Item 1. Business
Rancon Income Fund I, a California Limited Partnership, ("the Partnership") was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income producing commercial, industrial and residential real estate properties. The general partner of the Partnership is Rancon Income Partners I ("General Partner"). The Partnership was organized in 1986, completed its public offering of partnership units ("Units") in April 1989 and has 14,555 Units issued and outstanding. The Partnership has no employees.
At December 31, 1997, the Partnership owned three properties, which are more fully described in Item 2.
Item 2. Properties
The Partnership currently owns the properties listed below:
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Wakefield Industrial Center
In April 1987, the Partnership acquired the Wakefield facility, at a cost of approximately $1,899,000 in addition to acquisition fees of $87,000. Wakefield consists of two buildings on three adjacent parcels of land comprising an aggregate of approximately 3.99 acres. The property is located in Temecula, California, on the west side of Jefferson Avenue, approximately 500 feet west of the Interstate 15 highway in an area that is zoned for "medium manufacturing".
Both buildings are of concrete tilt-up construction with central heating and air conditioning systems in the office areas. The first building located on one parcel, contains approximately 25,000 square feet of leasable space, of which approximately 5,900 square feet is office space with the balance used for manufacturing and related purposes. The second building, located on the second parcel, contains approximately 19,200 square feet of leasable space of which approximately 4,800 square feet is office space with the balance used for warehousing and related purposes. Both lots contain uncovered parking for a total of approximately 54 cars. The third parcel is unimproved except for partial paving. It is used for car parking and truck access.
According to research conducted by the Partnership's property manager, the market has approximately 7,120,000 square feet of existing industrial space, with an overall vacancy rate of 5%. The area offers a wide range of high quality, attractive industrial projects ranging from multi-tenant incubator space to large, single-user distribution facilities located in master-planned business parks. Of the 7,120,000 square feet, approximately 96,000 square feet of multi-tenant and free standing industrial space compete directly with the Wakefield Industrial Center. The average annual effective rents for the area approximate $3.60 per foot NNN (tenant pays all operating expenses, including taxes, insurance, and capital) depending on age, location and size of the property. Land prices for finished industrial lots range from $2.00 to $4.00 per square foot depending on zoning, size, location and amenities.
The occupancy level at December 31, 1997 and 1996 and November 30, 1995, 1994 and 1993, expressed as a percentage of the total net rentable square feet, and the average annual effective rent per square foot for the last five years were:
Occupancy Level Average Annual Effective Percentage Rent Per Square Foot 1997 100% $ 4.14 1996 100% $ 4.04 1995 100% $ 3.96 1994 100% $ 5.48 1993 100% $ 4.77
One tenant occupies 100% of the net rentable square footage of the two buildings. Principal terms of the lease and the nature of the tenant's business are as follows:
Wakefield Engineering, Inc. Nature of Business: Manufacturer Lease Term: 10 years Expiration Date: November 30, 2004 Square Feet: 44,200 (% of rentable total): 100% Annual Rent: $183,000 Rent Increase: Annual - CPI Renewal Options: None
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In 1996, due to projected cash flow analyses, management determined that the carrying value of Wakefield Industrial Center was in excess of the estimated fair value. As a result, in 1996, the Partnership recorded a provision for impairment of its investment in Wakefield Industrial Center of $175,000.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Wakefield Industrial Center property is unencumbered.
During 1997, the property was assessed property taxes of approximately $23,000 based on a tax rate of 1.27%.
Bristol Medical Center
In October 1987, the Partnership entered into an agreement with Rancon Financial Corporation ("RFC") to acquire Bristol Medical Center, for a total purchase price of $5,105,000, plus all costs incurred by RFC in ownership and management of the property from December 1986. The purchase price was paid in installments through May 1988, so that the Partnership was entitled to receive a percentage of the net operating income of the property exclusive of depreciation expense. The Partnership completed the purchase of the Bristol Medical Center in May 1988 for a total cost of $5,370,000.
Bristol Medical Center consists of two two-story medical office buildings and related parking on approximately 3.42 acres. The two office buildings together contain an aggregate of approximately 52,311 net rentable square feet of office space. Each of the buildings has one elevator and three stairways, and each suite is served by its own roof-mounted heating and air conditioning unit. The property contains uncovered parking for approximately 299 cars.
Bristol Medical Center is located in Santa Ana, California, on the west side of Bristol Street, approximately 1.5 miles from a major east-west freeway and approximately 2 miles from a major north-south freeway. The John Wayne Orange County airport is located 2.5 miles northwest of the property.
The medical office market in which the property is located consists of approximately 189,847 rentable square feet in five projects, all of which are older Class "B" Buildings. The sub-market, consisting of smaller buildings, often houses converted to dental/medical offices and retail sites, is being condemned or purchased by the City of Santa Ana to widen Bristol Street. The project includes new retail buildings built on the reconfigured lots and a landscaped median, which should enhance the area considerably.
According to research conducted by the Partnership's property manager, net absorption in this area has been on a downward trend since 1992 when changes in the business environment for the medical industry pushed vacancy rates up. Total vacancy in this market was 15.67% for 1997, an increase of 1.07% from 1996. The annual rental rates for the area approximates $15.00 per square foot for modified gross (tenant pays utilities and interior janitorial costs) and $16.80 per square foot for full service gross (tenant pays interior janitorial costs).
The occupancy level at December 31, 1997 and 1996 and November 30, 1995, 1994 and 1993, expressed as a percentage of the total net rentable square feet, and the average annual effective rent per square foot for the last five years were as follows:
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Occupancy Level Average Annual Effective Percentage Rent Per Square Foot 1997 83% $ 19.00 1996 85% $ 18.89 1995 91% $ 18.76 1994 93% $ 18.91 1993 98% $ 18.82
The current annual rental rates range from $16.68 to $25.29 per square foot.
The current annual rental rates at Bristol Medical Center are higher than the market average as the leases in effect are old and were signed at a time when such rates were market rates. However, the vacancy rate at Bristol Medical Center remained at approximately 20% during 1997. The main obstacle in leasing space at Bristol Medical Center is the current state of the medical industry in Santa Ana, California. It appears that independent physicians not participating in a managed care group are going bankrupt and, as a result, no new doctors have leased space in the area in the last three years.
One tenant occupies more than ten percent of the net rentable square footage of the building. The principal terms of the lease and the nature of the tenant's business are as follows:
St. Jude Heritage Health --------------- Nature of Business: Medical clinic Lease Term: 1 year Expiration Date: September 30, 1998 Square Feet: 24,957 (% of rentable total): 48% Annual Rent: $470,500 Rent Increase: Annual - CPI Renewal Options: None
St. Jude Heritage Health has a one year contract to manage a neighboring hospital. Since the renewal of the St. Jude Heritage Health lease upon expiration is dependent upon their ability to renew their contract with the hospital, they do not commit to lease renewals with the Partnership in advance. In September 1997, management successfully executed a one year lease renew with St. Jude Heritage Health. Management believes, however, that the tenant will renew for another year in September 1998 as relations with the hospital and St. Jude Heritage Health appear positive.
In 1996, due to an increase in vacancy, the difficulty in leasing vacant space and projected cash flow analyses, management determined that the carrying value of the Bristol Medical Center was in excess of the estimated fair value. As a result, in 1996, the Partnership recorded a provision for impairment of its investment in Bristol Medical Center of $1,470,000.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Bristol Medical Center property is unencumbered.
During 1997, the property was assessed property taxes of approximately $59,000 based on a tax rate of 1.08%.
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Aztec Village Shopping Center
In May 1988, the Partnership entered into an agreement with RFC to acquire the Aztec Village Shopping Center located in San Diego, California for $3,350,000, plus all costs incurred by RFC in ownership and management of the property from May 1988. The purchase price was paid in installments through February 1989, so that the Partnership was entitled to receive a percentage of the net operating income of the property exclusive of depreciation expense. The Partnership completed the purchase of the Aztec Village Shopping Center in February 1989 for a total cost of $3,357,000. Management does not expect much growth or appreciation for the shopping center and as such is currently marketing the property for sale. This rental property is classified as property held for sale on the Partnership's 1997 and 1996 balance sheets.
Aztec Village Shopping Center contains approximately 23,789 square feet of leasable space on approximately 1.52 acres. The shopping center is a single story structure constructed with a wood frame and concrete block walls with metal stud interior portioning and stucco and wood siding on the exterior. The shopping center parking lot contains parking for approximately 105 cars.
Aztec Village Shopping Center is located in east San Diego situated approximately five miles east of downtown, and is situated at the convergence of Route 8 Inland Freeway and Interstate 15. All freeways are readily accessible within ten minutes of driving. The property is on the south side of El Cajon Boulevard, which is a primary business street.
The trade area surrounding the Aztec Village Shopping Center is considered East San Diego and the western portions of La Mesa. According to research conducted by the Partnership's property manager, there are approximately 446,000 square feet of retail space along El Cajon Boulevard from College Avenue to 70th Street within the neighborhood area, with a combined vacancy rate of 11%, a decrease of 2% over 1996. The commercial sector consists of nine strip retail shopping centers and two supermarket anchored centers. Annual rental rates range from $9.00 to $13.20 per square foot NNN (tenant pays all operating expenses, including taxes, insurance, and capital) for the strip retail centers and $9.00 to $16.80 per square foot NNN for the anchored centers depending upon size, location, condition, and amenities of the property.
The immediate area surrounding San Diego State University, commencing at College Avenue and Montezuma, is slated for major redevelopment. The redevelopment will consist of adding 150,000 square feet of commercial space and over 1,000 residential units. This project will offer considerable competition to the Aztec Village Shopping Center and, due to its proximity to the campus, will command higher rents and strong national tenant interest. As of December 31, 1997, the construction has been delayed.
The occupancy level at December 31, 1997 and 1996 and November 30, 1995, 1994 and 1993, expressed as a percentage of the total net rentable square feet, and the average annual effective rent per square foot for the last five years were:
Occupancy Level Average Annual Effective Percentage Rent Per Square Foot 1997 46% $ 10.56 1996 38% $ 10.46 1995 69% $ 10.62 1994 70% $ 7.80 1993 68% $ 13.83
At the end of 1995, two tenants occupying a total of 6,530 square feet vacated the premises due to their financial instability. Management has continued to market the space but has been unsuccessful due to the
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poor economic area in which the property is located. Management believes potential business is attracted to the competitors' products which offer either anchor tenants and/or closer proximity to San Diego State University.
The current annual rental rates range from $9.00 to $15.49 per square foot. In addition, one tenant rents storage space at an annual rental rate of $3.69 per square foot.
One tenant occupies more than ten percent of the net rentable square footage of the building. The principal terms of the lease and the nature of the tenant's business are as follows:
Music Trader, Inc. ------------------ Nature of Business: Music retailer Lease Term: 5 years Expiration Date: May 31, 2001 Square Feet: 2,649 (% of rentable total): 11% Annual Rent: $23,900 Rent Increase: Annual Fixed Renewal Options: None
In 1997 due to an increase in vacancy, the difficulty in leasing vacant space and projected cash flow analyses, management determined that the carrying value of the Aztec Village Shopping Center was in excess of the estimated fair value. As a result, in 1997, the Partnership recorded a provision for impairment of its investment in Aztec Village Shopping Center of $438,000.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Aztec Village Shopping Center property is unencumbered.
During 1997, the property was assessed property taxes of approximately $13,000 based on a tax rate of 0.96%.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Part II
Item 5.
Item 5. Market for Partnership's Common Equity and Related Stockholder Matters
Market Information - ------------------ There is no established trading market for the Units.
Holders - ------- As of December 31, 1997, a total of 1,409 persons (Limited Partners) held Units.
Distributions - ------------- Distributions are paid from either Cash From Operations or Cash From Sales or Financing.
Cash From Operations is defined in the Partnership Agreement as all cash receipts from operations in the ordinary course of business (except for the sale, refinancing, exchange or other disposition of real property in the ordinary course of business) after deducting payments disbursed for operating expenses. Distributions of Cash From Operations are generally allocated as follows: (i) first to the Limited Partners until they receive a noncumulative 6% return per annum on their unreturned capital contributions and (ii) the remainder, if any in a given year, shall be divided in the ratio of 90% to the Limited Partners and 10% to the General Partner.
Distributions equal to the amounts otherwise allocable to the General Partner but reallocated to the Limited Partners pursuant to (i) above shall be paid to the General Partner on the next occasion on which Cash From Operations is available for distributions to Limited Partners in an amount in excess of the amount required to provide the Limited Partners with a 6% per annum return on their unreturned capital contributions, in which case the excess shall be paid to the General Partner in an amount up to the aggregate amount previously re-allocated pursuant to (i) above and not subsequently repaid in accordance with the provisions of this paragraph.
Cash From Sales or Financing is defined in the Partnership Agreement as the net cash realized by the Partnership from the sale, disposition or refinancing of any property after retirement of applicable mortgage debt and all expenses related to the transaction, together with interest on any notes taken back by the Partnership upon the sale of a property. All distributions of Cash From Sales or Financing are allocated generally as follows (a more explicit statement of these distribution policies is set forth in the Partnership Agreement):
(i) First, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners have received an amount equal to their capital contributions; (ii) Second, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners have received a 6% return on their unreturned capital contributions (less prior distributions of Cash From Operations); (iii) Third, to the General Partner the amount of subordinated real estate commissions payable per the Partnership Agreement; (iv) Fourth, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners have received an additional 4% return on their unreturned capital contributions (less prior distributions of Cash From Operations); (v) Fifth, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners who purchased their Units prior to June 1, 1988, receive an additional return (depending on the date on which they purchased the Units) on their unreturned capital of either 8%, 5% or 2% (calculated through the first anniversary date of the purchase of the Units); (vi) Sixth, 98% to the General Partner and
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2% to the Limited Partners until the General Partner has received an amount equal to 15% of all prior distributions made to the Limited Partners and the General Partner pursuant to subparagraph (iv) and (v) (less prior distributions to the General Partner under subparagraph (iv) and (v)); and (vii) Seventh, 85% to the Limited Partners and 15% to the General Partner.
The following distributions of Cash From Operations were made by the Partnership during the three most recent fiscal years. There were no distributions of Cash From Sales or Financing made by the Partnership during the three most recent fiscal years.
Amount Amount Date of Amount Distributed Distributed Distributed to Distribution to Limited Partners Per Unit General Partner 08/29/97 $ 28,000 $ 1.92 -- 02/28/97 $ 14,000 $ 0.96 -- 11/29/96 $ 14,000 $ 0.96 -- 08/30/96 $ 14,000 $ 0.96 -- 05/31/96 $ 14,000 $ 0.96 -- 03/01/96 $ 60,000 $ 4.12 -- 12/31/95 $ 60,000 $ 4.12 -- 08/31/95 $ 61,000 $ 4.19 -- 06/02/95 $ 61,000 $ 4.19 -- 03/02/95 $ 182,000 $ 12.50 -- 12/02/94 $ 182,000 $ 12.50 --
Of the total distributions noted above, $2.88, $7.00 and $12.99 per unit represented a return of capital for the fiscal years ended December 31, 1997 and 1996 and November 30, 1995, respectively.
Estimated distributions for 1998 will remain consistent with the 1997 level but there can be no assurance that the distribution level will not be adjusted.
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Item 6.
Item 6. Selected Financial Data
The following is selected financial data for the five years ended December 31, 1997 and 1996 and November 30, 1995, 1994 and 1993 (in thousands, except per Unit data).
1997 1996 1995 1994 1993 -------- ------- -------- -------- ------- Rental income $ 1,142 $ 1,125 $ 1,397 $ 1,417 $ 1,304
Provision for impairment of investment in real estate $ 438 $ 1,645 $ -- $ 380 $ --
Net income (loss) $ (165) $ (1,394) $ 300 $ (69) $ 403
Net income (loss) allocable to limited partners $ (163) $ (1,380) $ 297 $ (62) $ 399
Net income (loss) per limited partnership unit $ (11.20) $ (94.81) $ 20.40 $ (4.26) $ 27.42
Total assets $ 6,323 $ 6,531 $ 8,159 $ 8,483 $ 8,905
Cash distributions per limited partnership unit $ 2.88 $ 7.00 $ 33.39 $ 37.50 $ 50.00
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
As of April 21, 1989, Rancon Income Fund I ("the Partnership") was funded from the sale of limited partnership units ("Units") in the amount of $14,555,000. As of December 31, 1997, the Partnership had cash of $749,000. The remainder of the Partnership's assets consists primarily of its investments in properties, which totaled approximately $5,478,000 at December 31, 1997.
The Partnership's primary source of funds has consisted of the proceeds of its public offering of Units. As the Partnership was organized for the purpose of acquiring income producing properties, the cash generated from such properties, net of costs incurred in operating the properties, is also a significant source of funds for the Partnership. Another source of funds is the interest income earned on cash balances. Such cash flows from operating activities have been sufficient to provide funds to reinvest in the properties by way of improvements, as well as to fund quarterly distributions to the limited partners.
All of the Partnership's assets are located in the Southern California region and have been directly affected by the economic weakness of the region. Management continues to evaluate the real estate market in Southern California in an effort to determine the optimal time to dispose of the assets and realize their maximum value.
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Management believes that the Partnership's available cash together with the cash generated by the operations of the Partnership's properties will be sufficient to finance the Partnership's continued operations. Estimated distributions for 1998 will remain consistent with the 1997 level but there can be no assurance that the distribution level will not be adjusted. The Partnership is currently soliciting offers for the sale of Aztec Village Shopping Center. This rental property is classified as property held for sale on the Partnership's 1997 and 1996 balance sheets.
RESULTS OF OPERATIONS
Effective with the year ended December 31, 1995, the Partnership's reporting year changed from November 30 to December 31. Since the Partnership's operations are not seasonal, the analysis of operations compares the fiscal years ended December 31, 1996 and November 30, 1995.
Rental income increased slightly, 2%, for the year ended December 31, 1997 compared to the year ended December 31, 1996. The 19%, or $272,000, decrease for the year ended December 31, 1996 compared to the year ended November 30, 1995 is a result of decreased occupancy at Aztec Village Shopping Center and Bristol Medical Center combined with the decrease in billings for common area maintenance (CAM) and prior year recoveries due to the higher vacancies. Aztec Village Shopping Center lost two major tenants at the end of 1995 due to financial instability and has been unsuccessful in leasing the space. In addition, there were unexpected vacancies in 1996 at Bristol Medical Center due to the depressed market.
Interest and other income decreased $107,000, or 88%, in 1997 compared to 1996 and increased $115,000 in 1996 compared to 1995 primarily due to a one-time legal settlement of $111,000 in 1996 from a former tenant at Bristol Medical Center. Additionally, interest income has increased in 1997 compared to the same periods in 1996 and 1995 due to higher average invested cash balances.
Operating expenses decreased $52,000, or 11%, for the year ended December 31, 1997 compared to the same period in 1996 primarily due to $42,000 of legal fees incurred in 1996 in connection with the settlement of a former tenant at Bristol Medical Center. The remaining decrease relates to $9,000 of costs incurred in 1996 when the Partnership obtained appraisals of the rental properties. The $84,000, or 15%, decrease for the year ended December 31, 1996 compared to the year ended November 30, 1995 was partially due to the vacancies at Aztec Village Shopping Center and Bristol Medical Center. As a result miscellaneous operating expenses, electric expense and base management fees decreased $30,000, $20,000 and $8,000, respectively. In addition, there was a decrease in real estate taxes of $25,000 pertaining to all the Partnership's properties.
The $46,000, or 20%, decrease in depreciation and amortization expense for the year ended December 31, 1997 compared to the same period in 1996 is a result of the decrease in depreciation of the Aztec Village Shopping Center as such property was classified as held for sale at December 31, 1996 and accordingly, depreciation of the asset ceased. The $68,000, or 23%, decrease for the year ended December 31, 1996 compared to the year ended November 30, 1995 is primarily the result of certain lease commissions becoming fully amortized at Bristol Medical Center and Aztec Village Shopping Center at the end of 1995.
In 1997 and 1996, due to an increase in vacancy, the difficulty in leasing vacant space and projected cash flow analyses, management determined that the carrying value of the Partnership's rental properties were in excess of their estimated fair values. As a result, in 1997, the Partnership recorded a provision for impairment of its investment in Aztec Village Shopping Center of $438,000 and, in 1996, provisions for impairment of the investments in Bristol Medical Center and Wakefield Industrial Center were recorded in the amounts of $1,470,000 and $175,000, respectively.
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General and administrative expenses decreased $14,000, or 5%, for the year ended December 31, 1997 compared to the year ended December 31, 1996 primarily due to additional one-time tax preparation fees of $13,000 incurred in 1996 resulting from the preparation of additional prior and current year tax returns. The $44,000, or 18%, increase in the year ended December 31, 1996 compared to the year ended November 30, 1995 is partially due to a the aforementioned tax preparation fees, $10,000 increase in quarterly overhead expense, a one-time payment of $5,000 for professional services rendered in connection with the valuation of the limited partner interests and an increase in data processing fees of $7,000. In addition, the Partnership incurred legal fees of approximately $9,000 associated with the management of the Partnership's and properties day-to-day affairs.
Year 2000 Compliance
The Partnership utilizes a number of computer software programs and operating systems across its entire organization, including applications used in financial business systems and various administrative functions. To the extent that the Partnership's software applications contain a source code that is unable to appropriately interpret the upcoming calendar year "2000" and beyond, some level of modification, or replacement of such applications will be necessary. The Partnership has completed its identification of applications that are not yet "Year 2000" compliant and has commenced modification or replacement of such applications, as necessary. Given information known at this time about the Partnership's systems that are non-compliant, coupled with the Partnership's ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, management does not expect "Year 2000" compliance costs to have any material adverse impact on the Partnership's liquidity or ongoing results of operations. No assurance can be given, however, that all of the Partnership's systems will be "Year 2000" compliant or that compliance costs or the impact of the Partnership's failure to achieve substantial "Year 2000" compliance will not have a material adverse effect on the Partnership's future liquidity or results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data
For information with respect to Item 8, see Financial Statements and Schedules as listed in Item 14.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
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Part III
Item 10.
Item 10. Directors and Executive Officers of the Partnership
Rancon Income Partners I is the General Partner of the Partnership. Daniel Lee Stephenson and Rancon Financial Corporation ("RFC") are the General Partners of Rancon Income Partners I, L.P. The executive officer and director of RFC is:
Daniel L. Stephenson Director, President, Chief Executive Officer and Chief Financial Officer
There is no fixed term of office for Mr. Stephenson.
Mr. Stephenson, age 54, founded RFC (formerly known as Rancon Corporation) in 1971 for the purpose of establishing itself as a commercial, industrial and residential property syndication, development and brokerage concern. Mr. Stephenson has, from inception, held the position of Director. In addition, Mr. Stephenson was President and Chief Executive Officer of RFC from 1971 to 1986, from August 1991 to September 1992 and from March 31, 1995 to present. Mr. Stephenson is Chairman of the Board of PacWest Group, Inc., a real estate firm which has acquired a portfolio of assets from the Resolution Trust Corporation.
Item 11.
Item 11. Executive Compensation
The Partnership has no executive officers. For information relating to fees, compensation, reimbursements and distributions paid to related parties, reference is made to Item 13 below.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
No person is known by the Partnership to be the beneficial owner of more than 5% of the Units.
Security Ownership of Management
Amount and Nature of Title of Class Name of Beneficial Owner Beneficial Ownership Percent of Class - -------------- ------------------------ -------------------- ----------------
Units Daniel L. Stephenson 3 Units (trust) Less than 1 percent
Changes in Control
The Limited Partners have no right, power or authority to act for or bind the Partnership. However, the Limited Partners have the power to vote upon the following matters affecting the basic structure of the Partnership, each of which shall require the approval of Limited Partners holding a majority of the outstanding Units: (i) amendment of the Partnership's Partnership Agreement; (ii) termination and dissolution of the Partnership; (iii) sale, exchange or pledge of all or substantially all of the assets of the Partnership; (iv) removal of the General Partner or any successor General Partner; (v) election of a new General Partner; (vi) the approval or disapproval of the terms of purchase of the General Partner's interest; and (vii) the modification of the terms of any agreement between the Partnership and the General Partner or an affiliate.
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Item 13.
Item 13. Certain Relationships and Related Transactions
For the year ended December 31, 1997, the Partnership did not incur any costs reimbursable to RFC.
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Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report
(1) Financial Statements:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1997 and 1996
Statements of Operationsfor the Years Ended December 31,1997 and 1996, the Month Ended December 31, 1995 and the Year Ended November 30,1995
Statements of Partners'Equity (Deficit)for the Years Ended December31, 1997 and 1996, the Month Ended December 31, 1995 and the Year Ended November 30, 1995
Statements ofCash Flows for the Years Ended December 31,1997 and 1996, the Month Ended December 31, 1995 and the Year Ended November 30,
Notes to Financial Statements
(2) Financial Statement Schedule:
Schedule III -- Real Estate and Accumulated Depreciation as of December 31, 1997 and Note thereto
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits: (27)Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RANCON INCOME FUND I, a California Limited Partnership (Partnership)
By: RANCON INCOME PARTNERS I, L.P. General Partner
Date: March 27, 1998 By: /s/ Daniel L. Stephenson ------------------------ Daniel L. Stephenson, Director,President,Chief Executive Officer and Chief Financial Officer of Rancon Financial Corporation, General Partner of Rancon Income Partners I, L.P.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Partnership and in the capacities and on the dates indicated.
By: RANCON INCOME PARTNERS I, L.P. General Partner
Date: March 27, 1998 By: /s/ Daniel L. Stephenson ------------------------ Daniel L. Stephenson, Director,President, Chief Executive Officer and Chief Financial Officer of Rancon Financial Corporation, General Partner of Rancon Income Partners I, L.P.
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RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP
AND SCHEDULE
Page ---- Report of Independent Public Accountants 18
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 19
Statements of Operations for the years ended December 31, 1997 and 1996, the month ended December 31, 1995 and the year ended November 30, 1995 20
Statements of Partners' Equity (Deficit) for the years ended December 31, 1997 and 1996, the month ended December 31, 1995 and the year ended November 30, 1995 21
Statements of Cash Flows for the years ended December 31, 1997 and 1996, the month ended December 31, 1995 and the year ended November 30, 1995 22
Notes to Financial Statements 23
Schedule:
III - Real Estate and Accumulated Depreciation as of December 31, 1997 and Note thereto 29
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP:
We have audited the accompanying balance sheets of RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP, as of December 31, 1997 and 1996, and the related statements of operations, partners' equity (deficit) and cash flows for the years ended December 31, 1997 and 1996, the month ended December 31, 1995 and the year ended November 30, 1995. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP, as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997 and 1996, the month ended December 31, 1995 and the year ended November 30, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule listed in the index to financial statements and schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
San Francisco, California /s/ Arthur Andersen LLP February 11, 1998
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RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets December 31, 1997 and 1996 (in thousands, except units outstanding)
The accompanying notes are an integral part of these financial statements.
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RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations For the years ended December 31, 1997 and 1996, the month ended December31, 1995 and for the year ended November 30, 1995 (in thousands, except per unit amounts)
The accompanying notes are an integral part of these financial statements.
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RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP
Statements of Partners' Equity (Deficit) For the years ended December 31, 1997 and 1996, the month ended December 31, 1995 and the year ended November 30, 1995 (in thousands)
General Limited Partner Partners Total ---------- ---------- ---------- Balance at November 30, 1994 $ (167) $ 8,382 $ 8,215
Distributions -- (486) (486)
Net income 3 297 300 ---------- --------- -----------
Balance at November 30, 1995 (164) 8,193 8,029
Distributions -- (60) (60)
Net loss -- (28) (28) --------- -------- ---------
Balance at December 31, 1995 (164) 8,105 7,941
Distributions -- (102) (102)
Net loss (14) (1,380) (1,394) --------- -------- ---------
Balance at December 31, 1996 (178) 6,623 6,445
Distributions -- (42) (42)
Net loss (2) (163) (165) ---------- ---------- ----------
Balance at December 31, 1997 $ (180) $ 6,418 $ 6,238 ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows For the years ended December 31, 1997 and 1996, the month ended December 31, 1995 and the year ended November 30, 1995 (in thousands)
The accompanying notes are an integral part of these financial statements.
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RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1996 and November 30, 1995
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Rancon Income Fund I ("the Partnership") was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income producing commercial, industrial and residential real estate properties. The Partnership reached final funding in April, 1989. The Partnership was formed with initial capital contributions from Rancon Income Partners I, L.P. (the General Partner) and Daniel Lee Stephenson, the initial limited partner, who indirectly owns and controls the General Partner. The General Partner and its affiliates are hereinafter referred to as the Sponsor. At December 31, 1997 and 1996, 14,555 units were issued and outstanding.
Effective with the year ended December 31, 1995, the Partnership's reporting year changed from November 30 to December 31.
Allocation of the profits and losses from operations are made pursuant to the terms of the Partnership Agreement. Generally, net income from operations is allocated to the general partner and limited partners in proportion to the amounts of cash from operations distributed to the partners for each fiscal year. If there are no distributions of cash from operations during such fiscal year, net income shall be allocated 90% to the limited partners and 10% to the general partner. Net losses from operations are allocated 90% to the limited partners and 10% to the general partner until such time as a partner's account is reduced to zero. Additional losses will be allocated entirely to those partners with positive account balances until such balances are reduced to zero. In no event will the general partner be allocated less than 1% of net income or net loss for any period. Distributions of cash from operations are generally allocated as follows: (i) first to the limited partners until they receive a noncumulative 6% return per annum on their unreturned capital contributions and (ii) the remainder, if any in a given year, shall be divided in the ratio of 90% to the limited partners and 10% to the general partner.
All of the Partnership's assets are located in the Southern California region and have been directly affected by the economic weakness of the region. Management continues to evaluate the real estate market in Southern California in an effort to determine the optimal time to dispose of the assets and realize their maximum value.
Management believes that the Partnership's available cash together with the cash generated by the operations of the Partnership's properties will be sufficient to finance the Partnership's continued operations. Estimated distributions for 1998 will remain consistent with the 1997 level but there can be no assurance that the distribution level will not be adjusted. The Partnership is currently soliciting offers for the sale of Aztec Village Shopping Center. This rental property is classified as property held for sale on the Partnership's 1997 and 1996 balance sheets.
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General Partner and Management Matters
In December 1994, Rancon Financial Corporation ("RFC") entered into an agreement with Glenborough Corporation (successor by merger with Glenborough Inland Realty Corporation) ("Glenborough") whereby RFC sold to Glenborough the contract to perform the rights and responsibilities under RFC's agreement with the Partnership and other related Partnerships (collectively, "the Rancon Partnerships") to perform or contract on the Partnership's behalf financial, accounting, data processing, marketing, legal, investor relations, asset and development management and consulting services for the Partnership for a period of ten years or to the liquidation of the Partnership, whichever comes first. According to the contract, the Partnership will pay Glenborough for its services as follows: (i) a specified asset administration fee of $208,000 per year, which is fixed for five years subject to reduction in the year following the sale of assets; (ii) sales fees of 2% for improved properties and 4% for land; (iii) a refinancing fee of 1% and (iv) a management fee of 5% of gross rental receipts. As part of this agreement, Glenborough will perform certain responsibilities for the General Partner of the Rancon Partnerships. RFC has agreed to cooperate with Glenborough, should Glenborough attempt to obtain a majority vote of the limited partners to substitute itself as the Sponsor for the Rancon Partnerships. This agreement was effective January 1, 1995. Glenborough is not an affiliate of RFC or the Partnership.
Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management has not yet determined the level of additional disclosure, if any, that may be required by SFAS 131. Additional disclosures that may be required will be provided beginning with the financial statements of the Partnership for the year ending December 31, 1998.
Rental Property to be Held and Used - Rental properties are stated at cost, and include the related land, unless events or circumstances indicate that cost cannot be recovered in which case carrying value is reduced to estimated fair value. Estimated fair value: (i) is based upon the Partnership's plans for the continued operation of each property; (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building, and (iii) does not purport, for a specific property, to represent the current sales price that the Partnership could obtain from third parties for such property. The fulfillment of the Partnership's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the
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Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership's properties could be materially different than current expectations.
Rental Property Held for Sale - Rental property held for sale is stated at its estimated fair value. Estimated fair value is computed using estimated sales price or appraised value of the property less selling costs and does not purport, for a specific property, to represent the sales price that the Partnership could obtain from third parties for such property.
Cash and cash equivalents - The Partnership considers all certificates of deposit and money marketfunds with original maturities of less than ninety days to be cash
Deferred Costs - Deferred lease commissions are amortized over the initial fixed term of the related lease agreement on a straight-line basis. Amortization expense was $7,000 and $24,000 for the years ended December 31, 1997 and 1996, respectively, and $58,000 for the year ended November 30, 1995.
Rental Income - Rental income is recognized as earned over the life of the respective leases.
Net Income (Loss) Per Limited Partnership Unit - Net income (loss) per limited partnership unit is calculated using the weighted average number of limited partnership units outstanding during the period and the limited partners' share of the net income (loss).
Income Taxes - No provision for income taxes is included in the accompanying financial statements as the Partnership's results of operations are passed through to the partners for inclusion in their respective income tax returns. Net income (loss) and partners' equity for financial reporting purposes will differ from the Partnership income tax return because of different accounting methods used for certain items, principally depreciation expense and the provision for impairment of investments in real estate.
Note 2. RELATED PARTY TRANSACTIONS
Reimbursable Expenses and Management Fee to Sponsor
In 1994, the Partnership had an agreement with RFC for property management services. The agreement provided for a management fee equal to 5% of gross rentals collected in addition to reimbursement of certain administrative expenses incurred while managing properties. Fees and costs incurred under this agreement totaled $6,000 for the year ended November 30, 1995.
The Partnership Agreement also provided for the reimbursement of actual costs incurred by RFC in providing certain administrative, legal and development services necessary for the prudent operation of the Partnership. Reimbursable costs incurred by the Partnership and paid to RFC totaled $7,000 for the year ended November 30, 1995. Effective January 1, 1995, these services are provided by Glenborough as described in Note 1.
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Note 3. RENTAL PROPERTY, NET
Rental property as of December 31, 1997 and 1996 is as follows: - ---------------------------------------------------------------
At December 31, 1997 and 1996, the Aztec Village Shopping Center property is classified as held for sale.
None of the Partnership's properties are encumbered as of December 31, 1997.
In 1997 and 1996, due to an increase in vacancy, the difficulty in leasing vacant space and projected cash flow analyses, management determined that the carrying value of the Partnership's rental properties were in excess of their estimated fair values. As a result, in 1997, the Partnership recorded a provision for impairment of its investment in Aztec Village Shopping Center of $438,000 and, in 1996, provisions for impairment of the investments in Bristol Medical Center and Wakefield Industrial Center were recorded in the amounts of $1,470,000 and $175,000, respectively.
Note 4. LEASES
The Partnership's rental properties are leased under operating leases that expire on various dates through November 2004. Minimum future rental income on non-cancelable operating leases as of December 31, 1997 is as follows: 1998 $ 950,000 1999 546,000 2000 459,000 2001 414,000 2002 401,000 Thereafter 1,913,000 ----------- Total $ 4,683,000 ===========
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Note 5. TAXABLE INCOME
The Partnership's tax returns, the qualification of the Partnership as a partnership for federal income tax purposes, and the amount of income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to the Partnership's taxable income or loss, the tax liability of the partners could change accordingly.
The Partnership's tax returns are filed on a calendar year basis. As such, the following is a reconciliation of the net income for financial reporting purposes to the estimated taxable income, for the years ended December 31, 1997 and 1996 and November 30, 1995, determined in accordance with accounting practices used in preparation of federal income tax returns (in thousands).
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The following is a reconciliation as of December 31, 1997 and 1996 of partner's equity for financial reporting purposes to estimated partners' equity for federal income tax purposes (in thousands).
1997 1996 ---- ---- Partners' equity per financial statements $ 6,238 $ 6,445 Cumulative provision for impairment of investments in real estate 4,563 4,125 Financial reporting depreciation in excess of tax reporting depreciation (285) (266) Operating expenses recognized in a different period for financial reporting than for tax reporting, net 49 3 Other, net (44) (7) ------------- ------------- Estimated partners' equity for federal income tax purposes $ 10,521 $ 10,300 ============= =============
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RANCON INCOME FUND I, A California Limited Partnership
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1997 (In Thousands)
(1) The aggregate cost for Federal income tax purposes is $11,478 (2) See Note 3 to Financial Statements
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NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (In Thousands)
Reconciliation of gross amount at which real estate was carried for the years ended December 31, 1997 and 1996 and the month ended December 31, 1995 and the year ended November 30, 1995:
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