Item 1. Business
Paine Webber Income Properties Five Limited Partnership (the "Partnership") is a limited partnership formed in January 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 such as apartments, shopping centers, office buildings, and other similar income-producing properties. The Partnership sold $34,928,000 in Limited Partnership Units (the "Units"), representing 34,928 units at $1,000 per Unit from May 26, 1983 to May 25, 1984 pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-81537). Limited Partners will not be required to make any additional contributions.
The Partnership originally invested the net proceeds of the public offering, through joint venture partnerships, in five operating properties, which consisted of four multi-family apartment complexes and one retail shopping center. As discussed further below, through September 30, 1996 one of the Partnership's original investments had been sold. As of September 30, 1996, the Partnership owned interests in operating investment properties through joint venture partnerships as set forth in the following table:
Name of Joint Venture Date of Name and Type of Property Acquisition Type of Location Size of Interest Ownership (1) - --------------------------- ---- ----------- -------------
Randallstown Carriage Hill 806 8/30/83 Fee ownership of land and Associates and units improvements (through Signature Partners, L.L.C. joint venture) Carriage Hill Village Apartments Randallstown, Maryland
Amarillo Bell Associates 144,000 9/30/83 Fee ownership of land and Bell Plaza Shopping Center gross improvements (though Amarillo, Texas leasable joint venture) sq. ft.
Greenbrier Associates 324 6/29/84 Fee ownership of land and Greenbrier Apartments units improvements (through Indianapolis, Indiana joint venture)
Seven Trails West Associates 532 9/13/84 Fee ownership of land and Seven Trails West Apartments units improvements (through Ballwin, Missouri joint venture)
(1) See Notes to the Financial Statements filed with this Annual Report for a description of the long-term mortgage indebtedness secured by the Partnership's operating property investments and for a description of the agreements through which the Partnership has acquired these real estate investments.
The Partnership previously owned an interest in Cambridge Associates, a joint venture which owned the Cambridge Apartments, a 378-unit apartment complex located in Omaha, Nebraska. On June 30, 1994, Cambridge Associates sold its operating investment property to an affiliate of the Partnership's co-venture partner for a gross purchase price of $9.7 million. After repayment of the outstanding mortgage debt and payment of transaction closing costs, net proceeds of approximately $4.7 million were available for distribution to the venture partners. In accordance with the joint venture agreement, the Partnership was entitled to and received approximately $3.7 million of such proceeds. A portion of the Cambridge sales proceeds was added to the Partnership's cash reserves in anticipation of future capital requirements at certain of the remaining joint ventures. The remainder of the proceeds, totalling approximately $2.2 million, was distributed to the Limited Partners in September 1994. See Note 4 to the Financial Statements accompanying this Annual Report for a further discussion of this transaction.
The Partnership's investment objectives are to:
(i) provide the Limited Partners with cash distributions which, to some extent, will not constitute taxable income; (ii) preserve and protect the Limited Partners' capital; (iii) obtain long-term appreciation in the value of its properties; and (iv) provide a build-up of equity through the reduction of mortgage loans on its properties.
The Partnership suspended the payment of regular quarterly distributions of excess net cash flow in fiscal 1988. Through September 30, 1996, the Limited Partners had received cumulative cash distributions totalling approximately $18,047,000, or approximately $542 per original $1,000 investment for the Partnership's earliest investors, of which approximately $7,720,000, or $284 per original $1,000 investment, represents net proceeds from a refinancing of the Carriage Hill Apartments in 1987 and approximately $2,200,000, or $63 per original $1,000 investment, represents the distributed portion of the net proceeds from the sale of the Cambridge Apartments in 1994. The remaining distributions have been made from the net operating cash flow of the Partnership. A substantial portion of such distributions has been sheltered from current taxable income. As of September 30, 1996, the Partnership retains its ownership interest in four of its five original investment properties. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final liquidation of the remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined. At the present time, real estate values for retail shopping centers in certain markets are being adversely impacted by the effects of overbuilding and consolidations among retailers which have resulted in an oversupply of space. It remains unclear at this time what impact, if any, this general trend will have on the operations and market value of the Partnership's retail shopping center investment.
All of the properties securing the Partnership's 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 continued availability of low interest rates on home mortgage loans has increased the level of this competition over the past several years. However, the impact of the competition from the single-family home market has been offset by the lack of significant new construction activity in the multi-family apartment market over most of this period. In the past 12 months, development activity for multi-family properties in many markets has escalated significantly. The shopping center competes for long-term commercial tenants with numerous projects of similar type generally on the basis of location, rental rates, tenant mix and tenant improvement allowances.
The Partnership has no operating property investments located outside the United States. The Partnership is engaged solely in the business of real estate investment, therefore, 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 Fifth Income Properties Fund, Inc. and Properties Associates. Fifth Income Properties Fund, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General Partner of the Partnership. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are officers of the Adviser and the Managing General Partner. Subject to the 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 September 30, 1996, the Partnership owned interests in four operating properties through joint venture partnerships. The joint venture partnerships and the related properties are referred to under Item 1 above to which reference is made for the name, location and description of each property.
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 12/31/95 3/31/96 6/30/96 9/30/96 Average -------- ------- ------- ------- -------
Carriage Hill Village Apartments 86% 85% 89% 94% 89%
Bell Plaza Shopping Center 82% 95% 98% 98% 93%
Greenbrier Apartments 93% 91% 91% 93% 92%
Seven Trails West Apartments 98% 96% 96% 95% 96%
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 Fifth Income Properties Fund, Inc. and Properties Associates, 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 Income Properties Five Limited Partnership, PaineWebber, Fifth Income Properties Fund, Inc. and Properties Associates (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 Income Properties Five Limited Partnership, also alleged that following the sale of the partnership interests, PaineWebber, Fifth Income Properties Fund, Inc. and Properties Associates misrepresented financial information about the Partnerships value and performance. The amended complaint alleged that PaineWebber, Fifth Income Properties Fund, Inc. and Properties Associates 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 was held in December 1996, and a ruling by the court as a result of this final hearing is currently pending.
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 September 30, 1996 there were 2,366 record holders of Units in the Partnership. There is no public market for the Units, and it is not anticipated that a public market for Units will develop. The Managing General Partner will not redeem or repurchase Units.
No distributions were made to the Limited Partners during fiscal 1996.
Item 6.
Item 6. Selected Financial Data
Paine Webber Income Properties Five Limited Partnership For the years ended September 30, 1996, 1995, 1994, 1993 and 1992 (In thousands except per Unit data)
Years Ended September 30, -------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ----
Revenues $ 90 $ 106 $ 87 $ 21 $ 16
Operating loss $ (132) $ (207) $ (262) $ (183) $ (177)
Partnership's share of ventures' losses $ (691) $(1,182) $ (995) $ (860) $(1,160)
Partnership's share of gain on sale of operating investment property - - $ 3,174 - -
Net income (loss) $ (823) $(1,389) $ 1,917 $(1,043) $(1,337)
Net income (loss) per Limited Partnership Unit $ (23.33) $(39.37) $ 54.36 $(29.57) $(37.90)
Cash distributions from sale, refinancing or other disposition transactions per Limited Partnership Unit - - $ 63.00 - -
Total assets $ 1,739 $ 1,658 $ 1,836 $ 1,280 $ 2,319
The above selected financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this Annual Report.
The above per Limited Partnership Unit information is based upon the 34,928 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 May 1983 to May 1984 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $34,928,000 were received by the Partnership and, after deducting selling expenses and offering costs, approximately $30,920,000 was invested in joint venture interests in five operating investment properties. The Partnership's interest in the Cambridge Apartments property was sold in June 1994 in a transaction which yielded net proceeds of $3.7 million to the Partnership. Of such proceeds, $2.2 million was distributed to the Limited Partners in September 1994 and $1.5 million was retained by the Partnership to bolster its cash reserve balances. The Partnership does not have any commitments for additional capital expenditures or investments but may be called upon to advance funds to its existing investments in accordance with the respective joint venture agreements.
The Partnership's four remaining investment properties consist of three multi-family apartment complexes and one retail shopping center. While the current estimated market values of certain of the remaining properties are below the amounts paid for the properties at the time of the Partnership's original investment in 1983 and 1984, all of the properties have estimated values above their respective outstanding mortgage debt obligations. Management's strategy over the past several years has been to capitalize on the favorable market interest rate environment by refinancing the mortgage loans secured by the operating investment properties to improve cash flow and permit the reinvestment of funds for capital improvement work. Such capital improvements are aimed at preserving and enhancing the properties' market values while the respective local economies and market conditions improve until favorable opportunities for the sale of the properties can be achieved. With the last of the required financing transactions completed during fiscal 1996, the Partnership's management will focus on potential disposition strategies for the remaining investment properties beginning in 1997. Depending on the availability of favorable sales opportunities, the Partnership could be positioned for a possible liquidation within the next 2-to-3 years. There are no assurances however, that the Partnership will be able to achieve the sale of its remaining assets within this time frame.
The average occupancy level at the Seven Trails West Apartments was 96% for fiscal 1996, compared to 95% for fiscal 1995. During fiscal 1996, the property continued to benefit from a combination of a stable multi-family rental market and the improvements in physical appearance resulting from the capital improvement programs implemented during fiscal 1995 and 1996. During fiscal 1996, major enhancements that were completed included replacing numerous roofs, gutters, decks and balconies, as well as upgrading apartment unit interiors on a turnover basis. Such improvements have contributed to management's ability to implement monthly rental rate increases at Seven Trails.
On April 17, 1996, the Partnership successfully completed the refinancing of the existing first mortgage loan secured by the Seven Trails West Apartments, reducing the annual interest rate from 12% to 7.87%. The new loan, in the initial principal amount of $17,000,000, is for a term of ten years with monthly payments of principal and interest totalling $130,000. The proceeds of the new loan, together with a contribution of $159,000 from the joint venture, were used to pay off all obligations of the prior first mortgage loan as well as to fund all reserves and escrows required by the new lender. Because the prior mortgage loan was not repaid by February 1, 1996, the joint venture forfeited a $147,000 fee which had been paid to the prior lender in connection with a fiscal 1994 extension agreement and was to be refundable under certain conditions. As part of the new loan agreement, reserves for agreed upon repairs and future replacements aggregating approximately $209,000 were established in escrow accounts with the mortgage lender. During fiscal 1996, the Partnership had temporarily advanced $600,000 to the Seven Trails joint venture to be used for a good faith deposit with the new lender and for the prepayment of certain loan closing costs. Such amounts were returned to the Partnership during the third quarter of fiscal 1996.
The Bell Plaza Shopping Center was 98% leased at September 30, 1996, up from 78% at September 30, 1995. During the first quarter of fiscal 1996, the property's leasing team was able to complete negotiations with a tenant, World Gym, to take the remaining 17,600 square feet of the former Wal-Mart space. The new lease for the remainder of the Wal-Mart space has improved the overall financial performance of the center due to the fact that, on a combined basis, the new tenant and United Supermarkets, which has occupied 62,800 square feet of the former Wal-Mart space since the first quarter of fiscal 1995, are paying a higher per square foot rent than Wal-Mart was originally paying for its space. As part of the negotiation for the United Supermarkets lease, a free-standing building formerly occupied by a restaurant was demolished, and the parking lot at Bell Plaza was reconfigured. This resulted in the addition of 235 parking spaces to the Center. As a result of the demolition, the Center's leasable area changed from 151,500 square feet to 144,000 square feet. At the present time, real estate values for retail shopping centers in certain markets are being adversely impacted by the effects of overbuilding and consolidations among retailers which have resulted in an oversupply of space. It remains unclear at this time what impact, if any, this general trend will have on the operations and market value of Bell Plaza in the near term. While operating results at Bell Plaza remain strong at the present time, several area employers in the Amarillo, Texas market have recently announced downsizing plans. Management will continue to closely monitor local market conditions in fiscal 1997.
As previously reported, the fiscal 1995 refinancing of the first mortgage loan secured by the Carriage Hill Apartments reduced the venture's monthly debt service requirements and provided additional funds which have been used to make improvements to the property. These improvements included the conversion of the gas utilities to individual metering for each apartment unit. In the past, operating results have been negatively impacted by high utility costs incurred during the winter season. By transferring the utility payments to the tenants, the property management company sought to reduce and stabilize property operating expenses. This conversion has now been completed, and currently over 65% of residents already pay for their own gas. In order to adjust rental rates to market, rental rates for units in which the tenants pay their own gas bills were lowered by approximately 8%. Current residents have the option upon renewal to lower their current rent and commence paying their own gas bill or to continue with landlord-paid gas and accept a 3% rental rate increase. Occupancy at the property, which had declined to the mid-80% range in early fiscal 1996, had rebounded to 94% for the quarter ended September 30, 1996. Now, with the gas utility conversion program complete and the average occupancy level stabilized, the property management company anticipates implementing further rental rate increases in fiscal 1997.
The occupancy level at the Greenbrier Apartments averaged 92% for fiscal 1996, compared to 91% for fiscal 1995. Capital expenditures during fiscal 1996 included carpeting and appliance replacements on an as-needed basis, and some roof repairs. In addition, the property's management team continued the balcony and gutter replacement program, replaced perimeter fences, repaired concrete retaining walls and purchased another computer for the leasing office. Improvements planned for fiscal 1997 include landscape replacements and updating clubhouse interiors. Greenbrier continues to produce excess cash flow after the payment of operating expenses, debt service payments to the lender and capital costs. The current mortgage debt of $5.4 million bears interest at 10% per annum and is not scheduled to mature until June 1998. Because of the potential for a sale of the property prior to the June 1998 maturity date, as well as increases in mortgage interest rate levels which occurred during fiscal 1996, management has decided to defer any immediate refinancing plans.
At September 30, 1996, the Partnership had cash and cash equivalents of $1,739,000. Such cash and cash equivalents will be utilized for the working capital requirements of the Partnership and for future capital contributions, as necessary, related to the Partnership's joint ventures. The source of future liquidity and distributions to the partners is expected to be from cash generated by the Partnership's income-producing properties and from the proceeds received from the sale or refinancing of such properties or from the sale of the Partnership's interests in the joint ventures. These sources of liquidity are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis.
Results of Operations 1996 Compared to 1995 - ---------------------
The Partnership reported a net loss of $823,000 for fiscal 1996 as compared to a net loss of $1,389,000 for fiscal 1995. The primary reason for this favorable change in net operating results is that the Carriage Hill joint venture recognized an extraordinary loss on the early extinguishment of debt during the prior year of approximately $1,177,000 as a result of the write-off of unamortized deferred financing costs related to the venture's prior debt in conjunction with the June 1995 refinancing transaction referred to above. The Partnership's share of this loss was approximately $471,000. Excluding this non-recurring charge in the prior year, the Partnership's share of ventures' losses decreased by $20,000 when compared to the prior year. This decrease can be mainly attributed to a $503,000 increase in combined revenues from the four joint ventures. Combined revenues increased largely due to improved occupancy and rental rates at the Seven Trails West and Greenbrier Apartments. Revenues were also higher at the Bell Plaza Shopping Center in fiscal 1996 due to the leasing improvements discussed further above. In addition, combined interest expense decreased by $261,000 as a result of the lower interest rates on the debts secured by the Carriage Hill Apartments and the Bell Plaza Shopping Center, which were refinanced in fiscal 1995, and on the debt secured by the Seven Trails Apartments, which was refinanced in fiscal 1996. The increase in rental revenues and decrease in interest expense were partially offset by increases in combined property operating expenses and depreciation and amortization of $634,000 and $122,000, respectively. Property operating expenses increased primarily due to higher utility costs at the Carriage Hill Apartments resulting from more severe weather conditions during the current year. As noted above, the venture has recently completed the process of converting the utilities at Carriage Hill Apartments to individual metering. This conversion will significantly reduce the venture's future exposure to fluctuations in utility charges caused by extreme weather conditions. Depreciation and amortization expense increased at all of the joint ventures, except for Carriage Hill, during fiscal 1996 due to capital improvements, tenant improvements and leasing commissions which were incurred over the past year.
The Partnership's operating loss decreased by $75,000, for fiscal 1996, when compared to the prior year. The decrease in operating loss is mainly attributable to a decrease in general and administrative expense of $91,000. General and administrative expense decreased mainly due to certain incremental expenses incurred in the prior year relating to an independent valuation of the Partnership's operating properties.
1995 Compared to 1994 - ---------------------
The Partnership reported a net loss of $1,389,000 for fiscal 1995 as compared to net income of $1,917,000 for the prior year. The primary reason for this unfavorable change in net operating results was that the Partnership recognized a $3.2 million gain in fiscal 1994 on the sale of the Cambridge Apartments, which occurred in June 1994. In addition, the Carriage Hill joint venture recognized a loss of $1,177,000 during fiscal 1995 as a result of the write-off of unamortized deferred financing costs related to the venture's prior debt in conjunction with the June 1995 refinancing transaction discussed further above. The Partnership's share of this loss was $471,000, which was included in the Partnership's share of ventures' losses for fiscal 1995. The Partnership's share of ventures' losses, prior to the effect of the Carriage Hill refinancing loss, decreased by $284,000 in fiscal 1995 mainly due to improved operating results at the Greenbrier, Seven Trails and Carriage Hill joint ventures. Rental revenues were higher at all three apartment properties in fiscal 1995, despite lower average occupancy levels, due to increases in rental rates made possible by the generally improving market conditions for multi-family apartment properties across the country during fiscal 1995. At Greenbrier, rental revenues improved by $58,000, or 4%, in fiscal 1995, when compared to the prior year, while average occupancy declined from 94% to 91%. In addition, repairs and maintenance expenses decreased by $96,000 at Greenbrier due to certain non-recurring repair work performed in fiscal 1994 as a result of winter storm damage. Rental revenues increased by $194,000, or 6%, at the Seven Trails property despite a slight drop in average occupancy from 96% for fiscal 1994 to 95% for fiscal 1995. Such increased revenues at Seven Trails were partially offset by the increase in the venture's interest expense which resulted from the fiscal 1994 modification agreement described above. At Carriage Hill, revenues were up only slightly in what have been less favorable local market conditions. The improvement in the Carriage Hill joint venture's net operating results were more attributable to a decrease in expenses, primarily depreciation and utilities expenses, which declined by $61,000 and $63,000, respectively. The improved operating results at the three apartment properties were partially offset by a decline in revenues at the Bell Plaza Shopping Center which resulted from the anchor tenant re-leasing situation described further above. The resulting drop in average occupancy at Bell Plaza, from 87% for fiscal 1994 to 78% for fiscal 1995, contributed to the decrease of $64,000 in the venture's rental revenues.
The unfavorable changes in net operating results were also partially offset by a decrease in the Partnership's operating loss of approximately $55,000 during fiscal 1995 due to an increase in interest income and a decrease in general and administrative expenses. Interest income increased by $19,000 due to an increase in the interest rates earned on the Partnership's cash reserves, as well as the significant increase in the average outstanding balance of such reserves which resulted from the retention of $1.5 million of the Cambridge sale proceeds from the June 1994 sale transaction. General and administrative expenses decreased by $36,000 mainly due to higher professional fees incurred in fiscal 1994.
1994 Compared to 1993 - ---------------------
The Partnership reported net income of $1,917,000 for fiscal 1994 as compared to a net loss of $1,043,000 in the prior year. The Partnership's net income for fiscal 1994 was a result of the Partnership's share of the gain realized from the sale of the Cambridge Apartments. The total gain recognized by the Cambridge joint venture totalled $3,336,000, and the Partnership's share of such gain amounted to $3,174,000 per the terms of the joint venture agreement. The Partnership's share of ventures' losses, prior to the gain on the Cambridge sale, increased by $135,000 when compared to the fiscal 1993 results. This unfavorable change in the Partnership's share of ventures' losses from operations was mainly a result of an increase in the operating loss at the Cambridge Apartments, primarily due to the payment, in accordance with the agreement, of previously unaccrued subordinated management fees in the amount of $100,000 upon the sale of the operating investment property. An increase in interest expense at the Seven Trails joint venture during fiscal 1994, as a result of a modification and extension agreement on the venture's mortgage loan, also contributed to the increase in the combined joint ventures' operating loss. The Partnership's operating loss increased by $79,000 during fiscal 1994 due to an increase in Partnership general and administrative expenses. These expenses increased mainly as a result of additional expenditures incurred related to an independent valuation of the Partnership's operating properties which was commissioned during fiscal 1994 in conjunction with management's ongoing refinancing efforts and portfolio management responsibilities.
Inflation - ---------
The Partnership completed its thirteenth 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.
Inflation in future periods may increase revenues, as well as operating expenses, at the Partnership's operating investment properties. Some of the existing leases with tenants at the Partnership's retail shopping center contain rental escalation and/or expense reimbursement clauses based on increases in tenant sales or property operating expenses which would tend to rise with inflation. Tenants at the Partnership's apartment projects have short-term leases, generally of 6-to-12 months in duration. Rental rates at these properties can be adjusted to keep pace with inflation, as market conditions allow, as the leases are renewed or turned over. Such increases in rental income would be expected to at least partially offset the corresponding increases in Partnership and property operating expenses caused by future 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 Fifth Income Properties Fund, 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 operation, 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 11/19/82 * Timothy J. Medlock Vice President and Treasurer 35 6/1/88 Thomas W. Boland Vice President 34 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors and principal executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors and 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 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 to February 1980, 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 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.
(f) None of the directors and officers were 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 September 30, 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 Partnership cash distributions and a share of profits and losses. These items are described under Item 13.
The Partnership has not paid regular cash distributions to the Unitholders over the past five years. Regular quarterly distributions of excess cash flow were suspended in 1988. Furthermore, 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, Fifth Income Properties Fund, 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. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership.
(b) The directors and officers of the Managing General Partner do not directly own any Units of limited partnership interest of the Partnership. No director or officer of the Managing General Partner, nor any general partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of limited partnership interest of the Partnership. As of September 30, 1996, PaineWebber and its affiliates owned 112 Units of limited partnership interests 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 General Partners of the Partnership are Fifth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). 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.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds shall be distributed generally 85% to the Limited Partners and 15% to the General Partners, after the prior receipt by the Limited Partners of their adjusted capital contributions and a cumulative, noncompounded return on their average adjusted capital contributions ranging from 10% to 6% depending on when a Limited Partner was admitted to the Partnership. All sale and refinancing proceeds received by the Partnership to date have been distributed to the Limited Partners in accordance with the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income and tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% 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 to the General Partners in proportion to the amounts of sale or refinancing 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 sale or refinancing proceeds, taxable income and tax losses from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. 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.
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 Managing General Partner. The Adviser is paid a basic management fee (4% of adjusted cash flow) and an incentive management fee (5% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contribution) for services rendered. No management fees were earned during fiscal 1996.
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 September 30, 1996 is $81,000, 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"), an affiliate of the Managing General Partner, 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 $4,000 for managing the Partnership's cash assets in fiscal 1996, which amount is included in general and administrative expenses on the accompanying statement of operations. 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 Schedule:
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 Schedule at page.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this Report.
(b) No Current 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 Schedule 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 INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
By: Fifth Income Properties Fund, 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: January 10, 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 Partnership in the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 10, 1997 ------------------------ ---------------- Bruce J. Rubin Director
By:/s/ Terrence E. Fancher Date: January 10, 1997 ------------------------ ---------------- Terrence E. Fancher Director
ANNUAL REPORT ON FORM 10-K Item 14(a)(3)
PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
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 May 26, 1983, supplemented, pursuant to Rule 424(c) with particular reference to the and incorporated herein Restated Certificate and Agreement by 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 September 30, 1996 has been sent to the Limited Partners. An 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 as required by Item 14.
ANNUAL REPORT ON FORM 10-K Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Reference ---------
Paine Webber Income Properties Five Limited Partnership:
Report of independent auditors
Balance sheets as of September 30, 1996 and 1995
Statements of operations for the years ended September 30, 1996, 1995 and 1994
Statements of changes in partners' capital (deficit) for the years ended September 30, 1996, 1995 and 1994
Statements of cash flows for the years ended September 30, 1996, 1995 and 1994
Notes to financial statements
Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership:
Report of independent auditors
Combined balance sheets as of September 30, 1996 and 1995
Combined statements of operations and changes in venturers' deficit for the years ended September 30, 1996, 1995 and 1994
Combined statements of cash flows for the years ended September 30, 1996, 1995 and 1994
Notes to combined financial statements
Schedule III - Real estate and accumulated depreciation
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 Income Properties Five Limited Partnership:
We have audited the accompanying balance sheets of Paine Webber Income Properties Five Limited Partnership as of September 30, 1996 and 1995, and the related statements of operations, changes in partners' capital (deficit), and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paine Webber Income Properties Five Limited Partnership at September 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP
Boston, Massachusetts January 8, 1997
PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
BALANCE SHEETS September 30, 1996 and 1995 (In thousands, except per Unit amounts)
ASSETS 1996 1995 ---- ----
Cash and cash equivalents $ 1,739 $ 1,658 ======== ========
LIABILITIES AND PARTNERS' DEFICIT
Equity in losses in excess of investments and advances in joint ventures $ 2,971 $ 2,059 Accounts payable and accrued expenses 30 38 -------- -------- Total liabilities 3,001 2,097
Partners' deficit: General Partners: Capital contributions 1 1 Cumulative net loss (147) (139) Cumulative cash distributions (60) (60)
Limited Partners ($1,000 per Unit; 34,928 Units issued): Capital contributions, net of offering costs 31,554 31,554 Cumulative net loss (14,563) (13,748) Cumulative cash distributions (18,047) (18,047) -------- --------- Total partners' deficit (1,262) (439) -------- --------- $ 1,739 $ 1,658 ======== ========
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS For the years ended September 30, 1996, 1995 and 1994 (In thousands, except per Unit amounts)
1996 1995 1994 ---- ---- ----
Revenues: Interest income $ 90 $ 106 $ 87
Expenses: General and administrative 222 313 349 ------ ----- --------
Operating loss (132) (207) (262)
Partnership's share of ventures' losses (691) (1,182) (995)
Partnership's share of gain on sale of operating investment property - - 3,174 ------ ------ --------
Net income (loss) $ (823) $(1,389) $ 1,917 ====== ======= ========
Net income (loss) per Limited Partnership Unit $(23.33) $(39.37) $ 54.36 ======= ======= ========
Cash distributions per Limited Partnership Unit $ - $ - $ 63.00 ======= ======= ========
The above net income (loss) and cash distributions per Limited Partnership Unit are based upon the 34,928 Limited Partnership Units outstanding during each year.
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT For the years ended September 30, 1996, 1995 and 1994 (In thousands)
General Limited Partners Partners Total -------- -------- -----
Balance at September 30, 1993 $(203) $ 1,436 $ 1,233
Net income 19 1,898 1,917
Cash distributions - (2,200) (2,200) ----- ------- -------
Balance at September 30, 1994 (184) 1,134 950
Net loss (14) (1,375) (1,389) ----- ------- -------
Balance at September 30, 1995 (198) (241) (439)
Net loss (8) (815) (823) ------ ------- -------
Balance at September 30, 1996 $(206) $(1,056) $(1,262) ===== ======= =======
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS For the years ended September 30, 1996, 1995 and 1994 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1996 1995 1994 ---- ---- ----
Cash flows from operating activities: Net income (loss) $ (823) $(1,389) $ 1,917 Adjustments to reconcile net income (loss) to net cash used in operating activities: Partnership's share of ventures' losses 691 1,182 995 Partnership's share of gain on sale of operating investment property - - (3,174) Changes in assets and liabilities: Accounts payable - affiliates - - (24) Accounts payable and accrued expenses (8) 13 - ------- ------- -------- Total adjustments 683 1,195 (2,203) ------ ------- -------- Net cash used in operating activities (140) (194) (286)
Cash flows from investing activities: Distributions from joint ventures 249 275 4,191 Additional investments in and advances to joint ventures (628) (259) (586) Repayment of advances to joint ventures 600 - - ------ ------- ------- Net cash provided by investing activities 221 16 3,605
Cash flows from financing activities: Distributions to partners - - (2,200) ------ ------- ------- Net cash used in financing activities - - (2,200) ------ -------- -------
Net increase (decrease) in cash and cash equivalents 81 (178) 1,119
Cash and cash equivalents, beginning of year 1,658 1,836 717 ------- -------- --------
Cash and cash equivalents, end of year $1,739 $ 1,658 $ 1,836 ====== ======== =======
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP Notes to Financial Statements
1. Organization and Nature of Operations -------------------------------------
Paine Webber Income Properties Five Limited Partnership (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in January 1983 for the purpose of investing in a diversified portfolio of income-producing properties. The Partnership authorized the issuance of units (the "Units") of limited partnership interest (at $1,000 per Unit) of which 34,928 were subscribed and issued between May 26, 1983 and May 25, 1984.
The Partnership originally invested the net proceeds of the public offering, through joint venture partnerships, in five operating investment properties, comprised of four multi-family apartment complexes and one retail shopping center. To date, one of the Partnership's original investments has been sold. See Note 4 for a further discussion of the Partnership's remaining real estate investments.
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 require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of September 30, 1996 and 1995 and revenues and expenses for each of the three years in the period ended September 30, 1996. Actual results could differ from the estimates and assumptions used.
The accompanying financial statements include the Partnership's investments in certain joint venture partnerships which own operating properties. The Partnership accounts for its investments in joint venture partnerships using the equity method because the Partnership does not have a voting control interest in the ventures. Under the equity method the ventures are carried at cost adjusted for the Partnership's share of the ventures' earnings and losses and distributions. The Partnership's policy is to identify any permanent impairment to the carrying value of its joint venture investments on a specific identification basis. At September 30, 1996 and 1995, the carrying value of one of the Partnership's joint ventures is adjusted for an allowance for possible investment loss. See Note 4 for a discussion of this allowance account and a description of the joint venture partnerships.
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.
For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments which have original maturities of 90 days or less.
The cash and cash equivalents, 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." The carrying amount of these assets and liabilities approximates their fair value as of September 30, 1996 due to the short-term maturities of these instruments.
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 General Partners of the Partnership are Fifth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). 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.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds shall be distributed generally 85% to the Limited Partners and 15% to the General Partners, after the prior receipt by the Limited Partners of their adjusted capital contributions and a cumulative, noncompounded return on their average adjusted capital contributions ranging from 10% to 6% depending on when a Limited Partner was admitted to the Partnership. All sale and refinancing proceeds received by the Partnership to date have been distributed to the Limited Partners in accordance with the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income and tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% 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 to the General Partners in proportion to the amounts of sale or refinancing 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 sale or refinancing proceeds, taxable income and tax losses from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. 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.
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 Managing General Partner. The Adviser earns a basic management fee (4% of adjusted cash flow) and an incentive management fee (5% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contribution) for services rendered. No management fees were earned during the three-year period ended September 30, 1996.
Included in general and administrative expenses for the years ended September 30, 1996, 1995 and 1994 is $81,000, $87,000 and $96,000, 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"), an affiliate of the Managing General Partner, 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 $4,000, $5,000 and $2,000 for managing the Partnership's cash assets in fiscal 1996, 1995 and 1994, respectively, which amounts are included in general and administrative expenses on the accompanying statements of operations.
4. Investments in Joint Venture Partnerships -----------------------------------------
As of September 30, 1996 and 1995, the Partnership has investments in four joint ventures. On June 30, 1994, Cambridge Associates, a joint venture in which the Partnership had an interest, sold its operating investment property, the Cambridge Apartments, a 378-unit apartment complex located in Omaha, Nebraska, to an affiliate of the Partnership's co-venture partner. The property was sold for $9,700,000. After repayment of the outstanding $5 million first mortgage loan and closing costs, the sale generated approximately $4.7 million to be split between the Partnership and the co-venturer in accordance with the venture agreement. The Partnership's share of such proceeds amounted to approximately $3.7 million in cash. The sale resulted in a gain of $3,336,000 which was recognized by the venture in fiscal 1994. The Partnership's share of such gain totalled $3,174,000.
The joint ventures are accounted for on the equity method in the Partnership's financial statements. Condensed combined financial statements of these joint ventures (including Cambridge Associates through the date of the sale transaction described above) are as follows:
Condensed Combined Balance Sheet ------------------------------ September 30, 1996 and 1995 (in thousands)
Assets ------ 1996 1995 ---- ----
Current assets $ 2,210 $ 2,369 Operating investment properties, net 44,853 45,566 Other assets, net 1,885 1,982 -------- -------- $ 48,948 $ 49,917 ======== ========
Liabilities and Venturers' Deficit ----------------------------------
Current liabilities $ 2,529 $ 18,333 Other liabilities 878 980 Long-term mortgage debt, less current portion 52,791 36,325
Partnership's share of combined deficit (3,583) (2,607) Co-venturers' share of combined deficit (3,667) (3,114) -------- -------- $ 48,948 $ 49,917 ======== ========
Reconciliation of Partnership's Investments ------------------------------------------- (in thousands) 1996 1995 ---- ----
Partnership's share of deficit, as shown above $ (3,583) $ (2,607) Partnership's share of current liabilities and long-term debt 912 848 Less: Allowance for possible investment loss (1) (300) (300) -------- ---------
Investments in joint ventures, at equity, net $ (2,971) $ (2,059) ======== ========
(1)The carrying value of the Partnership's investments in joint ventures at September 30, 1996 and 1995 is net of an allowance for possible investment loss of $300,000, which relates to the Amarillo Bell Associates joint venture. See discussion below for further details.
Condensed Combined Summary of Operations ---------------------------------------- For the years ended September 30, 1996, 1995 and 1994 (in thousands) 1996 1995 1994 ---- ---- ---- Revenues: Rental income and expense recoveries $11,646 $11,173 $12,458 Interest and other income 473 443 386 ------- ------- ------- 12,119 11,616 12,844
Expenses: Property operating expenses 5,602 4,968 6,199 Depreciation and amortization 2,647 2,525 2,688 Interest expense 4,955 5,216 5,421 Loss on write-off of deferred financing costs - 1,177 - ------- -------- ------- 13,204 13,886 14,308 ------- -------- -------
Operating loss (1,085) (2,270) (1,464)
Gain on sale of operating investment property - - 3,336 -------- -------- --------
Net income (loss) $ (1,085) $ (2,270) $ 1,872 ======== ======== ========
Net income (loss): Partnership's share of combined income (loss) $ (691) $ (1,182) $ 2,179 Co-venturers' share of combined loss (394) (1,088) (307) --------- --------- -------- $ (1,085) $ (2,270) $ 1,872 ======== ======== ========
The Partnership's share of the combined income (loss) of the joint ventures is presented as follows on the accompanying statements of operations (in thousands):
1996 1995 1994 ---- ---- ----
Partnership's share of ventures' losses $ (691) $ (1,182) $ (995) Partnership's share of gain on sale of operating investment property - - 3,174 -------- -------- ------- $ (691) $ (1,182) $ 2,179 ======== ======== ========
Investments in joint ventures, at equity, is the Partnership's net investment in the joint venture partnerships. These joint ventures are subject to partnership agreements which determine the distribution of available funds, the disposition of the venture's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the venture. Substantially all of the Partnership's investments in these joint ventures are restricted as to distributions.
Investments in joint ventures, at equity, on the accompanying balance sheets at September 30, 1996 and 1995 is comprised of the following (in thousands):
1996 1995 ---- ----
Randallstown Carriage Hill Associates $ (6,084) $ (5,796) Signature Partners, L.L.C. 239 238 Amarillo Bell Associates 1,623 1,556 Greenbrier Associates 822 855 Seven Trails West Associates 429 1,088 --------- --------- $ (2,971) $ (2,059) ========= =========
The Partnership received cash distributions from the ventures as set forth below (in thousands):
1996 1995 1994 ---- ---- ----
Amarillo Bell Associates $ - $ 50 $ 59 Greenbrier Associates 198 132 111 Randallstown Carriage Hill Associates 51 93 - Cambridge Associates - - 4,021 ------- ------- ------- $ 249 $ 275 $ 4,191 ======= ======= =======
A description of the ventures' properties and the terms of the joint venture agreements are summarized as follows:
a) Randallstown Carriage Hill Associates -------------------------------------
On August 30, 1983, the Partnership acquired an interest in Randallstown Carriage Hill Associates, a Maryland general partnership organized to purchase and operate Carriage Hill Village Apartments, an 806-unit apartment complex in Randallstown, Maryland. The Partnership ("PWIP5") is a general partner in the joint venture. JBG Associates ("JBG") was the original co-venturer of the joint venture. The joint venture obtained necessary new capital by admitting Signature Development Corporation ("Signature") as a new partner in fiscal 1988. The amended partnership agreement provided for the admission of Signature as a 50% partner in the joint venture with JBG and PWIP5 (collectively "JBG/PW"). JBG and PWIP5's ownership percentages were adjusted, pro rata, to 10% and 40%, respectively. In return for its 50% interest, Signature committed to contribute up to $3,000,000 to the joint venture over the first three years, primarily to fund capital improvements, working capital needs and meet debt payments.
The aggregate cash investment made by the Partnership for its interest was approximately $11,524,000 (including an acquisition fee of $1,150,000 paid to the Adviser). The apartment complex was acquired subject to four mortgages; two institutional nonrecourse first mortgages with balances totalling approximately $6,136,000 at the time of closing, and two second mortgage notes from the seller of the property with balances totalling $6,000,000 at the time of closing. On December 30, 1986, the Partnership refinanced the aforementioned debt by obtaining a $28,000,000 non-recourse mortgage loan. The Partnership received a distribution of approximately $9,926,000 in fiscal 1987, reflecting its share of the excess refinancing proceeds. In fiscal 1995, the venture's mortgage debt was refinanced again. The new mortgage loan, in the initial principal amount of approximately $27.9 million, has a fixed interest rate of 7.65% and a term of 35 years. The venture recognized a loss of $1,177,000 in fiscal 1995 in connection with the refinancing transaction to write off the unamortized balance of the deferred financing costs related to the prior mortgage loan. The new loan also released from the collateral a 23-acre parcel of excess land. The venture distributed this land parcel, which had a carrying value of $563,000, to a new entity, Signature Partners, L.L.C., in conjunction with the refinancing transaction. Signature Partners, L.L.C. is owned by Signature, JBG and the Partnership with the same ownership interest percentages as in the Carriage Hill joint venture agreement. The land owned by Signature Partners, L.L.C. could eventually be marketed to local developers once market conditions improve. Proceeds of any such sale, if completed, would be distributed to the owners in accordance with the same priorities called for under the terms of the Carriage Hill joint venture agreement described below.
The amended joint venture agreement provides that available net cash flow, as defined, is to be distributed in the following order of priority: 1) To the partners for any deficiency loans, as defined, simple but cumulative interest at 15% per annum; 2) To Signature and JBG/PW, until both have received an amount of $151,324 plus simple but cumulative interest at 10% thereon from January 15, 1995 through the date of distribution; 3) To Signature, simple but cumulative interest at 10% per annum on the aggregate unreturned balance of the Initial Capital Commitment of $2,549,120 and any Additional Capital, as defined; 4) To JBG/PW, simple but cumulative interest at 10% per annum on the unreturned balance of JBG/PW's deemed capital contribution of $1,500,000; and (5) any net cash flow remaining, to the partners pro rata in proportion to their respective partnership interests. Any cash flow distributed by the joint venture to JBG/PW is to be distributed between them in the following order of priority: 1) To the holders of operating notes, interest on all operating notes other than the Initial Operating Loan, as defined; 2) To PWIP5 and JBG, $300,000 distributed 90% to PWIP5 and 10% to JBG; and 3) any remainder, 80% to PWIP5 and 20% to JBG.
Per the terms of the amended joint venture agreement, any net proceeds arising from the refinancing, sale, exchange or other disposition of the Property or any part thereof, will be distributed in the following order of priority: 1) To the lenders of deficiency loans, simple but cumulative interest at 15% per annum on, and then to the payment of the principal of, any deficiency loans; 2) To Signature and JBG/PW, until both have received an amount of $151,324 plus simple but cumulative interest at 10% thereon from January 15, 1995 through the date of distribution; 3) to Signature and JBG/PW, an amount equal to their respective Closing Adjustment Accounts, as defined, plus the Deferred Distribution of $137,500 owed to JBG/PW, together with simple but cumulative interest at 10% per annum thereon; 4) to Signature, simple but cumulative interest at 10% per annum on, and then to the payment of principal of, the aggregate unreturned balance of the Initial Capital Commitment of $2,549,120 and any Additional Capital, as defined; 5) to JBG/PW, simple but cumulative interest at 10% per annum on, and then to the payment of principal of, the unreturned aggregate balance of JBG/PW's deemed capital contribution of $1,500,000, plus $351,000; and 5) the balance pro rata to the partners in proportion to their respective percentages of partnership interests. Any capital proceeds distributed by the joint venture to JBG/PW are to be distributed between them in the following order of priority: 1) To the holders of operating notes, all unpaid accrued interest on, and then to the payment of principal of, all outstanding operating notes other than the Initial Operating Loan; 2) To JBG, any subordinated management fees and management fees then unpaid and accrued from prior fiscal years, 3) To PWIP5, payment of the Initial Operating Note together with accrued interest thereon; 4) To JBG, $200,000 for services rendered in connection with the refinancing of the original mortgage; 5) To PWIP5 and JBG, the next $5,000,000 distributed 90% to PWIP5 and 10% to JBG; and 6) To PWIP5 and JBG, any remaining balance distributed 80% to PWIP5 and 20% to JBG.
All tax losses shall be allocated to the partners in proportion to their percentages of partnership interest; provided, however, that no partner shall be allocated any loss which would reduce its capital account below zero unless all Partners have negative capital accounts. Taxable income shall be allocated in accordance with the cash flow distributions set forth above. Any income allocated by the joint venture to JBG/PW is to be allocated between them to the extent of cash flow distributed to them for such taxable year, with the remainder allocated 80% to PWIP5 and 20% to JBG. Tax losses allocated by the joint venture to JBG/PW shall be allocated between them in the ratio of their positive capital account balances, subsequent to any distributions, with any remaining losses allocated 80% to PWIP5 and 20% to JBG. Allocations of the joint venture's net losses for financial accounting purposes have been made in accordance with the allocations of tax losses.
A management agreement ("Management Agreement"), dated as of July 8, 1988, between the joint venture and Signature Management Services, Inc., an affiliate of Signature, sets forth conditions of the property management for the Carriage Hill Apartments. The Management Agreement provides for a monthly management fee of 5% of the prior month's gross revenues, as defined. During fiscal 1996, the management agreement was amended to provide for the payment of 3% of the previous month's collected revenues and a deferral of 2%. The deferred management fees will be paid to Signature upon final distribution of the cumulative preferred return discussed above.
b) Amarillo Bell Associates ------------------------
On September 30, 1983, the Partnership acquired a 50% interest in Amarillo Bell Associates, an existing Texas general partnership which owns a 144,000 square foot shopping center in Amarillo, Texas. The Partnership is a general partner in the joint venture. The Partnership's co-venturer is an affiliate of The Boyer Company. The aggregate investment by the Partnership for its interest was approximately $2,222,000 (including an acquisition fee of $230,000 paid to the Adviser).
On June 19, 1995, the Partnership completed the refinancing of the existing first mortgage loan secured by Bell Plaza, reducing the interest rate from 9.4% to 8.125%. The new loan, in the initial principal amount of $3,300,000, has a seven-year term and requires monthly principal and interest payments based upon a twenty-five year amortization schedule. The terms of the loan allow for a prepayment of the principal balance after the end of one year. At September 30, 1996, the balance of the mortgage loan, which matures on July 1, 2002, was approximately $3,250,000.
Subsequent to the end of fiscal 1990, the Partnership had entered into negotiations with its co-venture partner to execute a purchase and sale agreement for the sale of the Partnership's interest in the joint venture. The proposed agreement would have given the co-venturer an option to purchase the Partnership's interest for $1,500,000. Because the option price was below the equity method carrying value of the Partnership's investment in Amarillo Bell Associates at September 30, 1990, the Partnership recognized a provision for possible investment loss of $300,000 in fiscal 1990 which reflected an estimate of the loss that would have been incurred if the option had been executed and exercised. The co-venturer was unable to obtain financing to complete this transaction and the option was never executed. The $300,000 allowance for possible investment loss remains on the Partnership's balance sheet at September 30, 1996 due to management's belief that it represents a permanent impairment to the carrying value of the investment in the Bell Plaza joint venture.
The joint venture agreement provides that the Partnership will receive from cash flow an annual non-cumulative preferred return, payable monthly, of 50% of the distributable cash flow with a minimum of $164,000 from October 1, 1988 annually through September 30, 1990. For the period after September 30, 1990, the Partnership will receive an annual distribution paid on a monthly basis equal to 50% of distributable cash flow. The co-venturer will receive an annual non-cumulative base return payable quarterly equal to the available cash flow after the Partnership's return as set forth above.
Taxable income before depreciation will be allocated to the Partnership and the co-venturer first in the same amount as cash is distributed, and any balance will be allocated 50% to the Partnership and 50% to the co-venturer. If no cash flow is available, then 100% is to be allocated to the Partnership. Depreciation will be allocated to the partners as it is attributable to their respective basis in the depreciable assets. Allocations of income and loss for financial accounting purposes have been made in accordance with the allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with the joint venture, it is to be provided in equal proportions by the Partnership and the co-venturer.
Per the terms of the joint venture agreement, distributions from a sale of the operating investment property and/or refinancing proceeds will be as follows, after the payment of mortgage debts and to the extent not previously returned to each partner: 1) to the Partnership, an amount equal to the Partnership's gross investment, 2) to the co-venturer, $2,140,000, 3) payment of all unpaid accrued interest on all outstanding operating notes and then to the repayment of the principal of all outstanding operating notes, 4) payment of any accrued subordinated management fees, 5) any remaining balance thereof shall be distributed 50% to the Partnership and 50% to the co-venturer.
The joint venture has entered into a property management contract with an affiliate of the co-venturer cancellable at the option of the Partnership upon the occurrence of certain events. The management fee is equal to 4% of gross rents.
c) Greenbrier Associates ----------------------
On June 29, 1984, the Partnership acquired an interest in Greenbrier Associates, an Indiana general partnership that owns and operates Greenbrier Apartments, a 324-unit apartment complex located in Indianapolis, Indiana. The Partnership is a general partner in the joint venture. The Partnership's co-venturer is an affiliate of the Paragon Group.
The aggregate cash investment made by the Partnership for its interest was approximately $4,109,000 (including an acquisition fee of $432,000 paid to the Adviser). The apartment complex is encumbered by a first mortgage loan with a balance of $5,400,000 at September 30, 1996.
The joint venture agreement provides that the Partnership will receive from available cash flow an annual cumulative preferred base return, payable monthly, of $378,000. The Partnership's preference return is noncumulative on a year-to-year basis beginning July 1, 1987. The cumulative preference return of the Partnership in arrears at September 30, 1996 and 1995 for unpaid preference returns through June 30, 1987 is approximately $312,000. Since such amount is payable only from available future sale or refinancing proceeds, as set forth below, it is not accrued in the joint venture's financial statements. After the Partnership has received its preferred return, the co-venturer is then entitled to receive an annual noncumulative, subordinated base return, payable quarterly, of $21,000. Any remaining cash flow not previously distributed at the end of each year will be used to pay any accrued interest on all outstanding operating notes. The next $100,000 of cash flow in any year will be distributed 90% to the Partnership and 10% to the co-venturer. Thereafter, any excess cash flow will be distributed 80% to the Partnership and 20% to the co-venturer.
Taxable income or tax loss from operations will be allocated in the same proportions as cash distributions, but in no event less than 5% to the co-venturer. Additionally, the co-venturer shall not be allocated net profits in excess of net cash flow distributed to it during the fiscal year. Allocations of the venture's operations between the Partnership and the co-venturer for financial accounting purposes have been made in conformity with the actual allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with the joint venture, it will be provided by the Partnership and the co-venturer as loans to the joint venture. Such loans would be provided 85% by the Partnership and 15% by the co-venturer.
Any proceeds arising from a refinancing, sale, exchange or other distribution of property will be distributed in the following order of priority: (1) to the payment of unpaid principal and accrued interest on all outstanding operating notes, then to the repayment of unpaid operating loans and accrued interest to the Partnership and the co-venturer, (2) to the Partnership, the aggregate amount of the Partnership's cumulative preference return not previously distributed, (3) the next $4,044,000 to the Partnership, (4) the next $200,000 to the co-venturer, (5) to the property manager, an amount equal to the sum of any unpaid subordinated management fees, (6) the next $3,500,000 to the Partnership and the co-venturer allocated 90% and 10%, respectively, (7) the next $3,000,000 to the Partnership and the co-venturer allocated 80% and 20%, respectively, and (8) any remaining balance to the Partnership and the co-venturer in the proportions of 70% and 30%, respectively.
The joint venture entered into a property management contract with an affiliate of the co-venturer, cancellable at the option of the Partnership upon the occurrence of certain events. The management fee is 5% of the gross receipts collected from the property.
d) Seven Trails West Associates ----------------------------
On September 13, 1984, the Partnership acquired an interest in Seven Trails West Associates, a Missouri general partnership that owns and operates Seven Trails West Apartments, a 532-unit apartment complex in Ballwin, Missouri. The Partnership is a general partner in the joint venture.
The aggregate cash investment by the Partnership for its interest was approximately $10,011,000 (including an acquisition fee of $1,050,000 paid to the Adviser). On April 17, 1996, the Partnership successfully completed the refinancing of the existing first mortgage loan secured by the Seven Trails West Apartments, reducing the annual interest rate from 12% to 7.87%. The new loan, in the initial principal amount of $17,000,000, is for a term of ten years with monthly payments of principal and interest totalling $130,000. The proceeds of the new loan, together with a contribution of $159,000 from the joint venture, were used to pay off all obligations of the prior first mortgage loan as well as to fund all reserves and escrows required by the new lender. Because the prior mortgage loan was not repaid by February 1, 1996, the joint venture forfeited a $147,000 fee which had been paid to the prior lender in connection with a fiscal 1994 extension agreement and was to be refundable under certain conditions.
The joint venture agreement provides that the Partnership will receive from available cash flow an annual cumulative preferred base return, payable monthly, of $875,000. The Partnership's preference return was cumulative on a year to year basis through September 30, 1987 and is cumulative monthly but not annually thereafter. The cumulative preference return of the Partnership in arrears at September 30, 1996 for unpaid preference returns through September 30, 1987 is approximately $1,691,000. As such amount is payable only from future available sale or refinancing proceeds, as set forth below, it is not accrued in the joint venture's financial statements.
After the Partnership has received its preferred return, the co-venturer is then entitled to receive an annual noncumulative, subordinated base return, payable quarterly, of $50,000. Any cash flow not previously distributed at the end of each fiscal year will be applied as follows: $250,000 of cash flow in any year will be distributed 90% to the Partnership and 10% to the co-venturer; the next $300,000 of annual cash flow will be distributed 80% to the Partnership and 20% to the co-venturer; thereafter, any excess cash flow will be distributed 70% to the Partnership and 30% to the co-venturer.
Taxable income or tax loss from operations will be allocated in the same proportions as cash distributions, but in no event less than 10% to the co-venturer. Additionally, the co-venturer shall not be allocated net profits in excess of net cash flow distributed to it during the fiscal year. Allocations of the venture's operations between the Partnership and the co-venturer for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with the joint venture, the joint venture agreement calls for such funds to be provided by the Partnership and the co-venturer as loans to the joint venture. Such loans would be provided 90% by the Partnership and 10% by the co-venturer. Through September 30, 1996, operating notes have been provided by the Partnership and co-venturer in the amounts of $836,000 and $11,000, respectively. The notes bear interest at the prime interest rate of a local bank. The Partnership advanced 100% of the funds required to close a loan modification and extension agreement in fiscal 1994. The portion of such operating notes representing the co-venture partner's 10% share of the required funds bears interest at twice the rate of the regular operating notes.
Any proceeds arising from a refinancing, sale or exchange or other disposition of property will be distributed first to the payment of unpaid principal and accrued interest on any outstanding notes. Any remaining proceeds will be distributed in the following order: repayment of unpaid principal and accrued interest on all outstanding operating notes to the Partnership and the co-venturer; and any remaining balance distributed 90% to the Partnership and 10% to the co-venturer.
The joint venture has entered into a property management contract with an affiliate of the co-venturer, cancellable at the option of the Partnership upon the occurrence of certain events. The management fee is equal to 4% of the gross receipts collected from the property.
5. 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 Fifth Income Properties Fund, Inc. and Properties Associates, 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 Income Properties Five Limited Partnership, PaineWebber, Fifth Income Properties Fund, Inc. and Properties Associates (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 Income Properties Five Limited Partnership, also alleged that following the sale of the partnership interests, PaineWebber, Fifth Income Properties Fund, Inc. and Properties Associates misrepresented financial information about the Partnerships value and performance. The amended complaint alleged that PaineWebber, Fifth Income Properties Fund, Inc. and Properties Associates 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 was held in December 1996, and a ruling by the court as a result of this final hearing is currently pending.
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.
REPORT OF INDEPENDENT AUDITORS
The Partners of Paine Webber Income Properties Five Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership as of September 30, 1996 and 1995, and the related combined statements of operations and changes in venturers' deficit, and cash flows for each of the three years in the period ended September 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership at September 30, 1996 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP
Boston, Massachusetts December 6, 1996
COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS September 30, 1996 and 1995 (In thousands)
Assets
1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 469 $ 545 Escrow deposits 1,085 1,030 Accounts receivable 83 130 Prepaid expenses 573 664 -------- --------- Total current assets 2,210 2,369
Operating investment properties: Land 5,250 5,250 Buildings, improvements and equipment 70,147 68,244 --------- -------- 75,397 73,494 Less accumulated depreciation (30,544) (27,928) --------- --------- Net operating investment properties 44,853 45,566
Reserve for capital expenditures 364 689
Deferred expenses, net of accumulated amortization of $234 ($212 in 1995) 1,373 1,138 Other assets, net 148 155 --------- --------- $ 48,948 $ 49,917 ========= =========
Liabilities and Venturers' Deficit Current liabilities: Current portion of long-term debt $ 461 $ 14,911 Current portion of deferred interest - 1,657 Accounts payable 205 117 Accounts payable - affiliates 120 30 Accrued real estate taxes 511 548 Accrued interest 648 585 Tenant security deposits 350 364 Distributions payable to venturers 132 - Other current liabilities 102 121 ---------- --------- Total current liabilities 2,529 18,333
Notes payable to venturers 847 966
Other liabilities 31 14
Long-term debt 52,791 36,325
Venturers' deficit (7,250) (5,721) --------- --------- $ 48,948 $ 49,917 ========= =========
See accompanying notes.
COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' DEFICIT For the years ended September 30, 1996, 1995 and 1994 (In thousands)
1996 1995 1994 ---- ---- ----
Revenues: Rental income and expense recoveries $11,646 $11,173 $12,458 Interest and other income 473 443 386 ------- ------- ------- 12,119 11,616 12,844
Expenses: Interest expense 4,955 5,216 5,421 Depreciation expense 2,616 2,501 2,669 Real estate taxes 958 994 1,136 Repairs and maintenance 920 839 1,288 Salaries and related expenses 1,454 1,376 1,505 Utilities 958 725 874 General and administrative 577 320 384 Management fees 573 532 670 Insurance 137 155 324 Bad debt expense 25 27 18 Amortization expense 31 24 19 Loss on write-off of deferred financing costs - 1,177 - ------- ------- ------- 13,204 13,886 14,308 ------- ------- -------
Operating loss (1,085) (2,270) (1,464)
Gain on sale of operating investment property - - 3,336 ------- -------- --------
Net income (loss) (1,085) (2,270) 1,872
Contributions from venturers - 916 50
Distributions to venturers (444) (695) (4,950)
Venturers' deficit, beginning of year (5,721) (3,672) (644) ------- -------- -------
Venturers' deficit, end of year $(7,250) $ (5,721) $(3,672) ======= ======== =======
See accompanying notes.
COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS For the years ended September 30, 1996, 1995 and 1994 Increase (Decrease) in Cash and Cash Equivalents (In thousands) 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (1,085) $ (2,270) $ 1,872 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,647 2,525 2,688 Amortization of deferred financing costs 70 99 70 Loss on write-off of deferred financing costs - 1,177 - Gain on sale of operating investment property - - (3,336) Changes in assets and liabilities: Escrow deposits (55) 183 (368) Accounts receivable 47 (63) 21 Prepaid expenses 91 (83) (48) Deferred expenses (86) (126) (144) Accounts payable 88 (134) (80) Accounts payable - affiliates 90 (14) (45) Accrued real estate taxes (37) (1) 27 Accrued interest 63 60 7 Tenant security deposits (14) (34) (97) Other current liabilities (19) (4) (37) Deferred interest (1,657) 11 (88) Other liabilities 17 1 2 ------ -------- ------- Total adjustments 1,245 3,597 (1,428) ------ -------- ------- Net cash provided by operating activities 160 1,327 444 ------ -------- -------
Cash flows from investment activities: Additions to operating investment properties (1,903) (1,323) (776) Decrease (increase) in reserve for capital expenditures 325 (467) 243 Proceeds from sale of assets - - 9,686 ------ -------- ------- Net cash (used in) provided by investing activities (1,578) (1,790) 9,153 ------ -------- -------
Cash flows from financing activities: Proceeds from long-term debt 17,000 31,184 - Payment of deferred financing costs (243) (945) - Contributions by venturers - 916 50 Distributions to venturers (312) (930) (5,115) Repayment of long-term debt (14,984) (30,002) (5,277) Proceeds from loans from venturers - 119 586 Repayment of notes to partners (119) - (85) ------ -------- ------- Net cash provided by (used in) financing activities 1,342 342 (9,841) ------ -------- -------
Net decrease in cash and cash equivalents (76) (121) (244) Cash and cash equivalents, beginning of year 545 666 910 ------- -------- ------- Cash and cash equivalents, end of year $ 469 $ 545 $ 666 ======= ======== ======= Cash paid during the year for interest $ 6,479 $ 4,909 $ 5,432 ====== ======= =======
See accompanying notes.
COMBINED JOINT VENTURES of PAINE WEBBER INCOME PROPERTIES FIVE LIMITED PARTNERSHIP Notes to Combined Financial Statements
1. Organization and Nature of Operations -------------------------------------
The accompanying financial statements of the Combined Joint Ventures of Paine Webber Income Properties Five Limited Partnership (Combined Joint Ventures) include the accounts of Randallstown Carriage Hill Associates, a Maryland general partnership; Signature Partners, L.L.C., a Maryland limited liability company; Amarillo Bell Associates, a Texas general partnership; Greenbrier Associates, an Indiana general partnership; Cambridge Associates, a Nebraska general partnership and Seven Trails West Associates a Missouri general partnership. As further described in Note 2, Cambridge Associates sold its operating investment property and commenced a liquidation of its operations during fiscal 1994. The financial statements of the Combined Joint Ventures are presented in combined form due to the nature of the relationship between the co-venturers and Paine Webber Income Properties Five Limited Partnership (PWIP5), which owns a majority financial interest but does not have voting control in each joint venture.
The dates of PWIP5's acquisition of interests in the joint ventures are as follows:
Date of Acquisition Joint Venture of Interest ------------- -----------
Randallstown Carriage Hill Associates 8/30/83 Signature Partners L.L.C. 6/1/95 Amarillo Bell Associates 9/30/83 Greenbrier Associates 6/29/84 Cambridge Associates 7/31/84 Seven Trails West Associates 9/13/84
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 require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of September 30, 1996 and 1995 and revenues and expenses for each of the three years in the period ended September 30, 1996. Actual results could differ from the estimates and assumptions used.
Basis of presentation ---------------------
Generally, the records of the combined joint ventures are maintained on the income tax basis of accounting and adjusted to generally accepted accounting principles for financial reporting purposes, principally for depreciation.
Reclassifications -----------------
Certain prior year amounts have been reclassified to conform to the current year presentation.
Operating investment properties -------------------------------
The operating investment properties are carried at the lower of cost, reduced by accumulated depreciation, or net realizable value. The net realizable value of a property held for long-term investment purposes is measured by the recoverability of the venture's investment through expected future cash flows on an undiscounted basis, which may exceed the property's market value. The net realizable value of a property held for sale approximates its current market value. All of the operating properties owned by the Combined Joint Ventures were held for long-term investment purposes as of September 30, 1996 and 1995.
The Combined Joint Ventures have 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 believe this new pronouncement will not have a material effect on the financial statements of the Combined Joint Ventures.
Depreciation expense is computed on a straight-line basis over the estimated useful lives of the buildings, improvements and equipment, generally, five to forty years. Professional fees and other costs incurred in connection with the acquisition of the properties have been capitalized and are included in the cost of the land and buildings.
Deferred expenses -----------------
Deferred expenses consist of leasing commissions and loan fees which are being amortized, using the straight-line method, over the terms of the related leases and loans, respectively. Amortization of deferred loan fees is included in interest expense on the accompanying statements of operations.
Revenue Recognition -------------------
The Combined Joint Ventures lease space at the operating investment properties under short-term and long-term operating leases. Rental revenues are recognized on a straight-line basis as earned pursuant to the terms of the leases.
Income tax matters ------------------
The Combined Joint Ventures are comprised of entities which are not taxable and accordingly, the results of their operations are included on the tax returns of the various partners. Accordingly no income tax provision is reflected in the accompanying combined financial statements.
Cash and cash equivalents -------------------------
For purposes of the statement of cash flows, the Partnerships consider all short-term investments with original maturity dates of 90 days or less to be cash equivalents.
Fair Value of Financial Instruments -----------------------------------
The carrying amounts of cash and cash equivalents, escrow deposits, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of September 30, 1996 due to the short-term maturities of these instruments. It is not practicable for management to estimate the fair value of the notes payable to venturers because the obligations were provided in non-arm's length transactions without regard to fixed maturities, collateral issues or other traditional conditions and covenants. Information regarding the fair value of long-term debt is provided in Note 5. The fair value of long-term debt is estimated using discounted cash flow analyses, based on the current market rates for similar types of borrowing arrangements.
Escrow deposits ---------------
Escrow deposits at September 30, 1996 and 1995 consist of tenant security deposits, amounts escrowed for the payment of insurance premiums, real estate taxes and repair and replacement funds.
Reserve for Capital Expenditures --------------------------------
In connection with the mortgage loan of the Carriage Hill joint venture, an escrow reserve account was established for replacements stipulating that a portion of each month's mortgage payment is to be deposited in the reserve for replacement account. When repairs are made, the joint venture pays the vendor and then the lender reimburses the joint venture and reduces the escrow account by the amount of the expenditure. These funds can only be used for making necessary repairs as stipulated in the mortgage agreement.
3. Joint Ventures - -- --------------
See Note 4 to the financial statements of PWIP5 in this Annual Report for a more detailed description of the joint venture partnerships. Descriptions of the ventures' properties are summarized below:
a. Randallstown Carriage Hill Associates -------------------------------------
The joint venture owns and operates Carriage Hill Village Apartments, an 806-unit apartment complex located in Randallstown, Maryland.
b. Signature Partners, L.L.C. --------------------------
This limited liability company owns a 23-acre parcel of land located in Randallstown, Maryland. See Note 5.
c. Amarillo Bell Associates --------------------------
The joint venture owns and operates Bell Plaza Shopping Center, a 144,000 gross leasable square foot shopping center located in Amarillo, Texas.
d. Greenbrier Associates ---------------------
The joint venture owns and operates Greenbrier Apartments, a 324-unit apartment complex located in Indianapolis, Indiana.
e. Seven Trails West Associates -----------------------------
The joint venture owns and operates Seven Trails West Apartments, a 532-unit apartment complex located in Ballwin, Missouri.
f. Cambridge Associates --------------------
The joint venture owned and operated Cambridge Apartments, a 378-unit apartment complex located in Omaha, Nebraska. On June 30, 1994, Cambridge Associates sold its operating investment property, the Cambridge Apartments, to an affiliate of PWIP5's co-venture partner. The property was sold for $9,700,000. After repayment of the outstanding $5 million first mortgage loan and closing costs, the sale generated approximately $4.7 million to be split between PWIP5 and the co-venturer in accordance with the venture agreement. PWIP5's share of such proceeds amounted to approximately $3.7 million in cash. The venture recognized a gain of $3,336,000 in fiscal 1994 in connection with the sale transaction.
The following description of the joint venture agreements provides certain general information.
Allocations of net income and loss ----------------------------------
The agreements generally provide that taxable income and losses (other than those resulting from sales or other dispositions of the projects) will be allocated between PWIP5 and the co-venturers in the same proportions as cash flow distributed from operations, except for certain items which are specifically allocated to the partners, as set forth in the joint venture agreements. Gains or losses resulting from sales or other dispositions of the projects shall be allocated as specified in the joint venture agreements. Allocations of income and loss for financial accounting purposes have been made in accordance with the actual joint venture agreement.
Distributions -------------
The joint venture agreements generally provide that distributions will be paid on an annual basis first to PWIP5, in specified amounts ranging from $283,500 to $875,000 as a preferred return. After payment of PWIP5's preference return, the agreements generally provide for certain preferred payments, up to specified amounts, to be paid to the co-venturers. Any remaining distributable cash will be paid in proportions ranging from 90% to 50% to PWIP5 and 10% to 50% to the co-venturers, as set forth in the joint venture agreements. Allocations of the distributable cash of the Carriage Hill joint venture differ significantly from these general terms. See Note 4 to the financial statements of PWIP5 included in this Annual Report for a further discussion.
Distributions of net proceeds upon the sale or refinancing of the projects shall be made in accordance with formulas provided in the joint venture agreements.
4. Related Party Transactions --------------------------
The Combined Joint Ventures entered into property management agreements with affiliates of the co-venturers, cancelable at the joint ventures' option upon the occurrence of certain events. The management fees are equal to between 4% and 5% of gross receipts, as defined in the agreements. Management fees totalling $573,000, $532,000 and $670,000 were earned by affiliates of the co-venturers for fiscal 1996, 1995 and 1994, respectively. During fiscal 1996, the management agreement of the Carriage Hill joint venture was amended to provide for the payment of 3% of the previous month's collected revenues and a deferral of 2% to be paid out of available sale or refinancing proceeds. Deferred management fees payable as of September 30, 1996 amounted to $86,000.
Accounts payable - affiliates at September 30, 1996 and 1995 are principally management fees and reimbursements payable to property managers. Notes payable to venturers at September 30, 1996 represents operating notes provided by PWIP5 and its co-venturer to Seven Trails West Associates. Notes payable to venturers at September 30, 1995 represents operating notes provided by PWIP5 and its co-venturer to Seven Trails West Associates and Randallstown Carriage Hill Associates in the amounts of $848,000 and $118,000, respectively. Such loans generally bear interest at the prime rate and are payable only out of the respective venture's available net cash flow or sale or refinancing proceeds.
5. Long-term Debt -------------
Long-term debt at September 30, 1996 and 1995 consists of the following (in thousands):
1996 1995 ---- ----
7.65% mortgage note to a financial institution, due in 2030. Payments are made in monthly installments of $191, including principal and interest. The mortgage note is secured by the property owned by Randallstown Carriage Hill Associates and is subject to certain escrow deposit requirements. The mortgage note is co-insured by the Secretary of Housing and Urban Development (HUD) in accordance with the provisions of the National Housing Act and the laws of the State of Maryland. The fair value of this note payable approximated its carrying value as of September 30, 1996. $ 27,675 $ 27,843
8.125% nonrecourse mortgage note secured by land and building owned by Amarillo Bell Associates, guaranteed by the co-venturer. Payable in monthly installments of $26, including interest, with a final payment of approximately $2,943 due July 1, 2002. The fair value of this note payable approximated its carrying value as of September 30, 1996. 3,250 3,293
Wrap-around mortgage note of $5,400 secured by the Greenbrier Associates property which bears interest at 10% payable monthly. The entire principal of $5,400 and any unpaid accrued interest is due June 29, 1998. See discussion below regarding extension. The fair value of this note payable approximated its carrying value as of September 30, 1996. 5,400 5,400
7.87% nonrecourse mortgage note secured by the Seven Trails West Associates operating investment property bearing interest at 7.87% per annum. The mortgage is payable in monthly installments, including principal and interest, of $130 through May 1, 2006, at which time the final principal installment of $13,724 plus any unpaid accrued interest is due. The fair value of this note payable approximated $16,099 as of September 30, 1996. 16,927 -
1996 1995 ---- ----
Wrap-around deed of trust of $14,700,000 secured by the Seven Trails West Associates operating investment property, bearing interest of 12% (11% payable monthly, 1% accrued and deferred). The entire principal balance and deferred interest is due February 1, 1996. See discussion below regarding 1994 modification agreement and 1996 refinancing. - 14,700 ------- -------- 53,252 51,236
Less current portion (461) (14,911) -------- -------- $ 52,791 $ 36,325 ======== ========
Maturities of long-term debt, which is all non-recourse to the joint ventures and PWIP5, for each of the next five years and thereafter are as follows (in thousands):
1997 $ 461 1998 5,897 1999 539 2000 582 2001 629 Thereafter 45,144 ------- $53,252 =======
During fiscal 1995, an existing first mortgage loan secured by Carriage Hill, with an outstanding principal balance of approximately $26.5 million, was refinanced. The new loan, in the initial principal amount of approximately $27.9 million, has a fixed interest rate of 7.65% and a term of 35 years. The venture recognized a loss of $1,177,000 in fiscal 1995 in connection with the refinancing transaction to write off the unamortized balance of the deferred financing costs related to the prior mortgage loan. As part of this refinancing transaction, the Carriage Hill joint venture was able to secure the release from collateral of a 23-acre parcel of excess land. Title to this land, which had a carrying value of $563,000, was transferred from the joint venture to a newly formed limited liability company, Signature Partners, L.L.C. ("Signature Partners"). Signature Partners is owned by the venture partners with the same ownership interest percentages as in the Carriage Hill joint venture agreement. This land could eventually be marketed to local developers once market conditions improve. Proceeds of any such sale, if completed, would be distributed to the owners in accordance with the same priorities called for under the terms of the Carriage Hill joint venture agreement.
In fiscal 1993, Greenbrier Associates exercised an option to extend the maturity date of its mortgage loan to June 29, 1998, at which time the entire principal and any unpaid accrued interest is due. In connection with the extension of the maturity date, deferred interest expense of $263,000 was to be paid partially with the extension, with two remaining installments of $88,000 to be paid on June 30, 1994 and 1995. As of September 30, 1995, all deferred interest had been paid.
On April 17, 1996, the Seven Trails joint venture successfully completed the refinancing of the existing first mortgage loan secured by the Seven Trails West Apartments, reducing the annual interest rate from 12% to 7.87%. The new loan, in the initial principal amount of $17,000,000, is for a term of ten years. The proceeds of the new loan, together with a contribution of $159,000 from the joint venture, were used to pay off all obligations of the prior first mortgage loan as well as to fund all reserves and escrows required by the new lender. Because the prior mortgage loan was not repaid by February 1, 1996, the joint venture forfeited a $147,000 fee which had been paid to the prior lender in connection with a fiscal 1994 extension agreement and was to be refundable under certain conditions. As part of the new loan agreement, reserves for agreed upon repairs and future replacements aggregating approximately $209,000 were established in escrow accounts with the mortgage lender.
6. Leases ------
Minimum annual future lease revenues under noncancellable operating leases at the Bell Plaza Shopping Center (owned by Amarillo Bell Associates) as of September 30, 1996 are as follows (in thousands):
1997 $ 790 1998 764 1999 649 2000 482 2001 437 Thereafter 3,824 --------- $ 6,946 =========
Revenues from two majors tenant of the Bell Plaza Shopping Center comprised approximately 38% and 13% of the total rental revenues of Amarillo Bell Associates for the year ended September 30, 1996. The duration of these leases extend between the years 1999 and 2014 and the tenants are subject to a base rent and a percentage rent which fluctuates with sales volume.