ITEM 1. BUSINESS
This form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein.
Development Partners III (A Massachusetts Limited Partnership) (the "Partnership"), formerly Berry and Boyle Development Partners III, was formed on July 11, 1988. The General Partners are Stephen B. Boyle and GP L'Auberge Communities, L. P., a California Limited Partnership, formerly Berry and Boyle Management.
The primary business of the Partnership is to invest in, operate, and ultimately dispose of a 154-unit residential property known as Casabella through its interest in Casabella Associates, a general partnership consisting of the Partnership and two other affiliated partnerships ("Associates"). The Partnership's acquisition is described below in Item 2.
ITEM 2. PROPERTIES
On September 28, 1990, the Partnership purchased an approximate 53% interest in Associates. Under the terms of the purchase, the Partnership contributed $2,500,000 to Associates. In addition to its contribution to Associates, the Partnership incurred $280,930 of acquisition expenses as of December 31, 1997.
Associates owns and operates a 154-unit multifamily rental property located in Scottsdale, Arizona, known as Casabella. The ownership was formerly structured as a Joint Venture of which Associates owned a majority interest. With regard to the termination of the Casabella Joint Venture see Note 5 of Notes to Consolidated Financial Statements.
As of January 27, 1998, the property was 94% occupied, compared to 99% approximately one year ago. At December 31, 1997 and 1996, the market rents for the various unit types were as follows:
Unit Type ............................. 1997 1996 - ---------------------------------------------- ------ ------ One bedroom two bath w/den ................... $ 950 $ 820 Two bedroom two bath ......................... 1,160 950 Two bedroom two bath w/den ................... 1,225 1,185
As noted above and discussed in Note 9 of the Notes to the Consolidated Financial Statements, Casabella is under contract to be sold to a purchaser unaffiliated with the General Partners. The following table sets forth certain information regarding the pending purchase and sale agreement ("Purchase Agreement").
Purchase Agreement Projected Mortgage Property Name and Location Indebtedness Purchase Closing at 6/01/98 Price Purchaser Date(1) - --------------------------- Casabella, $6,713,465 $11,700,000 JPR Capital LLC (3) Scottsdale, AZ(2) - ---------------------------
(1) Subject to the consent of the limited partners to the Dissolution.
(2) The Partnership owns an approximate 53% interest in Associates, a general partnership which holds fee simple title to the property. The Partnership's share of the net proceeds from the sale of Casabella is estimated to be approximately $2,568,000. The Partnership's partners in Associates are two public limited partnerships of which the General Partners or their affiliates are the general partners. Accordingly, the sale of Casabella is also conditioned upon the consent of the limited partners of the affiliated partnerships to the dissolution of such partnerships. Associates' former joint venture partner in the joint venture which previously held title to the property retained an economic interest in the property's cash flow and sales proceeds under certain circumstances. The former joint venture partner will not be entitled to receive any portion of the proceeds of the sale of Casabella.
(3) Approximately 90 days after the limited partner consents described in note (2) above are received, but not later than June 15, 1998.
The Purchase Agreement provides that the purchaser has a period of 45 days to conduct its "due diligence" review of the property. This review includes, but is not limited to, a physical inspection and examination of title and environmental matters. During the due diligence period, the purchaser has the customary right to withdraw its offer for any reason. Because the sale of Casabella is subject to the purchaser's due diligence review of the property, there can be no assurance that the proposed sale described above will actually occur. Alternatively, as is customary in similar real estate transactions, if, during the due diligence period, the purchaser identifies conditions which are unacceptable to it, the purchaser may seek a purchase price adjustment, which the General Partners would consider and negotiate as they deem appropriate. The Purchase Agreement provides that in the event that the purchaser defaults by failing to close following the end of the due diligence period, the Partnership will be entitled to retain the purchaser's deposit as liquidated damages.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceedings to which the Partnership or Associates is a party, or of which the property is the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The transfer of Units is subject to certain limitations contained in the Partnership Agreement. There is no public market for the Units and it is not anticipated that any such public market will develop.
The number of holders of Units as of December 31, 1997 was 289.
Distributions are made to the Partners on a quarterly basis based upon Net Cash from Operations, as calculated under Section 10 of the Partnership Agreement. Total cash distributions to the Limited Partners for 1997 and 1996 were paid as follows:
Quarter Ended ........................ Payment Date Amount - -------------------------------------- ----------------- ------- March 31, 1996 ....................... May 15, 1996 $33,305 June 30, 1996 ........................ August 15, 1996 $33,305 September 30, 1996 ................... November 15, 1996 $33,305 December 31, 1996 .................... February 28, 1997 $33,304 March 31, 1997 ....................... $ 0 June 30, 1997 ........................ $ 0 September 30, 1997 ................... $ 0 December 31, 1997 .................... $ 0
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Partnership and consolidated subsidiaries has been derived from consolidated financial statements audited by Coopers & Lybrand, LLP, whose reports for the periods ended December 31, 1997, 1996 and 1995 are included elsewhere in the Form 10K and should be read in conjunction with the full consolidated financial statements of the Partnership including the Notes thereto.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning the General Partners' expectations regarding future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements.
Liquidity; Capital Resources
The Partnership admitted 289 investors who purchased a total of 7,401 Units aggregating $3,700,500. These offering proceeds, net of organizational and offering costs of $555,075, provided $3,145,425 of net proceeds to be used for the purchase of income-producing residential properties, including related fees and expenses, and working capital reserves. The Partnership expended (1) $2,780,930 to acquire its interest in Casabella Associates and to pay acquisition expenses, including an acquisition fee to the General Partners and (2) $52,768 to cover costs associated with discontinued acquisitions. The remaining net proceeds of $311,727 were used to establish working capital reserves sufficient to meet the needs of the Partnership, including contributions that may be required at the joint venture level, as determined by the General Partners.
In addition to the proceeds generated from the public offering, the Partnership has utilized external sources of financing at the joint venture level to purchase Casabella. The Partnership Agreement limits the aggregate mortgage indebtedness which may be incurred in connection with the acquisition of Partnership properties to 80% of the purchase price of such properties.
The working capital reserves of the Partnership consist of cash and cash equivalents and short-term investments. These reserves provide the Partnership with the necessary liquidity to carry on its day-to-day operations and to make necessary contributions to Casabella. In 1997, the aggregate net decrease in working capital reserves was $278,001. This decrease resulted primarily from cash provided by operations of $30,017, offset by fixed asset purchases of $126,687, principal payments on mortgage notes payable of $119,236, distributions to partners of $36,200, and $25,895 of loan refinancing costs.
In 1996, the aggregate net increase in working capital reserves was $164,565. This increase resulted primarily from cash provided by operations of $54,292, and cash received on the maturities of short-term investments of $730,660 offset by fixed asset purchases of $156,015, distributions to the minority partners with respect to their interest in Associates of $220,331, distributions to partners of $133,218, deposits of $1,950 and $108,873 of principal payments on mortgage notes payable.
With regard to a balloon payment on the existing first mortgage debt on Casabella (see Note 6 of the Notes to Consolidated Financial Statements) which is due and payable in 1998, the General Partners anticipate repaying such loan utilizing a portion of the sales proceeds from the pending sale of the property. See Item 2 above. In the event that the pending sale is not consummated, the General Partners will seek to renegotiate the mortgage note with its existing lender or seek new sources of financing for the property. To date, the General Partners have neither sought to extend or renegotiate the existing mortgage debt nor have they sought new financing for the property and there can be no assurance that they would be successful in doing so. The General Partners believe that existing cash flow from the property will be sufficient to support a level of borrowing that is at least equal to amount outstanding as of December 31, 1997. If the general economic climate for real estate in the location of Casabella were to deteriorate resulting in an increase in interest rates for mortgage financing or a reduction in the availability of real estate mortgage financing or a decline in the market values of real estate it may affect the Partnership's ability to complete a refinancing. See also projected 1998 operating results.
In the event that Casabella is not sold pursuant to the Purchase Agreement, the Partnership would continue to operate the property until a substitute sales could be negotiated and consummated. The Partnership's ability to generate cash adequate to meet its needs is dependent primarily on the successful operations of Casabella. Such ability may also be dependent upon the future availability of bank borrowings, and upon the future refinancing and sale of the Partnership's real estate investments and the collection of any mortgage receivable which may result from such sale. These sources of liquidity will be used by the Partnership for payment of expenses related to real estate operations, debt service and professional and management fees and expenses. Net Cash From Operations and Net Proceeds, if any, as defined in the Partnership Agreement, will then be available for distribution to the Partners in accordance with Section 10 of the Partnership Agreement. The General Partners believe that the current working capital reserves together with projected cash flows for 1998 are adequate to meet the Partnership's operating cash needs in the coming year if the Partnership is required to continue to own and operate its property assuming the existing mortgage debt can be extended, renegotiated or refinanced.
Results of Operations
The Partnership's operating results for the year ended December 31, 1997 consisted of interest earned on short-term investments, general and administrative expenses, amortization expense and its share of the income (loss) from Casabella Associates and Casabella. A summary of these operating results (unaudited) appears below:
Comparison of 1997 and 1996 Operating Results
Total revenue increased by $123,606 or 9%, primarily due to an increase of rental income as a result of higher occupancy levels throughout the year. Operating expenses increased by $78,601 or 12% primarily due to one-time costs of preparing Casabella Apartments for disposition, including an increase of $62,779 in repairs and maintenance and an increase of $8,245 in advertising and promotion expense. General and administrative expenses decreased by $79,808 or 5% due in part to the one-time costs associated with the Evans Withycombe termination fee in 1996 and the related legal costs, as well as the re-stabilization of costs associated with the Partnership administrative, financial and investor services functions following the office relocation to Colorado Springs, Colorado.
Comparison of 1996 and 1995 Operating Results
In accordance with its disposition strategy, the Partnership incurred one-time costs associated with the Evans Withycombe termination ($38,345) and the related legal costs. (Refer to Note 5 of the Consolidated Financial Statement.) In addition, the Partnership incurred one-time costs associated with its property interior and exterior refurbishment program, the change in on-site management following the Evans Withycombe termination, the outsourcing of much of the Partnership's administration work to an administrative agent and the relocation of the remaining administration, financial and investor services functions to a more cost efficient location in Colorado Springs, Colorado. Consequently, competitive pressures and disposition-related activities led to a decrease in total revenue of $239,528 or 15%, rental operating expenses (including advertising, promotion, apartment locator and concession costs) to increase by $107,362 or 19% over the prior year and total general and administrative expenses of the Partnership increased $74,279 or 102% over the prior year. Fixed asset purchases increased $156,015, consisting of such items as carpet, appliances, equipment for fitness center facilities, and remodeling features. However, distributions to partners remained the same as 1995.
Projected 1998 Operating Results
As further discussed in Item 2 above and in Note 9 of the Notes to the Consolidated Financial Statements, the Partnersip's only investment property, Casabella, is under contract to be sold to a purchaser unaffiliated with the General Partners. Under the terms of the Purchase Agreement, it is anticipated that the closing would occur during the second quarter of 1998. If the sale does occur as anticipated, the Partnership and Associates will likely be liquidated in 1998. Although there can be no assurance the Partnership will dispose of Casabella during 1998 pursuant to the Purchase Agreement or otherwise, if the Dissolution is approved by the Limited Partners, the Partnership will continue to seek to dispose of its property. In the event that the Partnership disposes of Casabella during 1998, operating results of the Partnership would vary significantly from those achieved in prior periods.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this Report.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is a limited partnership and, as such, has no executive officers or directors. The General Partners of the Partnership are Stephen B. Boyle and GP L'Auberge Communities, L.P., a California limited partnership, of which L'Auberge Communities Inc. (formerly known as Berry and Boyle Inc.) ("L'Auberge") is the general partner.
Stephen B. Boyle
Stephen B. Boyle, age 57, is President, Executive Officer and Director of L'Auberge and a general partner and co-founder of LP L'Auberge Communities, a California limited partnership (formerly Berry and Boyle), a limited partnership formed in 1983 to provide funds to various affiliated general partners of real estate limited partnerships, one of which is GP L'Auberge Communities, L.P.
GP L'Auberge Communities, L.P.
GP L'Auberge Communities, L.P. was formed in 1983 for the purpose of acting as a general partner in partnerships formed to invest directly or indirectly in real property. L'Auberge is the sole general partner of GP L'Auberge Communities, L.P. The following sets forth certain biographical information with respect to the executive officers and directors of L'Auberge other than Stephen B. Boyle who is discussed above. There are no familial relationships between or among any officer or director and any other officer or director.
Name Position ------------------------ Stephen B. Boyle President, Executive Officer and Director ------------------------ Earl C. Robertson Executive Vice President and Chief Financial Officer ------------------------ Donna Popke Vice President and Secretary
Earl C. Robertson, age 50, has been Executive Vice President of L'Auberge since April 1995 and its Chief Financial Officer of L'Auberge since May 1996. Mr. Robertson joined L'Auberge in April 1995 as Executive Vice President. Prior to joining L'Auberge, Mr. Robertson had over 20 years experience as a senior development officer, partner and consultant in several prominent real estate development companies, including Potomac Investment Associates, a developer of planned golf course communities nationwide, where he was employed from 1989 to June 1993. He also served as a consultant to Potomac Sports Properties from July 1993 to April 1995. Mr. Robertson was also a key member of the management team that developed the nationally acclaimed Inn at the Market in Seattle.
Donna Popke, age 38, has been Vice President of L'Auberge since November 1995. Ms. Popke joined L'Auberge in June 1994 as Accounting Manager. Prior to joining L'Auberge, Ms. Popke was Accounting Manager for David R. Sellon & Company, a Colorado Springs land development company, from August 1989 to June 1994 and for Intermec of the Rockies from September 1985 to July 1989.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
None of the General Partners or any of their officers or directors received any compensation from the Partnership. See Item 13 below with respect to a description of certain transactions of the General Partners and their affiliates with the Partnership.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 21, 1998, no person of record owned or was known by the General Partners to own beneficially more than 5% of the Partnership's outstanding Units. Neither of the General Partners nor any of their directors and officers owns Units.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1997, the Partnership paid or accrued remuneration to the General Partners or their affiliates as set forth below. In addition to the information provided herein, certain transactions are described in Notes 7 and 8 in the Notes to Consolidated Financial Statements appearing in Appendix A, which are included in this report and are incorporated herein by reference thereto.
Net Cash from 1997 Operations to be distributed to the General Partners $2,896
Allocation of Loss to the General Partners ($1,146)
Property management fees paid to an affiliate of the General Partners $59,244
Reimbursements to General Partners $18,760
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1,2 See Page
3 See Exhibit Index contained herein
(b) Reports on Form 8-K
The Partnership has not filed, and was not required to file, any reports on Form 8-K during the last quarter of
(c) See Exhibit Index contained herein
(d) See Page.
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.
DEVELOPMENT PARTNERS III (A Massachusetts Limited Partnership)
By: GP L'Auberge Communities, L.P., A California Limited Partnership, General Partner
By: L'Auberge Communities, Inc., its General Partner
By: ____/s/ Earl C. Robertson________________ Earl C. Robertson, Executive Vice President and Chief Financial Officer
Date: March 26, 1998
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.
Signature Title Date
___/s/ Stephen B. Boyle _____ Director, President and March 26, 1998 STEPHEN B. BOYLE Principal Executive Officer of L'Auberge Communities, Inc.
___/s/ Earl C. Robertson _ Executive Vice President and March 26, 1998 EARL C. ROBERTSON Principal Financial Officer of L'Auberge Communities, Inc.
DEVELOPMENT PARTNERS III (A Massachusetts Limited Partnership) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------
APPENDIX A
DEVELOPMENT PARTNERS III (A Massachusetts Limited Partnership) AND SUBSIDIARY ---------
CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For the years ended December 31, 1997 and 1996
DEVELOPMENT PARTNERS III (A Massachusetts Limited Partnership)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants .......................................
Consolidated Balance Sheets at December 31, 1997 and 1996 ...............
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ........................................
Consolidated Statements of Partners' Equity (Deficit) for the years ended December 31, 1997, 1996 and 1995 ........................................
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 .................................. --
Notes to Consolidated Financial Statements ....................... --
All Schedules are omitted as they are not applicable, not required, or the information is provided in the financial statements or the notes thereto.
Report of Independent Accountants
To the Partners of Development Partners III (A Massachusetts Limited Partnership):
We have audited the accompanying consolidated balance sheets of Development Partners III (A Massachusetts Limited Partnership) and subsidiary as of December 31, 1997 and 1996, the related consolidated statements of operations, partners' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Development Partners III (A Massachusetts Limited Partnership) and subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 9, the General Partners of the Partnership have entered into a sales agreement to sell the property of the Partnership. If closing of this sale were to occur, any proceeds from sale will be allocated to the Partners in accordance with the terms of the Partnership Agreement and the Partnership will likely be liquidated.
___/s/__Coopers & Lybrand, L.L.P.
Coopers & Lybrand, L.L.P. Denver, Colorado February 27, 1998
DEVELOPMENT PARTNERS III (A Massachusetts Limited Partnership) AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
DEVELOPMENT PARTNERS III (A Massachusetts Limited Partnership) AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
-------------
1. Organization of Partnership
Development Partners III (A Massachusetts Limited Partnership) (the "Partnership"), formerly Berry and Boyle Development Partners III, was formed on July 11, 1988. GP L'Auberge Communities, L.P., a California Limited Partnership (formerly Berry and Boyle Management) and Stephen B. Boyle are the General Partners. In September, 1995, with the consent of Limited Partners holding a majority of the outstanding Units, as well as the consent of the mortgage lenders for the Partnership's three properties, Richard G. Berry resigned as a general partner of the Partnership. Except under certain limited circumstances upon termination of the Partnership, the General Partners are not required to make any additional capital contributions. The General Partners or their affiliates will receive various fees for services and reimbursement for various organizational, administrative and selling costs incurred on behalf of the Partnership.
On January 13, 1989 the Securities and Exchange Commission declared the Partnership's public offering (the "Prospectus") of up to 80,000 units of Limited Partnership Interests at $500 per unit (the "Units") effective and the marketing and sale of the Units commenced shortly thereafter. The initial closing of the offering took place on December 28, 1989 at which time the holders of 3,048 Units were admitted into the Partnership. The Partnership continued to admit subscribers monthly thereafter until December 27, 1991, its last closing date. The Partnership terminated the offering on January 13, 1992 having admitted 289 investors acquiring 7,401 Units totaling $3,700,500.
The Partnership will continue until December 31, 2018, unless earlier terminated by the sale of all, or substantially all, of the assets of the Partnership, or as otherwise provided in the Partnership Agreement (See Note 9.)
2. Significant Accounting Policies
A. Basis of Presentation
The consolidated financial statements include the accounts of the Partnership and its subsidiary Casabella Associates. All intercompany accounts and transactions have been eliminated in consolidation. The Partnership follows the accrual basis of accounting. Refer to Note 5 regarding the termination of the Casabella Joint Venture.
B. Cash and Cash Equivalents
The Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value. It is the Partnership's policy to invest cash in income-producing temporary cash investments. The Partnership mitigates any potential risk from such concentration of credit by placing investments with high quality financial institutions.
C. Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Significant Accounting Policies, continued
D. Depreciation
Depreciation is provided for by the use of the straight-line method over the estimated useful lives as follows: Buildings and improvements 39-40 years Equipment, furnishings and fixtures 5-15 years
E. Deferred Expenses
Costs of obtaining or extending the mortgage on Casabella are being amortized over the mortgage term using the straight-line method, which approximates the effective interest method. Any unamortized costs remaining at the date of refinancing are expensed in the year of refinancing.
F. Income Taxes
The Partnership is not liable for Federal or state income taxes because Partnership income or loss is allocated to the Partners for income tax purposes. If the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and such an examination results in a change in Partnership taxable income (loss), such change will be reported to the Partners.
G. Rental Income
Leases require the payment of rent in advance, however, rental income is recorded as earned.
H. Reclassification
Certain items in the financial statements for the years ended December 31, 1996 and 1995 have been reclassified to conform to the 1997 presentation.
I. Long-Lived Assets
In 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of." SFAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The adoption of SFAS 121 had no effect on reported results in 1996. As further discussed in Note 9, for the year ended December 31, 1997 the Partnership recorded its property at the lower of carrying value or net realizable value and has included these amounts as Assets Held for Sale.
For the years ended December 31, 1997 and 1996, permanent impairment conditions did not exist at the Partnership's property.
2. Significant Accounting Policies, continued
J. New Accounting Standard
In 1997, the Partnership adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." This accounting standard specifies new computation, presentation, and disclosure requirements for earnings per share to be applied retroactively. Among other things, SFAS 128 requires presentation of basic and diluted earnings per share on the face of the income statement. The computation of basic and diluted earnings per share was based on income available to the Limited Partners divided by the weighted average number of units outstanding during the period. The Partnership has no dilutive type securities. The adoption of SFAS 128 had no effect on the per unit results previously reported.
4. Cash and cash equivalents
Cash and cash equivalents at December 31, 1997 and 1996 consisted of the following:
1997 1996 -------- -------- Cash on hand .......... $167,044 $213,574 Money market accounts . 86,733 -- Certificates of Deposit ______- 318,204 -------- $253,777 $531,778 ======== ========
5. Joint Venture and Property Acquisitions
On September 28, 1990, the Partnership acquired a majority interest in Casabella Associates, a general partnership comprised of the Partnership, Development Partners (A Massachusetts Limited Partnership) ("DPI"), formerly Berry and Boyle Development Partners, and Development Partners II (A Massachusetts Limited Partnership) ("DPII"), formerly Berry and Boyle Development Partners II. Casabella Associates was formed to acquire a majority interest in the Casabella Joint Venture which owns Casabella, a 154-unit residential property located in Scottsdale, Arizona. Since the Partnership owns a majority interest in Casabella Associates, the accounts and operations of Casabella Associates (including the accounts and operations relating to Casabella Associates' majority interest in the Casabella Joint Venture) have been consolidated into the Partnership.
The co-venture partner was an affiliate of Evans Withycombe, Inc. ("EWI"), a Phoenix based residential development, construction and management firm. EWI also developed the property known as Casabella.
At December 31, 1997, the Partnership, DPI and DPII had contributed $2,500,000, $400,000 and $1,800,000, respectively, to Casabella Associates. Of the total contributions, $3,845,154 was used to purchase the majority interest in the Casabella Joint Venture referred to in the second preceding paragraph and $500,000 was used to fund an escrow account maintained by the permanent lender. In addition to the $4,700,000 of cash contributions referred to above, the Partnership, DPI and DPII collectively incurred $280,930 of acquisition costs which have been recorded as additional capital contributions to Casabella Associates.
The Partnership has invested in a single property located in Scottsdale, Arizona. The success of the Partnership will depend upon factors which are difficult to predict including general economic and real estate market conditions, both on a national basis and in the area where the Partnership's investment is located.
JANUARY 1, 1996 THROUGH MAY 13, 1996:
Cash distributions and allocations of income and loss from Casabella Associates are governed by the partnership agreement and are generally based on the ratio of capital contributed by each of the joint venture partners.
Net cash from operations of the Casabella Joint Venture, to the extent available, shall be distributed not less often than quarterly with respect to each fiscal year, as follows:
(A) First, to Associates, an amount equal to a 10.6% per annum (computed on a simple noncompounded daily basis from the date of the closing) of their capital investment;
(B) Second, the balance 70% to Associates and 30% to the property developer.
5. Joint Venture and Property Acquisitions, continued
All losses from operations and depreciation for the Casabella Joint Venture were allocated 99.5% to Associates and 0.5% to the property developer.
All profits from operations of the Casabella Joint Venture were allocated in accordance with distributions of net cash from operations; provided, however, that if any fiscal year has no distributable net cash from operations, profits will be allocated 99.5% to Associates and 0.5% to the property developer.
In the case of certain capital transactions and distributions as defined in the Casabella joint venture agreement, the allocation of related profits, losses and cash distributions, if any, would be different than as described above and would be affected by the relative balance in the individual partners' capital accounts.
MAY 14, 1996 THROUGH DECEMBER 31, 1997:
On May 14, 1996, the Partnership and certain affiliates consummated an agreement with Evans Withycombe Management, Inc. and certain of its affiliates ("EWI") which separated the interests of EWI and the Partnership, thus affording the Partnership greater flexibility in the operation and disposition of Casabella. The Partnership, DPI, and DPII paid $71,009 to EWI ($38,345 of which was the Partnership's portion) and delivered certain mutual releases. EWI (i) relinquished its contract to manage Casabella and its option to exercise its rights to first refusal with regard to the sale of the property and (ii) assigned all of its interest in the Casabella Joint Venture to the Partnership, DPII and DPIII (while preserving the economic interest of the venture in these Joint Ventures), which resulted in the dissolution of the Casabella Joint Venture. EWI may still share in the cash flow distributions or the proceeds from sale of the properties if certain performance levels are met.
6. Mortgage Note Payable
All of the property owned by the Partnership is pledged as collateral for the nonrecourse mortgage note payable pertaining to Casabella in the original principal amount of $7,320,000. The original maturity date for this note was July 15, 1997. On July 10, 1997 the lender extended the terms of the mortgage note for a period of one year. Under the modification agreement, monthly principal and interest payments of $61,887 and a fixed interest rate of 9.125% remain unchanged. The terms of the agreement provide for a pre-payment penalty of 0.5% of the outstanding loan amount in the event the note is paid prior to 60 days before the note becomes due. The balance of the note will be due on July 15, 1998.
As discussed in Note 9, the Casabella Associates entered into a Sales Agreement for Casabella. The estimated sales price is sufficient to cover the mortgage loan balance. However, there can be no assurance that the sale of the property will occur.
In the event the sales do not occur, the Partnership will seek new sources of financing for the property on a long-term basis or seek to renegotiate the mortgage note with its existing lender. If the general economic climate for real estate in these respective locations were to deteriorate resulting in an increase in interest rates for mortgage financing or a reduction in the availability of real estate mortgage financing or a decline in the market values of real estate it may affect the Partnership's ability to complete the refinancing or sell the property.
6. Mortgage Note Payable, continued
Accrued interest included in accrued expenses on the Balance Sheets of the Consolidated Financial Statements at December 31, 1997 and 1996, consisted of $25,727 and $26,180, respectively.
The principal balance of the mortgage note payable appearing on the consolidated balance sheets approximates the fair value of such note at December 31, 1997 and 1996.
7. Partners' Equity
Under the terms of the Partnership Agreement, as amended, profits are allocated 92% to the Limited Partners and 8% to the General Partners; losses are allocated 99% to the Limited Partners and 1% to the General Partners.
Cash distributions to the partners are governed by the Partnership Agreement and are made, to the extent available, 92% to the Limited Partners and 8% to the General Partners.
In the case of certain events as defined in the Partnership Agreement, such as the sale of an investment property or an interest in a joint venture partnership, the allocation of the related profits, losses, and distributions, if any, would be different than described above.
8. Related Party Transactions
L'Auberge Communities, Inc. is a General Partner of L'Auberge Communities, which owns a 99% interest in GP L'Auberge Communities, L.P. (formerly Berry and Boyle Management). Due to affiliates at December 31, 1997 and 1996 consisted of $5,370 and $3,012, respectively, of reimbursable costs payable to L'Auberge Communities, Inc., formerly Berry and Boyle Inc.
In 1997, 1996 and 1995, general and administrative expenses included $18,760, $35,441, and $29,304, respectively, of salary reimbursements paid to the General Partners for certain administrative and accounting personnel who performed services for the Partnership.
The officers and principal shareholders of Evans Withycombe, Inc., the developer of Casabella, together hold a two and one half percent cumulative profit or partnership voting interest in LP L'Auberge Communities, formerly Berry and Boyle.
During the years ended December 31, 1996 and 1995, property management fees of $37,735 and $78,663, respectively, were paid to Evans Withycombe, Inc. This represents 5% of the rental revenues. During the years ended December 31, 1997 and 1996, property management fees of $59,244 and $6,612, respectively, were paid to Residential Services-L'Auberge, an affiliate of the General Partner. This represents 4% of the rental revenues.
9. Asset Held for Sale
During the fourth quarter of 1997, the General Partners of the Partnership committed to a plan to dispose of Casabella in Scottsdale, Arizona. On February 4, 1998, Casabella Associates entered into a Sales Agreement (the "Agreement") to sell Casabella to an unaffiliated third party. The selling price for Casabella is approximately $11,700,000. The Agreement is subject to completion of customary due diligence to the satisfaction of the purchaser, and the purchaser obtaining a financing commitment for the purchase of the property on commercially reasonable terms and conditions. The Partnership expects to consummate this sale in 1998. Under certain conditions, the sale is contingent upon the approval of the Limited Partners.
As it is the intent of the General Partners to pursue the sale of this Property, the Partnership has recorded the assets at the lower of carrying value or net realizable value and has included these amounts as Assets held for Sale on the Consolidated Balance Sheets at December 31, 1997. In accordance with SFAS 121, the Partnership has stopped depreciating these assets effective January 1, 1998. If closing of the sale were to occur, any proceeds from the sale will be allocated to the Partners in accordance with the terms of the Partnership Agreement and the Partnership will likely be liquidated.
EXHIBIT INDEX
Exhibit Number
(4)(a)(1) Amended and Restated Certificate and Agreement of Limited Partnership (included as an exhibit to the Partnership's Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
(4)(a)(2) Fifteenth Amendment to the Amended and Restated Certificate and Agreement of Limited partnership dated January 13, 1991.
(4)(b) Subscription Agreement included as Exhibit B to Prospectus contained in Amendment No. 2 to the Partnership's Registration Statement No. 33-23240 filed and declared effective January 13, 1989, and incorporated herein by reference.
(10)(a) Agreement of Joint Venture of Casabella Associates dated September 27, 1990 (filed as Exhibit (10)(f) to the Form 10-K of Berry and Boyle Development Partners for the year ended December 31, 1990, and incorporated herein by reference).
(10)(b) Documents pertaining to the $7,300,000 permanent loan for Casabella Joint Venture (filed as an exhibit to the Form 10-K of Berry and Boyle Development Partners for the year ended December 31, 1991, and incorporated herein by reference).
(10)(c) Property Management Agreement between Casabella Associates and L'Auberge Communities Inc. dated November 1, 1996.
(10)(d) Agreement regarding Casabella Joint Venture
(10)(e) Purchase and Sale Agreement and Escrow Instructions between Casabella Associates and JPR Capital LLC related to the sale of Casabella dated February 4, 1998.
(27) Financial Data Schedule