ITEM 1. BUSINESS - ------- --------
ORGANIZATION - ------------
McNeil Real Estate Fund XXIV, L.P. (the "Partnership"), formerly known as Southmark Equity Partners, Ltd., was organized on October 19, 1984 as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate commercial and residential properties. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 30, 1992, the general partner of the Partnership was Southmark Investment Group, Inc. (the "Original General Partner"), a wholly-owned subsidiary of Southmark Corporation ("Southmark"). The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240.
On January 8, 1985, the Partnership registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 2-93979) and commenced a public offering for sale of $40,000,000 of limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the holders thereof to participate in certain allocations and distributions of the Partnership. The sale of Units closed on December 15, 1985 with 40,000 Units sold at $1,000 each, or gross proceeds of $40,000,000 to the Partnership. The Partnership subsequently filed a Form 8-A Registration Statement with the SEC and registered its Units under the Securities Exchange Act of 1934 (File No. 0-14267).
SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - --------------------------------------------------
On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General Partner nor the Original General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Original General Partner, were sold or liquidated for the benefit of creditors.
In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio.
On February 14, 1991, pursuant to the asset purchase agreement as amended on that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates and commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates.
On March 30, 1992, the limited partners approved a restructuring proposal that provided for (i) the replacement of the Original General Partner with a new general partner, McNeil Partners, L.P.; (ii) the adoption of the Amended Partnership Agreement which substantially alters the provisions of the original partnership agreement relating to, among other things, compensation, reimbursement of expenses and voting rights; (iii) the approval of an amended property management agreement with McREMI, the Partnership's property manager; and (iv) the approval to change the Partnership's name to McNeil Real Estate Fund XXIV, L.P. Under the Amended Partnership Agreement, the Partnership began accruing an asset management fee, retroactive to February 14, 1991, which is payable to the General Partner. For a discussion of the methodology for calculating the asset management fee, see Item 13 Certain Relationships and Related Transactions. The proposals approved at the March 30, 1992 meeting were implemented as of that date.
Concurrent with the approval of the restructuring, the General Partner acquired from Southmark and its affiliates, for aggregate consideration of $43,193, (i) the right to receive payment on the advances owing from the Partnership to Southmark and its affiliates in the amount of $642,581, and (ii) the general partner interest of the Original General Partner. None of the Units are owned by the General Partner or its affiliates.
CURRENT OPERATIONS - ------------------
General:
The Partnership is engaged in the ownership, operation and management of residential and retail real estate. At December 31, 1998, the Partnership owned five revenue-producing properties as described in Item 2
ITEM 2. PROPERTIES - ------- ----------
The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1998. All of the buildings and the land on which they are located are owned by the Partnership in fee and are unencumbered by mortgage indebtedness, with the exception of Riverbay Plaza Shopping Center, which is subject to a first lien deed of trust as set forth more fully in Item 8 - - Note 5 - "Mortgage Notes Payable." See also Item 8 - Note 4 "Real Estate Investments" and Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization. In the opinion of management, the properties are adequately covered by insurance.
- --------------------------------------- Total: Apartments - 240 units Retail Centers - 261,941 sq. ft.
The following table sets forth the properties' occupancy rate and rent per square foot for the last five years:
Occupancy rate represents all units leased divided by the total number of units for residential properties and square footage leased divided by total square footage for other properties as of December 31 of the given year. Rent per square foot represents all revenue, except interest, derived from the property's operations divided by the leasable square footage of the property.
Competitive Conditions - ----------------------
Real Estate Investments:
Pine Hills - ----------
Pine Hills is a two-story apartment community located in the small town of Livingston, approximately 60 miles north of Houston, Texas. There is no comparable competition within the area at present, however there is an abundance of affordable alternative housing such as mobile homes and rental houses. Although the property is located on a busy thoroughfare near an interstate highway, visibility is poor as the property frontage is limited to a driveway which leads to the main entrance. The vacant land in front of Pine Hills is currently on the market for sale. If the property is developed, it could have an impact on Pine Hills' future performance. The Partnership expects to maintain occupancy in the mid 90% range in 1999 by offering discounts to attract and maintain tenants and by working to renew leases 90 days prior to the lease expiration.
Riverbay Plaza - --------------
Riverbay Plaza is a single-story retail shopping center located at the busiest intersection of a rural area near Riverview, Florida. It is anchored by a grocery store and a drugstore and there are two out-parcels in front of the center that draw customers to the center. The Partnership renovated and expanded the grocery anchor tenant's space in 1997. Currently, there is only one competing shopping center in the area, and it is not as well maintained as Riverbay Plaza. There are currently two proposed shopping center developments within five miles of Riverbay Plaza. Any future development is not expected to have a significant impact on the property due to the high occupancy rates in the area and the renovation and expansion of the grocery anchor tenant's space. The Partnership expects to maintain occupancy in the high 90% range in 1999.
Sleepy Hollow - -------------
Sleepy Hollow is a two-story apartment community located in the small town of Cleveland, approximately 30 miles north of Houston, Texas. Although the property is located on a busy thoroughfare approximately three miles from an interstate highway, visibility is poor as the property frontage is limited to a driveway which leads to the main entrance. The driveway is shared with a comparable apartment community that completed exterior renovations, resulting in a decrease in Sleepy Hollow's occupancy in 1996. Occupancy improved in 1997 after Sleepy Hollow completed its own exterior upgrades. A new luxury apartment community opened in 1997 and another community opened in 1998. In addition, low interest rates and the availability of affordable alternative housing such as mobile homes and rental houses have softened the local real estate market. The Partnership expects to maintain occupancy in the low 90% range in 1999 by offering discounts and concessions to tenants.
Towne Center - ------------
Towne Center is a retail strip shopping center located in a suburb 10 miles south of Wichita, Kansas. The property is one of five strip shopping centers located in Derby, and it is by far the largest. In 1994, the center became 100% occupied due to the leasing of a large space that comprised 42% of the leasable area and had been vacant for several years. The lease on this space expired in 1997 and was not renewed. Although demand for retail space in Derby is limited, space available is also limited and smaller spaces are not difficult to lease. However, since there is a shortage of tenants requiring large spaces, management divided the large vacated space into three smaller spaces. One of the three spaces was leased in late 1998 and another was leased in early 1999. The remaining space (approximately 13% of the leasable area of the property) is expected to remain vacant throughout 1999. Four leases are scheduled to expire in 1999 and all are expected to be renewed at the same or higher rental rates. The Partnership expects to increase occupancy up to the mid 80% range in 1999.
Asset Held for Sale:
Springwood Plaza - ----------------
Springwood Plaza is a multi-leveled strip shopping center located in a suburb of St. Louis, Missouri. The center is anchored by a popular local grocery chain and contains fifteen other retail spaces. The area surrounding the property has been in a slow state of decline for the past few years. Most of the comparable properties in the area are superior to Springwood Plaza; however, the center's grocery anchor tenant has continued to draw shoppers to the property. This anchor tenant's lease expires in 1999 and management expects it to be renewed. With continued attention to the appearance of the property and rental rates lower than the newer centers in the area, management expects to increase occupancy to the mid to high 80% range in 1999.
The following schedule shows lease expirations for each of the Partnership's commercial properties for 1999 through 2008:
No residential tenant leases 10% or more of the available rental space. The following schedule reflects information on commercial tenants occupying 10% or more of the leasable square feet for each property:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following:
James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint).
The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid.
Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999.
Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint.
Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended.
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 UNITS OF LIMITED PARTNERSHIP AND - ------- ------------------------------------------------------------ RELATED SECURITY HOLDER MATTERS -------------------------------
(A) There is no established public trading market for limited partnership units, nor is one expected to develop.
(B) Title of Class Number of Record Unit Holders
Limited partnership units 2,744 as of February 1, 1999
(C) The Partnership distributed $4,644,400 to the limited partners in 1998, of which $3,144,250 was net cash proceeds from the sales of Southpointe Plaza and Island Plaza shopping centers and the remaining $1,500,150 was cash from operations. Distributions paid to limited partners totaled $500,000 in 1997 from cash from operations. No distributions were paid to the General Partner in 1998 or 1997. During the last week of March 1999, the Partnership distributed approximately $250,000 to the limited partners of record as of March 1, 1999. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies - Distributions."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------
FINANCIAL CONDITION - -------------------
The Partnership was formed to engage in the business of acquiring and operating revenue-producing real properties and holding the properties for investment. Since completion of its capital formation and property acquisition phases in 1985, when it completed the purchase of seven properties, the Partnership has operated its properties for production of income.
The General Partner placed Southpointe Plaza Shopping Center on the market for sale effective October 1, 1996. Based on an offer from a non-affiliate to purchase the center, the Partnership recorded a $700,000 write-down for impairment of value during the fourth quarter of 1996 to record the shopping center at its fair value less estimated costs to sell. On March 31, 1998, the Partnership sold Southpointe Plaza for a gross sales price of $6.8 million. The Partnership recognized a $118,750 loss on the sale.
The General Partner placed Island Plaza Shopping Center on the market for sale effective April 1, 1996. Based on an offer from a non-affiliate to purchase the center, the Partnership recorded a $220,000 write-down for impairment of value during the fourth quarter of 1997 to record the shopping center at its fair value less estimated costs to sell. On April 1, 1998, the Partnership sold Island Plaza for a gross sales price of $1.85 million. A $126,080 write-down for impairment of real estate was recorded in the first quarter of 1998 and no gain or loss was recorded on the sale.
In 1997, improvements totaling approximately $1.6 million were performed at Riverbay Plaza to renovate and expand an anchor tenant's space. These costs were paid by the tenant and reimbursed by the Partnership in 1998. The Partnership obtained a mortgage loan secured by Riverbay Plaza to pay these costs and received such funds in June 1998. See Item 8 - Note 5 - "Mortgage Notes Payable."
RESULTS OF OPERATIONS - ---------------------
1998 compared to 1997
Revenue:
Total revenue decreased by $1,110,294 in 1998 as compared to 1997, mainly due to the sales of Southpointe Plaza and Island Plaza shopping centers in 1998. Excluding total revenue of Southpointe Plaza and Island Plaza, total revenue increased by $109,050 in 1998.
Rental revenue in 1998 decreased by $931,255 as compared to 1997. Excluding rental revenue of Southpointe Plaza and Island Plaza, rental revenue increased by $218,280 in 1998. This increase was mainly due to increased rent charged to an anchor tenant at Riverbay Plaza Shopping Center after its space was expanded.
Interest income increased by $40,246 in 1998 as compared to 1997. The increase was mainly due to an increase in cash available for short-term investment in 1998 due to proceeds received from the sales of Southpointe Plaza and Island Plaza on March 31, 1998 and April 1, 1998, respectively.
A gain on involuntary conversion of $149,585 was recognized in 1997 relating to fire damage that occurred at Riverbay Plaza Shopping Center. No such gain on involuntary conversion was recorded in 1998.
In 1997, the assessed taxable value of Southpointe Plaza was reduced by taxing authorities, resulting in a $39,700 refund of prior years' property taxes. No refunds of prior years' property taxes were received in 1998.
In 1997, the Partnership received $30,000 in deposits forfeited by prospective buyers of Southpointe Plaza and Island Plaza. No such income was received in 1998.
Expenses:
Total expenses decreased by $207,092 in 1998 as compared to 1997. Excluding total expenses of Southpointe Plaza and Island Plaza, which were sold in 1998, total expenses increased by $504,785. This increase in expenses was mainly due to an increase in depreciation and amortization and general and administrative expenses. In addition, interest expense, utilities, and other property operating expenses showed significant increases in 1998, partially offset by a decrease in general and administrative-affiliates, as discussed below.
Interest expense in 1998 decreased by $211,414 as compared to 1997. Interest expense related to the Southpointe Plaza mortgage note payable decreased by $290,143 due to the repayment of the loan as a result of the sale of the property. In June 1998, the Partnership received $1,650,000 in proceeds from a mortgage note payable secured by Riverbay Plaza Shopping Center. The Partnership recorded $78,729 of interest expense related to this loan in 1998.
Depreciation and amortization increased by $151,260 in 1998 in relation to the prior year. The increase was mainly due to the amortization of improvements at Riverbay Plaza completed at the end of 1997 to expand an anchor tenant's space.
Property taxes, repairs and maintenance and property management fees - affiliates decreased by $124,595, $114,356 and $53,249, respectively, mainly due to the sales of Southpointe Plaza and Island Plaza in 1998.
In 1998, utilities expense decreased by $17,910 as compared to the prior year. Excluding expenses for utilities at Southpointe Plaza and Island Plaza, the remaining properties experienced an increase in utilities expense of $25,235. This increase in utilities was partially due to an increase in water usage at Riverbay Plaza due to the expansion of a major tenant's space at the shopping center. In addition, there was an increase in electricity costs at Towne Center Shopping Center due to a tenant vacating a large space in the third quarter of 1997. Since this space was vacant for most of 1998, the shopping center was responsible for paying for the electricity used in this space.
Other property operating expenses decreased by $61,202 in 1998 as compared to 1997. Excluding other property operating expenses at Southpointe Plaza and Island Plaza, other property operating expenses increased by $19,604. This increase is due to a tenant receivable at Springwood Plaza that was written off as uncollectible in 1998.
In 1998, general and administrative expenses increased by $285,955 in relation to 1997. The increase was mainly due to costs incurred in 1998 to explore alternatives to maximize the value of the Partnership (see Liquidity and Capital Resources).
General and administrative - affiliates decreased by $76,617 in 1998 as compared to 1997, mainly due to a decrease in asset management fees. Asset management fees decreased as a result of a decline in the tangible asset value of the Partnership, on which the fees are based, due to the sales of Southpointe Plaza and Island Plaza.
The Partnership recognized a $118,750 loss on the sale of Southpointe Plaza Shopping Center in the first quarter of 1998. No such loss was recognized in 1997.
Island Plaza Shopping Center was sold to an unaffiliated buyer on April 1, 1998. The Partnership recorded a $126,080 write-down for impairment of real estate in the first quarter of 1998 to record the property at its sales price less estimated costs to sell. In 1997, the Partnership recorded a $220,000 write-down for impairment of Island Plaza Shopping Center.
1997 compared to 1996
Revenue:
Total revenue increased by $197,959 in 1997 as compared to 1996. The increase was mainly due to a greater gain on involuntary conversion, property tax refund and other revenue being recorded in 1997, as discussed below.
Rental revenue in 1997 increased by $50,186 as compared to 1996. The slight increase was mainly due to increased rental rates at all of the properties except for Southpointe Plaza where expiring leases were renewed at lower market rates in 1997.
A gain on involuntary conversion of $149,585 was recognized in 1997 relating to fire damage that occurred at Riverbay Plaza Shopping Center. In 1996, a $45,134 gain on involuntary conversion relating to wind and hail damage suffered at Pine Hills Apartments was recorded.
In 1997, the assessed taxable value of Southpointe Plaza was reduced by taxing authorities, resulting in a $39,700 refund of prior years' property taxes. The Partnership received $20,433 in refunds of prior years' property taxes for Towne Center Shopping Center in 1996.
In 1997, the Partnership received $30,000 in deposits forfeited by prospective buyers of Southpointe Plaza and Island Plaza. No such income was received in 1996.
Expenses:
Total expenses decreased by $840,402 in 1997 as compared to 1996. The decrease was mainly due to a $700,000 write-down for impairment of real estate recorded in 1996 as compared to a write-down for impairment of $220,000 in 1997. In addition, there was a decrease in depreciation and amortization expense and general and administrative expenses, partially offset by an increase in utilities, as discussed below.
Depreciation and amortization expense in 1997 decreased by $281,194 in relation to 1996. The decrease was due to Island Plaza, Southpointe Plaza and Springwood Plaza being classified as assets held for sale by the Partnership effective April 1, 1996, October 1, 1996 and August 1, 1997, respectively. In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Partnership ceased recording depreciation on these assets at the time they were placed on the market for sale.
In 1997, utilities increased by $31,190 as compared to 1996, mainly due to an increase in water and sewer rates at a majority of the properties. In addition, there was an increase in water usage at Riverbay Plaza due to the expansion of a major tenant's space at the shopping center.
General and administrative expenses decreased by $93,903 in 1997 as compared to 1996. The decrease was mainly due to a decrease in costs incurred relating to evaluation and dissemination of information regarding an unsolicited tender offer. This decrease was partially offset by approximately $18,000 of costs incurred for investor services which were paid to an unrelated third party in 1997. In 1996, such costs were paid to an affiliate of the General Partner and were included in general and administrative - affiliates on the Statements of Operations.
In 1997, the Partnership recorded a $220,000 write-down for impairment of Island Plaza Shopping Center. In 1996, the Partnership recorded a $700,000 write-down for impairment of Southpointe Plaza Shopping Center.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
The Partnership's primary source of cash flows is from operating activities which generated $1,290,112 of cash in 1998, $1,504,410 in 1997 and $1,153,592 in 1996.
Cash flows from operating activities decreased by $214,298 in 1998 as compared to 1997. Excluding Southpointe Plaza and Island Plaza , cash flows increased by $187,628. This increase in cash provided by operating activities was mainly due to an increase in cash received from tenants (see above discussion of increase in rental revenue) and a decrease in cash paid to affiliates. These increases in cash provided were partially offset by an increase in cash paid to suppliers, mainly due to an increase in general and administrative expenses, as discussed above.
The increased cash generated through operating activities in 1997 as compared to 1996 was mainly due to an increase in cash received from tenants due to an increase in rental revenue and an increase in collections of prior year receivables. In addition, there was a decrease in cash paid to affiliates in 1997.
In 1997, the Partnership received $226,747 of net insurance proceeds for damage caused by a fire at Riverbay Plaza Shopping Center. In 1996, the Partnership received $75,000 of net insurance proceeds for wind and hail damage suffered at Pine Hills Apartments. No insurance proceeds were received in 1998.
The Partnership expended $2,469,527, $537,986 and $484,810 on capital additions to its real estate investments and assets held for sale in 1998, 1997 and 1996, respectively. The increase in expenditures in 1998 in relation to 1997 and 1996 was primarily due to approximately $1.6 million expended at Riverbay Plaza to expand an anchor tenant's space. These costs were paid by the tenant in 1997 and reimbursed by the Partnership in 1998. In addition, approximately $566,000 of costs were incurred in 1998 for improvements to a new tenant's space at Towne Center Shopping Center. In 1997, repairs totaling approximately $233,000 were completed to repair damage caused by a fire at Riverbay Plaza.
In April 1998, the Partnership received a total of $8,438,530 in proceeds from the sales of Southpointe Plaza and Island Plaza shopping centers. $5,261,942 of the proceeds was used to repay the Southpointe Plaza mortgage note payable.
The Partnership made $31,075, $128,746 and $116,764 in regularly scheduled principal payments on the Southpointe Plaza mortgage note payable in 1998, 1997 and 1996, respectively. The decrease in 1998 was due to the sale of the property and the repayment of the loan on April 1, 1998.
In June 1998, the Partnership received $1,650,000 in proceeds from a mortgage note payable secured by Riverbay Plaza Shopping Center. The proceeds were used to pay for improvements made in 1997 to renovate and expand an anchor tenant's space.
In 1996, the Partnership repaid $642,581 of advances from affiliates.
The Partnership distributed $4,644,400 to the limited partners in 1998, $3,144,250 of which was net cash proceeds from the sales of Southpointe Plaza and Island Plaza and the remaining $1,500,150 was cash from operations. The Partnership distributed $500,000 and $750,016 of cash from operations to the limited partners in 1997 and 1996, respectively.
Short-term liquidity:
At December 31, 1998, the Partnership held cash and cash equivalents of $1,103,846. This balance provides a reasonable level of working capital for the Partnership's immediate needs in operating its properties.
For the Partnership as a whole, management projects positive cash flow from operations in 1998. The Partnership has budgeted approximately $382,000 for necessary capital improvements for all properties in 1999, which are expected to be funded from available cash reserves or from operations of the properties. The present cash balance is believed to provide an adequate reserve for property operations.
Additional efforts to maintain and improve partnership liquidity have included continued attention to property management activities. The objective has been to obtain maximum occupancy rates while holding expenses to levels necessary to maximize cash flows. The Partnership has made capital expenditures on its properties where improvements were expected to increase the competitiveness and marketability of the properties.
Under the terms of the Amended Partnership Agreement, the Partnership pays a disposition fee to the General Partner equal to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties. The fee is due and payable at the time the sale closes. The Partnership incurred $204,000 and $55,500 of such fees during 1998 in connection with the sale of Southpointe Plaza and Island Plaza shopping centers, respectively. These fees were paid by the Partnership subsequent to December 31, 1998 and are included in payable to affiliates on the Balance Sheet at December 31, 1998.
During the last week of March 1999, the Partnership distributed approximately $250,000 to the limited partners of record as of March 1, 1999.
Long-term liquidity:
Only one property, Riverbay Plaza Shopping Center, is encumbered with mortgage debt. The mortgage is not due until 2001.
While the outlook for maintenance of adequate levels of liquidity is favorable, should operations deteriorate and present cash resources become insufficient to fund current needs, the Partnership would require other sources of working capital. No such sources have been identified. The Partnership has no established lines of credit from outside sources. Other possible actions to resolve cash deficiencies include refinancings, deferral of capital expenditures on Partnership properties except where improvements are expected to increase the competitiveness and marketability of the properties, arranging financing from affiliates or the ultimate sale of the properties. Sales and refinancings are possibilities only.
As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof.
YEAR 2000 DISCLOSURE - --------------------
State of readiness - ------------------
The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major systems failure or miscalculations.
Management has assessed its information technology ("IT") infrastructure to identify any systems that could be affected by the year 2000 problem. The IT used by the Partnership for financial reporting and significant accounting functions was made year 2000 compliant during recent systems conversions. The software utilized for these functions are licensed by third party vendors who have warranted that their systems are year 2000 compliant.
Management is in the process of evaluating the mechanical and embedded technological systems at the various properties. Management has inventoried all such systems and queried suppliers, vendors and manufacturers to determine year 2000 compliance. Management will complete assessment of findings by May 1, 1999. In circumstances of non-compliance management will work with the vendor to remedy the problem or seek alternative suppliers who will be in compliance. Management believes that the remediation of any outstanding year 2000 conversion issues will not have a material or adverse effect on the Partnership's operations. However, no estimates can be made as to the potential adverse impact resulting from the failure of third party service providers and vendors to be year 2000 compliant.
Cost - ----
The cost of IT and embedded technology systems testing and upgrades is not expected to be material to the Partnership. Because all the IT systems have been upgraded over the last three years, all such systems were compliant, or made compliant at no additional cost by third party vendors. Management anticipates the costs of assessing, testing, and if necessary replacing embedded technology components will be less than $50,000. Such costs will be funded from operations of the Partnership.
Risks - -----
Ultimately, the potential impact of the year 2000 issue will depend not only on the corrective measures the Partnership undertakes, but also on the way in which the year 2000 issue is addressed by government agencies and entities that provide services or supplies to the Partnership. Management has not determined the most likely worst case scenario to the Partnership. As management studies the findings of its property systems assessment and testing, management will develop a better understanding of what would be the worst case scenario. Management believes that progress on all areas is proceeding and that the Partnership will experience no adverse effect as a result of the year 2000 issue. However, there is no assurance that this will be the case.
Contingency plans - -----------------
Management is developing contingency plans to address potential year 2000 non-compliance of IT and embedded technology systems. Management believes that failure of any IT system could have an adverse impact on operations. However, management believes that alternative systems are available that could be utilized to minimize such impact. Management believes that any failure in the embedded technology systems could have an adverse impact on that property's performance. Management will assess these risks and develop plans to mitigate possible failures by June, 1999.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- -----------------------------------------------------------
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of McNeil Real Estate Fund XXIV, L.P.:
We have audited the accompanying balance sheets of McNeil Real Estate Fund XXIV, L.P. (a California limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XXIV, L.P. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas March 19, 1999
McNEIL REAL ESTATE FUND XXIV, L.P.
BALANCE SHEETS
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXIV, L.P.
STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXIV, L.P.
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1998, 1997 and 1996
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXIV, L.P.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
See discussion of noncash investing and financing activities in Note 4 - "Real Estate Investments," Note 7 - "Gains on Involuntary Conversions" and Note 8 - "Disposition of Real Estate."
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXIV, L.P.
STATEMENTS OF CASH FLOWS
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities
See accompanying notes to financial statements.
McNEIL REAL ESTATE FUND XXIV, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------------------------
Organization - ------------
McNeil Real Estate Fund XXIV, L.P. (the "Partnership"), formerly known as Southmark Equity Partners, Ltd., was organized on October 19, 1984, as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate commercial and residential properties. The general partner of the Partnership is McNeil Partners, L.P. ( the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil. The General Partner was elected at a meeting of limited partners on March 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240.
The Partnership is engaged in diversified real estate activities, including the ownership, operation and management of residential and commercial properties. At December 31, 1998, the Partnership owned five revenue-producing properties as described in Note 4 - "Real Estate Investments." All of the Partnership's remaining properties were acquired in transactions involving payment of all cash to the sellers. A mortgage note payable was obtained in 1998 to fund the expansion of a tenant's space at Riverbay Plaza as further described in Note 5 - "Mortgage Notes Payable."
As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof.
The Partnership placed Springwood Plaza on the market for sale effective August 1, 1997.
Basis of Presentation - ---------------------
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Adoption of Recent Accounting Pronouncements - --------------------------------------------
The Partnership has adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires an enterprise to report financial information about its reportable operating segments, which are defined as components of a business for which separate financial information is evaluated regularly by the chief decision maker in allocating resources and assessing performance. The Partnership does not prepare such information for internal use, since it analyzes the performance of and allocates resources for each property individually. The Partnership's management has determined that it operates one line of business and it would be impracticable to report segment information. Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial statements.
Real Estate Investments - -----------------------
Real estate investments are generally stated at the lower of depreciated cost or fair value. Real estate investments are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value.
Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred.
Assets Held for Sale - --------------------
Assets held for sale are stated at the lower of depreciated cost or fair value less costs to sell. Depreciation and amortization on these assets cease at the time they are placed on the market for sale.
Depreciation and Amortization - -----------------------------
Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant improvements are capitalized and are amortized over the terms of the related tenant lease, using the straight-line method.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents include cash on hand and cash on deposit in financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value.
Deferred Borrowing Costs - ------------------------
Loan fees and other related costs incurred to obtain long-term financing on real property are capitalized and are included in prepaid expenses and other assets on the Balance Sheets. Amortization is recorded using a method that approximates the effective interest method over the term of the related mortgage note payable. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations.
Rental Revenue - --------------
The Partnership leases its residential properties under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned.
The Partnership leases its commercial properties under non-cancelable operating leases. Certain leases provide concessions and/or periods of escalating or free rent. Rental revenue is recognized on a straight-line basis over the life of the related leases. The excess of the rental revenue recognized over the contractual rental payments is recorded as accrued rent receivable and is included in accounts receivable on the Balance Sheets.
Income Taxes - ------------
No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax and the tax effect of its activities accrues to the partners.
Allocation of Net Income and Net Loss - -------------------------------------
The Amended Partnership Agreement generally provides that net income and net loss (other than net income arising from sales or refinancing) shall be allocated 1% to the General Partner and 99% to the limited partners.
For financial statement purposes, net income arising from sales or refinancing shall be allocated 1% to the General Partner and 99% to the limited partners.
For tax reporting purposes, net income arising from sales or refinancing shall be allocated as follows: (a) first, amounts of such net income shall be allocated among the General Partner and limited partners in proportion to, and to the extent of, the portion of such partners' share of the net decrease in Partnership Minimum Gain determined under Treasury Regulations, (b) second, to the General Partner and limited partners in proportion to, and to the extent of, the amount by which their respective capital account balances are negative by more than their respective remaining shares of the Partnership's Minimum Gain attributable to properties still owned by the Partnership and (c) third, 1% of such net income shall be allocated to the General Partner and 99% of such net income shall be allocated to the limited partners.
Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocation of Partnership deductions attributable to debt. The Partnership's tax allocations for 1998, 1997, and 1996 have been made in accordance with these provisions.
Distributions - -------------
At the discretion of the General Partner, distributable cash (other than cash from sales or refinancing) shall be distributed to the limited partners until the limited partners have received distributions of cash flow equal to a 10% per annum cumulative return on their Adjusted Invested Capital, as defined, and then 100% to the limited partners as a class. At the discretion of the General Partner, cash from sales or refinancing shall be distributed to limited partners: (first) in an amount which when added to prior distributions from all sources to such limited partners is equal to a cumulative preferred return of 10% per annum; and (second) to limited partners in an amount which when added to prior distributions of cash from sales and refinancing to such limited partners is equal to such limited partners' Original Invested Capital, as defined; and (third) to the limited partners on a per limited partnership unit ("Unit") basis.
In connection with a Terminating Disposition, as defined, cash from sales or refinancing and any remaining reserves shall be allocated among, and distributed to, the General Partner and limited partners in proportion to, and to the extent of, their positive capital account balances after the net income has been allocated pursuant to the above.
The Partnership distributed $4,644,400, $500,000 and $750,016 to the limited partners in 1998, 1997 and 1996, respectively. During the last week of March 1999, the Partnership distributed approximately $250,000 to the limited partners of record as of March 1, 1999.
Net Income (Loss) Per Limited Partnership Unit - ----------------------------------------------
Net income (loss) per limited partnership unit is computed by dividing net income (loss) allocated to the limited partners by the weighted average number of Units outstanding. Per Unit information has been computed based on 40,000 Units outstanding in 1998, 1997 and 1996.
NOTE 2 - TRANSACTIONS WITH AFFILIATES - -------------------------------------
The Partnership pays property management fees equal to 5% of the gross rental receipts for its residential properties and 6% of gross rental receipts for its commercial properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management services for the Partnership's residential and commercial properties and leasing services for its residential properties. McREMI may also choose to provide leasing services for the Partnership's commercial properties, in which case McREMI will receive property management fees from such commercial properties equal to 3% of the property's gross rental receipts plus leasing commissions based on the prevailing market rate for such services where the property is located.
Under the terms of the Amended Partnership Agreement, the Partnership pays a disposition fee to the General Partner equal to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties. The fee is due and payable at the time the sale closes. The Partnership incurred $204,000 and $55,500 of such fees during 1998 in connection with the sale of Southpointe Plaza and Island Plaza shopping centers, respectively. These fees were paid by the Partnership subsequent to December 31, 1998 and are included in payable to affiliates on the Balance Sheet at December 31, 1998.
The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs.
Under the terms of the Amended Partnership Agreement, the Partnership is paying an asset management fee to the General Partner. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential properties and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter.
Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows:
Payable to affiliates at December 31, 1998 and 1997 consisted primarily of unpaid property management fees, disposition fees (1998 only), Partnership general and administrative expenses and asset management fees and is due and payable from current operations.
NOTE 3 - TAXABLE INCOME (LOSS) - ------------------------------
McNeil Real Estate Fund XXIV, L.P. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly.
The Partnership's net assets and liabilities for tax purposes exceeded the net assets and liabilities for financial reporting purposes by $5,099,178 in 1998, $5,529,886 in 1997 and $6,081,071 in 1996.
NOTE 4 - REAL ESTATE INVESTMENTS - --------------------------------
The basis and accumulated depreciation and amortization of the Partnership's real estate investments at December 31, 1998 and 1997 are set forth in the following tables:
On August 1, 1997 the General Partner placed Springwood Plaza, located in Dellwood, Missouri, on the market for sale. Springwood Plaza was classified as such at December 31, 1998 and 1997 with a net book value of $2,737,114 and $2,691,777, respectively.
The General Partner placed Southpointe Plaza Shopping Center, located in Sacramento, California on the market for sale effective October 1, 1996. Based on an offer from a non-affiliate to purchase the center, the Partnership recorded a $700,000 write-down for impairment of value during the fourth quarter of 1996 to record the shopping center at its fair value less estimated costs to sell. Southpointe Plaza was classified as an asset held for sale at December 31, 1997 with a net book value of $6,433,611. On March 31, 1998, the Partnership sold Southpointe Plaza for a gross sales price of $6.8 million as further discussed in Note 8 - "Disposition of Real Estate."
The General Partner placed Island Plaza Shopping Center, located in Ft. Myers, Florida, on the market for sale effective April 1, 1996. Based on an offer from a non-affiliate to purchase the center, the Partnership recorded a $220,000 write-down for impairment of value during the fourth quarter of 1997 to record the shopping center at its fair value less estimated costs to sell. Island Plaza was classified as an asset held for sale at December 31, 1997 with a net book value of $1,810,259. An additional $126,080 write-down for impairment of value was recorded in the first quarter of 1998. On April 1, 1998, the Partnership sold Island Plaza for a gross sales price of $1.85 million as further discussed in Note 8 - "Disposition of Real Estate."
The results of operations for the assets held for sale were $329,990, $626,063 and $317,577 for the years ended December 31, 1998, 1997 and 1996, respectively. Results of operations are operating revenues less operating expenses including depreciation and amortization and interest expense.
In 1997, improvements totaling approximately $1.6 million were performed at Riverbay Plaza to renovate and expand an anchor tenant's space. These costs were paid by the tenant and reimbursed by the Partnership in 1998. The Partnership obtained a mortgage loan secured by Riverbay Plaza to pay these costs and received such funds in June 1998. See Note 5 - "Mortgage Notes Payable."
The Partnership leases its commercial properties under non-cancelable operating leases. Future minimum rents to be received as of December 31, 1998 are as follows:
Real Estate Asset Held Investments For Sale
1999........................ $ 1,023,822 $ 299,689 2000........................ 950,006 109,031 2001........................ 882,842 49,010 2002........................ 810,055 17,925 2003........................ 710,534 1,500 Thereafter.................. 8,847,137 - ------------ ---------- Total $ 13,224,396 $ 477,155 ============ ==========
Future minimum rents do not include contingent rentals based on sales volume of tenants. No contingent rents were recognized in 1998. Contingent rents amounted to $38,404 and $32,518 for the years ended December 31, 1997 and 1996, respectively. Future minimum rents also do not include expense reimbursements for common area maintenance, property taxes and other expenses. These expense reimbursements amounted to $268,396, $526,529 and $548,716 for the years ended December 31, 1998, 1997 and 1996, respectively. These contingent rents and expense reimbursements, which include amounts related to the assets held for sale, are included in rental revenue on the Statements of Operations.
NOTE 5 - MORTGAGE NOTES PAYABLE - -------------------------------
The following sets forth the mortgage notes payable of the Partnership at December 31, 1998 and 1997. The mortgage notes payable are secured by the related real estate investment.
(a) The debt is non-recourse to the Partnership.
(b) Southpointe Plaza was sold and the mortgage was paid off on April 1, 1998. See Note 8 - "Disposition of Real Estate."
(c) In June 1998, the Partnership received $1,650,000 in proceeds from a mortgage note payable secured by Riverbay Plaza Shopping Center. The proceeds were used to pay for improvements made in 1997 to renovate and expand an anchor tenant's space. The mortgage note payable to an unaffiliated lender bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum and matures on April 15, 2001. At December 31, 1998, the interest rate of the mortgage note was 7.2965%. Interest-only payments are due monthly until July 1, 1999, at which time monthly principal and interest payments of $13,301 are due. The remaining principal balance of approximately $1,577,000 is due at maturity. The Partnership incurred $47,881 of deferred borrowing costs in connection with the financing of the property.
Scheduled principal maturities of the mortgage note payable under existing terms are as follows:
1999 $ 18,896 2000 39,955 2001 1,591,149 Thereafter - ------------ Total $ 1,650,000 ============
Based on borrowing rates currently available to the Partnership for a mortgage loan with similar terms and average maturities, the fair value of the mortgage notes payable was approximately $1,589,000 at December 31, 1998 and $4,953,000 at December 31, 1997.
NOTE 6 - LEGAL PROCEEDINGS - --------------------------
The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following:
James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint).
The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders.
On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid.
Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999.
Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint.
Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended.
NOTE 7 - GAINS ON INVOLUNTARY CONVERSIONS - -----------------------------------------
In December 1995, wind and hail damage occurred at Pine Hills Apartments. During 1996, reimbursements totaling $75,000 were received from the insurance carrier, and repairs to the property were completed. In 1996, the Partnership recognized a $45,134 gain on involuntary conversion, which represents the amount of insurance reimbursements received in excess of the basis of the property damaged.
In February 1997, a fire occurred at Riverbay Plaza Shopping Center. One tenant's space (less than 3% of the total leasable square footage of the center) was completely destroyed. In addition, there was damage to the roof and several tenant spaces incurred water and smoke damage. During 1997, reimbursements totaling $226,747 were received from the insurance carrier and repairs were completed. The Partnership recognized a $149,585 gain on involuntary conversion which represents the amount of insurance reimbursements received in excess of the basis of the property damaged.
NOTE 8 - DISPOSITION OF REAL ESTATE - -----------------------------------
On March 31, 1998, the Partnership sold Southpointe Plaza Shopping Center, located in Sacramento, California, to an unaffiliated purchaser for a cash purchase price of $6,800,000. Cash proceeds from the sale were received on April 1, 1998. Sales proceeds received, as well as the resulting loss on sale, are detailed below.
As discussed in Note 2 - "Transactions With Affiliates," the Partnership incurred a $204,000 disposition fee payable to the General Partner in connection with the sale of Southpointe Plaza. This fee increased the amount of the loss on disposition of real estate and is included in selling costs above. However, as the fee was not paid until subsequent to December 31, 1998, it did not reduce the amount of net cash proceeds received from the sale. The net cash proceeds from the sale of Southpointe Plaza are $1,115,730 after payment of the disposition fee.
On April 1, 1998, the Partnership sold Island Plaza Shopping Center, located in Ft. Myers, Florida, to an unaffiliated purchaser for a cash purchase price of $1,850,000. The Partnership recorded a $126,080 write-down for impairment of real estate in the first quarter of 1998 to record the property at the pending sales price less estimated costs to sell. Sales proceeds are detailed below.
As discussed in Note 2 - "Transactions With Affiliates," the Partnership incurred a $55,500 disposition fee payable to the General Partner in connection with the sale of Island Plaza. This fee increased the amount of the write-down for impairment of real estate and is included in selling costs above. However, as the fee was not paid until subsequent to December 31, 1998, it did not reduce the amount of net cash proceeds received from the sale. The net cash proceeds from the sale of Island Plaza are $1,769,020 after payment of the disposition fee.
NOTE 9 - COMMITMENTS AND CONTINGENCIES - --------------------------------------
Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws.
Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances.
The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral.
Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials.
In connection with the proposed sale transaction as more fully described in Note 1 - "Organization and Summary of Significant Accounting Policies", Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability.
NOTE 10 - PRO FORMA INFORMATION (UNAUDITED) - -------------------------------------------
The following unaudited pro forma information for the years ended December 31, 1998 and 1997 reflects the results of operations of the Partnership as if the sales of Southpointe Plaza and Island Plaza had occurred as of January 1, 1997. The unaudited pro forma information is not necessarily indicative of the results of operations which actually would have occurred or those which might be expected to occur in the future.
1998 1997 ------------- ------------ Total revenue........................... $ 3,079,948 $ 2,970,898 Net income (loss)....................... (292,131) 103,604
Net income (loss) per limited partnership unit...................... (7.23) 2.56
McNEIL REAL ESTATE FUND XXIV, L.P.
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
(b) The carrying values of Pine Hills Apartments and Towne Center Shopping Center were reduced by $692,000 and $500,000, respectively, in 1991.
(c) The asset held for sale is stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and amortization and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation and amortization cease at the time the asset is placed on the market for sale.
See accompanying notes to Schedule III.
McNEIL REAL ESTATE FUND XXIV, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
(a) For Federal income tax purposes, the properties are depreciated over lives ranging from 7-39 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $25,688,939 and accumulated depreciation was $12,592,596 at December 31, 1998.
(c) The asset held for sale is stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and amortization and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation and amortization cease at the time the asset is placed on the market for sale.
See accompanying notes to Schedule III.
McNEIL REAL ESTATE FUND XXIV, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
(c) The asset held for sale is stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and amortization and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation and amortization cease at the time the asset is placed on the market for sale.
See accompanying notes to Schedule III.
McNEIL REAL ESTATE FUND XXIV, L.P.
Notes to Schedule III Real Estate Investments and Accumulated Depreciation and Amortization
A summary of activity for the Partnership's real estate investments and accumulated depreciation and amortization is as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURES ---------------------
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- --------------------------------------------------
Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows:
Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- -------------------------------------
Robert A. McNeil, 78 Mr. McNeil is also Chairman of the Chairman of the Board and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such an entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the International Board of Directors of the Salk Institute, which promotes research in improvements in health care.
Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband Co-Chairman of the Robert A. McNeil, of McNeil Investors, Board Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute.
Ron K. Taylor 41 Mr. Taylor is the President and Chief President and Chief Executive Officer of McNeil Real Estate Executive Officer Management which is an affiliate of the General Partner. Mr. Taylor has been in this capacity since the resignation of Donald K. Reed on March 4, 1997. Prior to assuming his current responsibilities, Mr. Taylor served as a Senior Vice President of McREMI. Mr. Taylor has been in this capacity since McREMI commenced operations in 1991. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management firm. In this capacity, Mr. Taylor had the responsibility for the management and leasing of a 21,000,000 square foot portfolio of commercial properties. Mr. Taylor has been actively involved in the real estate industry since 1983.
Each director shall serve until his successor shall have been duly elected and qualified.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - -------- ----------------------
No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1998, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1998. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future.
See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- --------------------------------------------------------------
(A) Security ownership of certain beneficial owners.
No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, was known by the Partnership to own more than 5% of the Units, other than High River Limited Partnership which owns 3,648 Units at February 1, 1999 (9.1% of the outstanding Units). The business address for High River Limited Partnership is 100 South Bedford Road, Mount Kisco, New York 10549.
(B) Security ownership of management.
Neither the General Partner nor any of the officers or directors of its general partner own any limited partnership units.
(C) Change in control.
None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ----------------------------------------------
The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of general partner compensation other than property management fees and reimbursements of certain costs. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential properties and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. For the year ended December 31, 1998, the Partnership paid or accrued $238,962 of such asset management fees.
The Partnership pays property management fees equal to 5% of the gross rental receipts of residential properties and 6% for commercial properties to McREMI, an affiliate of the General Partner, for providing property management services. Additionally, the Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1998, the Partnership paid or accrued $400,050 of such property management fees and reimbursements. See Item 1 - Business, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Note 2 - "Transactions With Affiliates."
Under the terms of the Amended Partnership Agreement, the Partnership pays a disposition fee to the General Partner equal to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties. The fee is due and payable at the time the sale closes. The Partnership incurred $204,000 and $55,500 of such fees during 1998 in connection with the sale of Southpointe Plaza and Island Plaza shopping centers, respectively. These fees were paid by the Partnership subsequent to December 31, 1998 and are included in payable to affiliates on the Balance Sheet at December 31, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------- See accompanying Index to Financial Statements at Item 8 - Financial Statements and Supplementary Data.
(A) Exhibits
Exhibit Number Description -------- -----------
4. Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXIV, L.P. dated March 30, 1992 (incorporated by reference to the Current Report of the registrant on Form 8-K dated March 30, 1992, as filed on April 10, 1992).
4.1 Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXIV, L.P. dated June 1995 (incorporated by reference to the Quarterly Report of the registrant on Form 10-Q dated June 30, 1995, as filed on August 14, 1995).
10.4 Property Management Agreement dated March 30, 1992, between McNeil Real Estate Fund XXIV, L.P. and McNeil Real Estate Management, Inc. (2)
10.5 Amendment of Property Management Agreement dated March 5, 1993, by McNeil Real Estate Fund XXIV, L.P. and McNeil Real Estate Management, Inc. (2)
10.6 Promissory Note dated June 1, 1998, between Barnett Bank, N.A. and River Bay Plaza XXIV, L.P.
11. Statement regarding computation of net income (loss) per limited partnership unit (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies").
(1) Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the period ended March 31, 1991, as filed on May 14, 1991.
(2) Incorporated by reference to the Annual Report of the registrant on form 10-K for the period ended December 31, 1992, as filed on March 30, 1993.
(B) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended December 31, 1998.
McNEIL REAL ESTATE FUND XXIV, L.P. A Limited Partnership
SIGNATURE PAGE
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.
McNEIL REAL ESTATE FUND XXIV, L.P.
By: McNeil Partners, L.P., General Partner
By: McNeil Investors, Inc., General Partner
March 31, 1999 By: /s/ Robert A. McNeil - -------------- --------------------------------------------- Date Robert A. McNeil Chairman of the Board and Director Principal Executive Officer
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.
March 31, 1999 By: /s/ Ron K. Taylor - -------------- --------------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer)
March 31, 1999 By: /s/ Carol A. Fahs - -------------- --------------------------------------------- Date Carol A. Fahs Vice President of McNeil Investors, Inc. (Principal Accounting Officer)