Item 1. Business. --------
New England Life Pension Properties IV; A Real Estate Limited Partnership (the "Partnership") was organized under the Uniform Limited Partnership Act of the Commonwealth of Massachusetts on October 16, 1985, to invest primarily in newly constructed and existing income-producing real properties.
The Partnership was initially capitalized with contributions of $2,000 in the aggregate from Fourth Copley Corp. (the "Managing General Partner") and CCOP Associates Limited Partnership (the "Associate General Partner") (collectively, the "General Partners") and $10,000 from Copley Real Estate Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a Registration Statement on Form S-11 (the "Registration Statement") with the Securities and Exchange Commission on November 12, 1985, with respect to a public offering of 60,000 units of limited partnership interest at a purchase price of $1,000 per unit (the "Units") with an option to sell up to an additional 60,000 Units (an aggregate of $120,000,000). The Registration Statement was declared effective on January 3, 1986.
The first sale of Units occurred on May 29, 1986, at which time the Initial Limited Partner withdrew its contribution from the Partnership. Investors were admitted to the Partnership thereafter at monthly closings; the offering terminated and the last group of subscription agreements was accepted by the Partnership on December 31, 1986. As of January 31, 1987, a total of 94,997 Units had been sold, a total of 17,207 investors had been admitted as limited partners (the "Limited Partners") and a total of $94,348,550 had been contributed to the capital of the Partnership. The remaining 25,003 Units were de-registered on February 23, 1987.
As of December 31, 1997, the Partnership had investments in the four real properties described in A., B., D. and E. below. In December 1988, the Partnership sold one of its investments and received sale proceeds of $10,577,476 which were substantially reinvested. Four other investments have been sold. One investment in Atlanta, Georgia was sold on August 6, 1993, resulting in sale proceeds of $7,917,000. Capital was distributed to the Limited Partners in October 1993, in the amount of $82 per Unit . A second investment in Rancho Cucamonga, California was sold on December 30, 1994, resulting in sale proceeds of $5,261,275. On January 26, 1995, capital of $5,224,835 ($55 per Unit) was distributed to the Limited Partners. A third investment located in Decatur, Georgia was sold on October 10, 1996, resulting in sale proceeds of $9,333,325. On October 24, 1996, capital of $9,214,709 ($97 per unit) was distributed to the Limited Partners. Finally, a fourth investment located in Las Vegas, Nevada was sold on October 24, 1997, resulting in sale proceeds of $22,983,007. On November 25, 1997, the Partnership made a capital distribution of $22,989,274 ($242 per limited partnership unit) from the proceeds of the sale and prior4 sales proceeds previously held in reserves.
The Partnership has no current plan to renovate, improve or further develop any of its real property. In the opinion of the Managing General Partner of the Partnership, the properties are adequately covered by insurance. The Partnership has no employees. Services are performed for the Partnership by the Managing General Partner and affiliates of the Managing General Partner.
A. Apartment Complex in Fort Myers, Florida ("Reflections"). --------------------------------------------------------
On August 1, 1986, the Partnership acquired a 60% interest in Lee Partners (the "Joint Venture"), a joint venture formed with Lee-Oxford Limited Partnership, a Maryland limited partnership ("Lee-Oxford"). As of December 31, 1997, the Partnership had contributed $8,190,145 to the capital of the Joint Venture out of a maximum commitment of $8,685,000. The joint venture agreement entitles the Partnership to receive 60% of all cash flow from operations, refinancing proceeds and net sale proceeds.
The Partnership also committed to make a loan for investment in the joint venture of up to $5,790,000 to Lee-Oxford, of which $5,460,097 had been funded as of December 31, 1997. Interest only on the loan is payable monthly at the rate of 10.5% per annum. The entire outstanding principal balance of the loan matures in December, 1999 or will be due on the sale of all or substantially all of the assets of the Joint Venture or the sale of Lee-Oxford's interest in the Joint Venture. Lee-Oxford must apply any cash flow received from operations of the Joint Venture to interest payments on the loan and must apply proceeds of financings or sales received from the Joint Venture to payment of the interest on and principal of the loan. The Partnership agreed, effective January 1, 1988, that to the extent that Lee-Oxford's 40% share of the cash flow is not sufficient to pay interest currently due, interest due on the loan would accrue and compound at a rate of 10.5% per annum. The Partnership agreed, effective May 1, 1992, to extend the maturity date of the loan from August, 1996 to December, 1999, and the borrower agreed to pay interest, currently, at a minimum of 7% with the remainder accruing at 10.5% per annum compounded monthly. The loan is secured by Lee-Oxford's interest in the Joint Venture and by a guarantee of Oxford Development Corporation, an affiliate of Lee-Oxford.
The joint venture was restructured in the second quarter of 1996, whereby Lee-Oxford became an indirect limited partner. The Partnership thereby obtained control over management and operating decisions. The ownership restructuring was accomplished with the establishment of a new partnership entity in which the Partnership is the general partner and Lee-Oxford is the limited partner. The new entity holds a 42% interest in the Joint Venture, representing all of Lee-Oxford's prior direct ownership interest and 2% of the Partnership's prior direct interest. The Partnership also agreed to release the guarantee from Oxford Development Corporation upon payment to the Partnership of a total of $650,000 of which $136,437 remains unpaid at December 31, 1997.
The joint venture owns approximately 12.63 acres of land located in Fort Myers, Florida and has constructed a 282-unit apartment complex, consisting of 12 2- and 3-story buildings, thereon. The complex was approximately 92% occupied as of December 31, 1997.
B. Office/Industrial Buildings in Phoenix, Arizona ("Metro Business ---------------------------------------------------------------- Center"). --------
On September 15, 1986, the Partnership acquired a 60% interest in Copley/Hewson Northwest Associates, a joint venture formed with an affiliate of The Hewson Company (the "Developer"). Effective January 1, 1990, as a result of operating deficits, the joint venture agreement was amended to reflect an increase of the Partnership's interest in the joint venture to 80% and a decrease in the Developer's interest to 20%. As of December 31, 1997, the Partnership had contributed $5,302,193 to the capital of the joint venture out of a maximum obligation of $5,580,000.
The Partnership also committed to make a loan for investment in the joint venture of up to $3,988,000 to the Developer, of which $3,534,796 had been funded as of December 31, 1997. Interest only on the loan is payable monthly at the rate of 10.5% per annum. The loan has a ten-year term and is not prepayable. The Developer must apply any cash flow received from operations of the joint venture to interest payments on the loan and must apply proceeds of refinancings or sales received from the joint venture to payments of interest on and principal of the loan. The loan is secured by the borrower's interest in the joint venture.
The joint venture agreement entitled the Partnership to receive 80% of net cash flow, refinancing proceeds and sale proceeds once the loan and accrued interest are repaid in full.
On January 1, 1996 a letter agreement was executed which modified certain terms of the Joint Venture Agreement. The letter agreement, which constituted an amendment to the Joint Venture Agreement, granted the Partnership full control over management decisions. The Partnership's control over any decision to sell the property, however, became effective on July 1, 1996.
Effective December 30, 1996, the property owned by the joint venture was distributed to the venture partners as tenants-in-common. The Partnership, however, retained its overall decision-making authority. The property interest distributed to the Developer is encumbered by the aforementioned loan. The note was amended to mature on February 1, 1997 and is secured by a recorded deed-of- trust. The note was subsequently amended to mature on March 31, 1998. The maturity date is in the process of being extended. In connection with the transaction, the Partnership obtained the option to purchase the tenancy-in- common interest of the Hewson affiliate at its fair market value beginning February 1, 1997.
On February 28, 1998, the Partnership executed a purchase and sale agreement to purchase the tenancy-in-common interest of the Developer. The partnership expects to close on the sale on May 29, 1998. The purchase price is $6,927,000 and shall be payable by the Partnership as follows: (i) A portion of the purchase price will be paid with all outstanding amounts, including but not limited to accrued but unpaid interest, owed by the Developer to the Partnership under the aforementioned loan. (ii) The Partnership shall pay the remainder of the purchase price in excess of the outstanding loan amounts. The Partnership expects this amount to be nominal at the time of the closing.
The tenants-in-common own approximately seven acres of land located in Phoenix, Arizona, improved with four one-story warehouse buildings containing approximately 109,930 square feet of space. The buildings were 100% leased as of December 31, 1997.
C. Office, Industrial and Retail Buildings in Las Vegas, Nevada ------------------------------------------------------------ ("Palms Business Center"). -------------------------
On December 29, 1986, the Partnership acquired a 60% interest in Rancho Road Associates, a joint venture formed with an affiliate of Commerce Centre Partners. In the first quarter of 1990, the Partnership committed to increase its maximum commitment from $13,400,000 to $15,300,000. On October 2, 1991, the Partnership committed
to increase its maximum commitment from $15,300,000 to $15,840,000. As of the date of sale, discussed below, the Partnership had contributed $15,840,000 of capital to the joint venture. The additional funds were used to pay for higher than anticipated tenant finish costs and the costs of re-leasing the space vacated by tenants when leases expired. The joint venture agreement entitled the Partnership to receive a preferred cumulative compounded return of 11% per annum on its capital contribution, of which 9.5% per annum was due currently and up to 1.5% per annum could be accrued if sufficient cash was not available therefor. The entire unpaid accrued preferred return was due and payable at the end of the tenth year of the joint venture's operations. The joint venture agreement also entitled the Partnership to receive 60% of net cash flow and 60% of sale and refinancing proceeds following the return of the Partnership's equity capital.
As of January 1, 1995, the joint venture agreement was amended and restated granting the Partnership control over management and operating decisions. Additionally, the venture partner received 40% of the excess cash flow above a specified level until its cash investment of $360,000 was repaid in full, at which time the Partnership was entitled to all cash flow. The venture partner was paid in full as of the date of sale, discussed below. Unpaid preferred returns of $2,936,919 were added to the Partnership's capital account. Future preferred return payments were to be made monthly in the amount of $121,125. Monthly payments were made to the extent operating revenues or extraordinary cash flows were available. To the extent such payments could not be made from such sources when due, payments could accrue at a rate of 9.5% per annum, compounded monthly, until paid.
The joint venture owned approximately 14.1 acres of land in Las Vegas, Nevada improved with 15 one-story buildings suitable for office, industrial and retail use and containing approximately 224,474 square feet of space. At the time of sale, approximately 86% of the available leasable area was leased.
On November 16, 1990, the joint venture filed a complaint against a tenant for failure to pay rent and fraud, totaling approximately $500,000. A judgment in the amount of $911,200 was legally recorded in 1995. The Partnership had not collected on or recognized the judgment as of the date of sale.
On October 26, 1994, the joint venture filed a complaint against Han Lee, Inc. for failure to pay rent totaling $69,171, including late charges. In August, 1995, a Judgment by Default in the amount of $83,856 was legally recorded. The Partnership has determined that the claim was not collectible at the time of sale.
On October 24, 1997, the Palms Business Center was sold. The Partnership received proceeds of $22,983,007. On November 25, 1997, the Partnership made a distribution to the Limited Partners of $22,989,274 ($242 per Unit) from the proceeds of this sale and from reserves established with the proceeds of prior sales.
D. Office/Research and Development Buildings in Columbia, Maryland --------------------------------------------------------------- ("Columbia Gateway Corporate Park"). -----------------------------------
On December 21, 1987, the Partnership acquired a 17% interest in a joint venture formed with an affiliate of the Partnership (the "Affiliate"), which had a 33% interest, and M.O.R. Gateway 51 Associates Limited Partnership.
As of April 20, 1989, the joint venture agreement was amended and restated reflecting an increase in the Partnership's interest in the joint venture to 34.75% and a decrease in the Affiliate's interest in the joint venture to 15.25%. In addition, the amended and restated joint venture agreement increased the Partnership's maximum commitment to contribute capital to the joint venture and reallocated the capital contributed to the joint venture between the Partnership and the Affiliate. As of December 31, 1997, the Partnership had contributed $14,086,147 to the capital of the joint venture out of a maximum commitment of $14,598,000.
The joint venture agreement entitles the Partnership and the Affiliate to receive a preferred return on the their respective invested capital at the rate of 10.5% per annum. Such preferred return will be payable currently until the Partnership and the Affiliate have received an aggregate of $8,865,000; thereafter, if sufficient cash flow is not available therefor, the preferred return will accrue and bear interest at the rate of 10.5% per annum, compounded monthly. The joint venture agreement also entitles the Partnership to receive 34.75% of cash flow following payment of the preferred return and 34.75% of the net proceeds of sales and refinancings following return of the Partnership's and the Affiliate's equity. Ownership of the joint venture has been restructured whereby the Partnership and the Affiliate will obtain full control over the business of the joint venture. The restructuring will be effective January 1, 1998.
The joint venture owns approximately 20.85 acres of land in the Columbia Gateway Corporate Park in Columbia, Maryland. The intended development plan for this land was for a two-stage development of seven office and research and development buildings. The first phase of this development was completed by 1992 and included the construction of four, one-story buildings containing 142,545 square feet. The second phase of this development
commenced in the spring of 1994 in which a building totaling 46,000 square feet was constructed and leased to a single tenant for a term of ten years. As of December 31, 1997, the project was 98% leased.
E. Office/Research and Development Buildings in Frederick, Maryland ---------------------------------------------------------------- ("270 Technology Center"). -------------------------
On December 22, 1987, the Partnership acquired a 50% interest in a joint venture formed with MORF Associates VI Limited Partnership. As of December 31, 1997, the Partnership had contributed $4,857,000 to the capital of the joint venture out of a maximum commitment of $5,150,000. The joint venture agreement entitles the Partnership to receive a preferred return on its invested capital at the rate of 10% per annum. Such preferred return was payable currently through September 30, 1988; presently, and until the termination of the joint venture's operations, to the extent that sufficient cash flow is not available therefor, the preferred return will accrue and bear interest at the rate of 10% per annum, compounded monthly. The joint venture agreement entitles the Partnership to receive 50% of the net proceeds of sales and financings after return of its equity and preferred return.
As of July 3, 1990, the joint venture sold approximately 3.9 acres of land to an unrelated third party. In return, the joint venture received approximately $500,000 and a parcel of land consisting of approximately .4 acres. The joint venture currently owns approximately 8 acres of land in the 270 Technology Center in Frederick, Maryland, together with two one-story research and development/office buildings, containing approximately 73,360 square feet of space, located thereon. As of December 31, 1997, the buildings were approximately 70% leased.
Item 2.
Item 2. Properties. ----------
The following table sets forth the annual realty taxes for the Partnership's properties and information regarding tenants who occupy 10% or more of gross leasable area (GLA) in the Partnership's properties.
The following table sets forth for each of the last five years the gross leasable area, occupancy rates, rental revenue and net effective rent for the Partnership's properties:
* Net Effective Rent calculation is based on average occupancy during the respective year.
(1) This property was sold on October 24, 1997.
Following is a schedule of lease expirations for each of the next ten years for the Partnership's properties based on the annual contract rent in effect at December 31, 1997:
Note: N/A denotes that the disclosure is not applicable based on the nature of the property.
The following table sets forth for each of the Partnership's properties the: (i) federal tax basis, (ii) rate of depreciation, (iii) method of depreciation, (iv) life claimed, and (v) accumulated depreciation, with respect to each property or component thereof for purposes of depreciation:
SL= Straight Line DB= Declining Balance
Following is information regarding the competitive market conditions for each of the Partnership's properties. This information has been gathered from sources deemed reliable. However, the Partnership has not independently verified the information and, as such, cannot guarantee its accuracy or completeness.
Apartment Complex in Fort Myers, FL - ----------------------------------------
Reflections is located in the city of Fort Myers in Lee County. Employment in Lee County is concentrated in the services and trade sectors, which represent nearly 60% of the market's total employment. The area has experienced abundant commercial and industrial activity due to the influences of a strong transportation network, availability of reasonably priced land and proximity to an institute of higher learning. With over 1 million square feet of office space, this area should continue to generate substantial demand for multifamily housing. The impact of these employment generators should continue to have a major impact on demand for rental housing in the Lee County market.
Office/Industrial Buildings in Phoenix, AZ - ------------------------------------------
The property is located in the metropolitan Phoenix market, which has steadily outperformed most other western metro areas, adding jobs at over twice the national rate of expansion. Attracting both service and high-tech firms, Phoenix continues to diversify its industrial base, which has achieved sufficient size to begin attracting additional firms on its own. New office supply in the metro area during 1997 totaled 1.0 million square feet, a 2.3% increase to existing stock. Office demand growth during 1997 was approximately 2.4%, effectively unchanged from the 2.5% recorded in 1996. In turn, the office vacancy rate for 1997 decreased slightly to 9.4% from 9.5% at year-end 1996.
Office/R&D Buildings in Columbia, MD - ------------------------------------
The property is located within the Howard County R&D submarket, which has a base of 8.9 million square feet and a 6.3% vacancy rate as of year-end 1997. Due to limited space in the marketplace, tenants continue to seek space that will accommodate their growth needs and are moving from Washington, D.C. to the Baltimore suburbs. The Columbia flex submarket contains 6.8 million square feet of space and a 6.5% vacancy rate. Planned construction of 300,000 square feet of speculative office space in this market is showing offering rates on new product that are setting new highs. As a result, 1997 rents for Howard County averaged in the $10.00 - $10.50 range.
R&D/Office Buildings in Frederick, MD - -------------------------------------
The property is located in the Frederick County office/flex and light industrial market. The Frederick R&D/office market contains approximately 4.9 million square feet of space with a vacancy rate of approximately 16%. Current market rents range from $8.50 to $10.00 per square foot for R&D and $9.50 to $12.00 per square foot for office. Due to build-to-suit activity during 1997, which limited new large tenants to fill vacated space, the market is currently out of balance. While the office-using sector in Frederick County is expected to remain stable over the near term, rents are expected to remain flat through 1998.
Item 3.
Item 3.
Legal Proceedings - -----------------
The Partnership is not a party to, nor are any of its properties subject to, any material pending legal proceedings. A joint venture in which the Partnership holds an interest has received judgements against two former tenants for defaults under leases. See Item 1.C.
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 the fiscal year covered by this Annual Report on Form 10-K.
PART II - -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. ---------------------------------------------------------------------
There is no active market for the Units. Trading in the Units is sporadic and occurs solely through private transactions.
As of December 31, 1997, there were 16,983 holders of Units.
The Partnership's Amended and Restated Agreement of Limited Partnership dated May 29, 1986, as amended to date (the "Partnership Agreement"), requires that any Distributable Cash (as defined therein) be distributed quarterly to the Partners in specified proportions and priorities. There are no restrictions on the Partnership's present or future ability to make distributions of Distributable Cash. For the year ended December 31, 1997, cash distributions paid in 1997 or distributed after year end with respect to 1997 to the Limited Partners as a group totaled $26,517,463, including $22,989,274 ($242 per Limited Partnership Unit) from the proceeds of a property sale and proceeds from reserves established from the proceeds of previous sales. For the year ended December 31, 1996, cash distributions paid in 1996 or distributed after year end with respect to 1996 to the Limited Partners as a group totaled $14,032,008, including $9,214,709 ($97 per Limited Partnership unit) from the proceeds of a property sale.
Cash distributions exceeded net income in 1997 and 1996 and, therefore, resulted in a reduction of partners' capital. Reference is made to the Partnership's Statement of Partner's Capital (Deficit) and Statement of Cash Flows in Item 8 hereof.
Item 6.
Item 6. Selected Financial Data. -----------------------
(1) Net income includes a gain on the sale of property of $10,482,458. Cash distributions include a return of capital of $242.00 per Limited Partnership Unit.
(2) Net income includes a gain on the sale of a joint venture investment of $1,055,591. Cash distributions include a return of capital of $97.00 per Limited Partnership Unit.
(3) Cash distributions include $8.09 per Limited Partnership Unit that is attributable to a discretionary reduction of cash reserves, which had been previously accumulated through operating activities.
(4) Net income includes a gain on the sale of a joint venture investment of $399,865. Cash distributions include a return of capital of $55.00 per Limited Partnership Unit.
(5) The Partnership recorded investment valuation allowances totaling $2,760,784 ($28.77 per Limited Partnership Unit) during 1993. Cash distributions include a return of capital of $82.00 per Limited Partnership Unit.
Item 7
Item 7 ------
Management's Discussion and Analysis of Financial Condition and Results of -------------------------------------------------------------------------- Operations ----------
Liquidity and Capital Resources
The Partnership completed its offering of units of limited partnership interest in December, 1986. A total of 94,997 units were sold. The Partnership received proceeds of $85,677,259, net of selling commissions and other offering costs, which have been invested in real estate, used to pay related acquisition costs, or retained as working capital reserves. The Partnership made nine real estate investments. Five investments have been sold; one each in 1988, 1993, 1994, 1996 and 1997. Capital of $45,218,572 ($476 per limited partnership unit) has been returned to the limited partners through December 31, 1997.
On October 10, 1996, the Partnership sold its interest in the Decatur TownCenter II joint venture to its partner for $9,540,860. The Partnership received net sale proceeds of $9,333,325 and after closing costs recognized a gain of $1,055,591 ($11.00 per limited partnership unit). On October 24, 1996, the Partnership made a capital distribution of $97 per limited partnership unit ($9,214,709) from the proceeds of the sale. The adjusted capital contribution after this sale is $766.
On October 24, 1997, the Palms Business Center property was sold to an institutional buyer which is unaffiliated with the Partnership for $23,200,000. The Partnership received net proceeds of $22,983,007, after closing costs and repayment of a loan from the venture partner. The Partnership recognized a gain of $10,482,458 ($109.24 per limited partnership unit). A disposition fee of $696,000 was accrued but not paid to AEW. On November 25, 1997, the Partnership made a capital distribution of $22,989,274 ($242 per limited partnership unit) from the proceeds of the sale and prior sales proceeds held in reserves. This distribution reduced the adjusted capital contribution to $524 per limited partnership unit.
At December 31, 1997, the Partnership had $ 6,907,226 in cash, cash equivalents and short-term investments, of which $806,035 was used for cash distributions to partners on January 29, 1998; the remainder will primarily be used for working capital reserves. The source of future liquidity and cash distributions to partners will be cash generated by the Partnership's real estate and short-term investments. Quarterly distributions of cash from operations relating to 1997 were made at the annualized rate of 5% on the weighted average adjusted capital contribution. Quarterly distributions of cash from operations related to 1996 were made at the annualized rate of 6% on the weighted average adjusted capital contribution.
The carrying value of real estate investments in the financial statements at December 31, 1997 is at depreciated cost, or if the investment's carrying value is determined not to be recoverable through expected undiscounted future cash flows, the carrying value is reduced to estimated fair market value. The fair market value of such investments is further reduced by the estimated cost of sale for properties held for sale. Carrying value may be greater or less than current appraised value. At December 31, 1997, the appraised values of certain investments exceeded the related carrying values by an aggregate of $5,500,000.
The current appraised value of real estate investments has been estimated by the Managing General Partner and is generally based on a combination of traditional appraisal approaches performed by AEW and independent appraisers. Because of the subjectivity inherent in the valuation process, the estimated current appraised value may differ significantly from that which could be realized if the real estate were actually offered for sale in the marketplace.
The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Partnership's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions or engage in normal business operations. The Managing General Partner and its affiliates are assessing the modifications or replacements of its software that may be necessary for its computer systems to function properly with respect to the dates in the year 2000 and thereafter. The Managing General Partner and its affiliates do not believe that the cost of either modifying existing software or converting to new software will be significant or that the Year 2000 Issue will pose significant operational problems.
Results of Operations ---------------------
Form of Real Estate Investments
At December 31, 1997, two of the investments in the portfolio are structured as joint ventures with real estate development/management firms, and in one case, with an affiliate of the Partnership. The Palms Business Center ( which was sold October 24, 1997), Reflections Apartments and Metro Business Center investments were originally structured as joint ventures. However, effective January 1, 1995, April 1, 1996 and July 1, 1996, respectively, the Partnership was granted full control over management decisions and the investments have been accounted for as wholly-owned properties since those dates.
Operating Factors
As previously discussed, the Palms Business Center was sold on October 24, 1997 and the Partnership recognized a gain of $10,482,458. At the time of the sale the Palms Business Center was 86% leased compared to 98% and 96% at December 31, 1996 and December 31, 1995, respectively.
Overall occupancy at Columbia Gateway Corporate Park was 98% at December 31, 1997, up from 94% at December 31, 1996. Ownership of the Columbia Gateway Corporate Park joint venture has been restructured whereby the Partnership and its affiliate will obtain full control over the business of the joint venture. The restructuring will be effective January 1, 1998.
Occupancy at Reflections Apartments at December 31, 1997 was 92%, up from 88% at December 31, 1996. Current rental rates are at the high end of the market range.
Occupancy at Metro Business Center at December 31, 1997 was at 100%, up from 92% at December 31, 1996.
Occupancy at 270 Technology Center was 70% at December 31, 1997, down from 89% at December 31, 1996 and 98% at December 31, 1995. This decrease in occupancy is primarily due to the expiration of a lease whose tenant occupied 30% of the space. This space is currently being marketed.
Investment Activity
1997 Compared to 1996
Interest on cash equivalents and short-term investments increased by approximately $102,000 compared to 1996, primarily due to higher average investment balances as a result of the temporary investment of the receipt of the Palms Business Center sales proceeds and to higher yields.
Exclusive of 1996 operating results at Decatur TownCenter ($220,428), total real estate operations were $2,925,862 and $3,558,278 for the twelve months ended December 31, 1997 and 1996, respectively. The decrease of $632,416, is primarily due to a decrease in joint venture earnings in 270 Technology Center due to higher vacancy and a write off of tenant improvements. The decrease is also attributable to the decrease in operations from Palms Business Center due to the October, 1997 sale. These decreases were offset by improved operating results at both Metro Business Center and Reflections, both of which experienced higher occupancy rates during 1997.
Operating cash flow in 1997 decreased $1,463,739. Cash flow in 1996 included $250,000 received pursuant to a loan guarantee from one of the Partnership's joint venture partners, relating to previously accrued investment income. Exclusive of this item, operating cash flow decreased $1,213,739 between 1996 and 1997. The change primarily stems from the change in Partnership operating results discussed above, increases in working capital and the timing of cash distributions from joint ventures.
1996 Compared to 1995
Exclusive of the operating results from Decatur TownCenter II ($220,428 in 1996 and $680,012 in 1995), total real estate operating activity was $3,558,278 for 1996 and $3,722,962 for 1995. The decrease is primarily attributable to a decline in operating income at Reflections ($270,000) due to a decrease in occupancy and higher maintenance expenses. Operating results at the other properties were relatively unchanged between 1996 and 1995, except for the receipt of $90,000 by 270 Technology Center from a former tenant in bankruptcy.
Operating cash flow in 1996 includes $250,000 received pursuant to a loan guarantee from one of the Partnership's joint venture partners, relating to previously accrued investment income. Operating cash flow in 1995 was reduced by the payment of previously deferred management fees of $175,374. Exclusive of these items, operating cash flow decreased $913,331 between 1996 and 1995. The change primarily stems from the change in Partnership operating results, together with the timing of cash distributions from certain joint ventures.
Portfolio Expenses
The Partnership management fee is 9% of distributable cash flow from operations after any increase or decrease in working capital reserves as determined by the Managing General Partner. General and administrative expenses primarily consist of real estate appraisal, printing, legal, accounting and investor servicing fees.
1997 Compared to 1996
General and administrative expenses decreased approximately $14,000 or 4%, primarily due to a decrease in professional fees for 1997 which were the result of a reduction in accounting fees and lower legal fees in 1997. Legal fees in 1996 had included expenses incurred for the two investment restructurings. Management fees decreased in 1997 compared to 1996 due to a decrease in distributable cash flow and a corresponding decrease in operating distributions to partners.
1996 Compared to 1995
General and administrative expenses decreased approximately $18,000 as a result of lower legal expenses. The management fee decreased due to an decrease in distributable cash flow from operations. This decrease is primarily attributable to the discretionary reduction in the Partnership's cash reserves in 1995.
Inflation ---------
By their nature, real estate investments tend not to be adversely affected by inflation. Inflation may tend to result in appreciation in the value of the Partnership's real estate investments over time if rental rates and replacement costs increase. Declines in real property values during the period of the Partnership operations, due to market and economic conditions, have overshadowed the overall positive effect inflation may have on the value of the Partnership's investments.
Item 8.
Item 8. Financial Statements and Supplementary Data. -------------------------------------------
See the Financial Statements of the Partnership included as a part of this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. --------------------
The Partnership has had no disagreements with its accountants on any matters of accounting principles or practices or financial statement disclosure.
PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant. --------------------------------------------------
(a) and (b) Identification of Directors and Executive Officers. --------------------------------------------------
The following table sets forth the names of the directors and executive officers of the General Partner and the age and position held by each of them as of December 31, 1997.
(c) Identification of Certain Significant Employees. ----------------------------------------------- None.
(d) Family Relationships. -------------------- None.
(e) Business Experience. -------------------
The Managing General Partner was incorporated in Massachusetts on October 16, 1985. The background and experience of the executive officers and directors of the Managing General Partner are as follows:
Wesley M. Gardiner, Jr. joined AEW Real Estate Advisors, Inc. ("AEW") , formerly known as Copley Real Estate Advisors, Inc., in 1990 and has been a Vice President at AEW since January, 1994. AEW is a subsidiary of AEW Capital Management, L.P. ("AEW Capital Management"). From 1982 to 1990, he was employed by Metric Realty, a nationally-known real estate investment advisor and syndication firm, as a portfolio manager responsible for several public and private limited partnerships. His career at AEW has included asset management responsibility for the company's Georgia and Texas holdings. Presently, Mr. Gardiner has overall responsibility for all the partnerships advised by AEW whose securities are registered under the Securities and Exchange Act of 1934. He received a B.A. in Economics from the University of California at San Diego.
Pamela J. Herbst directs AEW Capital Management's Portfolio Advisory Services, with oversight responsibility for the asset and portfolio management areas. Ms. Herbst is a member of AEW Capital Management's Investment Policy Group and Management Committee. She came to AEW Capital Management in December 1996 as a result of the firm's merger with Copley Real Estate Advisors, Inc., where she held various senior level positions in asset and portfolio management, acquisitions, and corporate operations since 1982. Ms. Herbst is a graduate of the University of Massachusetts (B.A.) and Boston University (M.B.A.).
J. Grant Monahon is AEW Capital Management's General Counsel and a member of the firm's Management Committee and Investment Policy Group. He has over 25 years of experience in real estate law and investments. Prior to joining AEW Capital Management in 1987, Mr. Monahon was a partner with a major Boston law firm. As the head of that firm's real estate finance department, he represented a wide variety of institutional clients, both domestic and international, in complex equity and debt transactions. He is the former Chairman of the General Counsel section of the National Association of Real Estate Investment Managers. Mr. Monahon is a graduate of Dartmouth College (B.A.) and Georgetown University Law Center (J.D.).
James J. Finnegan is the Assistant General Counsel of AEW Capital Management. Mr. Finnegan served as Vice President and Assistant General Counsel of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital Management. Mr. Finnegan has over ten years of experience in real estate law, including seven years of experience in private practice with major New York City and Boston law firms. Mr. Finnegan also serves as AEW's securities and regulatory compliance officer. Mr. Finnegan is a graduate of the University of Vermont (B.A.) and Fordham University School of Law (J.D.).
Karin J. Lagerlund directs the Advisory Services Portfolio Accounting Group at AEW Capital Management, overseeing portfolio accounting, performance measurement and client financial reporting for AEW's private equity investment portfolios. Ms. Lagerlund is a Certified Public Accountant and has over ten years experience in real estate consulting and accounting. Prior to joining AEW Capital Management in 1994, she was an Audit Manager at EY/Kenneth Leventhal LLP. Ms. Lagerlund is a graduate of Washington State University (B.A.).
(f) Involvement in Certain Legal Proceedings. ----------------------------------------
None.
Item 11.
Item 11. Executive Compensation. ----------------------
Under the Partnership Agreement, the General Partners and their affiliates are entitled to receive various fees, commissions, cash distributions, allocations of taxable income or loss and expense reimbursements from the Partnership. See Notes 1, 2 and 6 to Notes to Financial Statements.
The following table sets forth the amounts of the fees and cash distributions and reimbursements of out-of-pocket expenses which the Partnership paid to or accrued for the account of the General Partners and their affiliates for the year ended December 31, 1997.
For the year ended December 31, 1997 the Partnership allocated $156,581 of taxable income to the General Partners.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners -----------------------------------------------
No person or group is known by the Partnership to be the beneficial owner of more than 5% of the outstanding Units at December 31, 1997. Under the Partnership Agreement, the voting rights of the Limited Partners are limited and, in some circumstances, are subject to the prior receipt of certain opinions of counsel or judicial decisions.
Except as expressly provided in the Partnership Agreement, the right to manage the business of the Partnership is vested exclusively in the General Partner.
(b) Security Ownership of Management. --------------------------------
An affiliate of the General Partner of the Partnership owned 1,648 Units as of December 31, 1997.
(c) Changes in Control. ------------------
There exists no arrangement known to the Partnership the operation of which may at a subsequent date result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions. ----------------------------------------------
The Partnership has no relationships or transactions to report other than as reported in Item 11 above.
PART IV -------
Item 14.
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K. -------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on the accompanying Index to Financial Statements and Schedule and Financial Statement Index No. 2 are filed as part of this Annual Report.
(2) Financial Statement Schedule--The Financial Statement Schedule listed on the accompanying Index to Financial Statements and Schedule is filed as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report and incorporated in this Annual Report as set forth in said Index.
(b) Reports on Form 8-K. On November 10, 1997, the Partnership filed one Current Report on Form 8-K disclosing the sale of the Palms Business Center property on October 24, 1997.
New England Life Pension Properties IV;
A Real Estate Limited Partnership
Financial Statements
* * * * * * *
December 31, 1997
NEW ENGLAND LIFE PENSION PROPERTIES IV; -------------------------------------- A REAL ESTATE LIMITED PARTNERSHIP ---------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE ------------------------------------------
Report of Independent Accountants
Financial Statements:
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - Years ended December 31, 1997, 1996 and 1995
Statements of Partners' Capital (Deficit) - Years ended December 31, 1997, 1996 and 1995
Statements of Cash Flows - Years ended December 31, 1997,1996 and 1995
Notes to Financial Statements
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation at December 31, 1997
REPORT OF INDEPENDENT ACCOUNTANTS ---------------------------------
To the Partners
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP
In our opinion, based on our audits and the reports of other auditors for the years ended December 31, 1997, 1996 and 1995, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of New England Life Pension Properties IV; a Real Estate Limited Partnership (the "Partnership") at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Fourth Copley Corp., the Managing General Partner of the Partnership; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the Partnership's Decatur TownCenter II joint venture investee for the year ended December 31, 1995, which results of operations are recorded using the equity method of accounting in the Partnership's financial statements. Equity in joint venture income for this venture was $680,012 for the year ended December 31, 1995. We also did not audit the financial statements of the Partnership's Columbia Gateway Corporate Park and 270 Technology Center joint venture investees for the years ended December 31, 1996 and 1995, which results of operations are recorded using the equity method of accounting in the Partnership's financial statements. Equity in joint venture income for these ventures aggregated $1,415,605 and $1,371,477 for the years ended December 31, 1996 and 1995, respectively. We also did not audit the financial statements of the Partnership's investment in Reflections and Metro Business Center for the years ended December 31, 1996 and 1995. Operating income for these investments was $809,714 for the year ended December 31, 1996, and equity in joint venture income was $339,763 and $1,045,307 for the years ended December 31, 1996 and 1995, respectively. We also did not audit the financial statements of the Partnership's investment in Palms Business Centers for the years ended December 31, 1996 and 1995. Operating income for this investment was $1,806,638 and $1,770,345 for the years ended December 31, 1996 and 1995. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amount included for the equity in joint venture income for Decatur TownCenter II for the year ended December 31, 1995, and for Columbia Gateway Corporate Park and 270 Technology Center for the years ended December 31, 1996 and 1995, and for the operating income and equity in joint venture income for Reflections, Metro Business Center and Palms Business Centers for the years ended December 31, 1996 and 1995 is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by the Managing General Partner, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors for the years ended December 31, 1997, 1996 and 1995 provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP - ------------------------------ Boston, Massachusetts March 24, 1998
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP
BALANCE SHEETS
(See accompanying notes to financial statements)
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(See accompanying notes to financial statements)
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
NON-CASH TRANSACTIONS: Effective January 1, 1995, the Partnership's joint venture investment in Palms Business Center was converted to a wholly-owned property. The carrying value of this investment at conversion was $12,519,961. Effective April 1, 1996, the Partnership's joint venture investment in Reflections Apartments was converted to a wholly-owned property. The carrying value of this investment at conversion was $10,469,511. Effective July 1, 1996, the Partnership's joint venture investment in Metro Business Center was converted to a wholly-owned property. The carrying value of this investment at conversion was $5,889,261.
(See accompanying notes to financial statements)
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(See accompanying notes to financial statements)
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and Business - ----------------------------------
General -------
New England Life Pension Properties IV; A Real Estate Limited Partnership (the "Partnership") is a Massachusetts limited partnership organized for the purpose of investing primarily in newly constructed and existing income producing real properties. It primarily serves as an investment for qualified pension and profit sharing plans and other organizations intended to be exempt from federal income tax. The Partnership commenced operations in May, 1986 and acquired the four real estate investments it currently owns prior to the end of 1987. It intends to dispose of its investments within twelve years of their acquisition, and then liquidate; however, the Managing General Partner could extend the investment period if it is considered to be in the best interest of the limited partners.
The Managing General Partner of the Partnership is Fourth Copley Corp., a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly known as Copley Real Estate Advisors, Inc. ("Copley"). The associate general partner is CCOP Associates Limited Partnership, a Massachusetts limited partnership. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by AEW pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment Companies, Limited Partnership ("NEIC"), a publicly traded master limited partnership, acquired certain assets subject to then existing liabilities from Aldrich Eastman & Waltch, Inc. and its affiliates and principals (collectively, "the AEW operations"). Simultaneously, a new entity, AEW Capital Management, L.P., was formed into which NEIC contributed its interest in Copley and its affiliates. As a result, the AEW operations were combined with Copley to form the business operations of AEW Capital Management, L.P. This transaction is not expected to have a material effect on the operations of the Partnership. At the end of 1997, NEIC completed a restructuring plan under which it contributed all of its operations to a newly formed private partnership, NEIC Operating Partnership, L.P., in exchange for a general partnership interest in the newly formed entity. As such, at December 31, 1997, AEW Capital Management, L.P. is wholly owned by NEIC Operating Partnership, L.P.. AEW is a subsidiary of AEW Capital Management, L.P..
Prior to August 30, 1996, New England Mutual Life Insurance Company ("The New England") was NEIC's principal unit holder and owner of all of the outstanding stock of NEIC's general partner. On August 30, 1996, The New England merged with and into Metropolitan Life Insurance Company ("Met Life"). Met Life is the surviving entity and, therefore, through a wholly-owned subsidiary, became the owner of the units of partnership interest previously owned by The New England and of the stock of NEIC's general partner.
At December 31, 1997 and 1996, an affiliate of the Managing General Partner owned 1,648 and 1,613 units of limited partnership interest, respectively, which were repurchased from certain qualified plans, within specified annual limitations provided for in the Partnership Agreement.
Management ----------
AEW, as advisor, is entitled to receive stipulated fees from the Partnership in consideration of services performed in connection with the management of the Partnership and the acquisition and disposition of Partnership investments in real property. Partnership management fees are 9% of distributable cash flow from operations, as defined, before deducting such fees. Payment of 50% of management fees incurred is deferred until cash distributions to limited partners exceed a specified rate. Cash distributions for the first quarter of 1995 exceeded the stipulated minimum, which resulted in a payment to AEW of previously deferred management fees totaling $175,374. Deferred management fees were $2,511,107 and $2,334,875 at December 31, 1997 and 1996, respectively. AEW is also
reimbursed for expenses incurred in connection with administering the Partnership ($15,000 in 1997, $15,146 in 1996 and $13,874 in 1995). Acquisition fees paid were based on 2% of the gross proceeds from the offering. Disposition fees are limited to the lesser of 3% of the selling price of the property, or 50% of the standard real estate commission customarily charged by an independent real estate broker. Payments of disposition fees are subject to the prior receipt by the limited partners of their capital contributions plus a stipulated return thereon. Deferred disposition fees were $1,694,879 and $998,879 at December 31, 1997 and 1996, respectively.
New England Securities Corporation, an indirect subsidiary of Met Life, is engaged by the Partnership to act as its unit holder servicing agent. Fees and out-of-pocket expenses for such services totaled $25,155, $24,040, and $21,543 in 1997, 1996 and 1995, respectively.
Note 2 - Summary of Significant Accounting Policies - ---------------------------------------------------
Accounting Estimates --------------------
The preparation of financial statements in conformity with generally accepted accounting principles requires the Managing General Partner to make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. In the Partnership's business, certain estimates require an assessment of factors not within management's control, such as the ability of tenants to perform under long-term leases and the ability of the properties to sustain their occupancies in changing markets. Actual results, therefore, could differ from those estimates.
Real Estate Joint Ventures --------------------------
Investments in joint ventures, including loans made to venture partners, which are in substance real estate investments, are stated at cost plus (minus) equity in undistributed joint venture income (losses). Allocations of joint venture income (losses) were made to the Partnership's venture partners as long as they had substantial economic equity in the project. Currently, the Partnership records an amount equal to 100% of the operating results of each joint venture, after the elimination of all inter-entity transactions, except for the one venture jointly owned by an affiliate of the Partnership, which has substantial economic equity in the project. Joint ventures are consolidated with the accounts of the Partnership if, and when, the venture partner no longer shares in the control of the business.
Property --------
Property includes land and buildings and improvements, which are stated at cost less accumulated depreciation, plus other operating net assets (liabilities). The Partnership's initial carrying value of a property previously owned by a joint venture equals the Partnership's carrying value of the predecessor investment on the conversion date.
Capitalized Costs, Depreciation and Amortization ------------------------------------------------
Maintenance and repair costs are expensed as incurred. Significant improvements and renewals are capitalized. Depreciation is computed using the straight-line method based on estimated useful lives of the buildings and improvements. Leasing costs are also capitalized and amortized over the related lease terms.
Acquisition fees have been capitalized as part of the cost of real estate investments. Amounts not related to land are being amortized using the straight-line method over the estimated useful lives of the underlying property.
Certain tenant leases provide for rental increases over the respective lease terms. Rental revenue is being recognized on a straight-line basis over the lease terms.
Realizability of Real Estate Investments ----------------------------------------
The Partnership considers a real estate investment to be impaired when it determines the carrying value of the investment is not recoverable through expected undiscounted cash flows generated from the operations and disposal of the property. The impairment loss is based on the excess of the investment's carrying value over its estimated fair market value. For investments held for sale, the impairment loss also includes estimated costs of sale. Property held for sale is not depreciated during the holding period.
The carrying value of an investment may be more or less than its current appraised value. At December 31, 1997 and 1996, the appraised values of certain investments exceeded the related carrying values by an aggregate of $5,500,000 and $10,000,000, respectively; and the appraised values of the remaining investments were less than the related carrying values by an aggregate of $1,200,000 at December 31, 1996. At December 31, 1997, no appraised values were less than the related carrying values.
The current appraised value of real estate investments has been estimated by the Managing General Partner and is generally based on a combination of traditional appraisal approaches performed by AEW and independent appraisers. Because of the subjectivity inherent in the valuation process, the estimated current appraised value may differ significantly from that which could be realized if the real estate were actually offered for sale in the marketplace.
Cash Equivalents and Short-Term Investments - -------------------------------------------
Cash equivalents are stated at cost, plus accrued interest. The Partnership considers all highly liquid debt instruments purchased with a maturity of ninety days or less to be cash equivalents; otherwise, they are classified as short- term investments.
The Partnership has the positive intent and ability to hold all short-term investments to maturity; therefore, short-term investments are carried at cost plus accrued interest, which approximates market value. At December 31, 1997 and 1996 all investments were in commercial paper with less than seven months and three months, respectively, remaining to maturity.
Deferred Disposition Fees -------------------------
Disposition fees due to AEW related to sales of investments are included in the determination of gains or losses resulting from such transactions. According to the terms of the advisory contract, payment of such fees has been deferred until the limited partners first receive their capital contributions, plus stipulated returns thereon.
Income Taxes ------------
A partnership is not liable for income taxes and, therefore, no provision for income taxes is made in the financial statements of the Partnership. A proportionate share of the Partnership's income is reportable on each partner's tax return.
Per Unit Computations ---------------------
Per unit computations are based on the number of units of limited partnership interest outstanding during the year. The actual per unit amount will vary by partner depending on the date of admission to, or withdrawal from, the Partnership.
Effective January 1, 1998, the Partnership adopted FAS 128 "Earnings per Share," which simplifies the standards of reporting earnings per share (EPS) previously found in APB No. 15. It provides guidance on the computation and disclosure of basic and diluted EPS and requires restatement of prior periods for comparative purposes. The adoption of FAS 128 did not have a material impact on the Partnership's financial statements
Note 3 - Real Estate Joint Ventures - -----------------------------------
The Partnership had invested in seven real estate joint ventures, organized as general partnerships with a real estate management/development firm, and in one case, with an affiliate of the Partnership. One joint venture sold its property in 1994; another sold its property 1996. One joint venture investment was restructured into a wholly-owned property in 1995; and two joint venture investments were restructured into wholly-owned properties in 1996. The Partnership made capital contributions to the ventures, which are generally subject to preferential cash distributions at a specified rate and to priority distributions with respect to sale or refinancing proceeds. The Partnership also made loans to certain of its venture partners who, in turn, contributed the proceeds to the capital of the venture. The loans bear interest at a specified rate. The loans are in substance real estate investments and are accounted for accordingly. The joint venture agreements provide for the funding of cash flow deficits by the venture partners in proportion to their ownership interests, and for the dilution of their ownership share in the event a venture partner does not contribute proportionately.
The respective real estate management/development firms are responsible for day-to-day development and operating activities, although overall authority and responsibility for the business is shared by the venturers. The real estate development/management firms or their affiliates also provide various services to the respective joint ventures for a fee.
The following is a summary of cash invested in joint ventures, net of returns of capital and excluding acquisition fees:
Columbia Gateway Corporate Park -------------------------------
On December 21, 1987, the Partnership entered into a joint venture with an affiliate of the Partnership and with an affiliate of the Manekin Corporation to construct and operate seven research and development/office buildings, of which six have been constructed to date. The Partnership committed to make a $14,598,000 capital contribution. The Partnership and its affiliate collectively have a 50% interest in the joint venture. Ownership of the Columbia Gateway Corporate Park joint venture has been restructured whereby the Partnership and its affiliate will obtain full control over the business of the joint venture effective January 1, 1998. The minimum future rentals due to the venture under non-cancelable operating leases are: $1,510,900 in 1998, $1,408,027 in 1999, $707,156 in 2000, $602,419 in 2001, and $475,580 in 2002.
270 Technology Center ---------------------
On December 22, 1987, the Partnership entered into a joint venture with an affiliate of the Manekin Corporation to construct and operate two research and development/office buildings. The Partnership committed to make a $5,150,000 capital contribution. The minimum future rentals due to the venture under non-cancelable operating leases are: $480,576 in 1998, $306,660 in 1999, $232,729 in 2000, $213,029 in 2001 and $34,411 in 2002.
Reflections -----------
On August 1, 1986, the Partnership entered into a joint venture with an affiliate of Oxford Development Corporation to construct and operate a multi- family apartment complex. The
Partnership's commitment is for a total cash investment of $14,475,000, $5,790,000 of which is a loan to the venture partner. In May 1992, the Partnership agreed to extend the maturity of the loan from August, 1996 to December, 1999 and the venture partner agreed to pay interest at a minimum of 7% per annum with the unpaid amount subject to compounding at 10.5% per annum. The loan is secured by the venture partner's interest in the joint venture, as well as a guarantee from an affiliate of the venture partner. In the second quarter of 1996, the joint venture agreement was amended, whereby the Partnership's venture partner became an indirect limited partner. Accordingly, this investment has been accounted for as a wholly-owned property since April 1, 1996. (See Note 4.)
In connection with the ownership restructuring, the Partnership agreed to release the affiliate of the venture partner from its guarantee upon payment to the Partnership of $650,000. The Partnership received $250,000 at the time the agreement was executed. During the third quarter of 1996, the Partnership received an additional $263,563. The first payment was accounted for as a reduction of previously accrued investment income. The second payment was accounted for as a reduction of the Partnership's investment in the property.
Metro Business Center ---------------------
On September 15, 1986, the Partnership entered into a joint venture with an affiliate of Hewson Properties, Inc. (The "Developer"), to construct and operate four multi-tenant office/warehouse buildings. The Partnership committed to make a maximum cash investment of $9,568,000, $3,988,000 of which is a loan to the venture partner. The loan was to mature in October 1996 and was secured by the venture partner's interest in the joint venture. Effective January 1, 1996, the joint venture agreement was amended to grant the Partnership full control over management decisions, beginning July 1, 1996. As full control over the operation of this investment was not transferred until July 1, 1996, the Partnership accounted for this investment as a joint venture until that date.
Effective December 30, 1996, the property owned by the joint venture was distributed to the venture partners as tenants-in-common. The Partnership, however, retained its overall decision-making authority. The property interest distributed to the Hewson affiliate is encumbered by the aforementioned loan to the Hewson affiliate. The note was amended to mature on February 1, 1997 and is secured by a recorded deed-of-trust which provides that the note is due upon the sale of the collateral. The note was subsequently amended to mature on March 31, 1998. In connection with this transaction, the Partnership obtained the option to purchase the tenancy-in-common interest of the Hewson affiliate at its fair market value beginning February 1, 1997.
On February 28, 1998, the Partnership executed a purchase and sale agreement to purchase the tenancy-in-common interest of the Developer. The partnership expects to close on the sale on May 29, 1998. The purchase price is $6,927,000 and shall be payable by the Partnership as follows: (i) A portion of the purchase price will be paid with all outstanding amounts, including but not limited to accrued but unpaid interest, owed by the Developer to the Partnership under the aforementioned loan. (ii) The Partnership shall pay the remainder of the purchase price in excess of the outstanding loan amounts. The Partnership expects this amount to be nominal at the time of the closing.
Sale of Decatur TownCenter II -----------------------------
On December 31, 1987, the Partnership entered into a joint venture with an affiliate of Pope & Land Enterprises to construct and operate an office building. The Partnership contributed a total of $10,985,575 to the venture. On October 10, 1996, the joint venture sold its property for a total sales price of $9,540,860. In conjunction with this sale, the joint venture was also dissolved. After closing costs, the Partnership received proceeds of $9,333,325 and recognized a gain on the sale of $1,055,591 ($11 per limited partnership unit.) A disposition fee of $286,226 was accrued but not paid to AEW. A capital distribution to the limited partners was made on October 24, 1996 in the aggregate amount of $9,214,709 ($97 per limited partnership unit).
Sale of Rancho Cucamonga ------------------------
On September 4, 1986, the Partnership entered into a joint venture with an affiliate of Vance Charles Mape III to construct and operate a warehouse facility in Rancho Cucamonga, California. The Partnership made a contribution of $5,273,545. On December 30, 1994, the joint venture sold the property for a total sales price of $5,472,000. After closing costs, the Partnership received proceeds of $5,261,275 and recognized a gain on the sale of $399,865 ($4.17 per limited partnership unit). A disposition fee of $164,160 was accrued but not paid to AEW. A capital distribution to the limited partners was made on January 26, 1996 in the aggregate amount of $5,224,835 ($55.00 per limited partnership unit).
Summarized Financial Information - --------------------------------
The following summarized financial information is presented in the aggregate for the joint ventures:
Assets and Liabilities ----------------------
Results of Operations ---------------------
Liabilities and expenses exclude amounts owed and attributable to the Partnership and (with respect to one joint venture) its affiliate on behalf of their various financing arrangements with the joint ventures.
The Decatur TownCenter II investment was sold on October 10, 1996. The Reflections and Metro Business Center investments were converted to wholly-owned properties on April 1, 1996 and July 1, 1996, respectively. The above amounts include results of operations through those dates.
Note 4 - Property - -----------------
Palms Business Center ---------------------
Effective January 1, 1995, the Palms Business Center joint venture was restructured, giving the Partnership control over management decisions. Since that date, the investment was accounted for as a wholly-owned property. The carrying value of the joint venture investment at conversion ($12,519,961) was allocated to land, building and improvements, amount payable to venture partner and other net operating liabilities. The venture partner received 40% of the excess cash flow above a specified level until the initial obligation of $360,000 was repaid in full. The obligation was paid in full as of the date of sale (see discussion below).
The buildings and improvements (fifteen office/industrial buildings in Las Vegas, Nevada) were being depreciated over 25 years, beginning January 1, 1995.
The Palms Business Center was sold on October 24, 1997 to an institutional buyer, which is unaffiliated with the Partnership for $23,200,000. The Partnership received net proceeds of $22,983,007, after closing costs and payoff of the remaining initial obligation due to the venture partner, and recognized a gain of $10,482,458 ($109.24 per limited partnership unit). A disposition fee of $696,000 was accrued but not paid to AEW. On November 25, 1997, the partnership made a distribution to the limited partners in the aggregate amount of $22,989,274 ($242 per limited partnership unit) with proceeds from this sale and partially from reserves established from the proceeds of previous sales.
Reflections -----------
Effective April 1, 1996, the Reflections joint venture was restructured, whereby the Partnership's venture partner became an indirect limited partner. Accordingly, the investment has been accounted for as a wholly-owned property since that date. The carrying value of the joint venture investment at conversion ($10,469,511) was allocated to land, building and improvements and other net operating assets.
The buildings and improvements (a multi-family apartment complex in Fort Meyers, Florida) are being depreciated over 25 years, beginning April 1, 1996.
Metro Business Center ---------------------
Effective July 1, 1996, the Partnership obtained control over all management decisions related to the properties owned by the Metro Business Center joint venture (and subsequently by the tenants-in common). (See Note 3.) Since that date, the investment has been accounted for as a wholly-owned property. The carrying value of the joint venture investment at conversion ($5,889.261) was allocated to land, buildings and improvements, and other net operating assets.
The buildings and improvements (four office/warehouse buildings in Phoenix, Arizona) are being depreciated over 25 years, beginning July 1, 1996.
The following is a summary of the Partnership's investment in properties (two in 1997 and three in 1996):
Assets and Liabilities ----------------------
Tenant leases provide for minimum rents, subject to periodic adjustments. Tenants are also generally obligated to reimburse their pro-rata share of operating expenses. The minimum rents due under non-cancelable operating leases at the Partnership's remaining properties are as follows: $730,000 in 1998; $488,000 in 1999; $283,000 in 2000; $138,000 in 2001, and $38,000 in 2002.
Note 5 - Income Taxes - ---------------------
The Partnership's income for federal income tax purposes differs from that reported in the accompanying statement of operations as follows:
Note 6 - Partners' Capital - --------------------------
Allocation of net income (losses) from operations and distributions of distributable cash from operations, as defined, are in the ratio of 99% to the limited partners and 1% to the general partners. Cash distributions are made quarterly.
Net sale proceeds and financing proceeds are allocated first to limited partners to the extent of their contributed capital plus a stipulated return thereon, as defined, second to pay disposition fees, and then 85% to the limited partners and 15% to the general partners. As a result of returns of capital from sales transactions, the adjusted capital contribution per limited partnership unit was reduced from $1,000 to $918 in 1993, to $863 in 1995, to $766 in 1996 and to $524 in 1997. No capital distributions have been made to the general partners. Income from a sale is allocated in proportion to the distribution of related proceeds, provided that the general partners are allocated at least 1%. Income or losses from a sale, if there are no residual proceeds after the repayment of the related debt, will be allocated 99% to the limited partners and 1% to the general partners.
Note 7 - Subsequent Event - -------------------------
Distributions of cash from operations relating to the quarter ended December 31, 1997 were made on January 29, 1998 in the aggregate amount of $806,035 ($8.40 per limited partnership unit).
NEW ENGLAND PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION Schedule III
AT DECEMBER 31, 1997
NEW ENGLAND PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION - WHOLLY OWNED PROPERTY SCHEDULE III NOTE A AT DECEMBER 31, 1997
``
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP SCHEDULE III NOTE B REAL ESTATE AND ACCUMULATED DEPRECIATION-JOINT VENTURES AT DECEMBER 31, 1997
FINANCIAL STATEMENTS INDEX NO. 2
AUDITOR'S REPORT AND FINANCIAL STATEMENTS
OF GATEWAY 51 PARTNERSHIP
Independent Auditor's Report of Wolpoff and Company, LLP
Balance Sheet - December 31, 1997 and 1996
Statement of Income - For the Years ended December 31, 1997, 1996 and 1995
Statement of Partners' Capital - For the Years ended December 31, 1997, 1996 and 1995
Statement of Cash Flows - For the Years ended December 31, 1997, 1996 and
Notes to Financial Statements
GATEWAY 51 PARTNERSHIP (A MARYLAND GENERAL PARTNERSHIP)
FINANCIAL REPORT
DECEMBER 31,1997
GATEWAY 51 PARTNERSHIP ----------------------
(A MARYLAND GENERAL PARTNERSHIP) ------------------------------
CONTENTS --------
DECEMBER 31, 1997 -----------------
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS 1
FINANCIAL STATEMENTS
Balance Sheet 2-3
Statement of Income 4
Statement of Partners' Capital 5
Statement of Cash Flows 6
Notes to Financial Statements 7-10
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION 11
SUPPLEMENTARY INFORMATION
Schedule of Partners' Capital 12
Schedule of Changes in Partners' Capital - Income Tax Basis 13
[WOLPOFF & COMPANY, LLP LOGO APPEARS HERE]
To the Partners Gateway 51 Partnership (A Maryland General Partnership) Columbia, Maryland
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS ----------------------------------------------------
We have audited the balance sheet of Gateway 51 Partnership (A Maryland General Partnership) as of December 31,1997 and 1996, and the related statements of income, partners' capital, and cash flows for each of the three years in the period ended December 31,1997,1996, and 1995. These financial statements are the responsibility of the Partnership's management Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gateway 51 Partnership (A Maryland General Partnership) as of December 31,1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1997, 1996, and 1995, in conformity with generally accepted accounting principles.
/s/ Wolpoff & Company, LLP
WOLPOFF & COMPANY, LLP
Baltimore, Maryland January 12,1998
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
200 SAINT PAUL PLACE . SUITE 2300 . BALTIMORE, MARYLAND 21202 . (410) 837-3770 . FAX (410) 752-2369
P.O. BOX 470 . 1301 WEST WASHINGTON STREET . HAGERSTOWN, MARYLAND 21741 (301) 733-7200 . FAX (301) 797-3153 - --------------------------------------------------------------------------------
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) ------------------------------
BALANCE SHEET -------------
ASSETS ------
- ---------------- The notes to financial statements are an integral part of this statement.
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) ------------------------------
BALANCE SHEET -------------
LIABILITIES AND PARTNERS' CAPITAL ---------------------------------
- ---------------- The notes to financial statements are an integral part of this statement.
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) ------------------------------
STATEMENT OF INCOME -------------------
- ----------- The notes to financial statements are an integral part of this statement.
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) ------------------------------
STATEMENT OF PARTNERS' CAPITAL ------------------------------
- ------------- The notes to financial statements are an integral part of this statement.
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) ------------------------------
STATEMENT OF CASH FLOWS -----------------------
- ----------- The notes to financial statements are an integral part of this statement.
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GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) -------------------------------
NOTES TO FINANCIAL STATEMENTS -----------------------------
DECEMBER 31, 1997 -----------------
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization ------------ Gateway 51 Partnership (A Maryland General Partnership) (the Partnership) was formed on December 21, 1987, under the Maryland Uniform Partnership Act. The agreement was amended and restated in 1989 to reflect changes in partner ownership percentages.
Property --------
The Partnership owns 21 acres of land in Howard County, Maryland. The property has been developed with six office/research buildings, with two placed into service in August 1994. Plans call for a seventh building with approximately 15,000 square feet of space.
In 1996, the Partnership adopted Statement of Financial Accounting Standards (SFAS) NO. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No.121 requires that real estate assets be evaluated for impairment if impairment indicators are present. An impairment writedown to fair value would occur only if the estimated undiscounted cash flows from the asset were less than the carrying amount of the asset. At December 31, 1997, the Partnership does not hold any assets that meet the impairment criteria of SFAS No.121.
All property is recorded at cost. Information regarding the buildings is as follows:
Carrying costs, operating expenses, and depreciation begin as a charge against operations on the date the buildings were placed into service.
During 1997, tenant improvements completed in prior years were demolished in order to build out the space for new tenants. The loss on abandonment of tenant improvements is calculated as follows:
Acquired Value $ 127,688 Accumulated Depreciation (47,510) -------- Abandonment of Tenant Improvements $ 80,178 ========
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) -------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED -----------------------------------------
DECEMBER 31, 1997 -----------------
Note 1 - Use of Estimates ---------------- (Cont.) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.
Cash and Cash Equivalents ------------------------- The Partnership considers all highly liquid debt instruments purchased with a maturity of 3 months or less to be cash equivalents.
The majority of the Partnership's cash is held in financial institutions with insurance provided by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Periodically during the year, the balance may have exceeded the FDIC insurance limitation.
Depreciation ------------ Building costs and tenant improvements are being depreciated using the straight-line method over the estimated useful lives of 50 years.
Rental Income ------------- Rental income for major leases is being recognized on a straight-line basis over the terms of the leases. The excess of the rental income recognized over the amount stipulated in the lease is shown as deferred rent receivable.
Amortization ------------ Deferred costs are amortized as follows:
Amortization Amount Period -------- ------------ Organization Costs $ 13,555 Complete Leasing Costs and Commissions 650,164 Lease Terms --------
$663,719 ========
Income Taxes ------------ Partnerships, as such, are not subject to income taxes. The partners are required to report their respective shares of partnership income and other tax items on their income tax returns (see Note 5).
Capital Placement Fee --------------------- Costs incurred for arranging the Partnership's equity have been treated as a reduction of partners' capital (see Note 2).
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) -------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED -----------------------------------------
DECEMBER 31, 1997 -----------------
Note 2 - PARTNERS' CAPITAL
Capital Investment ------------------ New England Life Pension Properties IV (NELPP IV) and New England Pension Properties V (NEPP V) have agreed to provide equity of $14,598,000 and $6,402,000, respectively, totaling $21,000,000. As of December 31, 1997,1996, and 1995, total capital contributions amounted to $20,267,826.
Cumulative Priority Return -------------------------- NELPP IV and NEPP V are entitled to cumulative priority returns of 10.5%, compounded monthly on capital invested. The Partnership paid priority returns totaling $747,831, $1,100,000, and $1,200,000 during 1997,1996, and 1995, respectively. As of December 31,1997, 1996, and 1995, unpaid priority returns amounted to $9,127,936, $6,888,115, and $5,427,949, respectively.
Capital Placement Fee --------------------- The Partnership incurred fees of $202,678 with Paine Webber Mortgage Finance, Inc. with respect to capital raised by the Partnership. This amount has been charged against partners' capital.
Note 3 - TENANT IMPROVEMENT LOAN RECEIVABLE
The Partnership had made several tenant improvement loans to tenants. The remaining loan required monthly principal and interest payments, with the final payment in 1997. Pertinent terms were as follows:
Original Balance Due Loan Interest ------------------ Tenant Amount Rate Due Date 12/31/97 12/31/96 - -------------- -------- -------- -------- -------- --------
Pediatric Care $16,580 12.00% 3/31/97 $ -0- $ 688
Note 4 - RELATED PARTY TRANSACTIONS
Management Fees --------------- The Partnership has entered into an agreement with Manekin Corporation, a related entity, to act as management agent for the property. The management agreement provides for a management fee equal to 3% of rent and tenant expense billings.
Leasing Commissions ------------------- Leasing commissions in the amount of $105,387, $80,786, and $74,448 were paid to related parties during 1997,1996, and 1995, respectively.
GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) ------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED -----------------------------------------
DECEMBER 31,1997 ----------------
Note 5 - TAX ACCOUNTING
Tax accounting differs from financial accounting as follows:
Note 6 - LEASES
The following is a schedule of future minimum lease payments to be received under noncancelable operating leases at December 31,1997:
To the Partners Gateway 51 Partnership (A Maryland General Partnership) Columbia, Maryland
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION ---------------------------------------------------------
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information contained on pages 12 and 13 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audits of the basic financial statements, and accordingly, we express no opinion on it.
/s/ Wolpoff & Company, LLP
WOLPOFF & COMPANY, LLP
Baltimore, Maryland January 12, 1998
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GATEWAY 51 PARTNERSHIP ---------------------- (A MARYLAND GENERAL PARTNERSHIP) ------------------------------
SCHEDULE OF PARTNERS' CAPITAL -----------------------------
DECEMBER 31, 1997 -----------------
- ------------- See Independent Auditor's Report on Supplementary Information.
GATEWAY 51 PARTNERSHIP (A MARYLAND GENERAL PARTNERSHIP) -------------------------------
SCHEDULE OF CHANGES IN PARTNERS' CAPITAL - INCOME TAX BASIS ------------------------------------------------------------
DECEMBER 31, 1997 -----------------
- ---------
See Independent Auditor's Report on Supplementary Information.
EXHIBIT INDEX -------------
EXHIBIT INDEX -------------
EXHIBIT INDEX -------------
EXHIBIT INDEX -------------
- ---------------------- * Previously filed and incorporated herein by reference
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.
NEW ENGLAND LIFE PENSION PROPERTIES IV; A REAL ESTATE LIMITED PARTNERSHIP
Date: March 30, 1998 By: /s/ Wesley M. Gardiner, Jr. --------------------------- Wesley M. Gardiner, Jr. President of the Managing General Partner
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/ Wesley M. Gardiner, Jr. President, Chief March 30, 1998 - ----------------------------- Executive Officer and Wesley M. Gardiner, Jr. Director
/s/ Pamela J. Herbst Vice President and March 30, 1998 - ----------------------------- Director Pamela J. Herbst
/s/ J. Grant Monahon Vice President and March 30, 1998 - ----------------------------- Director J. Grant Monahon
/s/ James J. Finnegan Vice President March 30, 1998 - ----------------------------- James J. Finnegan
/s/ Karin J. Lagerlund Treasurer and Principal March 30, 1998 - ----------------------------- Financial and Accounting Karin J. Lagerlund Officer