ITEM 1. BUSINESS
Krupp Insured Mortgage Limited Partnership (the "Partnership") is a Massachusetts limited partnership which was formed on March 21, 1988. The Partnership raised approximately $299 million through a public offering of limited partner interests evidenced by units of depositary receipts ("Units"), and used the proceeds available for investment primarily to acquire participating insured mortgages ("PIMs") and mortgage-backed securities ("MBS"). The Partnership considers itself to be engaged only in the industry segment of investment in mortgages.
The Partnership's investments in PIMs on multi-family residential properties consist of a MBS or an insured mortgage loan (collectively, the "insured mortgage") guaranteed or insured as to principal and basic interest. These insured mortgages were issued or originated under or in connection with the housing programs of the Government National Mortgage Association ("GNMA"), "Fannie Mae" or the Department of Housing and Urban Development ("HUD"). PIMs provide the Partnership with monthly payments of principal and basic interest and also may provide the Partnership with participation in the current revenue stream and in residual value, if any, from the sale or other realization of the underlying property. The borrower conveys these rights to the Partnership through a subordinated promissory note and mortgage. The participation features are neither insured nor guaranteed.
The Partnership also acquired MBS collateralized by single-family mortgage loans issued or originated by Fannie Mae or the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC guarantee the principal and basic interest of the Partnership's FNMA and FHLMC MBS, respectively.
Proceeds received from prepayments or other realizations of mortgage assets will be distributed by the Partnership to investors through quarterly or special distributions.
Although the Partnership will terminate no later than December 31, 2028, the value of the PIMs may be realized by the Partnership through repayment or sale as early as ten years from the dates of the closing of the permanent loans and the Partnership may realize the value of all its other investments within that time frame. Therefore, it is anticipated that dissolution of the Partnership could occur significantly prior to December 31, 2028.
The Partnership's investments are not expected to be subject to seasonal fluctuations. However, the future performance of the Partnership will depend upon certain factors which cannot be predicted. In addition, any ultimate realization of the participation features of the PIMs will be subject to similar risks associated with equity real estate investments, including: reliance on the owner's operating skills, ability to maintain occupancy levels, control operating expenses, maintain the property and provide adequate insurance coverage; adverse changes in general economic conditions, adverse local conditions, and changes in governmental regulations, real estate zoning laws, or tax laws; and other circumstances over which the Partnership may have little or no control.
The requirements for compliance with federal, state and local regulations to date have not had an adverse effect on the Partnership's operations, and the Partnership does not presently anticipate any adverse effect in the future.
As of December 31, 1999 there were no personnel directly employed by the Partnership.
ITEM 2.
ITEM 2. PROPERTIES
None.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Partnership is a party or to which any of its securities is the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There currently is no established trading market for the Units.
The number of investors holding Units as of December 31, 1999 was approximately 13,200. One of the objectives of the Partnership is to provide quarterly distributions of cash flow generated by its investments in mortgages. The Partnership presently anticipates that future operations will continue to generate cash available for distribution.
During 1999, the Partnership made special distributions consisting of principal proceeds from the Pope Building, Remington, Valley Manor and Cross Creek PIM Prepayments.
During 1998, the Partnership made special distributions consisting primarily of principal proceeds from the Deering Place, Southland and Paddock Club Apartments PIM prepayments.
The Partnership will make special distributions in the future as PIMs prepay or a sufficient amount of cash is available from MBS and PIM principal collections.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Supplementary Data, which are included in Items 7 and 8 (Appendix A) of this report, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements.
Starting in 1997, the General Partners conducted an assessment of the Partnership's core internal and external computer information systems to understand the nature and extent of work required to make its systems Year 2000 ready. The Year 2000 readiness issue was concerned with the inability of computerized information systems to accurately calculate, store or use a date after 1999. The General Partners believed that a system failure or miscalculation could cause disruptions of operations.
As a result of this concern, the General Partners, along with certain affiliates, upgraded their computer systems including their hardware and software so they would be Year 2000 ready. In addition, the General Partners surveyed the Partnership's material third-party service providers and significant vendors and received assurances that they were Year 2000 ready. The General Partners also developed contingency plans for all of their "mission-critical functions" to insure business continuity. As a result of these efforts and the efforts of third parties, the Year 2000 did not result in any disruption of activities to the Partnership.
Liquidity and Capital Resources
The most significant demands on the Partnership's liquidity are the regular quarterly distributions paid to investors of approximately $3.1 million. Funds used for the investor distributions are generated from interest income received on the PIMs, MBS, cash and short-term investments and the principal collections received on the PIMs and MBS. The Partnership funds a portion of the quarterly distribution from principal collections causing the capital resources of the Partnership to continually decrease. As a result of the decrease, the total cash inflows to the Partnership will also decrease, which will result in periodic adjustments to the distributions paid to investors. The General Partners periodically review the distribution rate to determine whether an adjustment is necessary based on projected future cash flows. In general, the General Partners try to set a distribution rate that provides for level quarterly distributions. Based on current projections the General Partners believe the Partnership will need to adjust the current distribution rate of $.21 per Unit per quarter commencing with the distribution to be paid in May 2000. The General Partners will determine the revised rate during the first quarter of 2000.
In addition to providing insured or guaranteed monthly principal and basic interest payments, the Partnership's PIM investments also may provide additional income through its participation feature in the underlying properties if they operate successfully. The Partnership may receive a share in any operating cash flow that exceeds debt service obligations and capital needs or a share in any appreciation in value when the properties are sold or refinanced. However, this participation is neither guaranteed nor insured, and it is dependent upon whether property operations or its terminal value meet certain criteria.
On February 25, 2000 the Partnership received a payoff on the Brookside Apartments PIM in the amount of $4,531,910. The Borrower defaulted on the first mortgage loan and Fannie Mae paid off the MBS upon maturity in February 2000. The Partnership anticipates a first quarter special distribution of $.31 per unit. The Partnership is pursuing the receipt of approximately $307,000 in additional income due from the borrower. At this time, it is uncertain if the Partnership will receive this income.
During December 1999, the Partnership received prepayments on the Salishan, Saratoga, and Marina Shores Apartments PIMs, and the Patrician MBS. In addition to the principal proceeds of $14,666,235 from the Salishan PIM, the Partnership also received $146,662 of prepayment premium income and $311,650 of Shared Interest Income and Minimum Additional Income. The Partnership received $6,008,565 of principal proceeds from the Marina Shores PIM along with $176,679 of Shared Appreciation and prepayment premium income. The principal proceeds from the Saratoga PIM and the Patrician MBS prepayments were $6,204,895 and $7,830,263, respectively. The Partnership did not receive any additional interest on the Saratoga prepayment. On January 11, 2000, the Partnership paid a special distribution of $2.37 per Limited Partner interest from the principal proceeds, Shared Appreciation and prepayment premium received from these four payoffs.
In October 1999 the Partnership received a repayment of the Valley Manor Apartments PIM of $4,425,993. The Partnership did not receive any Additional Interest as a result of this prepayment because the underlying property's appraised value did not exceed the threshold required to realize additional interest. In November 1999 the Partnership paid a special destribution of $.30 per Limited Partner interest from the Valley Manor proceeds. In February 1999, the Partnership received a payoff of the Pope Building PIM in the amount of $3,176,761. In addition, the Partnership received $703,860 of Shared Appreciation and prepayment premium income and $218,578 of Shared Income and Minimum Additional Interest upon the payoff of the underlying mortgage. During March 1999, the Partnership received a payoff of the Remington PIM in the amount of $12,199,298. The payoff was the result of a default on the underlying loan which resulted in the Partnership receiving all of the outstanding principal balance under the insurance feature of the PIM. However, due to the default the Partnership did not receive any participation income from this PIM. During May 1999, the Partnership paid a special distribution of $1.08 per Limited Partner interest from the principal proceeds received from the Remington and Pope Building PIMs and the Shared Appreciation and prepayment premium proceeds received from the Pope Building PIM.
During January 1999, the Partnership paid a special distribution of $.66 per Limited Partner Interest from the principal proceeds and prepayment premium received from the Cross Creek PIM in 1998. The prepayment of the Cross Creek PIM remaining principal balance amounted to $9,414,586 with Additional Income (in lieu of a prepayment premium) of approximately $318,000 was received along with Shared Income of approximately $60,000.
The Partnership made two special distributions during 1998. On July 27, 1998 and August 26, 1998, the Partnership received a partial prepayment and final prepayment of approximately $654,000, and $2,985,000, respectively, for the Deering Place Apartments PIM. In addition to the principal prepayment the Partnership received minimum additional interest and shared interest income of $90,195 and a prepayment premium of $268,638. The Partnership distributed the capital transaction proceeds from this prepayment to investors through a special distribution on September 18, 1998 in the amount of $.27 per Limited Partner interest. In January 1998, a $1.12 per Unit special distribution was made with the prepayment proceeds of the Paddock Club and Southland Station PIMs that were received in 1997. During the fourth quarter of 1997, the Partnership received the principal repayments totaling $15.2 million when those two properties were sold. In addition to the principal repayments, the Partnership received a total of $380,000 of accrued Additional Interest from both properties and $565,000 of Shared Appreciation Income on Southland Station and a $895,000 prepayment premium on Paddock Club.
Most of the properties had stable operating results in 1999. High occupancy rates were maintained at more than half of the properties due to stable or improving markets. However, due to poor operating performance, the General Partners are closely monitoring the Wildflower apartments PIM property which is located in the thriving Las Vegas market. Wildflower has suffered a dramatic decline in occupancy to the mid-80% range at year-end that is not representative of the rest of the market. Wildflower, which offers only a basic apartment, does not compete successfully with the newer apartment properties, which have many amenities that have been built since the strong Las Vegas economy has fostered a tremendous construction boom.
During the first five years, owners are prohibited from prepaying the first mortgage loans underlying the PIMs. During the second five years, owners may prepay the loans by incurring a prepayment penalty. The Partnership has the option to call certain PIMs by accelerating their maturity if they are not prepaid by the tenth year after permanent funding. The Partnership will determine the merits of exercising the call option for each PIM as economic conditions warrant. Such factors as the condition of the asset, local market conditions, the interest rate environment and availability of financing will affect those decisions.
Assessment of Credit Risk
The Partnership's investments in mortgages are guaranteed or insured by Fannie Mae, GNMA, FHLMC or HUD and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represent interests in pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by the full faith and credit of the U.S. Government.
The Partnership includes in cash and cash equivalents approximately $38.9 million of commercial paper, which is issued by entities with a credit rating equal to one of the top two rating categories of a nationally recognized statistical rating organization.
Interest Rate Risk
The Partnership's primary market risk exposure is to interest rate risk, which can be defined as the exposure of the Partnership's net income, comprehensive income or financial condition to adverse movements in interest rates. At December 31, 1999, the Partnerships PIMs, PIMIs and MBS comprise the majority of the Partnership's assets. As such, decreases in interest rates may accelerate the prepayment of the Partnership's investments. The Partnership does not utilize any derivatives or other instruments to manage this risk as the Partnership plans to hold all of its investments to expected maturity.
The Partnership monitors prepayments and considers prepayment trends, as well as distribution requirements of the Partnership, when setting regular dividend distribution policy. For MBS, the fund forecasts prepayments based on trends in similar securities as reported by statistical reporting entities such as Bloomberg. For PIMs and PIMIs, the Partnership incorporates prepayment assumptions into planning as individual properties notify the Partnership of the intent to prepay or as they mature.
The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For mortgage investments, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The expected maturity date is contractual maturity adjusted for expectations of prepayments.
Results of Operations
The following discussion relates to the operation of the Partnership during the years ended December 31, 1999, 1998 and 1997.
Net income decreased by approximately $1,598,000 during 1999 as compared to 1998. This decrease was due primarily to lower basic interest on PIMs and interest income on MBS in the amounts of approximately $2,764,000 and $389,000, respectively. This was partially offset by an increase in Participation interest of approximately $801,000 and decreases in asset management fees and amortization expense, in the amounts of approximately $215,000 and $338,000, respectively. The reduction in basic interest on PIMs is due to the payoff of the Remington, Pope Building and Valley Manor PIMs in 1999 and the payoffs of the Deering Place and Cross Creek PIMs in 1998. The decrease in MBS interest income was due to the on-going prepayment of the Partnership's single-family MBS. The increase in participation interest on PIMs was due primarily to the receipt of $922,000, $458,000 and $177,000 of participation interest from the Pope Building, Salishan and Marina Shores PIM prepayments as compared to the $359,000 and $378,000 received in 1998 from the Deering Place and Cross Creek PIM payoffs, respectively. Also, asset management fees decreased during 1999 as compared to 1998 due to the prepayments and principal collections reducing the Partnership's mortgage investments. Amortization expense was greater in 1998 as a result of the full amortization of the remaining prepaid fees and expenses of the Deering Place and Cross Creek PIMs and the Patrician multi-family MBS in 1998 exceeding the amount of amortization resulting from the PIM prepayments occurring in 1999.
Net income decreased by approximately $3,088,000 during 1998 as compared to 1997. The decrease was primarily due to lower basic interest and participation interest. The decrease in basic interest of approximately $1,798,000 was a result of the Deering Place and Cross Creek PIM prepayments during 1998, and the prepayments of the Rock Creek, Silver Springs, Hampton Ridge, Southland Station and Paddock Club PIM's during 1997 and the Patrician PIM converting to a non-participating insured mortgage during the fourth quarter of 1997. Participation interest declined by approximately $2,845,000 as a result of the significant level of PIM prepayments in 1997 mentioned above exceeding the level of participation interest received when the Deering Place and Crosscreek PIM prepayments occurred in 1998. Other interest income decreased in 1998 as compared to 1997 due to lower average short-term investment balances during 1998 when compared to 1997. Amortization expense decreased for the twelve month period ending 1998 as compared to the same period in 1997 as a result of the Partnership fully amortizing the costs associated with the PIMs that were prepaid in 1997. The decrease in Partnership expenses was due primarily to lower asset management fees resulting from the prepayments of the Deering Place and Crosscreek PIMs in 1998 and the Rock Creek, Silver Springs, Hampton Ridge, Paddock Club and Southland PIMs in 1997. In addition, lower transfer agent costs were incurred in 1998 and a rebate was received for expense reimbursements related to 1997 during the second quarter of 1998.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. Information as to the directors and executive officers of Krupp Plus Corporation which is a General Partner of the Partnership and is the general partner of Mortgage Services Partners Limited Partnership which is the other General Partner of the Partnership, is as follows:
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive Officer of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisitions, property management, investment sponsorship, venture capital investing, mortgage banking and financial management, and ownership of three operating companies through private equity investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969 and he has served as the Chief Executive Officer since 1992. Mr. Krupp serves as a member of the Board of Trustees at Brigham & Women's Hospital. He is a graduate of Bryant College where he received an honorary Doctor of Science in Business Administration in 1989 and was elected trustee in 1990.
George Krupp (age 55) is the Co-Founder and Co-Chairman of The Berkshire Group, an integrated real estate financial services firm engaged in real estate acquisitions, property management, investment sponsorship, venture capital investing, mortgage banking and financial management, and ownership of three operating companies through private equity investments. Mr. Krupp has held the position of Co-Chairman since The Berkshire Group was established as The Krupp Companies in 1969. Mr. Krupp has been an instructor of history at the New Jewish High School in Waltham, Massachusetts since September of 1997. Mr. Krupp attended the University of Pennsylvania and Harvard University and holds a Master's Degree in History from Brown University.
Peter F. Donovan is Chief Executive Officer of Berkshire Mortgage Finance which position he has held since January of 1998 and in this capacity, he oversees the strategic growth plans of this mortgage banking firm. Berkshire Mortgage Finance is the 16th largest servicer of commercial mortgages in the United States. Previously he served as President of Berkshire Mortgage Finance from January of 1993 to January of 1998 and in that capacity he directed the production, underwriting, servicing and asset management activities of the firm. Prior to that, he was Senior Vice President of Berkshire Mortgage Finance and was responsible for all participating mortgage originations. Before joining the firm in 1984, he was Second Vice President, Real Estate Finance for Continental Illinois National Bank & Trust, where he managed a $300 million construction loan portfolio of commercial properties. Mr. Donovan received a B.A. from Trinity College and an M.B.A. degree from Northwestern University.
Ronald Halpern is President and COO of Berkshire Mortgage Finance. He has served in these positions since January of 1998 and in this capacity, he is responsible for the overall operations of the Company. Prior to January of 1998, he was Executive Vice President, managing the underwriting, closing, portfolio management and servicing departments for Berkshire Mortgage Finance. Before joining the firm in 1987, he held senior management positions with the Department of Housing and Urban Development in Washington D.C. and several HUD regional offices. Mr. Halpern has over 30 years of experience in real estate finance. He is currently a member of the Advisory Council for Fannie Mae and Freddie Mac and was prior Chairman of the MBA Multifamily Housing Committee. He holds a B.A. degree from the University of the City of New York and J.D. degree from Brooklyn Law School.
Robert A. Barrows is Senior Vice President and Chief Financial Officer of Berkshire Mortgage Finance. Mr. Barrows has held several positions within The Berkshire Group since joining the company in 1983 and is currently responsible for accounting, financial reporting, treasury and management information systems for Berkshire Mortgage Finance. Prior to joining The Berkshire Group, he was an audit supervisor for Coopers & Lybrand L.L.P. in Boston. He received a B.S. degree from Boston College and is a Certified Public Accountant.
Carol J.C. Mills is Senior Vice President for Loan Management of Berkshire Mortgage Finance and in this capacity, she is responsible for the Loan Servicing and Asset Management functions of the Boston, Bethesda and Seattle offices of Berkshire Mortgage Finance. She manages the estimated $7.2 billion portfolio of loans. Ms. Mills joined Berkshire in December 1997 as Vice President and was promoted to Senior Vice President in January 1999. From January 1989 through November 1997, Ms. Mills was Vice President of First Winthrop Corporation and Winthrop Financial Associates, in Cambridge, MA. Ms. Mills earned a B.A. degree from Mount Holyoke College and a Master of Architecture degree from Harvard University. Ms. Mills is a member of the Real Estate Finance Association, New England Women in Real Estate and the Mortgage Bankers Association.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors or executive officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1999, no person of record owned or was known by the General Partners to own beneficially more than 5% of the Partnership's 14,956,796 outstanding Units. The only interests held by management or its affiliates consist of its General Partner and Corporate Limited Partner Interests.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item is contained in Note F to the Partnership's Financial Statements presented in Appendix A to this report.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page of this report.
2. Financial Statement Schedule - see Index to Financial Statements and Schedule included under Item 8, Appendix A, on page of this report. All other schedules are omitted as they are not applicable, not required or the information is provided in the Financial Statements or the Notes thereto.
(b) Exhibits: Number and Description Under Regulation S-K
The following reflects all applicable Exhibits required under Item 601 of Regulation S-K:
(4) Instruments defining the rights of security holders including indentures:
(4.1)Agreement of Limited Partnership dated as of July 19, 1988 [Exhibit A included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 20, 1988 (File No. 33-21201)].*
(4.2)Subscription Agreement whereby a subscriber agrees to purchase Units and adopts the provisions of the Agreement of Limited Partnership [Exhibit D included in Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 20, 1988 (File No. 33-21201)].*
(4.3)Copy of First Amended and Restated Certificate of Limited Partnership filed with the Massachusetts Secretary of State on July 1, 1988. [Exhibit 4.4 to Amendment No. 1 of Registrant's Registration Statement on Form S-11 dated July 20, 1988 (File No. 33-21201)].*
(10) Material Contracts:
(10.1) Form of agreement between the Partnership and Krupp Mortgage Corporation [Exhibit 10.2 to Registrant's Registration Statement on Form S-11 dated April 20, 1988 (File No. 33-21201)].*
Richmond Park Apartments
(10.2) Prospectus for GNMA Pool No. 260865 (PL) [Exhibit 1 to Registrant's report on Form 8-K dated August 30, 1989 (File No. 0-17690)].*
(10.3) Subordinated Multifamily Open-End Mortgage (including Subordinated Promissory Note) dated July 14, 1989 between Carl Milstein, Trustee, Irwin Obstgarten, Al Simmon and Krupp Insured Plus-II Limited Partnership. [Exhibit 2 to Registrant's report on Form 8-K dated August 30, 1989 (File No. 0-17690)].*
(10.4) Participation Agreement dated July 31, 1989 between Krupp Insured Mortgage Limited Partnership and Krupp Insured Plus-II Limited Partnership [Exhibit 3 to Registrant's report on Form 8-K dated August 30, 1989 (File No. 0-17690)].*
Wildflower Apartments
(10.5) Prospectus for GNMA Pool No. 280652(PL) [Exhibit 10.30 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-17690)].*
(10.6) Subordinated Multifamily Deed of Trust dated December 12, 1989 (including Subordinated Promissory Note) between Lincoln Wildflower Limited Partnership and Krupp Insured Mortgage Limited Partnership [Exhibit 10.31 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 0-17690)].*
Brookside Apartments
(10.7) Supplement to Prospectus dated November 1, 1989 for Federal National Mortgage Association Pool Number MX-073009 [Exhibit 19.1 to Registrant's report on Form 10-Q for the quarter ended March 31, 1990 (File No. 0-17690)].*
(10.8) Subordinated Multifamily Deed of Trust dated January 30, 1990 between Brookside Manzanita and Krupp Insured Mortgage Limited Partnership [Exhibit 19.2 to Registrant's report on Form 10-Q for the quarter ended March 31, 1990 (File No. 0-17690)].*
(10.9) Subordinated Promissory Note dated January 30, 1990 between Brookside Manzanita and Krupp Insured Mortgage Limited Partnership [Exhibit 19.3 to Registrant's report on Form 10-Q for the quarter ended March 31, 1990 (File No. 0-17690)].*
Bell Station Apartments
(10.10) Supplement to Prospectus dated April 1, 1990 for Federal National Mortgage Association Pool Number MX-073011 [Exhibit 19.4 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].*
(10.11) Subordinated Multifamily Mortgage dated March 28, 1990 between Bell Station Associates, L.P. and Krupp Insured Mortgage Limited Partnership [Exhibit 19.4 to Registrant's report on Form 10-Q for the quarter ended March 31, 1990 (File No. 0-17690)].*
(10.12) Subordinated Promissory Note dated March 28, 1990 between Bell Station Associates, L.P. and Krupp Insured Mortgage Limited Partnership [Exhibit 19.5 to Registrant's report on Form 10-Q for the quarter ended March 31, 1990 (File No. 0-17690)].*
The Enclave Apartments
(10.13) Supplement to Prospectus dated April 1, 1990 for Federal National Mortgage Association Pool Number MX-073013 [Exhibit 19.1 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].*
(10.14) Subordinated Multifamily Open-End Mortgage dated April 26, 1990 between Beavercreek Associates and Krupp Insured Mortgage Limited Partnership [Exhibit 19.2 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].*
(10.15) Subordinated Promissory Note dated April 26, 1990 between Beavercreek Associates and Krupp Insured Mortgage Limited Partnership [Exhibit 19.3 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].*
Creekside Apartments
(10.16) Subordinated Promissory Note dated June 28, 1990 between Creekside Associates Limited Partnership and Krupp Insured Mortgage Limited Partnership [Exhibit 19.6 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].*
(10.17) Subordinated Multifamily Deed of Trust dated June 28, 1990 between Creekside Associates Limited Partnership and Krupp Insured Mortgage Limited Partnership [Exhibit 19.7 to Registrant's report on Form 10-Q for the quarter ended June 30, 1990 (File No. 0-17690)].*
(10.18) Participation Agreement dated June 28, 1990 between Krupp Mortgage Corporation and Krupp Insured Mortgage Limited Partnership [Exhibit 19.1 to Registrant's report on Form 10-Q for the quarter ended September 30, 1990 (File No. 0-17690)].*
* Incorporated by reference.
(c) Reports on Form 8-K During the last quarter of the year ended December 31, 1999, the Partnership did not file any reports on Form 8-K.
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, on the 9th day of March, 2000.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
By: Krupp Plus Corporation, a General Partner
By: /s/ Douglas Krupp Douglas Krupp, President, Co-Chairman (Principal Executive Officer), and Director of Krupp Plus Corporation
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 indicated, on the 9th day of March, 2000.
APPENDIX A
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
FINANCIAL STATEMENTS AND SCHEDULE ITEM 8 of FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION For the Year Ended December 31, 1999
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Accountants
Balance Sheets at December 31, 1999 and 1998
Statements of Income and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997
Statements of Changes in Partners' Equity for the Years Ended December 31, 1999, 1998 and 1997
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997
Notes to Financial Statements -
Schedule IV - Mortgage Loans on Real Estate -
All other schedules are omitted as they are not applicable or not required, or the information is provided in the financial statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Krupp Insured Mortgage Limited Partnership:
In our opinion, the accompanying balance sheets and the related statements of income and comprehensive income, of partners' equity and of cash flows, and Schedule IV, present fairly, in all material respects, the financial position of Krupp Insured Plus Limited Partnership (the "Partnership") at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with auditing principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States 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 management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts March 9, 2000
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, Continued
A. Organization
Krupp Insured Mortgage Limited Partnership (the "Partnership") was formed on March 21, 1988 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. The Partnership was organized for the purpose of investing in multi-family loans and mortgage backed securities. The Partnership issued all of the General Partner Interests to two General Partners in exchange for capital contributions aggregating $3,000. Krupp Plus Corporation and Mortgage Services Partners Limited Partnership are the General Partners of the Partnership and Krupp Depositary Corporation is the Corporate Limited Partner. Except under certain limited circumstances upon termination of the Partnership, the General Partners are not required to make any additional capital contributions. The Partnership terminates on December 31, 2028, unless terminated earlier upon the occurrence of certain events as set forth in the Partnership Agreement.
The Partnership commenced the public offering of Units on July 22, 1988 and completed its public offering on May 23, 1990 having sold 14,956,696 Units for $298,678,321 net of purchase volume discounts of $457,599. In addition, Krupp Depository owns one hundred units.
B. Significant Accounting Policies
The Partnership uses the following accounting policies for financial reporting purposes, which may differ in certain respects from those used for federal income tax purposes (see Note G):
MBS
The Partnership, in accordance with Financial Accounting Standards Board's Special Report on Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), classifies its MBS portfolio as available-for-sale. As such the Partnership carries its MBS at fair market value and reflects any unrealized gains (losses) as a separate component of Partners' Equity. The Partnership amortizes purchase premiums or discounts over the life of the underlying mortgages using the effective interest method.
Effective January 1, 1998, the Partnership adopted Statement of Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' (FAS 130). FAS 130 established standards for reporting and displaying comprehensive income and its components. FAS 130 requires comprehensive income and its components, as recognized under accounting standards, to be displayed in a financial statement with the same prominence as other financial statements, if material. Accordingly, unrealized gains (losses) on the Partnership's available-for sale securities have been included in other comprehensive income.
PIMs
The Partnership accounts for its MBS portion of a PIM in accordance with FAS 115 under the classification of held to maturity. The Partnership carries the Government National Mortgage Association (GNMA) or Fannie Mae MBS at amortized cost.
The insured mortgage portion of its Federal Housing Administration (FHA) PIM is carried at amortized cost. The Partnership holds this FHA insured mortgage at amortized cost since the loan is fully insured by the FHA.
Basic interest on PIMs is recognized based on the stated rate of the FHA mortgage loan (less the servicer's fee) or the stated coupon rate of the GNMA or Fannie Mae MBS. Participation interest is recognized as earned and when deemed collectible by the Partnership.
Continued
B. Significant Accounting Policies, continued
Cash and Cash Equivalents
The Partnership includes all short-term investments with maturities of three months or less from the date of acquisition in cash and cash equivalents. The Partnership invests its cash primarily in commercial paper and money market funds with a commercial bank and has not experienced any loss to date on its invested cash.
Prepaid Fees and Expenses
Prepaid fees and expenses represent prepaid acquisition fees, expenses and prepaid participation servicing fees paid for the acquisition and servicing of PIMs. The Partnership amortizes prepaid acquisition fees and expenses using a method that approximates the effective interest method over a period of ten to twelve years, which represents the actual maturity or anticipated repayment of the underlying mortgage. Acquisition expenses incurred on potential acquisitions which were not consummated were charged to operations.
The Partnership amortizes prepaid participation servicing fees using a method that approximates the effective interest method over a ten-year period beginning at final endorsement of the loan if a Department of Housing and Urban Development ("HUD") loan or GNMA loan and at closing if a Fannie Mae loan.
Income Taxes
The Partnership is not liable for federal or state income taxes as Partnership income is allocated to the partners for income tax purposes. In the event that the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and the examination results in a change in Partnership taxable income, such change will be reported to the partners.
Estimates and Assumptions
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities and revenues and expenses during the period. Actual results could differ from those estimates.
C. PIMs
At December 31, 1999 and 1998, the Partnership had investments in six PIMs and twelve PIMs, respectively. The Partnership's PIMs consist of (a) a GNMA or Fannie Mae MBS representing the securitized first mortgage loan on the underlying property or a sole participation interest in the mortgage loan originated under HUD's FHA lending program (collectively the "insured mortgages"), and (b) participation interests in the revenue stream and appreciation of the underlying property above specified base levels. The borrower conveys these participation features to the Partnership generally through a subordinated promissory note and mortgage (the "Agreement").
The Partnership receives guaranteed monthly payments of principal and interest on the GNMA and Fannie Mae MBS, and HUD insures the FHA mortgage loan. The borrower usually cannot prepay the first mortgage loan during the first five years and may prepay the first mortgage loan thereafter subject to a 9% prepayment premium in years six through nine, a 1% prepayment premium in year ten and no prepayment premium thereafter. The Partnership may receive interest related to its participation interests in the underlying property, however, these amounts are neither insured nor guaranteed.
Generally, the participation features consist of the following: (i) "Minimum Additional Interest" which is at the rate of .5% to 1% per annum calculated on the unpaid principal balance of the first mortgage on the underlying property, (ii) "Shared Income Interest" which is 25% to 35% of the monthly gross rental income generated by the underlying property in excess of a specified base, but only to the extent that it exceeds the amount of Minimum Additional Interest earned Continued
C. PIMs, continued
during such month, (iii) "Shared Appreciation Interest" which is 25% to 35% of any increase in the value of the underlying property in excess of a specified base. Payment of participation interest from the operations of the property is limited in any year to 50% of net revenue or surplus cash as defined by Fannie Mae or HUD, respectively. The aggregate amount of Minimum Additional Interest, Shared Income Interest and Shared Appreciation Interest payable by the underlying borrower on the maturity date generally cannot exceed 50% of any increase in value of the property.
However, generally any net proceeds from the sale or refinancing of the property will be available to satisfy any accrued but unpaid Shared Income or Minimum Additional Interest.
Shared Appreciation Interest is payable when one of the following occurs: (1) the sale of the underlying property to an unrelated third party on a date which is later than five years from the date of the Agreement, (2) the maturity date or accelerated maturity date of the Agreement, or (3) prepayment of amounts due under the Agreement and the insured mortgage.
The Partnership, upon giving twelve months written notice, can accelerate the maturity date of the Agreement to a date not earlier than ten years from the date of the Agreement for (a) the payment of all participation interest due under the Agreement as of the accelerated maturity date, or (b) the payment of all participation interest due under the Agreement plus all amounts due on the first mortgage note on the property.
During December 1999, the Partnership received prepayments on the Salishan, Saratoga, and Marina Shores Apartments PIMs, and the Patrician MBS. In addition to the principal proceeds from the Salishan PIM of $14,666,235, the Partnership received $146,662 of prepayment premium income and $311,650 of Shared Interest Income and Minimum Additional Income. The Partnership received $6,008,565 of principal proceeds from the Marina Shores PIM along with $176,679 of Shared Appreciation and prepayment premium income. The principal proceeds from the Saratoga PIM and the Patrician MBS prepayments were $6,204,895 and $7,830,263, respectively. The Partnership did not receive any additional interest on the Saratoga prepayment. On January 11, 2000, the Partnership paid a special distribution of $2.37 per Limited Partner interest from these four payoffs.
During November 1999, the Partnership paid a special distribution of $.30 per Limited Partner interest from the principal proceeds received from the Valley Manor PIM prepayment of $4,425,993. The Partnership did not receive any participation income from this PIM prepayment.
During May 1999, the Partnership paid a special distribution of $1.08 per Limited Partner interest from the principal proceeds, Shared Appreciation and prepayment proceeds received from the Remington and Pope Building PIMs (see below).
During March 1999, the Partnership received a payoff of the Remington PIM in the amount of $12,199,298. The payoff was the result of a default on the underlying loan which resulted in the Partnership receiving all of the outstanding principal balance under the insurance feature of the PIM. However, due to the default the Partnership did not receive any participation income from this PIM.
During February 1999, the Partnership received a payoff of the Pope Building PIM in the amount of $3,176,761. In addition, the Partnership received $703,860 of Shared Appreciation and prepayment premium income and $218,578 of Shared Income and Minimum Additional Interest upon the payoff of the underlying mortgage.
During January 1999, the Partnership paid a special distribution of $.66 per Limited Partner interest from the principal proceeds and prepayment premium received from the Cross Creek PIM during 1998.
On November 16, 1998, the Partnership received a prepayment of the Cross Creek PIM in the amount of approximately $9,414,586. Additional interest in lieu of a prepayment penalty of approximately $318,000 along with shared interest income of approximately $60,000 was also received during 1998.
Continued
C. PIMs, continued
On July 27, 1998 and August 26, 1998, the Partnership received a partial prepayment and final prepayment of approximately $654,000, and $2,985,000, respectively, for the Deering Place Apartments PIM. In addition to the principal repayment, the Partnership received minimum additional interest and shared interest income of $90,195 and a prepayment penalty of $268,638. The Partnership distributed the capital transaction proceeds from this prepayment to investors through a special distribution on September 18, 1998 in the amount of $.27 per Limited Partner interest.
During January 1998, the Partnership made a $1.12 per Unit special distribution with the prepayment proceeds of the Paddock Club and Southland Station PIMs that were received during the fourth quarter of 1997.
At December 31, 1999 and 1998 there were no loans within the Partnership's portfolio that were delinquent as to principal or interest.
(a) Includes one PIM - Richmond Park - in which the Partnership held 38% of the total PIM. The remaining portion is held by an affiliate of the Partnership.
(b) The Partnership had seven GNMA PIMs as of December 31, 1998. During 1999, the Partnership received prepayments on the Pope Building, Valley Manor, Remington, Saratoga and Marina Shores GNMA PIMs.
(c) The Partnership had four Fannie Mae PIMs as of December 31,1998. During 1999 the Partnership received a prepayment of the Salishan Apartments PIM.
The underlying mortgages of the PIMs are collateralized by multi-family apartment complexes located in 5 states. The apartment complexes range in size from 92 to 736 units.
D. MBS
At December 31, 1999, the Partnership's MBS portfolio has an amortized cost of $7,456,537 and gross unrealized gains of $140,027 and gross unrealized losses of $136,452. At December 31, 1998, the Partnership's MBS portfolio had an amortized cost of $18,161,683 and gross unrealized gains of $645,187. The MBS portfolio has maturity dates ranging from 2016 to 2024.
Continued
E. Partners' Equity
Profits from Partnership operations and Distributable Cash Flow are allocated 97% to the Unitholders and Corporate Limited Partner (the "Limited Partners") and 3% to the General Partners.
Upon the occurrence of a capital transaction, as defined in the Partnership Agreement, net cash proceeds and profits from the capital transaction will be distributed first, to the Limited Partners until they have received a return of their total invested capital, second, to the General Partners until they have received a return of their total invested capital, third, 99% to the Limited Partners and 1% to the General Partners until the Limited Partners receive an amount equal to any deficiency in the 11% cumulative return on their invested capital that exists through fiscal years prior to the date of the capital transaction, fourth, to the class of General Partners until they have received an amount equal to 4% of all amounts of cash distributed under all capital transactions and fifth, 96% to the Limited Partners and 4% to the General Partners. Losses from a capital transaction will be allocated 97% to the Limited Partners and 3% to the General Partners.
As of December 31, 1999, the following cumulative partner contributions and allocations have been made since inception of the Partnership:
F. Related Party Transactions
Under the terms of the Partnership Agreement, the General Partners or their affiliates receive an Asset Management Fee equal to .75% per annum of the value of the Partnership's invested assets payable quarterly. The General Partners may also receive an incentive management fee in an amount equal to .3% per annum on the Partnership's Total Invested Assets providing the Unitholders receive a specified non-cumulative annual return on their Invested Capital. Total fees payable to the General Partners as asset management or incentive management fees shall not exceed 9.05% of distributable cash flow over the life of the Partnership.
Additionally, the Partnership reimburses affiliates of the General Partners for certain expenses incurred in connection with maintaining the books and records of the Partnership and the preparation and mailing of financial reports, tax information and other communications to investors.
Continued
G. Federal Income Taxes
For the years ended December 31, 1999, 1998 and 1997 the average per unit income to the Unitholders for federal income tax purposes was $.36, $.60 and $.83 respectively.
The basis of the Partnership's assets for financial reporting purposes is less than its tax basis by approximately $2,634,000 and $3,823,000 at December 31, 1999 and 1998, respectively. The basis of the Partnership's liabilities for financial reporting purposes are less than its tax basis by approximately $265,000 and $0 at December 31, 1999 and 1998, respectively.
H. Fair Value Disclosure of Financial Instruments
The Partnership uses the following methods and assumptions to estimate the fair value of each class of financial instruments:
Cash and cash equivalents
The carrying amount approximates fair value due to the short maturity of those instruments.
MBS
The Partnership estimates the fair value of MBS based on quoted market prices. Based on the estimated fair value determined using these methods and assumptions, the Partnership's investments in MBS had gross unrealized gains and losses of approximately $140,000 and $136,000 at December 31, 1999 and $645,000 and $0 at December 31, 1998.
Continued
H. Fair Value Disclosure of Financial Instruments, continued
PIMs
There is no active trading market for these investments. Management estimates the fair value of the PIMs using quoted market prices of MBS having the same stated coupon rate. Management does not include any participation income in the Partnership's estimated fair value arising from appreciation of the properties, because Management does not believe it can predict the time of realization of the feature with any certainty. Based on the estimated fair value determined using these methods and assumptions, the Partnership's investments in PIMs had gross unrealized gains and losses of approximately $168,000 and $311,000, respectively, at December 31, 1999, and gross unrealized gains of approximately $2,527,000 at December 31, 1998.
I. Subsequent Event
On February 25, 2000 the Partnership received a payoff on the Brookside Apartments PIM in the amount of $4,531,910. The Borrower defaulted on the first mortgage loan and Fannie Mae paid off the MBS upon maturity in February 2000. The Partnership anticipates a first quarter special distribution of $.31 per unit. The Partnership is pursuing the receipt of approximately $307,000 in additional income due from the borrower. At this time, it is uncertain if the Partnership will receive this income.
Continued
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
(a) The Participating Insured Mortgages ("PIMs") consist of either a mortgage-backed security ("MBS") issued and guaranteed by Fannie Mae, an MBS issued and guaranteed by the Government National Mortgage Association ("GNMA") or a sole participation interest in a first mortgage loan insured by the United States Department of Housing and Urban Development ("HUD") and a subordinated promissory note and mortgage or shared income and appreciation agreement with the underlying Borrower that conveys participation interests in the revenue stream and appreciation of the underlying property above certain specified base levels.
(b) Represents the permanent interest rate of the GNMA or Fannie Mae MBS or the HUD-insured first mortgage less the servicers fee. The Partnership may also receive additional interest which consists of (i) Minimum Additional Interest based on a percentage of the unpaid principal balance of the first mortgage on the property, (ii) Shared Income Interest based on a percentage of monthly gross income generated by the underlying property in excess of a specified base amount (but only to the extent it exceeds the amount of Minimum Additional Interest received during such month), (iii) Shared Appreciation Interest based on a percentage of any increase in the value of the underlying property in excess of a specified base value.
(c) Minimum additional interest is at a rate of .5% per annum calculated on the unpaid principal balance of the first mortgage note.
(d) Shared income interest is based on 25% of monthly gross rental income over a specified base amount.
(e) Shared appreciation interest is based on 25% of any increase in the value of the project over the specified base value.
(f) Shared income interest is based on 30% of monthly gross rental income over a specified base amount.
(g) Shared appreciation interest is based on 30% of any increase in the value of the project over the specified base value.
(h) Shared income interest is based on 35% of monthly gross rental income over a specified base amount and shared appreciation interest is based on 35% of any increase in the value of the project over the specified base value.
(i) The Partnership's GNMA MBS and HUD direct mortgages have call provisions, which allow the Partnership to accelerate their respective maturity dates.
(j) The normal monthly payment consisting of principal and interest is payable monthly at level amounts over the term of the GNMA MBS and the HUD direct mortgages. (k) PIMs generally may not be prepaid during the first five years and may be prepaid subject to a 9% prepayment penalty in years six through nine, a 1% prepayment penalty in year ten and no prepayment penalty after year ten.
(l) The normal monthly payment consisting of principal and interest for a Fannie Mae PIM is payable at level amounts based on a 35-year amortization. All unpaid principal and accrued interest is due at the end of year ten.
(m) The approximate principal balance due at maturity for each PIM, respectively, is as follows:
KRUPP INSURED MORTGAGE LIMITED PARTNERSHIP
NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE, Continued
(n) The aggregate cost of PIMs for federal income tax purposes is $51,390,092.
A reconciliation of the carrying value of PIMs for each of the three years in the period ended December 31, is as follows:
Distributable Cash Flow and Net Cash Proceeds from Capital Transactions
Shown below is the calculation of Distributable Cash Flow and Net Cash Proceeds from Capital Transactions as defined in Section 17 of the Partnership Agreement and the source of cash distributions for the year ended December 31, 1999 and the period from inception through December 31, 1999. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Distributable Cash Flow and Net Cash Proceeds from Capital Transactions should not be considered by the reader as a substitute to net income as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity.
(a) Represents all distributions paid in 1999 except the February 1999 distribution and includes the special distribution paid in January 2000, and an estimate of the distribution to be paid in February 2000.
(b) Includes the special distribution paid in January 2000 and an estimate of the distribution to be paid in February 2000.
(c) Limited Partners average per Unit return of capital as of February 2000 is $13.68 [$23.98 - $10.30]. Return of capital represents that portion of distributions which is not funded from DCF such as proceeds from the sale of assets and substantially all of the principal collections received from MBS and PIMs.