ITEM 1.BUSINESS
Krupp Realty Limited Partnership-VII ("KRLP- VII") was formed on August 21, 1984 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. KRLP-VII issued all of the General Partner Interests to two General Partners, The Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited Partnership-II, a Massachusetts limited partnership. KRLP-VII also issued all of the Original Limited Partner Interests to The Krupp Company Limited Partnership-II. On November 2, 1984, KRLP-VII commenced an offering of up to 40,000 units of Investor Limited Partner Interest (the "Units") for $1,000 per Unit. The public offering was closed on April 25, 1986, at which time 27,184 Units had been sold. For additional details, see Note A to Consolidated Financial Statements included in Item 8 (Appendix A) of this report. The primary business of KRLP-VII is to invest in, operate, refinance and ultimately dispose of a diversified portfolio of residential and commercial real estate. KRLP-VII considers itself to be engaged only in the industry segment of investment in real estate.
On December 19, 1984 the General Partners formed Krupp Realty Courtyards Limited Partnership ("Realty-VII") as a prerequisite for the refinancing of Courtyards Village East Apartments ("Courtyards Village"). At the same time, the General Partners transferred ownership of Courtyards Village to Realty-VII. The General Partner of Realty-VII is KRLP-VII. The Limited Partners of Realty-VII are KRLP- VII and The Krupp Corporation ("Krupp Corp."). Krupp Corp. has beneficially assigned its interest in Realty-VII to KRLP-VII.
On March 31, 1994, the General Partners formed Windsor Partners Limited Partnership ("Windsor L.P.") as a prerequisite for the refinancing of Windsor Apartments. At the same time, the General Partners transferred ownership of the property to Windsor L.P. In exchange for the property, KRLP-VII received 99% Limited Partnership interest in Windsor L.P. The General Partner of Windsor L.P. is ST. Windsor Corporation which has a 1% interest in Windsor L.P. and is 100% owned by KRLP-VII.
KRLP-VII, Realty-VII and Windsor L.P. are collectively known as Krupp Realty Limited Partnership-VII and Subsidiaries (collectively referred to herein as the "Partnership").
On December 2, 1997, Berkshire Realty Enterprise Limited Partnership, an affiliate of the General Partners, as agent for the Partnership, entered into an Agreement of Sale to sell Nora Corners, a shopping center containing 89,432 leasable square feet, located in Indianapolis, Indiana, to Kejack, Inc. and its permitted assigns, which are unaffiliated third parties. The transaction was consummated on January 30, 1998 (see Note K to Consolidated Financial Statements, included in Item 8 (Appendix A) of this report).
The Partnership's real estate investments are subject to some seasonal fluctuations due to changes in utility consumption and seasonal maintenance expenditures. However, the future performance of the Partnership will depend upon factors which cannot be predicted. Such factors include general economic and real estate market conditions, both on a national basis and in those areas where the Partnership's real estate investments are located, the availability and cost of borrowed funds, real estate tax rates, operating expenses, energy costs, government regulations and federal and state income tax laws. The requirements for compliance with federal, state and local regulations to date have not had an adverse affect on the Partnership's operations, and no adverse affect therefrom is anticipated in the future. The Partnership's investments in real estate are also subject to such risks as (i) competition from existing and future projects held by other owners in the locations of the Partnership's properties, (ii) possible reduction in rental income due to an inability to maintain high occupancy levels, the financial failure of a tenant or the inability of retail tenants to achieve gross sales at a level sufficient to provide for additional rental income based on a percentage of sales, (iii) possible adverse changes in mortgage interest rates, (iv) possible adverse changes in general economic and local conditions, such as competitive over-building, increases in unemployment, or adverse changes in real estate zoning laws, (v) the possible future adoption of rent control legislation which would not permit the full amount of increased costs to be passed on to tenants in the form of rent increases, and (vi) other circumstances over which the Partnership may have little or no control.
As of December 31, 1997, the Partnership did not employ any personnel.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1997, the Partnership had leveraged investments in two apartment complexes having an aggregate of 524 units and one commercial shopping center with 89,432 square feet of leasable space.
A summary of the Partnership's real estate investments as of December 31, 1997 is presented below. Schedule III included in Item 8 (Appendix A) to this report contains additional detailed information with respect to individual properties.
The Partnership has no present plans for major improvements or developments of its real estate. Only improvements necessary to keep the Partnership's properties competitive in their respective markets were completed in 1997 and are expected to be completed in the next year.
There were two tenants at Nora Corners occupying 10% or more of the Partnership's leasable space as of December 31, 1997.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Partnership is a party or of which any of its property is the subject.
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 COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The transfer of Units is subject to certain limitations contained in the Partnership Agreement. There is no public market for the Units and it is not anticipated that any such public market will develop.
The number of Investor Limited Partners as of December 31, 1997 was approximately 1,500.
One of the objectives of the Partnership is to generate cash available for distribution. The Partnership discontinued distributions during 1989 due to insufficient operating Cash Flow. In 1994, however, the General Partners determined that there was sufficient Cash Flow to reinstate distributions. These distributions commenced in August, 1994 at a rate of $5.00 per Unit and thereafter have been paid semiannually at an annual rate of $20.00 per Unit.
The Partnership made the following distributions to its Partners during the years ended December 31, 1997 and 1996:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be used in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto, which are included in Items 7 and 8 of this report, respectively.
Operating results for the periods presented are not comparable due to the sale of Westbrook Place and Willow Cove Apartments on July 1, 1993.
Prior performance of the Partnership is not necessarily indicative of future operations. ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements.
Liquidity and Capital Resources
The Partnership's ability to generate cash adequate to meet its needs is dependent primarily upon the operations of its real estate investments. Such ability would also be impacted by the future availability of bank borrowings and the future refinancing and sale of the Partnership's remaining real estate investments. These sources of liquidity will be used by the Partnership for payment of expenses related to real estate operations, capital improvements, debt service and other expenses. Cash Flow, if any, as calculated under Section 8.2(a) of the Partnership Agreement, will then be available for distribution to the Partners. In 1994, the General Partners determined that there was sufficient Cash Flow to reinstate semiannual distributions. These distributions commenced in August 1994 at a rate of $5.00 per Unit and increased in February 1995 to a rate of $20.00 per Unit.
On July 30, 1997, the Partnership successfully completed the refinancing of the Courtyards Village East Apartments ("Courtyards Village") mortgage note. The new $5,280,000 note bears interest at an annual rate of 7.88%, requires equal monthly principal and interest installments of $38,302, and matures on August 1, 2007. Net refinancing proceeds of approximately $1,860,000 will provide additional liquidity to fund capital improvements at the Partnership's properties, Courtyards Village and Windsor Apartments.
In order to remain competitive in their respective markets, the Partnership's properties spent approximately $1,301,000 in 1997 and are expecting to spend approximately $1,721,000 for fixed assets in 1998, primarily funded from refinancing proceeds. These improvements include interior and exterior enhancements, carpeting and vinyl flooring upgrades, roofing at Windsor Apartments and an extensive rehabilitation project at Courtyards Village.
On December 2, 1997, Berkshire Realty Enterprises Limited Partnership, an affiliate of the General Partners, as agent for the Partnership, entered into an Agreement of Sale to sell Nora Corners, a shopping center containing 89,432 net leasable square feet located in Indianapolis, Indiana, to Kejack, Inc. and its permitted assigns, which are unaffiliated third parties. The transaction was consummated on January 30, 1998 (see Note K to Consolidated Financial Statements, included in Item 8
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to 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 directors or executive officers. Information as to the directors and executive officers of The Krupp Corporation, which is a General Partner of KRLP-VII, and The Krupp Company Limited Partnership-II, the other General Partner of KRLP-VII, is as follows:
Position with Name and AgeThe Krupp Corporation
Douglas Krupp (51)President and Co-Chairman of the Board George Krupp (53)Co-Chairman of the Board Wayne H. Zarozny (39)Treasurer
Douglas Krupp is Co-Chairman and Co-Founder of The Berkshire Group. Established in 1969 as the Krupp Companies, this real estate-based firm expanded over the years within its areas of expertise including investment program sponsorship, property and asset management, mortgage banking, health care facility ownership and the management of the company. Mr. Krupp is a graduate of Bryant College. In 1989 he received an honorary Doctor of Science in Business Administration from this institution and was elected trustee in 1990. Mr. Krupp is Chairman of the Board and a Director of both Berkshire Realty Company, Inc. (NYSE-BRI) and Harborside Health care (NYSE-HBR). Mr. Krupp also serves as Chairman of the Board and Trustee of Krupp Government Income Trust and as Chairman of the Board and Trustee of Krupp Government Income Trust II. George Krupp is Douglas Krupp's brother.
George Krupp is the Co-Chairman and Co- Founder of The Berkshire Group. Established in 1969 as the Krupp Companies, this real estate-based firm expanded over the years within its areas of expertise including investment program sponsorship, property and asset management, mortgage banking and healthcare facility ownership. Mr. Krupp received his undergraduate education from the University of Pennsylvania and Harvard University Extension School, and holds a Master's degree in history from Brown University.
Wayne H. Zarozny is Vice President of The Berkshire Group. Mr. Zarozny has held several positions within The Berkshire Group since joining the company in 1986 and is currently responsible for accounting and financial reporting, treasury, accounts payable and payroll activities. Prior to joining The Berkshire Group, he was an audit supervisor for Pannell Kerr Forster International and on the audit staff of Deloitte, Haskins and Sells in Boston. He received a B.S. degree from Bryant College, a Master's degree in Business Administration from Clark University and is a Certified Public Accountant.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors or executive officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1997, beneficial owners of record owning more than 5% of the Partnership's 27,184 outstanding Units were as follows:
Title Name and Address Amount and NaturePercent of of of of Class Beneficial Owner Beneficial Ownership Class
InvestorEquity Resource Cambridge Fund L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 105.00 Units .39%
Title Name and Address Amount and NaturePercent of of of of Class Beneficial Owner Beneficial Ownership Class
InvestorEquity Resource General Fund L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 30.00 Units .11%
Investor Equity Resource Brattle Fund L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 20.00 Units .07%
Investor Equity Fund XV L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 160.00 Units .59%
Investor Equity Resource Fund XVI L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 515.00 Units 1.89%
Investor Equity Resource Fund XVII L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 497.50 Units 1.83%
Investor Equity Resource Fund XVIII L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 150.00 Units .55%
Investor Equity Fund XIX L.P. Limited 14 Story Street Partner Cambridge, MA 02138 Units 186.50 Units .69%
Total 1,664.00 Units 6.12%
The only interests held by management or its affiliates consist of its General Partner and Original Limited Partner Interests.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership does not have any directors, executive officers or nominees for election as director.
PART IV
ITEM 14.
ITEM 14.EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements - see Index to Consolidated Financial Statements and Schedule included under Item 8 (Appendix A), on page to this report.
2. Consolidated Financial Statement Schedules - see Index to Consolidated Financial Statements and Schedule included under Item 8 (Appendix A), on page to this report. All other schedules are omitted as they are not applicable or not required or the information is provided in the Consolidated Financial Statements or the Notes thereto.
(b) Exhibits:
Number and Description Under Regulation S-K
The following reflects all applicable exhibits required under Item 601 of Regulation S-K:
(4) Instruments defining the rights of security holders including indentures:
(4.1) Amended Agreement of Limited Partnership dated as of October 23, 1984 [Exhibit A to Prospectus included in Registrant's Registration Statement on Form S-11 (File 2-92889)].*
(4.2) Thirty-Second Amendment and Restatement of Certificate of Limited Partnership filed with the Massachusetts Secretary of State on June 4, 1986 [Exhibit 4.2 to Registrant's Report on Form 10-K dated October 31, 1986 (File No. 0- 14377)].*
(10) Material Contracts
Windsor Apartments
(10.1) Purchase and Sale Agreement dated June 3, 1983 between Douglas Krupp, on behalf of himself and others, and Garland Land Joint Venture [Exhibit 1 to Registrant's Report on Form 8-K dated December 27, 1984 (File No. 2-92889)].*
(10.2) Property Management Agreement, dated December 27, 1984 between Krupp Realty Limited Partnership-VII, as Owner and BRI OP Limited Partnership, formerly known as Berkshire Property Management, a subsidiary of Berkshire Realty Company, Inc. [Exhibit 10.4 to Registrant's Report on Form 10-K for the fiscal year ended October 31, 1984 (File No. 2- 92889)].*
(10.3) Promissory Note dated April 13, 1994 by and between Windsor Partners Limited Partnership and Sun Life Insurance Company of America [Exhibit 10.1 to Registrant's Report on Form 10-Q dated June 30, 1994 (File No. 0- 14377)].*
(10.4) Deed of Trust, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents dated April 13, 1994 from the grantor, Windsor Partners Limited Partnership, to the Trustee, Brian C. Rider [Exhibit 10.2 to Registrant's Report on Form 10-Q dated June 30, 1994 (File No. 0-14377)].*
Courtyards Village East Apartments
(10.5) Purchase and Sale Agreement dated October 12, 1984 between Douglas Krupp on behalf of himself and others, and The Courtyards Village and The Courtyards Village Inn-East Apartments Partnership [Exhibit 1 to Registrant's Report on Form 8-K dated April 1, 1985 (File 2-92889)].*
(10.6) Amended Trust Agreement dated May 6, 1976 between The Courtyards Village and The Courtyards Village Inn-East Apartments Partnership and American National Bank and Trust Company of Chicago [Exhibit 2 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.7) Assignment of Trust of American National Bank and Trust Company of Chicago dated April 1, 1985 [Exhibit 3 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.8) Mortgage Note dated January 1, 1973 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Company [Exhibit 4 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.9) Modification Agreement dated May 1, 1975 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Corporation. [Exhibit 5 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.10) Mortgage Note dated May 18, 1976 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Company [Exhibit 6 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.11) Mortgage Agreement dated May 18, 1976 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Corporation [Exhibit 7 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.12) Amended HUD Regulatory Agreement dated May 18, 1976 between American National Bank and Trust Company of Chicago and Republic Realty Mortgage Corporation [Exhibit 8 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.13) Consolidation Agreement dated June 14, 1976 between American Bank and Trust Company of Chicago, as Trustee, and Republic Realty Mortgage Corporation [Exhibit 9 to Registrant's Report on Form 8-K dated April 1, 1985 (File No. 2-92889)].*
(10.14) Property Management Agreement, dated April 1, 1985 between Krupp Realty Limited Partnership-VII, as Owner and BRI OP Limited Partnership, formerly known as Berkshire Property Management, an affiliate of Berkshire Realty Company, Inc. [Exhibit 10.20 to Registrant's Report on Form 10-K for the year ended October 31, 1985 (File No. 2-92889)].*
(10.15) Promissory Note dated July 30, 1997 between American National Bank and Trust Company of Chicago and Reilly Mortgage Group, Inc.+
(10.16) Multifamily Mortgage, Assignment of Rents, and Security Agreement dated July 30, 1997 between American National Bank and Trust Company of Chicago and Reilly Mortgage Group, Inc.+
Nora Corners Shopping Center
(10.17) Purchase and Sale Agreement dated June 16, 1986 between Douglas Krupp, on behalf of himself and others and Nora Corners Building Associates, Ltd., an Illinois limited partnership [Exhibit 1 to Registrant's Report on Form 8-K dated September 24, 1986 (File No. 0-14377)].*
(10.18) Amendment to Purchase and Sale Agreement dated August 29, 1986 between Douglas Krupp, on behalf of himself and others (assigned to Krupp Realty Limited Partnership- VII), and Nora Corners Building Associates, Ltd., an Illinois limited partnership [Exhibit 2 to Registrant's Report on Form 8-K dated September 24, 1986 (File No. 0-14377)].*
(10.19) Property Management Agreement dated September 24, 1986 between Krupp Realty Limited Partnership-VII, as Owner and Krupp Asset Management Company, now known as Berkshire Property Management ("BPM"), as Agent [Exhibit 10.36 to Registrant's Report on Form 10-K dated October 31, 1987 (File No. 0-14377)].*
(10.20) Special Warranty Deed dated September 24, 1986 between Krupp Realty Limited Partnership-VII and Nora Corners Building Associates, Ltd., an Illinois limited partnership [Exhibit 8 to Registrant's Report on Form 8-K dated September 24, 1986 (File No. 0-14377)].*
(10.21) Land Lease dated October 11, 1962 between Cornelius M. and Wilma Brown (lessor) and Burger Chef Systems, Inc., an Indiana corporation (lessee) [Exhibit 9 to Registrant's Report on Form 8-K dated September 24, 1986 (File No. 0-14377)].*
(10.22) Notice of Lease dated September 23, 1963 between Cornelius M. and Wilma Brown (lessor) and Burger Chef Systems, Inc., an Indiana corporation (lessee) [Exhibit 10 to Registrant's Report on Form 8-K dated September 24, 1986 (File No. 0-14377)].*
(10.23) Assignment of Lease dated September 24, 1986 between Krupp Realty Limited Partnership-VII and Nora Corners Building Associates, Ltd., an Illinois limited partnership [Exhibit 11 to Registrant's Report on Form 8-K dated September 24, 1986 (File No. 0-14377)].*
(10.24) Promissory Note dated September 27, 1994, effective October 6, 1994, by and between Krupp Realty Limited Partnership-VII and John Hancock Mutual Life Insurance Company. [Exhibit 10.22 to Registrant's Report on Form 10-K dated December 31, 1994 (File No. 0-14377)].*
(10.25) Mortgage, Security Agreement, Assignment of Leases and Fixture Filing dated September 27, 1994, effective October 6, 1994, by and between Krupp Realty Limited Partnership-VII and John Hancock Mutual Life Insurance Company. [Exhibit 10.23 to Registrant's Report on Form 10-K dated December 31, 1994 (File No. 0-14377)].*
* Incorporated by reference + Filed herein
(c) Reports on Form 8-K
During the last quarter of the year ended December 31, 1997, the Partnership did not file any reports on Form 8-K. 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, on the th day of March, 1998.
KRUPP REALTY LIMITED PARTNERSHIP-VII By: The Krupp Corporation, a General Partner
By:/s/ Douglas Krupp Douglas Krupp, President, Co-Chairman (Principal Executive Officer) and Director of The Krupp Corporation
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 indicated, on the th day of March, 1998.
Signatures Titles
/s/ Douglas Krupp President, Co- Chairman (Principal Executive Douglas KruppOfficer) and Director of The Krupp Corporation, a General Partner.
/s/ George Krupp Co-Chairman (Principal Executive Officer)George Krupp and Director of The Krupp Corporation, a General Partner.
/s/ Wayne H. Zarozny Treasurer of The Krupp Corporation, a Wayne H. Zarozny General Partner.
APPENDIX A
KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE ITEM 8 OF FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 1997 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1997 and December 31, 1996
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Partners' Equity for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial StatementsF-8 -
Schedule III - Real Estate and Accumulated Depreciation -
All other schedules are omitted as they are not applicable, not required, or the information is provided in the consolidated financial statements or the notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Krupp Realty Limited Partnership-VII and Subsidiaries:
We have audited the consolidated financial statements and the financial statement schedule of Krupp Realty Limited Partnership-VII and Subsidiaries (the "Partnership") listed in the index on page of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Krupp Realty Limited Partnership-VII and Subsidiaries as of December 31, 1997 and 1996 and the consolidated 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. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information required to be included therein.
Boston, Massachusetts COOPERS & LYBRAND L.L.P. January 30, 1998 KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996 and 1995
The accompanying notes are an integral part of the consolidated financial statements.
KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995
The per Unit distributions for each of the years ended December 31, 1997, 1996 and 1995 was $20.00, none of which represented a return of capital.
The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995
The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization
Krupp Realty Limited Partnership-VII ("KRLP- VII") was formed on August 21, 1984 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. KRLP-VII terminates on December 31, 2025 unless earlier terminated upon the occurrence of certain events as set forth in the Partnership Agreement. KRLP-VII issued all of the General Partner Interests to two General Partners, The Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited Partnership-II, a Massachusetts limited partnership, in exchange for capital contributions aggregating $1,000. In addition, the General Partners were required to make additional capital contributions of $135,891 which were used to pay organization and offering costs in excess of 5% of the gross proceeds of the offering. Except under certain limited circumstances upon termination of KRLP-VII, the General Partners are not required to make any other additional capital contributions.
KRLP-VII also issued all of the Original Limited Partner Interests to The Krupp Company Limited Partnership-II in exchange for a capital contribution of $4,000.
On November 2, 1984, KRLP-VII commenced an offering of up to 40,000 units of Investor Limited Partner Interest (the "Units") for $1,000 per Unit. The public offering was closed on April 25, 1986, at which time 27,184 Units had been sold for $27,184,000.
On December 19, 1984 the General Partners formed Krupp Realty Courtyards Limited Partnership ("Realty-VII") as a prerequisite for the refinancing of Courtyards Village East Apartments ("Courtyards Village"). At the same time, the General Partners transferred ownership of Courtyards Village to Realty-VII. The General Partner of Realty-VII is KRLP-VII. The Limited Partners of Realty-VII are KRLP- VII and The Krupp Corporation ("Krupp Corp."). Krupp Corp. has beneficially assigned its interest in Realty-VII to KRLP-VII.
On March 31, 1994, the General Partners formed Windsor Partners Limited Partnership ("Windsor L.P.") as a prerequisite for the refinancing of Windsor Apartments. At the same time, the General Partners transferred ownership of the property to Windsor L.P. In exchange for the property, KRLP-VII received a 99% Limited Partnership interest in Windsor L.P. The General Partner of Windsor L.P. is ST. Windsor Corporation which has a 1% interest in Windsor L.P. and is 100% owned by KRLP-VII.
KRLP-VII, Realty-VII and Windsor L.P. are collectively known as Krupp Realty Limited Partnership-VII and Subsidiaries (collectively referred to herein as the "Partnership").
On December 2, 1997, Berkshire Realty Enterprises Limited Partnership, an affiliate of the General Partners, as agent for the Partnership, entered into an Agreement of Sale to sell Nora Corners, a shopping center containing 89,432 leasable square feet, located in Indianapolis, Indiana, to Kejack, Inc. and its permitted assigns, which are unaffiliated third parties. Nora Corners Shopping Center was included in a package with thirteen other properties owned by affiliates of the General Partners. The transaction was consummated subsequent to year end on January 30, 1998 (see Note K).
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
B. Significant Accounting Policies
The Partnership uses the following accounting policies for financial reporting purposes, which may differ in certain respects from those used for federal income tax purposes (see Note J):
Basis of Presentation
The consolidated financial statements present the consolidated assets, liabilities and operations of the Partnership. All intercompany balances and transactions have been eliminated.
Risks and Uncertainties
The Partnership invests its cash primarily in deposits and money market funds with commercial banks. The Partnership has not experienced any losses to date on its invested cash.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Partnership includes all short-term investments with original maturities of three months or less from the date of acquisition in cash and cash equivalents. The cash investments are recorded at cost, which approximates market values.
Rental Revenues
Residential and commercial leases require the payment of base rent monthly in advance. Rental revenues are recorded on the accrual basis. Commercial leases generally contain provisions for additional rent based on a percentage of tenant sales and other provisions which are also recorded on the accrual basis, but are billed in arrears. Minimum rental revenue for long term commercial leases is recognized on a straight- line basis over the life of the related lease.
Depreciation
Depreciation is provided for by the use of the straight-line method over estimated useful lives of the related assets as follows:
Buildings and improvements 2 to 39 years Equipment, furnishings and fixtures3 to 8 years
Tenant improvements for commercial tenants are depreciated over the life of the related lease.
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
B.Significant Accounting Policies, Continued
Impairment of Long-Lived Assets
Real estate assets and equipment are stated at depreciated cost. Pursuant to Statement of Financial Accounting Standards Opinion No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", impairment losses are recorded on long-lived assets used in operations on a property by property basis, when events and circumstances indicate that the assets might be impaired and the estimated undiscounted cash flows to be generated by those assets are less than the are less than the carrying amount of those assets. Upon determination that an impairment has occurred, those assets shall be reduced to fair value less estimated costs to sell.
Leasing Commissions
Leasing commissions on commercial properties are deferred and amortized over the life of the related lease.
Deferred Expenses
Costs of obtaining and recording mortgages on the properties are being amortized over the term of the mortgage notes using the straight line method.
Income Taxes
The Partnership is not liable for federal or state income taxes as the Partnership income or loss is allocated to the Partners for income tax purposes. In the event that the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and the examination results in a change in the Partnership taxable income or loss, such change will be reported to the Partners.
Reclassifications
Certain prior year balances have been reclassified to conform with current year consolidated financial statement presentation.
C. Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1997 and 1996 consisted of the following:
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
D. Mortgage Notes Payable
The properties owned by the Partnership are pledged as collateral for the respective non-recourse mortgage notes payable outstanding at December 31, 1997 and 1996. Mortgage notes payable consisted of the following:
Courtyards Village East Apartments
On July 30, 1997, the Partnership completed the refinancing of the Courtyards Village Apartments mortgage note. The property was refinanced with a $5,280,000 non-recourse mortgage note payable at the rate of 7.88% per annum with monthly principal and interest payments of $38,302. The mortgage note, which is collateralized by the property, matures on August 1, 2007 at which time the remaining principal (approximately $4,658,637) and any accrued interest are due. The note may be prepaid, subject to a prepayment premium, at any time with 30 days notice. The Partnership used the majority of the proceeds from the refinancing to repay the existing mortgage note on the property of $3,172,809, pay closing costs of $136,040 and to establish various escrows. As part of the refinancing, the Partnership was required to establish a $9,525 repair escrow and a replacement reserve escrow. The replacement reserve escrow required no initial deposit at the close and monthly deposits of $4,200 beginning on September 1, 1998.
At December 31, 1996, the property was subject to a non-recourse mortgage note payable, held by the U.S. Department of Housing and Urban Development ("HUD") which required equal monthly installments of $26,506, which consisted of principal and interest. In addition, the Partnership was required to make a monthly deposit of $2,000 to an escrow account to be used for property replacements and improvements, and a monthly mortgage insurance premium deposit equal to .5% per annum of the outstanding principal balance.
Based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities, the fair value of long-term debt is approximately $5,400,000 and $3,000,000 for the years ended December 31, 1997 and 1996, respectively.
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
D.Mortgage Notes Payable, Continued
Nora Corners Shopping Center
The property is subject to a non-recourse mortgage note payable in the original amount of $4,250,000, based on a 25-year amortization and payable in equal monthly installments of $35,666, consisting of principal and interest. At maturity, all unpaid principal, approximately $3,526,000, and any accrued interest are due. After October 1, 1998, the note may be prepaid subject to a prepayment penalty.
Based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities, the fair value of long-term debt is approximately $4,400,000 and $4,300,000 for the years ended December 31, 1997 and 1996, respectively.
Windsor Apartments
The property is subject to a non-recourse mortgage note payable in the original amount of $5,300,000, based on a 30-year amortization and payable in equal monthly installments of $43,602, consisting of principal and interest. At maturity, all unpaid principal, approximately $5,021,000, and any accrued interest are due. The note may be prepaid subject to a prepayment penalty.
Based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities, the fair value of long-term debt is approximately $5,500,000 for the years ended December 31, 1997 and 1996.
The aggregate scheduled principal amounts of long-term borrowings due during the five years ending December 31, 2002 are $156,747, $171,020, $186,599, $5,161,146 and $152,964.
The Partnership paid interest on its borrowings in the amounts of $1,155,562, $1,087,261 and $1,101,325 during the years ended December 31, 1997, 1996 and 1995, respectively.
E. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following at December 31, 1997 and 1996:
F.Partners' Equity
Under the terms of the Partnership Agreement, losses from operations are allocated 99% to the Investor Limited Partners and 1% to the General Partners. Profits from operations are allocated 90% to the Investor Limited Partners, 8% to the Original Limited Partner and 2% to the General Partners, until such time that the Investor Limited Partners have received a return of their total invested capital plus a 9% per annum cumulative return thereon and thereafter, 69% to the Investor Limited Partners, 25% to the Original Limited Partner and 6% to the General Partners.
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
F.Partners' Equity, Continued
Profits from Capital Transactions are allocated first, to the Investor Limited Partners until they have received a return of their total invested capital. Thereafter, profits from Capital Transactions are allocated in accordance with the Partnership Agreement. Losses from Capital Transactions are allocated 99% to the Investor Limited Partners and 1% to the General Partners. Notwithstanding anything above, the General Partners shall be allocated at least 1% of all profits and losses from Capital Transactions.
Under the terms of the Partnership Agreement, cash distributions are made on the same basis as the allocations of profits described above. Pursuant to the Partnership Agreement, proceeds from Capital Transactions shall first be applied to the payment of all debts and liabilities of the Partnership and second to fund reserves for contingent liabilities. The remaining net cash proceeds shall then be distributed in accordance with the Partnership Agreement and will be distributed in part after payment by the Partnership of a certain subordinated financial consulting fee as described below.
The Partnership entered into a Sales Agent Agreement for the public offering of Units. Under that Agreement, the Partnership was required to pay to the sales agent underwriting commissions and related financial consulting fees equal to 9% of the gross proceeds from the offering. In addition, the sales agent will be entitled to receive, over the life of the Partnership, a subordinated financial consulting fee based upon the net cash proceeds received by the Partnership as a result of sales and refinancings of Partnership properties, which fee shall be in an amount not exceeding 1.5% of the gross proceeds of the offering of Units. No such fees will, however, be payable unless and until all Partners have received a return of their Invested Capital and the Investor Limited Partners have received a 9% per annum cumulative return.
As of December 31, 1997, the following cumulative partner contributions and allocations have been made since the inception of the Partnership:
G. Future Base Rents Due Under Commercial Operating Leases
As a result of the sale of the Nora Corners, subsequent to year end, all commercial operating leases were assumed by the buyer (see Note K).
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
H.Land Lease
Nora Corners is situated on 11.21 acres of land, seven acres of which are owned by certain non-affiliated third parties. These seven acres of land are leased to the Partnership subject to a 99-year land lease which expires in 2061. The land lease requires annual rental payments of $17,280 from 1987 through 2012, $20,180 from 2012 through 2037, and $23,040 from 2037 through 2061. Under the terms of the land lease, the lessee may assign its rights to a subsequent purchaser of the property (see Note K).
I. Related Party Transactions
The Partnership pays property management fees to an affiliate of the General Partners for management services. Pursuant to the management agreements, management fees are payable monthly at a rate of 4% of the gross receipts, net of leasing commissions, from the commercial property under management and 5% of gross receipts from residential properties under management. The affiliate of the General Partners sold the residential management agreements to BRI OP Limited Partnership, a subsidiary of Berkshire Realty Company Inc., a publicly traded real estate investment trust and an affiliate of the General Partners, on February 28, 1997. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its properties including administrative expenses.
Amounts accrued or paid to the General Partners' affiliates during the years ended December 31, 1997, 1996 and 1995 were as follows:
Expense reimbursements due from affiliates of $78,010 and $14,328 were included in prepaid expenses and other assets at December 31, 1997 and 1996, respectively.
In addition to the amounts above, refinancing costs of $53,540 were paid to the General Partners' affiliates during the year ended December 31, 1997.
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
J. Federal Income Taxes
For federal income tax purposes, the Partnership is depreciating property using the Accelerated Cost Recovery System ("ACRS") and the Modified Accelerated Cost Recovery System ("MACRS") depending on which is applicable.
The reconciliation of the net income (loss) reported in the accompanying Consolidated Statement of Operations with the net loss reported in the Partnership's federal income tax return for the years ended December 31, 1997, 1996 and 1995 is as follows:
For the years ended December 31, 1997, 1996 and 1995, the per Unit net loss to the Investor Limited Partners for federal income tax purposes was ($4.61), ($.88) and ($3.11), respectively.
The basis of the Partnership's assets for financial reporting purposes exceeds its tax basis by approximately $4,141,800 and $4,198,500 at December 31, 1997 and 1996, respectively. The basis of the Partnership's liabilities for financial reporting purposes is less than its tax basis by approximately $2,895,500 for the year ended December 31, 1997.
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
K. Subsequent Events
The sale of Nora Corners Shopping Center, as discussed in Note A, was consummated on January 30, 1998. The total selling price of the fourteen properties was $138,000,000, of which the Partnership received $6,604,300, less the assumption of the first mortgage note payable of $4,084,037 and its share of the closing costs. The land lease discussed in Note H was assigned to the buyer in conjunction with the sale.
As a result of the sale of Nora Corners Shopping Center on January 30, 1998, the Partnership filed a report on Form 8-K on February 2, 1998. KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
Continued KRUPP REALTY LIMITED PARTNERSHIP-VII AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
December 31, 1997
Reconciliation of Real Estate and Accumulated Depreciation for each of the three years in the period ended December 31, 1997:
The aggregate cost of the Partnership's real estate for federal income tax purposes is $30,172,138 and the aggregate accumulated depreciation for federal income tax purposes is $19,654,470.