit data)
1996 1995 1994 ---- ---- ---- Revenues: Interest from mortgage loans $ 1,021 $ 1,021 $1,021 Land rent 153 175 161 Interest earned on cash equivalents 44 95 65 Other income - 24 25 -------- -------- ------ 1,218 1,315 1,272
Expenses: Management fees 83 89 90 General and administrative 312 391 344 Amortization of deferred expenses 4 4 4 --------- -------- ------ 399 484 438 --------- -------- ------
Operating income 819 831 834
Gain on sale of investment in operating property - 61 -
Income from investment property held for sale, net 536 545 551 -------- -------- -------
Net income $ 1,355 $ 1,437 $ 1,385 ======== ======= =======
Net income per Limited Partnership Unit $ 37.47 $ 39.73 $ 38.31 ======= ======== ========
Cash distributions per Limited Partnership Unit $ 32.64 $ 77.36 $ 35.36 ======= ======== ========
The above net income and cash distributions per Limited Partnership Unit are based upon the 35,794 Units of Limited Partnership Interest outstanding during each year.
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the years ended August 31, 1996, 1995 and 1994 (In thousands)
General Limited Partners Partners Total -------- -------- -----
Balance at August 31, 1993 $ 7 $17,121 $17,128
Net income 14 1,371 1,385
Cash distributions (13) (1,266) (1,279) ----- -------- -------
Balance at August 31, 1994 8 17,226 17,234
Net income 15 1,422 1,437
Cash distributions (13) (2,770) (2,783) ------ -------- --------
Balance at August 31, 1995 10 15,878 15,888
Net income 13 1,342 1,355
Cash distributions (12) (1,168) (1,180) ------ ------- --------
Balance at August 31, 1996 $ 11 $16,052 $16,063 ====== ======= =======
See accompanying notes.
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP
STATEMENTS OF CASH FLOWS For the years ended August 31, 1996, 1995 and 1994 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 1,355 $ 1,437 $ 1,385 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investment in operating property - (61) - Amortization of deferred expenses 4 4 4 Changes in assets and liabilities: Prepaid expenses - 4 (5) Tax and tenant security deposit escrows 2 (2) 5 Accounts payable - affiliates - (1) (29) Accounts payable and accrued expenses 3 27 3 Tenant security deposits (1) - - ------- ------- ------ Total adjustments 8 (29) (22) ------- ------- ------ Net cash provided by operating activities 1,363 1,408 1,363
Cash flows from investing activities: Net proceeds from sale of investment in operating property - 311 -
Cash flows from financing activities: Distributions to partners (1,180) (2,783) (1,279) -------- ------- -------
Net increase (decrease) in cash and cash equivalents 183 (1,064) 84
Cash and cash equivalents, beginning of period 790 1,854 1,770 -------- ------- -------
Cash and cash equivalents, end of period $ 973 $ 790 $ 1,854 ======== ======= =======
See accompanying notes.
PAINEWEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP Notes to Financial Statements
1. Organization and Nature of Operations
Paine Webber Qualified Plan Property Fund Three, LP (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in June 1983 for the purpose of investing in a diversified portfolio of existing income-producing real properties through land purchase-leaseback transactions and first mortgage loans. The Partnership authorized the issuance of units (the "Units") of Partnership interests, of which 35,794 (at $1,000 per Unit) were subscribed and issued between October 14, 1983 and October 13, 1984.
The Partnership originally owned land and made first mortgage loans secured by buildings with respect to six operating investment properties. To date, the Partnership has sold or been prepaid on its investments with respect to three of the original operating properties. As of August 31, 1996, the Partnership's mortgage loan and land lease investments on two of the original properties were still outstanding and the Partnership owned one operating property directly as a result of foreclosing on a mortgage loan. As discussed further in Notes 4 and 5, during fiscal 1996 the borrowers on both of the remaining loan investments continued discussions with the Partnership regarding potential prepayment transactions. While there are no assurances that these borrowers will be able to finance prepayment transactions in the near term, if such transactions were to be completed the Partnership would be positioned for a possible liquidation pending the disposition of the wholly-owned Westside Creek Apartments for which the Partnership is currently in the process of negotiating a potential sales contract.
2. Use of Estimates and Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of August 31, 1996 and 1995 and revenues and expenses for each of the three years in the period ended August 31, 1996. Actual results could differ from the estimates and assumptions used.
Investment property held for sale represents an asset acquired by the Partnership through foreclosure proceedings on a first mortgage loan. The Partnership's policy is to carry this asset at the lower of cost or estimated fair value (net of selling expenses). The Partnership's cost basis is equal to the fair value of the asset at the date of foreclosure. Declines in the estimated fair value of the asset subsequent to foreclosure would be recorded through the use of a valuation allowance. Subsequent increases in the estimated fair value of the asset would result in a reduction of the valuation allowance, but not below zero. All costs incurred to hold the asset are charged to expense and no depreciation expense is recorded.
The Partnership's investments in land subject to ground leases are carried at the lower of cost or net realizable value. The net realizable value of a real estate investment held for long-term investment purposes is measured by the recoverability of the investment through expected future cash flows on an undiscounted basis, which may exceed the property's current market value. The net realizable value of a property held for sale approximates its current market value. None of the Partnership's land investments were held for sale as of August 31, 1996 or 1995. The Partnership has reviewed FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of", which is effective for financial statements for years beginning after December 15, 1995, and believes this new pronouncement will not have a material effect on the Partnership's financial statements.
Mortgage loans receivable are carried at the lower of cost or fair value. The Partnership's policy is to provide for any valuation allowances for its mortgage loan investments on a specific identification basis, principally by evaluating the market value of the underlying collateral since the loans are collateral dependent.
Deferred expenses consist of acquisition fees paid to PaineWebber Properties Incorporated (the "Adviser") as compensation for analyzing, structuring and negotiating the Partnership's real estate investments. These expenses are being amortized using the straight-line method over twelve- to fifteen-year periods.
For purposes of reporting cash flows, the Partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
The mortgage loans receivable, cash and cash equivalents, interest receivable, escrow deposits, accounts payable - affiliates and accounts payable and accrued expenses appearing on the accompanying balance sheets represent financial instruments for purposes of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." With the exception of mortgage loans receivable, the carrying amount of these assets and liabilities approximates their fair value as of August 31, 1996 due to the short-term maturities of these instruments. Information regarding the fair value of the Partnership's mortgage loans receivable is provided in Note 4. Due to the likelihood of near term prepayment, the mortgage loans receivable have been valued at the lesser of face value or the estimated fair value of the collateral property, as determined by an independent appraisal. Such appraisals make use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparable sales analysis (see Note 4 for a further discussion).
No provision for income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership.
3. The Partnership Agreement and Related Party Transactions
The Managing General Partner of the Partnership is Third Qualified Properties, Inc., a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber"). The Associate General Partner is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments.
Distributable Cash, as defined, of the Partnership will be distributed 98% to the Limited Partners, 1% to the General Partners and 1% to the Adviser as an asset management fee. Residual proceeds resulting from disposition of Partnership investments will be distributed, generally, 85% to the Limited Partners, 11.99% to the Adviser as an asset management fee and 3.01% to the General Partners after the prior receipt by the Limited Partners of their original capital contributions and a cumulative annual return of 10%-12%, depending upon their date of admission into the Partnership, as defined in the Amended Partnership Agreement.
In connection with investing Partnership capital, the Adviser earned acquisition fees, paid by both the borrowers and sellers and the Partnership, aggregating not more than 3% of the gross proceeds of the offering. The Adviser received total acquisition fees of approximately $1,074,000, of which $306,000 was paid by the Partnership. The Adviser may receive a commission, in an amount not yet determinable, upon the disposition of certain Partnership investments.
Under the advisory contract, the Adviser has specific management responsibilities to administer day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the General Partners. The Adviser is paid a basic management fee (6% of adjusted cash flow distributed to the partners) and an incentive management fee (2% of adjusted cash flow distributed to the partners, subordinated to a non-cumulative annual return to the Limited Partners equal to 9% based upon their adjusted capital contribution), in addition to the asset management fee described above for services rendered. Basic and asset management fees of $83,000, $89,000 and $90,000 were earned for the years ended August 31, 1996, 1995 and 1994, respectively. No incentive management fees have been earned to date. Accounts payable - affiliates at both August 31, 1996 and 1995 consists of management fees of $18,000 payable to the Adviser.
All taxable income or tax loss (other than from a Capital Transaction) of the Partnership will be allocated 98.989899% to the Limited Partners and 1.010101% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of residual proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no residual proceeds, tax loss or taxable income from a sale or refinancing will be allocated 98.989899% to the Limited Partners and 1.010101% to the General Partners. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
The Managing General Partner and the Adviser are reimbursed for their direct expenses relating to the offering of Units, the administration of the Partnership and the acquisition and operations of the Partnership's real property investments.
Included in general and administrative expenses for the years ended August 31, 1996, 1995 and 1994 is $144,000, $178,000 and $159,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $5,000, $4,000, and $5,000 (included in general and administrative expenses) during fiscal 1996, 1995 and 1994, respectively, for managing the Partnership's cash assets.
4. Mortgage Loan and Land Investments
The following first mortgage loans were outstanding at August 31, 1996 and 1995 (in thousands):
Date of Amount of Loan Loan and Property 1996 1995 Interest Rate Maturity -------- ---- ---- ------------- --------
Appletree Apartments $ 4,850 $ 4,850 11.00% 5/8/84 Omaha, NE 6/1/99
Woodcroft Shopping Center Durham, NC: Phase I 3,100 3,100 11.25% 12/17/84 12/17/96
Phase II 1,235 1,235 11.25% 11/29/85 12/17/96 ------- ------- $ 9,185 $ 9,185 ======= =======
The loans are secured by first mortgages on the properties, the owner's leasehold interest in the land and an assignment of all tenant leases, where applicable. Interest is payable monthly and the principal is due at maturity.
In relation to the above-mentioned mortgage loans, the following land purchase-leaseback transactions had also been entered into as of August 31, 1996 and 1995 (in thousands):
Cost of Land to the Partnership Annual Property 1996 1995 Base Rent -------- ---- ---- ---------
Appletree Apartments $ 650 $ 650 $ 72
Woodcroft Shopping Center 500 500 $ 56 ------ ------ $1,150 $1,150 ====== ======
The land leases have terms of 40 years. Among the provisions of the lease agreements, the Partnership is entitled to additional rent based upon the gross revenues in excess of a base amount, as defined. For the years ended August 31, 1996, 1995 and 1994, additional rents of $25,000, $47,000 and $33,000, respectively, were earned from the Woodcroft Shopping Center investment. The lessees have the option to purchase the land for specified periods of time at a price based on the fair market value, as defined, but not less than the original cost to the Partnership.
The objectives of the Partnership with respect to its mortgage loan and land investments are to provide current income from fixed mortgage interest payments and base land rents, then to provide increases to this current income through participation in the annual revenues generated by the property as they increase above a specified base amount. In addition, the Partnership's investments are structured to share in the appreciation in value of the underlying real estate. Accordingly, upon either sale, refinancing, maturity of the mortgage or exercise of the option to repurchase the land, generally, the Partnership will receive a 33% to 50% share of the appreciation above a specified base amount.
During the last quarter of fiscal 1995, the Partnership received notice from the Appletree borrower of its intent to prepay the Partnership's mortgage loan and repurchase the underlying land. The borrower reports that it has secured the necessary financing to complete this transaction. The amount to be received by the Partnership as its share of the appreciation of the Appletree property has not been agreed upon to date. The terms of the Partnership's ground lease provide for the possible resolution of disputes between the parties over value issues through an arbitration process. Presently, the Partnership and the borrower continue to try to resolve their differences regarding the value of the property. If an agreement cannot be reached, the borrower could force the Partnership to submit to arbitration during fiscal 1997. In addition to the amount to be determined as the Partnership's share of the property's appreciation under the ground lease, the terms of the Appletree mortgage loan require a prepayment penalty which would be equal to 2.5% of the outstanding principal balance of $4,850,000 for any prepayment prior to April 30, 1997. Subsequent to April 30, 1997, the prepayment penalty declines to 1.5% for the next twelve months after which there would be no prepayment penalty for the remainder of the term through maturity in May 1999. If completed, the proceeds of any prepayment transaction would be distributed to the Limited Partners. However, the transaction remains contingent on, among other things, a resolution of the value issue. Accordingly, there are no assurances that this transaction will be consummated.
During the first quarter of fiscal 1996, the Partnership received notice from the owner of the Woodcroft Shopping Center of its intent to repay the Partnership's first mortgage loan and purchase the underlying land in conjunction with a sale of the operating property to a third party. The proposed terms of the transaction would have resulted in the full repayment of the Partnership's mortgage loan of $4,335,000 and the receipt of $1,220,000 as payment in full for obligations owing under the ground lease, representing the repayment of the $500,000 ground investment and $720,000 as the Partnership's share of the appreciation in value of the underlying property. During the quarter ended February 28, 1996, it was determined that the third-party buyer of Woodcroft was unable to secure the necessary financing required to purchase the property. During the quarter ended May 31, 1996, the Partnership again received notice from the owner of the Woodcroft Shopping Center of its intent to repay the outstanding first mortgage loan and purchase the underlying land in conjunction with a sale of the operating property to a third party. As was the case with the prior proposed transaction, this sale did not close due to problems with the buyer's financing plans. The owner of the Woodcroft Shopping Center has been remarketing the property in an effort to complete a sale before the December 1996 maturity date of the loan. Subsequent to year end, the Woodcroft owner negotiated a contract for the sale of the property to a third party at a lower price than the prior proposed transactions. Based on the terms of the potential sale transaction, the Partnership's share of the property's appreciation would total $650,000. The terms of the Partnership's ground lease require that the Partnership agree with the borrower's determination of value for purposes of calculating the Partnership's share of the appreciation in value due under the lease before a sale of the land can be completed. At the present time, market values for retail shopping centers in many markets are being adversely impacted by overbuilding and consolidations among retailers which have resulted in an oversupply of space. While the operations of the Woodcroft Shopping Center do not appear to have been affected to date by this general trend, such conditions would seem to have impacted the fair market value of the property, as evidenced by the difficulties that the Woodcroft owner has encountered in the prior sale efforts. As a result, the Partnership has agreed to accept the $650,000 premium for its ground lease interest in the event that this transaction can be completed.
As discussed further above, the maturity date of the Woodcroft loan is in December 1996, and the potential for a near term prepayment of the Appletree loan is high. As a result of these circumstances, based on an expected short-term maturity, the estimated fair values of the Partnership's mortgage loan instruments approximate their carrying values as of August 31, 1996 since the estimated fair values of the collateral properties exceed the principal balances of the loans.
5. Investment Property Held for Sale
On March 23, 1989, the Partnership foreclosed under the terms of the mortgage loan secured by Westside Creek Apartments due to nonpayment of the required debt service. The Adviser has employed a local management company to operate the property, which is a 142-unit apartment complex located in Little Rock, Arkansas, on the Partnership's behalf.
The Partnership complies with the guidelines set forth in the Statement of Position entitled "Accounting for Foreclosed Assets," issued by the American Institute of Certified Public Accountants, to account for its investment properties acquired through foreclosures. Under the Statement of Position, a foreclosed asset is recorded at the lower of cost or estimated fair value, reduced by the estimated costs to sell the asset. Cost is defined as the fair value of the asset at the date of the foreclosure. Declines in the estimated fair value of the asset subsequent to foreclosure are recorded through the use of a valuation allowance. Subsequent increases in the estimated fair value of the asset result in a reduction in the valuation allowance, but not below zero. The Westside Creek investment was originally made by the Partnership on July 1, 1985 and was structured as a ground lease and first leasehold mortgage. The total investment by the Partnership was comprised of the land, purchased for $215,000, and a $4,635,000 mortgage loan secured by the improvements for a total investment of $4,850,000. At the date of the foreclosure in fiscal 1989, management estimated the fair value of the property at $4,720,000 and recorded a loss on foreclosure of $130,000.
The Partnership recognizes income from the investment property held for sale in the amount of the excess of the property's gross revenues over property operating expenses (including capital improvement costs), taxes and insurance. Summarized operating results for the years ended August 31, 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994 ---- ---- ----
Rental income $ 970 $ 937 $ 924 Other income 33 33 34 ------ ----- ----- 1,003 970 958
Property operating expenses 381 338 324 Property taxes and insurance 86 87 83 ------ ------ ----- 467 425 407 ------ ------ ----- Income from investment property held for sale, net $ 536 $ 545 $ 551 ====== ====== =====
6. Investment in Operating Property
On February 20, 1990, an affiliate of the Partnership, which held the mortgage and land lease on the Cordova Creek Apartments, located in Memphis, Tennessee, foreclosed on the property due to nonpayment of the required interest payments. The Partnership had held a 3.5% interest in the mortgage loan and land investments through an agreement with this affiliate. Subsequent to foreclosure, the Partnership recorded its investment at the net combined carrying value of its previous interest in the land and mortgage loan of $250,000. The Partnership's investment, which consisted of a 3.5% equity ownership in the operations and eventual sales proceeds of the Cordova Creek property, was accounted for on the cost method. Accordingly, distributions which were received from the operations of Cordova Creek were recorded as income when received, to the extent that they represented current earnings. The Partnership received distributions from the current earnings of the Cordova Creek property totalling $24,000 and $25,000 in fiscal 1995 and 1994, respectively. Such amounts have been recorded as other income on the Partnership's statements of income.
The affiliate which held the majority ownership interest in the operating property sold the Cordova Creek Apartments to an unaffiliated third party on April 12, 1995. The Partnership's share of the net sales proceeds was $311,000, resulting in a $61,000 gain over the Partnership's cost basis of $250,000. A special distribution of $42 per original $1,000 investment, or $1,503,000, was made to Limited Partners on June 15, 1995, which represented $9 from Cordova Creek net sales proceeds and $33 as a distribution from cash reserves which were deemed to be in excess of the Partnership's expected future requirements.
7. Contingencies
In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including Third Qualified Properties, Inc. and Properties Associates ("PA"), which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleged that, in connection with the sale of interests in Paine Webber Qualified Plan Property Fund Three, LP, PaineWebber, Third Qualified Properties, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purported to be suing on behalf of all persons who invested in Paine Webber Qualified Plan Property Fund Three, LP, also alleged that following the sale of the partnership interests, PaineWebber, Third Qualified Properties, Inc. and PA misrepresented financial information about the Partnership's value and performance. The amended complaint alleged that PaineWebber, Third Qualified Properties, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs sought unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also sought treble damages under RICO.
In January 1996, PaineWebber signed a memorandum of understanding with the plaintiffs in the New York Limited Partnership Actions outlining the terms under which the parties have agreed to settle the case. Pursuant to that memorandum of understanding, PaineWebber irrevocably deposited $125 million into an escrow fund under the supervision of the United States District Court for the Southern District of New York to be used to resolve the litigation in accordance with a definitive settlement agreement and plan of allocation. On July 17, 1996, PaineWebber and the class plaintiffs submitted a definitive settlement agreement which has been preliminarily approved by the court and provides for the complete resolution of the class action litigation, including releases in favor of the Partnership and the General Partners, and the allocation of the $125 million settlement fund among investors in the various partnerships at issue in the case. As part of the settlement, PaineWebber also agreed to provide class members with certain financial guarantees relating to some of the partnerships. The details of the settlement are described in a notice mailed directly to class members at the direction of the court. A final hearing on the fairness of the proposed settlement is scheduled to continue in November 1996.
In February 1996, approximately 150 plaintiffs filed an action entitled Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber Incorporated and various affiliated entities concerning the plaintiffs' purchases of various limited partnership interests, including those offered by the Partnership. The complaint alleges, among other things, that PaineWebber and its related entities committed fraud and misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs by selling or promoting limited partnership investments that were unsuitable for the plaintiffs and by overstating the benefits, understating the risks and failing to state material facts concerning the investments. The complaint seeks compensatory damages of $15 million plus punitive damages against PaineWebber. In September 1996, the court dismissed many of the plaintiffs' claims as barred by applicable securities arbitration regulations. Mediation hearings are currently scheduled to be held in December 1996. The eventual outcome of this litigation and the potential impact, if any, on the Partnership's unitholders cannot be determined at the present time.
Under certain limited circumstances, pursuant to the Partnership Agreement and other contractual obligations, PaineWebber affiliates could be entitled to indemnification for expenses and liabilities in connection with the litigation described above. However, PaineWebber has agreed not to seek indemnification for any amounts it is required to pay in connection with the settlement of the New York Limited Partnership Actions. At the present time, the General Partners cannot estimate the impact, if any, of the potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements.
8. Subsequent Events
On October 15, 1996, the Partnership distributed $292,000 to the Limited Partners, $3,000 to the General Partners and $3,000 to the Adviser as an asset management fee for the quarter ended August 31, 1996.
Schedule III - Real Estate Owned
PAINE WEBBER QUALIFIED PLAN PROPERTY FUND THREE, LP August 31, 1996 (In thousands)
Gross Amount at Cost of Which Carried Date of Investment to at Close of Original Size of Description Partnership (A) Period (A) Investment Investment - ----------- --------------- ----------- ---------- ----------
Land underlying $ 650 $ 650 5/8/84 16.2 acres Apartment Complex (B) Omaha, NE
Land underlying 500 500 12/17/84 12 acres Shopping Center (B) Durham, NC
Apartment Complex 4,850 4,720 (1) 7/1/85 11.4 acres Little Rock, AR of land; 142 units ------ ------ $6,000 $5,870 ====== ======
Notes:
(A)These amounts represent the cost of each investment and the gross amount at which the investment is carried on the balance sheet at August 31, 1996. The aggregate cost for federal income tax purposes at August 31, 1996 is approximately $6,205,000.
(B)Senior mortgages on the properties related to the land investments listed above are held by Paine Webber Qualified Plan Property Fund Three, LP. See Schedule IV.
(C) Reconciliation of real estate owned (in thousands):
1996 1995 1994 ---- ---- ----
Balance at beginning of year $ 5,870 $6,120 $6,120 Acquisitions - - - Sale of investment in operating property (2) - (250) - ------- ------- ------
Balance at end of year $ 5,870 $5,870 $6,120 ======= ====== ======
(1)The Partnership foreclosed on the mortgage loan secured by the property on March 23, 1989. A loss of $130,000 related to the foreclosure was recorded in fiscal 1989. The cost of the land and the face amount of the related mortgage loan were adjusted for the loss on foreclosure and were reclassified to investment property held for sale. See discussion in Note 5 to the financial statements.
(2)See discussion in Note 6 to the accompanying financial statements regarding the sale in 1995 of the Cordova Creek Apartment complex.