ITEM 1. BUSINESS - ------- --------
ORGANIZATION - ------------
McNeil Real Estate Fund IX, Ltd. (the "Partnership") was organized May 1, 1978, as a limited partnership under provisions of the California Uniform Limited Partnership Act. The general partner of the Partnership is McNeil Partners L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The Partnership is governed by an amended and restated partnership agreement dated November 12, 1991, as amended (the "Amended Partnership Agreement"). Prior to November 12, 1991, Pacific Investors Corporation (the prior "Corporate General Partner"), a wholly-owned subsidiary of Southmark Corporation ("Southmark"), and McNeil were the general partners of the Partnership, which was governed by an agreement of limited partnership dated May 1, 1978 (the "Original Partnership Agreement"). The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240.
On January 10, 1979, a Registration Statement on Form S-11 was declared effective by the Securities and Exchange Commission whereby the Partnership offered for sale $55,000,000 of limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the holders thereof to participate in certain allocations and distributions of the Partnership. The sale of Units closed on September 7, 1979, with 110,000 Units sold at $500 each, or gross proceeds of $55,000,000 to the Partnership. In addition, the original general partners purchased an additional 200 Units for $100,000. In 1993, 30 Units were relinquished leaving 110,170 Units outstanding at December 31, 1997.
SOUTHMARK BANKRUPTCY AND ASSET PURCHASE AGREEMENT - -------------------------------------------------
On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, McNeil nor the Corporate General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Corporate General Partner, were sold or liquidated for the benefit of creditors.
In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio.
On February 14, 1991, pursuant to the asset purchase agreement as amended on that date: (a) an affiliate of McNeil purchased the Corporate General Partner's economic interest in the Partnership; (b) McNeil became the managing general partner of the Partnership pursuant to an agreement with the Corporate General Partner that delegated management authority to McNeil; and (c) McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates and commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates.
On November 12, 1991, the limited partners approved a restructuring proposal that provided for (i) the replacement of the Corporate General Partner and McNeil with the General Partner; (ii) the adoption of the Amended Partnership Agreement, which substantially altered the provisions of the Original Partnership Agreement relating to, among other things, compensation, reimbursement of expenses, and voting rights; and (iii) the approval of a new property management agreement with McREMI, the Partnership's property manager.
The Amended Partnership Agreement provides for a Management Incentive Distribution ("MID") to replace all other forms of general partner compensation other than property management fees and reimbursements of certain costs. Additional Units may be issued in connection with the payment of the MID pursuant to the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions with Affiliates." For a discussion of the methodology for calculating and distributing MID, see Item 13 - Certain Relationships and Related Transactions.
Settlement of Claims:
The Partnership filed claims with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court") against Southmark for damages relating to improper overcharges, breach of contract and breach of fiduciary duty. The Partnership settled these claims in 1991, and such settlement was approved by the Bankruptcy Court.
An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April 14, 1995, was issued by the Bankruptcy Court. In accordance with the Order, in May 1995, the Partnership received in full satisfaction of its claims, $53,573 in cash, and common and preferred stock in the reorganized Southmark. The cash and stock represent the Partnership's pro-rata share of Southmark assets available for Class 8 claimants. The Partnership sold the Southmark common and preferred stock in May 1995 for $17,244 which, when combined with the cash proceeds from Southmark, resulted in a gain on settlement of litigation of $70,817.
CURRENT OPERATIONS - ------------------
General:
The Partnership is engaged in real estate activities, including the ownership, operation and management of residential real estate and other real estate related assets. At December 31, 1997, the Partnership owned thirteen income-producing properties as described in Item 2
ITEM 2. PROPERTIES - ------- ----------
The table on the following page sets forth the real estate investment portfolio of the Partnership at December 31, 1997. The buildings and the land on which they are located are owned by the Partnership in fee, subject in each case to a first lien deed of trust as set forth more fully in Item 8 - Note 5 - "Mortgage Notes Payable." See also Item 8 - Note 4 - "Real Estate Investments" and Schedule III - "Real Estate Investments and Accumulated Depreciation." In the opinion of management, the properties are adequately covered by insurance.
- ---------------------------- Total: Apartments - 3,306 units
(1) Berkley Hills Apartments is owned by Berkley Hills Associates which is wholly-owned by the Partnership and the General Partner.
(2) Cherry Hills Apartments is owned by Cherry Hills Fund IX Limited Partnership which is wholly-owned by the Partnership.
(3) Forest Park Village Apartments is owned by Forest Park Fund IX Associates Limited Partnership which is wholly-owned by the Partnership and the General Partner.
(4) Lantern Tree Apartments is owned by Lantern Tree Fund IX Limited Partnership which is wholly-owned by the Partnership.
(5) Meridian West Apartments is owned by Meridian West Fund IX Limited Partnership which is wholly-owned by the Partnership.
(6) Pennbrook Apartments is owned by Pennbrook Fund IX Associates, L.P. which is wholly-owned by the Partnership and the General Partner.
(7) Rockborough Apartments is owned by Rockborough Fund IX Limited Partnership which is wholly-owned by the Partnership.
(8) Rolling Hills Apartments is owned by Rolling Hills Fund IX Associates L.P. which is wholly-owned by the Partnership and the General Partner.
(9) Ruskin Place Apartments is owned by Ruskin Place Fund IX Associates which is wholly-owned by the Partnership and the General Partner.
(10) Westgate Apartments (formerly known as Sherwood Forest Apartments) is owned by Sherwood Forest Fund IX Associates which is wholly-owned by the Partnership and the General Partner.
(11) Williamsburg Apartments is owned by Williamsburg Fund IX Limited Partnership which is wholly-owned by the Partnership.
The following table sets forth the properties' occupancy rate and rent per square foot for each of the last five years:
Occupancy rate represents all units leased divided by the total number of units of the property as of December 31 of the given year. Rent per square foot represents all revenue, except interest, derived from the property divided by the leasable square footage of the property.
Competitive Conditions - ----------------------
Real Estate Investments:
Berkley Hills Apartments - ------------------------
A strong local economy has benefited Berkley Hills Apartments. Occupancy rates are comparable with the property's competitors. Capital improvements at Berkley Hills have allowed the property to remain competitive with nearby apartment communities. The strong local economy, and the high occupancy rates are prompting new construction in the area; but to date, the new construction has not been located near Berkley Hills, and has been targeted to upscale single residents while Berkley Hills targets middle class families and singles.
Cherry Hills Apartments - -----------------------
Cherry Hills Apartments is one of Wichita's finer apartment communities in terms of interior and exterior appearance. The well-maintained property's occupancy rate is several points above the average occupancy rate of its competitors. Rental rates, also, have typically been higher than the rates charged by the property's competitors. The Wichita unemployment rate is at a record low level, and all major employers are thriving, providing a good economic setting for the property.
Forest Park Village Apartments - ------------------------------
Forest Park Village Apartments is currently in the midst of a five-year capital improvement program. Exterior renovations are largely complete, and interior upgrades are in process. The capital program is needed to allow the property to compete with numerous other apartment communities in the Northeast Columbus submarket. Forest Park Village represents a common property in the submarket, with no distinguishing characteristics other than basements in all its units. The submarket is very competitive, and many of the competing properties have been renovated in the past few years.
Heather Square Apartments - -------------------------
Occupancy rates at Heather Square Apartments typically run 2 or 3 percentage points above the market due to the excellent curb appeal of the property. The property also is able to command rental rates slightly higher than most of its competition. Competition is mixed in the Dallas submarket where Heather Square is located. As long as the local economy remains strong, it is anticipated that the property will do well in competition with both older properties and new construction under development. Annual absorption of apartment units in the property's submarket has roughly equaled newly constructed units in the past two years.
Lantern Tree Apartments - -----------------------
Occupancy rates at Lantern Tree Apartments stabilized in 1997 after decreasing in 1996. A new business park development is being constructed just a few blocks from the property. Completion of the project toward the end of 1998 is expected to improve Lantern Tree's occupancy rate. Lantern Tree compares well with its competition due to spacious and attractive floor plans. Lantern Tree's occupancy rate usually exceeds its competition's occupancy rate. The property appeals to single, upper-middle class residents. The principal competitive disadvantage of the property is its location which is set back from the main thoroughfare reducing its drive-by visibility.
Meridian West Apartments - ------------------------
The economy in Meridian West Apartments' submarket continues to improve, leading to improved operating results at the property. Vacancy losses decreased in 1997. The property implemented its first rate increase in several years in late 1997. The improved cash flow is being reinvested in the property to improve the competitiveness of the property. Meridian West competes primarily with better quality apartment communities, and thus the Partnership generally expects rental and occupancy rates lower than local market rates.
Pennbrook Apartments - --------------------
The 96% occupancy rate at Pennbrook Apartments exceeds the 94% average of the Dallas submarket where the property is located. Extensive capital improvements during 1991-1993 have positioned the property to compete effectively for the middle-class, single residents that dominate its resident profile. The Dallas market is expected to remain strong. For the past two years, new apartment construction has roughly equaled the number of apartment units absorbed by the market. New construction is expected to modestly exceed absorption in 1998, resulting in some downward pressure on rental revenue, but most of the new construction will be for newer, high-quality apartment communities, and should have little effect on Pennbrook.
Rockborough Apartments - ----------------------
Rockborough Apartments boasts excellent curb appeal, which has enabled the property to maintain occupancy levels a few percentage points above the 94% average occupancy for the property's submarket. Rockborough compares well to the established apartment communities in the area. There is new construction in the area, but rental rates are substantially higher than the rates charged at Rockborough. The Dallas area economy is expected to remain strong. New construction is expected to modestly exceed absorption in 1998, resulting in some downward pressure on rental revenue. However, most of the new construction will be for high-quality apartment communities, and should have little effect on Rockborough.
Rolling Hills Apartments - ------------------------
The area surrounding Rolling Hills Apartments is experiencing strong growth. Capital improvements at Rolling Hills the past three years have upgraded the property to compete more effectively with the high-quality apartment communities in the immediate area. Rolling Hills offers the largest floor plans in the area. The unit interiors are being updated to better compete with the newer properties in Rolling Hills' submarket. The property's average occupancy rate is in line with the Louisville market's 93% average, but average rental rates are lower than market rates. Rolling Hills is a good quality property competing against properties of even better quality.
Ruskin Place Apartments - -----------------------
Ruskin Place Apartments has steadily improved its performance over the past several years despite competitive pressures from newer apartment properties in the Lincoln market. The newer properties and new construction in progress have put upward pressure on local rental rates. Ruskin Place Apartments has been able to offer its units at lower, but still rising rental rates. This trend is expected to continue given the population increases and stable economic conditions in the local area.
Westgate Apartments - -------------------
Westgate Apartments is in need of extensive capital improvements to compete effectively with other Lansing apartment properties. The exterior and interiors of the units are dated and unattractive. Occupancy rates are averaging four percentage points below competing properties, and rental rates are averaging approximately 85% of the average rental rates charged by competing properties. Nine percent of Westgate's units are three and four bedroom floor plans, which are the only three and four bedroom units in the area. The local economy is doing very well, with unemployment at 2.6%. The property also has a good location in a desirable school district.
Williamsburg Apartments - -----------------------
Competition from new and refurbished apartment communities is putting pressure on Williamsburg Apartments' financial performance. Although the occupancy rate remains above the city-wide average, rental rate increases will be limited for the next year or two. The property is in good condition, with only minor capital improvements needed. The property offers attractive floor plans with interiors that are being upgraded with new fixtures. Nearby Barksdale Air Force Base and a growing gambling industry provide the employment base for many of the property's tenants.
Asset Held for Sale:
Sheraton Hills Apartments - -------------------------
Sheraton Hills Apartments has enjoyed an occupancy rate two to three percentage points greater than the Nashville market in general. The Nashville apartment market is overbuilt, and developers are planning new apartment projects for 1998. Although Sheraton Hills will not compete directly with the new construction, the new construction will tend to slow the increases in rental rates that older properties may expect in coming years. Sheraton Hills will continue to focus on selected capital improvements and its excellent reputation for service that has promoted decreased tenant turnover. On August 1, 1997, the Partnership placed Sheraton Hills on the market for sale.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following:
James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., et al. - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint).
The action involves purported class and derivative actions brought by limited partners of each of the fourteen limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid.
Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. Defendants must move, answer or otherwise respond to the second consolidated and amended complaint by June 30, 1998.
For a discussion of the Southmark bankruptcy, see Item 1 - Business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND - ------- ------------------------------------------------------------ RELATED SECURITY HOLDER MATTERS -------------------------------
(A) There is no established public trading market for limited partnership units, nor is one expected to develop.
(B) Title of Class Number of Record Unit Holders -------------- -----------------------------
Limited partnership units 4,513 as of January 31, 1998
(C) The Partnership paid $2,749,992 of distributions to the limited partners in 1997. No such distributions were paid in 1996 or 1995. During the last week of March 1998, the Partnership distributed approximately $2,300,000 to limited partners of record as of March 1, 1998. The Partnership accrued distributions of $1,137,022 and $1,133,561 for the benefit of the General Partner for the years ended December 31, 1997 and 1996, respectively, of which $354,171 remains unpaid at December 31, 1997. These distributions relate to the MID pursuant to the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions with Affiliates." Distributions of MID are expected to be paid to the General Partner in 1998. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the likelihood that the Partnership will continue distributions to the limited partners.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data.
See Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------
FINANCIAL CONDITION - -------------------
The Partnership was formed to acquire, operate and ultimately dispose of a portfolio of income-producing real properties. At the end of 1997, the Partnership owned thirteen apartment properties. All of the Partnership's properties are subject to mortgage notes.
RESULTS OF OPERATIONS - ---------------------
1997 compared to 1996
Revenues:
Rental revenue increased $215,408 or 1.1% in 1997 compared to rental revenue achieved in 1996. Excluding rental revenue from Westridge Apartments, sold by the Partnership on July 30, 1996, rental revenue increased $613,921 or 3.1% in 1997 compared to 1996. Rental revenues increased at 11 of the Partnership's 13 remaining properties. Rental revenue was unchanged at Forest Park Village Apartments and Williamsburg Apartments as the increases in base rental rates were matched by comparable increases in vacancy losses. Of the Partnership's 11 other properties, 10 increased base rental rates an average of 3.5%. Meridian West Apartments did not increase base rental rates, but rental revenue improved as vacancy losses decreased by 19.1%. Improving occupancy rates also boosted rental revenue at Cherry Hills Apartments, Lantern Tree Apartments, and Westgate Apartments.
In 1997, the Partnership incurred a gain on involuntary conversion totaling $474,376 relating to a fire that destroyed twelve apartment units at Sheraton Hills Apartments. No such gains were recorded in 1996.
Expenses:
Partnership expenses decreased $619,925 or 3.1% in 1997 compared to 1996. However, after excluding both the loss on sale of Westridge Apartments and expenses associated with operations at Westridge Apartments before its sale, expenses remained virtually unchanged in 1997 compared to 1996. Decreases in general and administrative expenses and general and administrative expenses paid to affiliates were partially offset by increased property taxes.
Excluding Westridge Apartments for 1996, property taxes for 1997 increased $114,337 or 8.3% over property taxes for 1996. The increase was due to increases assessed valuation and tax rates in Dallas County, Texas, where three of the Partnership's properties are located.
General and administrative expenses decreased $172,168 or 51%. The decrease is attributable to costs relating to the evaluation and dissemination of information with regards to an unsolicited tender offer in 1996. No such costs were incurred in 1997. Decreased tender offer costs were partially offset by investor services expenses that were paid to a non-affiliate vendor beginning in 1997. Prior to 1997, investor services were provided by an affiliate of the General Partner, and the related expenses were reported with general and administrative expenses paid to affiliates.
General and administrative expenses paid to affiliates decreased $83,821 or 15.6%. Such expenses are generally charged based on the number of properties under management. The sale of Westridge Apartments during 1996, as well as decreased expenses incurred by the affiliates, both contributed to the decrease in expenses paid to affiliates. Also contributing to the decrease in general and administrative expenses paid to affiliates was the reclassification of investor services expenses to general and administrative expenses as discussed in the preceding paragraph.
Due to the sale of Westridge Apartments on July 30, 1996, the Partnership recognized a $220,157 loss on sale of real estate in 1996. No properties were disposed of during 1997.
1996 compared to 1995
Revenues:
Rental revenue increased $608,676 or 3.2% in 1996 compared to rental revenue achieved in 1995. Excluding rental revenue from Westridge Apartments, sold by the Partnership on July 30, 1996, rental revenue increased $881,595 or 4.8% in 1996 compared to 1995. Rental revenues increased at 11 of the Partnership's 13 remaining properties. Rental revenue was unchanged at Lantern Tree Apartments as a 4% increase in base rental rates was matched by a comparable increase in vacancy losses. Rental revenue decreased 2.1% at Westgate Apartments due to increased vacancy losses at the Michigan property. Of the Partnership's 11 other properties, 10 increased base rental rates an average of 4.7%. Cherry Hills Apartments did not increase base rental rates, but rental revenue improved as vacancy losses decreased by nearly half. Improving occupancy rates also boosted rental revenue at Forest Park Village Apartments, Heather Square Apartments, Meridian West Apartments, Pennbrook Apartments, and Rockborough Apartments.
Expenses:
Partnership expenses increased $362,754 or 1.8% in 1996 compared to 1995. However, after excluding both the loss on sale of Westridge Apartments, and the expenses associated with operations at Westridge Apartments before its sale, expenses increased $381,881 or 2.0% in 1996 compared to 1995. The increased expenses were concentrated in depreciation, repair and maintenance, and general and administrative expenses. These increases were partially offset by a decrease in general and administrative expenses paid to affiliates.
Depreciation expense increased $253,415 or 6.5% in 1996 compared to 1995. Excluding the effects of the sale of Westridge Apartments reveals an even larger increase of $346,749 or 9.3%. Increased depreciation expense is the result of depreciation on the $2.4 million of new capital improvements placed in service during 1996. The capital improvements are generally depreciated over lives ranging from five to ten years.
Repair and maintenance expenses increased $244,052 or 10.3% in 1996 compared to 1995. The increase is attributable to a $284,000 increase in floor covering replacements during 1996. Expenditures for floor covering replacements during 1995 were large enough to qualify for capitalization under the Partnership's capitalization policy. Though still substantial, such expenditures in 1996 did not qualify for capitalization and were, accordingly, expensed.
General and administrative expenses increased $42,123 or 14.2% in 1996 compared to 1995. The Partnership incurred a $17,630 increase in costs relating to the evaluation and dissemination of information with regards to an unsolicited tender offer. An additional $20,000 was expended for appraisal fees.
Due to the sale of Westridge Apartments on July 30, 1996, the Partnership recognized a $220,157 loss on sale of real estate. No properties were disposed of during 1995.
General and administrative expenses paid to affiliates decreased $196,189 or 27% in 1996 compared to 1995. Part of the decrease is due to the sale of Westridge Apartments during the year, but a greater part of the decrease is due to a reduced level of overhead expenses charged to the Partnership by affiliates.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
During the three year period ended December 31, 1997, the Partnership's net income totaled $354,284. During the same three year period, the Partnership generated $12,788,743 of cash flow from operating activities. Cash provided by operating activities increased $807,127 or 19.9% in 1997 compared to 1996. A 7.2% increase in property taxes paid and escrowed was more than offset by decreases in cash paid to suppliers and to affiliates as well as an increase in cash received from tenants.
The Partnership continued to invest in capital improvements at its properties during 1997. The Partnership invested $2,064,414 in capital improvements during 1997, a 13.9% decrease from the amount invested during 1996. These expenditures are necessary to allow the Partnership's aging properties to maintain their appeal to current and prospective tenants. 27% of the capital expenditures were used to repair damage caused by a fire at Sheraton Hills Apartments. The Partnership received $546,069 in insurance reimbursements to offset these costs. The Partnership has budgeted an additional $1,579,000 for capital improvements in 1998.
The Partnership received $1,550,000 and $492,384 in proceeds from the sale of Westridge Apartments in 1997 and 1996, respectively.
Short-term liquidity:
At December 31, 1997, the Partnership held cash and cash equivalents of $3,330,836, up $329,315 from the balance at the end of 1996. The general partner anticipates that cash generated from operations during 1998 will be sufficient to fund the partnership's operating expenses, budgeted capital improvements, and monthly debt service requirements. Cash reserves are adequate for anticipated operations during 1998.
Though reduced in scope from amounts incurred in previous years, the Partnership will continue to invest substantial sums in capital improvements for the Partnership's properties. The Partnership has budgeted $1,579,000 for capital improvements for 1998. The General Partner believes these capital improvements are necessary to allow the Partnership to increase its rental revenues in the competitive markets in which the Partnership's properties operate. These expenditures also allow the Partnership to reduce future repair and maintenance expenses from amounts that would otherwise be incurred.
The Forest Park Village mortgage note matured in January 1998. On March 20, 1998, the Partnership refinanced the Forest Park Village mortgage note with a new $5,925,000 mortgage note that matures on March 20, 2001. The new mortgage note bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate. The only other mortgage note maturing in 1998 is the Sheraton Hills mortgage note, which matures in October 1998. The General Partner intends to resolve the Sheraton Hills mortgage maturity by selling Sheraton Hills Apartments. The General Partner placed Sheraton Hills Apartments on the market for sale on August 1, 1997. Initial responses to the Partnership's marketing efforts would seem to indicate that the Partnership will be able to sell Sheraton Hills Apartments for an amount sufficient to retire the Sheraton Hills mortgage note and to provide additional cash reserves for the Partnership. However, the sale of Sheraton Hills Apartments is not assured, and if the Partnership is unable to sell or otherwise refinance the Sheraton Hills mortgage note, the Partnership's investment in Sheraton Hills Apartments could be at risk.
Long-term liquidity:
For the long term, property operations will remain the primary source of funds. In this regard, the General Partner expects that the approximately $8 million of capital improvements made by the Partnership during the past three years will yield improved cash flow from property operations in 1998. Furthermore, the General Partner has budgeted an additional $1,579,000 of capital improvements for 1998.
While the present outlook for the Partnership's liquidity is favorable, market conditions may change and property operations can deteriorate. In that event, the Partnership would require other sources of working capital. No such other sources have been identified, and the Partnership has no established lines of credit. Other possible actions to resolve working capital deficiencies include refinancing or renegotiating terms of existing loans, deferring major capital expenditures on Partnership properties except where improvements are expected to enhance the competitiveness or marketability of the properties, or arranging working capital support from affiliates. No affiliate support has been required in the past, and there is no assurance that support from affiliates would be provided in the future, since neither the General Partner nor any affiliates have any obligation in this regard.
Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or
entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof.
Income Allocations and Distributions:
Terms of the Amended Partnership Agreement specify that income before depreciation is allocated to the General Partner to the extent of MID paid in cash. Depreciation is allocated in the ratio of 95:5 to the limited partners and the General Partner, respectively. Therefore, for the years ended December 31, 1997, 1996 and 1995, net income of $706,613, $1,161,697 and $684,002, respectively, was allocated to the General Partner. The limited partners received allocations of net income (loss) of $270,649, $(1,455,679) and $(1,012,998) for the years ended December 31, 1997, 1996 and 1995, respectively.
With the exception of the MID, distributions to partners had been suspended as part of the General Partner's policy of maintaining adequate cash reserves. However, on February 28, 1997, the General Partner distributed approximately $2,250,000 to the limited partners. An additional $500,000 was distributed on September 16, 1997. Approximately $2,042,000 of the distributions represents proceeds from the sale of Westridge Apartments. The Partnership plans to distribute approximately $2,300,000 to limited partners of record as of March 1, 1998. This distribution will be made from cash reserves and operations of the Partnership. The General Partner will continue to monitor the cash reserves and working capital needs of the Partnership to determine when cash flows will support additional distributions to the limited partners.
The Partnership paid $903,815, $1,370,360 and $879,994 of MID to the General Partner in 1997, 1996 and 1995, respectively. MID payments to the General Partner are expected to continue in 1998. To the extent that cash flow from operations is not sufficient to fund payments of MID along with other Partnership obligations, the Partnership will use its cash reserves to make such payments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
All other schedules are omitted because they are not applicable or the financial information required is included in the financial statements or the notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of McNeil Real Estate Fund IX, Ltd.:
We have audited the accompanying balance sheets of McNeil Real Estate Fund IX, Ltd. (a California limited partnership) as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund IX, Ltd. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas March 20, 1998
McNEIL REAL ESTATE FUND IX, LTD.
BALANCE SHEETS
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND IX, LTD.
STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND IX, LTD.
STATEMENTS OF PARTNERS' DEFICIT
For the Years Ended December 31, 1997, 1996 and 1995
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND IX, LTD.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
See discussion of noncash investing activity in Note 6 - "Sale of Real Estate."
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND IX, LTD.
STATEMENTS OF CASH FLOWS
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------------------------
Organization
McNeil Real Estate Fund IX, Ltd. (the "Partnership") was organized on May 1, 1978 as a limited partnership under the provisions of the California Uniform Limited Partnership Act. The general partner of the Partnership is McNeil Partners L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil. The Partnership is governed by an amended and restated partnership agreement dated November 12, 1991, as amended (the "Amended Partnership Agreement"). The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas 75240.
The Partnership is engaged in real estate activities, including the ownership, operation and management of residential real estate and other real estate related assets. At December 31, 1997, the Partnership owned 13 income-producing properties as described in Note 4 - "Real Estate Investments."
Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof.
Basis of Presentation - ---------------------
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP 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.
The Partnership's financial statements include the accounts of the tier partnerships listed on the next page for the years ended December 31, 1997, 1996 and 1995. These single asset tier partnerships were formed to accommodate the refinancings of the related properties. The ownership interest of the Partnership and the General Partner in each tier partnership is detailed below. The Partnership retains effective control of each tier partnership. The General Partner's minority interest is not presented because it is either negative or immaterial.
(a) The general partner of these partnerships is a corporation whose stock is 100% owned by the Partnership.
(b) Forest Park Fund IX Associates Limited Partnership assigned all of its interest and rights to the Partnership on December 22, 1992.
Real Estate Investments - -----------------------
Real estate investments are generally stated at the lower of depreciated cost or fair value. Real estate investments are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value.
The Partnership's method of accounting for real estate investments is in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which the Partnership adopted effective January 1, 1996. The adoption of SFAS 121 did not have a material impact on the accompanying financial statements.
Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred.
Asset Held for Sale - -------------------
The asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Depreciation ceased at the time the asset was placed on the market for sale.
Depreciation - ------------
Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 32 years.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents include cash on hand and cash on deposit with financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value.
Escrow Deposits - ---------------
The Partnership is required to maintain escrow accounts in accordance with the terms of various mortgage agreements. These escrow accounts are controlled by the mortgagee and are used for payment of property taxes, hazard insurance, capital improvements and/or property replacements. Carrying amounts for escrow deposits approximate fair value.
Deferred Borrowing Costs - ------------------------
Loan fees and other related costs incurred to obtain long-term financing on real property are capitalized and amortized using a method that approximates the effective interest method over the terms of the related mortgage notes payable. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations.
Discounts on Mortgage Notes Payable - -----------------------------------
Discounts on mortgage notes payable are amortized over the remaining terms of the related mortgage notes using the effective interest method. Amortization of discounts on mortgage notes payable is included in interest expense on the Statements of Operations.
Rental Revenue - --------------
The Partnership leases its properties under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned.
Income Taxes - ------------
No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax and the tax effect of its activities accrues to the partners. See Note 3 - "Taxable Loss."
Allocation of Net Income and Net Loss - -------------------------------------
The Amended Partnership Agreement provides for net income or net loss of the Partnership for both financial statement and income tax reporting purposes to be allocated as indicated below. For allocation purposes, net income and net loss of the Partnership are determined prior to deductions for depreciation.
(a) First, 5% of all deductions for depreciation shall be allocated to the General Partner, and 95% of all deductions for depreciation shall be allocated to the limited partners;
(b) then, an amount of net income equal to the cumulative amount of Management Incentive Distribution ("MID") paid to the General Partner for which no income has previously been allocated (see Note 2 - "Transactions with Affiliates") shall be allocated to the General Partner; however, if all or a portion of the MID consists of limited partnership units ("Units"), the amount of net income so allocated to the General Partner shall be equal to the amount of cash the General Partner would have otherwise received;
(c) then, any remaining net income shall be allocated to the General Partner and to the limited partners so that the total amount of net income allocated to the General Partner pursuant to paragraph (b) above and this paragraph (c), and to the limited partners pursuant to this paragraph (c), shall be in the ratio of 5% to the General Partner and 95% to the limited partners.
(d) Net loss shall be allocated 95% percent to the limited partners and 5% to the General Partner.
Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocations of Partnership deductions attributable to debt. The Partnership's tax allocations for 1997, 1996 and 1995 have been made in accordance with these provisions.
Distributions - -------------
Pursuant to the Amended Partnership Agreement and at the sole discretion of the General Partner, distributions during each taxable year shall be made as follows:
(a) first, to the General Partner, an amount equal to the MID; and
(b) any remaining distributable cash, as defined, shall be distributed 100% to the limited partners.
The Partnership paid distributions of $2,749,992 to the limited partners in 1997. No distributions were paid to the limited partners in 1996 or 1995. The Partnership paid or accrued distributions of $1,137,022, $1,133,561 and $1,070,763 for the benefit of the General Partner for the years ended December 31, 1997, 1996 and 1995, respectively. These distributions are the MID pursuant to the Amended Partnership Agreement. The General Partner has waived the collection terms of reimbursable expenses and MID, and has elected for the Partnership to pay limited partner distributions before the payment of such amounts. During the last week of March 1998, the Partnership plans to distribute approximately $2,300,000 to limited partners of record as of March 1, 1998.
Net Income (Loss) Per Limited Partnership Unit - ----------------------------------------------
Net income (loss) per limited partnership unit is computed by dividing net income (loss) allocated to the limited partners by the weighted average number of Units outstanding. Per Unit information has been computed based on 110,170 Units outstanding in 1997, 1996, and 1995.
NOTE 2 - TRANSACTIONS WITH AFFILIATES - -------------------------------------
The Partnership pays property management fees equal to 5% of the gross rental receipts of the Partnership's properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management and leasing services for the Partnership's properties.
The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs.
Under terms of the Amended Partnership Agreement, the Partnership is paying a MID to the General Partner. The maximum MID is calculated as 1% of the tangible asset value of the Partnership. The maximum MID percentage decreases subsequent to 1999. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items.
The MID will be paid to the extent of the lesser of the Partnership's excess cash flow as defined, or net operating income, as defined (the "Entitlement Amount"), and may be paid (i) in cash, unless there is insufficient cash to pay the distribution in which event any unpaid portion not taken in Units will be deferred and is payable, without interest, from the first available cash and/or (ii) in Units. A maximum of 50% of the MID may be paid in Units. The number of Units issued in payment of the MID is based on the greater of $50 per Unit or the net tangible asset value, as defined, per Unit. During 1997, 1996 and 1995, no Units were issued as payment for the MID.
During 1991, the Partnership amended its capitalization policy and began capitalizing certain costs of improvements and betterments that under policies of prior management had been expensed when incurred. The purpose of the amendment was to more properly recognize items which were capital in nature. The effect of the amendment standing alone was evaluated at the time the change was made and determined not to be material to the financial statements of the Partnership in 1991, nor was it expected to be material in any future year. However, the amendment can have a material effect on the calculation of the Entitlement Amount which determines the amount of MID earned. Capital improvements are excluded from cash flow, as defined. The majority of base period cash flow was measured under the previous capitalization policy, while incentive period cash flow is determined using the amended policy. Under the amended policy, more items are capitalized, and cash flow increases. Had base period cash flow been measured on a basis comparable with incentive period cash flow, MID for the year ended December 31, 1995 would have been reduced by $111,248. The amendment of the capitalization policy did not materially affect the MID for 1997 or 1996 because the Entitlement Amount was sufficient to pay the MID notwithstanding the amendment to the capitalization policy.
Any amount of the MID which is paid to the General Partner in Units will be treated as if cash is distributed to the General Partner and is then contributed to the Partnership by the General Partner. The MID represents a return of equity to the General Partner for increasing cash flow, as defined, and accordingly is treated as a distribution.
Compensation and reimbursements paid or accrued for the benefit of the General Partner or its affiliates are as follows:
For the Years Ended December 31, -------------------------------------- 1997 1996 1995 ----------- ---------- -----------
Property management fees - affiliates......................... $ 992,361 $ 978,168 $ 946,627 Charged to general and administrative - affiliates: Partnership administration......... 453,876 537,697 733,886 ---------- ---------- ----------
$ 1,446,237 $ 1,515,865 $ 1,680,513 ========== ========== ==========
Charged to General Partner's deficit: Management Incentive Distribution.. $ 1,137,022 $ 1,133,561 $ 1,070,763 ========== ========== ==========
Payable to affiliates - General Partner at December 31, 1997, 1996 and 1995 consists of MID, reimbursable costs and property management fees which are due and payable from current operations. The General Partner has waived the collection terms of reimbursable expenses and MID, and has elected for the Partnership to pay limited partner distributions before the payment of such amounts.
NOTE 3 - TAXABLE LOSS - ---------------------
McNeil Real Estate Fund IX, Ltd. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly.
The Partnership's net assets and liabilities for tax purposes exceeded the net assets and liabilities for financial reporting purposes by $10,256,886 in 1997, $9,965,434 in 1996 and $9,613,062 in 1995.
NOTE 4 - REAL ESTATE INVESTMENTS - --------------------------------
The basis and accumulated depreciation of the Partnership's real estate investments at December 31, 1997 and 1996 are set forth in the following tables:
(a) On August 1, 1997, the General Partner placed Sheraton Hills Apartments, located in Nashville, Tennessee, on the market for sale. Accordingly, Sheraton Hills Apartments is classified as an asset held for sale on the Partnership's December 31, 1997 balance sheet. The net book value of Sheraton Hills Apartments is $3,009,553 at December 31, 1997.
The results of operations for Sheraton Hills Apartments are $797,974, $146,983, and $154,785 for 1997, 1996 and 1995, respectively. Results of operations are operating revenues including gain on involuntary conversion, less operating expenses including depreciation and interest expense.
NOTE 5 - MORTGAGE NOTES PAYABLE - -------------------------------
The table below sets forth the mortgage notes payable of the Partnership at December 31, 1997 and 1996. All mortgage notes are secured by real estate investments.
(a) The debt is non-recourse to the Partnership.
(b) Mortgage discounts are based on an effective interest rate of 8.62%.
(c) The mortgage encumbering Sheraton Hills Apartments contains provisions which may give the lender the right to accelerate the mortgage debt as a result of the November 12, 1991, restructuring of the Partnership. The General Partner has requested that the lender waive its right to accelerate the mortgage debt. The lender may require the payment of fees or additional interest as a condition to granting such a waiver. In the event the waiver is not obtained and the mortgage debt is accelerated, the Partnership would be required to satisfy the outstanding mortgage debt, which totaled $2,747,663 at December 31, 1997. In such event, the Partnership will attempt to arrange alternative sources of mortgage financing. However, such refinancing may be at an interest rate which is higher or is otherwise on terms which are less favorable than those provided for by the current mortgage. Furthermore, if alternative financing cannot be obtained, the lender could foreclose on Sheraton Hills Apartments. The General Partner believes the likelihood of this outcome is remote.
(d) The Sheraton Hills mortgage note bears interest at a variable rate, adjusted at six-month intervals equal to the six-month treasury bill weekly average rate plus 3.0% per annum, not to exceed 12.75% per annum. The monthly payment is also adjusted each six months so that the mortgage note will fully amortize over a period of 30 years. At December 31, 1997, the interest rate was 8.36%, and the monthly payment of principal and interest was $23,239.
(e) Financing was obtained under the terms of a Real Estate Mortgage Investment Conduit financing. The mortgage notes payable are cross-collateralized and may not be prepaid in whole or in part before July 1998. Any prepayments made during the sixth or seventh loan years are subject to a Yield Maintenance Premium, as defined. Additionally, the Partnership must pay a release payment equal to 25% of the prepaid balance which will be applied to the remaining mortgage notes in the collateral pool.
(f) The Partnership refinanced the Forest Park Village mortgage note on March 20, 1998. See Note 9 - "Subsequent Event."
(g) Balloon payments on the Partnership's mortgage notes are due as follows:
Property Balloon Payment Date -------- --------------- ----
Forest Park Village .................... $ 5,831,000 02/98 Sheraton Hills.......................... 2,661,000 10/98 Pennbrook............................... 3,059,000 02/00 Cherry Hills............................ 3,875,000 07/03 Lantern Tree............................ 2,010,000 07/03 Meridian West........................... 2,804,000 07/03 Rockborough............................. 1,850,000 07/03 Williamsburg............................ 2,278,000 07/03
Scheduled principal maturities of the mortgage notes payable under existing agreements, before consideration of discounts of $289,910, are shown below.
1998.................................... $ 9,355,346 1999.................................... 812,434 2000.................................... 3,912,038 2001.................................... 923,348 2002.................................... 1,006,377 Thereafter.............................. 34,025,674 ----------- $ 50,035,217 ===========
Based on borrowing rates currently available to the Partnership for mortgage loans with similar terms and average maturities, the fair value of the mortgage notes payable was approximately $52,907,000 and $50,250,000 at December 31, 1997 and 1996, respectively.
NOTE 6 - SALE OF REAL ESTATE - ----------------------------
On July 30, 1996, the Partnership sold Westridge Apartments to an unaffiliated purchaser for a purchase price of $2,110,500. The Partnership agreed to finance a portion of the sales price by accepting a short-term, $1,550,000 purchase money mortgage note. The mortgage note accrued interest at 10.0% per annum and required monthly interest-only payments. On February 5, 1997, the purchaser repaid the $1,550,000 mortgage note to the Partnership. See Note 7 - "Mortgage Note Receivable." Cash proceeds from the sale, as well as the loss on sale of Westridge Apartments, are presented below.
Loss on Sale Cash Proceeds
Cash sales price....................... $ 2,110,500 $ 2,110,500 Selling costs.......................... (68,116) (68,116) Basis of real estate sold.............. (2,262,541) -----------
Loss on sale of real estate............ $ (220,157) ===========
Net cash proceeds received in 1996..... (492,384) ---------
Net cash proceeds received in 1997..... $ 1,550,000 ==========
NOTE 7 - MORTGAGE NOTE RECEIVABLE - ---------------------------------
In connection with the sale of Westridge Apartments (see Note 6 - "Sale of Real Estate"), the purchaser financed a portion of the sales price by entering into a short-term, $1,550,000 mortgage note payable to the Partnership until the purchaser could arrange permanent financing. The Partnership's mortgage note receivable was secured by a non-recourse lien against Westridge Apartments. The table below sets forth the terms of the mortgage note receivable at December 31, 1997 and 1996.
On February 5, 1997, the purchaser paid the $1,550,000 mortgage note receivable together with all accrued and unpaid interest thereon.
NOTE 8 - GAIN ON INVOLUNTARY CONVERSIONS - ----------------------------------------
On April 24, 1996, a fire damaged 12 units at Sheraton Hills Apartments. The cost to repair the fire damage was $562,560, of which, the Partnership received $546,069 in insurance reimbursements. The Partnership recognized a $474,376 gain on involuntary conversion equal to the insurance proceeds received less the adjusted basis of the property damaged by the fire. Because the insurance proceeds had not yet been received at December 31, 1996, the gain on involuntary conversion was deferred and reported on the Partnership's December 31, 1996 balance sheet. The deferred gain on involuntary conversion was recognized in 1997 when the insurance proceeds were received. Reconstruction of the damaged units was completed during the third quarter of 1996.
On November 3, 1995, two units at Cherry Hills Apartments were damaged by a fire that caused $55,495 in damages. The Partnership received a $40,428 insurance reimbursement to cover the cost to repair Cherry Hills Apartments. The insurance reimbursement received in excess of the basis of the property damaged was recorded as a $16,961 gain on involuntary conversion.
On May 5, 1995, Westridge Apartments incurred hail damage of $150,938. The Partnership received $144,666 in insurance reimbursements to cover the cost to repair Westridge Apartments. Insurance reimbursements received in excess of the basis of the property damaged were recorded as a $109,006 gain on involuntary conversion.
NOTE 9 - SUBSEQUENT EVENT - -------------------------
On March 20, 1998, the Partnership refinanced the Forest Park Village mortgage note. The new note, in the amount of $5,925,000, bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum. The new mortgage note requires monthly interest only payments and quarterly principal payments in the amount necessary to reduce the principal balance of the note by 5% annually. The new Forest Park Village mortgage note matures March 20, 2001.
NOTE 10 - LEGAL PROCEEDINGS - ---------------------------
The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following:
James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., et al. - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint).
The action involves purported class and derivative actions brought by limited partners of each of the fourteen limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid.
Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. Defendants must move, answer or otherwise respond to the second consolidated and amended complaint by June 30, 1998.
McNEIL REAL ESTATE FUND IX, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1997
See accompanying notes to Schedule III.
McNEIL REAL ESTATE FUND IX, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1997
See accompanying notes to Schedule III
McNEIL REAL ESTATE FUND IX, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1997
See accompanying notes to Schedule III.
McNEIL REAL ESTATE FUND IX, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1997
(a) For Federal income tax purposes, the properties are depreciated over lives ranging from 5-27.5 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $92,572,312 and accumulated depreciation was $54,190,231 at December 31, 1997.
(b) The initial cost and encumbrances reflect the present value of future loan payments discounted, if appropriate, at a rate estimated to be the prevailing interest rate at the date of acquisition or refinancing.
(c) The asset held for sale is carried at the lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and cumulative write-downs, becomes the new cost basis when the asset is classified as "Asset Held for Sale." Depreciation ceases at the time the asset is placed on the market for sale.
McNEIL REAL ESTATE FUND IX, LTD.
Notes to Schedule III
Real Estate Investments and Accumulated Depreciation
A summary of activity for the Partnership's real estate investments and accumulated depreciation is as follows:
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 - -------- ---------------------------------------------------
Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows:
Each director shall serve until his successor shall have been duly elected and qualified.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - -------- ----------------------
No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1997, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1997. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future.
See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- --------------------------------------------------------------
(A) Security ownership of certain beneficial owners.
No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, known to the Partnership is the beneficial owner of more than 5% of the Partnership's securities, except as noted in below:
1. A group of limited partnerships affiliated with Liquidity Financial Corporation, all of whose outstanding stock is owned by Richard G. Wollack and Brent R. Donaldson, 2200 Powell Street, Suite 700, Emeryville, California, 94608, collectively own 6,389 Units (5.8%) as of January 31, 1998.
2. High River Limited Partnership, 100 S. Bedford Road, Mount Kisco, New York, 10549, owns 15,616 Units (14.2%) as of January 31, 1998.
(B) Security ownership of management.
The General Partner and the officers and directors of its general partner, collectively, own 5,715 Units (5.2%) as of January 31, 1998.
(C) Change in control.
None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ----------------------------------------------
Under the terms of the Amended Partnership Agreement, the Partnership is paying the MID to the General Partner. The maximum MID is calculated as 1% of the tangible asset value of the Partnership. The maximum MID percentage decreases subsequent to 1999. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items.
The MID will be paid to the lesser of the Partnership's excess cash flow, as defined, or net operating income (the "Entitlement Amount"), and may be paid in (i) cash, unless there is insufficient cash to pay the distribution, in which event any unpaid portion not taken in Units will be deferred and is payable, without interest, from the first available cash and/or (ii) in Units. A maximum of 50% of the MID may be paid in Units. The number of Units issued in payment of the MID is based on the greater of $50 per Unit or the net tangible asset value, as defined, per Unit. For the year ended December 31, 1997, the Partnership paid or accrued MID for the General Partner in the amount of $1,137,022.
During 1991, the Partnership amended its capitalization policy and began capitalizing certain costs of improvements and betterments which under policies of prior management had been expensed when incurred. The purpose of the amendment was to more properly recognize items which were capital in nature. The effect of the amendment standing alone was evaluated at the time the change was made and determined not to be material to the financial statements of the Partnership in 1991, nor was it expected to be material in any future year. However, the amendment can have a material effect on the calculation of the Entitlement Amount which determines the amount of MID earned. Capital improvements are excluded from cash flow, as defined. The majority of base period cash flow was measured under the previous capitalization policy, while incentive period cash flow is determined using the amended policy. Under the amended policy, more items are capitalized, and cash flow increases. Had base period cash flow been measured on a basis comparable with incentive period cash flow, MID for the year ended December 31, 1995 would have been reduced by $111,248. The amendment of the capitalization policy did not materially affect the MID for 1997 or 1996 because the Entitlement Amount was sufficient to pay the MID notwithstanding the amendment to the capitalization policy.
The Partnership pays property management fees equal to 5% of gross rental receipts of the Partnership's properties to McREMI for providing property management and leasing services for the Partnership's properties. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1997, the Partnership incurred $1,446,237 of property management fees and reimbursements.
See Item 1 - Business, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 2 - "Transactions with Affiliates."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------
See accompanying Index to Financial Statements at Item 8 - Financial Statements and Supplementary Data.
(A) The following exhibits are incorporated by reference and are an integral part of this Form 10-K.
Exhibits - --------
The Partnership has omitted instruments with respect to long-term debt where the total amount of the securities authorized thereunder does not exceed 10% of the total assets of the Partnership. The Partnership agrees to furnish a copy of each such instrument to the Commission upon request.
(1) Incorporated by reference to the Annual Report of McNeil Real Estate Fund IX, Ltd. (File No. 0-9026) on Form 10-K for the period ended December 31, 1990, as filed with the Securities and Exchange Commission on March 29, 1991.
(2) Incorporated by reference to the Annual Report of McNeil Real Estate Fund IX, Ltd. (File No. 0-9026), on Form 10-K for the period ended December 31, 1991, as filed with the Securities and Exchange Commission on March 30, 1992.
(3) Incorporated by reference to the Annual Report of McNeil Real Estate Fund IX, Ltd. (File No. 0-9026), on Form 10-K for the period ended December 31, 1992, as filed with the Securities and Exchange Commission on March 30, 1993.
(4) Incorporated by reference to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783), on Form 10-K for the period ended December 31, 1993, as filed with the Securities and Exchange Commission on March 30, 1994.
(5) Incorporated by reference to the Annual Report of McNeil Real Estate Fund IX, Ltd. (File No. 0-9026), on Form 10-K for the period ended December 31, 1993, as filed with the Securities and Exchange Commission on March 30, 1994.
(6) Incorporated by reference to the Annual Report of McNeil Real Estate Fund IX, Ltd. (File No. 0-9026), on Form 10-K for the period ended December 31, 1994, as filed with the Securities and Exchange Commission on March 30, 1995.
27. Financial Data Schedule for the year ended December 31, 1997.
(B) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 1997.
McNEIL REAL ESTATE FUND IX, LTD. A Limited Partnership
SIGNATURE PAGE
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.
McNEIL REAL ESTATE FUND IX, LTD.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
March 31, 1998 By: /s/ Robert A. McNeil - -------------- ---------------------------------- Date Robert A. McNeil Chairman of the Board and Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 31, 1998 By: /s/ Ron K. Taylor - -------------- ----------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer)
March 31, 1998 By: /s/ Brandon K. Flaming - -------------- ----------------------------------- Date Brandon K. Flaming Vice President of McNeil Investors, Inc. (Principal Accounting Officer)