Item 1. Business - ----------------
Balcor Current Income Fund-85 A Real Estate Limited Partnership (the "Registrant") is a limited partnership formed in 1985 under the laws of the State of Illinois. The Registrant raised $57,074,000 from sales of Limited Partnership Interests. The Registrant's operations consist 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 five real property investments. The Registrant sold two properties during 1996 and the remaining three properties described under "Item 2.
Item 2. Properties - ------------------
As of December 31, 1996, the Registrant owned the three properties described below, all of which are owned in fee simple:
Location Description of Property - -------- -----------------------
Fairfield, New Jersey * American Way Mall: a neighborhood shopping center containing approximately 140,210 square feet located on approximately 13 acres.
Charlotte, North Carolina * Providence Square Apartments: a 473-unit apartment complex located on approximately 69 acres.
Norcross, Georgia * Storage USA of Norcross Mini-Warehouse: a self-storage facility containing 586 units on approximately 4 acres.
* This property was sold during 1997. See Note 14 of Notes to the Financial Statements for additional information.
Providence Square Apartments was held subject to a mortgage loan.
The average occupancy rates and effective average rent per unit for each of the last five years for the residential property owned by the Registrant at December 31,1996, are below. Apartment units in this property are rented with leases of one year or less, with no tenant occupying greater than 10% of the property.
1996 1995 1994 1993 1992 Providence Square Occupancy rate 94% 93% 96% 93% 82% Effective rent $776 $777 $716 $663 $599
The average occupancy rates and the effective average rate per square foot for each of the last five years for the two commercial properties owned by the Registrant at December 31, 1996, are described below. No tenant occupies 10% or more of the leasable square feet of any commercial property.
1996 1995 1994 1993 1992 American Way Mall Occupancy rate 31% 45% 63% 95% 88% Effective rate $7.27 $8.54 $12.31 $9.40 $10.44
Storage USA of Norcross Occupancy rate 78% 88% 96% 94% 89% Effective rate $7.79 $8.18 $7.68 $7.35 $6.99
Real estate taxes incurred in 1996 for the above residential and commercial properties totaled $482,652.
The Federal tax basis of the Registrant's properties totaled $30,044,161 as of December 31, 1996. For Federal income tax purposes, the acquisition costs of the properties are depreciated over useful lives ranging from 15 to 18 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 properties.
See Notes to Financial Statements for other information regarding real property investments.
Item 3.
Item 3. Legal Proceedings - -------------------------
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 he 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 actions. 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, 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 Registrant's Common Equity and Related Stockholder - --------------------------------------------------------------------- Matters - -------
There has not been an established public market for Limited Partnership Interests and it is not anticipated that one will develop. For information regarding previous distributions see Financial Statements, Statements of Partners' Capital, and Item 7. Liquidity and Capital Resources, below.
As of December 31, 1996, the number of record holders of Limited Partnership Interests of the Registrant was 3,735.
Item 6.
Item 6. Selected Financial Data - -------------------------------
Year ended December 31,
--------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ------------ ----------- ----------
Total income $8,187,202 $10,007,275 $10,366,096 $10,016,645 $ 9,112,704 Provision for investment property write-downs None None 6,700,000 None 3,400,000 Loss before gains on sales of properties and extraordinary item (388,289) (436,493) (7,389,060) (1,075,433) (5,549,632) Net income (loss) 8,986,361 (975,964) (7,389,060) (1,075,433) (4,989,632) Net income (loss) per Limited Partnership Interest 155.88 (16.93) (128.17) (18.65) (86.55) Total assets 22,779,071 52,642,536 50,448,385 57,538,005 59,087,119 Mortgage notes payable 16,803,395 33,824,504 29,854,081 29,560,964 29,657,223 Distributions per Limited Partner- ship Interest (A) 389.62 12.31 None None None
(A) These amounts include a distribution of original capital of $367.81 per Limited Partnership Interest for 1996.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - -------------
Operations - ----------
Summary of Operations - ---------------------
During 1996, Balcor Current Income Fund-85 A Real Estate Limited Partnership (the "Partnership") sold the El Dorado Hills Apartments and the Willow Lawn Self-Storage Facility and recognized significant gains on these sales which resulted in net income during 1996 as compared to a net loss during each of 1995 and 1994. During 1994, the Partnership determined that the asset value of the American Way Mall had been impaired. Accordingly, the Partnership recognized a provision for investment property write-down which contributed to the net loss generated by the Partnership during 1994. Further discussion of the Partnership's operations are summarized below.
1996 Compared to 1995 - ---------------------
Rental and service income decreased in 1996 as compared to 1995 primarily due to the sales of El Dorado Hills Apartments and Willow Lawn Self-Storage Facility in August 1996 and a decrease in occupancy at American Way Mall.
Interest expense on mortgage notes payable decreased in 1996 as compared to 1995 due to the sale of El Dorado Hills Apartments and due to lower interest rates as a result of the 1995 refinancing described below. In September 1995, the Partnership refinanced the mortgage loan secured by the Providence Square Apartments, Storage USA of Norcross and Willow Lawn self-storage facilities. The Partnership obtained a new mortgage loan secured by the Providence Square Apartments, which carried a lower interest rate than the prior financing.
Depreciation expense decreased in 1996 as compared to 1995 due to the sales of El Dorado Hills Apartments and Willow Lawn Self-Storage Facility.
Amortization of deferred expenses decreased in 1996 as compared to 1995 due to the sale of El Dorado Hills Apartments and due to the 1995 refinancing.
Real estate tax expense decreased during 1996 as compared to 1995 due to the sales of El Dorado Hills Apartments and Willow Lawn Self-Storage Facility and due to a reduction in the assessed value of American Way Mall received from the taxing authority in the second quarter of 1996.
Property management fees decreased in 1996 as compared to 1995 due to the sales of El Dorado Hills Apartments and Willow Lawn Self-Storage Facility.
Administrative expenses decreased in 1996 as compared to 1995 due to lower portfolio management, professional and legal fees relating to the unsuccessful sale negotiations for American Way Mall in 1995.
The Partnership sold the El Dorado Hills Apartments and the Willow Lawn Self-Storage Facility and recognized gains on the sales of these properties totaling $9,666,645 in 1996.
In connection with the sale of El Dorado Hills Apartments, the Partnership wrote off the remaining unamortized deferred expenses in the amount of $291,995. This amount was recognized as an extraordinary item and is classified as debt extinguishment expense in 1996. During 1995, the first mortgages collateralized by El Dorado Hills and Providence Square apartment complexes and the Storage USA at Norcross and Willow Lawn self-storage facilities were refinanced, and prepayment penalties of $490,747 were incurred. In conjunction with the refinancing of the Partnership's mortgage loans, the remaining unamortized deferred expenses of $48,724 relating to the previous loans were written off. These amounts were recognized as an extraordinary item and classified as debt extinguishment expenses in 1995.
1995 Compared to 1994 - ---------------------
Rental and service income decreased during 1995 as compared to 1994 primarily as a result of a decrease in occupancy at American Way Mall. The lower occupancy at American Way Mall resulted in overall decrease of approximately $809,000 in rental income which was partially offset by an increase of approximately $321,000 in rental income at Providence Square Apartments, due to increased average rental rates and occupancy.
Increased cash available for short-term investment, primarily from the net proceeds received in connection with the Partnership's mortgage loan refinancings, and higher average interest rates were the primary reasons for an increase in interest income on short-term investments during 1995 as compared to 1994.
During the latter part of 1994, the Partnership determined that the value of the American Way Mall had been impaired. As a result, the property was written down to the Partnership's best estimate of the property's fair value, and a $6,700,000 provision for investment property write-down was recognized in 1994. Due to the property write-down recognized in 1994 on American Way Mall, depreciation expense decreased in 1995 as compared to 1994.
The Partnership refinanced its mortgage loans during 1995 and the fees associated with the refinancing are being amortized over the term of the new mortgage loans. Since the terms of the new mortgage loans were longer than the terms of the prior mortgage loans, amortization of deferred expenses decreased during 1995 as compared to 1994.
Due to the completion of the repair and renovation program at the Providence Square Apartments, property operating expense decreased in 1995 as compared to 1994.
Real estate tax expense increased during 1995 as compared to 1994 due to an increase in the tax rates at the American Way Mall and refunds of 1992 and 1993 real estate taxes received in 1994 resulting from a reduction in the assessed value of the El Dorado Hills apartment complex.
Administrative expense increased during 1995 as compared to 1994 due to increases in accounting fees and additionally, legal and professional fees relating primarily to the potential sale of American Way Mall.
Liquidity and Capital Resources - -------------------------------
The cash position of the Partnership decreased by approximately $2,966,000 as of December 31, 1996 when compared to December 31, 1995 primarily due to the distribution of cash reserves and proceeds from the August 1996 property sales. In 1996, the Partnership received cash totaling approximately $1,604,000 from its operating activities which consisted primarily of cash flow generated from property operations which was partially offset by the payment of administrative expenses. The Partnership also received cash of approximately $17,452,000 from investing activities consisting of proceeds received from the sales of the El Dorado Hills Apartments and Willow Lawn Self-Storage Facility. The Partnership used cash of approximately $22,021,000 to fund its financing activities which consisted primarily of the payment of distributions of approximately $22,237,000 to Limited Partners.
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 where applicable. Providence Square Apartments is the only property that had underlying debt at December 31, 1996, and El Dorado Hills Apartments had underlying debt prior to its sale in August 1996. During 1996 and 1995, the Providence Square Apartments and the Storage USA at Norcross Self-Storage Facility generated positive cash flow after applicable debt service payments. The American Way Mall, which does not have underlying debt, generated a significant cash flow deficit during 1996 as compared to a marginal cash flow deficit during the same period in 1995 due to lower rental and service income resulting from lower occupancy. The El Dorado Hills Apartments and the Willow Lawn Self-Storage Facility, which were sold in August 1996, both generated positive cash flow in 1995, and during 1996 prior to their sale. As of December 31, 1996, the occupancy rates at the Providence Square Apartments, Storage USA of Norcross Self-Storage Facility and American Way Mall were 91%, 78% and 31%, respectively. These properties were sold in 1997.
As discussed below, during 1996, the Partnership sold the El Dorado Hills Apartments and the Willow Lawn Self-Storage Facility and during 1997, sold its remaining properties, the American Way Mall, Providence Square Apartments and Storage USA of Norcross Self-Storage Facility. A majority of the proceeds from the sales will be distributed to Limited Partners in 1997. The Partnership will retain 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 exists or may arise. Such contingencies may include legal and other fees stemming from litigation
involving the Partnership including, but not limited to, the lawsuit discussed in Item 3 "Legal Proceedings". In the absence of any such contingency, the reserves will be paid within twelve months of the last property sale. In the event a contingency arises, reserves may be held by the Partnership for a longer period of time.
In August 1996, the Partnership sold the El Dorado Hills Apartments for $29,350,000. The purchaser of the El Dorado Hills Apartments took title subject to the existing first mortgage loan in the amount of $16,771,749. From the proceeds of the sale, the Partnership paid $707,859 in selling costs. The remainder of the 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.
In August 1996, the Partnership sold the Willow Lawn Storage Facility in an all cash sale for $5,603,470. From the proceeds of the sale, the Partnership paid $21,770 in selling costs. The remainder of the proceeds were distributed as a special distribution to Limited Partners in October 1996. See Note 10 of Notes to Financial Statements for additional information.
In January 1997, the Partnership sold the American Way Mall in an all cash sale for $5,500,000. From the proceeds of the sale, the Partnership paid $204,082 in selling costs. The remainder of the available proceeds will be distributed to the Limited Partners in 1997. See Note 14 of Notes to the Financial Statements for additional information.
In February 1997, the Partnership sold the Providence Square Apartments and the personal property located thereon for a net price of $25,010,000. The purchaser of the property took title subject to the existing first mortgage loan in the amount of $16,789,620. From the proceeds of the sale, the Partnership paid $751,659 in selling costs. Pursuant to the terms of the sale, $250,000 of the proceeds will be retained by the Partnership until May 1997. A majority of the remaining available proceeds will be distributed to the Limited Partners in 1997. See Note 14 of Notes to the Financial Statements for additional information.
In February 1997, the Partnership sold the Storage USA of Norcross Self-Storage Facility in an all cash sale for $3,250,000. From the proceeds of the sale, the Partnership paid $24,803 in selling costs. The remainder of the available proceeds will be distributed to the Limited Partners in 1997. See Note 14 of Notes to the Financial Statements for additional information.
The Partnership made distributions totaling $389.62 and $12.31 per Interest in 1996 and 1995, respectively. See Statement of Partner's Capital for additional information. Distributions were comprised of $21.81 per Interest of Net Cash Receipts and $367.81 per Interest of Net Cash Proceeds in 1996 and, $12.31 per Interest of Net Cash Receipts in 1995.
In January 1997, the Partnership made a distribution of $240,650 ($4.22 per Interest) to the holders of Limited Partnership Interests representing a quarterly distribution of Net Cash Receipts. Including the January 1997
distribution, Limited Partners have received distributions of Net Cash Receipts of $173.34 and Net Cash Proceeds of $382.81, totaling $556.15 per $1,000 Interest. In light of results to date, the General Partner does not anticipate that investors will recover all 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 can be expected to increase operating costs and replacement costs and may lead to increased rental revenues and real estate values.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
See Index to Financial Statements and 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 $22,779,071 $14,575,700 $52,642,536 $51,594,818
Partners' capital accounts (deficit): General Partner (153,527) (125,316) (243,391) 33,943 Limited Partners 5,355,042 11,211,506 18,695,717 17,393,870
Net (loss) income: General Partner 89,864 (159,259) (9,759) 91,956 Limited Partners 8,896,497 16,054,808 (966,205) (1,611,892)
Per Limited Part- nership Interest 155.88 281.30 (16.93) (28.24)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - --------------------
On September 14, 1995 the Registrant approved the engagement of Coopers & Lybrand L.L.P. as its independent auditors for the fiscal year ending December 31, 1995 to replace the firm of Ernst & Young LLP, who were dismissed as auditors of the Registrant effective September 14, 1995. The General Partner of the Registrant approved the change in auditors.
The reports of Ernst & Young LLP on the Registrant's financial statements for each of the two fiscal years ended December 31, 1994 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Registrant's financial statements for each of the two fiscal years ended December 31, 1994, and in the subsequent interim period, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the matter in their report.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Current Income Partners-85, 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 Executive Officer Thomas E. Meador 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 administration 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 $1,390 in 1996 with respect to one of the executive officers and directors of Balcor Current Income Partners-85, 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 the 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) No person owns of record or is known by the Registrant to own beneficially more than 5% of the outstanding Limited Partnership Interests of the Registrant.
(b) Balcor Current Income Partners-85 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 158 Interests Less than 1%
Relatives and affiliates of the officers and partners of the General Partner do not own any additional Interests.
(c) The Registrant is not aware of any 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 Schedule in this Form 10-K.
(3) Exhibits:
(3) Amended and Restated Agreement and Certificate of Limited Partnership, previously filed as Exhibit 3 to Amendment No. 5 to the Registrant's Registration Statement on Form S-11 dated August 16, 1985 (Registration No. 2-95910), is hereby incorporated herein by reference.
(4) Amended and Restated Form of Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 5 to the Registrant's Registration Statement on Form S-11 dated August 16, 1985 (Registration No. 2-95910), 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 September 30, 1992 are incorporated herein by reference.
(10)(a)(i) Agreement of Sale and attachment thereto relating to the sale of the El Dorado Hills Apartments previously filed as Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated June 7, 1996 is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale relating to the sale of El Dorado Hills Apartments previously filed as Exhibit (10)(a)(ii) to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference.
(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to the sale of El Dorado Hills Apartments previously filed as Exhibit (10)(a)(iii) to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference.
(b)(i) Agreement of Sale and attachment thereto relating to the sale of the American Way Mall previously filed as Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated June 7, 1996, is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale relating to the sale of the American Way Mall previously filed as Exhibit (10)(b)(ii) to the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference.
(iii) Second Amendment to Agreement of Sale relating to the sale of the American Way Mall previously filed as Exhibit (99)(b) to the Registrant's Current Report on Form 8-K dated September 26, 1996, is incorporated herein by reference.
(iv) Third Amendment to Agreement of Sale relating to the sale of American Way Mall, Fairfield, New Jersey, is attached hereto.
(v) Fourth Amendment to Agreement of Sale relating to the sale of American Way Mall, Fairfield, New Jersey, is attached hereto.
(c)(i) Agreement of Sale and attachment thereto relating to the sale of Providence Square Apartments previously filed as Exhibit (2)(a) to the Registrant's Current Report on Form 8-K dated September 26, 1996 is incorporated herein by reference.
(ii) Agreement relating to the sale of Providence Square Apartments, Charlotte, North Carolina, previously filed as Exhibit (2)(b) to the Registrant's Current Report on Form 8-K dated September 26, 1996 is incorporated herein by reference.
(iii) Amendment No. 1 to Agreement of Sale relating to the sale of Providence Square Apartments, Charlotte, North Carolina, previously filed as Exhibit (2) to the Registrant's Current Report on Form 8-K dated September 26, 1996 is incorporated herein by reference.
(iv) Letter Agreement relating to the sale of Providence Square Apartments, Charlotte, North Carolina, previously filed as Exhibit (2)(d) to the Registrant's Current Report on Form 8-K dated September 26, 1996 is incorporated herein by reference.
(v) Amendment No. 2 to Agreement of Sale relating to the sale of Providence Square Apartments, Charlotte, North Carolina, is attached hereto.
(vi) Letter dated December 17, 1996 relating to the sale of Providence Square Apartments, Charlotte, North Carolina, is attached hereto.
(vii) Amendment No. 3 to Agreement of Sale relating to the sale of Providence Square Apartments, Charlotte, North Carolina, is attached hereto.
(16) Letter from Ernst & Young L.L.P. dated September 19, 1995 regarding the change in the Registrant's certifying accountant previously filed as Exhibit to the Registrant's Report on Form 8-K/A dated October 27, 1995 (Commission File No. 0-14352) is hereby incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1996 is attached hereto.
(99)(a)(i)Third Amendment to Agreement of Sale relating to the sale of Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, is attached hereto.
(ii) Fourth Amendment to Agreement of Sale relating to the sale of Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, is attached hereto.
(iii) Fifth Amendment to Agreement of Sale relating to the sale of Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, is attached hereto.
(iv) Sixth Amendment to Agreement of Sale relating to the sale of Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, is attached hereto.
(v) Seventh Amendment to Agreement of Sale relating to the sale of Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, is attached hereto.
(vi) Eighth Amendment to Agreement of Sale relating to the sale of Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, is attached hereto.
(vii) Ninth Amendment to Agreement of Sale relating to the sale of Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, is attached hereto.
(b) Reports on Form 8-K: A Current Report on Form 8-K dated September 26, 1996 was filed reporting the execution of contracts for the sale of Providence Square Apartments, Charlotte, North Carolina, and Storage USA of Norcross Self-Storage Facility, Norcross, Georgia, and the extension of the closing date of the sale of American Way Mall, Fairfield, New Jersey.
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 CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP
By: /s/ Jayne A. Kosik ----------------------------------- Jayne A. Kosik Managing Director and Chief Financial Officer (Principal Accounting Officer) of Balcor Current Income Partners-85, the General Partner
Date: March 26, 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 Current Income /s/ Thomas E. Meador Partners-85, the General Partner March 26, 1997 - -------------------- --------------- Thomas E. Meador
Managing Director and Chief Financial Officer (Principal Accounting Officer) of Balcor Current Income Partners-85, /s/ Jayne A. Kosik the General Partner March 26, 1997 - -------------------- --------------- Jayne A. Kosik
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants
Report of Independent Auditors
Financial Statements:
Balance Sheets, December 31, 1996 and 1995
Statements of Partners' Capital, 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
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 Current Income Fund-85 A Real Estate Limited Partnership:
We have audited the accompanying balance sheets of Balcor Current Income Fund-85 A Real Estate Limited Partnership (An Illinois Limited Partnership) as of December 31, 1996 and 1995 and the related statements of partners' capital, income and expenses, and cash flows for each of the two years in the period ended December 31, 1996. We have also audited the accompanying financial statement schedule. 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 Current Income Fund-85 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 two 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. On February 26, 1997, the Partnership disposed of its remaining real estate asset. Upon resolution of the litigation described in Note 13 to the financial statements, the Partnership intends to cease operations and dissolve.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois March 20, 1997
REPORT OF INDEPENDENT AUDITORS
To the Partners of Balcor Current Income Fund-85 A Real Estate Limited Partnership:
We have audited the accompanying statements of partners' capital, income and expenses and cash flows of Balcor Current Income Fund-85 A Real Estate Limited Partnership (An Illinois Limited Partnership) for the year ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Balcor Current Income Fund-85 A Real Estate Limited Partnership for the year ended December 31, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois March 1, 1995
BALCOR CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALANCE SHEETS December 31, 1996 and 1995
ASSETS
1996 1995 ------------- ------------- Cash and cash equivalents $ 2,509,984 $ 5,475,539 Escrow deposits 416,773 909,293 Prepaid expenses 54,726 35,463 Accounts and accrued interest receivable 102,578 157,490 Deferred expenses, net of accumulated amortization of $56,916 in 1996 and $23,383 in 1995 261,816 631,343 ------------- ------------- 3,345,877 7,209,128 ------------- ------------- Investment in real estate: Land 3,440,509 10,567,930 Buildings and improvements 29,537,388 58,506,072 ------------- ------------- 32,977,897 69,074,002 Less accumulated depreciation 13,544,703 23,640,594 ------------- ------------- Investment in real estate, net of accumulated depreciation 19,433,194 45,433,408 ------------- ------------- $ 22,779,071 $ 52,642,536 ============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 291,536 $ 61,352 Due to affiliates 97,071 23,216 Other liabilities 294,801 23,314 Security deposits 90,753 257,824 Mortgage notes payable 16,803,395 33,824,504 ------------- ------------- Total liabilities 17,577,556 34,190,210 ------------- ------------- Commitments and contingencies
Limited Partners' capital (57,074 Interests issued and outstanding) 5,355,042 18,695,717 General Partner's deficit (153,527) (243,391) ------------- ------------- Total partners' capital 5,201,515 18,452,326 ------------- ------------- $ 22,779,071 $ 52,642,536 ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL for the years ended December 31, 1996, 1995 and 1994
Partners' Capital (Deficit) Accounts ------------- ------------- ------------- General Limited Total Partner Partners ------------- ------------- -------------
Balance at December 31, 1993 $ 27,519,931 $ (159,741) $ 27,679,672
Net loss for the year ended December 31, 1994 (7,389,060) (73,891) (7,315,169) ------------- ------------- ------------- Balance at December 31, 1994 20,130,871 (233,632) 20,364,503
Cash distribution (A) (702,581) (702,581)
Net loss for the year ended December 31, 1995 (975,964) (9,759) (966,205) ------------- ------------- ------------- Balance at December 31, 1995 18,452,326 (243,391) 18,695,717
Cash distributions (A) (22,237,172) (22,237,172)
Net income for the year ended December 31, 1996 8,986,361 89,864 8,896,497
------------- ------------- ------------- Balance at December 31, 1996 $ 5,201,515 $ (153,527) $ 5,355,042 ============= ============= =============
(A) Summary of cash distributions paid per Interest:
1996 1995 ------------ ------------ First Quarter $47.31 None Second Quarter 27.50 None Third Quarter 5.00 None Fourth Quarter 309.81 $12.31
The accompanying notes are an integral part of the financial statements.
BALCOR CURRENT INCOME FUND-85 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 $ 7,937,839 $ 9,774,233 $ 10,261,850 Interest on short-term investments 249,363 233,042 104,246 ------------- ------------- ------------- Total income 8,187,202 10,007,275 10,366,096 ------------- ------------- -------------
Expenses: Interest on mortgage notes payable 2,112,567 2,893,638 3,018,612 Depreciation 1,443,018 1,749,574 2,015,073 Amortization of deferred expenses 77,532 152,423 182,173 Property operating 3,406,567 3,715,619 4,231,189 Real estate taxes 700,127 931,134 690,010 Property management fees 399,491 492,664 533,154 Administrative 436,189 508,716 384,945 Provision for investment property writedown 6,700,000 ------------- ------------- ------------- Total expenses 8,575,491 10,443,768 17,755,156 ------------- ------------- ------------- Loss before gains on sales of properties and extraordinary item (388,289) (436,493) (7,389,060)
Gains on sales of properties 9,666,645 ------------- ------------- ------------- Income (loss) before extraordinary item 9,278,356 (436,493) (7,389,060)
Extraordinary item: Debt extinguishment expenses (291,995) (539,471) ------------- ------------- ------------- Net income (loss) $ 8,986,361 $ (975,964) $ (7,389,060) ============= ============= ============= Income (loss) before extraordinary item allocated to General Partner $ 92,784 $ (4,365) $ (73,891) ============= ============= =============
BALCOR CURRENT INCOME FUND-85 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)
Income (loss) before extraordinary item allocated to Limited Partners $ 9,185,572 $ (432,128) $ (7,315,169) ============= ============= ============= Income (loss) before extraordinary item per Limited Partnership Interest (57,074 issued and outstanding) $ 160.94 $ (7.57) $ (128.17) ============= ============= =============
Extraordinary item allocated to General Partner $ (2,920) $ (5,394) NONE ============= ============= ============= Extraordinary item allocated to Limited Partners $ (289,075) $ (534,077) NONE ============= ============= ============= Extraordinary item per Limited Partnership Interest (57,074 issued and outstanding) $ (5.06) $ (9.36) NONE ============= ============= ============= Net income (loss) allocated to General Partner $ 89,864 $ (9,759) $ (73,891) ============= ============= ============= Net income (loss) allocated to Limited Partners $ 8,896,497 $ (966,205) $ (7,315,169) ============= ============= ============= Net income (loss) per Limited Partnership Interest (57,074 issued and outstanding) $ 155.88 $ (16.93) $ (128.17) ============= ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR CURRENT INCOME FUND-85 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) $ 8,986,361 $ (975,964) $ (7,389,060) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary item: Debt extinguishment expenses 291,995 48,724 Gains on sales of properties (9,666,645) Depreciation of properties 1,443,018 1,749,574 2,015,073 Amortization of deferred expenses 77,532 152,423 182,173 Provision for investment property writedown 6,700,000 Net change in: Escrow deposits 27,480 (265,498) Accounts and accrued interest receivable 54,912 57,628 (56,505) Prepaid expenses (19,263) (35,463) Accounts payable 230,184 (26,645) (11,211) Due to affiliates 73,855 (49,106) 19,037 Other liabilities 271,487 23,314 Security deposits (167,071) (45,290) (1,503) ------------- ------------- ------------- Net cash provided by operating activities 1,603,845 633,697 1,458,004 ------------- ------------- ------------- Investing activities: Proceeds from sales of properties 18,181,721 Payment of selling costs (729,629) ------------- Net cash provided by investing activities 17,452,092 ------------- Financing activities: Distributions to Limited Partners (22,237,172) (702,581) Repayment of mortgage notes payable (29,427,232) Principal payments on mortgage notes payable (249,360) (502,345) (600,028)
BALCOR CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994 (Continued)
Proceeds from issuance of mortgage notes payable 33,900,000 893,145 Payment of deferred expenses (654,726) Release of improvement escrows 465,040 Funding of improvement escrows (643,795) ------------- ------------- ------------- Net cash provided by or used in financing activities (22,021,492) 1,969,321 293,117 ------------- ------------- ------------- Net change in cash and cash equivalents (2,965,555) 2,603,018 1,751,121 Cash and cash equivalents at beginning of year 5,475,539 2,872,521 1,121,400 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 2,509,984 $ 5,475,539 $ 2,872,521 ============= ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Current Income Fund-85 A Real Estate Limited Partnership (the "Partnership") was engaged in the operation of residential, retail and mini-storage real estate located in various markets within the United States. The Partnership sold its last property in February 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 El Dorado Hills Apartments and the Willow Lawn Self-Storage Facility and during 1997, sold its remaining properties, the American Way Mall, Providence Square Apartments, and Storage USA of Norcross Self-Storage Facility. 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 exists or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Partnership including, but not limited to, the lawsuit discussed in Note 13 of Notes to the Financial Statements. In the absence of any such contingency, the reserves will be paid within twelve months of the last property sale. In the event a contingency 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 is computed using the straight-line method. Rates used in the determination of depreciation are based upon the following estimated useful lives: Years -----
Buildings and improvements 27 to 30 Furniture and fixtures 5
Maintenance and repairs are charged to expense when incurred. Expenditures for improvements were charged to the related asset account.
(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 sales 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 mortgage loan refinancing fees which are amortized over the terms of the respective 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 from its disclosure requirements.
(f) Cash equivalents include all highly liquid investments with an original maturity of three months or less when purchased.
(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. Income from operating leases with significant abatements and/or scheduled rent increases is recognized on a straight line basis over the respective lease term. Service income included reimbursements for operating costs such as real estate taxes, maintenance and insurance and is recognized as revenue in the period the applicable costs are incurred.
(i) A reclassification has been made to the previously reported 1994 financial statements to conform with the classification used in 1995 and 1996. This reclassification has not changed the 1994 results.
4. Partnership Agreement:
The Partnership was organized in February 1985. The Partnership Agreement provides for Balcor Current Income Partners-85 to be the General Partner and for the admission of Limited Partners through the sale of up to 125,000 Limited Partnership Interests at $1,000 per Interest, 57,074 of which were sold on or prior to August 19, 1986, the termination date of the offering.
The Partnership Agreement provides that profits and losses will be allocated 1% to the General Partner and 99% to the Limited Partners.
To the extent that Net Cash Receipts are available, distributions will be made 90% to the Limited Partners and 10% to the General Partner, 9% as its Partnership management fee and 1% as its distributive share. The General Partner's share of distributed Net Cash Receipts is subordinated to receipt by the Limited Partners of a Cumulative Distribution of 6% through March 1988, 6.5% thereafter through March 1989 and 7% thereafter through March 1990. No subordination of the General Partner's share of distributed Net Cash Receipts is required after March 1990. Since Cumulative Distribution levels to the Limited Partners specified in the Partnership Agreement were not attained, the General Partner was required to subordinate its receipt of its share of Net Cash Receipts of approximately $650,000 through March 1990. This amount has been deferred and will be paid only from Net Cash Proceeds as described below.
When and as the Partnership sells or refinances its properties, the Net Cash Proceeds resulting therefrom which are available for distribution will be distributed only to holders of Interests until such time as holders of Interests have received an amount equal to their Original Capital plus a 7% per annum non-compounded Cumulative Distribution. Thereafter, if any portion of the General Partner's share of Net Cash Receipts has been deferred as a result of the subordination to the Cumulative Distribution, available Net Cash Proceeds shall be distributed to the General Partner to the extent of the deferred amount. Any remaining Net Cash Proceeds available for distribution will be distributed 85% to the Limited Partners and 15% to the General Partner.
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 Inter- Matur- Current Estimated Pledged as Notes at Notes at est ity Monthly Balloon Collateral 12/31/96 12/31/95 Rate Date Payment Payment - ------------ ----------- ----------- -------------- --------- -----------
El Dorado Hills Apartments (A)(B) None $16,862,363 (B) (B) (B) (B)
Providence Square Apart- ments (A)(C) $16,803,395 16,962,141 7.53% 2002 $119,216 $15,639,631 ----------- -----------
Total $16,803,395 $33,824,504 =========== ===========
(A) In September 1995, the Partnership refinanced the mortgage loan collateralized by the El Dorado Hills Apartments and the mortgage loan collateralized by Providence Square Apartments, Storage USA of Norcross and Willow Lawn Self-Storage Facilities. The Partnership obtained two new mortgage loans of $16,900,000 and $17,000,000 which are collateralized by El Dorado Hills and Providence Square Apartments, respectively. The interest rates decreased from 10.02% to 7.53%, the maturity dates were extended from December 1995 to October 2002 and the total monthly payments decreased from $311,038 to $237,731. A portion of the proceeds from the new El Dorado Hills and Providence Square loans was used to repay the existing mortgage loans of $16,039,332 and $13,387,900, as well as prepayment penalties of $490,747.
(B) This property was sold in August 1996. See Note 10 of Notes to the Financial Statements for additional information.
(C) This property was sold in February 1997. See Note 14 of Notes to the Financial Statements for additional information.
The Partnership's loans described above required current monthly payments of principal and interest.
Real estate with an aggregate carrying value of $13,708,677 at December 31, 1996 was pledged as collateral for repayment of mortgage loans.
During 1996, 1995 and 1994, the Partnership incurred and paid interest expense on mortgage notes payable of $2,112,567, $2,893,638 and $3,018,612.
6. Management Agreements:
The El Dorado Hills and Providence Square apartment complexes were managed by a third-party management company. These management agreements provide for annual fees of 5% of gross operating revenues.
American Way Mall was also managed by a third-party management company for fees that ranged from 3% to 6% of adjusted gross operating revenues.
Willow Lawn Self-Storage Facility was managed by a third-party management company for annual fees equal to the greater of 5% of gross operating revenues or $12,000.
The Storage USA of Norcross Self-Storage Facility was managed by a third-party management company for annual fees of 6% of gross operating revenues.
7. Provision for Investment Property Writedown:
The northern New Jersey retail market where the American Way Mall is located is very competitive. During 1994 the Partnership determined that the property needed to be reconfigured and retenanted with strong anchor tenants to compete in the local retail market. The property was written down to the Partnership's best estimate of the property's fair value, and a $6,700,000 provision for investment property writedown was recognized in 1994.
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 $6,909,188 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 $535,138 None
Reimbursement of expenses to the General Partner, at cost: Accounting $15,706 $14,891 $39,422 $2,844 71,533 $28,892 Data processing 911 None 14,844 429 30,877 8,303 Investment processing 1,950 1,849 12,424 849 7,275 2,939 Investor communication None None 7,062 None 12,205 4,929 Legal 9,219 8,742 17,181 1,605 8,179 3,303 Portfolio management 76,789 71,589 147,085 17,489 59,347 23,956
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 $11,764, $55,606 and $86,566 for 1996, 1995 and 1994, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed three of the Partnership's properties until the affiliate was sold to a third party in November 1994.
10. Property Sales:
(a) In August 1996, the Partnership sold the El Dorado Hills Apartments for $29,350,000. The purchaser of the El Dorado Hills Apartments took title subject to the existing first mortgage loan in the amount of $16,771,749. From the proceeds of the sale, the Partnership paid $707,859 in selling costs. The basis of the property was $22,380,642, which is net of accumulated depreciation of $10,703,315. For financial statement purposes, the Partnership recognized a gain of $6,261,499 from the sale of this property.
(b) In August 1996, the Partnership sold the Willow Lawn Self-Storage Facility in an all cash sale for $5,603,470. From the proceeds of the sale, the Partnership paid $21,770 in selling costs. The basis of the property was $2,176,554, which is net of accumulated depreciation of $835,594. For financial statement purposes, the Partnership recognized a gain of $3,405,146 from the sale of this property.
11. Extraordinary Item:
(a) In August 1996, the Partnership sold the El Dorado Hills Apartments. In connection with the sale, the Partnership wrote off the remaining unamortized deferred financing fees in the amount of $291,995. This amount was recognized as an extraordinary item and classified as debt extinguishment expense.
(b) As discussed in Note 5 of Notes to the Financial Statements, during September 1995 the mortgages collateralized by El Dorado Hills and Providence Square apartment complexes and Storage USA at Norcross and Willow Lawn Self-Storage facilities were refinanced and prepayment penalties of $490,747 were incurred. In conjunction with the refinancing of the mortgage loans, the remaining unamortized deferred expenses of $48,724 relating to the previous loans were written off. These amounts were recognized as extraordinary items and classified as debt extinguishment expenses.
12. 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.
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.
13. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership and certain affiliates have been named as defendants alleging certain federal securities law violations with regard to the adequacy and accuracy of disclosures of information concerning, as well as the marketing efforts related to the offering of the Limited Partnership Interests of the Partnership. The defendants continue to vigorously contest this action. A plaintiff class has not yet been certified, and no determination of the merits have been made. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the financial position, operations and liquidity of the Partnership. The Partnership believes that it has meritorious defenses to contest the claims.
14. Subsequent Events:
(a) In January 1997, the Partnership made a distribution of $240,650 ($4.22 per Interest) to the holders of Limited Partnership Interests representing a distribution of Net Cash Receipts of $4.22 per Interest for the fourth quarter of 1996.
(b) In January 1997, the Partnership sold the American Way Mall in an all cash sale for $5,500,000. From the proceeds of the sale, the Partnership paid $204,082 in selling costs. For financial statement purposes, the Partnership will recognize a gain of approximately $1,600,000 from the sale of this property during the first quarter 1997.
(c) In February 1997, the Partnership sold the Providence Square Apartments for $25,010,000. The purchaser of the Providence Square Apartments took title subject to the existing first mortgage loan in the amount of $16,789,620. From the proceeds of the sale, the Partnership paid $751,659 in selling costs. For financial statement purposes, the Partnership will recognize a gain of approximately $10,600,000 from the sale of this property during the first quarter 1997.
(d) In February 1997, the Partnership sold the Storage USA of Norcross Self-Storage Facility in an all cash sale for $3,250,000. From the proceeds of the sale, the Partnership paid $24,803 in selling costs. For financial statement purposes, the Partnership will recognize a gain of approximately $1,200,000 from the sale of this property during the first quarter 1997.
BALCOR CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALCOR CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALCOR CURRENT INCOME FUND-85 A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
NOTES TO SCHEDULE III
(a) Consists of legal fees, appraisal fees, title costs and other related professional fees.
(b) The carrying basis of the American Way Mall was reduced during each of 1994 and 1992 due to a permanent impairment in the value of the property. In addition, guaranteed income earned on properties under the terms of certain management and guarantee agreements was recorded by the Partnership as a reduction of the basis of the property to which the guaranteed income relates.
(c) The aggregate cost of land for Federal income tax purposes is $4,762,347 and the aggregate cost of buildings and improvements for Federal income tax purposes is $25,281,814. The total of these is $30,044,161.
(d) Reconciliation of Real Estate ------------------------------
1996 1995 1994 ---------- ---------- ----------
Balance at beginning of year $69,074,002 $69,074,002 $75,774,002
Deduction during the year: Investment property write-down (6,700,000) Cost of properties sold (36,096,105) ----------- ----------- ----------- Balance at end of year $32,977,897 $69,074,002 $69,074,002 =========== =========== ===========
Reconciliation of Accumulated Depreciation -------------------------------------------
1996 1995 1994 ---------- ---------- ----------
Balance at beginning of year $23,640,594 $21,891,020 $19,875,947
Depreciation expense for the year 1,443,018 1,749,574 2,015,073 Accumulated depreciation of properties sold (11,538,909) ----------- ----------- ----------- Balance at end of year $13,544,703 $23,640,594 $21,891,020 =========== =========== ===========
(e) See description of Mortgage Notes Payable in Note 5 of Notes to Financial Statements.
(f) Depreciation expense is computed based upon the following estimated useful lives:
Years -----
Buildings and improvements 27 to 30 Furniture and fixtures 5
(g) This apartment complex was completed in three phases from 1971 to 1972.
(h) Phase I was completed in November 1983 and Phase II was completed in April 1987.
(i) In January 1997, this property was sold. See Note 14 of Notes to the Financial Statements for additional information.
(j) In February 1997, this property was sold. See Note 14 of Notes to the Financial Statements for additional information.