ITEM 1. BUSINESS
Description of SB Partners (the “Registrant”)
The Registrant is a New York limited partnership engaged in acquiring, operating and holding for investment a varying portfolio of real estate interests. The Registrant's initial public offering was in 1971, the year it began operations. As of December 31, 2009, the Registrant owns an industrial flex property in Maple Grove, Minnesota, and warehouse distribution properties in Lino Lakes, Minnesota and Naperville, Illinois. In addition, the Registrant has a thirty percent interest in Sentinel Omaha, LLC (“Omaha”). Omaha is a real estate investment company which currently owns 25 multifamily properties and 1 industrial property in 17 markets. Omaha is an affiliate of the Registrant’s general partner.
The principal objectives of the Registrant are, first, to obtain capital appreciation through equity investments in real estate; second, to generate cash available for distribution, a portion of which may not be currently taxable; and third, to the extent still permitted under the Internal Revenue Code of 1986, as amended, to generate tax losses which may offset the limited partners' income from the Registrant and certain other sources.
The Registrant does not maintain a Website. However, the Registrant’s filings with the Securities and Exchange Commission (the “SEC”) are available on the SEC’s Website.
Recent Developments and Real Estate Investment Factors
The Registrant has no direct investment in the multifamily market as of December 31, 2009. However, Omaha invests primarily in the multifamily market. The multifamily market has suffered from the effects of the national debt crisis which did not improve in 2009. Potential buyers for multifamily properties are struggling with wide spreads on lending rates, lower loan to value ratio requirements and far stricter credit terms. Even quality borrowers have limited financing available. This led to an increase in capitalization rates during 2008 which had pushed values down. During 2009, capitalization rates continued to increase which led to further declines in value. The stagnant national economy has kept unemployment higher and prevented economic growth in most markets in which Omaha owns properties which had a negative effect on rental apartment operations during 2009. Omaha reports on a fair value basis and due to the mortgage crisis, stagnant real estate market and slowing economy, Omaha reported a write-down in the value of its real estate portfolio of approximately $69,749,000 (15%) for the twelve months ended December 31, 2009 in addition to the approximately $58,203,000 (10%) write-down recorded in 2008. Also, under the terms of the unsecured loan extension Omaha signed effective July 1, 2009, Omaha is precluded from making distributions to its investors until its unsecured loan is paid. As a result of the aforementioned, Registrant does not anticipate receiving any distributions from Omaha during the foreseeable future and has reserved 100% of the reported value of its investment in Omaha on the balance sheet as of December 31, 2009. On April 14, 2010, Omaha executed the fourth amendment to its unsecured loan which reduced the blended interest rate on the loan from LIBOR plus 585 basis points to LIBOR plus 386 basis points, as of February 1, 2010. Additionally, Omaha’s financial ratio requirements were waived at December 31, 2009 and March 31, 2010 and were relaxed prospectively. Furthermore, the maturity date of the unsecured loan was extended from May 31, 2011 to May 31, 2012 with an option for an additional one year extension at which time exit fees are to be paid on a portion of any remaining balance of the unsecured loan. However, Omaha is still precluded from making distributions to its investors until its unsecured loan is paid.
The industrial market also has suffered from the effects of the debt crisis and the slowing economy. The primary drivers of demand for industrial space continued to be impacted during 2009. Retail sales remained down from the declines reported in 2008. Registrant owns industrial properties in the Chicago and Minneapolis MSA’s. Both reported higher vacancy rates and lower market rents in 2009. In addition, industrial tenants are signing leases with shorter terms which increases both the investment risk and borrowing risk for buyers and lenders, respectively. This has led to an increase in capitalization rates and lower values for industrial properties.
Occupancy for the industrial flex and warehouse distribution portfolio owned by the registrant remained at 100% during 2009.
(Please refer to Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations.)
The Registrant did not make any direct changes to its portfolio during 2009 or 2008. However, during 2009 and 2008, Omaha sold 2 multifamily properties and 5 multifamily properties, respectively and did not acquire any new properties. During 2007, the Registrant sold the Le Coeur Du Monde Apartments in St. Louis, Missouri and the Registrant acquired a thirty percent interest in Omaha. On June 22, 2007, the Registrant made an initial investment in the amount of $5,000,000 in Omaha. Additionally, $2,800,000, $9,500,000 and $19,900,000 were invested on July 27, September 14 and September 17, 2007, respectively, for a total investment of $37,200,000, representing a thirty percent ownership interest in Omaha. For the year 2009, the Registrant’s interest in the net income from operations, net unrealized depreciation of real estate properties, mortgages and interest rate protection agreements, and realized gain from the sale of properties of Omaha were $684,929, $19,177,007 and $159,952, respectively. For the year 2008, the Registrant’s interest in the net loss from operations, net unrealized depreciation of real estate properties, mortgages and interest rate protection agreements, and realized loss from the sale of properties of Omaha were $574,449, $13,426,622 and $504,803, respectively. For the year 2007, the Registrant’s interest in the net loss of Omaha was $972,787.As of December 31, 2009, Omaha consists of 25 wholly owned multifamily residential properties and a wholly owned commercial property.
As of December 18, 2008, Registrant designated Eagle Lake Business Center IV as real estate held for sale. Accordingly, this property was included in real estate held for sale on the consolidated balance sheets as of December 31, 2008. Assets and liabilities of this property were reflected as other assets and liabilities in discontinued operations on the consolidated balance sheet and its results of operations were reflected as income (loss) from discontinued operations on the consolidated statements of operations.
During 2009 the Partnership terminated marketing the property for sale. As of December 31, 2009, the Partnership re-designated Eagle Lake Business Center IV as a component of continuing operations. The consolidated financial statements as of December 31, 2009 and for the years ended December 31, 2008 and 2007, as amended, have been retrospectively adjusted to reflect this reclassification. See Note 2 to the consolidated financial statements.
ITEM 1A.
ITEM 1A. Risks Factors
This report on Form 10-K includes statements that constitute "forward looking statements" within the meaning of Section 27(A) of the Securities Act of 1933 and Section 21(E) of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. By their nature, all forward looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward looking statements for a number of reasons, including, but not limited to, those risks described below:
General
The Registrant's investments generally consist of investments in real property and as such will be subject to varying degrees of risk generally incident to the ownership of real estate assets. The underlying value of the Registrant's real estate investments and the Registrant's financial condition will be dependent upon its ability to operate its properties in a manner sufficient to maintain or increase revenues and to generate sufficient income in excess of ownership and operating expenses. Income from the properties may be adversely affected by changes in national and local economic conditions such as oversupply of industrial flex, warehouse distribution spaces or apartments in the Registrant's markets, the attractiveness of the properties to tenants, changes in interest rates and in the availability, cost and terms of mortgage financing, the ongoing need for capital improvements, particularly in older structures, changes in real estate tax rates, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws, civil unrest, acts of God, including natural disasters (which may result in uninsured losses), and other factors which are beyond the control of the Registrant. If the Registrant were unable to promptly renew or re-let the leases of a significant number of tenants, or, if the rental rates upon such renewal or re-letting were significantly lower than expected rates, the Registrant's results of operations, financial condition and ability to make distributions to Unit holders may be adversely affected.
Risks of Liability and Loss
The development and ownership of real estate may result in liability to third parties due to conditions existing on a property which may result in injury. In addition, real estate may suffer a loss in value due to casualties such as fire or natural disaster. Such liability or loss may be uninsurable in some circumstances, such as a loss caused by the presence of mold, or may exceed the limits of insurance maintained at typical amounts for the type and condition of the property. Real estate may also be taken, in whole or in part, by public authorities for public purposes in eminent domain proceedings. Awards resulting from such proceedings may not adequately compensate the Registrant for the value lost.
Value and Non-liquidity of Real Estate
Real estate investments are relatively non-liquid. The Registrant's ability to vary its portfolio in response to changes in economic and other conditions will therefore be limited. If the Registrant must sell an investment, there can be no assurance that it will be able to dispose of the investment in the time period it desires or that the sales price of the investment will recoup or exceed the amount of the Registrant's cost of the investment.
Potential Adverse Effect on Results of Operations Due to Operating Risks
The Registrant's properties are subject to operating risks common to real estate in general, any and all of which may adversely affect occupancy or rental rates.
Debt Servicing and Financing
The real estate market continues to suffer through one of its worst debt crises. Interest rates remain higher and some borrowers still find it difficult to secure debt at acceptable terms as lenders have imposed stricter terms on borrowers. If the Registrant does not have funds sufficient to repay its indebtedness at maturity, the Registrant may need to refinance such indebtedness with new debt financing or through equity offerings. The Registrant may be restricted from obtaining a loan which will be sufficient to retire the existing loan and which may be based on lower debt service coverage. If it is unable to refinance this indebtedness on acceptable terms, the Registrant may be forced to dispose of properties upon disadvantageous terms, which could result in losses to the Registrant and adversely affect the amount of cash available for distribution to Unit holders. If prevailing interest rates or general economic conditions result in higher interest rates at a time when the Registrant must refinance its indebtedness, the Registrant's interest expense could increase, which would adversely affect the Registrant's results of operations and financial condition and its ability to pay distributions to Unit holders. Further, if any of the Registrant's
properties are mortgaged to secure payment of indebtedness and the Registrant is unable to meet mortgage payments, mortgagee could foreclose or otherwise transfer the property, with a consequent loss of income and asset value to the Registrant.
Registrant’s $22,000,000 unsecured credit facility matured October 1, 2008. The holder of the unsecured debt formally extended the maturity to February 28, 2009 and has entered into discussions with Registrant as to options for curing the default. As a result of Registrant’s inability to replace, extend or refinance the unsecured credit facility, in their report dated May 27, 2009 as of and for the year ended December 31, 2008, Registrant’s independent auditors expressed substantial doubt as to Registrant’s ability to continue as a going concern. On July 1, 2009 Registrant received written notice from the holder of the Loan which makes demand for the immediate payment of the Loan. If the outstanding obligation is not paid, the holder may initiate appropriate action to collect the outstanding obligations, including enforcement of its rights and remedies under the loan documents or applicable law. The holder and Registrant continue to discuss options for curing the default. There can be no assurance that the holder will offer such options or that Registrant will be able to comply with the terms offered and conditions imposed by the holder in exchange for such options. As a result of Registrant’s inability to replace, extend or refinance the unsecured credit facility, in their report dated May 20, 2010 as of and for the year ended December 31, 2009, Registrant’s independent auditors again expressed substantial doubt as to Registrant’s ability to continue as a going concern.
Registrant has a $6,634,550 mortgage secured by the property located at 175 Ambassador Drive. The mortgage matures in October 2010. Registrant has begun discussions with potential lenders to refinance the existing mortgage. There can be no assurance that Registrant will be able to obtain a new loan to satisfy the existing mortgage nor obtain an extension of the existing mortgage beyond the maturity date. Registrant may have to market the property for a sale in order to pay off the existing mortgage.
Environmental Issues
Under various federal, state and local environmental laws, ordinances and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. These laws often impose environmental liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate their presence, may adversely affect the owner's or operator's ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain third parties may seek recovery from owners or operators of such properties or persons who arranged for the disposal or treatment of hazardous or toxic substances and, therefore, are potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property.
Competition
The Registrant competes for tenants with many other real estate owners. The success of the Registrant in attracting tenants for its properties will depend upon its ability to maintain its properties and their attractiveness to tenants, new property developments, local conditions, and changing demographic trends. All of the Registrant's properties are located in developed areas that include other, similar properties. The number of competitive properties in a particular area could have a material effect on the Registrant's ability to lease industrial flex or warehouse distribution space at its properties and on the rents charged at such properties.
Tax Matters
There were no significant changes in the tax laws or the extent to which such legislation impacts the Registrant or the partners during the year ended December 31, 2009. Unit holders are urged to consult their own tax advisors with respect to the tax consequences arising under the federal law and the laws of any state, municipality or other taxing jurisdiction, including tax consequences arising from such Unit holder's own tax characteristics.
General
Efforts required in complying with federal, state and local environmental regulations may have and may continue to have an adverse effect on the Registrant's operations in the future, although such costs have not historically been significant in amount.
The Registrant considers itself to be engaged in only one industry segment, real estate investment, and therefore information regarding industry segments is not applicable and has not been provided.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The properties owned by the Registrant as of December 31, 2009 are as follows:
Additional information regarding properties owned by the Registrant:
(a) Property was sold on April 24, 2007.
(b) Property was purchased on October 5, 2005.
(c) Property was purchased on November 28, 2006
(d) For period of ownership.
(e) Property was sold on May 2, 2006.
(f) Property was sold on March 28, 2005.
(g) Property was sold on December 20, 2006.
(h) Per apartment unit. Gross potential rent, less concessions and vacancies, divided by
the total number of units at the property. Annualized for periods of ownership of less than one year.
(i) Per square foot. Base rent plus escalations, divided by the total number of square feet at
the property. Annualized for periods of ownership of less than one year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4.
(Removed and Reserved).
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S UNITS OF PARTNERSHIP
INTEREST AND RELATED UNITHOLDER MATTERS
The transfer of Units or Participations (equivalent to one-half Unit) is subject to certain limitations, including the consent of the General Partner. There is no public market for the Units and it is not anticipated that any such public market will develop. The number of Unit holders as of December 31, 2009 was 2,823.
On August 21, 2008, MacKenzie Patterson Fuller, LP (“MPF”) and certain of its affiliated funds initiated an unsolicited tender offer to buy up to 1,500 units of limited partnership interests at a price of $700 per Unit. In a letter to Unit holders dated September 5, 2008, the general partner recommended that Unit holders reject the offer. On June 26, 2009, MPF sent a letter to those unit holders who had executed assignments to transfer their units to MPF, returning the assignments back to the unit holders and terminated the offer.
At various times, the Registrant has generated and distributed cash to the unit holders. A distribution of $350 per unit totaling $2,713,725 was paid on March 1, 2007 to unit holders of record on December 31, 2006. In addition, on March 1, 2008, the Registrant made a distribution of $110 per unit, totaling $852,885, to unit holders on record as of December 31, 2007. In view of the continuing economic downturn and constricting capital markets, the Registrant did not declare a distribution for 2008 or 2009 in order to begin building cash reserves to respond to future capital needs. Cumulative distributions since inception have totaled $111,747,950. However, there is no requirement to make such distributions nor can there be any assurance that future operations will generate cash available for distribution.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding the Registrant's financial condition and results of operations determined in accordance with accounting principles generally accepted in the United States of America. This data should be read in conjunction with the Audited Consolidated Financial Statements and Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this annual report on Form 10-K. Certain prior year amounts have been reclassified to make them comparable to the current year presentation. See Note 2 to the consolidated financial statements.
In March 2009, Registrant was informed by the manager of Omaha that Omaha’s 2008 financial statements included a cumulative effect of a change in accounting principle that, as a result of Registrant’s early adoption in 2007 of Financial Accounting Standards No. 159, as codified in Accounting Standards Codification Topic 825, required Registrant to amend our 2007 financial statements. The change affected the estimated fair value of the mortgage notes, bonds and credit facilities payable reported on the consolidated statement of assets, liabilities and members’ equity for Omaha and the net unrealized depreciation on fair value of mortgage notes and bonds reported on the consolidated statement of operations for Omaha. See Note 3 to the consolidated financial statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Registrant is a New York limited partnership engaged in acquiring, operating and holding for investment a varying portfolio of real estate interests. The Registrant's initial public offering was in 1971, the year it began operations. As of December 31, 2009, the Registrant owned an industrial flex property in Maple Grove, Minnesota, and warehouse distribution centers in Lino Lakes, Minnesota and Naperville, Illinois. The Registrant also has a thirty percent interest in Sentinel Omaha, LLC. Omaha is a real estate investment company which currently owns 25 multifamily properties and 1 industrial property in 17 markets. Omaha is an affiliate of the Registrant’s general partner.
The principal objectives of the Registrant are, first, to obtain capital appreciation through equity investments in real estate; second, to generate cash available for distribution, a portion of which may not be currently taxable; and third, to the extent still permitted under the Internal Revenue Code of 1986, as amended, to generate tax losses which may offset the limited partners' income from the Registrant and certain other sources.
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. The summary should be read in conjunction with the more complete discussion of significant accounting policies included in Note 1 to the consolidated financial statements for the year ended December 31, 2009.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Maintenance and repairs are charged to operations as incurred. Depreciation requires an estimate by management of the useful life of each property as well as an allocation of the costs associated with a property to its various components. If the Partnership does not allocate these costs appropriately or incorrectly estimates the useful lives of its real estate, depreciation expense may be misstated.
The Partnership's properties are regularly evaluated on a property-by-property basis for impairment. Impairment is determined by calculating the sum of the estimated undiscounted future cash flows including the projected undiscounted future net proceeds from the sale of the property. In the event such sum is less than the net carrying value of the property, the property will be written down to estimated fair value. If the Partnership incorrectly estimates the value of the asset or the undiscounted cash flows, the impairment charges may be different from those, if any, in the consolidated financial statements.
Investment in Sentinel Omaha, LLC
The Registrant has a 30% non-controlling interest in Omaha that is accounted for at fair value. During 2009 and 2008, Omaha reported significant write-downs of its real estate portfolio of $69,749,000 (15%) and $58,203,000 (10%), respectively. In addition, Registrant reviewed its own analysis of the current and projected financial condition of Omaha. On July 1, 2009, Omaha executed an extension of its unsecured loan. The extension, among other items, increased the spread on the interest rate on the unsecured debt by approximately 390 basis points. The current outstanding balance of the unsecured debt is approximately $94,000,000, increasing the interest expense on that balance by approximately $3,666,000 per annum. As of December 31, 2009, the outstanding unsecured loan combined with the outstanding mortgages related to the real estate properties exceeds the estimated value of the real estate properties by 2.6% of the value of the real estate properties. On April 14, 2010, Omaha executed the fourth amendment to its unsecured loan which reduced the blended interest rate on the loan from LIBOR plus 585 basis points to LIBOR plus 386 basis points as of February 1, 2010. Additionally, Omaha’s financial ratio requirements were waived at December 31, 2009 and March 31, 2010 and were relaxed prospectively. Furthermore, the maturity date of the unsecured loan was extended from May 31, 2011 to May 31, 2012 with an option for an additional one year extension at which time exit fees are to be paid on a portion of any remaining balance of the unsecured loan. However, Omaha is still
precluded from making distributions to its investors until its unsecured loan is paid. As a result of the aforementioned, Registrant does not anticipate receiving any distributions from Omaha during the foreseeable future and has reserved 100% of the reported value of its investment in Omaha on the balance sheet as of December 31, 2009.
Determination of the fair value of Omaha involves numerous estimates and subjective judgments that are subject to change in response to current and future economic and market conditions, including, among other things, demand for residential apartments, competition, and operating cost levels such as labor, energy costs, real estate taxes and market interest rates. Judgments regarding these factors are not subject to precise quantification or verification and may change from time to time as economic and market factors change.
Estimated fair value is based on the criteria outlined in Financial Accounting Standards Board Accounting Standard Codification No. 820-10, “Fair Value Measurements and Disclosures” (ASC 820-10). ASC 820-10 established a "three-tier" valuation hierarchy to prioritize the assumptions used in valuation techniques to measure fair value. The three levels of fair value hierarchy under ASC 820-10 are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;
Level 2 - Quoted prices in active markets for similar assets and liabilities or quoted prices in less active dealer or broker markets;
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and are unobservable.
Estimated fair value calculations were prepared by Omaha's management utilizing Level 3 inputs.
Further, the investment in Omaha is not consolidated because other investors have substantive ownership and participative rights regarding Omaha’s operations and therefore control does not vest in the Registrant. Were the Registrant deemed to control Omaha, it would have to be consolidated and therefore would impact the financial statements and related ratios.
Revenue Recognition
Rental income is recognized when earned pursuant to the terms of the leases. Base rents and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. Before the Partnership can recognize revenue, it is required to assess, among other things, its collectability. The Partnership continually analyzes the collectability of its revenue and will reserve against its revenue if conditions warrant such action.
Off-Balance Sheet Arrangements
None.
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification Topic 105 “Generally Accepted Accounting Principles” (ASC 105). ASC 105 establishes the FASB Accounting Standards Codification (ASC) as the single source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB and substantially retains existing GAAP. The ASC does not replace or affect guidance issued by the Securities and Exchange Commission (SEC) or its staff for public entities in the filings with the SEC. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. All references to authoritative accounting literature in the Company’s financial statements reflect the newly adopted ASC.
In May 2009, the FASB issued ASC Topic 855 “Subsequent Events”. ASC 855 establishes guidance for the accounting for and the disclosure of events that occur after the date of the balance sheet but before the issuance of the financial statements. The adoption of ASC 855 did not have a material impact on our financial statements.
In February 2008, the FASB issued an update to ASC Topic 820 “Fair Value Measurements and Disclosures”. This update deferred the effective date of changes to fair value measurements as it relates to non-financial assets and liabilities until fiscal years beginning after November 15, 2008. Effective January 1, 2009, we began applying
the changes to the fair value measurements which were previously deferred. The adoption of this update did not have a material impact on our financial statements.
CONTRACTUAL OBLIGATIONS
As of December 31, 2009, the Registrant’s contractual obligations consisted of mortgage notes and unsecured loan payable. Principal payments under the mortgage notes and unsecured loan payable are due as follows:
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2009, the Registrant had cash and cash equivalents of approximately $148,000. These balances are approximately $396,000 less than the cash and cash equivalents as of December 31, 2008. Operating activities reduced cash and cash equivalents by approximately $189,000 during 2009. Other uses of cash during the year included debt principal payments and tenant improvement costs of approximately $172,000 and $36,000, respectively.
Total outstanding debt at December 31, 2009 consisted of approximately $10,000,000 of a long-term non-recourse first mortgage note, secured by real estate owned by the Registrant due in October 2015, $6,635,000 of a non-recourse mortgage note secured by real estate owned by the Registrant due in October 2010 and $22,000,000 under an unsecured credit facility (see Note 8 to the Consolidated Financial Statements). The Registrant has no other debt except normal trade accounts payable and accrued interest on mortgage notes payable.
Inflation and changing prices during the current period did not significantly affect the markets in which the Registrant conducts its business, or the Registrant’s business overall. However, the real estate market continues to suffer through one of its worst debt crises. Interest rates have increased and some borrowers still find it difficult to secure debt at acceptable terms as lenders have imposed stricter terms on borrowers.
Registrant’s unsecured credit facility matured October 1, 2008. The holder of the unsecured debt formally extended the maturity to February 28, 2009 and has entered into discussions with Registrant as to options for curing the default. As a result of Registrant’s inability to replace, extend or refinance the unsecured credit facility, in their report dated May 27, 2009 as of and for the year ended December 31, 2008, Registrant’s independent auditors expressed substantial doubt as to Registrant’s ability to continue as a going concern. On July 1, 2009 Registrant received written notice from the holder of the loan which makes demand for the immediate payment of the loan. If the outstanding obligation is not paid, the holder may initiate appropriate action to collect the outstanding obligations, including enforcement of its rights and remedies under the loan documents or applicable law. The holder and Registrant continue to discuss options for curing the default. There can be no assurance that the holder will offer such options or that Registrant will be able to comply with the terms offered and conditions imposed by the holder in exchange for such options. As a result of Registrant’s inability to replace, extend or refinance the unsecured credit facility, in their report dated May 20, 2010 as of and for the year ended December 31, 2009, Registrant’s independent auditors again expressed substantial doubt as to Registrant’s ability to continue as a going concern.
Registrant has a $6,634,550 mortgage secured by the property located at 175 Ambassador Drive. The mortgage matures October 2010. Registrant has begun discussions with potential lenders to refinance the existing mortgage. There can be no assurance that Registrant will be able to obtain a new loan to satisfy the existing mortgage nor obtain an extension of the existing mortgage beyond the maturity date. Registrant may have to market the property for a sale in order to pay off the existing mortgage.
The downturn in the debt market had led to a significant slowing of the national economy during 2008 and continued throughout 2009. Companies have contracted or gone out of business leading to an increase in unemployment, significantly in some markets where Omaha owns multifamily properties. The stagnant
economic growth and increase in unemployment has lead to increases in vacancies and lower rental growth during the past two years. Although the three commercial properties owned by the Registrant are 100% occupied, the stagnant market increases the risk that one or more tenants could default on their lease. The economic slowdown has increased the amount of vacant industrial space available to leasing prospects and has decreased the pool of potential leasing prospects. Registrant may require a longer time period to replace one of the tenants at its properties should a default occur.
Registrant did not pay a distribution in 2009 in order to begin building cash reserves to respond to future capital needs. There is no requirement to make such distributions, nor can there be any assurance that future operations will generate cash available for distribution.
The Registrant's properties are expected to generate sufficient cash flow to cover operating, financing, and capital improvement costs, and other working capital requirements of the Registrant for the foreseeable future.
MANAGEMENT’S DISCUSSION OF RESULTS OF OPERATIONS
2009 VS. 2008 (As amended to reflect the reclassification discussed in Note 2 to the consolidated financial statements)
Total revenues from continuing operations increased $224,000 to approximately $3,984,000 in 2009 from approximately $3,760,000 in 2008 due to higher rental income and higher other rental income partially offset by lower interest income on short term investments. Rental income increased due to scheduled increases in base rent for each tenant at all three of Registrant’s wholly owned properties. Other rental income increased due to higher real estate tax reimbursements at the Lino Lakes property and operating expense reimbursements at the Eagle Lake IV property. The reduction in interest income is due to lower cash funds available for short term investment during 2009. The increase in real estate tax reimbursement at Lino Lakes was due to higher tax expense. The increase in operating expense reimbursements from Eagle Lake IV was due to higher tenant charges for operating costs incurred in the prior year.
The Registrant reported a net loss from continuing operations of approximately $23,605,000, a decline of approximately $8,688,000 as compared to a net loss of $14,917,000 in 2008. The decline was primarily the result of the Registrant’s interest in the loss from Omaha as well as Registrant reserving 100% of the reported value of Omaha. Total expenses from continuing operations for 2009 decreased approximately $570,000 to $4,737,000 from $5,307,000 in 2008, primarily due to decreases in interest expense, asset management fees, depreciation and amortization and other real estate operating expenses of $531,000, $25,000, $35,000 and $39,000, respectively. In addition, equity in net loss of investments increased approximately $4,956,000 to $18,326,000 for 2009 from $13,370,000 for 2008. Omaha reports on a fair value basis and due to the mortgage crisis, stagnant real estate market and slowing economy, Omaha reported a significant write-down in the value of its real estate portfolio of approximately $69,749,000 (15%) during 2009. On July 1, 2009, Omaha executed an extension of its unsecured loan. The extension, among other items, increased the spread on the interest rate on the unsecured debt by approximately 390 basis points. The current outstanding balance of the unsecured debt is approximately $94,000,000 increasing the interest cost on that balance by approximately $3,666,000 per annum. As of December 31, 2009, the outstanding unsecured loan combined with the outstanding mortgages related to the real estate properties exceeds the estimated value of the real estate properties by 2.6% of the value of the real estate properties. On April 14, 2010, Omaha executed the fourth amendment to its unsecured loan which reduced the blended interest rate on the loan from LIBOR plus 585 basis points to LIBOR plus 386 basis points as of February 1, 2010. Additionally, Omaha’s financial ratio requirements were waived at December 31, 2009 and March 31, 2010 and were relaxed prospectively. Furthermore, the maturity date of the unsecured loan was extended from May 31, 2011 to May 31, 2012 with an option for an additional one year extension at which time exit fees are to be paid on a portion of any remaining balance of the unsecured loan. However, Omaha is still precluded from making distributions to its investors until its unsecured loan is paid. As a result of the aforementioned, Registrant does not anticipate receiving any distributions from Omaha during the foreseeable future and has reserved 100% of the reported value of its investment in Omaha on the balance sheet as of December 31, 2009.
Interest expense from continuing operations was approximately $531,000 lower for 2009 as compared to 2008. This is primarily due to a decrease in interest expense incurred of approximately $574,000 for the $22,000,000 unsecured credit facility due to a decrease in the average LIBOR rate. The unsecured credit facility was used to partially finance the investment in Sentinel Omaha, LLC in 2007.
For additional analysis, please refer to the discussions of the individual properties below.
Eagle Lake Business Center IV (Maple Grove, Minnesota)
Total revenues increased approximately $134,000, to approximately $928,000 in 2009 compared with $794,000 in 2008. Net income, which includes deductions for depreciation, increased $139,000, to approximately $451,000 in 2009 from $312,000 in 2008. Occupancy for both years was 100%. The increase in total revenue was due to higher scheduled rent collected from the tenant and an increase in expense reimbursements collected from the tenant. The increase in net income was due to the increase in revenues plus a slight decrease in expenses of $5,000. The decrease in expenses was primarily due to decreases in repairs and maintenance of $17,000 partially offset by increases in real estate taxes and amortization expense of $4,000 and $7,000, respectively.
The Minneapolis-St. Paul industrial market reported a vacancy rate for the 4th quarter of 2009 of 7.6% which is 1.7 percentage points higher than the 5.9% reported in December 2008 according to a research report by CB Richard Ellis. Space absorption in the Minneapolis-St. Paul industrial market for 2009 was approximately negative 2,554,000 square feet.
435 Park Court (Lino Lakes, Minnesota)
Total revenues increased approximately $78,000, to approximately $1,654,000 in 2009 compared with approximately $1,576,000 in 2008 due to higher rental income combined with higher expense reimbursements. Net income, which includes deductions for depreciation and mortgage interest expense, decreased approximately $31,000, to approximately $157,000 in 2009 from approximately $188,000 in 2008. Occupancy for both years was 100%. The decrease in net income was mostly due to the increase in real estate tax expense and mortgage interest of $119,000 and $50,000, respectively partially offset due to higher income from higher expense reimbursements and higher rental income.
The Minneapolis-St. Paul industrial market reported a vacancy rate for the 4th quarter of 2009 of 7.6% which is 1.7 percentage points higher than the 5.9% reported in December 2008 according to a research report by CB Richard Ellis. Space absorption in the Minneapolis-St. Paul industrial market for 2009 was approximately negative 2,554,000 square feet.
175 Ambassador Drive (Naperville, Illinois)
Total revenues increased approximately $42,000 to $1,402,000 in 2009, as compared to $1,360,000 in 2008. Net income, which includes deductions for depreciation and mortgage interest expense, increased approximately $60,000 to $384,000 in 2009 as compared to $324,000 in 2008. Expenses decreased approximately $18,000 primarily due to reductions in interest expense and insurance of $7,000 and $4,000, respectively. Total revenues increased $41,000 due to a scheduled increase in base rental income collected from the tenant.
The Chicago industrial market ended 2009 reporting an all-time high vacancy rate of 12.1%, an increase of 1.9 percentage points from 2008 according to a research report produced by Grubb and Ellis. The State of Illinois lost over 70,000 manufacturing jobs in 2009. The Grubb and Ellis report predicts 2010 will be a year when industrial and manufacturing companies evaluate market conditions and proceed cautiously.
Investments
On June 22, 2007, the Registrant made an initial investment in the amount of $5,000,000 in Omaha. Additionally, $2,800,000, $9,500,000 and $19,900,000 was invested on July 27, September 14 and September 17, 2007, respectively, for a total investment of $37,200,000, representing a thirty percent ownership interest in Omaha. The Registrant’s investment in Omaha is accounted for at fair value.
On September 18, 2007, Omaha acquired all the outstanding common shares of America First Apartment Investors, Inc., a publicly held real estate investment trust, in a transaction valued at approximately $532 million, including the assumption of outstanding debt and excluding transactions costs. Omaha consisted of 31 wholly owned multifamily residential properties, a wholly owned commercial property and a wholly owned multifamily property that is under development. During 2009 Omaha sold two multifamily properties in Omaha, Nebraska and Oklahoma City, Oklahoma. During 2008, Omaha sold five multifamily properties in Bristol, Tennessee; Tulsa, Oklahoma; Newport News, Virginia; Ann Arbor, Michigan and Southfield, Michigan. Prior to September 18, 2007, there were no ongoing operations of Omaha, except for those necessary for the acquisition.
Total revenues for 2009 were approximately $50,119,000. Income before net unrealized depreciation and appreciation, and realized gains and losses was $2,283,000. Major expenses included $18,162,000 of interest expense, $5,401,000 for repairs and maintenance, $7,213,000 for payroll and $5,114,000 for real estate taxes.
In addition, Omaha reported a net gain on the sale of two multifamily properties and the satisfaction of their related mortgages of $533,000 and unrealized depreciation on the valuation of the remaining real estate assets and related mortgages of $63,923,000. For the year 2009, the Registrant’s interest in the loss of Omaha was $18,326,000.
2008 VS. 2007 (As amended to reflect the reclassification discussed in Note 2 to the consolidated financial statements)
Total revenues from continuing operations decreased $633,000 to approximately $3,760,000 in 2008 from approximately $4,393,000 in 2007 due to lower interest income on short term investments and lower other rental income due to lower real estate tax reimbursements at the Lino Lakes property. The reduction in interest income is due to lower cash funds available for short term investment during 2008. During 2007, the net sales proceeds from the sale of Le Cour de Monde Apartments were invested in marketable securities until Registrant invested the proceeds in Omaha. The decline in real estate tax reimbursement at Lino Lakes was due to lower tax expense. The Registrant generated a net loss from continuing operations of approximately $14,917,000, a decline of approximately $13,551,000 as compared to a net loss of $1,366,000 in 2007. The decline was primarily the result of the Registrant’s interest in the loss from Omaha. Total expenses from continuing operations for 2008 increased approximately $520,000 to $5,307,000 from $4,787,000 in 2007, primarily due to increases in interest expense, asset management fees and other expenses of $519,000, $118,000 and $20,000, respectively. In addition, equity in net loss of investments increased $12,397,000 to approximately $13,370,000 for 2008 from approximately $973,000 for 2007. The Omaha investment reports on a fair value basis and due to the mortgage crisis, stagnant real estate market and slowing economy, the investment in Omaha reported a significant write-down in the value of its real estate portfolio of approximately 10%. The Registrant did not report any loss from discontinued operations in 2008, an improvement from the loss of approximately $42,000 reported in 2007, primarily due to the sale of Le Coeur Du Monde Apartments in 2007.
Interest expense from continuing operations was approximately $519,000 higher for 2008 as compared to 2007. This is due to an increase of $623,000 in interest expense incurred for the $22,000,000 drawn on the unsecured credit facility that reflects a full year of investment of Omaha. The unsecured credit facility was used to partially finance the investment in Sentinel Omaha, LLC in 2007. This increase in interest expense was partially offset by a decrease due to the retirement of the mortgage related to LeCour de Monde Apartments which was sold in April 2007.
The changes in revenues, expenses and net income and loss are primarily the result of the changes from 2007 to 2008 in the composition of the portfolio. For additional analysis, please refer to the discussions of the individual properties below.
Le Coeur du Monde Apartments (St. Louis, Missouri)
On April 24, 2007, the Registrant sold Le Coeur du Monde Apartments for approximately $16,000,000 in an all cash transaction. The net proceeds from the sale were used, in part, to retire the mortgage note of approximately $9,427,000 that had been secured by the property. The gain on sale of Le Coeur du Monde Apartments was approximately $2,518,000.
Eagle Lake Business Center IV (Maple Grove, Minnesota)
Total revenues decreased approximately $41,000, to approximately $794,000 in 2008 compared with $835,000 in 2007. Net income, which includes deductions for depreciation, decreased $63,000, to approximately $312,000 in 2008 from $375,000 in 2007. Occupancy for both years was 100%. The decrease in total revenue was primarily due to lower scheduled rent collected from the tenant in accordance with the lease extension partially offset by an increase in expense reimbursements collected from the tenant. The decrease in net income was due to the decrease in revenues combined with an increase in expenses of $37,000. The increase in expenses was primarily due to increases in repairs and maintenance and real estate taxes of $21,000 and $20,000, respectively.
The Minneapolis-St. Paul industrial market reported a year to date overall absorption of industrial space of nearly negative 328,000 square feet in 2008 according to market research prepared by Grubb & Ellis. The 2008 vacancy rate for the Minneapolis-St. Paul industrial market for the 4th quarter was reported to be 5.5%. Warehouse/distribution lease rates were $5.26 per square foot. The Minneapolis-St. Paul labor market remained strong in 2008 with an unemployment rate of 6.5% which was slightly below the national average of 7.1%
435 Park Court (Lino Lakes, Minnesota)
Total revenues decreased approximately $90,000, to approximately $1,576,000 in 2008 compared with approximately $1,666,000 in 2007 due to lower expense reimbursements. Net income, which includes deductions for depreciation and mortgage interest expense, increased approximately $23,000, to approximately $188,000 in 2008 from approximately $165,000 in 2007. Occupancy for both years was 100%. The increase in net income was mostly due to the decrease in real estate tax expense and mortgage interest of 38,000 and $97,000, respectively partially offset due to lower income from lower expense reimbursements.
The Minneapolis-St. Paul industrial market reported a year to date overall absorption of industrial space of nearly negative 328,000 square feet in 2008 according to market research prepared by Grubb & Ellis. The 2008 vacancy rate for the Minneapolis-St. Paul industrial market for the 4th quarter was reported to be 5.5%. Warehouse/distribution lease rates were $5.26 per square foot. The Minneapolis-St. Paul labor market remained strong in 2008 with an unemployment rate of 6.5% which was slightly below the national average of 7.1%
175 Ambassador Drive (Naperville, Illinois)
Total revenues increased approximately $8,000 to $1,360,000 in 2008, as compared to $1,352,000 in 2007. Net income, which includes deductions for depreciation and mortgage interest expenses, increased approximately $50,000 to $324,000 in 2008 as compared to $274,000 in 2007. Expenses decreased $42,000 due to reductions in repairs and maintenance, interest expense and insurance of $21,000, $9,000 and $9,000, respectively. Total revenues increased $8,000 due to higher rental income collected from the tenant partially offset by lower expense reimbursements collected from the tenant.
The Chicago industrial market reported a net absorption of industrial space of nearly 5 million square feet at the end of the fourth quarter in 2008 which is 50% less than the overall absorption in 2007 according to market research prepared by Grubb & Ellis. The vacancy rate for the Chicago industrial market as of December 31, 2008 was reported to be 10.2%, an increase of 1.5% from 2007. Lease rates decreased to $4.50 per square foot for all industrial. The Chicago regional labor market increased to an unemployment rate of 7.1% which is the same as the national average of 7.1%. The Chicago industrial market is anticipated to remain soft until 2010.
Investments
On September 18, 2007, Omaha acquired all the outstanding common shares of America First Apartment Investors, Inc.
Total revenues for 2008 were approximately $54,555,000. Income before deductions for depreciation, unrealized losses and realized losses was $1,873,000. Major expenses included $20,537,000 of interest expense, $5,955,000 for repairs and maintenance, $7,796,000 for payroll and $5,669,000 for real estate taxes. In addition, Omaha reported a loss on the sale of five multifamily properties of $1,683,000 and unrealized depreciation on the valuation of the real estate assets, related mortgages and interest rate protection agreements of $44,755,000. In addition, due to Omaha’s inability to replace, extend or refinance its unsecured credit facility that was to mature on May 31, 2009, Omaha’s independent auditors expressed substantial doubt as to Omaha’s ability to continue as a going concern. For the year 2008, the Registrant’s interest in the loss of Omaha was $13,370,000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this item, together with the Independent Auditors’ Report thereon, are contained herein on pages 26 through 42 of this Annual Report on Form 10-K. Supplementary financial information required by this item is contained herein on pages 43 through 44 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a)
The Chief Executive Officer and the Chief Financial Officer of the general partner of SB Partners have evaluated the disclosure controls and procedures relating to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission and have judged such controls and procedures to be effective.
(b)
There have been no changes in the Registrant’s internal controls during the year ended December 31, 2009 that could significantly affect those controls subsequent to the date of evaluation.
(c) Management’s Report on Internal Control Over Financial Reporting
The Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.
Based on our evaluation under the frameworks described above, our management has concluded that our internal control over financial reporting was effective as of December 31, 2009.
This Annual Report does not include an attestation report of the Partnership’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Partnership’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Partnership to provide only management’s report in this Annual Report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant has no executive officers or directors. All of its business affairs are handled by its General Partner, SB Partners Real Estate Corporation (the "General Partner").
The directors and executive officers of the General Partner are elected by Sentinel Holdings Corporation ("SHC") as its sole shareholder to serve until their successors are duly elected and qualified. The limited partners of the Registrant are not entitled to vote in their election.
The directors and executive officers of the General Partner who are active in the Registrant's operations are:
Name
Age
Position
John H. Streicker
President & Director
Millie C. Cassidy
Vice President & Director
David Weiner
Chief Executive Officer
Anita Breslin
First Vice President
Robert Leniart
Vice President
George N. Tietjen
Vice President
Martin Cawley
Vice President
Leland J. Roth
Treasurer
John H. Zoeller
Chief Financial Officer
Mr. Streicker joined the General Partner in May 1976. He has been a Director since April 1984. He is Chairman of SHC and its parent company, The Sentinel Corporation.
Ms. Cassidy joined the General Partner in August 1982. She has been a Director of the General Partner since March 1988. She is President of SHC and its parent company, The Sentinel Corporation.
Mr. Weiner joined the General Partner in April 1984. He has been a Director of the General Partner since March 1988. He is Vice Chairman of SHC and its parent company, The Sentinel Corporation.
Ms. Breslin joined the General Partner in 1978. She is the regional manager responsible for residential property transactions and management for the Northeastern region.
Mr. Leniart joined the General Partner in 1983. He is responsible for overseeing major capital projects for the real estate properties.
Mr. Tietjen joined the General Partner in 1990. He is the regional manager responsible for residential property transactions and management for the Northwestern region.
Mr. Cawley joined the General Partner in 1994. He is the regional manager responsible for commercial property transactions and management.
Mr. Roth joined the General Partner in 1994 and serves as its treasurer. He is a certified public accountant with over 24 years of real estate related financial, accounting and reporting experience.
Mr. Zoeller joined the General Partner in 1994 and serves as its principal financial and accounting officer. He is a certified public accountant with over 28 years of real estate related financial, accounting and reporting experience.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant has no executive officers or directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
(a)
At December 31, 2009, an institutional investor of record owned 7.13% of the outstanding Units of Limited Partnership Interests. On January 13, 1993, a group of Unit holders of record, including the institutional investor referred to above, entered into a collective agreement with respect to their ownership interest in the Registrant. The aggregate number of Units beneficially owned by the group is 606 Units, representing 7.8% of the total number of outstanding Units of Limited Partnership Interest on that date. Each Unit holder has disclaimed beneficial ownership of all Units owned by the other Unit holders in this group. The foregoing information is based upon a 13-D filing made by the respective Unit holders.
(b)
As of December 31, 2009, none of the Directors of the General Partner owned any outstanding Units of Limited Partnership Interest. However, an Assistant Secretary of the General Partner owned four Units of Limited Partnership Interest. No Officers or Directors of SHC owned any outstanding Units of Limited Partnership Interest. SRE Clearing Services, Inc., an affiliate of the General Partner, owned 2,642 Units of Limited Partnership Interest, representing 34.07% of the outstanding number of Units on December 31, 2009. In accordance with SEC regulations, SRE Clearing Services, Inc. filed Form 13-D/A on October 15, 2009, when the total number of Units held reached 34% of the outstanding number of Units.
(c)
During the year ended December 31, 2009, there were no changes in control of the Registrant or the General Partner.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The General Partner, among other things, furnishes services and advice to the Registrant and is paid a variable annual fee for such services based on calculations prescribed in the Registrant's Partnership Agreement. For these services, the General Partner receives a management fee equal to 2% of the average amount of capital invested in real estate plus cumulative mortgage amortization payments, and 0.5% of capital not invested in real estate, as defined in the partnership agreement. The management fee amounted to $826,573, $851,590 and $734,094 for the years ended December 31, 2009, 2008, and 2007, respectively. In addition, the General Partner is entitled to 25% of cash distributions in excess of the annual distribution preference, as defined in the partnership agreement. No such amounts were due for the years ended December 31, 2009, 2008 or 2007.
Certain affiliates of the General Partner oversee the management and operations of various real estate properties, including those owned by the Registrant. Services performed by these affiliates applicable to the Registrant's properties are billed at actual or allocated cost, or percentage of revenues. The costs of such services are believed to be competitive with charges for similar services provided by unrelated management companies. Fees charged by these affiliates totaled $196,780, $186,594 and $329,174 in 2009, 2008, and 2007, respectively.
On June 22, 2007, the Registrant made an initial investment in the amount of $5,000,000 in Omaha, an affiliate of the Registrant’s general partner. Additionally, $2,800,000, $9,500,000 and $19,900,000 were invested on July 27, September 14 and September 17, 2007, respectively, for a total investment of $37,200,000, representing a thirty percent ownership interest in Omaha. For the years 2009, 2008 and 2007, the Registrant’s equity interest in the net loss of Omaha was $18,326,000, $13,370,000 and $973,000, respectively.
In connection with the mortgage financing of certain properties, the respective lenders required the Registrant to place the assets and liabilities of these properties into single asset limited partnerships or land trusts which hold title to these properties. A trust company affiliated with the General Partner holds the general partner interest in each single asset limited partnership as trustee for the Registrant. An affiliate of the General Partner is also the trustee of the land trust. For its services, the affiliate was not paid an annual fee in 2009, 2008 or 2007.
Reference is made to Items 10 and 11, and Notes 4, 6, 7, 9 and 12 in the consolidated financial statements.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
1.
Audit Fees. The aggregate fees billed for professional services rendered by the principal accountant for the audit of the Partnership’s annual financial statements and review of financial statements included in the Partnership’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were approximately $113,000 and $150,000 for the years ended December 31, 2009 and 2008, respectively. $30,000 of the fees for 2008 were paid to Deloitte & Touche, LLP, the former independent auditor for the Partnership for their review of the 2007 audited financial statements as it related to reclassifications reported to the 2005 Statement of Operations. Deloitte and Touche , LLP was the auditor for the partnership in 2005. All of the 2009 and the remaining 2008 fees were paid to Dworken, Hillman, LaMorte & Sterczala, P.C., the current independent auditor for the Partnership.
2.
Audit-Related Fees. No fees were billed by the principal accountant during the years ended December 31, 2009 and 2008 for assurance and related services that are reasonably related to the performance of the audit or review of the Partnership's financial statements that are not reported under subparagraph (1) of this section.
3.
Tax Fees. The aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were approximately $16,000 and $15,000 each for the years ended December 31, 2009 and 2008, respectively. This work included reviewing year-end tax projections as well as the Registrant’s tax returns prepared by the Registrant for the respective years.
4.
All Other Fees. No other fees were billed in either of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in subparagraphs (1) through (3) of this section.
5.
(i)The selection of the independent auditors to audit the annual financial statements and perform review procedures on the quarterly reports filed with the SEC by the Registrant is made by the general partner of the partnership. Fees quoted by the independent auditors are approved by the general partner prior to their acceptance by the Registrant.
(ii) Not Applicable.
6.
Not Applicable.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
(1)
Financial statements - The Registrant's 2009 Annual Audited Consolidated Financial Statements are included in this Annual Report on Form 10-K.
(2)
Financial statement schedules - See Index to Consolidated Financial Statement Schedules on page 25. All other financial statement schedules are inapplicable or the required subject matter is contained in the consolidated financial statements or notes thereto.
(b) Exhibits -
Exhibit
No. Description
3.1
Agreement of Limited Partnership (incorporated by reference to Exhibit A to Registration Statement on form S-11 as filed with the Securities and Exchange Commission on May 16, 1985)
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Audited Financial Statements of Sentinel Omaha, LLC
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SB PARTNERS
By:
SB PARTNERS REAL ESTATE CORPORATION
General Partner
Chief Executive Officer
Dated: June 10, 2010
By:
/s/ David Weiner
David Weiner
Principal Financial & Accounting Officer
Dated: June 10, 2010
By:
/s/ John H. Zoeller
John H. Zoeller
Chief Financial 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.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David Weiner, certify that:
(1)
I have reviewed this annual report on Form 10-K of SB Partners;
(2)
Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the year covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; the registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and
(4) 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15f for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)
designed such internal control over financial reporting, caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financing reporting; and
(5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Chief Executive Officer
Dated: June 10, 2010
By:
/s/ David Weiner
David Weiner
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John H. Zoeller, certify that:
(1)
I have reviewed this annual report on Form 10-K of SB Partners;
(2)
Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the year covered by this annual report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4)
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)(4)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15f for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financing reporting;
(5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: June 10, 2010
By:
Principal Financing & Accounting Officer
/s/ John H. Zoeller
John h. Zoeller
Chief Financial Officer
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, David Weiner, certify that:
(1) the Annual Report on Form 10-K of the registrant for the annual period ended December 31, 2009, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
Chief Executive Officer
Dated: June 10, 2010
By:
/s/ David Weiner
David Weiner
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, John H. Zoeller, certify that:
(1)
the Annual Report on Form 10-K of the registrant for the annual period ended December 31, 2009, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
Dated: June 10, 2010
By:
Principal Financing & Accounting Officer
/s/ John H. Zoeller
John H. Zoeller
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the Partners
SB Partners
We have audited the accompanying consolidated balance sheets of SB Partners and subsidiaries (collectively, the “Partnership”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in partners’ capital (deficit), and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Partnership’s general partner. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. 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 the general partner, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of SB Partners and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 8 to the consolidated financial statements, the Partnership’s unsecured credit facility matured on February 28, 2009 and the Partnership has not yet been able to arrange a replacement loan, extension or refinancing. This matter raises substantial doubt about the Partnership’s ability to continue as a going concern. The general partner’s plans in regard to this matter are also described in Note 8. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In connection with our audit of the financial statements referred to above, we audited the supplemental financial statement schedule listed in the foregoing table of contents as of December 31, 2009 and 2008 and for the years then ended. In our opinion, the supplemental financial statement schedule presents fairly, in all material respects, the information stated therein, when considered in relation to the financial statements taken as a whole.
/s/ Dworken, Hillman, LaMorte and Sterczala, P.C.
Shelton, Connecticut
May 20, 2010
SB PARTNERS
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
SB Partners, a New York limited partnership, and its subsidiaries (collectively, the "Partnership"), have been engaged since April 1971 in acquiring, operating, and holding for investment a varying portfolio of real estate interests. SB Partners Real Estate Corporation (the "General Partner") serves as the general partner of the Partnership.
The significant accounting and financial reporting policies of the Partnership are as follows:
(a)
The accompanying consolidated financial statements include the accounts of SB Partners and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Revenues are recognized as earned and expenses are recognized as incurred. The preparation of financial statements in conformity with such principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(b)
In connection with the mortgage financing on certain of its properties, the Partnership placed the assets and liabilities of the properties into single asset limited partnerships, limited liability companies or land trusts which hold title to the properties. The Partnership has effective control over such entities and holds 100% of the beneficial interest. Accordingly, the financial statements of these subsidiaries are consolidated with those of the Partnership.
(c)
Depreciation of buildings, furnishings and improvements is computed using the straight-line method of depreciation, based upon the estimated useful lives of the related properties, as follows:
Building and Improvements 5 to 40 years
Furnishings 5 to 7 years
Investments in real estate are carried at historical cost and reviewed periodically for impairment. Expenditures for maintenance and repairs are expensed as incurred. Expenditures for improvements, renewals and betterments, which increase the useful life of the real estate, are capitalized. Upon retirement or sale of property, the related cost and accumulated depreciation are removed from the accounts. Amortization of deferred financing and refinancing costs is computed by amortizing the cost on a straight-line basis over the terms of the related mortgage notes.
(d)
Real estate properties are regularly evaluated on a property by property basis to determine if it is appropriate to write down carrying values to recognize an impairment of value. Impairment is determined by calculating the sum of the estimated undiscounted future cash flows including the projected undiscounted future net proceeds from the sale of the property. In the event such sum is less than the net carrying value of the property, the property will be written down to estimated fair value. Based on the Partnership’s long-term hold strategy for its investments in real estate, the carrying value of its properties at December 31, 2009 is estimated to be fully realizable.
(e)
Real estate held for sale is carried at the lower of cost or fair value less selling costs. Upon determination that a property is held for sale, depreciation of such property is no longer recorded.
(f)
For financial reporting purposes, the Partnership considers all highly liquid, short-term investments with original maturities of three months or less when purchased to be cash equivalents.
(g)
The Partnership accounts for its investment in Sentinel Omaha, LLC at fair value. Determination of the fair value of Omaha involves numerous estimates and subjective judgments that are subject to change in response to current and future economic and market conditions, including, among other things, demand for residential apartments, competition, and operating cost levels such as labor, energy costs and real estate taxes. Judgments regarding these factors are not subject to precise quantification or verification and may change from time to time as economic and market factors change. (see Note 7)
(h)
Tenant leases at the multifamily properties owned by Omaha generally have terms of one year or less. Rental income at the multifamily properties is recognized when earned pursuant to the terms of the leases with tenants. Tenant leases at the industrial flex and warehouse distribution properties have terms that exceed one year. Rental income at the industrial flex and warehouse
distribution properties is recognized on a straight-line basis over the terms of the leases.
(i)
Gains on sales of investments in real estate are recognized in accordance with accounting principles generally accepted in the United States of America applicable to sales of real estate which require minimum levels of initial and continuing investment by the purchaser, and certain other tests be met, prior to the full recognition of profit at the time of the sale. When the tests are not met, gains on sales are recognized on either the installment or cost recovery methods.
(j)
Each partner is individually responsible for reporting its share of the Partnership's taxable income or loss. Accordingly, no provision has been made in the accompanying consolidated financial statements for Federal, state or local income taxes.
(k)
Net income per unit of partnership interest has been computed based on the weighted average number of units of partnership interest outstanding during each year. There were no potentially dilutive securities outstanding during each year.
(l)
The Partnership is engaged in only one industry segment, real estate investment, and therefore information regarding industry segments is not applicable and is not included in these consolidated financial statements.
(m)
Certain prior year amounts have been reclassified to conform with the current year presentation (see Notes 2 and 3).
(2) RECLASSIFICATIONS
As of December 18, 2008, the Partnership designated Eagle Lake Business Center IV as real estate held for sale. Accordingly, this property was included in real estate held for sale on the consolidated balance sheets as of December 31, 2008. Assets and liabilities of this property was reflected as other assets and liabilities in discontinued operations on the consolidated balance sheets and its results of operations was reflected as income (loss) from discontinued operations on the consolidated statements of operations.
During 2009 the Partnership terminated marketing the property for sale. As of December 31, 2009, the Partnership re-designated Eagle Lake Business Center IV as a component of continuing operations. The consolidated financial statements as of December 31, 2009 and for the years ended December 31, 2008 and 2007, as amended, have been retrospectively adjusted to reflect this reclassification as follows:
(3) ADJUSTMENT TO PRIOR PERIOD
In March 2009, Registrant was informed by the manager of Omaha that Omaha’s 2008 financial statements included a cumulative effect of a change in accounting principle that, as a result of Registrant’s early adoption in 2007 of Financial Accounting Standards No. 159, as codified in Accounting Standards Codification Topic 825, required Registrant to amend our 2007 financial statements. The change affected the estimated fair value of the mortgage notes, bonds and credit facilities payable reported on the consolidated statement of assets, liabilities and members’ equity for Omaha and the net unrealized depreciation on fair value of mortgage notes and bonds reported on the consolidated statement of operations for Omaha. The net effect of this change to the financial statements of the Partnership for 2007 is as follows:
1)
On the Consolidated Statement of Operations an increase in Equity in Net Loss of Investments of $732,399.
(4) INVESTMENT MANAGEMENT AGREEMENT
The Partnership entered into a management agreement with the General Partner. Under the terms of this agreement, the General Partner is responsible for the acquisition, management and disposition of all investments, as well as performance of the day-to-day administrative operations and provision of office space for the Partnership.
For these services, the General Partner receives a management fee equal to 2% of the average amount of capital invested in real estate plus cumulative mortgage amortization payments, and 0.5% of capital not invested in real estate, as defined in the partnership agreement. The management fee amounted to $826,573, $851,590, and $734,094, for the years ended December 31, 2009, 2008, and 2007, respectively. In addition, the General Partner is entitled to 25% of cash distributions in excess of the annual distribution preference, as defined in the partnership agreement. No such amounts were due for the years ended December 31, 2009, 2008 or 2007.
(5) INVESTMENTS IN REAL ESTATE
During 2009 and 2008, the Partnership owned an industrial flex property in Maple Grove, Minnesota, warehouse distribution properties in Lino Lakes, Minnesota; and Naperville, Illinois. The following is the cost basis and accumulated depreciation of the real estate investments owned by the Partnership as of December 31, 2009 and 2008:
(6) REAL ESTATE TRANSACTIONS
On April 24, 2007, the Registrant sold Le Coeur du Monde Apartments for $16,000,000 in an all cash transaction. The carrying value of the property at the time of the sale was $12,567,028 which resulted in a net gain for financial reporting purposes of $2,518,418 after closing costs of $914,554, which includes a market rate brokerage commission of $320,000 paid to an affiliate of the General Partner. The historical cost of the property at the time of the sale was $14,871,244. The net proceeds from the sale were used, in part, to retire the mortgage note of $9,427,012 that had been secured by the property.
(7) INVESTMENT SENTINEL OMAHA, LLC
On June 22, 2007, the Registrant made an initial investment in the amount of $5,000,000 in Sentinel Omaha, LLC (“Omaha”). Omaha is a real estate investment company which currently owns 25 multifamily properties and 1 industrial property in 17 markets. Omaha is an affiliate of the Partnership’s general partner. Additionally, $2,800,000, $9,500,000 and $19,900,000 were invested on July 27, September 14 and September 17, 2007, respectively for a total investment of $37,200,000 representing a thirty percent ownership interest in Omaha. The Omaha annual audited financial statements are filed as an exhibit to the Partnership's annual form 10-K filed with the SEC.
With respect to its investment in Omaha, the Registrant elected to early adopt SFAS No. 159, as codified in Accounting Standards Codification Topic 825. Accordingly, the investment is presented at fair value. Early adoption was elected, in part, because the audited financial statements of Omaha are presented at fair value and it was believed that a similar presentation would best reflect the value of the Registrant’s investment from its inception.
The following are the audited condensed financial statements (000’s omitted) of Omaha as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009.
Determination of the fair value of Omaha involves numerous estimates and subjective judgments that are subject to change in response to current and future economic and market conditions, including, among other things, demand for residential apartments, competition, and operating cost levels such as labor, energy costs, real estate taxes and market interest rates. Judgments regarding these factors are not subject to precise quantification or verification and may change from time to time as economic and market factors change.
Estimated fair value is based on the criteria outlined in Financial Accounting Standards Board Accounting Standard Codification No. 820-10, “Fair Value Measurements and Disclosures” (ASC 820-10). ASC 820-10 established a "three-tier" valuation hierarchy to prioritize the assumptions used in valuation techniques to measure fair value. The three levels of fair value hierarchy under ASC 820-10 are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;
Level 2 - Quoted prices in active markets for similar assets and liabilities or quoted prices in less active dealer or broker markets;
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and are unobservable.
Estimated fair value calculations were prepared by Omaha's management utilizing Level 3 inputs.
Further, the investment in Omaha is not consolidated because other investors have substantive ownership and participative rights regarding Omaha’s operations and therefore control does not vest in the Registrant. Were the Partnership deemed to control Omaha, it would have to be consolidated and therefore would impact the financial statements and related ratios.
Under the terms of the loan extension Omaha signed effective July 1, 2009, Omaha is precluded from making distributions to its investors until its unsecured loan is paid. On April 14, 2010, Omaha executed the fourth amendment to its unsecured loan which reduced the blended interest rate on the loan from LIBOR plus 5.85% to LIBOR plus 3.86%, as of February 1, 2010. Additionally, Omaha’s financial ratio requirements were waived at December 31, 2009 and March 31, 2010 and were relaxed prospectively. Furthermore, the maturity date of the unsecured loan was extended from May 31, 2011 to May 31, 2012 with an option for an additional one year extension at which time exit fees are to be paid on a portion of any remaining balance of the unsecured loan. However, Omaha is still precluded from paying distributions to its investors until the unsecured loan is paid. As a result of the aforementioned, the Partnership does not anticipate receiving any distributions from Omaha during the foreseeable future and has reserved 100% of the reported value of its investment in Omaha on the balance sheet as of December 31, 2009.
(8) MORTGAGE NOTES AND UNSECURED LOAN PAYABLE
Mortgage notes payable consist of the following non-recourse first liens:
(a) Annual installment payments include interest only.
(b) Annual installment payments include principal and interest. The mortgage matures in October 2010. The Partnership has begun discussions with potential lenders to refinance the existing mortgage. There can be no assurance that Registrant will be able to obtain a new loan to satisfy the existing mortgage nor obtain an extension of the existing mortgage beyond the maturity date. The Partnership may have to market the property for a sale in order to pay off the existing mortgage.
(c) On September 17, 2007, the Partnership entered into a bank loan (the “Loan”) with a bank in the amount of $22,000,000, which matured on October 1, 2008 and provides for interest only monthly payments based upon LIBOR plus 1.95%. The outstanding amount of the loan at December 31, 2009 and 2008 was $22,000,000. The loan provides for a pledge of the proceeds of sale or refinancing of the industrial flex property located in Maple Grove, Minnesota which is currently unencumbered. The holder of the unsecured debt formally extended the maturity to February 28, 2009 and had entered into discussions as to terms for extending the debt on a longer term basis. On July 1, 2009 Registrant received written notice from the holder of the Loan which makes demand for the immediate payment of the Loan. If the outstanding obligation is not paid, the holder may initiate appropriate action to collect the outstanding obligations, including enforcement of its rights and remedies under the loan documents or applicable law. The holder and Registrant continue to discuss options for curing the default. There can be no assurance that the holder will offer such options or that the Partnership will be able to comply with the terms offered and conditions imposed by the holder in exchange for such options. This matter raises substantial doubt regarding the Partnership’s ability to continue as a going concern.
Scheduled principal payments on mortgage notes and unsecured loan payable are as follows:
$ 28,634,550
-
-
-
-
Thereafter
10,000,000
Total
$ 38,634,550
(9) LEASE EXTENSION
On January 9, 2009, the Registrant signed an amendment to extend the lease with the sole tenant at the Maple Grove, MN property. The extension is for two years to July 31, 2015 and requires annual rent payments of $622,157 and $640,864 for the first and second years, respectively. The Registrant paid an affiliate $41,001 as a leasing commission for procuring the lease extension.
(10) QUARTERLY FINANCIAL INFORMATION - UNAUDITED
(11) FEDERAL INCOME TAX INFORMATION (UNAUDITED)
A reconciliation of net income (loss) for financial reporting purposes to net income (loss) for Federal income tax reporting purposes is as follows:
As of December 31, 2009 and 2008, the tax bases of the Partnership's assets and liabilities were approximately $52,981,874 and $62,068,851 of assets, and $38,935,149 and $39,504,639 of liabilities, respectively.
(12) MANAGEMENT SERVICES
Certain affiliates of the General Partner oversee the management and operation of various real estate properties, including those owned by the Partnership. Services performed by affiliates are billed at actual or allocated cost, percentage of revenues or net equity. For the years ended December 31, 2009, 2008 and 2007 billings to the Partnership amounting to $196,780, $186,594 and $329,174, respectively, and are included in real estate operating expenses.
In connection with the mortgage financing of certain properties, the respective lenders required the Partnership to place the assets and liabilities of these properties into single asset limited partnerships which hold title to these properties. A trust company affiliated with the General Partner holds the general partner interest in each single asset limited partnership as trustee for the Partnership. For its services, the affiliate is paid an annual fee, which aggregated $0 in 2009, 2008, and 2007, respectively, and is based upon the trust company's standard rate schedule.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership’s financial instruments include cash, cash equivalents and mortgage notes payable. The carrying amount of cash and cash equivalents are reasonable estimates of fair value. Mortgage notes payable have been valued by discounting future payments required under the terms of the obligations at rates currently available to the Partnership for debt with similar maturities, terms and underlying collateral. The fair value of the mortgage notes payable is estimated to be $38,581,739and $37,674,035 at December 31, 2009 and 2008, respectively.
(14) COMMITMENTS AND CONTINGENCIES
The Partnership is a party to certain actions directly arising from its normal business operations. While the ultimate outcome is not presently determinable with certainty, the Partnership believes that the resolution of these matters will not have a material adverse effect on its financial statements.
The Partnership leases its properties to tenants under operating lease agreements, certain of which require tenants at the industrial flex and warehouse distribution properties to pay all or part of certain operating and other expenses of the property. The minimum future rentals to be received in respect of non-cancelable commercial operating leases with unexpired terms in excess of one year as of December 31, 2010 are $3,077,206 for 2010; $3,106,946 for 2011; $3,137,322 for 2012; $3,176,485 for 2013; $3,243,733 for 2014; and $21,011,539 thereafter.
Pursuant to the original investment agreement, the Registrant may be called upon to contribute, in cash, an additional $3,720,000 to the capital of Omaha, as and when required, as determined by the Manager. In addition, the Registrant shall not have any liability to restore any negative balance in its capital account.
Pursuant to the original investment agreement, the Registrant may be called upon to contribute, in cash, an additional $3,720,000 to the capital of Omaha, as and when required, as determined by the Manager. In addition, the Registrant shall not have any liability to restore any negative balance in its capital account.