Item 1. Business
The registrant, First Dearborn Income Properties L.P. II (the "Partnership"), is a limited partnership formed in May 1988 under the Revised Uniform Limited Partnership Act of the State of Delaware to invest in income producing commercial and residential real estate consisting principally of existing shopping centers and office buildings, as well as apartment complexes, parking garages and lots and warehouse and industrial buildings. On February 1, 1989, the Partnership commenced an offering of $10,000,000 (subject to increase by an additional $5,000,000) of its limited partnership interests (the "Units") at $500 per Unit, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933 (File No. 33-23048). A total of 10,000 Units was sold. The holders of 3,345 Units were admitted to the Partnership in 1989, holders of 4,444 Units were admitted to the Partnership in 1990, and holders of 2,211 Units were admitted in 1991. Of the 2,211 Units purchased in 1991, 1,669 Units were purchased by an affiliate of the General Partners pursuant to its Agreement to Purchase Units. The offering terminated on January 31, 1991 (extended from its originally scheduled termination date of January 31, 1990). Since admission to the Partnership, no holder of Units (hereinafter, a "Limited Partner") has made any additional capital contributions. The Limited Partners of the Partnership share in the benefits of ownership of the Partnership's real property investments in proportion to the number of Units held.
Net of offering costs, Limited Partners have contributed a total of $4,058,963 to the Partnership. The Partnership is engaged solely in the business of real estate investment. It is the Partnership's objective to realize cash flow from operations and appreciation in the value of the real estate. The Partnership has entered into three joint venture agreements with partnerships sponsored by affiliates of the General Partners. Pursuant to such agreements, the Partnership has made capital contributions aggregating $3,652,066 through December 31, 1998. The Partnership has acquired, through these ventures, interests in two shopping centers and a mixed use apartment/retail building. No investments have been made since 1991. The Country Isles property was sold in December 1997. As of December 31, 1998, the Partnership had made the real property investments set forth in the following table:
Sycamore Mall represents the most significant investment made by the Partnership. A total of $2,275,000 has been invested by the Partnership which represents 62% of the Partnership's real estate investments. Since acquiring the Sycamore Mall investment in 1990, the Partnership has received cash distributions of $1,423,351 from Sycamore Mall Associates. Country Isles represents an investment of $775,000 or 21% of the Partnership's real estate investments. Since acquiring the Country Isles investment in 1991, the Partnership had received distributions of $1,536,718, including distributions from the sale of the property. Evanston Galleria accounts for $602,066 or 17% of the Partnership's real estate investments. Since acquiring the Evanston Galleria investment in 1989, the Partnership has received distributions of $50,133.
During the past five years, operations at the Partnership's three properties have provided sufficient cash flow to meet the obligations of the Partnership and continue to make distributions to its partners. Each of the properties has been able to sustain adequate cash flow even though they have each had some releasing issues over the last few years. The real estate market in general had suffered from overbuilding which occurred during the 1980's. This increased the competition for the Partnership's properties, which resulted in a decrease in rental rates from 1990 to 1994. Since 1994, the market rental rates have continued to increase moderately.
During 1996, Randall's, a tenant at Sycamore Mall, vacated its leased premises of 19,800 square feet. As a result of the Randall's vacancy, occupancy at Sycamore Mall fell to approximately 86% during the second quarter of 1996. However, Randall's continued to pay rent through December, 1996. Sears, Roebuck and Co. was a tenant under a lease which had an original termination date of March 31, 1992. Prior to that termination, a ten-year extension was agreed to which provided Sears an option to terminate the lease at any time after March 31, 1997 by giving landlord a one year written notice. Sears gave such notice on September 17, 1997 and terminated its lease on September 1, 1998. Management is currently negotiating with a potential replacement tenant, however there can be no assurance that a new lease will be entered into. If this space is not released, the ability of Sycamore Mall to meet its financial obligations could be effected, as a result of the decreased revenues. In response to the uncertainty relative to Sycamore Mall Associates ability to recover the net carrying value of Sycamore Mall through future operations and sale, Sycamore Mall Associates, as a matter of prudent accounting practices and for financial reporting purposes, recorded a provision for value impairment in 1998 in the amount of $1,100,000.
During 1995, the Evanston Galleria experienced a problem with retail tenants. There was 13,635 square feet of retail space of which the tenants were in default of their leases for non payment of rent. Occupancy in the apartments at Evanston Galleria has remained in the 94% - 100% range during the last five years. The retail space has had a problem with tenant defaults, which has reduced overall occupancy to as low as 80% in 1991. As of December 31, 1996, occupancy was 84%. During the fourth quarter of 1997, Evanston Galleria collected $50,000 as a settlement for past due rents. Management has settled its legal actions against the previously defaulted tenants. Also during the fourth quarter of 1997, management was successful in signing two new leases. As of December 31, 1997 occupancy was 83%. During 1998, a lease was entered into to lease the lower level space of 11,300 square feet which has increased occupancy to over 93%, as of December 31, 1998.
As of October 1, 1997, the Evanston Galleria property was considered to be held for sale. In accordance with SFAS 121, no depreciation expense relative to the property was recorded by the Partnership from October 1, 1997 through December 31, 1998. The net book value of the Evanston Galleria property at December 31, 1998 and 1997 was $8,422,717 and $8,408,900, respectively, and net loss from operations for the years ended December 31, 1998, 1997 and 1996, net of the Venture Partners share were $35,661, $90,086 and $78,686 respectively.
On February 16, 1999, a contract was entered into for the sale of the Evanston Galleria. The purchase price, net of closing costs and prorations, should be sufficient to repay all liabilities of the Evanston Galleria Limited Partnership. However there will not be a significant distribution to the Partnership. The Partnership is expected to recognize a gain on the sale of approximately $100,000.
The Partnership's real property investments are subject to competition from similar types of properties in the vicinities in which they are located. Approximate occupancy levels for the Partnership's properties are set forth on a quarterly basis in the table set forth in Item 2
Item 2. Properties
The Partnership owns through joint venture partnerships the properties referred to in Item 1. The three properties in which the Partnership has held an interest in are described below:
Sycamore Mall Associates The property is a retail shopping center located in Iowa City, Iowa, and is situated on an approximate 21.2 acre site. It includes a main building containing 213,206 square feet and an out parcel building containing 27,000 square feet. A 14,000 square foot parcel which contains a 4,590 square foot building is under a ground lease. The property is owned fee simple by a partnership of which the Partnership is a partner. It is subject to a first mortgage in the amount of $4,574,933 which bears interest at a rate of 8.125% payable in monthly installments of principal and interest of $44,375 until March 1, 2002, when the balance comes due.
The major tenant is Von Maur which occupies approximately 17% of the net rentable area. Occupancy at Sycamore Mall had remained in the 94% - 99% range through 1995. During 1996, Randall's vacated its leased premises of 19,800 square feet. Occupancy fell to 86%, however, Randall's continued to pay rent through December, 1996 so that there was no adverse financial impact in 1996. Sears, Roebuck and Co. was a tenant under a lease which had an original termination date of March 31, 1992. Prior to that termination, a ten-year extension was agreed to which provided Sears an option to terminate the lease at any time after March 31, 1997 by giving landlord a one year written notice. Sears gave such notice on September 17, 1997 and terminated its lease on September 1, 1998. Management is currently negotiating with potential replacement tenants, however there can be no assurance that a new lease will be entered into. As of December 31, 1998, the property is over 50% vacant. If this space is not released, the ability of Sycamore Mall to meet its financial obligations could be effected, as a result of decreased revenues. The Sears lease comprised 82,605 square feet which is 34% of the leaseable area of the shopping center. However, the annual rental income received from Sears is approximately $109,000 or approximately 6% of total revenues. The Von Maur lease expires in 2009 and the annual rent is approximately $210,000. Average total rents received per square foot at the property during the last three years are $6.98 in 1998, $7.65 in 1997, and $8.15 in 1996.
There are currently no plans for any significant improvements to the property. However, construction has begun on a new regional shopping center in the area. The location of the new mall will create additional competition for Sycamore Mall. Management is closely monitoring the situation.
The following table illustrates the scheduled lease expirations for Sycamore Mall, over the next ten years:
Management believes that the Sycamore Mall property has adequate insurance coverage.
Country Isles The Country Isles Shopping Center, located in the Weston community of Fort Lauderdale, Florida, was an approximately 106,000 square foot retail shopping center containing approximately 71,000 square feet which opened in 1986 and an additional expansion of approximately 35,000 square feet which opened in 1989. On April 25, 1996, Country Isles Associates completed the refinancing of Country Isles Plaza in Ft. Lauderdale, Florida. The new mortgage provided funding of $8,100,000, the proceeds of which were used to repay the outstanding balance of $6,807,669 on the previous mortgage, pay the costs of completing the new loan (approximately $174,000), and provide for property tax escrow and working capital. Out of the remaining proceeds, the Partnership received a distribution of $210,650 from Country Isles Associates. The Partnership made a special distribution to the Limited Partners. As a result of the refinancing, the interest rate was reduced from 9.75% to 7.00%, the monthly payments decreased from $60,141 to $57,250. The mortgage was due to mature on May 1, 2001.
On December 17, 1997, Country Isles Associates, sold the Country Isles Shopping Center in Fort Lauderdale, Florida, to Principal Mutual Life Insurance Company ("Buyer"). The total purchase price received by Country Isles was $13.2 million, which price was determined through arm's length negotiations with Buyer. Of this total purchase price, approximately $7.9 million was used to repay amounts owed to the lender holding the mortgage on the shopping center and approximately $595,000 was used for customary additional selling expenses and prorations. The net proceeds to Country Isles after these deductions were approximately $4.7 million. Of these proceeds, the Partnership received approximately $991,000 for its 21% interest.
Evanston Galleria Limited Partnership Evanston Galleria is a mixed-use residential and retail property located in Evanston, Illinois. The property, located on a 0.79 acre site, contains 36,068 square feet of rentable retail space and 55 loft apartments containing a total of 45,190 square feet of rentable area. The apartments are leased on a one or two year lease term. The retail space is generally leased with 5 to 10 year leases.
The property is owned fee simple by a partnership of which the Partnership is a partner. The property is subject to a first mortgage which matured May 1, 1996. Effective May 1, 1996, a modification of the first mortgage was entered into which, among other modifications, extended the maturity of the loan until May 1, 1998. Commencing on May 1, 1996, monthly payments were adjusted to $57,143, which represents interest only payments at an annual rate of 8.25%, based on the outstanding principal balance of the loan as of May 1, 1996. Notwithstanding the pay rate of 8.25%, interest on the loan continues to accrue and compound monthly on the unpaid principal balance at the annual rate of 9.00%. The interest differential, as defined, will be paid only from proceeds resulting from a sale or refinancing of the property or from any remaining funds in the cash flow escrow. The unpaid interest together with the unpaid principal balance of the loan was due and payable May, 1 1998. The first mortgage loan maturity has been extended to August 1, 1999. All net cash flow from the property, in excess of the payments due for interest, shall be deposited into a cash flow escrow account. If cash flow in any month is insufficient to pay amounts due under the loan, then the amounts may be withdrawn from the cash flow escrow account.
On February 16, 1999, a contract was entered into for the sale of the Evanston Galleria. The purchase price, net of closing costs and prorations should be sufficient to repay all liabilities of the Evanston Galleria Limited Partnership, including the first mortgage. However there will not be a significant distribution to the Partnership. If the sale is consummated, the Partnership is expected to recognize a gain on the sale of approximately $100,000. The closing is currently scheduled to occur on April 30, 1999. However, the Purchaser has requested a 90 day extension.
Evanston Galleria has no single tenant which accounts for more then 10% of the rentable area. Occupancy in the apartments at Evanston Galleria has remained in the 94% - 100% range during the last five years. The retail space has had a problem with tenant defaults, which has reduced overall occupancy to as low as 80% in 1991. As of December 31, 1996, occupancy was 84% and as of December 31, 1998 had increased to 97%. Average total rents received per square foot at the property during the last three years were $16.83 in 1998, $19.57 in 1997, and $21.85 in 1996.
The residential leases have terms typically expiring in one year. During 1998 residential leases representing $698,640 of annual rent will expire. During the fourth quarter of 1997, Evanston Galleria collected $50,000 as a settlement for past due rents. Management has settled its legal actions against the previously defaulted tenants. Also during the fourth quarter of 1997, management was successful in signing two new leases. As of December 31, 1997 occupancy was 83%. During 1998, a lease was entered into to lease the lower level space of 11,300 square feet which has increased occupancy to over 93%, as of December 31, 1998. The Evanston Bible Fellowship has leased the lower level through September 30, 2002. Rents will be $45,142 in 1998, $69,486 in 1999, $71,571 in 2000, $73,718 in 2001 and $56,523 in 2002.
The following table illustrates the scheduled lease expirations relating to the retail space, for Evanston Galleria, over the next ten years:
As of October 1, 1997, the Evanston Galleria property was considered to be held for sale. In accordance with SFAS 121, no depreciation expense relative to the property was recorded by the Partnership from October 1, 1997 through December 31, 1998. The net book value of the Evanston Galleria property at December 31, 1998 and 1997 was $8,422,717 and $8,408,908, respectively, and net loss from operations for the years ended December 31, 1998, 1997 and 1996, net of the Venture Partners share were $35,661, $90,086 and $78,686, respectively.
Management believes that the Evanston Galleria property has adequate insurance coverage.
Occupancy Summary The following is a list of approximate occupancy levels by quarter for the Partnership's investment properties:
Item 3.
Item 3. Legal Proceedings
The Partnership is not aware of any material pending legal proceedings to which it or its properties are subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of December 31, 1998, there were 532 Limited Partners holding 10,000 Units. There is no public market for Units and it is not anticipated that a public market for Units will develop. Pursuant to the terms of the Limited Partnership Agreement of the Partnership (the "Partnership Agreement"), there are restrictions on the ability of the Limited Partners to transfer their Units. In all cases, the General Partners must consent to the substitution of a Limited Partner.
Distributions to Limited Partners, through December 31, 1997, have totaled $1,394,298 since the Partnership's formation. This is approximately $139.43 of cash distributions per Unit. Each Unit originally sold for $500 and the offering was closed on January 31, 1991. Reference is made to Item 6
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources:
On February 1, 1989, the Partnership commenced a public offering of $10,000,000 of units of Limited Partnership interest (the "Units") (subject to increase by an additional $5,000,000 of Units) pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. The Partnership terminated the offering of Units on January 31, 1991, having issued 10,000 Units, resulting in gross proceeds of $5,000,000 and net proceeds to the Partnership (after deducting offering costs and selling discounts related to the purchase of Units by the General Partners and their affiliates) of $4,058,963.
At December 31, 1998, the Partnership had cash and cash equivalents of $968,437 as compared to $1,659,443 as of December 31, 1997. The decrease in cash and cash equivalents results primarily because the partnership made a distribution, to its Limited Partners, during the first quarter of 1998, in the amount of $740,600 resulting from $991,000 of net cash provided from the sale of Country Isles shopping center. Cash Flow from operations has been sufficient to meet the Partnerships' obligations in the past, however, past performance is not necessarily indicative of future performance.
As of December 31, 1998, the Partnership has no material commitments for capital expenditures. The Partnership does not anticipate any need for external sources of liquidity. As of October 1, 1997, the Evanston Galleria property was considered to be held for sale. In accordance with SFAS 121, no depreciation expense relative to the property was recorded by the Partnership from October 1, 1997 through December 31, 1998. The net book value of the Evanston Galleria property at December 31, 1998 and 1997 was $8,422,717 and $8,408,908, respectively, and net loss from operations for the years ended December 31, 1998, 1997 and 1996, net of the Venture Partners share were $41,715, $90,086 and $78,686 respectively.
As the Partnership intends to distribute all "net cash receipts" and "sales proceeds" in accordance with the terms of the Partnership Agreement, and does not intend to reinvest any such proceeds, the Partnership is intended to be self-liquidating in nature. The Partnership's future source of liquidity and distributions is expected to come from cash generated by the Partnership's investment properties and from the sale and refinancing of such properties. To the extent a property does not generate adequate cash flow to meet its working capital requirements, the Partnership may (i) withdraw funds from the working capital reserve it maintains, (ii) fund such shortfall from excess cash generated by other properties owned or (iii) pursue outside financing sources. However, the Partnership may decide not to, or may not be able to, commit additional funds to certain of its investment properties. Nonetheless, it is anticipated that the current and future capital resources of the Partnership will be adequate to fund currently anticipated short and long-term requirements of its investment portfolio taken as a whole.
There are certain risks and uncertainties associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic or business interests or goals that are inconsistent with those of the Partnership. To date, the Partnership has not experienced any significant detrimental impact from these uncertainties and risks, except at Evanston Galleria as more fully described in Note 2 (b) to the Notes to Consolidated Financial Statements included in Item 8.
In response to the weakness of the U.S. economy in general and the problems being experienced at the Sycamore Mall property in particular, the Partnership is taking steps to preserve its working capital. Therefore, the Partnership carefully scrutinizes the appropriateness of any possible discretionary expenditures, particularly as such expenditures relate to the amount of working capital reserves the Partnership has available. By conserving working capital, the Partnership expect to be in a better position to meet future needs of its properties without having to rely on external financing sources.
Results of Operations:
The results of operations for the years ended December 31, 1998, reflect the consolidated operations of the Partnership and Sycamore Mall Associates (the "Sycamore Partnership") and the Partnership's equity investments in Evanston Galleria Limited Partnership (the "Galleria Partnership. The results of operations for the years ended December 31, 1997 and December 31, 1996 reflect the consolidated operations of the Partnership and Sycamore Mall Associates (the "Sycamore Partnership") and the Partnership's equity investments in Evanston Galleria Limited Partnership (the "Galleria Partnership") and Country Isles Associates ("Country Isles"). The results of operations of the Sycamore Partnership reflect the operations of the Sycamore Mall Shopping Center. The equity investment in the Galleria Partnership reflects the Partnership's share of the operations of the Evanston Galleria. The equity investment in Country Isles reflects the Partnership's share of the operations of the Country Isles Plaza Shopping Center.
Changes from 1997 to 1998:
The Partnership's net income in 1998 decreased $1,321,651 to ($562,139) in 1998 from $759,512 in 1997. This decrease resulted primarily from the Partnership's recognition of its share of the loss of value impairment from Sycamore Mall Associates of approximately $583,000 and the gain on the sale of the Country Isles property in December 1997. The Partnership's share of the gain was $698,447. The loss allocated from Evanston Galleria was $90,086 in 1997 as compared to $35,661 in 1998. The improvement in operating results from the Evanston Galleria resulted from increased occupancy in the commercial spaces at Evanston Galleria. In response to the uncertainty relative to Sycamore Mall Associates ability to recover the net carrying value of Sycamore Mall through future operations and sale, Sycamore Mall Associates, as a matter of prudent accounting practices and for financial reporting purposes, recorded a provision for value impairment in 1998 in the amount of $1,100,000.
The Partnership's rental income decreased $153,213 (12%), from $1,293,749 in 1997 to $1,140,536 in 1998. Revenue from tenant charges decreased $172,219 (32%) from $530,597 in 1997 to $358,378 in 1998. This decrease is due to a decrease in occupancy at Sycamore Mall, and a decrease in property tax expense.
Interest income increased $22,094 (96%) from $22,950 in 1997 to $45,044 in 1998. The increase results from the increase in cash reserves which have been held and invested by the Partnership.
Property operating expenses decreased to $682,200 for the year ended December 31, 1998 from $912,456 for the year ended December 31, 1997. This $230,256 (25%) decrease results primarily from a decrease of property taxes at Sycamore Mall.
Interest expense decreased $13,068 (3%) from $377,530 in 1997 to $364,462 in 1998. The reduction results from the repayment of mortgage indebtedness throughout the year.
The Partnership's share of operations of unconsolidated venture resulted in a loss of $35,661 in 1998 compared to $9,079 in 1997. This decrease is attributable to the elimination of income which had previously been allocated from Country Isles.
General and administrative expenses increased $76,109 (96%) from $79,647 in 1997 to $155,756 in 1998. The increase results from the increase in professional and legal fees.
Changes from 1996 to 1997:
The Partnership's net income in 1997 increased $678,641 from $80,871 in 1996 to $759,512 in 1997. This increase resulted primarily from the Partnership's recognition of its share of the gain on the sale of the Country Isles property, in December 1997. The Partnership's share of the gain was $698,447. The loss allocated from Evanston Galleria was $90,086 in 1997 as compared to $78,686 in 1996. The decrease in operating results from the Evanston Galleria resulted from increased vacancy in the commercial spaces at Evanston Galleria. The income allocated from Country Isles in 1996 was $33,541 as compared to a gain of $81,007 in 1997. Operations at Country Isles continued to improve from increased rental rates and increased occupancy.
The Partnership's rental income decreased $62,046 (5%) from $1,355,795 in 1996 to $1,293,749 in 1997. The decrease in rental income results from an increase in vacancy at Sycamore Mall. Occupancy fell during the second quarter of 1996, although occupancy has been increasing slightly since then, the overall average for the year was a decrease in occupancy.
Revenue from tenant charges decreased $51,337 (9%) from $581,934 in 1996 to $530,597 in 1997. The decrease in rental income results from an increase in the average vacancy at Sycamore Mall, over the year.
Interest income increased $5,282 (30%) from $17,668 in 1996 to $22,950 in 1997. The increase results from the increase in cash reserves which have been held and invested by the Partnership.
Property operating expenses increased to $912,456 for the year ended December 31, 1997 from $871,550 for the year ended December 31, 1996. This $40,906 (5%) increase results primarily from an increase in maintenance and landscaping expenses at Sycamore Mall.
Interest expense decreased $12,056 (3%) from $389,586 in 1996 to $377,530 in 1997. The reduction results from the repayment of $153,932 of mortgage indebtedness throughout the year. Interest expense in 1998 is expected to decrease further as a result of the continued repayment of the mortgage indebtedness.
General and administrative expense decreased $7,205 (8%) from $86,852 during the year ended December 31, 1996 to $79,647 during the year ended December 31, 1997. This decrease resulted in a decrease in administrative costs charged by an affiliate of the General Partner.
Inflation:
The Partnership has completed its tenth full year of operations. During the ten years the annual inflation rate has ranged from 3.01% to 5.40% with an average of 4.21%. The effect which inflation has had on income from operations is minimal primarily due to the weak real estate market.
Inflation in future periods may increase rental income levels (from leases to new tenants or renewals of existing leases) in accordance with normal market conditions. Such increases in rental income should offset most of the adverse impact that inflation has on property operating expenses with little effect on operating income. Continued inflation may also tend to cause capital appreciation of the Partnership's investment properties over a period of time as rental rates and replacement costs of properties continue to increase.
Year 2000:
The General Partner has determined that it does not expect that the consequences of the Partnership's year 2000 issues will have a material effect on the Partnership's business, results of operations or financial condition.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures about Market Rate:
The Partnership has identified interest rate changes as a potential market risk. However, as a majority of the Partnership`s long-term debt bears interest at a fixed rate, the Partnership does not believe that it is exposed to market risk relative to interest rate changes.
Item 8.
Item 8. Financial Statements and Supplementary Data
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
INDEX
Schedules not filed:
All schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or the related notes.
Evanston Galleria, L.P. (a limited partnership) INDEX
Schedules not filed:
All schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or the related notes.
Independent Auditors' Report
The Partners First Dearborn Income Properties L.P. II
We have audited the consolidated financial statements of First Dearborn Income Properties L.P. II (a limited partnership) and consolidated venture as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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 the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Dearborn Income Properties L.P. II and consolidated venture as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP Chicago, Illinois April 14, 1999
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization and Basis of Accounting
The Partnership was formed under the Delaware Revised Uniform Limited Partnership Act by the recording of a Certificate of Limited Partnership as of May 19, 1988. Initial capital contributions were $1,000 by the General Partners and $1,000 by the Initial Limited Partner. The Initial Limited Partner (an affiliate of the Managing General Partner) withdrew as a Limited Partner upon the admission of the first additional Limited Partners on October 16, 1989 when the initial closing of the offering was consummated. The Agreement of Limited Partnership authorized the issuance of up to 20,000 additional Units (subject to increase by an additional 10,000 Units) at $500 per Unit. A total of 7,789 Units was subscribed for and issued between February 1, 1989 and December 31, 1990. An additional 2,211 Units were issued during 1991 of which 1,669 Units were purchased by an affiliate of the General Partners pursuant to its Agreement to Purchase Units. The offering terminated on January 31, 1991 at which time an aggregate 10,000 Units had been sold.
The accompanying consolidated financial statements include the accounts of the Partnership and its consolidated venture - Sycamore Mall Associates. The effect of all transactions between the Partnership and the venture has been eliminated.
The equity method of accounting has been applied in the accompanying consolidated financial statements with respect to the Partnership's interest in Evanston Galleria Limited Partnership, for the years ended December 31, 1998, 1997 and 1996, and in Country Isles Associates, for the years ended December 31, 1997 and 1996.
The Partnership records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying Consolidated Financial Statements have been prepared from such records after making appropriate adjustments, where applicable, to present the Partnership's accounts in accordance with generally accepted accounting principles (GAAP). Such adjustments are not recorded for the Partnership. The net effect of these is as follows:
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements - Continued
Partnership distributions from unconsolidated ventures are considered cash flow from operating activities to the extent of the Partnership's cumulative share of net income. In addition, the Partnership records amounts held in U.S. Government obligations, commercial paper and certificates of deposit at cost which approximates market. For the purposes of these statements, the Partnership's policy is to consider all such investments, with an original maturity of three months or less ($788,980 and $1,400,707 at December 31, 1998 and 1997, respectively), as cash equivalents.
Deferred loan costs are amortized over the terms of the related agreements using the straight-line method. Leasing commissions are amortized over the terms of the related tenant leases using the straight-line method.
Depreciation on the investment properties acquired has been provided over the estimated useful lives of 5 to 30 years using the straight-line method.
No provision for Federal income taxes has been made as any liability for such taxes would be that of the partners rather than the Partnership.
The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Partnership adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of", on January 1, 1996. SFAS 121 requires that the Partnership record an impairment loss on its property held for investment whenever the property's carrying value cannot be fully recovered through estimated undiscounted cash flows from its operations and sale. The amount of the impairment loss to be recognized would be the difference between the property's carrying value and the property's estimated fair value. In addition, SFAS 121 provides that a property may not be depreciated while being held for sale. As of October 1, 1997, the Evanston Galleria property was considered to be held for sale. In accordance with SFAS 121, no depreciation expense relative to the property was recorded by the Partnership from October 1, 1997 through December 31, 1998. The net book value of the Evanston Galleria property at December 31, 1998 and 1997 was $8,422,717 and $8,408,908, respectively, and net loss from operations for the years ended December 31, 1998, 1997 and 1996, net of the Venture Partners share were $35,661, $90,086 and $78,686 respectively. The remaining properties are considered to be held for investment at December 31, 1998.
The Partnership has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Partnership defines each of its property investments as an individual operating segment and has determined such property investments exhibit substantially identical economic characteristics and meet the other criteria specified by SFAS No. 131 which permits the property investments to be aggregated into one reportable segment. The Partnership assesses and measures operating results based on net operating income (rental income less property operating expenses). With the exception of interest expense, professional services and general and administrative expenses, substantially all other components of net earnings (loss) of the Partnership relate to property investments. With the exception of cash and cash equivalents, substantially all other assets of the Partnership relate to property investments.
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements - Continued
(2) Venture Agreements
(a) General
The Partnership has entered into three joint venture agreements with partnerships sponsored by affiliates of the General Partners. Pursuant to such agreements, the Partnership has made capital contributions aggregating $3,652,066 through December 31, 1998. The Partnership has acquired, through these ventures, interests in a mixed use retail/residential property and two shopping centers.
(b) Evanston Galleria Limited Partnership
On October 31, 1989, the Partnership acquired an interest in Evanston Galleria Limited Partnership (the "Galleria Partnership") which owns a 100% beneficial interest in the Evanston Galleria, a mixed-use residential and retail property located in Evanston, Illinois. The property, located on a .79 acre site, contains 36,068 square feet of rentable retail space and 55 loft apartments. The Partnership's acquisition of its interest was effected through its acquisition of an 18.30% general partnership interest in the Galleria Partnership from First Dearborn Evanston Associates Limited Partnership ("Evanston Associates"), an affiliate of the General Partners. Evanston Associates originally agreed to purchase a 76.67% interest in the Galleria Partnership by agreeing to contribute an aggregate $2,313,125 to the Galleria Partnership. The Partnership acquired a portion of the 76.67% general partnership interest on the same terms by contributing $552,066 for its 18.30% general partnership interest. The seller retained a 23.33% limited partnership interest.
The Partnership and Evanston Associates, as general partners of the Galleria Partnership, have certain preferences from operating cash flow and distributions from sales or refinancing. Profits are generally allocated in accordance with cash distributions (including preferences) and then in accordance with the respective partner's interest. Losses are allocated first to partners with positive capital account balances and then in accordance with the respective partner's interest.
The limited partners ("Guarantors") of the Galleria Partnership had provided the Partnership and Evanston Associates with a guaranty of minimum rentals on certain retail space, maximum debt service levels and maximum real estate tax expenses in the Galleria Partnership. The property has failed to perform as expected and the Galleria Partnership has called upon the Guarantors to satisfy their obligations under the guaranties. The Guarantors have failed to fulfill their obligations to the Partnership, and the General Partners have taken actions to protect the rights of the Partnership, including receipt of an assignment in favor of the Partnership of the Guarantors' limited partnership interests in the Galleria Partnership of 5.57% and the receipt of security interests in certain other limited partnership interests owned by the Guarantors. Amounts owned pursuant to such guaranties which are secured by the limited partners' partnership interests will be recorded upon receipt.
The property is managed by an affiliate of the General Partners. During 1998, 1997 and 1996, management fees totaling $41,681, $41,550 and $25,091, respectively, were paid to an affiliate of the General Partners.
The property was subject to a first mortgage which matured May 1, 1996. Effective May 1, 1996, a modification of the first mortgage was entered into which, among other modifications, extended the maturity of the loan until May 1, 1998. Commencing on May 1, 1996, monthly payments were adjusted to $57,143, which represents interest only payments at an annual rate of 8.25%, based on the outstanding principal balance of the loan as of May 1, 1996. Notwithstanding the pay rate of 8.25%, interest on the loan continues to accrue and compound monthly on the unpaid principal balance at the annual rate of 9.00%. The interest differential, as defined, will be paid only from proceeds resulting from a sale or refinancing of the property or from any remaining funds in the cash flow escrow. The unpaid interest together with the unpaid principal balance of the loan was due and payable May 1, 1998. The first mortgage maturity was extended to August 1, 1999. All net cash flow from the property, in excess of the payments due for interest, shall be deposited into a cash flow escrow account. If cash flow in any month is insufficient to pay amounts due under the loan, then the amounts may be withdrawn from the cash flow escrow account.
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements - Continued
On February 16, 1999, a contract was entered into for the sale of the Evanston Galleria. The purchase price, met of closing costs and prorations should be sufficient to repay all liabilities of the Evanston Galleria Limited Partnership, including the first mortgage. However there will not be a significant distribution to the Partnership. The Partnership is expected to recognize a gain on the sale of approximately $100,000. The Purchaser has satisfied all of the contingencies under the contract and closing is currently expected to occur on April 30, 1999.
(c) Sycamore Mall Associates
On October 26, 1990, the Partnership contributed $2,275,000 to acquire a 53.40% general partnership interest in Sycamore Mall Associates, a general partnership formed to acquire the Sycamore Mall Shopping Center in Iowa City, Iowa. The property, situated on an approximate 21.2 acre site, includes a main building containing 213,206 square feet and an out parcel building containing 27,000 square feet. A 14,000 square foot parcel which contains a 4,590 square foot building is under a ground lease. Sycamore Mall Associates acquired the property on October 26, 1990 for a purchase price of $9,400,000, subject to a purchase money note of $5,140,000 bearing interest at 10% payable interest only until maturity on October 26, 1995. On August 8, 1991, Sycamore Mall Associates obtained a first mortgage in the amount of $5,140,000 which bore interest at a rate of 9.625% payable in monthly installments of principal and interest of $45,355 commencing October 1, 1991 for 60 months until September 30, 1996. The proceeds of this first mortgage were used to repay the original purchase money note. In October 1995, the first mortgage loan was modified. The terms of the modification reduced the interest rate to 8.125%, reduced the monthly payments of principal and interest to $44,375 and extended the maturity to March 1, 2002.
First Dearborn Income Properties L.P., a public limited partnership affiliated with the General Partners of the Partnership, and First Dearborn Sycamore Associates Limited Partnership ("FDSALP"), a privately offered limited partnership also affiliated with the General Partners, are the joint venture partners in Sycamore Mall Associates and contributed a total of $1,075,000 and $910,000 for 25.24% and 21.36% of the general partner interests, respectively.
The terms of the Sycamore Mall Associates partnership agreement provide that cash flow, sale or refinancing proceeds and profit and loss will be distributed or allocated in proportion to the partners' ownership interests.
The property is managed by an affiliate of the General Partners and an affiliate of the seller under a five year management agreement that provides for a fee equal to 5% of the effective gross income, of which 1% is paid to an affiliate of the General Partners. During 1998, 1997 and 1996 the property incurred management fees of $84,679, $93,053 and $96,048, respectively.
(d) Country Isles
The Country Isles Shopping Center, located in the Weston community of Fort Lauderdale, Florida, is an approximately 106,000 square foot retail shopping center containing approximately 71,000 square feet which opened in 1986 and an additional expansion of approximately 35,000 square feet which opened in 1989. The Country Isles Shopping Center was managed by an affiliate of the seller.
On April 25, 1996, Country Isles Associates completed the refinancing of Country Isles Plaza in Ft. Lauderdale, Florida. The new mortgage provided funding of $8,100,000, the proceeds of which were used to repay the outstanding balance of $6,807,669 on the previous mortgage, pay the costs of completing the new loan (approximately $174,000), and provide for property tax escrow and working capital. Out of the remaining proceeds, the Partnership received a distribution of $210,650 from Country Isles Associates. The Partnership made a special distribution to the Limited Partners.
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements - Continued
On December 17, 1997, Country Isles Associates, sold the Country Isles Shopping Center in Fort Lauderdale, Florida, to Principal Mutual Life Insurance Company ("Buyer"). The total purchase price received by Country Isles was $13.2 million, which price was determined through arm's length negotiations with Buyer. Of this total purchase price, approximately $7.9 million was used to repay amounts owed to the lender holding the mortgage on the shopping center and approximately $595,000 was used for customary additional selling expenses and prorations. The net proceeds to Country Isles after these deductions were approximately $4.7 million. Of these proceeds, the Partnership received approximately $991,000 for its 21% interest.
Country Isles Shopping Center was managed by JMB Property Management, an affiliate of Arvida/JMB Partners, the Seller. The Management Agreement provided that the Manager rent and manage the project for an initial term of five years, and thereafter for yearly periods, unless otherwise terminated by the parties in accordance with the management agreement. Country Isles Associates paid the Manager a management fee in an amount equal to 4% of the monthly operating revenues from the operation of the property. Notwithstanding the foregoing, until such time as the management agent notifies owner of its election to receive the management fee discussed immediately above, Country Isles Associates was to pay the Manager, in lieu of the management fee, an amount equal to 15% of amounts paid by tenants at the property on account of reimbursement of operating expenses, excluding taxes and insurance. During 1997 and 1996 the property incurred management fees of $68,600 and $68,053, respectively.
(3) Long-Term Debt
Long-term debt consists of the following at December 31, 1998 and 1997:
Five year maturities of long-term debt are as follows:
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements - Continued
(4) Partnership Agreement
Pursuant to the terms of the Partnership Agreement, net profits or losses of the Partnership for Federal income tax purposes from operations generally will be allocated 99% to the Limited Partners and 1% to the General Partners. Net profits for Federal income tax purposes from the sale or refinancing of properties will be allocated as follows: (i) first, to the Partners who have a deficit capital account balance in an amount equal to their deficit balance; (ii) second, to the Limited Partners in an amount equal to their contributed capital plus a stipulated return thereon; and (iii) thereafter, 90% to the Limited Partners and 10% to the General Partners. Net losses from the sale or refinancing of properties will be allocated as follows: (i) first, to the Partners who have a positive capital account balance in an amount equal to their positive balance; and (ii) thereafter, 99% to the Limited Partners and 1% to the General Partners.
Operating Cash Flow, as defined in the Partnership Agreement, prior to the date the public offering terminated was distributed 100% to the Limited Partners. Operating Cash Flow subsequent to termination of the public offering will be distributed during the first five years, 99% to the Limited Partners and 1% to the General Partners and, thereafter, 90% to the Limited Partners and 10% to the General Partners subject to certain limitations. Sale or refinancing proceeds will be distributed 100% to the Limited Partners until the Limited Partners have received their contributed capital plus a stipulated return thereon. Any remaining sale or refinancing proceeds will then be distributed 90% to the Limited Partners and 10% to the General Partners.
For financial reporting purposes, net profits or losses from operations are allocated 99% to the Limited Partners and 1% to the General Partners. The General Partners are not required to make any capital contributions except under certain limited circumstances upon dissolution and termination of the Partnership.
(5) Leases
The Partnership has determined that all leases relating to the properties are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over the estimated useful life of the property. Leases with tenants range in term from one to thirty years and provide for fixed minimum rent and partial to full reimbursement of operating costs. In addition, many of the leases provide for additional rent based upon percentages of tenants' sales volume.
Minimum lease payments, including amounts representing executory costs (e.g. taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:
Percentage rents (based on tenants' sales volume) included in rental income were $204,819, $192,100 and $180,846 for the years ended December 31, 1998, 1997 and 1996, respectively.
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements - Continued
(6) Transactions with Affiliates
Affiliates of the General Partners are entitled to receive from the Partnership acquisition fees, equal to 9% of the gross proceeds from the offering of Units, in connection with the evaluation, investigation, negotiation, selection and purchase of the Partnership's investment properties. The Managing General Partner and its affiliates are entitled to reimbursement for salaries and direct expenses of officers and employees of the Managing General Partner and its affiliates relating to the administration of the Partnership.
Fees, commissions and other expenses required to be paid by the Partnership to affiliates of the General Partners for the years ended December 31, 1998, 1997 and 1996 are as follows:
(7) Investment in Unconsolidated Ventures
Summary combined financial information for Evanston Galleria Limited Partnership, for 1998 and Evanston Galleria Limited Partnership and Country Isle Associates, for 1997 and 1996 is as follows:
FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture
Notes to Consolidated Financial Statements - Continued
The total revenues, expenses and net loss for the above ventures for the year ended December 31, 1996 were $3,198,453, $3,368,380 and $169,927, respectively.
(8) Subsequent Event
In March 1999, the Partnership paid cash distributions of $20,600 to the Limited Partners.
Independent Auditors' Report The Partners Evanston Galleria L.P.
We have audited the financial statements of Evanston Galleria L.P. (a limited partnership) and as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements and financial statement 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 the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Evanston Galleria L.P. as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP Chicago, Illinois April 14, 1999
Evanston Galleria, L.P. (a limited partnership)
Notes to Consolidated Financial Statements
	(1)	Organization and Basis of Accounting The accompanying financial statements have been prepared for the purpose of complying with Rule 3.09 of Regulation S-X of the Securities and Exchange Commission. They include the accounts of the unconsolidated Partnership, Evanston Galleria L.P. (the "Partnership"), in which First Dearborn Properties L.P. II and Evanston Associates, an affiliate of the General Partners of First Dearborn Income Properties L.P. II are partners. The Partnership's acquisition of its interest was effected through its acquisition of an 18.30% general partnership interest in the Partnership from First Dearborn Evanston Associates Limited Partnership ("Evanston Associates"), an affiliate of the General Partners. Evanston Associates originally agreed to purchase a 76.67% interest in the Partnership by agreeing to contribute an aggregate $2,313,125 to the Partnership. The Partnership acquired a portion of the 76.67% general partnership interest on the same terms by contributing $552,066 for its 18.30% general partnership interest. The seller retained a 23.33% limited partnership interest. The Partnership and Evanston Associates, as general partners of the Partnership, have certain preferences from operating cash flow and distributions from sales or refinancing. Profits are generally allocated in accordance with cash distributions (including preferences) and then in accordance with the respective partner's interest. Losses are allocated first to partners with positive capital account balances and then in accordance with the respective partner's interest.
The limited partners ("Guarantors") of the Partnership had provided the Partnership and Evanston Associates with a guaranty of minimum rentals on certain retail space, maximum debt service levels and maximum real estate tax expenses in the Galleria Partnership. The property has failed to perform as expected and the Partnership has called upon the Guarantors to satisfy their obligations under the guaranties. The Guarantors have failed to fulfill their obligations to the Partnership, and the General Partners have taken actions to protect the rights of the Partnership, including receipt of an assignment in favor of the Partnership of the Guarantors' limited partnership interests in the Partnership of 5.57% and the receipt of security interests in certain other limited partnership interests owned by the Guarantors. Amounts owned pursuant to such guaranties which are secured by the limited partners' partnership interests will be recorded upon receipt. The Partnership owns a 100% beneficial interest in the Evanston Galleria, a mixed-use residential and retail property located in Evanston, Illinois. The property, located on a .79 acre site, contains 36,068 square feet of rentable retail space and 55 loft apartments.
The Partnership records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying financial statements have been prepared from such records after making appropriate adjustments, where applicable to present the Partnership's accounts in accordance with generally accepted accounting principles (GAAP). Such adjustments are not recorded for the Partnership. The net effect of these is as follows:
Evanston Galleria, L.P. (a limited partnership)
Notes to Consolidated Financial Statements
Deferred loan costs are amortized over the terms of the related agreements using the straight-line method. Leasing commissions are amortized over the terms of the related tenant leases using the straight-line method.
Depreciation on buildings and improvements was provided over the estimated useful lives of 5 to 30 years using the straight-line method.
Maintenance and repair expenses are charged to operations as incurred. Significant betterments and improvements are capitalized and were depreciated over their estimated useful lives.
No provision for Federal income taxes has been made as any liability for such taxes would be that of the partners rather than the Partnership.
The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Partnership adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", on January 1, 1996. SFAS 121 requires that the Partnership record an impairment loss on its property held for investment whenever the property's carrying value cannot be fully recovered through estimated undiscounted cash flows from its operations and sale. The amount of the impairment loss to be recognized would be the difference between the property's carrying value and the property's estimated fair value. In addition, SFAS 121 provides that a property may not be depreciated while being held for sale. As of October 1, 1997, the Evanston Galleria property was considered to be held for sale. In accordance with SFAS 121, no depreciation expense relative to the property was recorded by the Partnership from October 1, 1997 through December 31, 1998.
On February 16, 1999, a contract was entered into for the sale of the Evanston Galleria. The purchase price, net of closing costs and prorations should be sufficient to repay all liabilities of the Evanston Galleria Limited Partnership. However there will not be a significant distribution to the Partnership. If the sale is consummated, the Partnership is expected to recognize a gain on the sale of approximately $100,000. The closing is currently scheduled to occur on April 30, 1999. However, the Purchaser has requested a 90 day extension.
The property is managed by an affiliate of the General Partners. During 1998, 1997 and 1996, management fees totaling $41,681, $41,550 and $25,091, respectively, were paid to an affiliate of the General Partners.
Evanston Galleria, L.P. (a limited partnership)
Notes to Consolidated Financial Statements
	(2)	Long-Term Debt The property was subject to a first mortgage which matured May 1, 1996. Effective May 1, 1996, a modification of the first mortgage was entered into which, among other modifications, extended the maturity of the loan until May 1, 1998. Commencing on May 1, 1996, monthly payments were adjusted to $57,143, which represents interest only payments at an annual rate of 8.25%, based on the outstanding principal balance of the loan as of May 1, 1996. Notwithstanding the pay rate of 8.25%, interest on the loan continues to accrue and compound monthly on the unpaid principal balance at the annual rate of 9.00%. The interest differential, as defined, will be paid only from proceeds resulting from a sale or refinancing of the property or from any remaining funds in the cash flow escrow. The first mortgage maturity was extended to August 1, 1999. The unpaid interest together with the unpaid principal balance of the loan will be due and payable August 1, 1999. All net cash flow from the property, in excess of the payments due for interest, shall be deposited into a cash flow escrow account. If cash flow in any month is insufficient to pay amounts due under the loan, then the amounts may be withdrawn from the cash flow escrow account. The first mortgage is expected to be retired from the proceeds of the expected sale of the property.
	(3)	Leases At December 31, 1998 the Partnership's principal asset is a residential and retail building. The Partnership has determined that all leases related to the property are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over the estimated useful life of the property. Leases with tenants range in term from one to thirty years and provide for fixed minimum rent and partial to full reimbursement of operating costs. In addition, many of the leases provide for additional rent based upon percentages of tenants' sales volume.
Minimum lease payments, including amounts representing executory costs (e.g., taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:
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 General Partners of the Partnership are:
FDIP, Inc., an Illinois corporation, Managing General Partner; and FDIP Associates, an Illinois general partnership, Associate General Partner.
FDIP, Inc., the Managing General Partner, is a corporation formed under the laws of the State of Illinois. Its issued and outstanding shares are owned by Messrs. Bruce H. Block and Robert S. Ross. The officers of the Managing General Partner are Robert S. Ross, President, and Bruce H. Block, Vice President and Secretary. Messrs. Block and Ross are its sole directors.
FDIP Associates, the Associate General Partner, was formed under the laws of the State of Illinois and has a nominal net worth. Its constituent partners are First Dearborn Partners, an Illinois general partnership formed in January, 1984, whose constituent partners are Messrs. Block and Ross, and Hampshire Syndications, Inc., a New Hampshire corporation. Hampshire Syndications, Inc. is wholly owned by Jefferson-Pilot Investments, Inc., a North Carolina corporation, which is a wholly-owned subsidiary of Jefferson-Pilot Corporation. The officers and directors of Hampshire Syndications, Inc. are Ronald Angarella, President and Director, Charles C. Cornelio, Vice President and Director, Sheri J. Lease, Secretary, Dennis R. Glass, Executive Vice President and Director, E. J. Yelton, Executive Vice President and Director, John A. Weston, Treasurer.
Messrs. Block and Ross are not affiliated with Jefferson Pilot Securities Corporation, except that each is affiliated with the Associate General Partner.
The persons listed below occupy key management position with the General Partners:
Mr. Bruce H. Block, age 61, has been a principal in numerous real estate ventures which own, have an interest in, or have owned various types of property that have included apartment and office buildings, shopping centers and vacant land. Mr. Block is an Illinois licensed attorney, a certified public accountant and a licensed real estate broker in the State of Illinois. Mr. Block practiced corporate and real estate law in Chicago for over 20 years and is a shareholder in the Chicago law firm of Ross & Block, P.C.
Mr. Robert S. Ross, age 61, has been a principal in many real estate ventures which own, have an interest in, or have owned various types of property including apartment and office buildings, shopping centers and vacant land. Mr. Ross is an Illinois licensed attorney, a licensed real estate broker in the State of Illinois and is an affiliate member of Real Estate Securities and Syndication Institute. He also practiced general and real estate law in the Chicago area for over 22 years and is a shareholder in the Chicago law firm of Ross & Block P.C.
Mr. Ronald R. Angarella, age 41, currently serves as President, Chairman and Director of Jefferson Pilot Securities Corporation and Hampshire Funding, Inc. and President and Director of Hampshire Syndications, Inc. Mr. Angarella is also President and Director of Jefferson Pilot Variable Fund and Senior Vice President and Chief Marketing Officer of Jefferson Pilot Financial Insurance Company.
Mr. Charles C. Cornelio, age 39, is Vice President, General Counsel and Secretary of Jefferson Pilot Securities Corporation and Vice President and Director of Hampshire Syndications, Inc. He is also Executive Vice President of Jefferson Pilot Financial Insurance Company and Vice President and General Counsel of Jefferson Pilot Variable Fund.
Shari J. Lease, age 44, was elected Assistant Secretary of Hampshire Syndications, Inc. in May, 1994 and Secretary in May 1997. She was also elected Secretary of Hampshire Funding, Inc. and Assistant Secretary of Jefferson Pilot Securities Corporation in December 1994. Her principal occupation since February 1998 has been as Vice President and Counsel of Jefferson Pilot Financial Insurance Company. Ms. Lease served as Assistant Vice President and Counsel of Jefferson Pilot Financial Insurance Company from April 1995 to February 1998. Ms. Lease was elected Secretary of Jefferson Pilot Variable Fund in April 1992. She served as Associate Counsel of Jefferson Pilot Financial Insurance Company from April 1994 to April 1995, Assistant Counsel of Jefferson Pilot Financial Insurance Company from October 1990 to April 1994 and Assistant Secretary of Jefferson Pilot Variable Fund from July 1991 to April 1992.
John Weston, age 39, is Treasurer of Hampshire Funding, Inc., Jefferson Pilot Securities Corporation, Hampshire Syndications, Inc., Jefferson Pilot Variable Fund and Jefferson Pilot Advisory Corporation. His principal occupation singe April 1995 has been as Assistant Vice President of Jefferson Pilot Financial Insurance Company until his election as Vice President of Jefferson Pilot Financial Insurance Company in February 1999.
Dennis R. Glass, age 49, was elected Executive Vice President and Director of Hampshire Syndications, Inc. in May 1997. Mr. Glass is also a Director of Hampshire Funding, Inc. Since October 1993 Mr. Glass has served as Executive Vice President, Chief Financial Officer and Treasurer of Jefferson-Pilot Corporation. From 1991 to October 1993, he was associated with Protective Life Corporation, having last served as Executive Vice President and Chief Financial Officer. From 1983 to 1991 he was associated with the Portman Companies, having served as Executive Vice President and Chief Financial Officer.
E.J. Yelton, age 59, was elected Executive Vice President and Director of Hampshire Syndications, Inc. in May 1997. Mr. Yelton is also a Director of Hampshire Funding, Inc. Since October 1993, Mr. Yelton has served as Executive Vice President of Investments of Jefferson-Pilot Corporation and for more than five years prior thereto was President of the Investment Centre.
Item 11.
Item 11. Executive Compensation
The Partnership has no officers or directors and instead is managed by FDIP, Inc., its Managing General Partner.
Officers and directors of the Managing General Partner receive no direct remuneration in such capacities from the Partnership. In addition, the Partnership is a registrant that qualifies as a small business issuer as defined in Item 10(a)(1) of Regulation S-B. Accordingly, certain of the disclosures typically required by Item 402 are not applicable to the Partnership and the information set forth herein has been appropriately modified.
The Partnership is required to pay certain fees to the General Partners or their affiliates and the General Partners are entitled to receive a share of cash distributions, when and as cash distributions are made to the Limited Partners, and a share of profits or losses as described under the caption "Compensation Table" at pages 9-10 of the Prospectus, a copy of which descriptions is filed herewith and is hereby incorporated herein by reference. Reference is also made to Note 4 of Notes to Consolidated Financial Statements filed with this annual report for a description of such distributions and allocations.
Certain compensation has accrued to the General Partners and their affiliates for services rendered on behalf of the Partnership. Affiliates of the General Partners are entitled to receive from the Partnership acquisition fees, equal to 9% of the gross proceeds from the offering of Units, in connection with the evaluation, investigation, negotiation, selection and purchase of the Partnership's investment properties.
The Managing General Partner and its affiliates are entitled to reimbursement for salaries and direct expenses of officers and employees of the Managing General Partner and its affiliates relating to the administration of the Partnership.
Fees, commissions and other expenses required to be paid by the Partnership to affiliates of the General Partners for the years ended December 31, 1998, 1997 and 1996 are as follows:
There are no compensatory plans or arrangements regarding termination of employment or change of control.
Item 12.
Item 12. Security ownership of certain Beneficial Owners and Management
(a) No person or group is known by the Partnership to own beneficially more than 5% of the outstanding Units of the Partnership.
(b) The following table sets forth information regarding the beneficial ownership of Units as of December 31, 1997 by directors and/or general partners of the General Partners, and by all officers, directors and for general partners of the General Partners as a group:
Item 13.
Item 13. Certain Relationships and Related Transactions
There were no significant transactions or business relationships with the Managing General Partner, affiliates, or other management other than those described in Item 10 and 11 above, and Note 6 to the Consolidated Financial Statements.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1)(2) See Index to Financial Statements and Financial Statement Schedules on page 16.
(3) Exhibits (3-A) The Prospectus of the Partnership dated February 1, 1989 as supplemented February 24, 1989, October 27, 1989, April 26, 1990, October 9, 1990 and December 24, 1990 filed pursuant to Rule 424(b) under the Securities Act of 1933 as amended (File No. 33-23048), is hereby incorporated herein by reference.
(3-B) Amended Agreement of Limited Partnership set forth as Exhibit A to the Prospectus, pursuant to Rule 424(b) under the Securities Act of 1933 as amended (File No. 33-23048), is hereby incorporated herein by reference.
(b) No reports on Form 8-K were filed in the last quarter of 1998.
(c) An annual report for the fiscal year 1998 will be sent to the Limited Partners subsequent to this filing and the Partnership will furnish copies of such report to the Securities and Exchange Commission at that time.
(d) Exhibits - See Item 14(a) - (3).
(e) Financial Statement Schedules. See Index to Financial Statements and Financial Statement Schedules on page 16.
SIGNATURES
Pursuant to the requirements 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.
	 FIRST DEARBORN INCOME PROPERTIES L.P. II 	 (Registrant)
	BY: FDIP, Inc. 	(Managing General Partner)
Date: April 14, 1999 	 BY: /s/ Robert S. Ross 	 Its: President
	 BY: FDIP Associates II 	 (Associate General Partner) 	 BY: First Dearborn Partners, a Partner
Date: April 14, 1999	 BY: /s/ Bruce H. Block 	 a Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
	 Signatures 	Title 	Date
	 /s/ Robert S. Ross 	 President and Director 	 April 14, 1999 	 Robert S. Ross 	of FDIP, Inc. (Principal 		 Executive Officer)
	 /s/ Bruce H. Block 	 Secretary and Director 	 April 14, 1999 	 Bruce H. Block 	 of FDIP, Inc. (Principal 		 Financial Officer)