ITEM 1. BUSINESS -------- OWNERSHIP STRUCTURE -------------------
Capital Income Properties - C Limited Partnership (the Partnership) was formed as of December 15, 1984, under the District of Columbia Uniform Limited Partnership Act for the purpose of investing in a mixed use development located in Bethesda, Maryland, consisting of a hotel, an office building containing both office and retail space, a retail pavilion and a parking facility (the Development). The investment was accomplished through the purchase of a limited partnership interest in Bethesda Metro Center Limited Partnership (BMCLP), a Maryland limited partnership which owns, operates and maintains the Development.
Between October 21, 1985 and December 31, 1985, 600 limited partnership interests (Units) were sold to the public through a private placement offering with an aggregate offering price of $60,000,000 (reduced to $59,639,200 for Units paid in full at a discount at inception) conducted pursuant to Section 4(2) of the Securities Act of 1933, as amended and Regulation D promulgated thereunder. As a result of the sale of half-units, the 600 units outstanding are held by 700 limited partners (Investors) of the Partnership. As of December 31, 1990, the Partnership had received capital contributions from Investors in an aggregate amount equal to $59,599,769. No additional capital contributions have been received since December 31, 1990.
The Partnership made all of its payments of capital contributions totaling $42,500,100 to BMCLP in nine installments commencing in December 1985 and ending in March 1990 in return for a 92.5% limited partnership interest in BMCLP. Such capital contributions were funded with the proceeds of the Investors' capital contributions to the Partnership. Effective June 15, 1992 the Investors voted, in connection with a loan modification, to remove the managing general partners of BMCLP and to make an affiliate of the Managing General Partner of the Partnership the managing general partner of BMCLP. The affiliate of the Managing General Partner of the Partnership is able to exercise significant control over the operating, financing and investing activities of BMCLP. Accordingly, effective June 15, 1992, the Partnership commenced reporting of its financial statements on a consolidated basis of accounting for its investment in BMCLP. Prior to the assumption by an affiliate of the Partnership of the managing general partner duties, the Partnership recorded its investment in BMCLP under the equity method.
BMCLP was organized on November 30, 1981 and owns and operates the Development. The Development consists of a 381-room hotel known as the Hyatt
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Regency Bethesda (the Hotel), an office building including The Market at Bethesda Metro, which contains approximately 336,000 square feet of net rentable office space and 18,000 square feet of net rentable retail space, known as Bethesda Metro Office Building, a parking garage and an outdoor plaza with cafes, fountains and a performing arts center that converts into an ice skating rink in the winter months (collectively, the Office Building). The Development is located on top of the subway station in downtown Bethesda, Maryland, on approximately 3.5 acres of land leased from the Washington Metropolitan Area Transit Authority (WMATA). The five floors of underground parking, with a total of approximately 1,300 parking spaces, allow direct access to the Office Building.
The Partnership has four general partners, C.R.I., Inc. (CRI), William B. Dockser, Martin C. Schwartzberg and H. William Willoughby (the General Partners), one affiliated initial limited partner, CRICO-Bethesda Growth Partners Limited Partnership, and 700 Investors. The Managing General Partner of the Partnership is CRI. Martin C. Schwartzberg retired from CRI and its affiliated business effective January 1, 1996 and has had no role in management of the Partnership since then. The Partnership is a limited partnership owning a 92.5% limited partner interest in BMCLP. The other limited partners of BMCLP are Alan I. Kay, Allen E. Rozansky (Special Limited Partners) and R & K Bethesda Metro Limited Partnership. C.R.C.C. of Bethesda, Inc. (CRCC), an affiliate of CRI, acts as BMCLP's managing general partner.
The Hotel is managed by the Hyatt Corporation (Hyatt) and the Office Building is managed by Realty Management Company, a former affiliate of one of the Special Limited Partners.
ITEM 2.
ITEM 2. PROPERTIES ---------- THE HOTEL ---------
The Hotel is a 12-story, 381 room luxury hotel which includes 13 suites, 181 king-bedded rooms, 11 queen-bedded rooms and 176 double-bedded rooms, with a 120-foot high central atrium lobby. The Hotel has a 104-seat restaurant and a lobby bar, and contains two levels of convention, meeting and banquet facilities. The 7,300 square foot Crystal Ballroom can accommodate over 480 people school-room style and seat approximately 700 people for banquets. There are thirteen additional conference rooms capable of accommodating from 30-150 people for banquets and from 40-200 people for receptions. In addition, there are two executive conference rooms.
THE OFFICE BUILDING -------------------
The Office Building is a 17-story deluxe office building featuring a lobby atrium garden and a 130-foot hanging sculpture, with The Market at Bethesda Metro, a glass enclosed retail pavilion of European design containing three levels of shopping, restaurants, convenience stores, services and offices, connected to it at the plaza level. An outdoor plaza offers year-round activities. In the winter months, an outdoor ice arena is centrally located in the plaza. During the warmer months, the ice arena converts into an outdoor eating plaza and performing arts center, where outdoor cafes, vendors,
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sculptures, fountains and various activities are located. The Office Building is managed by Realty Management Company (Realty), a former affiliate of one of the Special Limited Partners.
THE LAND LEASE --------------
BMCLP entered into a non-recourse Land Lease with WMATA, dated December 1, 1981, pursuant to which BMCLP leases the land on which the Development is built, for a term of 50 years, renewable at the option of BMCLP for an additional term of 49 years.
As of December 1, 1985 and continuing throughout the remainder of the initial lease term, BMCLP is required to pay WMATA a minimum annual rental of $1,600,000 in equal quarterly installments in advance. Further, BMCLP is obligated to pay WMATA additional rent in an amount equal to 7.5% of all Gross Income (which is defined in the Land Lease as gross receipts) in excess of $31,000,000, commencing in calendar year 1986 and payable within 90 days of the end of the calendar year to which each payment relates. In 1997, total land lease rental payments of $1,600,000 were made; no additional rent was due or paid for 1997, 1996, or 1995.
WMATA may terminate the Land Lease at least thirty (30) days after giving BMCLP notice if (1) BMCLP fails to make a payment of minimum or additional rent for 30 days after notice of such failure from WMATA or (2) BMCLP fails to perform any other covenants contained in the Land Lease for 60 days after notice of such failure from WMATA. No such default notices have been received.
BMCLP constructed its buildings on land it leases from WMATA. WMATA asserted claims against BMCLP concerning the deterioration of the concrete slab in areas that WMATA has used as a bus terminal and Kiss & Ride area since 1985. WMATA asserted that the deterioration was due to construction defects, but BMCLP took the position that the deterioration was due to improper maintenance. The deterioration reached the point that BMCLP's parking garage, which underlies the concrete slab, could have been damaged. Accordingly, although BMCLP denied any legal liability for the repair of the concrete slab, it agreed to contribute $100,000 toward repair of the deck in exchange for a full release of any and all claims WMATA may have with respect to the design and construction issues. The estimated cost for repair was approximately $1,000,000, of which WMATA paid all but the $100,000 contributed by BMCLP. BMCLP negotiated a release with WMATA, and in July 1996 submitted it together with the $100,000. On September 26, 1996 the release and a settlement agreement were signed, thus releasing BMCLP from any liability over $100,000. At such time, the $100,000 was transferred to WMATA. The settlement agreement specifies work to be performed and WMATA's use of BMCLP's parking garage space for structural shoring during its repairs of the overhead concrete deck. The repair work began during July 1997 and was concluded during early 1998.
MANAGEMENT OF THE DEVELOPMENT -----------------------------
Hotel Management - ----------------
Hyatt manages the Hotel under the name of Hyatt Regency Bethesda, in accordance with the terms and conditions of the Hotel Management Agreement dated March 1, 1982. The Hotel Management Agreement will expire on December 31, 2015,
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unless earlier terminated in accordance with its terms. Hyatt is given substantial control and discretion in the operation of the Hotel, including the right on behalf of BMCLP to negotiate all agreements necessary to the operation of the Hotel and the right to determine the charges for rooms, entertainment, food and beverages, to determine labor policies, and to conduct all phases of promotion and publicity relating to the Hotel.
Pursuant to the Hotel Management Agreement, Hyatt also provides "chain services" to the Hotel consisting of: (1) convention, business and sales promotion services, (2) advertising, publicity and public relations services, (3) food and beverage, personnel and other departmental supervision and control services, and (4) centralized reservations services, for which BMCLP is to pay its allocable share of the Hyatt expenses.
Hyatt will be relieved of its obligation to operate the Hotel as a first-class hotel and may, in addition, terminate the Hotel Management Agreement: (1) if prevented from performing its obligations by events beyond Hyatt's control, (2) in the event of a breach by BMCLP of any provision of the Hotel Management Agreement, or (3) if there is a limitation on Hyatt's ability to expend funds for the Hotel, such as would result from BMCLP's failure to provide adequate working capital or replacement reserves, as required under the Hotel Management Agreement.
The Hotel Management Agreement places the following financial obligations on BMCLP.
(1) BMCLP must set aside 3% of gross receipts (as defined in the Hotel Management Agreement as all revenues and income of any kind from the Hotel) as a reserve for the replacement of the Hotel's furnishings and equipment.
(2) BMCLP must assure that there is sufficient working capital on hand to make timely payment of all current obligations of the Hotel (including the annual management fee) and to assure the uninterrupted and efficient operation of the Hotel as a first class hotel development.
(3) BMCLP must reimburse Hyatt for the Hotel's pro rata share of Hyatt's reservation expenses incurred in providing the chain services.
(4) BMCLP must pay Hyatt an annual management fee of (i) a basic fee, equal to 4%, as set forth below, of the gross receipts of the Hotel, and (ii) a contingent incentive fee equal to the amount by which 20% of the profit, before management fees, for such fiscal year exceeds the basic fee payable for such fiscal year.
As of December 31, 1997 the above financial obligations were met by BMCLP. By agreement, the basic fee was reduced to 3% for the period December 31, 1991, to December 31, 1995; as of January 1, 1996, the basic management fee returned to 4%. Management fees paid to Hyatt for the years ended December 31, 1997, 1996 and 1995 were approximately $788,000, $734,000 and $520,000, respectively; the incentive fees earned for the years ended December 31, 1997, 1996 and 1995 were approximately $466,000, $356,000 and $232,000, respectively.
BMCLP can terminate the Hotel Management Agreement upon no less than 60 days written notice if, for two successive fiscal years after December 31, 1995 (referred to as the Sixth Full Year), the Owner's Remittance (as defined) is less than the annual principal and interest payments paid on the first mortgage
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note (presently the Restated First Mortgage Note), up to a maximum of $6,250,000. This shortfall occurred in 1996 and 1997. Accordingly, BMCLP explored the possibility of engaging a different hotel manager, but Hyatt would not agree to let the Partnership retain the franchise unless Hyatt managed the hotel. Instead, BMCLP and Hyatt began negotiating a new Hotel Management Agreement with a lower fee. Currently, BMCLP may not sell or transfer the Hotel or any portion thereof without the prior approval of Hyatt, which may not be unreasonably withheld and will be based upon, among other things, the ability of the prospective purchaser or transferee to fulfill BMCLP's financial obligations under the Hotel Management Agreement. However, during these negotiations, Hyatt asserted that the determination of whether or not a shortfall had occurred must be based on the portion of the Restated First Mortgage Note allocable to the Hotel, rather than the entire debt service, and that based on their analysis, a shortfall may not have occurred in 1996 or 1997. BMCLP vigorously disagrees with this assertion, and is presently considering its options. Management cannot currently project the impact on the accompanying consolidated financial statements of the outcome of these negotiations.
Office Building Management - --------------------------
The Office Building is managed by Realty, an affiliate prior to July 1, 1988, of one of the Special Limited Partners. BMCLP entered into an agreement with Realty, dated January 31, 1985, in which Realty was to manage the Office Building for a term of twenty years commencing with the date the Office Building opened. Under the terms of that agreement, Realty received a management fee equal to 4% of all income collected from the operation of the Office Building, to be paid monthly. However, Realty agreed to allow BMCLP to defer payment of its management fees, effective January 1, 1992, through the date of the restructuring of the original mortgage debt.
In connection with the debt restructuring, which occurred November 16, 1994, BMC Lender Partnership (BMC), the holder of the amended and restated second mortgage note, paid Realty $1,000,000 to terminate its former twenty year management contract with BMCLP (which amount is not part of any financing for which BMCLP is liable). At that time BMCLP entered into a new management contract with Realty for a term of one year which will automatically renew for successive one year periods so long as Realty is not then in default of the management contract. The agreement provides for a management fee in the amount of 4% of total revenues. Of this amount, one-half or 2% shall be paid by Realty to BMC, during the term of the amended and restated second mortgage loan, in partial consideration for the $1,000,000 payment to terminate the original contract. Management fees for the years ended December 31, 1997, 1996 and 1995 were approximately $403,000, $401,000 and $391,000, respectively.
Realty was formed in 1976. It has informed the Partnership that it now has approximately 20 employees and manages approximately 1,000,000 gross square feet of space.
As of December 31, 1997, there was no office space available for rent in the Office Building. Retail and marketplace space was 83% occupied as of December 31, 1997 with approximately 2,400 square feet available for rent. See page II-7 for average occupancy percentages.
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Parking Garage Management - -------------------------
Monument Parking Co., Inc. (Monument) entered into a garage lease with BMCLP, dated March 14, 1983, pursuant to which BMCLP leased the underground parking garage from the date that it opened. Under the garage lease, Monument pays rent to BMCLP in an amount equal to the gross receipts of the parking garage less all operating expenses thereof, including an annual management fee to Monument in the amount of $65,000, until adjusted gross receipts (defined as all cash, revenue and compensation received from garage operations, reduced by parking taxes and other operating expenses) equal $1,500,000.
Monument retains 10% of all adjusted gross receipts in excess of $1,500,000 until the adjusted gross receipts reach $2,000,000, as an incentive fee. In addition, Monument retains 30% of all adjusted gross receipts in excess of $2,000,000, as a further incentive fee. In 1997, adjusted gross receipts equaled $1,126,162.
The garage lease requires Monument to provide parking privileges to tenants of the Office Building, their guests and employees and the guests and employees of the Hotel on a priority basis.
BMCLP FINANCING ---------------
Original Mortgage Debt - ----------------------
On December 23, 1985, BMCLP entered into a ten-year, nonrecourse mortgage note (the First Mortgage Note) with Great Western Bank (Great Western) in the amount of $120,000,000. The First Mortgage Note provided for a variable interest rate, adjustable monthly, of 2.75% in excess of the Federal Home Loan Bank Board Eleventh District weighted-average cost of funds.
On July 1, 1987, BMCLP entered into a five-year nonrecourse mortgage note (the Second Mortgage Note) with Great Western for $10,000,000 together with a modification of the First Mortgage Note. Principal and accrued interest were due at maturity. The proceeds of this loan were used to fund operating deficit requirements. The Second Mortgage Note also provided for a variable interest rate, adjustable monthly, of 4% in excess of the Federal Home Loan Bank Board Eleventh District weighted-average cost of funds.
On October 12, 1990, BMCLP was notified by Great Western that an event of default had occurred related to the nonpayment of its debt service obligation under the First and Second Mortgage Notes (collectively, the Notes). Effective June 15, 1992, Great Western and BMCLP entered into a modification which superseded all previous modifications and was in effect until the restructuring on November 16, 1994, as discussed below.
The modification provided for interest to be accrued at the stated rate, adjusted as set forth in the original Notes, and for interest payments in an amount equal to all of BMCLP's net cash flow, as defined, to be due and payable monthly. All accrued but unpaid interest was added to principal and was to be due in full at maturity. No regular principal payments were required.
The modification also provided for quarterly payments (Excess Payments) to be paid to Great Western beginning March 1992. However, BMCLP paid all net cash
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flow to Great Western, and, therefore, did not itself have cash to make the Excess Payments. These Excess Payments were partially funded to Great Western from management fees waived by Hyatt and those deferred by Realty and Capitol Hotel Group (CHG), an affiliate of the General Partners. During 1994, BMCLP was advanced a total of $193,916, including accrued interest, from CRI for the payments of the Excess Payments due. BMCLP paid $796,876 of Excess Payments to Great Western in 1994, as required. Under the restructured debt, which occurred November 16, 1994, as discussed below, no further Excess Payments were required.
Restructuring of Original Mortgage Debt - ---------------------------------------
On November 16, 1994, Great Western sold the Notes to BMC Lender Partnership (BMC), an unaffiliated entity. BMC sold the First Mortgage Note to General Electric Capital Corporation (GECC), which amended and restated the First Mortgage Note (the Restated First Mortgage Note) to a principal amount of $48,000,000. BMC amended and restated the Second Mortgage Note (the Restated Second Mortgage Note) (collectively, the Restated Notes) to a principal amount of $10,000,000 advanced at closing. Of the total $58 million principal amount of the Restated Notes, $55 million was paid to Great Western in consideration for the Notes, approximately $1.8 million was used to fund loan fees and related costs on behalf of BMCLP, approximately $200,000 was used to fund interest and insurance premiums at the closing date, and the remaining amount of approximately $1.0 million was deposited into an escrow account restricted for working capital requirements.
The Restated First Mortgage Note requires monthly interest payments in arrears, payable at 4.25% in excess of the GECC Composite Commercial Rate which, at December 31, 1997 and 1996 was 5.79% and 5.53%, respectively. In addition to monthly interest payments, monthly principal payments are due in the amount of $108,333. Furthermore, if certain major tenants of the Office Building, as defined in the Restated First Mortgage Note agreement, do not exercise an option to renew, or if they cancel their leases, additional principal payments equal to 100% of net cash flow, as defined, must be remitted to GECC. These payments must continue until the space vacated is 93% rented and other minimum financial conditions are met. All unpaid principal is due at the maturity date, which is November 30, 2001. Additional advances may be made by GECC in an aggregate amount not to exceed 50% of all previously made principal payments. Any additional advances are generally intended to fund tenant improvements, leasing costs and other capital improvements, but may be used to fund other cash flow needs as well. For the years ended December 31, 1997, 1996 and 1995, advances from GECC, and interest accrued thereon, totalled $687,527, $1,030,937 and $216,666, respectively. These advances were used for capital improvements, tenant improvements and leasing commissions.
Annual principal payments due on the Restated First Mortgage Note follow.
1998 $ 1,299,996 1999 1,299,996 2000 1,299,996 2001 40,417,016 ------------ Total $ 44,317,004 ============
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Additionally, under the terms of the Restated First Mortgage Note, an interest reserve account to be used as additional collateral under the Restated First Mortgage Note must be established. Monthly payments of $23,125 must be made into this reserve beginning January 1, 1995, as discussed in Note 2 to the consolidated financial statements. For the years ended December 31, 1997 and 1996, the interest reserve balance was $832,500 and $555,000, respectively.
The Restated Second Mortgage Note stipulates that 16% interest is payable monthly from available cash flow, as defined, on a cumulative basis. Based on the provisions of the Restated Second Mortgage Note, BMCLP s cash flow from operations shall be disbursed in priority, as follows.
(1) Debt service and reserves on the Restated First Mortgage Note.
(2) Establishment of working capital reserves of $50,000 plus an amount reasonably required to pay ordinary and necessary expenses of operations.
(3) Debt service on the Restated Second Mortgage Note (to the extent of available cash flow).
(4) Principal and interest on additional advances, as discussed below, if any, made to BMCLP by BMC.
(5) 75% of the remaining net cash flow (as defined) to BMC and 25% of the remaining net cash flow to BMCLP (less up to $50,000 per year to cover management and administrative costs of the Partnership and/or CRCC), subject to the establishment of the reserves as stipulated in the agreement, as discussed below.
Furthermore, BMC is entitled to an Economic Value Participation Interest, as defined, which requires BMCLP to pay the following at the sale of the property or maturity date of the Restated Notes.
(1) 75% of the amount by which the Economic Value of the Development, as defined, up to $100 million exceeds the unpaid principal balance and accrued interest under the Restated Notes, and
(2) 50% of the Economic Value in excess of $100 million.
In general, the Economic Value is defined by the Restated Second Mortgage Note as the value of the Development as determined by the Partnership or the average of three independent appraisals, if deemed necessary by BMC.
In 1997, 1996 and 1995, $150,000, $150,000 and $300,000, respectively, were paid to BMC as 75% of remaining net cash flow for 1996, 1995 and 1994, respectively; such amounts are included in net cash flow participation in the accompanying consolidated statements of operations. Also in 1997, 1996 and 1995, $50,000 was paid each year to CRCC as management fees for 1996, 1995 and 1994, respectively; such amounts are included in management fees in the accompanying consolidated statements of operations. Additionally, $150,000 and $50,000 were accrued for net cash flow participation and management fees, respectively, as of both December 31, 1997 and December 31, 1996 for fiscal years 1997 and 1996, respectively.
The Restated Second Mortgage Note is due on November 30, 2001 and no principal payments are required until then. However, any amounts remitted to
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BMC with respect to its 75% net cash flow participation described above may be re-advanced to BMCLP for payment of debt service on the Restated First Mortgage Note, repairs, capital improvements, leasing commissions, tenant concessions and improvements, taxes and ground lease payments. These advances are limited to 75% of the total amount required to fund these items. The remaining 25% must be funded by BMCLP. BMC has reserved the right, but does not have the obligation, to make up to $5 million in additional advances that would be secured under its Restated Second Mortgage Note. These additional advances would carry an interest rate of 18% payable from available net cash flow, as defined, and would also be due on November 30, 2001. As of December 31, 1997, no additional advances have been made.
BMC required that BMCLP deposit a deed in lieu of foreclosure in escrow to be recordable in the event of a default under the Restated Second Mortgage Note. CRCC agreed to amend and restate various "no bankruptcy" agreements of the type the original lender, Great Western, had required of it and certain affiliates. The new agreements are not secured or guaranteed, but a default thereunder could trigger the recordation of the escrowed deed in lieu of foreclosure. One event of default would occur if an entity other than CRCC became a General Partner of BMCLP (and could potentially put BMCLP in bankruptcy).
Additionally, under the terms of the Restated Second Mortgage Note, the Partnership received working capital reserves as proceeds in connection with the November 16, 1994 debt restructuring. These funds are held by BMC in an escrow account and can be used by BMCLP to fund any operating expenses by demonstrating the need for such funds to BMC. As of both December 31, 1997 and December 31, 1996, the balance in the escrow account was $273,654. There were no withdrawals from or deposits to the reserve by BMCLP during 1997. During 1996 and 1995, BMCLP withdrew $715,000 and $400,000, respectively, from the reserve to fund costs of leasing and operating expenses and to help pay interest on the Restated Second Mortgage Note. Additionally, during 1996 and 1995, BMCLP deposited $250,000 and $100,000, respectively, to replenish the reserve.
A purchase money mortgage had been placed upon the Development as of September 17, 1985 to secure repayment for the redemption by BMCLP of the partnership interest in BMCLP held by Iroquois Financial Corporation (Iroquois), a Maryland corporation, which is owned 50% by Alan I. Kay and Allen E. Rozansky and 50% by an individual unaffiliated with Alan I. Kay and Allen E. Rozansky or the General Partners. This purchase money mortgage (the Third Mortgage Note) was subordinated to the Second Mortgage Note as of July, 1987. The Third Mortgage Note collateralizes the payment by BMCLP of the $3,000,000 purchase money note given by BMCLP to Iroquois in exchange for Iroquois' interest in BMCLP. The Third Mortgage Note bears simple interest at 9%. In connection with the debt restructuring on November 16, 1994, the Third Mortgage Note was amended to provide that interest is due and payable annually only to the extent funds are available after taking into account payment of amounts due and payable on the Restated Notes and a payment of up to $50,000 per year to CRCC and/or the Partnership to cover costs of management and administration. Accrued but unpaid interest is to be deferred without interest and is to be paid, together with the outstanding principal balance of the Third Mortgage Note, upon the earliest of: (i) sale of the assets of BMCLP; (ii) refinancing of the Restated Notes for an amount in excess of the aggregate outstanding principal balances due thereunder; or (iii) one day later than the later of any Maturity Date under the Restated Notes. As of December 31, 1997 and 1996, accrued interest of $3,319,500 and $3,049,500, respectively, has been added to the outstanding principal balance of
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$3,000,000 in accordance with the amended Third Mortgage Note. No net cash flow, as defined in the agreement, was available for repayment of this note during 1997, 1996 or 1995.
Substantially all of BMCLP's property and equipment is pledged as collateral to the Restated First and Second Mortgage Notes and to the Third Mortgage Note.
Debt Forgiveness - ----------------
BMCLP's outstanding obligation under the First Restated Note prior to the restructuring was $178,373,753. The carrying amount of the outstanding principal and accrued interest that was forgiven based on the assignment and subsequent restatement of the First Mortgage Note is presented as deferred gain on debt forgiveness in the accompanying consolidated balance sheets. This amount is being amortized as an extraordinary gain over the remaining term of the Restated First Mortgage Note based on a constant effective yield as required by Statement of Financial Accounting Standards No. 15 (SFAS 15), "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Based on the Restated First Mortgage Note s interest rate of 10.04% and 9.78% in effect at December 31, 1997 and 1996, respectively, and the monthly principal curtailments of $108,333 as stipulated in the Restated First Mortgage Note, the estimated total future obligation for principal and interest is $62,774,907 and $67,453,640 at December 31, 1997 and 1996, respectively, including additional draws subsequent to the restructuring. Although these obligations are lower than the combined obligations of the Restated First Mortgage Note and the deferred gain on debt forgiveness (which totalled $117,266,883 and $136,886,036 at December 31, 1997 and 1996, respectively), SFAS 15 does not permit the entire difference to be recognized as an extraordinary gain at the time of the restructuring as the Restated First Mortgage Note s interest rate is variable, which makes the amount of future debt-service payments contingent upon changes in the index upon which the interest rate is calculated. Accordingly, the $54,491,976 and $69,432,396 difference between the carrying value and total future obligation of the debt at December 31, 1997 and 1996, respectively, was deferred and is being amortized into income as extraordinary gain on debt forgiveness in the accompanying consolidated statements of operations using the effective interest method over the term of the Restated First Mortgage Note.
As a result of the fluctuations of the interest rate on the Restated First Mortgage Note, the Partnership continues to remeasure the total future obligation for principal and interest based upon changes in the underlying index, as discussed above. Differences in the future obligation resulting from interest rate changes are reflected as a reclassification between the Restated First Mortgage Note and deferred gain on debt forgiveness. For the years ended December 31, 1997, 1996 and 1995, $551,054, $990,767 and $4,556,760, respectively, was reclassified from the deferred gain on debt forgiveness to the Restated First Mortgage Note resulting from an increase in the future obligation based on changes in the underlying index. The adjusted deferred gain on debt forgiveness will be amortized as extraordinary gain over the remaining term of the Restated First Mortgage Note.
For the years ended December 31, 1997, 1996 and 1995, amortization of this deferred debt forgiveness amounted to $14,389,366, $14,600,160 and $14,085,175, respectively. The amortization of deferred gain is included in the
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extraordinary item of $14,129,506, $14,340,300 and $13,825,315 at December 31, 1997, 1996 and 1995, respectively, in the accompanying consolidated statements of operations, as it is shown net of the interest expense on the Restated Second Mortgage Note of $259,860, $259,860 and $259,860, respectively, as discussed below.
With regard to the Restated Second Mortgage Note, the total estimated future obligation for payment of principal and interest based on the fixed interest rate of 16% is $21,200,000. This amount exceeds the carrying value of the Restated Second Mortgage Note at November 16, 1994, of $19,380,974. In accordance with SFAS 15, this difference of $1,819,026 represents a constant additional interest obligation based on the fixed interest rate, and is to be amortized as a reduction of the extraordinary gain on the Restated First Mortgage Note at $21,655 per month through maturity, using the effective interest method, over the term of the Restated Second Mortgage Note. Accordingly, accrual of this additional interest for the years ended December 31, 1997 and 1996 amounted to $259,860 in each year and was added to the principal balance of the Restated Second Mortgage Note.
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Investments" (SFAS 107), requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The Partnership has determined that the carrying amount of the total future obligation of the Restated First Mortgage Note, which represents the estimated total future obligation for principal and interest, approximates fair value based on the variable nature of the Restated First Mortgage Note's interest rate. Because future debt service payments are contingent upon changes in the underlying index upon which the interest rate is calculated, the total future obligation of the Restated First Mortgage Note is expected to fluctuate with changing market rates of interest. The Partnership has determined that it is not practicable to estimate the fair value for the Restated Second Mortgage Note or the Third Mortgage Note due to: (1) the lack of an active market for these types of financial instruments, (2) the variable nature of the remaining net cash flow payments payable to BMC under the Restated Second Mortgage Note, as discussed above, (3) the variable nature of the Third Mortgage Note's interest payments as a result of its dependence on available cash flow from BMCLP, and (4) the excessive costs associated with an independent appraisal of the Restated Second Mortgage Note and the Third Mortgage Note.
OPERATING DEFICIT OBLIGATION ----------------------------
For operating deficits which arise, the BMCLP Limited Partnership Agreement (LPA) provides that Alan I. Kay and Allen E. Rozansky and their affiliates (collectively, R&K) are required to loan, or cause to be loaned, all amounts necessary to pay operating deficits (Operating Deficit Loans) up to an aggregate principal amount of $15,600,000. R&K and the Partnership have agreed that the former Second Mortgage Note of $10,000,000 was an Operating Deficit Loan "caused to be" made to BMCLP by R&K. Further, R&K's Operating Deficit Loan obligation limit of $15,600,000 was increased by (1) an amount equal to the net positive difference between the interest due and payable under the original terms of the First Mortgage Note and the interest due and payable under the original First Mortgage Note as a result of the third loan modification and (2) the amount that interest accruing on the original Second Mortgage Note exceeded the interest that would have accrued had the loan been made directly by R&K. At December 31, 1997, BMCLP estimates that R&K's total operating deficit obligation has increased to approximately $29,000,000, although R&K do not concur with this
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PART I ------
ITEM 2. PROPERTIES - Continued ----------
amount. As of December 31, 1997 and 1996, R&K have provided $2,490,352 and $2,367,168, respectively, including accrued interest, to BMCLP to fund operating deficits under this provision of the LPA. Interest on amounts advanced to BMCLP for operating deficits is accrued at the prime rate plus 1% and will be repaid subject to the terms of the Restated Notes and then out of 50% of cash flow available after payment of certain priorities as set forth in the BMCLP partnership agreement. These Operating Deficit Loans shall be repaid in full upon the earlier to occur of (1) fifteen years from the date of such loans or (2) liquidation, sale or refinancing of the Development (except a refinancing which does not exceed the outstanding principal balance of the original First Mortgage Note).
The obligation of R&K to make or cause to be made Operating Deficit Loan(s) is jointly and severally guaranteed by Alan I. Kay and Allen E. Rozansky and further secured by the expense allowance payable to Alan I. Kay and Allen E. Rozansky, the Incentive Management Fee payable to Rozansky & Kay Construction Company (R&KCC), one-half (1/2) of the disposition fee payable to Alan I. Kay and Allen E. Rozansky from the proceeds of any sale of the Development, and any distributions made to Alan I. Kay and Allen E. Rozansky from the net cash flow of BMCLP or from the proceeds of any sale or refinancing of BMCLP. All obligations of R&KCC have been assumed by Alan I. Kay and Allen E. Rozansky.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
There are no material pending legal proceedings to which the Partnership is a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
None.
I-12
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND ----------------------------------------------------- RELATED PARTNERSHIP MATTERS ---------------------------
There is no established public trading market for the Units and it is not anticipated that a public trading market for the Units will develop. Article VII of the Partnership Agreement governs transfer or assignment by an Investor of his or her limited partnership interest in the Partnership. Transfer or assignment by an Investor of his or her limited partnership interest is restricted and may not be made without the consent of the Managing General Partner.
Section 7.02 of the Partnership Agreement describes the procedure for transferring a limited partnership interest. Units may be sold, transferred, assigned or otherwise disposed of by an Investor only if, in the opinion of counsel for the Partnership, registration is not required under the Securities Act of 1933 and such transfer and assignment would not violate state securities or "blue sky" laws (including investment suitability standards).
As of December 31, 1997, there were 700 holders of record of 600 Units. There have been no cash distributions to the Investors since the inception of the Partnership.
II-1
PART II -------
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA-REGISTRANT ----------------------------------
(1) The cumulative net loss attributable to minority interest of $57,534,409, $75,257,437 and $92,993,658 as of December 31, 1997, 1996 and 1995, respectively, represents losses not attributable to the partners of the Partnership. (See the Consolidated Statements of Partners' Deficit in the Consolidated Financial Statements located in Part IV of this document.) Cumulative BMCLP losses in excess of the Partnership's investment in BMCLP are comprised of $77,472,839, which represents BMCLP's cumulative losses prior to June 15, 1992 (the consolidated date), plus net cumulative additional excess BMCLP income (losses) at December 31, 1997, 1996 and 1995 of $19,938,430, $2,215,402 and ($15,520,819), respectively. The cumulative BMCLP losses in excess of the Partnership's investment have been reflected
II-2
PART II -------
ITEM 6. SELECTED FINANCIAL DATA-REGISTRANT - Continued ----------------------------------
as losses attributable to minority interest at consolidation date, and the BMCLP losses subsequent to June 15, 1992 have been consolidated into the operating accounts of the Partnership for the years ended December 31, 1997, 1996 and 1995.
II-3
PART II -------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
Liquidity ---------
The Partnership's sole investment is its limited partner interest in BMCLP. BMCLP has experienced cash deficits in recent years as cash flow from operations has been insufficient to fund capital and debt service requirements.
BMCLP's management is of the opinion that cash flow from operations for the year ended December 31, 1998, after funding anticipated capital and debt service requirements, will be at a break-even level. To the extent that any cash deficits arise, management may utilize certain working capital reserves established in 1994 and additional borrowing capacity under its Restated Notes. However, since access to reserves and additional borrowings is contingent upon the approval of the BMC Lender Partnership, there can be no assurance that management will be able to fund cash flow deficits should they arise.
The Partnership does not have adequate cash reserves or any source of cash to fund its projected cash requirements in 1998, which are principally comprised of professional fees and administrative expenses. Additionally, based on the projected operating performance of BMCLP, it is unlikely that the Partnership will receive any cash distribution from its investment in BMCLP in 1998 due to priorities established for distribution of excess cash flow pursuant to the restructuring of BMCLP's mortgage notes. However, the Managing General Partner, CRI, has represented a willingness to fund projected cash flow requirements of the Partnership for the year ending December 31, 1998.
At December 31, 1997 and 1996, the Partnership had $116 in available cash.
During 1997, the Partnership's available cash remained constant at $116, whereas accounts payable increased $37,976. The increase in accounts payable includes an increase of $35,051 in loan payable to its Managing General Partner for administrative expenses and an increase of $2,925 in third-party payables.
Capital Resources -----------------
BMCLP, of which the Partnership owns a 92.5% limited partnership interest, had unrestricted cash and cash equivalents of $2,071,713 and $2,015,128 at December 31, 1997 and 1996, respectively. During 1997, unrestricted cash and cash equivalents increased by $56,585; operating activities provided for $1,630,787 of the increase and financing activities provided for $481,817 of the increase, both of which were offset by $2,056,019 used in investing activities. The increase of $56,585 was despite net income of $17,723,028. This was due largely to the non-cash gain on debt forgiveness of $14,129,506, as well as the net debt and interest payments of $7,539,537, fixed assets additions and payment of leasing costs of $1,355,196 and $700,823, respectively, a $632,094 increase in restricted cash and cash equivalents and a $511,730 increase in accounts receivable which were offset by depreciation and amortization totalling $4,748,292 and proceeds from mortgage debt of $687,527 along with a $1,132,262 advance from affiliates. BMCLP had restricted cash and cash equivalents of $2,433,117 and $1,801,023 at December 31, 1997 and 1996, respectively.
The Partnership has determined that the carrying amounts of BMCLP's cash and cash equivalents and restricted cash and cash equivalents approximate fair value.
II-4
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - Continued ---------------------
Operating Deficit Obligation ----------------------------
For operating deficits which arise, the BMCLP Limited Partnership Agreement (LPA) provides that Alan I. Kay and Allen E. Rozansky and their affiliates (collectively, R&K) are required to loan, or cause to be loaned, all amounts necessary to pay operating deficits (Operating Deficit Loans) up to an aggregate principal amount of $15,600,000. R&K and the Partnership have agreed that the former Second Mortgage Note of $10,000,000 was an Operating Deficit Loan "caused to be" made to BMCLP by R&K. Further, R&K's Operating Deficit Loan obligation limit of $15,600,000 was increased by (1) an amount equal to the net positive difference between the interest due and payable under the original terms of the First Mortgage Note and the interest due and payable under the original First Mortgage Note as a result of the third loan modification and (2) the amount that interest accruing on the original Second Mortgage Note exceeded the interest that would have accrued had the loan been made directly by R&K. At December 31, 1997, BMCLP estimates that R&K's total operating deficit obligation has increased to approximately $29,000,000, although R&K do not concur with this amount. As of December 31, 1997 and 1996, R&K have provided $2,490,352 and $2,367,168, respectively, including accrued interest, to BMCLP to fund operating deficits under this provision of the LPA. Interest on amounts advanced to BMCLP for operating deficits is accrued at the prime rate plus 1% and will be repaid subject to the terms of the Restated Notes and then out of 50% of cash flow available after payment of certain priorities as set forth in the BMCLP partnership agreement. Cumulative interest accrued on these advances was $1,251,465 and $1,128,281 at December 31, 1997 and 1996, respectively, and has been added to the original advance amount. For the years ended December 31, 1997 and 1996, no amounts were advanced to BMCLP for operating deficits because R&K have represented that their net worth is not significant, their assets are very illiquid and they do not have resources to meet their operating deficit obligations.
In accordance with the terms of the Restated Notes dated November 16, 1994, BMCLP has several additional resources to fund current operating deficits. If BMCLP requires funds to pay for capital improvements, tenant improvements, leasing commissions, etc., and is in compliance with the conditions stated in the Restated First Mortgage Note, GECC shall advance for such purposes up to 50% of the amounts previously paid by BMCLP as principal payments. In 1997 and 1996, GECC advanced $687,527 and $975,001 respectively, to BMCLP for capital improvements, tenant improvements and leasing commissions.
Upon approval of BMC Lender Partnership (BMC), BMCLP may draw upon the $1,038,654 that was placed in an escrow account at the closing of the Restated Second Mortgage Note. These funds may be used to pay operating expenses of the Development including payments under the Restated First and Second Mortgage Notes. As of both December 31, 1997 and December 31, 1996, the balance in the escrow account was $273,654. There were no withdrawals from or deposits to the reserve by BMCLP during 1997. During 1996 and 1995, BMCLP withdrew $715,000 and $400,000, respectively, from the reserve to fund costs of leasing and operating expenses and to help pay interest on the Restated Second Mortgage Note. Additionally, during 1996 and 1995, BMCLP deposited $250,000 and $100,000, respectively, to replenish the reserve.
BMC may advance additional amounts of up to $5,000,000 to BMCLP in accordance with the Restated Second Mortgage Note. Also, BMC may re-advance
II-5
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - Continued ---------------------
funds received from BMCLP as additional interest payments (75% of net cash flow) if BMCLP pays its 25% share of net cash flow held in reserves. No advances were made in 1996 or 1997.
Results of Operations ---------------------
Partnership - -----------
1997 versus 1996 - ----------------
The Partnership recorded a net loss for 1997 of $37,976 as compared with a net loss of $29,922 for 1996. Operating expenses during 1997 were $8,054 higher than 1996, primarily due to an increase in professional fees.
1996 versus 1995 - ----------------
The Partnership recorded a net loss for 1996 of $29,922 as compared with a net loss of $31,598 for 1995. Operating expenses during 1996 were $1,679 lower than 1995, primarily due to a decrease in professional fees.
Bethesda Metro Center Limited Partnership - -----------------------------------------
1997 versus 1996 - ----------------
BMCLP had net income for 1997 of $17,723,028 as compared with net income of $17,736,221 for 1996. This was primarily the result of an increase in room revenue and food and beverage revenue and a decrease in amortization expense. BMCLP's net income was negatively impacted by an increase in interest expense, a decrease in extraordinary gain on debt forgiveness due to fluctuations in the underlying debt interest rate, a decrease in office, retail and parking rentals, and an increase in food and beverage expense, insurance expense and management fees.
Room revenue increased by $999,715, or 8%, from 1996 due to increased transient and group revenue. The Hotel experienced an increase in occupancy from 78% to 80% and an increase of $7 in average room rate over 1996. Food and beverage revenues increased by $364,964, or 7%, from 1996 due to increased in- room and banquet dining. The increase in room and food departmental profits, combined with the Hotel's cost control efforts, resulted in gross operating profits exceeding 1996 by $922,140, or 13%.
Office building revenue decreased $233,049 or 2% during 1997 compared with 1996. The occupancy of the Office Building decreased from 98% to 97% while the rental rate remained constant at $24 per square foot. The retail and marketplace occupancy decreased from 92% to 85% primarily due to the expiration of two major retail leases during 1997 which were not renewed. The retail and marketplace average rental rate decreased from $33 in 1996 to $31 per square foot in 1997 primarily due to decreased rates throughout the market.
II-6
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - Continued ---------------------
Operating expenses for the Office Building for 1997 increased by $51,891, or 2%, from 1996, primarily due to payroll increases associated with customary raises and utility increases.
1996 versus 1995 - ----------------
BMCLP had net income for 1996 of $17,736,221 as compared with net income of $16,217,328 for 1995. The increase was primarily a result of an increase in room revenue, food and beverage revenue, telephone revenue and office retail and parking rentals revenue. Contributing to BMCLP's increase in net income was an increase in extraordinary gain on debt forgiveness due to fluctuations in the underlying debt interest rate and a decrease in depreciation expense. BMCLP's net income was negatively impacted by an increase in real estate and property taxes, the Hotel's increase in management fees from 3% to 4% effective January 1, 1996, and an increase in food and beverage expense.
Room revenue increased by $615,079, or 5%, from 1995. The Hotel experienced an increase in occupancy from 77% to 78% and an increase of $4.10 in average room rate over 1995. Food and beverage revenues increased by $342,246, or 7%, from 1995 as a result of increased banquet revenue. The increase in room and food departmental profits, combined with the Hotel's cost control efforts, resulted in gross operating profits exceeding 1995 by approximately $775,641 or 12%.
Office building revenue increased $488,428 or 5% during 1996 compared with 1995. The occupancy of the Office Building increased from 97% to 98% while the rental rate remained constant at $24 per square foot in 1996 and 1995. The retail and marketplace occupancy decreased from 98% to 92% primarily due to three major retail leases expiring during 1996 and not being renewed. The retail and marketplace average rental rate decreased from $38 per square foot in 1995 to $33 in 1996, primarily due to decreased rates throughout the market.
Operating expenses for the Office Building for 1996 increased by $64,539, or 2%, from 1995 primarily due to common area painting and wallcovering and maintenance and repairs to the plaza, fountain and HVAC system.
II-7
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - Continued ---------------------
Pertinent data regarding the operations of the Office Building and Hotel follow.
Office Building ---------------
II-8
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - Continued ---------------------
Hotel -----
It should be noted that BMCLP's investment in the Development is a high-risk investment involving many factors beyond the control of its General Partner. Such factors could adversely affect the operation and value of the Development and, consequently, the value of an interest in the Partnership, to an extent not currently ascertainable. These factors, include, but are not limited to, over-building of office, hotel or commercial space; changes in general or local economic conditions including changes in interest rates; adjacent land utilization; changes in demand or use with respect to the nearby business facilities; demographic trends; increases in real estate taxes; changes in the federal income tax laws, which could be applied retroactively; local, state and federal environmental, energy, and other regulations (including regulations governing the maintenance of liquor licenses); possible restrictive changes in the uses applicable to real estate, zoning and similar land use and environmental laws and regulations; and acts of God. Effective July 1, 1996, the local government in Montgomery County, Maryland, where the Hotel is located, increased room taxes from 5% to 7% to fund the Montgomery County Conference Center which is expected to be completed in 1999.
In addition, Hotel occupancy and room rates may be adversely affected by a downturn in the business cycle or by shortages of gasoline or increases in the price of gasoline, increases in airline fare rates or the curtailment of airline service, or other constraints upon travel. Furthermore, in the event mortgage payment and/or tax assessment obligations are not met, the Partnership may sustain a loss of its equity investment as a result of foreclosure of the Restated First or Second Mortgage Notes and/or a tax sale as previously discussed.
II-9
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - Continued ---------------------
Year 2000 Computer Issue ------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many computer systems in use today to recognize "00" in the date field as the year 2000 and to recognize the year 2000 as a leap year. The Y2K problem arose because, for many years, computer software programs, including programs embedded in hardware, utilized only the last two digits to specify the year with the assumption that the first two digits were "19." As a result, such programs may not be able to recognize and process dates beyond 1999; rather they may recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902, instead of as 2000, 2001, 2002. In the opinion of computer experts, this could cause such programs to create erroneous results, malfunction, or fail completely unless corrective measures are taken.
The Partnership utilizes software and related computer technologies essential to its operations that will be affected by the Y2K issue. The Managing General Partner is studying what actions will be necessary to make its computer systems Y2K compliant; certain upgrades are already scheduled. The expense associated with these actions cannot presently be determined, but the Managing General Partner does not expect it to be material to the Partnership's financial condition or results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
The financial statements and supplementary data required by this Item are included in Part IV, Item 14 of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURES ---------------------
None.
II-10
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
(a), (b) and (c)
The Partnership has no directors, executive officers or significant employees of its own.
(a), (b), (c) and (e)
The names, ages and business experience of the directors and executive officers of C.R.I., Inc. (CRI), the Managing General Partner of the Partnership, are as follows:
William B. Dockser, 61, has been the Chairman of the Board of CRI and a Director since 1974. Prior to forming CRI, he served as President of Kaufman and Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a number of publicly held limited partnerships created to invest in low and moderate income multifamily apartment properties. For a period of 2-1/2 years prior to joining Kaufman and Broad, he served in various positions at HUD, culminating in the post of Deputy FHA Commissioner and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where he was responsible for all federally insured housing production programs. Before coming to Washington, Mr. Dockser was a practicing attorney in Boston and also was a special Assistant Attorney General for the Commonwealth of Massachusetts. He holds a Bachelor of Laws degree from Yale University Law School and a Bachelor of Arts degree, cum laude, from Harvard University. He is also Chairman of the Board and a Director of CRIIMI MAE Inc. and CRIIMI, Inc.
H. William Willoughby, 51, has been President, Secretary and a Director of CRI since January 1990 and Senior Executive Vice President, Secretary and a Director of CRI from 1974 to 1989. He is principally responsible for the financial management of CRI and its associated partnerships. Prior to joining CRI in 1974, he was Vice President of Shelter Corporation of America and a number of its subsidiaries dealing principally with real estate development and equity financing. Before joining Shelter Corporation, he was a senior tax accountant with Arthur Andersen & Co. He holds a Juris Doctor degree, a Master of Business Administration degree and a Bachelor of Science degree in Business Administration from the University of South Dakota. He is also a Director and executive officer of CRIIMI MAE Inc. and CRIIMI, Inc.
Ronald W. Thompson, 51, is Group Executive Vice President-Hotel Asset Management. Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he most recently served as the General Manager of the Hyatt Regency in Flint, Michigan. During his nine year tenure with Hyatt, he held senior management positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond, Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England for the English Tourist Board as well as holding management positions in Europe, Australia, and New Zealand in the hotel industry. Mr. Thompson received his education in England where he received a business degree in Hotel Administration from Winston College.
III-1
PART III --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued --------------------------------------------------
Susan R. Campbell, 39, is Executive Vice President and Chief Operating Officer. Prior to joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory Company. She holds a Bachelor of Science degree in General Business from the University of Maryland.
Melissa Cecil Lackey, 42, is Senior Vice President and General Counsel. Prior to joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder, Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in Houston, Texas. She holds a Juris Doctor degree from the University of Virginia School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
III-2
PART III --------
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ----------------------
(a), (b), (c), (d), (e), (f), (g), (i), (j), (k) and (l)
As described above in Item 10, the Partnership has no officers, directors or any employees. Under the Partnership Agreement, however, the General Partners have the exclusive right to conduct the business and affairs of the Partnership. Set forth below are all fees and other consideration payable to the General Partners and their affiliates, and to Alan I. Kay and Allen E. Rozansky and their affiliates, in fiscal year 1997.
A. Operational Period ------------------
1. General Partner No distributions of net cash Interests of C.R.I., flow have been made through Inc., Dockser, December 31, 1997. Schwartzberg and Willoughby, and Limited Partner Interest of CRICO-Bethesda in the Partnership.
2. Partnership Management No incentive management fee Fee to CIP Management 14, was paid. Inc.
3. Partnership Interests of No distributions of net cash CRCC, Alan I. Kay, Allen flow have been made through E. Rozansky and R&K December 31, 1997. Construction Company (R&KCC) in BMCLP.
4. Expense Allowances to (A) There was no net cash flow Alan I. Kay, Allen E. generated by BMCLP, as Rozansky and CRCC in BMCLP; defined, for fiscal year 1997, Management Fee and therefore, no expense Incentive Management Fee allowances were paid to Alan to R&KCC. I. Kay, Allen E. Rozansky and CRCC; (B) $3,000,000 payable to R&KCC for its management services to BMCLP in 1986 through 1990. As of December 31, 1986, no additional management fee was payable to R&KCC and since then all additional amounts owed have been used to fund operating deficits of BMCLP in accordance with the terms of LPA; and (C) there was no cash flow, as defined, generated by BMCLP in fiscal year 1997, therefore, no incentive management fee was paid to R&KCC.
III-3
PART III --------
ITEM 11. EXECUTIVE COMPENSATION - Continued ----------------------
5. Additional Purchase Price (A) In fiscal year 1997, there to Sellers and an were no funds available in the Additional Incentive Operating Deficit Reserve to Management Fee to CRCC, pay additional purchase price Alan I. Kay and Allen E. to the sellers; (B) there was Rozansky. no net cash flow, as defined, generated by BMCLP for fiscal year 1997, therefore, no additional incentive management fee was paid.
6. Management and Management and Administrative Administration Fees to fees relating to 1995 of $50,000 CRCC and/or the were paid in 1996. Partnership Management and Administration fees relating to 1996 of $50,000 were paid in 1997. Management and Administrative fees relating to 1997 of $50,000 were accrued in 1997.
B. Termination Period ------------------
1. General Partners' and 1.00% to the General Partners CRICO-Bethesda's Share of and 0.1% to CRICO-Bethesda of Liquidation, Sale and Liquidation, Sale and Refinancing Proceeds of Refinancing Proceeds remaining the Partnership after all payments and distributions have been made, and a return of their capital contributions. In addition, 9.08% to CRICO-Bethesda of the amount remaining prior to the final distribution in accordance with partnership interests. The General Partners and CRICO-Bethesda will also receive a return of their nominal capital contributions.
2. Disposition Fee payable 3.00% of the gross sales price to CRICO-Bethesda upon of the Development, payable sale of the Development after payment of all debts of the Partnership, return of capital contributions to the Investors, and payment of the Preferred Distribution, as may be multiplied by the Tax Bracket Adjustment Factor, if applicable.
III-4
PART III --------
ITEM 11. EXECUTIVE COMPENSATION - Continued ----------------------
3. Alan I. Kay, Allen E. (A) 1.00% to CRCC and 6.5% in Rozansky, R&KCC the aggregate to Alan I. Kay, and CRCC's Allen E. Rozansky and R&KCC Share of Liquidation, of Liquidation, Sale or Refinancing Sale or Refinancing Proceeds Proceeds remaining after all payments and distributions have been made; plus (B) 18.928% to Alan I. Kay and Allen E. Rozansky of the amount remaining after payment of the Disposition Fee described in C-4 below. Alan I. Kay, Allen E. Rozansky, R&KCC and CRCC will also receive a return of their nominal capital contributions.
4. Disposition Fee to Alan The lesser of (i) 0.75% of the I. Kay and Allen E. gross sales price of the Rozansky Development or (ii) $2,500,000 as such fee shall be increased by an amount equal to 25% of the amount by which the Preferred Distribution is increased by the Tax Bracket Adjustment Factor, if any, payable after payment of all debts of BMCLP, repayment to the Partnership of its capital contributions to BMCLP, and payment of the Preferred Distribution, as adjusted by the Tax Bracket Adjustment Factor, if applicable.
5. Loan Repayment to Repayment to Iroquois of the Iroquois purchase money Third Mortgage Note, including all accrued but unpaid interest thereon.
(h) Employment contracts and termination of employment and change in control arrangement.
None.
III-5
PART III --------
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
(a) Security ownership of certain beneficial owners.
As of December 31, 1997, no person owned of record, or owned beneficially, more than 5% of the total number of Units of the Partnership.
The General Partners own as a group a 1.00% interest in the Partnership. Alan I. Kay and Allen E. Rozansky and their affiliates own as a group a 6.50% interest in BMCLP.
(b) Security ownership of management.
The following table sets forth certain information concerning all units beneficially owned, as of December 31, 1997, by each director and by all directors and officers as a group of the Managing General Partner of the Partnership.
(c) Changes in control.
The Partnership is not aware of any arrangement which may, at a subsequent date, result in a change in control of the Partnership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
(a) Transactions with Management and Others.
The Partnership has no directors or officers. The Partnership has had no transactions with individual officers or directors of the Managing General Partner of the Partnership other than any indirect interest such officers and directors may have in the amounts paid to the Managing General Partner or its affiliates or by virtue of their stock ownership in CRI. See Item 11 for a discussion of fees and other compensation paid or accrued by the Partnership to the General Partners or affiliates.
Iroquois, which is an affiliate of the Special Limited Partners, has provided financing through the Third Mortgage Note.
A summary of indebtedness to related parties as of December 31, 1997 and 1996 follows.
III-6
PART III --------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued ----------------------------------------------
The $405,810 and $342,558 due to CRI as of December 31, 1997 and 1996, respectively, is partially comprised of $107,103 of advances to BMCLP to fund Excess Payments due on its former mortgages with Great Western. The remaining amount due to CRI is comprised of advances to the Partnership to fund operating deficits and accrued interest on advances. In addition, the $1,303,861 and $1,215,586 due to CHG as of December 31, 1997 and 1996, respectively, and $1,511,128 and $972,233 due to Realty as of December 31, 1997 and 1996, respectively, represent advances made to BMCLP and interest accrued thereon, to fund Excess Payments on the Great Western mortgages, as discussed in Note 4 to the consolidated financial statements. The advances from CRI, CHG and Realty accrue interest at the prime rate (8.5% as of December 31, 1997) plus 1% in accordance with the Partnership Agreement. These advances plus any accrued interest will be repaid subject to cash availability as defined by the BMCLP partnership agreement and the Restated Notes, as discussed in Note 4 to the consolidated financial statements. Finally, the $1,395,274 and $953,434 due to Hyatt as of December 31, 1997 and 1996, respectively, consists of $1,085,429 and $819,679, respectively, of incentive management fees earned under its management agreement with BMCLP and is due subject to Hyatt meeting certain performance standards as defined in the management agreement. The remaining balance consists of trade payables to Hyatt for various services as described in Note 7 to the consolidated financial statements.
CRCC and/or the Partnership may receive an annual payment of up to $50,000 to cover costs of management and administration, to the extent that funds are available after payment of amounts due on the Restated First and Second Mortgage Notes, as discussed in Note 4 to the consolidated financial statements. CRCC received a payment of $50,000 in 1997, 1996 and 1995 from remaining net cash flow relating to 1996, 1995 and 1994, respectively. Additionally, $50,000 was accrued as of December 31, 1997 for fiscal year 1997 management fees as described in Note 4 to the consolidated financial statements.
CIP Management 14, Inc., an affiliate of the Managing General Partner, may receive an incentive management fee on a noncumulative annual basis commencing in 1987 equal to 9.08% of net cash flow after payment of certain priorities set forth in the Partnership Agreement. No
III-7
PART III --------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued ----------------------------------------------
incentive management fee has been incurred or paid in 1997, 1996 and 1995.
Realty Management Company, which is a former affiliate of one of the Special Limited Partners, provides management services related to the Office Building, while Iroquois, which is an affiliate of the Special Limited Partners, has provided financing through the Third Mortgage Note.
(b) Certain business relationships.
The Partnership's response to Item 13(a) is incorporated herein by reference. In addition, the Partnership has no business relationship with entities of which the General Partners of the Partnership are officers, directors or equity owners other than as set forth in the Partnership's response to Item 13(a).
(c) Indebtedness of management.
None.
(d) Transaction with promoters.
Not applicable.
III-8
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ---------------------------------------------------------------
(a) (1) Financial Statements Page -------------------- ------
Report of Independent Public Accountants IV-6
Consolidated Balance Sheets as of December 31, 1997 and 1996 IV-7
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 IV-9
Consolidated Statements of Partners' Deficit for the years ended December 31, 1997, 1996 and 1995 IV-10
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 IV-11
Notes to Consolidated Financial Statements IV-12
(2) Financial Statement Schedules -----------------------------
All financial statement schedules are omitted since they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
(3) Exhibits (listed according to the number assigned in the -------- table in Item 601 of Regulation S-K).
Exhibit No. 4 - Instruments defining the rights of security holders, including indentures
a. Second Amended Certificate and Limited Partnership Agreement of Capital Income Properties-C Limited Partnership (Incorporated by reference from Exhibit 4 to Registrant's Regulation D filing as amended, dated October 1, 1985)
b. Bethesda Metro Center Limited Partnership Indemnification and Hold Harmless Agreement dated July 1, 1987 (Incorporated by reference to the 1987 Annual Report on Form 10-K filed on March 30, 1988)
c. Bethesda Metro Center Limited Partnership Second Amendment to Second Restated Certificate and Agreement of Limited Partnership dated July 1, 1987 (Incorporated by reference to the 1987 Annual Report on Form 10-K filed on March 30, 1988)
d. Bethesda Metro Center Limited Partnership Second Restated Agreement of Limited Partnership (related to Second Amendment to Restated Certificate of Limited Partnership) (Incorporated by reference to the 1992 Annual Report on Form 10-K filed on April 15, 1993)
IV-1
PART IV -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM ----------------------------------------------------------- 8-K - Continued ---
e. Bethesda Metro Center Limited Partnership Second Restated Certificate and Agreement of Limited Partnership (Incorporated by reference to the 1992 Annual Report on Form 10-K filed on April 15, 1993)
f. Bethesda Metro Center Limited Partnership Third Amendment to the Second Restated Certificate and Agreement to Limited Partnership (Incorporated by reference to the 1992 Annual Report on Form 10-K filed on April 15, 1993)
g. Bethesda Metro Center Limited Partnership Amended and Restated Promissory Note (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
h. Bethesda Metro Center Limited Partnership Amended and Restated First Leasehold Deed of Trust and Security Agreement (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
i. Bethesda Metro Center Limited Partnership Assignment of Rents and Leases (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
j. Bethesda Metro Center Limited Partnership Amended and Restated Second Deed of Trust Note (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
k. Bethesda Metro Center Limited Partnership Loan Agreement (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
l. Bethesda Metro Center Limited Partnership Amended and Restated Second Leasehold Deed of Trust and Security Agreement (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
m. Bethesda Metro Center Limited Partnership Second Assignment of Rents and Leases (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
n. Collateral Assignment of Partnership Interests Bethesda Metro Center Limited Partnership (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
o. Bethesda Metro Center Limited Partnership Amended and Restated Escrow Agreement (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
p. Bethesda Metro Center Limited Partnership First Allonge to Non-negotiable Non-recourse Purchase Money Promissory Note (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
IV-2
PART IV -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM ----------------------------------------------------------- 8-K - Continued ---
Exhibit No. 10 - Material Contracts
a. Management services agreement between Capital Income Properties-C Limited Partnership and CIP Management-14, Inc. (Incorporated by reference from Exhibit 10 to the Registrant's Regulation D filing as amended, dated October 1, 1985)
b. Management Agreement with Hyatt Corporation (Incorporated by reference to the 1992 Annual Report on Form 10-K filed on April 15, 1993)
c. Amendment to Management Agreement with Hyatt Corporation (Incorporated by reference to the 1992 Annual Report on Form 10-K filed on April 15, 1993)
d. Garage Lease with Monument Parking Co., Inc. (Incorporated by reference to the 1992 Annual Report on Form 10-K filed on April 15, 1993)
e. Land Lease (Incorporated by reference to the 1992 Annual Report on Form 10-K filed on April 15, 1993)
f. Management Agreement with Realty Management Company (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
g. Collateral Assignment of Management Agreement with Hyatt Corporation (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 31, 1995)
IV-3
PART IV -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM ----------------------------------------------------------- 8-K - Continued ---
Exhibit No. 27 - Financial Data Schedule
(b) Reports on Form 8-K -------------------
No reports of Form 8-K were filed during the quarter ended December 31, 1997.
(c) Exhibits --------
The list of Exhibits required by Item 601 at Regulation S-K is included in Item (a)(3) above.
(d) Financial Statement Schedules ------------------------------
See (a)(2), above.
IV-4
SIGNATURES ----------
Pursuant to the requirements 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.
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
by: C.R.I., Inc. Managing General Partner
March 31, 1998 by: /s/ William B. Dockser - ----------------- --------------------------------- DATE William B. Dockser, Director, Chairman of the Board, and Treasurer (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/ H. William Willoughby - ----------------- --------------------------------- DATE H. William Willoughby, Director, President and Secretary
March 31, 1998 by: /s/ Michael J. Tuszka - ----------------- --------------------------------- DATE Michael J. Tuszka Vice President and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer)
IV-5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------
To Partners of Capital Income Properties C Limited Partnership:
We have audited the accompanying consolidated balance sheets of Capital Income Properties-C Limited Partnership, a District of Columbia limited partnership (the Partnership ), and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, partners deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Partnership and Subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C., March 10, 1998
IV-6
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
IV-7
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS DEFICIT
The accompanying notes are an integral part of these consolidated financial statements.
IV-8
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
IV-9
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
The accompanying notes are an integral part of these consolidated financial statements.
IV-10
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS DEFICIT
The accompanying notes are an integral part of these consolidated financial statements.
IV-11
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
IV-12
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE PARTNERSHIP
General -------
Capital Income Properties - C Limited Partnership (the Partnership), a District of Columbia limited partnership, was organized as of December 15, 1984. The purpose of the Partnership is to invest in real estate by acquiring and holding a limited partnership interest in Bethesda Metro Center Limited Partnership (BMCLP). BMCLP owns and operates a 381-room hotel known as the Hyatt Regency Bethesda Hotel (the Hotel) and an office building known as Bethesda Metro Office Building (the Office Building) located in Bethesda, Maryland containing approximately 336,000 square feet of net rentable office space and approximately 18,000 square feet of net rentable retail space. In addition, attached to the structure is a parking facility for approximately 1,300 cars serving the entire development.
The Managing General Partner of the Partnership is C.R.I., Inc. (CRI), which has a 0.01% general partner interest. Other general partner interests which total 0.99% are held by three individuals affiliated (or formally affiliated) with CRI. Martin C. Schwartzberg retired from CRI and its affiliated business effective January 1, 1996 and has had no role in management of the Partnership since then. The total limited partner interest of 99% is comprised of 0.01% owned by CRICO-Bethesda Growth Partners Limited Partnership, the affiliated Initial Limited Partner, and the remaining 98.99% interest is widely held by unrelated parties. On June 15, 1992, pursuant to a debt modification with BMCLP s former first mortgage lender, as discussed in Note 4, C.R.C.C. of Bethesda, Inc. (CRCC) replaced the managing general partners of BMCLP (unrelated parties, hereinafter referred to as the Special Limited Partners). Since CRCC is a wholly-owned affiliate of CRI, the accompanying financial statements as of December 31, 1997 and 1996, and for each of the three years ended December 31, 1997 have been consolidated with BMCLP.
Although an entity affiliated with the Partnership has assumed responsibility for management of BMCLP and the Partnership has consolidated its interest therein in the accompanying financial statements, the Partnership has not assumed responsibility for any past or future operating deficits of BMCLP.
Of the total partners deficit of $57,779,585, $75,464,637 and $93,170,936 as of December 31, 1997, 1996 and 1995, respectively, $57,534,409, $75,257,437 and $92,993,658, respectively, are not attributable to the partners of the Partnership. The amounts are comprised of cumulative BMCLP losses in excess of the Partnership s investment in BMCLP as of June 15, 1992 of $77,472,839, and cumulative net BMCLP income (losses) of $19,938,430, $2,215,402 and ($15,520,819) as of December 31, 1997, 1996 and 1995, respectively. BMCLP losses subsequent to June 15, 1992, have been consolidated into the operating accounts of the Partnership in the accompanying consolidated statements of operations. Liquidity ---------
As discussed above, the Partnership s sole investment is its limited partnership interest in BMCLP. BMCLP has experienced cash deficiencies in recent years as cash flow from operations has been insufficient to fund capital and debt service requirements.
However, subsequent to the November 1994 debt restructuring, as discussed in Note 4, BMCLP s management is of the opinion that cash flow from operations for the year ended December 31, 1998, after funding anticipated capital and debt
IV-13
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE PARTNERSHIP - Continued
service requirements, will be at a break-even level. To the extent that any cash deficits arise, management may utilize certain working capital reserves established in 1994, as discussed in Note 2, and additional borrowing capacity under its Restated Notes, as discussed in Note 4. However, since access to such reserves and additional borrowings is contingent upon the approval of the BMC Lender Partnership, there can be no assurance that management will be able to fund cash flow deficits should they arise.
The Partnership does not have adequate cash reserves or any source of cash to fund its projected cash requirements in 1998, which are principally comprised of professional fees and administrative expenses. Additionally, based on the projected operating performance of BMCLP, it is unlikely that the Partnership will receive any cash distribution from its investment in BMCLP in 1998 due to priorities established for distribution of excess cash flow pursuant to the restructuring of BMCLP s mortgage notes. However, the Managing General Partner, CRI, has represented a willingness to fund projected cash flow requirements of the Partnership for the year ending December 31, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of presentation ---------------------
The consolidated financial statements of the Partnership are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles and include the accounts of the Partnership and BMCLP. All intercompany transactions have been eliminated in consolidation.
b. Consolidation -------------
As discussed in Note 1, the Partnership consolidated its interest in BMCLP in 1992. The accompanying balance sheets as of December 31, 1997 and 1996, reflect all the accounts of both the Partnership and BMCLP. Additionally, the consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995, include the Partnership s and BMCLP s operations for the entire year.
c. Use of estimates ----------------
In preparing the consolidated financial statements in conformity with generally accepted accounting principles, the Partnership is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and of revenues and expenses during the reporting period. Actual results could differ from those estimates.
IV-14
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES - Continued
d. Cash and cash equivalents -------------------------
Cash and cash equivalents consist of all time and demand deposits with original maturities of three months or less. The Partnership has determined that the carrying amount of its cash and cash equivalents approximates fair value.
e. Restricted cash and cash equivalents ------------------------------------
The $2,433,117 and $1,801,023 as of December 31, 1997 and 1996, respectively, in restricted cash and cash equivalents includes $1,106,154 and $828,654 in working capital reserves as of December 31, 1997 and 1996, respectively. The Partnership received the working capital reserves as proceeds in connection with the restructuring of its mortgage debt, as discussed in Note 4. These funds are held in an escrow account and can be used by BMCLP to fund any operating expenses without limitation by demonstrating the need for such funds to the refinance lenders. Of this amount, $832,500 and $555,000 of the working capital reserves were held by the Restated First Mortgage Note lender (as defined in Note 4) as of December 31, 1997 and 1996, respectively. Additionally, $273,654 of the working capital reserves are held by the Restated Second Mortgage Note lender (as defined in Note 4) as of both December 31, 1997 and 1996. The remaining $1,326,963 and $972,369 of the restricted cash and cash equivalents balance as of December 31, 1997 and 1996, respectively, represents the balances in an escrow account for property taxes and ground rent as required by the Restated First Mortgage Note lender and another miscellaneous escrow. Amounts in the escrow account are funded from cash flow from operations. The Partnership has determined that the carrying amount of its restricted cash and cash equivalents approximates fair value.
f. Accounts receivable -------------------
Accounts receivable, consisting primarily of trade related receivables, are stated at cost less an allowance for accounts deemed uncollectible of $86,439 and $69,465 at December 31, 1997 and 1996, respectively.
g. Property and equipment ----------------------
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Buildings 40 years Tenant improvements 5-15 years Furniture and equipment (half year convention) 5 years
IV-15
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES - Continued
Additions to property and equipment were $1,355,196 and $1,354,687 in 1997 and 1996, respectively. The additions in each year were less than 10% of the beginning balance of property and equipment and were primarily comprised of hotel furniture and fixtures, renovations performed on the Hotel, and leasehold improvements to the Office Building. There were no significant retirements in 1997 or 1996.
h. Deferred charges ----------------
Deferred charges include mortgage note financing costs and costs related to leasing space to tenants of the Office Building. Deferred financing costs are amortized as interest expense using the effective interest method over the life of the related debt. Deferred leasing costs are amortized over the term of the related lease using the straight-line method.
Net deferred charges of $2,878,253 and $2,785,249 as of December 31, 1997 and 1996, respectively, consist of $1,759,336 of deferred financing costs related to the mortgage debt restructuring, as discussed in Note 4, and $4,307,732 and $3,606,909, respectively, of leasing costs incurred to lease office space at the Office Building. These deferred amounts are presented in the accompanying consolidated balance sheets net of accumulated amortization of $3,188,815 and $2,580,996 as of December 31, 1997 and 1996, respectively.
i. Reclassifications -----------------
Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform them with the 1997 presentation.
j. Deferred revenue and security deposits --------------------------------------
Deferred revenue and security deposits represent funds received in advance from tenants of the Office Building.
k. Rental income and deferred rent receivable ------------------------------------------
Office and retail rental income consists of base annual rents, as adjusted by scheduled and cost of living increases, and the reimbursement of certain operating costs of the Office Building. The lease arrangements with tenants are classified as operating leases. The Partnership recognizes rental income for financial statement purposes using the straight-line method over the terms of the respective leases, as discussed in Note 9.
l. Income taxes ------------
No provision has been made for income taxes in the accompanying consolidated financial statements because the Partnership allocates profits and losses to the individual partners for Federal and state income tax purposes.
IV-16
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP
The Partnership has invested $42,500,100 in cash in BMCLP through December 31, 1997, to acquire a 92.5% limited partnership interest. Prior to June 15, 1992, the Partnership s investment in BMCLP was accounted for under the equity method which prohibits the recognition of investment losses in excess of the original investment. However, as discussed in Note 1, subsequent to June 15, 1992, the Partnership s investment in BMCLP has been consolidated in the accompanying consolidated financial statements.
Condensed financial information of the Partnership on an unconsolidated basis follows.
IV-17
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
IV-18
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
Condensed financial information of BMCLP on an unconsolidated basis follows.
During 1997 and 1996, the Partnership did not invest any cash in BMCLP. No cash distributions were made to the Partnership by BMCLP in 1997, 1996 or 1995.
IV-19
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
A reconciliation of BMCLP's financial statement net income to its tax return net loss follows.
4. MORTGAGE DEBT
Original Mortgage Debt ----------------------
On December 23, 1985, BMCLP entered into a ten-year, nonrecourse mortgage note (the First Mortgage Note) with Great Western Bank (Great Western) in the amount of $120,000,000. The First Mortgage Note provided for a variable interest rate, adjustable monthly, of 2.75% in excess of the Federal Home Loan Bank Board Eleventh District weighted-average cost of funds.
On July 1, 1987, BMCLP entered into a five-year nonrecourse mortgage note (the Second Mortgage Note) with Great Western for $10,000,000 together with a modification of the First Mortgage Note. Principal and accrued interest were due at maturity. The proceeds of this loan were used to fund operating deficit requirements. The Second Mortgage Note also provided for a variable interest rate, adjustable monthly, of 4% in excess of the Federal Home Loan Bank Board Eleventh District weighted-average cost of funds.
On September 17, 1985, BMCLP entered into a nonrecourse mortgage note (the Third Mortgage Note) in the amount of $3,000,000 with Iroquois Financial Corporation (Iroquois), an affiliate of the Special Limited Partners of BMCLP, with interest at a rate of 9.0%. Payments of principal and interest were contingent upon available net cash flow as defined in the agreement.
Substantially all of BMCLP s property and equipment was pledged as collateral to the Restated First and Second Mortgage Notes and the Third Mortgage Note.
IV-20
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE DEBT - Continued
Modifications to Original Mortgage Debt ---------------------------------------
On October 12, 1990, BMCLP was notified by Great Western that an event of default had occurred related to the nonpayment of its debt service obligation under the First and Second Mortgage Notes (collectively, the Notes). In 1992, BMCLP reached an agreement with Great Western to modify the terms of the Notes as discussed below.
In connection with the debt modification described below, the mortgage principal and related accrued interest were classified as a current obligation. In addition, all accrued interest on the three mortgage notes was added to the principal balances. However in fiscal 1994, prior to the restructuring, accrued interest on the First Mortgage Note was net of cash transfers from the Hotel and Office Building as required under the debt modifications. For the year ended December 31, 1994, Great Western had collected and received net transfers of cash from BMCLP of $8,346,407. Pursuant to the terms of the Notes, a late fee equal to 3% of the required principal payment could have been assessed by Great Western. However, the potential late fee of approximately $1,100,000 at the time of the restructuring is not reflected in the accompanying consolidated financial statements because Great Western agreed not to accelerate payment or impose the penalty as part of the modification described below.
The modification provided for interest to be accrued at the stated rate, adjusted as set forth in the original Notes, and for interest payments in an amount equal to all of BMCLP's net cash flow, as defined, to be due and payable monthly. All accrued but unpaid interest was added to principal and was to be due in full at maturity. No regular principal payments were required.
The modification also provided for quarterly payments (Excess Payments) to be paid to Great Western beginning March 1992. However, BMCLP paid all net cash flow to Great Western, and, therefore, did not itself have cash to make the Excess Payments. These Excess Payments were partially funded to Great Western from management fees waived by Hyatt and those deferred by Realty and Capitol Hotel Group (CHG), an affiliate of the General Partners. During 1994, BMCLP was advanced a total of $193,916, including accrued interest, from CRI for the payments of the Excess Payments due. BMCLP paid $796,876 of Excess Payments to Great Western in 1994, as required. Under the restructured debt, which occurred November 16, 1994, as discussed below, no further Excess Payments were required.
Restructuring of Original Mortgage Debt ---------------------------------------
On November 16, 1994, Great Western sold the Notes to BMC Lender Partnership (BMC), an unaffiliated entity. BMC sold the First Mortgage Note to General Electric Capital Corporation (GECC), which amended and restated the First Mortgage Note (the Restated First Mortgage Note) to a principal amount of $48,000,000. BMC amended and restated the Second Mortgage Note (the Restated Second Mortgage Note) (collectively, the Restated Notes) to a principal amount of $10,000,000 advanced at closing. Of the total $58 million principal amount of the Restated Notes, $55 million was paid to Great Western in consideration for the Notes, approximately $1.8 million was used to fund loan fees and related costs on behalf of BMCLP, approximately $200,000 was used to fund interest and insurance premiums at the closing date, and the remaining amount of approximately $1.0 million was deposited into an escrow account restricted for working capital requirements, as discussed in Note 2.
IV-21
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE DEBT - Continued
The Restated First Mortgage Note requires monthly interest payments in arrears, payable at 4.25% in excess of the GECC Composite Commercial Rate which, at December 31, 1997 and 1996 was 5.79% and 5.53%, respectively. In addition to monthly interest payments, monthly principal payments are due in the amount of $108,333. Furthermore, if certain major tenants of the Office Building, as defined in the Restated First Mortgage Note agreement, do not exercise an option to renew, or if they cancel their leases, additional principal payments equal to 100% of net cash flow, as defined, must be remitted to GECC. These payments must continue until the space vacated is 93% rented and other minimum financial conditions are met. All unpaid principal is due at the maturity date, which is November 30, 2001. Additional advances may be made by GECC in an aggregate amount not to exceed 50% of all previously made principal payments. Any additional advances are generally intended to fund tenant improvements, leasing costs and other capital improvements, but may be used to fund other cash flow needs as well. For the years ended December 31, 1997, 1996 and 1995, advances from GECC, and interest accrued thereon, totalled $687,527, $1,030,937 and $216,666, respectively. These advances were used for capital improvements, tenant improvements and leasing commissions.
Annual principal payments due on the Restated First Mortgage Note follow.
1998 $ 1,299,996 1999 1,299,996 2000 1,299,996 2001 40,417,016 ------------ Total $ 44,317,004 ============
Additionally, under the terms of the Restated First Mortgage Note, an interest reserve account to be used as additional collateral under the Restated First Mortgage Note must be established. Monthly payments of $23,125 must be made into this reserve beginning January 1, 1995, as discussed in Note 2 to the consolidated financial statements. As of December 31, 1997 and 1996, the interest reserve balance was $832,500 and $555,000, respectively.
The Restated Second Mortgage Note stipulates that 16% interest is payable monthly from available cash flow, as defined, on a cumulative basis. Based on the provisions of the Restated Second Mortgage Note, BMCLP s cash flow from operations shall be disbursed in priority, as follows.
(1) Debt service and reserves on the Restated First Mortgage Note.
(2) Establishment of working capital reserves of $50,000 plus an amount reasonably required to pay ordinary and necessary expenses of operations.
(3) Debt service on the Restated Second Mortgage Note (to the extent of available cash flow).
(4) Principal and interest on additional advances, as discussed below, if any, made to BMCLP by BMC.
IV-22
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE DEBT - Continued
(5) 75% of the remaining net cash flow (as defined) to BMC and 25% of the remaining net cash flow to BMCLP (less up to $50,000 per year to cover management and administrative costs of the Partnership and/or CRCC), subject to the establishment of the reserves as stipulated in the agreement, as discussed below.
Furthermore, BMC is entitled to an Economic Value Participation Interest as defined which requires BMCLP to pay the following at the sale of the property or maturity date of the Restated Notes.
(1) 75% of the amount by which the Economic Value of the Development, as defined, up to $100 million exceeds the unpaid principal balance and accrued interest under the Restated Notes, and
(2) 50% of the Economic Value in excess of $100 million.
In general, the Economic Value is defined by the Restated Second Mortgage Note as the value of the Development as determined by the Partnership or the average of three independent appraisals, if deemed necessary by BMC.
In 1997, 1996 and 1995, $150,000, $150,000 and $300,000, respectively, were paid to BMC as 75% of remaining net cash flow for 1996, 1995 and 1994, respectively; such amounts are included in net cash flow participation in the accompanying consolidated statements of operations. Also in 1997, 1996 and 1995, $50,000 was paid each year to CRCC as management fees for 1996, 1995 and 1994, respectively; such amounts are included in management fees in the accompanying consolidated statements of operations. Additionally, $150,000 and $50,000 were accrued as of both December 31, 1997 and December 31, 1996 for fiscal years 1997 and 1996, respectively, for net cash flow participation and management fees, respectively.
The Restated Second Mortgage Note is due on November 30, 2001 and no principal payments are required until then. However, any amounts remitted to BMC with respect to its 75% net cash flow participation described above may be re-advanced to BMCLP for payment of debt service on the Restated First Mortgage Note, repairs, capital improvements, leasing commissions, tenant concessions and improvements, taxes and ground lease payments. These advances are limited to 75% of the total amount required to fund these items. The remaining 25% must be funded by BMCLP. BMC has reserved the right, but does not have the obligation, to make up to $5 million in additional advances that would be secured under its Restated Second Mortgage Note. These additional advances would carry an interest rate of 18% payable from available net cash flow, as defined, and would also be due on November 30, 2001. As of December 31, 1997, no additional advances have been made.
BMC required that BMCLP deposit a deed in lieu of foreclosure in escrow to be recordable in the event of a default under the Restated Second Mortgage Note. CRCC agreed to amend and restate various "no bankruptcy" agreements of the type the original lender, Great Western, had required of it and certain affiliates. The new agreements are not secured or guaranteed, but a default thereunder could trigger the recordation of the escrowed deed in lieu of foreclosure. One event of default would occur if an entity other than CRCC became a General Partner of BMCLP (and could potentially put BMCLP in bankruptcy).
Additionally, under the terms of the Restated Second Mortgage Note, the Partnership received working capital reserves as proceeds in connection with the November 16, 1994 debt restructuring. These funds are held by BMC in an escrow
IV-23
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE DEBT - Continued
account and can be used by BMCLP to fund any operating expenses by demonstrating the need for such funds to BMC. As of both December 31, 1997 and December 31, 1996, the balance in the escrow account was $273,654. There were no withdrawals from or deposits to the reserve by BMCLP during 1997. During 1996 and 1995, BMCLP withdrew $715,000 and $400,000, respectively, from the reserve to fund costs of leasing and operating expenses and to help pay interest on the Restated Second Mortgage Note. Additionally, during 1996 and 1995, BMCLP deposited $250,000 and $100,000, respectively, to replenish the reserve.
In connection with the debt restructuring on November 16, 1994, the Third Mortgage Note was amended to provide that interest is due and payable annually only to the extent funds are available after taking into account payment of amounts due and payable on the Restated Notes and a payment of up to $50,000 per year to CRCC and/or the Partnership to cover costs of management and administration. Accrued but unpaid interest is to be deferred without interest and is to be paid, together with the outstanding principal balance of the Third Mortgage Note, upon the earliest of: (i) sale of the assets of BMCLP; (ii) refinancing of the Restated Notes for an amount in excess of the aggregate outstanding principal balances due thereunder; or (iii) one day later than the later of any Maturity Date under the Restated Notes. As of December 31, 1997 and 1996, accrued interest of approximately $3,319,500 and $3,049,500, respectively, has been added to the outstanding principal balance of $3,000,000 in accordance with the amended Third Mortgage Note. No net cash flow, as defined in the agreement, was available for repayment of this note during 1997, 1996 or 1995.
DEBT FORGIVENESS ----------------
BMCLP's outstanding obligation under the First Restated Note prior to the restructuring was $178,373,753. The carrying amount of the outstanding principal and accrued interest that was forgiven based on the assignment and subsequent restatement of the First Mortgage Note is presented as deferred gain on debt forgiveness in the accompanying consolidated balance sheets. This amount is being amortized as an extraordinary gain over the remaining term of the Restated First Mortgage Note based on a constant effective yield as required by Statement of Financial Accounting Standards No. 15 (SFAS 15), "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
Based on the Restated First Mortgage Note s interest rate of 10.04% and 9.78% in effect at December 31, 1997 and 1996, respectively, and the monthly principal curtailments of $108,333 as stipulated in the Restated First Mortgage Note, the estimated total future obligation for principal and interest is $62,774,907 and $67,453,640 at December 31, 1997 and 1996, respectively, including additional draws subsequent to the restructuring. Although these obligations are lower than the combined obligations of the Restated First Mortgage Note and the deferred gain on debt forgiveness (which totalled $117,266,883 and $136,886,036 at December 31, 1997 and 1996, respectively), SFAS 15 does not permit the entire difference to be recognized as an extraordinary gain at the time of the restructuring as the Restated First Mortgage Note s interest rate is variable, which makes the amount of future debt-service payments contingent upon changes in the index upon which the interest rate is calculated. Accordingly, the $54,491,976 and $69,432,396 difference between the carrying value and total future obligation of the debt at December 31, 1997 and
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CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE DEBT - Continued
1996, respectively, was deferred and is being amortized into income as extraordinary gain on debt forgiveness in the accompanying consolidated statements of operations using the effective interest method over the term of the Restated First Mortgage Note.
As a result of the fluctuations of the interest rate on the Restated First Mortgage Note, the Partnership continues to remeasure the total future obligation for principal and interest based upon changes in the underlying index, as discussed above. Differences in the future obligation resulting from interest rate changes are reflected as a reclassification between the Restated First Mortgage Note and deferred gain on debt forgiveness. For the years ended December 31, 1997, 1996 and 1995, $551,054, $990,767 and $4,556,760, respectively, was reclassified from the deferred gain on debt forgiveness to the Restated First Mortgage Note resulting from an increase in the future obligation based on changes in the underlying index. The adjusted deferred gain on debt forgiveness will be amortized as extraordinary gain over the remaining term of the Restated First Mortgage Note.
For the years ended December 31, 1997, 1996 and 1995, amortization of this deferred debt forgiveness amounted to $14,389,366, $14,600,160 and $14,085,175, respectively. The amortization of deferred gain is included in the extraordinary item of $14,129,506, $14,340,300 and $13,825,315 at December 31, 1997, 1996 and 1995, respectively, in the accompanying consolidated statements of operations, as it is shown net of the interest expense on the Restated Second Mortgage Note of $259,860, $259,860 and $259,860, respectively, as discussed below.
With regard to the Restated Second Mortgage Note, the total estimated future obligation for payment of principal and interest based on the fixed interest rate of 16% is $21,200,000. This amount exceeds the carrying value of the Restated Second Mortgage Note at November 16, 1994, of $19,380,974. In accordance with SFAS 15, this difference of $1,819,026 represents a constant additional interest obligation based on the fixed interest rate, and is to be amortized as a reduction of the extraordinary gain on the Restated First Mortgage Note at $21,655 per month through maturity, using the effective interest method, over the term of the Restated Second Mortgage Note. Accordingly, accrual of this additional interest for the years ended December 31, 1997 and 1996 amounted to $259,860 in each year and was added to the principal balance of the Restated Second Mortgage Note.
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Investments" (SFAS 107), requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The Partnership has determined that the carrying amount of the total future obligation of the Restated First Mortgage Note, which represents the estimated total future obligation of principal and interest, approximates fair value based on the variable nature of the Restated First Mortgage Note's interest rate. Because future debt service payments are contingent upon changes in the underlying index upon which the interest rate is calculated, the total future obligation of the Restated First Mortgage Note is expected to fluctuate with changing market rates of interest. The Partnership has determined that it is not practicable to estimate the fair value for the Restated Second Mortgage Note or the Third Mortgage Note due to: (1) the lack of an active market for these types of financial instruments, (2) the variable nature of the remaining net cash flow payments payable to BMC under the Restated Second Mortgage Note, as discussed above, (3) the variable nature of the Third Mortgage Note's interest payments as a result of its dependence on available
IV-25
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE DEBT - Continued
cash flow from BMCLP, and (4) the excessive costs associated with an independent appraisal of the Restated Second Mortgage Note and the Third Mortgage Note.
5. ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS OF CASH FLOW
As discussed in Note 1, the Partnership is not obligated to fund the operating deficits of BMCLP. As a result, only the portion of net loss associated with activity of the Partnership (the Allocable Net Loss) has been allocated to the partners of the Partnership.
In accordance with the Partnership Agreement, 1% of the Allocable Net Loss has been allocated to the General Partners, and 99% of the Allocable Net Loss has been allocated to the Limited Partners. Allocations of cash flow distributions are specified in the Partnership Agreement. See Note 4 for discussion of how BMCLP and the lenders of the Restated Notes participate in cash flow from BMCLP.
IV-26
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RECONCILIATION OF FINANCIAL STATEMENTNET INCOME TO TAX RETURN NET LOSS
A reconciliation of the Partnership s financial statement net income to its tax return net loss follows.
7. COMMITMENTS AND CONTINGENCIES
Management Agreements ---------------------
BMCLP entered into a management agreement with Hyatt in March 1982, pursuant to which Hyatt is to manage the Hotel commencing from the date the Hotel opened through December 31, 2015. Based on the management agreement, Hyatt is to be paid a management fee consisting of a base management fee of 4% of gross revenues, as defined, and an incentive management fee which is calculated based on 20% of the adjusted gross operating profit, as defined, for the years ended December 31, 1997 and 1996. For the year ended December 31, 1995, the base management fee was 3% (pursuant to a modification of the agreement in connection with the debt restructuring). Management fees paid to Hyatt for the years ended December 31, 1997, 1996 and 1995, were approximately $788,000, $734,000 and $520,000, respectively. The incentive fees earned, as discussed in Note 8, for the years ending December 31, 1997, 1996 and 1995 were approximately $466,000, $356,000 and $232,000, respectively, which have not been paid and are included in due to affiliates in the accompanying consolidated balance sheets.
BMCLP can terminate the Hotel Management Agreement upon no less than 60 days written notice if, for two successive fiscal years after December 31, 1995 (referred to as the Sixth Full Year), the Owner's Remittance (as defined) is less than the annual principal and interest payments paid on the first mortgage note (presently the Restated First Mortgage Note), up to a maximum of $6,250,000. This shortfall occurred in 1996 and 1997. Accordingly, BMCLP explored the possibility of engaging a different hotel manager, but Hyatt would
IV-27
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES - Continued
not agree to let the Partnership retain the franchise unless Hyatt managed the hotel. Instead, BMCLP and Hyatt began negotiating a new Hotel Management Agreement with a lower fee. Currently, BMCLP may not sell or transfer the Hotel or any portion thereof without the prior approval of Hyatt, which may not be unreasonably withheld and will be based upon, among other things, the ability of the prospective purchaser or transferee to fulfill BMCLP's financial obligations under the Hotel Management Agreement. However, during these negotiations, Hyatt asserted that the determination of whether or not a shortfall had occurred must be based on the portion of the Restated First Mortgage Note allocable to the Hotel, rather than the entire debt service, and that based on their analysis, a shortfall may not have occurred in 1996 or 1997. BMCLP vigorously disagrees with this assertion, and is presently considering its options. Management cannot currently project the impact on the accompanying consolidated financial statements of the outcome of these negotiations.
Pursuant to the management agreement, Hyatt also provides "chain services" to the Hotel such as promotion services, advertising, and centralized reservation services, for which BMCLP is to pay its allocable share of Hyatt expenses. As of December 31, 1997 and 1996, approximately $110,000 and $134,000, respectively, of this related party payable are recorded as due to affiliates in the accompanying financial statements.
The management agreement provides for the establishment of a property improvement fund. Contributions to the property improvement fund are equal to 3% of gross Hotel revenues (as defined) in fiscal years 1997, 1996 and 1995, respectively. Unexpended reserves are recorded as escrows and deposits within the accompanying financial statements. The reserve balances included in escrows and deposits at December 31, 1997 and 1996, were approximately $391,000 and $342,000, respectively.
BMCLP entered into a management agreement with Realty, an affiliate prior to July 1, 1988, of one of the Special Limited Partners, dated January 31, 1985, pursuant to which Realty was to manage the Office Building for a term of 20 years commencing with the date the Office Building opened. Under the terms of that agreement, Realty received a monthly management fee equal to 4% of all income collected from the operation of the Office Building. Realty had agreed to allow BMCLP to defer payments of all management fees, effective January 1, 1992, through the date of the restructuring of the original mortgage debt. In connection with the debt restructuring, which occurred November 16, 1994, BMC Lender Partnership (the holder of the Restated Second Mortgage Note) paid Realty $1,000,000 to terminate its former management contract with BMCLP. At that time BMCLP entered into a new management contract with Realty for a term of one year which will automatically renew for successive one year periods so long as Realty is not then in default of the management contract. The agreement provides for a management fee in the amount of 4% of total revenues. Management fees for the years ended December 31, 1997, 1996 and 1995, were approximately $403,000, $401,000 and $391,000, respectively.
BMCLP constructed its buildings on land it leases from WMATA. WMATA asserted claims against BMCLP concerning the deterioration of the concrete slab in areas that WMATA has used as a bus terminal and Kiss & Ride area since 1985. WMATA asserted that the deterioration was due to construction defects, but BMCLP took the position that the deterioration was due to improper maintenance. The deterioration reached the point that BMCLP's parking garage, which underlies the concrete slab, could have been damaged. Accordingly, although BMCLP denied any legal liability for the repair of the concrete slab, it agreed to contribute $100,000 toward repair of the deck in exchange for a full release of any and all
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CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES - Continued
claims WMATA may have with respect to the design and construction issues. The estimated cost for repair was approximately $1,000,000, of which WMATA paid all but the $100,000 contributed by BMCLP. BMCLP negotiated a release with WMATA, and in July 1996 submitted it together with the $100,000. On September 26, 1996 the release and a settlement agreement were signed, thus releasing BMCLP from any liability over $100,000. At such time the $100,000 was transferred to WMATA. The settlement agreement specifies work to be performed and WMATA's use of BMCLP's parking garage space for structural shoring during its repairs of the overhead concrete deck. The repair work began during July 1997 and was concluded during early 1998.
Ground Leases -------------
BMCLP entered into a ground lease with WMATA for land on which the Development is built. The land lease expires on November 30, 2031, and can be renewed for an additional 49 years at the option of BMCLP. The agreement provides for $400,000 minimum quarterly rental payments. Additional rent is payable at the rate of 7.5% of annual gross receipts in excess of $31,000,000. No additional rent was due or paid for 1997, 1996, or 1995.
Future minimum rental payments under the ground lease follow.
Year Ended December 31, ------------ 1998 $ 1,600,000 1999 1,600,000 2000 1,600,000 2001 1,600,000 2002 1,600,000 Thereafter 46,400,000 ------------ Total $ 54,400,000 ============
Examination of Federal Income Tax Return ----------------------------------------
The 1994 federal income tax return of BMCLP is being examined by the Internal Revenue Service, primarily due to the refinancing of the Notes resulting in cancellation of debt income to the Partnership. Management cannot currently project the impact on the accompanying consolidated financial statements of the outcome of the examination.
IV-29
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED-PARTY TRANSACTIONS
A summary of amounts due to affiliates follows.
The $405,810 and $342,558 due to CRI as of December 31, 1997 and 1996, respectively, is partially comprised of $107,103 of advances to BMCLP to fund Excess Payments due on its former mortgages with Great Western. The remaining amount due to CRI is comprised of advances to the Partnership to fund operating deficits and accrued interest on advances. In addition, the $1,303,861 and $1,215,586 due to CHG as of December 31, 1997 and 1996, respectively, and $1,511,128 and $972,233 due to Realty as of December 31, 1997 and 1996, respectively, represent advances, and interest accrued thereon, made to BMCLP to fund Excess Payments on the Great Western mortgages, as discussed in Note 4. The advances from CRI, CHG and Realty accrue interest at the prime rate (8.5% as of December 31, 1997) plus 1% in accordance with the Partnership Agreement. These advances plus any accrued interest will be repaid subject to cash availability as defined by the BMCLP partnership agreement and the Restated Notes, as discussed in Note 4. Finally, the $1,395,274 and $953,434 due to Hyatt as of December 31, 1997 and 1996, respectively, consist of $1,085,429 and $819,679, respectively, of incentive management fees earned under its management agreement with BMCLP and is due subject to Hyatt meeting certain performance standards as defined in the management agreement. The remaining balance consists of trade payables to Hyatt for various services as described in Note 7.
CRCC and/or the Partnership may receive an annual payment of up to $50,000 to cover costs of management and administration, to the extent that funds are available after payment of amounts due on the Restated First and Second Mortgage Notes, as discussed in Note 4. CRCC received payments of $50,000 in each of 1997, 1996 and 1995 from remaining net cash flow relating to 1996, 1995 and 1994, respectively. Additionally, $50,000 was accrued as of December 31, 1997 for fiscal year 1997 management fees, as described in Note 4.
CIP Management 14, Inc., an affiliate of the Managing General Partner, may receive an incentive management fee on a noncumulative annual basis commencing in 1987 equal to 9.08% of net cash flow after payment of certain priorities set forth in the Partnership Agreement. No such incentive management fee was earned or paid in 1997, 1996, or 1995.
IV-30
CAPITAL INCOME PROPERTIES - C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED-PARTY TRANSACTIONS - Continued
Realty Management Company, which is a former affiliate of one of the Special Limited Partners, provides management services related to the Office Building, while Iroquois, which is an affiliate of the Special Limited Partners, has provided financing through the Third Mortgage Note.
9. RENTAL INCOME UNDER OPERATING LEASES
BMCLP s principal leasing activities consist of office space rentals under operating leases. Future minimum rental receipts under noncancelable leases follow.
Year Ended December 31, ------------
1998 $ 4,932,738 1999 4,490,040 2000 4,452,866 2001 3,928,653 2002 2,866,091 Thereafter 6,789,862 ------------ Total $ 27,460,250 ============
BMCLP has entered into a parking lease with Monument Parking Co., Inc., dated March 14, 1983, for a term of 30 years commencing with the date the garage opened. Under the terms of this agreement, BMCLP receives all adjusted net gross receipts up to $1,500,000, and a percentage of fees in excess of $1,500,000, as stipulated in the agreement.
10. DUE TO GUARANTOR OF OPERATING DEFICITS
Pursuant to the BMCLP partnership agreement and operating deficit guarantee agreement, R&KCC, an affiliate of the Special Limited Partners, has guaranteed the funding of all BMCLP operating deficits up to $15,600,000. To satisfy a portion of this obligation, the shareholders of R&KCC arranged for the original Second Mortgage Note as described in Note 4. Upon R&KCC s discontinuance of business, the Special Limited Partners assumed the obligations for funding operating deficits. The total due to R&KCC with respect to operating deficit loans, including accrued interest, is $2,490,352 and $2,367,168 as of December 31, 1997 and 1996, respectively. Interest on amounts advanced to BMCLP for operating deficits is 1% over the prime rate (8.5% as of December 31, 1997) and will be repaid subject to the terms of the Restated Notes and then out of 50% of cash flow available after payment of certain priorities as set forth in the BMCLP partnership agreement. Cumulative interest accrued on these advances was $1,251,465 and $1,128,281 at December 31, 1997 and 1996, respectively, and has been added to the original advance amount and classified as due to guarantor of operating deficits in the accompanying consolidated balance sheets. For the years ended December 31, 1997 and 1996, no amounts were advanced to the BMCLP for operating deficits because the Special Limited Partners have represented that their net worth is not significant, their assets are very illiquid, and they do not have resources to meet their operating deficit obligations.
IV-31
EXHIBIT INDEX -------------
Exhibit Method of Filing - ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-32