Item 1. Business
(a) General Development of Business
Capital Growth Mortgage Investors, L.P. (the "Partnership", formerly Shearson Lehman Pension and Retirement Investors Fund, L.P.), was formed on July 30, 1986 as a limited partnership under the Partnership Laws of the State of Delaware. The general partner of the Partnership is CG Realty Funding Inc. (the "General Partner", formerly Shearson Lehman Realty Funding Inc.), a Delaware Corporation and affiliate of Lehman Brothers Inc. ("Lehman", formerly Shearson Lehman Brothers Inc.). The Partnership was formed to invest in and originate zero coupon first and second mortgage loans on properties owned by limited partnerships sponsored by affiliates of the General Partner, properties owned by unaffiliated entities, or to refinance existing mortgage debt.
On October 15, 1986, the Partnership commenced an offering of a minimum of 3,900,000 and a maximum of 30,000,000 units of limited partnership interests (the "Units") pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933. The offering was terminated on June 30, 1987 with a total of 7,047,000 Units sold for proceeds of $70,470,000. The net proceeds of the offering, after deducting selling expenses and other offering and organizational costs, aggregated $66,246,500. During the period from June 30, 1987 (inception of operations) to July 30, 1987, the Partnership invested $61,999,973 of its offering proceeds in four zero coupon mortgage loans (the "Mortgage Loans"). On October 27, 1987, the Partnership invested $1,452,974 in zero coupon U.S. Treasury securities.
Under the terms of the Agreement of Limited Partnership (the "Partnership Agreement"), the General Partner has sole responsibility for the overall management of the investment portfolio and affairs of the Partnership.
The Partnership's investment objectives were to:
(1) preserve and protect the Partnership's invested capital;
(2) receive accrued interest and principal at maturity of the Mortgage Loans; and
(3) share, in certain instances, in the appreciation of properties securing the Mortgage Loans through a participation in those loans.
(b) Narrative Description of Business
The Partnership's sole business is the origination and ownership of the Mortgage Loans. The Partnership originally held two zero coupon first mortgage loans and two zero coupon second mortgage loans.
A description and history of the Partnership's four original loans follows:
(1) On July 28, 1987, the Partnership purchased a 50% interest in a zero coupon loan for $24,099,945 which included accrued interest to the date of purchase of $2,099,945 on a mortgage loan to EQK Green Acres, L.P. ("EQK"), a limited partnership which owns and operates the Green Acres Mall in southwestern Nassau County, Long Island, New York. This loan represented approximately 35% of the Partnership's original loan portfolio. The property consists of a mall anchored by four major department stores and 13 freestanding outparcel buildings, located on a site of approximately 93 acres. In August 1993, EQK secured financing for a prepayment of the Partnership's loan. On August 19, 1993 the Partnership received a total of $49,174,622, of which $44,624,814 represented the accreted value of the loan and $4,549,808 represented a prepayment premium in accordance with the terms of the loan agreement.
(2) On July 30, 1987, the Partnership originated a participating zero coupon second mortgage loan in the amount of $17,500,000 to 417 Fifth Avenue Realty Company (the "Borrower"), a New York general partnership which owned 417 Fifth Avenue, New York, New York. This loan represented approximately 30% of the Partnership's original loan portfolio. The property consists of an eleven-story office building containing a total of 371,648 gross square feet located in midtown Manhattan. The Borrower was in default on the loan since February 1992. In an effort to preserve a portion of the Partnership's loan investment, the Partnership exchanged the loan in early 1994 for an agreement to share in the proceeds from sale of the property.
On May 10, 1994, Equitable Life Assurance Society of the United States ("Equitable"), the holder of the first mortgage, sold the 417 Fifth Avenue property, which secured the Partnership's second mortgage loan. Pursuant to the Intercreditor Agreement between Equitable and the Partnership, the Partnership received $1,565,079 out of the sale proceeds. In addition to the sale proceeds, the Partnership obtained $453,637 from certain escrowed reserve accounts which were added to the Partnership's cash reserves to fund projected operating expenses and contingencies. The assignment of the loan also resulted in the write-off of $234,653 of deferred charges related to the original financing.
(3) On July 28, 1987, the Partnership purchased a 24% interest in a participating zero coupon mortgage (the "Laurel Centre Loan") for $5,555,431 which included accrued interest to the date of purchase of $155,431 on a first mortgage loan to Laurel Owner Partners Limited Partnership (the "Owner Partnership"), a Maryland limited partnership which owns Laurel Centre (the "Mall"), a regional shopping mall in Laurel, Prince George's County, Maryland. The remaining 76% interest in the loan was held by a real estate mortgage investment conduit (the "REMIC"). The Laurel Centre loan represented approximately 10% of the Partnership's original loan portfolio, and matured on October 15, 1996, with a total accreted value of $57,894,077, of which $13,894,578 was the Partnership's share.
On or about October 9, 1996, after Shopco Laurel was unable to refinance or sell the Mall on terms that would repay the Laurel Centre Loan, Shopco Laurel entered into an agreement (the "Agreement") with the Partnership and the REMIC (together, the "Lenders"), pursuant to which the Lenders, among other things, (a) indicated their intent to commence a foreclosure action on the Laurel Centre Loan and appoint a receiver, on or after October 16, 1996, and (b) agreed to release any claims that they may have to any cash held by Shopco Laurel or its partners prior to October 16, 1996. In addition, Shopco Laurel and the Lenders agreed that all cash flow from the Mall generated on or after October 16, 1996 would be paid to the Lenders. Foreclosure proceedings were commenced by the Lenders on October 16, 1996, and a receiver for the Mall was appointed. During the foreclosure period, an unaffiliated third-party offered to purchase the Partnership's interest in the Laurel Centre Loan at a price equal to the amount the Partnership would have realized if the Laurel Centre Loan were paid in full, including interest at the non-default rate of 10.2% to the date of closing of the purchase, less a $100,000 negotiated discount. The Partnership closed the sale of its interest in the Laurel Centre Loan on January 24, 1997, for total proceeds of $14,184,322.
(4) On July 28, 1987, the Partnership purchased a zero coupon second mortgage loan for $14,844,597, (the "Hotel Loan") which included accrued interest to date of purchase of $1,519,597 on a second mortgage loan to Union Square Hotel Partners, L.P. ("Union Square", formerly Shearson Union Square Associates L.P.) which owns the Grand Hyatt San Francisco Hotel (the "Hotel") in San Francisco, California. This loan represented approximately 25% of the Partnership's original loan portfolio and, matured on January 2, 1997, with a total accreted value of $42,207,709. During 1992, Union Square defaulted on its mortgages and subsequently completed a restructuring of its debt, including the Partnership's loan. See Note 4 "Loans Receivable" of the Notes to Financial Statements for a discussion of the restructuring and the modified terms of the Partnership's zero coupon second mortgage loan.
In September 1996, Union Square announced that it had entered into exclusive negotiations to sell the Hotel to one prospective purchaser. In early November 1996, Union Square agreed to sell the Hotel to an affiliate of California Hyatt Corporation, the current operator of the Hotel ("Hyatt"), for $126,900,000 in cash and the assumption of certain debt owed to an affiliate of Hyatt. Based upon the negotiated selling price, Union Square would have sufficient proceeds to pay the first mortgage ("First Mortgage Loan") balance of approximately $89.7 million as of December 31, 1996. The remaining proceeds however, would be insufficient to pay the entire balance of the Hotel Loan. The general partner of Union Square is an affiliate of the General Partner of the Partnership. Accordingly, the General Partner retained a nationally-recognized investment bank (the "Partnership's Independent Advisor") to negotiate with Union Square regarding the proposed sale of the Hotel, and to render an opinion (as required by the Partnership Agreement) to the effect that such transaction is fair, from a financial point of view, and at least as favorable to the Partnership as such transaction would be if entered into with an unaffiliated entity in similar circumstances. The Partnership's Independent Advisor negotiated an allocation agreement (the "Allocation Agreement") on behalf of the Partnership, with a similar representative engaged by Union Square. Pursuant to the terms of the Allocation Agreement, the Partnership agreed to accept $30,250,000 in full satisfaction of all of Union Square's obligations to the Partnership. On February 21, 1997, Union Square sold the Hotel and the Partnership received $30,250,000, in accordance with the Allocation Agreement.
See Note 4 "Loans Receivable" of the Notes to the Financial Statements for a discussion of the terms of the Partnership's zero coupon mortgage loans.
In 1987 the Partnership purchased $1,452,974 in zero coupon Treasury securities with net proceeds from the offering not invested in the zero coupon mortgage loans. These zero coupon Treasury securities yielded 9.1% with interest compounded semi-annually and matured on August 15, 1996. At maturity, the treasury securities were converted to cash and added to the Partnership's reserves.
(c) Employees
The Partnership has no employees.
Item 2.
Item 2. Properties
The Partnership owns no property other than its interests in the mortgage loans.
Item 3.
Item 3. Legal Proceedings
On January 24, 1997, certain holders of Units of the Partnership commenced an action in Delaware Chancery Court against the General Partner of the Partnership, Union Square Hotel Partners, L.P., its general partner, and others. The Partnership was named as a nominal defendant. The litigation seeks to invalidate the Partnership's acceptance of a discounted pay-off of the Union Square loan pursuant to the Allocation Agreement entered into between Union Square Hotel Partners, L.P. and the Partnership. The litigation does not challenge the closing of the sale of the Hotel, but merely the allocation of the proceeds from the sale in accordance with the Allocation Agreement. The litigation was filed as a purported class action on behalf of all Unit holders and as a purported derivative action in the name of the Partnership. The plaintiffs also seek unspecified damages. The Partnership has retained counsel and is seeking an expedited resolution of this litigation.
To minimize the risk that the litigation might impede the closing of the sale of the Hotel, the Partnership and Union Square Hotel Partners, L.P.(the "Hotel Borrower") entered into a Non- Distribution and Security Agreement, dated February 21, 1997, and related documents, pursuant to which certain net sales proceeds from the sale of the Hotel otherwise distributable to the Hotel Borrower, in the amount of approximately $6,911,149, were deposited in a restricted bank account (the "Blocked Account") with a nationally recognized commercial bank. The terms of the Blocked Account generally prohibit the release of any funds therefrom on or prior to April 21, 1997. In addition, Union Square granted the Partnership a security interest in the Blocked Account until April 21, 1997, to secure certain of Union Square's obligations to the Partnership, as they may be determined by the litigation. If the litigation is not resolved on or prior to April 21, 1997, or the Blocked Account is not extended by mutual agreement of Union Square and the Partnership or by order of the court, Union Square will receive the funds held therein, free from the Partnership's security interest in such funds. There can be no assurance that the litigation will be resolved, the Blocked Account extended or a court order obtained on or prior to April 21, 1997. The Partnership and its General Partner are continuing their efforts to resolve the litigation.
Item 4.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted to the Unitholders for a vote during the fourth quarter of the year for which this report is filed.
PART II
Item 5.
Item 5. Market for Registrant's Limited Partnership Units and Related Security Holder Matters
(a) Market Information
There is no established trading market for the Units nor is there anticipated to be any in the future.
(b) Holders
At December 31, 1996, there were 8,162 Unitholders.
(c) Distributions
On September 23, 1993, the Partnership made a cash distribution to the partners totaling $48,674,622, or $6.84 per Unit, relating to the prepayment of the EQK Loan.
On July 15, 1994, the Partnership paid a cash distribution totaling $1,508,250, or $.21 per Unit, resulting from the Partnership's share of sale proceeds from 417 Fifth Avenue property in May 1994. In addition to the sale proceeds, the Partnership obtained $453,637 from certain reserve accounts which were added to the Partnership's cash reserves to fund projected operating expenses and contingencies.
The Partnership paid a cash distribution to the partners on February 18, 1997, totaling $14,236,364, or $2.00 per Unit, as a result of the Partnership's sale of its interest in the Laurel Centre Loan.
In April 1997 the Partnership will pay a cash distribution to the partners in the amount of $28,472,727, or $4.00 per Unit, as a result of having received $30,250,000 as full satisfaction of the Union Square loan in accordance with the Allocation Agreement dated November 1, 1996. Upon liquidation of the Partnership, which is expected to occur during 1997, any remaining unused working capital will also be distributed.
Item 6.
Item 6. Selected Financial Data
(dollars in thousands except per Unit data)
For the years ended December 31, 1996 1995 1994 1993 1992 Net Investment Income (1) $ 30,673 $ 1,356 $ 1,221 $ 4,002 $ 5,057 Loan Prepayment Premium -- -- -- 4,550 -- Total Income 30,681 1,363 3,250 8,625 5,150 Net Income (Loss) 30,248 1,088 2,677 7,707 (48,628)(2) Net Income (Loss) per Limited Partnership Unit (7,047,000 outstanding) 4.29 .15 .38 1.09 (6.83)(2) Cash Distributions per Limited Partnership Unit -- -- .21(3) 6.84(4) -- Total Assets 45,176 14,934 13,838 12,688 53,662
(1) Includes recovery of $25,029,061 in 1996, and allowances of $3,770,483 in 1995, $5,016,635 in 1994, $7,184,222 in 1993 and $6,425,950 in 1992. See Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
The Partnership's primary assets are its zero coupon mortgage loans. The Partnership originally held two zero coupon first mortgage loans and two zero coupon second mortgage loans. During 1993, the loan secured by EQK Green Acres Mall was repaid together with a prepayment premium. In early 1994, the loan secured by 417 Fifth Avenue was retired by means of a transaction which resulted in the receipt of proceeds upon sale of the property. Below is a summary of the status of the Partnership's two other loans secured by Laurel Centre Mall and the Grand Hyatt San Francisco.
Laurel Centre Loan The Partnership held a 24% interest in a zero coupon first mortgage loan in the original amount of $5,555,431. The mortgage note matured on October 15, 1996, with a fully accreted value of $57,894,075, of which $13,894,578 was the Partnership's share. On or about October 9, 1996, after Shopco Laurel was unable to refinance or sell the Mall on terms that would repay the Laurel Centre Loan, Shopco Laurel entered into an agreement (the "Agreement") with the Partnership and the REMIC (together, the "Lenders"), pursuant to which the Lenders, among other things, (a) indicated their intent to commence a foreclosure action on the Laurel Centre Loan and appoint a receiver, on or after October 16, 1996, and (b) agreed to release any claims that they may have to any cash held by Shopco Laurel or its partners prior to October 16, 1996. In addition, Shopco Laurel and the Lenders agreed that all cash flow from the Mall generated on or after October 16, 1996 would be paid to the Lenders. Foreclosure proceedings were commenced by the Lenders on October 16, 1996, and a receiver for the Mall was appointed. During the foreclosure period, an unaffiliated third-party offered to purchase the Partnership's interest in the Laurel Centre Loan at a price equal to the amount the Partnership would have realized if the Laurel Centre Loan were paid in full, including interest at the non-default rate of 10.2% to the date of closing of the purchase, less a $100,000 negotiated discount. The Partnership closed the transaction on January 24, 1997, for total proceeds of $14,184,322. As a result, the Partnership paid a cash distribution to the partners on February 18, 1997, totaling $14,236,364, or $2.00 per Unit.
Union Square Loan The Partnership held a zero coupon second mortgage (the "Hotel Loan") in the original amount of $13,325,000 funded to Union Square Hotel Partners L.P. ("Union Square," formerly Shearson Union Square Associates L.P.), which owned the Grand Hyatt San Francisco Hotel (the "Hotel") located in San Francisco, California. The Partnership's loan was subordinate to a first mortgage held by the Bank of Nova Scotia (the "Bank") in the original principal amount of $70,000,000. On June 30, 1992, Union Square consummated a restructuring of its financing and property management arrangements with the Bank, the Partnership and certain other creditors. A detailed description of the terms of the restructuring is incorporated herein by reference to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 1992.
During the third quarter of 1992, the Partnership received an appraisal that indicated that the Hotel's value was insufficient to collateralize its loan. Accordingly, the General Partner fully reserved the carrying value of the loan during the third quarter of 1992. The valuation allowance for this loan at December 31, 1995 totaled $37,999,250, representing the accreted value of the loan at such date.
In early November 1996, Union Square agreed to sell the Hotel to an affiliate of California Hyatt Corporation, the current operator of the Hotel ("Hyatt"), for $126,900,000 in cash and the assumption of certain debt owed to an affiliate of Hyatt. Based upon the negotiated selling price, Union Square would have sufficient proceeds to pay the first mortgage ("First Mortgage Loan") balance of approximately $89.7 million as of December 31, 1996. The remaining proceeds however, would be insufficient to pay the entire balance of the Hotel Loan. The general partner of Union Square is an affiliate of the General Partner of the Partnership. As required by the Partnership Agreement, the General Partner retained a nationally-recognized investment bank (the "Partnership's Independent Advisor") to negotiate with Union Square regarding the proposed sale of the Hotel, and to render an opinion to the effect that such transaction is fair, from a financial point of view, and at least as favorable to the Partnership as such transaction would be if entered into with an unaffiliated entity in similar circumstances. The Partnership's Independent Advisor negotiated an allocation agreement (the "Agreement") on behalf of the Partnership, with a similar representative engaged by Union Square. Pursuant to the terms of the Agreement, the Partnership agreed to accept $30,250,000 in full satisfaction of all of Union Square's obligations to the Partnership, which totaled approximately $42,184,471 at December 31, 1996.
Based upon the circumstances as discussed above and in particular the negotiated sales price of the Hotel, the Partnership has elected to reduce the valuation allowance reflected on the Partnership's financial statements as of September 30, 1996. As a result, the second mortgage loan has an indicated value at December 31, 1996 of $29,500,000.
On February 21, 1997, Union Square sold the Hotel and the Partnership received $30,250,000, in accordance with the Allocation Agreement. As a result, the Partnership will pay a cash distribution to the partners in April 1997, totaling $28,472,727, or $4.00 per Unit. As of February 21, 1997, the Partnership had sold or received payment on all of its original zero coupon mortgage loan investments. Subject to the pending litigation discussed in Item 3, the General Partner will seek to liquidate the Partnership and make a final cash distribution to the limited partners prior to year-end 1997.
On August 27, 1996, an unaffiliated third party: Moraga Fund 1, L.P., a California limited partnership; Cal-Kan, Inc., a Kansas corporation; Moraga Gold LLC, a California limited liability company; Previously Owned Mortgage Partnerships Income Fund 3, L.P., a California limited partnership; Accelerated High Yield Institutional Fund I, L.P., a Florida limited partnership; Accelerated High Yield Institutional Investors, L.P., a Florida limited partnership; Accelerated High Yield Income Fund I, L.P., a Florida limited partnership; Accelerated High Yield Income Fund II, L.P., a Florida limited partnership; Beagle Fund 7, a Colorado limited partnership; and Summit Venture, an Arizona general partnership, (collectively know as the "Bidders"), commenced an unsolicited tender offer to purchase up to 2,818,000 Units (40% of the total outstanding Units) at a price of $2.10, net of any distributions paid to limited partners after the date of the offer and until its expiration. On October 4, 1996, the tender offer expired with the Bidders accepting for purchase 37,200 Units, or approximately 0.53% of the outstanding Units.
At December 31, 1996, the Partnership had cash and cash equivalents of $1,486,065, and compared to $910,771, at December 31, 1995. The increase in cash and cash equivalents is mainly due to the maturity of the U.S. Treasury securities on August 15, 1996, which were transferred to cash, partially offset by the Partnership meeting its normal operating expenses.
Results of Operations
1996 versus 1995 Net income for the year ended December 31, 1996, totaled $30,248,408 compared with $1,087,928 for 1995. The increase is mainly due to higher net investment income as a result of the recovery of the valuation allowance on the Union Square mortgage loan, partially offset by higher expenses.
Net investment income for the year ended December 31, 1996, totaled $30,672,991 compared to $1,355,969 for 1995. The increase is primarily attributable to the write-up of the Union Square loan to $29,500,000 as of September 30, 1996, and the compounding of interest on both the Union Square and Laurel Centre loans.
Total expenses were $433,023 and $274,941, respectively, for the years ended December 31, 1996 and 1995. The increase in 1996 is attributable to higher general and administrative expenses. For the year ended December 31, 1996, general and administrative expenses were $254,174 compared to $96,089 for 1995. The increase is the result of higher legal fees related to the foreclosure of the Laurel Centre Loan and higher printing costs related to the tender offer.
1995 versus 1994 Net income for the year ended December 31, 1995, totaled $1,087,928 compared with $2,677,094 for 1994. The decrease in net income from 1994 reflects the inclusion in 1994 of a gain on mortgage retirement of the 417 Fifth Avenue loan totaling $2,018,716, partially offset by a decrease in amortization of deferred charges.
Net investment income for the year ended December 31, 1995, totaled $1,355,969 compared to $1,221,305 for 1994. The increase is primarily attributable to the compounding of interest on the Laurel Centre loan and higher interest rates earned on the Partnership's cash balances in 1995, partially offset by the retirement of the 417 Fifth Avenue loan.
Total expenses were $274,941 and $572,875, for the years ended December 31, 1995 and 1994, respectively. The decrease in 1995 is primarily attributable to a decrease in amortization of deferred charges due to the write-off of deferred charges relating to the 417 Fifth Avenue loan in 1994. The decrease in total expenses is also attributable to lower general and administrative expenses resulting from lower legal and other professional fees in 1995.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Item 14 "Exhibits, Financial Statement Schedules, and Reports on Form 8-K" for a listing of the financial statements filed with this 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 Registrant
The Partnership has no officers or directors. The General Partner of the Partnership is CG Realty Funding Inc. (formerly Shearson Lehman Realty Funding Inc.), a Delaware Corporation and affiliate of Lehman Brothers Inc. The General Partner manages and controls substantially all of the Partnership's affairs and has general responsibility and ultimate authority in all matters affecting the Partnership's business.
Certain officers and directors of CG Realty Funding Inc. are now serving (or in the past have served) as officers and directors of entities which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which that real estate is located and, consequently, the partnerships sought the protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure.
The directors and executive officers of the General Partner are as follows:
Name Office Kenneth L. Zakin Director and President Moshe Braver Director Daniel M. Palmier Vice President and Chief Financial Officer
Kenneth L. Zakin, 49, is a Senior Vice President of Lehman Brothers and has held such title since November 1988. He is currently a senior manager in Lehman Brothers' Diversified Asset Group and was formerly group head of the Commercial Property Division of Shearson Lehman Brothers' Direct Investment Management Group responsible for the management and restructuring of limited partnerships owning commercial properties throughout the United States. From January 1985 through November 1988, Mr. Zakin was a Vice President of Shearson Lehman Brothers Inc. Mr. Zakin was a director of Lexington Corporate Properties, Inc. from 1993 to 1996. He is a member of the Bar of the State of New York and previously practiced as an attorney in New York City from 1973 to 1984 specializing in the financing, acquisition, disposition, and restructuring of real estate transactions. Mr. Zakin is a member of the Real Estate Lender's Association and is currently an associate member of the Urban Land Institute and a member of the New York District Council Advisory Services Committee. He received a Juris Doctor degree from St. John's University School of Law in 1973 and a B.A. degree from Syracuse University in 1969.
Moshe Braver, 43, is currently a Managing Director of Lehman Brothers and has held such position since October 1985. During this time, he has held positions with the Business Analysis Group, International and Capital Markets Administration and currently, with the Diversified Asset Group. Mr. Braver joined Shearson Lehman Brothers in August 1983 as Senior Vice President. Prior to joining Shearson, Mr. Braver was employed by the accounting firm of Coopers & Lybrand from January 1975 through August 1983 as an Audit Manager. He received a Bachelor of Business Administration degree from Bernard Baruch College in January 1975 and is a Certified Public Accountant.
Daniel M. Palmier, 35, is a Vice President of Lehman Brothers Inc. in its Diversified Asset Group, and has been employed by Lehman Brothers since June 1990. He is responsible for the asset management and restructuring of a diverse portfolio of assets including commercial real estate and mortgages. From March of 1988, Mr. Palmier worked for LJ Hooker Corporation, Inc. and held positions of Senior Associate of Mergers and Acquisitions/Corporate Finance and Vice President in the Real Estate division. From September 1986, Mr. Palmier was a Real Estate Acquisitions Officer at John Anthony Associates, Inc. in New York. From June 1983, Mr. Palmier worked in the public accounting field, most notably for the firm Price Waterhouse. Mr. Palmier, a New York Certified Public Accountant, earned a Masters of Science in Real Estate Degree from New York University in 1995 and graduated from the University of Notre Dame in 1983 with a B.B.A. in Accounting.
Item 11.
Item 11. Executive Compensation
All of the Directors and Executive Officers of the General Partner are employees of Lehman Brothers Inc. They do not receive any salaries or other compensation from the Partnership. See Item 13 "Certain Relationships and Related Transactions" with respect to a description of certain transactions of the General Partner or its affiliates with the Partnership.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners
As of December 31, 1996, no person was known by the Partnership to be the beneficial owner of more than five percent (5%) of the outstanding Units of the Partnership.
(b) Security ownership of management
As of December 31, 1996 none of the officers and directors of the General Partner owned any Units.
(c) Changes in control
None.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Partnership has and will continue to have certain relationships with the General Partner and its affiliates, as discussed below. However, there have been no direct financial transactions between the Partnership and the directors or executive officers of the General Partner.
The General Partner is entitled to an Annual Investment Management Fee of $75,000 for managing the Partnership's portfolio of mortgages and Treasury securities.
First Data Investor Services Group (formerly The Shareholder Services Group), an unaffiliated company, provides partnership accounting and investor relations services for the Partnership. The Partnership's transfer agent and certain tax reporting services are provided by Service Data Corporation, an unaffiliated company. A summary of amounts paid to the General Partner or its affiliates during the past three fiscal years is included in Note 5 "Transactions with Related Parties" of the Notes to Financial Statements.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) (2) Financial statements and financial statement schedules:
CAPITAL GROWTH MORTGAGE INVESTORS, L.P.
Page Independent Auditors' Report Balance Sheets - At December 31, 1996 and 1995 Statements of Partners Capital (Deficit) - For the years ended December 31, 1996, 1995 and 1994 Statements of Operations - For the years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows - For the years ended December 31, 1996, 1995 and 1994 Notes to the Financial Statements Schedule II - Valuation and Qualifying Accounts Schedule IV - Mortgage Loans on Real Estate
(3) Exhibits:
3.1 Amended and Restated Agreement of Limited Partnership (filed as Exhibit A to Prospectus dated October 15, 1986) is hereby incorporated by reference.
10.1 Amended and Restated Shearson Union Square Associates Limited Partnership Zero Coupon Mortgage Note due January 2, 1997 (filed as Exhibit 10(A) to the Partnership's Current Report on Form 8-K filed July 14, 1992) is hereby incorporated by reference.
10.2 Settlement of Loan Defaults and Bankruptcy (Filed as exhibit 10.2 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994) is hereby incorporated by reference.
(A) Intercreditor Agreement dated August 5, 1993 between Capital Growth Mortgage Investors, L.P. and the Equitable Life Assurance Society of The United States. (B) Letter Agreement dated September 1, 1993 between The Equitable Life Assurance Society of The United States and 417 Fifth Avenue Realty Company. (C) Letter Agreement dated September 22, 1993 between Capital Growth Mortgage Investors, L.P. and the Equitable Life Assurance Society of The United States.
27 Financial Data Schedule
(b) Reports on Form 8-K:
A current report on Form 8-K was filed on November 8, 1996, disclosing information about both the Union Square and Laurel Centre loans.
A current report on Form 8-K was filed on February 5, 1997, disclosing information about the Partnership's sale of its interest in the Laurel Centre loan.
A current report on Form 8-K was filed on February 26, 1997, disclosing information about the sale of the Union Square Hotel.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997 CAPITAL GROWTH MORTGAGE INVESTORS L.P.
BY: CG Realty Funding Inc. General Partner
BY: /s/ Kenneth L. Zakin Name: Kenneth L. Zakin Title: Director and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
CG REALTY FUNDING INC. A General Partner
Date: March 28, 1997 BY: /s/ Kenneth L. Zakin Kenneth L. Zakin Director and President
Date: March 28, 1997 BY: /s/ Moshe Braver Moshe Braver Director
Date: March 28, 1997 BY: /s/ Daniel M. Palmier Daniel M. Palmier Vice President and Chief Financial Officer
Independent Auditors' Report
The Partners Capital Growth Mortgage Investors Fund, L.P.:
We have audited the financial statements of Capital Growth Mortgage Investors Fund, L.P. (a Delaware limited partnership) as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Growth Mortgage Investors Fund, L.P. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, subsequent to December 31, 1996, the General Partner liquidated the Partnership's remaining mortgage loan assets. The General Partner will seek to liquidate the Partnership in 1997.
KPMG Peat Marwick LLP
Boston, Massachusetts March 26, 1997
Balance Sheets At December 31, At December 31, 1996 1995 Assets Zero coupon second mortgage loan receivable, net of unamortized discount of $459 in 1996 and $4,779 in 1995 (Note 4) $ 42,184,012 $ 37,999,250 Less valuation allowance (12,684,012) (37,999,250) 29,500,000 -- Zero coupon first mortgage loan receivable (Note 4) 14,189,837 12,846,120 Cash and cash equivalents 1,486,065 910,771 Investments in U.S. Treasury securities -- 1,073,105 Notes receivable, net of allowance for doubtful accounts of $2,611,952 in 1996 and 1995 (Note 4) -- -- Deferred charges, net of accumulated amortization of $882,731 in 1995 -- 103,849 Total Assets $ 45,175,902 $14,933,845 Liabilities and Partners' Capital (Deficit) Liabilities: Accounts payable and accrued expenses $ 34,777 $ 33,096 Due to affiliates (Note 5) 7,029 12,794 Total Liabilities 41,806 45,890
Partners' Capital (Deficit): General Partner (983,819) (983,819) Limited Partners (7,047,000 units outstanding) 46,117,915 15,871,774 Total Partners' Capital 45,134,096 14,887,955 Total Liabilities and Partners' Capital $ 45,175,902 $ 14,933,845
Statements of Partners' Capital (Deficit) For the years ended December 31, 1996, 1995 and 1994 Limited General Partners Partner Total Balance at December 31, 1993 $13,600,002 $(968,819) $12,631,183 Cash distributions to foreign limited partners (16,068) -- (16,068) Cash distributions to partners (1,477,182) (15,000) (1,492,182) Net Income 2,677,094 -- 2,677,094 Balance at December 31, 1994 14,783,846 (983,819) 13,800,027 Net Income 1,087,928 -- 1,087,928 Balance at December 31, 1995 15,871,774 (983,819) 14,887,955 Cash distributions to foreign limited partners (2,267) -- (2,267) Net Income 30,248,408 -- 30,248,408 Balance at December 31, 1996 $46,117,915 $(983,819) $45,134,096
Statements of Operations For the years ended December 31, 1996 1995 1994 Income Interest income $ 5,643,930 $ 5,126,452 $ 6,237,940 Recovery of (allowance for) doubtful accounts (Note 4) 25,029,061 (3,770,483) (5,016,635) Net investment income 30,672,991 1,355,969 1,221,305
Miscellaneous income (Note 5) 8,440 6,900 9,948 Gain on mortgage retirement (Note 4) -- -- 2,018,716 Total Income 30,681,431 1,362,869 3,249,969 Expenses Amortization of deferred charges 103,849 103,852 370,799 General and administrative (Note 5) 254,174 96,089 127,076 Investment management fee (Note 5) 75,000 75,000 75,000 Total Expenses 433,023 274,941 572,875 Net Income $30,248,408 $ 1,087,928 $ 2,677,094 Net Income Allocated: To the General Partner $ -- $ -- $ -- To the Limited Partners 30,248,408 1,087,928 2,677,094 $30,248,408 $ 1,087,928 $ 2,677,094 Per limited partnership unit (7,047,000 outstanding) $4.29 $.15 $.38
Statements of Cash Flows For the years ended December 31, 1996 1995 1994 Cash Flows From Operating Activities Net income $30,248,408 $1,087,928 $2,677,094 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Gain on mortgage retirement -- -- (2,018,716) Allowance for (recovery of) doubtful accounts (25,315,238) 3,770,483 5,016,635 Amortization of deferred charges 103,849 103,852 370,799 Amortization of discount on loan (4,320) (4,317) (4,318) Increase (decrease) in cash arising from changes in operating assets and liabilities: Zero coupon mortgage loan interest receivable (5,524,159) (4,982,638) (6,113,595) Accounts receivable -- -- 50,000 Investment in U.S. Treasury securities 1,073,105 (91,371) (83,590) Accounts payable and accrued expenses 1,681 1,531 (19,270) Due to affiliates (5,765) 6,544 351 Net cash provided by (used for) operating activities 577,561 (107,988) (124,610) Cash Flows From Investing Activities Proceeds from retirement of mortgage loan -- -- 2,018,716 Net cash provided by investing activities -- -- 2,018,716 Cash Flows From Financing Activities Cash distributions to partners -- -- (1,492,182) Distributions - income tax withholdings to foreign partners (2,267) -- (16,068) Net cash used for financing activities (2,267) -- (1,508,250) Net increase (decrease) in cash and cash equivalents 575,294 (107,988) 385,856 Cash and cash equivalents, beginning of period 910,771 1,018,759 632,903 Cash and cash equivalents, end of period $1,486,065 $ 910,771 $ 1,018,759 Supplemental Disclosure of Cash Flow Information: Included in the recovery of doubtful accounts are $286,177 of collection costs paid to recover the Second Mortgage reducing the recovery from $25,315,238 to $25,029,061 on the Statements of Operations.
Notes to the Financial Statements December 31, 1996, 1995 and 1994
1. Organization Capital Growth Mortgage Investors, L.P. (formerly Shearson Lehman Pension & Retirement Investors Fund, L.P.), (the "Partnership"), a Delaware limited partnership, was formed on July 30, 1986 for the purpose of investing in and originating zero coupon first and second mortgage loans made for purposes of financing the acquisition of properties by limited partnerships sponsored by affiliates of CG Realty Funding Inc. (formerly Shearson Lehman Realty Funding Inc.), (the "General Partner"), an affiliate of Lehman Brothers Inc. and by unaffiliated entities or to refinance existing mortgage debt. The initial capital was $200, representing capital contributions of $100 by the General Partner and $100 by Shearson Zero Coupon Depositary Corp.
On July 31, 1993, certain of Shearson Lehman Brothers Inc.'s domestic retail brokerage and management businesses were sold to Smith Barney, Harris Upham & Co. Inc. Included in the purchase was the name "Shearson." Consequently, the General Partner's name was changed to CG Realty Funding Inc. to delete any reference to "Shearson."
The agreement of limited partnership authorizes the issuance of 30,000,000 Depositary Units (the "Units"), which represent assignments of the economic and certain other rights attributable to the Partnership interests. The offering period ended on June 30, 1987 at which time 7,047,000 Depositary Units had been issued and aggregate capital contributed by investors, (the "Limited Partners") was $70,470,000.
Subsequent to December 31, 1996, the General Partner liquidated the Partnership's remaining mortgage loan assets and will seek to liquidate the Partnership and pay a final cash distribution prior to year end 1997.
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Interest income on the zero coupon loans is recognized based upon the contractual amounts due. Other income is recognized as earned and expenses are recorded as obligations are incurred.
Accounting for Loans Receivable - The Partnership accounts for its loans using the guidance of Statement of Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") as amended by FAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." As of December 31, 1996, the Partnership's zero coupon mortgage loan receivables are valued based upon the individual loan sale transaction reduced for estimates of costs to sell (See Note 4). As of December 31, 1995, the loans were valued at the lower of carrying value or fair market value.
Cash Equivalents - Cash equivalents consist of short-term, highly liquid investments with maturities of three months or less from the date of issuance. The carrying value approximates fair value because of the short maturity of these instruments.
Concentration of Credit Risk - Financial instruments which potentially subject the Partnership to a concentration of credit risk principally consist of cash in excess of the financial institutions' insurance limits. The Partnership invests available cash with high credit quality financial institutions.
Marketable securities - Marketable securities, which consisted of United States Treasury securities, were carried at amortized cost, which approximated market value. These securities were held through maturity.
Deferred Charges - Deferred charges consisted of mortgage placement and mortgage evaluation fees. These fees were amortized using the straight-line method over the original terms of the respective loans.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes - No provision is made for income taxes since such liability is that of the individual partners.
3. Partnership Agreement
Allocation of income and losses - Net income is allocated 100% to the Limited Partners until such time as each investor has received an amount equal to their Preferred Return (a 14% annual cumulative non-compounded return on their adjusted capital contribution). Additional net income is allocated 100% to the General Partner until such allocation equals 2% of the Gross Proceeds received from the sale of limited partnership units ($70,470,000). Thereafter, net income is allocated 98% to the Limited Partners and 2% to the General Partner. Net loss shall be allocated 99% to the Limited Partners and 1% to the General Partner. As of December 31, 1996, the Limited Partners have not yet received their cumulative annual return.
Cash Distributions - Adjusted cash from operations and repayment proceeds shall be distributed 99% to the Limited Partners and 1% to the General Partner.
Dissolution of Partnership - If, upon dissolution of the Partnership, the General Partner has a negative capital account, it shall contribute capital equal to the amount of the deficit. In no event, however, shall the required capital contribution exceed 1.01% of the total capital contributed by the Limited Partners less all prior contributions by the General Partner.
4. Loans Receivable
Descriptions of remaining and former loans in the Partnership's portfolio follow:
Remaining Loan Investments
The Union Square Loan - The Partnership owns a zero coupon second mortgage loan (the "Second Mortgage") to Union Square Hotel Partners, L.P. ("Union Square" or the "Borrower"), formerly Shearson Union Square Associates limited partnership, which is collateralized by the Grand Hyatt San Francisco Hotel in San Francisco, California. The principal amount of the first mortgage is $70,000,000 (the "First Mortgage").
On January 9, 1992, the Bank of Nova Scotia (the "First Mortgagee") delivered a notice of default under the First Mortgage note as a result of Union Square's failure to pay a scheduled interest payment due on January 2, 1992. On March 9, 1992, the First Mortgagee recorded with the San Francisco County Recorder a Notice of Default and Election to Sell under Deed of Trust (the "Default Notice"). An event of default under the First Mortgage constitutes an event of default under the Partnership's Second Mortgage.
On March 17, 1992, the Partnership delivered to Union Square a notice of acceleration of the Second Mortgage. Pursuant to the terms of the mortgage agreement, Union Square also owed an additional premium (the "Default Premium") as a result of the Default Notice in the amount of $4,476,875. Upon acceleration, the terms of the Second Mortgage also call for interest to accrue at a default rate of 15.5% on the accreted value of the loan, including the Default Premium.
On June 30, 1992, Union Square consummated a restructuring of its financing and property management arrangements with the First Mortgagee, the Partnership, certain other creditors and the hotel management company. As part of the restructuring, the Partnership agreed to reduce the interest rate on its Second Mortgage Loan from 12.5% to 11%. The reduction of the interest rate was effective from and after January 2, 1992. The Partnership also agreed to waive the mandatory prepayments of interest of $261,199, $1,014,379 and $1,996,457, otherwise required to be paid on January 2, 1995, January 2, 1996 and January 2, 1997, respectively. As a result of these changes, the total revised amount due upon maturity was $42,207,709 or approximately $3 million less than the amount that would have otherwise been due if the interest rate remained at 12.5% and the scheduled interest prepayments been made as scheduled. The Partnership also agreed to waive any prepayment (or yield maintenance) charges in connection with the prepayment of all or any portion of the principal or accrued interest under the Second Mortgage.
Also, as part of the restructuring, Lehman Brothers Holdings Inc. (formerly Shearson Lehman Brothers Holdings Inc., hereafter referred to as "Lehman"), assigned to the Partnership two unsecured interest bearing notes previously executed by Union Square and held by Lehman (the "Unsecured Notes"). The total indebtedness evidenced by the Unsecured Notes (and certain related obligations of Union Square) was $2,611,952 in original principal plus accrued interest. The Unsecured Notes accrued interest at the following interest rates: (a) 9.699% per annum on $1,000,000 of the indebtedness represented by the Unsecured Notes; and (b) the prime rate plus 1% per annum on the remaining portion of the indebtedness represented by the Unsecured Notes. The Unsecured Notes matured simultaneously with the maturity of the Second Mortgage. At that time Union Square will also be required to pay all accrued but unpaid interest on the Unsecured Notes.
During the third quarter of 1992, the Partnership received an appraisal that indicated that the Hotel's value was insufficient to collateralize its loan. Accordingly, the General Partner fully reserved the carrying value of the second mortgage and the unsecured notes during the third quarter of 1992.
In September 1996, the Borrower announced that it had entered into exclusive negotiations to sell the Hotel to one prospective purchaser. In November 1996, the Borrower agreed to sell the Hotel to an affiliate of California Hyatt Corporation, the current operator of the Hotel ("Hyatt"), for $126,900,000 in cash and the assumption of certain debt owed to an affiliate of the prospective buyer.
In connection with any material transactions entered into between the Partnership and any affiliate, the Partnership's Amended and Restated Agreement of Limited Partnership requires that the General Partner of the Partnership retain an independent adviser to render an opinion to the effect that such transaction is fair, from a financial point of view, and at least as favorable to the Partnership as such transaction would be if entered into with an unaffiliated entity in similar circumstances. Accordingly, the Partnership engaged a nationally-recognized independent investment bank (the "Partnership's Independent Advisor") to negotiate with the Borrower regarding the proposed sale of the Hotel and to render the required opinion.
On behalf of the Partnership, the Partnership's Independent Advisor negotiated, with a similar representative engaged by the Borrower, an allocation that was incorporated in an agreement dated as of November 1, 1996 (the "Allocation Agreement") and rendered the aforementioned opinion. Pursuant to the terms of the Allocation Agreement, the Partnership has agreed (a) subject to certain limitations, to temporarily forbear during the pendency of the sale of the Hotel from pursuing foreclosure action on the Hotel Loan, and (b) to accept $30,250,000 in full satisfaction of all of the Borrower's obligations to the Partnership (including unsecured debt obligations and the obligation to reimburse the Partnership for certain costs).
Based upon the circumstances as discussed above, the Partnership adjusted the carrying value of its Second Mortgage. The estimate is based upon the amount to be received under the Allocation Agreement less the Partnership's estimated costs to settle the loan.
On February 21, 1997, Union Square sold the Hotel and the Partnership received $30,250,000, in accordance with the Allocation Agreement.
The Laurel Centre Loan - The Partnership holds a 24% interest in a zero-coupon mortgage loan (the "Laurel Centre Loan") previously made to the owner (the "Laurel Borrower") of the Laurel Centre Mall located in Laurel, Maryland (the "Mall") and secured by a first mortgage encumbering the Mall. The remaining 76% interest in the Laurel Centre Loan is held by a real estate mortgage investment conduit serviced by a third party (the "REMIC"). The Laurel Centre Loan accrued interest at the rate of 10.2% per annum and was due and payable on October 15, 1996. The fully accreted amount of the Laurel Centre Loan as of October 15, 1996 was $57,894,077.
On or about October 9, 1996, after the Laurel Borrower was unable to refinance or sell the Mall on terms that would repay the Laurel Centre Loan, the Laurel Borrower entered into an agreement (the "Agreement") with the Partnership and the REMIC (together, the "Lenders"), pursuant to which the Lenders, among other things, (a) indicated their intent to commence a foreclosure action on the Laurel Centre Loan and appoint a receiver, on or after October 16, 1996, and (b) agreed to release any claims that they may have to any cash held by the Laurel Borrower or its partners prior to October 16, 1996. In addition, under the Agreement, the Laurel Borrower and the Lenders agreed that all cash flow from the Mall on or after October 16, 1996, shall be paid to the Lenders. On October 16, 1996, foreclosure proceedings were commenced by the Partnership and a receiver for the Mall was appointed. Accordingly, the receiver took immediate possession of the Mall and was authorized, among other things: to manage the Mall; to collect all rent proceeds from Mall tenants paid on or after October 16, 1996; and to apply such proceeds to the payment of, among other things, the Mall's management and operating expenses, capital improvements and leasing expenses, with any remaining funds to be paid to the mortgage lenders; in each case, in accordance with the terms of the agreement.
During the foreclosure period, an unaffiliated third-party offered to purchase the Partnership's interest in the Laurel Centre Loan at a price equal to the amount the Partnership would have realized if the Laurel Centre Loan were paid in full, including interest at the non-default rate of 10.2% to the date of closing of the purchase, less a $100,000 negotiated discount. On January 24, 1997, the Partnership sold its interest in the Laurel Centre Loan for total proceeds of $14,184,322.
Former Loan Investments
The 417 Fifth Avenue Loan - The Partnership owned a zero coupon loan in the face amount of $17,500,000 to 417 Fifth Avenue Realty Company (the "Borrower"), a New York general partnership. The loan was secured by a second mortgage on an eleven story office building located at 417 Fifth Avenue in Manhattan, New York (the "Property"). The carrying value of the loan was fully reserved for in 1992.
The First Mortgage Holder commenced a foreclosure proceeding against the Borrower. On May 1, 1992, the Partnership delivered a notice of default informing the Borrower of its default on the Partnership's second mortgage loan and also commenced its own foreclosure proceeding.
On or about August 9, 1993, the Borrower filed a voluntary bankruptcy petition in the Southern District of New York. On August 15, 1993 the Partnership agreed with the First Mortgage Holder to coordinate activities in the bankruptcy and to give the Partnership an interest in whatever the First Mortgage Holder ultimately realized in the Property (the "Intercreditor Agreement").
Pursuant to the Intercreditor Agreement, the Partnership realized $1,565,079 from the sale of the Property in 1994. In addition to the sales proceeds, the Partnership obtained approximately $453,637 from certain reserve accounts. The Partnership distributed $1,508,250 of the proceeds to the partners and the remaining funds were added to the Partnership's cash reserves to fund the projected operating expenses and contingencies. The assignment of the loan also resulted in the write-off of $234,653 of deferred charges related to the original financing.
On July 15, 1994, a cash distribution was paid totaling $1,500,000, of which $15,000 was paid to the general partner pursuant to the terms of the Partnership Agreement, and $1,485,000 was paid to the limited partners, or $.21 per limited partnership unit. The Partnership withheld $7,818 from the limited partners' distribution to recoup foreign withholding taxes previously paid by the Partnership on behalf of certain limited partners.
5. Transactions with Related Parties
Cash and cash equivalents reflected on the Partnership's balance sheets at December 31, 1995 were on deposit with an affiliate of the General Partner. As of December 31, 1996, no cash or cash equivalents were on deposit with an affiliate of the General Partner or the Partnership.
The General Partner and its affiliates received fees and compensation for the offering of interests in the Partnership, fees for acting as general partner of the Partnership, and reimbursement of organization and offering expenses. The aforementioned amount of fees and organizational and offering costs was $7,042,300. In addition, the General Partner earned investment management fees of $75,000 in 1996, 1995 and 1994 of which $6,250 was unpaid at December 31, 1996 and $12,500 were unpaid at December 31, 1995.
During 1993, the right of first refusal on a loan formerly held by the Partnership was sold to an affiliate of the General Partner for $50,000 which amount was received on November 22, 1994.
6. Reconciliation of Financial Statement Net Income and Partners' Capital to Federal Income Tax Basis Net Income (Loss) and Tax Basis Partners' Capital
Year Ended December 31, 1996 1995 1994 Financial statement net income $ 30,248,408 $ 1,087,928 $ 2,677,094 Recovery of valuation allowance for financial reporting purposes on the Second Mortgage (24,532,759) -- -- Tax loss on retirement of note -- -- (29,409,324) Other -- 405 --
Federal income tax basis net income (loss) $ 5,715,649 $ 1,088,333 $(26,732,230)
1996 1995 1994 Financial statement basis partners' capital $ 45,134,096 $ 14,887,955 $ 13,800,027 Current year financial statement net income (over) under federal income tax basis net income (24,532,759) 405 (29,409,324) Cumulative federal income tax basis net income over cumulative financial statement net income 25,012,165 25,011,760 54,421,084
Federal income tax basis partners' capital $ 45,613,502 $ 39,900,120 $ 38,811,787
Because many types of transactions are susceptible to varying interpretations under Federal and State income tax laws and regulations, the amounts reported above may be subject to change at a later date upon final determination by the respective taxing authorities.
7. Litigation On January 24, 1997, certain limited partners commenced a lawsuit in Delaware Chancery Court against the General Partner, Union Square, its general partner, and others. The Partnership was named as a nominal defendant. The litigation seeks to increase the amount of the discounted pay-off from the Union Square loan pursuant to the terms of the Allocation Agreement described in Note 4. The litigation was filed as a purported class action on behalf of all Unitholders and as a purported derivative action in the name of the Partnership. The plaintiffs also seek unspecified damages. The Partnership has retained counsel and is seeking an expedited resolution of this litigation.
8. Supplemental Information (Unaudited) The following are condensed financial statements of the borrowers on the loans comprising the Partnership's portfolio. This information is not covered by the independent auditors' report.
Shopco Laurel Centre L.P. and Consolidated Partnership (A Delaware limited partnership)
Consolidated Balance Sheets At December 31, At December 31, 1996 1995 Assets Property held for disposition $55,973,759 $ -- Real estate, at cost: Land -- 5,304,011 Building -- 61,062,234 Improvements -- 3,668,110 -- 70,034,355 Less accumulated depreciation and amortization -- (14,100,499) -- 55,933,856 Cash and cash equivalents 7,906,335 13,427,085 Accounts receivable, net of allowance of $254,927 in 1995 -- 242,818 Deferred rent receivable -- 482,624 Deferred charges, net of accumulated amortization of $273,442 in 1995 -- 133,295 Prepaid expenses -- 553,034 Total Assets $63,880,094 $70,772,712 Liabilities, Minority Interest and Partners' Capital (Deficit) Liabilities: Accounts payable and accrued expenses $ 657,759 $ 286,860 Zero coupon first mortgage note payable 58,580,564 53,525,503 Second mortgage note payable 2,000,000 2,000,000 Second mortgage note accrued interest payable 74,167 19,167 Due to affiliates 7,768 7,026 Security deposits payable -- 14,633 Deferred income -- 804,171 Distribution payable 6,354,545 588,384 Total Liabilities 67,674,803 57,245,744 Minority interest (783,875) (583,239) Partners' Capital (Deficit): General Partner 746,545 917,755 Limited Partners (4,660,000 limited partnership units authorized, issued and outstanding) (3,757,379) 13,192,452 Total Partners' Capital (Deficit) (3,010,834) 14,110,207 Total Liabilities, Minority Interest and Partners' Capital (Deficit) $63,880,094 $70,772,712
8. Supplemental Information (Unaudited) Continued The following are condensed financial statements of the borrowers on the loans comprising the Partnership's portfolio. This information is not covered by the independent auditors' report.
Shopco Laurel Centre L.P. and Consolidated Partnership (A Delaware limited partnership)
Consolidated Statements of Operations For the years ended December 31, 1996 1995 1994 Income Rental income $ 5,000,201 $ 5,835,838 $ 5,526,093 Escalation income 3,992,192 5,092,316 5,004,831 Miscellaneous income 599,178 454,382 316,315 Interest income 585,119 567,284 274,960 Total Income 10,176,690 11,949,820 11,122,199 Expenses Interest expense 4,550,655 5,298,639 4,822,735 Property operating expenses 3,521,767 3,737,361 3,642,418 Depreciation and amortization 1,650,643 1,984,980 1,873,237 Real estate taxes 811,866 1,023,297 1,034,656 General and administrative 425,485 223,623 209,045 Total Expenses 10,960,416 2,267,900 11,582,091 Loss before discontinued operations and minority interest (783,726) (318,080) (459,892) Loss from discontinued operations (1,177,531) -- -- Loss before minority interest (1,961,257) (318,080) (459,892) Minority interest 20,519 2,811 2,547 Net Loss $(1,940,738) $ (315,269) $ (457,345) Net Loss Allocated: To the General Partner $ (19,407) $ (3,153) $ (4,573) To the Limited Partners (1,921,331) (312,116) (452,772) $(1,940,738) $ (315,269) $ (457,345) Per limited partnership unit (4,660,000 outstanding): Loss before discontinued operations and minority interest $(.16) $(.07) $(.10) Loss from discontinued operations (.25) -- -- $(.41) $(.07) $(.10)
8. Supplemental Information (Unaudited) Continued The following are condensed financial statements of the borrowers on the loans comprising the Partnership's portfolio. This information is not covered by the independent auditors' report.
Union Square Hotel Partners, L.P. (A Delaware limited partnership)
Balance Sheets At December 31, At December 31, 1996 1995 Assets Real estate, at cost: Land $ -- $32,231,229 Building -- 80,121,007 Furniture, fixtures and equipment -- 29,586,047 -- 141,938,283 Less accumulated depreciation -- (43,176,995) -- 98,761,288 Property held for disposition 96,076,204 -- Cash and cash equivalents 5,291,387 3,378,174 Replacement reserve receivable 1,283,862 500,440 Rent receivable 520,710 318,626 Deferred charges, net of accumulated amortization of $4,307,099 in 1996 and $3,849,203 in 1995 724,108 495,582 Total Assets $103,896,271 $103,454,110 Liabilities and Partners' Deficit Liabilities: Accounts payable and accrued expenses $ 72,765 $ 51,645 Due to affiliates 11,798 10,397 Mortgage loan payable 70,000,000 70,000,000 Accrued interest 13,537,078 13,104,156 Deferred interest 9,672,070 8,800,319 Notes and loans - affiliates 57,585,170 53,016,740 Loan payable - Hyatt 3,882,006 3,772,578 Total Liabilities 154,760,887 148,755,835 Partners' Deficit: General Partner (1,191,866) (1,136,237) Limited Partners (49,672,750) (44,165,488) Total Partners' Deficit (50,864,616) (45,301,725) Total Liabilities and Partners' Deficit $103,896,271 $103,454,110
8. Supplemental Information (Unaudited) Continued The following are condensed financial statements of the borrowers on the loans comprising the Partnership's portfolio. This information is not covered by the independent auditors' report.
Union Square Hotel Partners, L.P. (A Delaware limited partnership)
Statements of Operations For the years ended December 31, 1996 1995 1994 Income Rental income: Operating income $10,664,266 $ 7,677,616 $ 5,816,107 Replacement escrow, net 1,406,715 1,247,873 1,147,573 Interest income 157,781 123,210 39,454 Miscellaneous income 1,935 2,757 2,765 Total Income 12,230,697 9,051,456 7,005,899 Expenses Interest expense 13,761,446 13,159,716 12,337,774 Depreciation and amortization 3,766,273 5,402,353 5,474,406 General and administrative 265,869 206,467 208,946 Total Expenses 17,793,588 18,768,536 18,021,126 Net Loss $(5,562,891) $(9,717,080) $(11,015,227) Net Loss Allocated: To the General Partner $ (55,629) $ (97,171) $ (110,152) To the Limited Partners (5,507,262) (9,619,909) (10,905,075) $(5,562,891) $(9,717,080) $(11,015,227) Per limited partnership unit (7,174,100 outstanding) $(.77) $(1.34) $(1.52)
Schedule II
Valuation and Qualifying Accounts
December 31, 1996
Charged to Balance at (recovery of) Balance at Beginning Costs and End of Description of Period Expenses Deductions Period
Allowance for (recovery of) doubtful accounts:
Year ended December 31, 1994: Mortgage loans receivable $68,030,204 $ 5,016,635 $(38,818,072) $34,228,767
Year ended December 31, 1995: Mortgage loans receivable $34,228,767 $ 3,770,483 $ -- $37,999,250
Year ended December 31, 1996: Mortgage loans receivable $37,999,250 $(25,029,061) $ (286,177) $12,684,012
Schedule IV - Mortgage Loans on Real Estate December 31, 1996
Principal Amount Description Interest Final Periodic Prior Face Carrying of Loans Rate Maturity Payment Liens amount of Amount of Subject Date Terms mortages Mortgages to at maturity Delinquent Principal or Interest The Implicit 1/02/97 No Grand annual payment Hyatt rate of of $70,000,000 $42,207,709 $29,500,022 N/A San 11% interest Francisco compounded or annually principal are due until maturity.(1)
The Implicit 10/15/96 No Laurel annual payments Centre rate of of None $13,894,578 $14,189,837 N/A Loan 10.2% interest (2) (3) Partici- compounded or pation semiannually principal are due until maturity.
$56,102,287 $43,689,837
The aggregate cost for Federal income tax purposes of the mortgage loans at December 31, 1996 is $44,189,837
1 Prior to restructuring, three interim interest payments were required. 2 Represents the Partnership's 24% interest. 3 Represents the Partnership's 24% interest plus interest through 12/31/96.
Reconciliation of Mortgage Loans on Real Estate For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 Beginning of year $12,846,120 $ 11,629,648 $ 10,528,370 Accrued interest 5,524,159 4,982,638 6,113,596 Amortization of discount 4,320 4,317 4,317 Recovery of (allowance for) doubtful accounts 25,029,061 (3,770,483) (5,016,635) Collection costs 286,177 -- --
End of year $ 43,689,837 $ 12,846,120 $ 11,629,648