ITEM 1. BUSINESS
General
National Realty, L.P. ("National Realty" or the "Registrant") is a Delaware limited partnership formed on January 29, 1987, the primary business of which is owning and operating through National Operating, L.P., also a Delaware limited partnership (the "Operating Partnership" or "NOLP"), a portfolio of real estate and financing real estate and real estate activities through investments in mortgage loans as more fully described in ITEM 2.
ITEM 2. PROPERTIES
The Partnership's real estate consists of properties purchased and properties obtained through foreclosure of mortgage notes. The discussion set forth below under the heading "Real Estate" provides certain summary information concerning the Partnership's real estate. The Partnership holds investments in 55 apartments and 11 commercial properties (five office buildings and six shopping centers) in all geographic regions of the United States, except for the Northeast region, as shown more specifically in the table under "Real Estate" below. The Partnership holds mortgage notes receivable secured by real estate in all geographic regions of the United States, except the Pacific and Mountain regions, as shown more specifically in the table under "Mortgage Loans" below.
At December 31, 1998, no single asset of the Partnership accounted for 10% or more of its total assets. At December 31, 1998, 50% of the Partnership's assets consisted of real estate and 34% consisted of mortgage notes and interest receivable. The remaining 16% of the Partnership's assets at December 31, 1998, consisted of cash, cash equivalents and other assets. The percentage of the Partnership's assets invested in any one asset category is subject to change and no assurance can be given that the composition of the Partnership's assets in the future will approximate the percentages listed above.
Geographic Regions
The Partnership has divided the United States into the following six geographic regions.
[GEOGRAPHICAL REGIONS MAP APPEARS HERE]
Northeast region comprised of the states of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the District of Columbia. The Partnership has no properties in this region.
Southwest region comprised of the states of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. This Partnership has 10 apartments and 4 commercial properties in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. The Partnership has 18 apartments and 2 commercial properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, West Virginia and Wisconsin. The Partnership has 22 apartments and 1 comercial property in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada, Utah and Wyoming. The Partnership has 2 apartments and 1 commercial property in this region.
Pacific region comprised of the states of Alaska, California, Hawaii, Oregon and Washington. The Partnership has 3 apartments and 3 commercial properties in this region.
Real Estate
At December 31, 1998, the Partnership owned 66 properties located in 21 states, consisting of 55 apartments with a total of 13,957 units and eleven commercial properties (five office buildings with an aggregate of 367,271 sq. ft. and six shopping centers with an aggregate of 712,338 sq. ft.).
All but nine of the Partnership's properties are encumbered by mortgage debt. Generally, the ability to make debt service payments under a mortgage loan will be dependent upon the performance of the property, which is subject to the risks associated with real estate investments, many of which are beyond the control of management or the General Partner. In the event of default under one of these mortgages, the property securing such mortgage would be subject to foreclosure. Most of the Partnership's borrowings are subject to substantial "balloon" payments at maturity.
Eighteen of the apartments transferred to GCLP were refinanced in 1998, under a five-year blanket mortgage loan, evidenced by a single mortgage with an original principal balance of $150.0 million. A portion of the blanket mortgage debt was assigned to each apartment complex and each is cross- defaulted and cross-collateralized. In the event of a default, the lender is entitled to accelerate all or any portion of the principal amount of the loan and to exercise its remedies against any or all of the mortgaged properties.
Additional detailed information with respect to individual Partnership properties and associated debt is set forth in Schedule III to the Consolidated Financial Statements included in ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
The following table sets forth the percentages, by property type and geographic region, of the Partnership's real estate at December 31, 1998.
The foregoing table is based solely on the number of apartment units and amount of commercial square footage owned by the Partnership and does not reflect the value of the Partnership's investment in each geographic region. See Schedule III to the Consolidated Financial Statements included in ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a more detailed description of the Partnership's real estate.
A summary of the activity in the Partnership's owned real estate portfolio during 1998 is as follows:
Set forth below are the Partnership's properties and the monthly rental rate for apartments and the average annual rental rate for commercial properties and occupancy thereof at December 31, 1998, 1997 and 1996:
Occupancy presented here and throughout this ITEM 2. is without reference to whether leases in effect are at, below or above market rates.
The Partnership owns a fee simple interest in each property except for the Katella and Westwood shopping centers located in Orange, California and Tallahassee, Florida, respectively, in each of which the Partnership owns a long-term leasehold interest. Such leasehold interests permit some potential for capital appreciation and marketability.
The Partnership had a 75% general partner interest in Southern Palms Associates ("Southern Palms"), which owned the Southern Palms Shopping Center in Tempe, Arizona. In December 1997, the Partnership entered into an agreement with the 25% general partner, which provided such partner with an option to purchase the Partnership's interest in Southern Palms. The 25% general partner exercised his option in May 1998 and acquired the Partnership's interest in Southern Palms for $5.5 million in cash. Neither gain nor loss was recognized.
In April 1998, the Partnership sold the 156 unit Brookview Apartments in Smyrna, Georgia, for $4.5 million, receiving $397,000 in net cash after the payment of various closing costs, including a real estate brokerage commission of $135,000 to Carmel Realty and the purchaser's assumption of the $4.0 million mortgage secured by the property. A gain of $3.1 million was recognized.
Also in April 1998, the Partnership sold the 300 unit Creekwood Apartments in College Park, Georgia, for $5.5 million, receiving net cash of $718,000 after the payment of various closing costs, including a real estate brokerage commission of $166,000 to Carmel Realty, and the purchaser's assumption of the $4.6 million mortgage secured by the property. A gain of $2.9 million was recognized.
Further in April 1998, the Partnership sold 338 acres of undeveloped land in Granby, Colorado, for $800,000, receiving net cash of $768,000 after the payment of various closing costs, including a real estate brokerage commission of $24,000 to Carmel Realty. A gain of $772,000 was recognized.
In May 1998, the Partnership sold the 406 unit Alexandria Apartments in Decatur, Georgia, for $12.4 million. The Partnership received net cash of $3.8 million after paying off $8.2 million in mortgage debt, including a $289,000 prepayment penalty, and the payment of various closing costs, including a real estate brokerage commission of $372,000 to Carmel Realty. A gain of $8.5 million was recognized.
Also in May 1998, the Partnership refinanced the mortgage debt secured by the Quail Point Apartments in Huntsville, Alabama in the amount of $3.9 million. The Partnership received net cash of $1.5 million after paying off $2.1 million in existing mortgage debt, the funding of required escrows and the payment of various closing
costs, including a mortgage brokerage and equity refinancing fee of $39,000 to BCM. The new mortgage bears interest at 7.135% per annum, requires monthly payments of principal and interest of $25,964 and matures in June 2008.
In June 1998, the Partnership sold the 184,878 sq. ft. Countryside Plaza Shopping Center in Clearwater, Florida, for $4.1 million. The Partnership received $1.7 million in net cash after paying off $2.0 million in mortgage debt and the payment of various closing costs, including a real estate brokerage commission of $123,000 to Carmel Realty. A gain of $1.1 million was recognized.
In July 1998, the Partnership sold the 240 unit Lakewood Park Apartments in St. Petersburg, Florida, for $5.5 million, receiving net cash of $5.1 million after the payment of various closing costs, including a real estate brokerage commission of $165,000 to Carmel Realty. A gain of $1.7 million was recognized.
Also in July 1998, the Partnership sold the 300 unit Royal Oaks Apartments in Stone Mountain, Georgia, for $6.8 million, receiving net cash of $6.3 million after the payment of various closing costs, including a real estate brokerage commission of $203,000 to Carmel Realty. A gain of $3.9 million was recognized.
Further in July 1998, GCLP commenced a three-phase refinancing of mortgage debt secured by the 50 properties held by it. Phase I consisted of 18 of the properties, in Arizona, Florida, Illinois, Indiana, Kansas, Missouri, Oklahoma and Texas, which were refinanced in the total amount of $150.0 million. GCLP received net cash of $33.6 million after paying off $102.9 million in mortgage debt, the funding of required escrows and the payment of various closing costs. This new mortgage bears interest at 6.88% per annum, requires monthly payments of principal and interest of $1.0 million and matures in July 2003. The new $150.0 million mortgage loan requires that the cash flow from the 18 properties be used to fund various escrow and reserve accounts and limits the payment of distributions to the Partnership.
Phase II consisted of a bridge financing of 29 of the properties, in Arizona, Arkansas, California, Colorado, Florida, Georgia, Kansas, Louisiana, Michigan, Missouri, Nebraska, Ohio, Oklahoma, Tennessee, Texas and Virginia, which were refinanced in the total amount of $86.2 million. GCLP received net cash of $1.4 million after paying off $80.0 million in mortgage debt, the funding of required escrows and the payment of various closing costs. This bridge financing bore interest at a variable rate and required monthly payments of interest only. GCLP paid a mortgage brokerage and equity refinancing fee of $2.4 million to BCM based on the $236.2 million Phase I and Phase II refinancings. Three GCLP properties were unencumbered.
In September 1998, GCLP completed Phase III of the refinancing by refinancing the properties secured by the Phase II bridge loan. The mortgage debt secured by 16 of the properties, in Arizona, California, Colorado, Florida, Georgia, Kansas, Michigan, Missouri, Nebraska, Tennessee, Texas and Virginia was refinanced in the total amount of $90.7 million. GCLP received net cash of $1.7 million after paying off $83.4 million of Phase II principal and interest and funding of required escrows and the payment of various closing costs. The new mortgages bear interest at rates ranging from 6.535% to 6.77% per annum, require monthly payments of principal and interest totaling $582,690 and mature in October 2008. No mortgage brokerage and equity refinancing fee was paid to BCM in conjunction with the Phase III refinancing. Thirteen Phase II properties were unencumbered after the payoff of the bridge loan.
The Partnership used $13.2 million of the net cash received from the refinancings to pay off debt secured by NOLP's interest in GCLP.
In August 1998, the Partnership obtained second lien financing secured by the Pheasant Ridge Apartments in Bellevue, Nebraska, in the amount of $825,000, receiving net cash of $786,000 after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $8,000 to BCM. The second lien mortgage bears interest at 7.275% per annum, requires monthly payments of principal and interest of $5,642 and matures in September 2009.
In September 1998, the Partnership refinanced the mortgage debt secured by the Chalet II Apartments in Topeka, Kansas, in the amount of $1.6 million, receiving net cash of $372,000 after paying off $1.1 million in mortgage debt, the funding of required escrows and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $16,000 to BCM. The new mortgage bears interest at 6.535% per annum, requires monthly payments of principal and interest of $10,150 and matures in October 2008.
In October 1998, GCLP obtained mortgage financing secured by the unencumbered Country Place Apartments in Round Rock, Texas, in the amount of $4.4 million, receiving net cash of $4.1 million after the funding of required escrows and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $44,000 to BCM. The mortgage bears interest at 6.2% per annum, requires monthly payments of principal and interest of $26,851 and matures in November 2008.
Also in October 1998, GCLP obtained mortgage financing secured by the unencumbered La Mirada Apartments in Jacksonville, Florida, in the amount of $7.7 million, receiving net cash of $6.7 million after the funding of required escrows and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $77,000 to BCM. The mortgage bears interest at 6.2% per annum, requires monthly payments of principal and interest of $47,038 and matures in November 2008.
Further in October 1998, GCLP sold the 260 unit Skipper's Pond Apartments in Tampa, Florida, for $6.5 million. GCLP received net cash of $6.1 million after the payment of various closing costs, including a real estate brokerage commission of $194,000 to Carmel Realty. A gain of $5.0 million was recognized.
In November 1998, the Partnership refinanced the mortgage debt secured by the Sherwood Glen Apartments in Urbandale, Iowa, in the amount of $4.7 million. The Partnership received net cash of $597,000 after paying off $3.9 million in mortgage debt, the funding of required escrows and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $47,000 to BCM. The new mortgage bears interest at 6.46% per annum, requires monthly payments of principal and interest of $29,584 and matures in December 2008.
Also in November 1998, GCLP obtained mortgage financing secured by the unencumbered Regency Falls Apartments in San Antonio, Texas, in the amount of $5.6 million. GCLP received net cash of $5.3 million after the funding of required escrows and the payment of various closing costs, including a mortgage and equity refinancing fee of $56,000 to BCM. The mortgage bears interest at a variable rate, currently 7.5% per annum, requires monthly payments of principal and interest of $41,384 and matures in June 2000.
Further in November 1998, GCLP obtained mortgage financing secured by the unencumbered Horizon East apartments in Dallas, Texas, in the amount of $2.6 million. GCLP received net cash of $2.5 million after the funding of required escrows and the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $26,000 to BCM. The mortgage bears interest at a variable rate, currently 7.5%, requires monthly payments of principal and interest of $19,214 and matures in June 2000.
In December 1998, GCLP sold the 152 unit Towne Oaks Apartments in Monroe, Louisiana, for $5.0 million, receiving net cash of $4.8 million after the payment of various closing costs, including a real estate brokerage commission of $150,000 to Carmel Realty. A gain of $2.9 million was recognized.
Also in December 1998, GCLP sold the 212 unit Oakmont Apartments in Monroe, Louisiana, for $5.7 million, receiving net cash of $5.6 million after the payment of various closing costs, including a real estate brokerage commission of $171,000 to Carmel Realty. A gain of $4.2 million was recognized.
Further in December 1998, GCLP sold the 343 unit River Glen Apartments in Tulsa, Oklahoma, for $6.7 million, receiving net cash of $6.4 million after the payment of various closing costs, including a real estate brokerage commission of $201,000 to Carmel Realty. A gain of $3.8 million was recognized.
In December 1998, GCLP sold the 212 unit Wisperwood Apartments in Tampa, Florida, for $3.7 million, receiving net cash of $3.5 million after the payment of various closing costs, including a real estate brokerage commission of $111,000 to Carmel Realty. A gain of $2.7 million was recognized.
Also in December 1998, the Partnership purchased an undivided interest in one of the ground leases under the Westwood Shopping Center for $507,000 in cash. The Partnership paid a $15,000 real estate brokerage commission to Carmel Realty.
In January 1999, GCLP sold the 199 unit Olde Towne Apartments in Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after the payment of various closing costs, including a real estate brokerage commission of $136,000 to Carmel Realty. A gain will be recognized on the sale.
In February 1999, the Partnership obtained mortgage financing secured by the unencumbered 56 Expressway Office Building in Oklahoma City, Oklahoma, in the amount of $1.7 million. The Partnership received net cash of $1.7 million after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $17,000 to BCM. The mortgage bears interest at a variable rate, currently 8.5% per annum, requires monthly payments of principal and interest of $15,000 and matures in February 2019.
Also in February 1999, the Partnership obtained mortgage financing secured by the unencumbered Melrose Business Park in Oklahoma City, Oklahoma, in the amount of $900,000. The Partnership received net cash of $870,000 after the payment of various closing costs, including a mortgage brokerage and equity refinancing fee of $9,000 to BCM. The mortgage bears interest at a variable rate, currently 8.5% per annum, requires monthly payments of principal and interest of $8,000 and matures in February 2019.
Further in February 1999, GCLP sold the 225 unit Santa Fe Apartments in Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million after the payment of various closing costs, including a real estate brokerage commission of $137,000 to Carmel Realty. A gain will be recognized on the sale.
In February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa, Arizona, for $19.5 million, receiving net cash of $793,000 after the payment of various closing costs, including a real estate brokerage commission of $585,000 to Carmel Realty and remitting $17.8 million to the lender to hold in escrow pending a substitution of collateral. Such funds will be released when substitute collateral is approved. If substitute collateral is not provided by August 1999, $13.0 million of the escrow will be applied against the mortgage's principal balance, approximately $885,000 will be retained by the lender as a prepayment penalty and the remaining $3.9 million will be returned to GCLP. A gain will be recognized on the sale. NMC will earn an incentive sales fee on the sale in accordance with the partnership agreement.
Mortgage Loans
In addition to real estate, a substantial portion of the Partnership's assets are invested in mortgage notes receivable, secured by income-producing real estate, unimproved land and other income producing assets. The Partnership expects that the percentage of its assets invested in mortgage loans will increase as it increases its lending activity in 1999 to take advantage of interest rate spreads or profit participation opportunities. The Partnership intends to service and hold for investment the mortgage notes currently in its portfolio. The Partnership's mortgage notes consist of first, wraparound and junior mortgage loans secured by real estate, and other secured and unsecured loans.
Types of Mortgage Activity. The Partnership may originate its own mortgage loans. The Partnership is not, however, considering acquiring existing mortgage notes. BCM, in its capacity as a mortgage servicer, services the Partnership's mortgage notes. The Partnership's investment policy is described in ITEM 1. "BUSINESS--Business Plan and Investment Policy".
Types of Properties Subject to Mortgages. The properties securing the Partnership's mortgage notes receivable portfolio at December 31, 1998, consisted of an office building, shopping centers, unimproved land and partnership interests.
At December 31, 1998, the Partnership's mortgage notes had an aggregate face amount of $133.7 million and an aggregate net carrying value of $114.5 million, net of deferred gains ($2.4 million), discounts ($109,000) and allowance for estimated losses ($1.9 million).
The following table sets forth the percentage (based on the outstanding mortgage note balance at December 31, 1998), by property type and geographic region, of the properties that serve as collateral for the mortgage notes in the Partnership's mortgage notes receivable portfolio at December 31, 1998, excluding the $91.3 million in mortgage notes secured by unimproved land and other security as discussed below. See Schedule IV to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for further details of the Partnership's mortgage notes receivable portfolio.
A summary of the activity in the Partnership's mortgage notes receivable portfolio during 1998 is as follows:
First Mortgage Loans. These loans can provide for level periodic payments of principal and interest, may involve interest only payments or for all interest and a "balloon" principal payment at maturity. With respect to first mortgage loans, it is the Partnership's general policy to require that the borrower provide a mortgagee's title policy or an acceptable legal opinion of title as to the validity and the priority of the mortgage lien over all other obligations, except liens arising from unpaid property taxes and other exceptions normally allowed by first mortgage lenders in the relevant area.
The following discussion briefly describes first mortgage loans funded by the Partnership in 1998, as well as events that affected previously funded first mortgage loans.
During 1998, the Partnership funded a total of $8.0 million of a $23.8 million loan commitment to Centura Tower, Ltd. The loan is secured by 2.244 acres of land, and an office building under construction in Dallas, Texas. The loan bears interest at 12.0% per annum, requires monthly payments based on net revenues after development of the land and building and matures in January 2003. The borrower has not obtained a construction loan, therefore, the Partnership may be required to fund construction costs in excess of its loan commitment in order to preserve its collateral interest. Cost to construct the office building is in excess of $60.0 million. Through February 1999, the Partnership has funded an additional $2.5 million.
During 1998, the Partnership funded $2.1 million of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The loan is secured by 129.77 acres of land in Riverside County, California and a pledge of the stock of the borrower. The loan bears interest at 15.0% per annum and matures in November 1999. All principal and interest are due at maturity.
During the first and second quarters of 1998, the Partnership funded a $356,000 loan to Ellis Development Company, Inc. The loan is secured by 4.5 acres of land in Abilene, Texas. The loan bears interest at 14.0% per annum and had an original maturity of April 1999. All principal and interest are due at maturity. In August 1998, the loan was modified and extended, increasing the loan commitment to $946,000, of which $942,000 has been funded and extending the maturity date to August 1999. In exchange for the modification and extension the borrower pledged additional collateral consisting of the personal guarantees of the principal owners of the borrower and a collateral assignment of a $220,000 note receivable. All other terms of the loan remained unchanged.
In June 1998, the Partnership funded a $2.4 million loan to Cuchara Partners, Ltd. and Ski Rio Partners, Ltd., affiliates of JNC Enterprises, Ltd. ("JNC"). The loan is secured by (1) a first lien on approximately 1,000 acres of land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) assignment of a $2.0 million promissory note which is secured by approximately 2,623 acres of land in Taos County, New Mexico, known as Ski Rio Resort; and (3) a pledge of all related partnership interests. The loan bears interest at 16.0% per annum and matures in June 1999. All principal and interest are due at maturity. In July 1998, the Partnership funded an additional $1.8 million, increasing the loan balance to $4.2 million. All other terms of the loan remained unchanged. In the fourth quarter of 1998, the Partnership received $109,000 on the sale of 11 parcels of the collateral property in Taos, New Mexico. This loan is cross-collateralized with other JNC loans discussed below.
In June 1998, GCLP collected $18.5 million in full payment of a mortgage note receivable, receiving net cash of $3.9 million after paying off a $14.6 million underlying lien, including a prepayment penalty. GCLP recognized a gain of $1.0 million on the early collection, as well as a previously deferred gain of $11.2 million related to the 1988 sale of the property, the gain having been deferred until the seller provided financing was paid off.
In the second quarter of 1998, the Partnership received a total of $3.8 million on the collection of two of its mortgage notes receivable. The Partnership made a $3.5 million paydown on a mortgage partially secured by one of the paid off notes.
In July 1998, the Partnership paid in full two mortgage loans in the total amount of $3.5 million secured by six of the Partnership's mortgage notes receivable.
In August 1998, the Partnership funded a $6.0 million loan to Centura Holdings, LLC, a subsidiary of Centura Tower, Ltd. The loan is secured by 6.4109 acres of land in Dallas, Texas. The loan bears interest at 15.0% per annum and matures in August 2000. All principal and interest are due at maturity.
In September 1998, the Partnership received payment in full of a $800,000 note receivable which had matured.
In March 1998, the Partnership ceased receiving the required payments on a $3.0 million note receivable secured by an office building in Dallas, Texas. In October 1998, the Partnership began foreclosure proceedings. In January 1999, the borrower filed for bankruptcy protection. The Partnership expects to incur no loss on foreclosure as the fair value of the collateral property less estimated costs of sale, exceeds the carrying value of the note. In March 1999, the Partnership received payment in full, including accrued but unpaid interest.
In December 1998, the Partnership obtained financing in the amount of $6.1 million secured by seven notes receivable with an aggregate principal balance of $19.1 million. The Partnership received net cash of $5.9 million after the payment of various closing costs. The financing bears interest at 14.0% per annum, requires monthly payments of interest only and matures in December 1999. The Partnership paid a mortgage brokerage and equity refinancing fee of $61,000 to BCM.
In December 1997, the Partnership funded a $3.4 million loan to Stratford & Graham Developers, L.L.C. The loan is secured by 1,485 acres of undeveloped land in Riverside County, California. The loan bears interest at 15.0% per annum and matures in June 1999. All principal and interest are due at maturity. In the second, third and fourth quarters of 1998, the Partnership funded an additional $370,000 increasing the loan balance to $3.8 million. In January and February 1999, the Partnership funded an additional $105,000, increasing the loan balance to $3.9 million.
Wraparound Mortgage Loans. A wraparound mortgage loan, sometimes called an all-inclusive loan, is a mortgage loan having an original principal amount equal to the outstanding balance under the prior existing mortgage loan(s) plus the amount actually advanced under the wraparound mortgage loan. Wraparound mortgage loans may provide for full, partial or no amortization of principal.
At December 31, 1998, the Partnership's one wraparound mortgage note receivable was in default. The Partnership has been vigorously pursuing its rights regarding the loan. The Partnership expects to incur no loss in excess of reserves previously provided if it is unable to collect the balance due.
Junior Mortgage Loans. Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower.
In May 1998, the Partnership funded $713,000 of an original $836,000 loan commitment to Warwick of Summit, Inc., of which $619,000 was used to repay an affiliate's loan from the Partnership. The new loan is secured by a second lien on a shopping center in Rhode Island, by 100% of the stock of the borrower and by the personal guarantee of the principal shareholder of the borrower. The loan bears interest at 14.0% per annum and matures in December 1999. All principal and interest are due at maturity. In June 1998, the Partnership funded the remaining $123,000 of the initial loan commitment and in July 1998, an additional $301,000 was funded, increasing the loan balance to $1.1 million. In August 1998, the loan was modified, increasing the commitment to $1.8 million, which has been fully funded. All other terms of the loan remained unchanged.
In October 1998, the Partnership funded two $1.0 million loans to JNC. One loan is secured by a second lien on 3.5 acres of land in Dallas, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bears interest at 14.0% per annum and matures in October 1999. The other loan was secured by a second lien on 2.92 acres of land in Dallas, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 14.0% per annum and matured in October 1999. All principal and interest were due at maturity. This loan was paid in full in March 1999. The loans are cross-collateralized with the Cuchara/Ski Rio and other JNC loans funded by the Partnership.
Also in October 1998, the Partnership funded a $2.1 million loan to Frisco Panther Partners, Ltd. , an affiliate of JNC. The loan is secured by a second lien on 408.23 acres of land in Frisco, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bears interest at 14.0% per annum and matures in October 1999. All principal and interest are due at maturity. This loan is cross-collateralized with the Cuchara/Ski Rio and other JNC loans funded by the Partnership. In January 1999, the Partnership received an $820,000 paydown on the loan, as discussed below.
In December 1998, the Partnership funded $3.3 million of a $5.0 million loan commitment to JNC. The loan is secured by a second lien on 1,791 acres of land in Denton County, Texas and a second lien of 220 acres of land in Tarrant County, Texas. The loan bears interest at 12.0% per annum and matures in December 1999. All principal and interest are due at maturity. This loan is cross-collateralized with the Cuchara/Ski Rio and other JNC loans funded by the Partnership. In January 1999, the Partnership received a $1.3 million paydown on the loan, as discussed below. In January and February 1999, the Partnership funded an additional $2.0 million.
Other. Beginning in 1997 and through October 1998, the Partnership funded $1.5 million of a $1.6 million loan commitment to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (1) a 100%
limited partnership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux partners. The loan bears interest at 14.0% per annum. Until November 1998, the loan required monthly payments of interest only at 12.0% per annum, with the deferred interest payable at maturity in January 1999. In November 1998, the loan was modified to allow payments based on monthly cash flow of the collateral property and the maturity date was extended to December 1999. The property has had no cash flow. The remaining $50,000 was funded in January 1999.
In June 1998, the Partnership funded a $365,000 loan to RB Land & Cattle, L.L.C. The loan is secured by a pledge of a note secured by 7,200 acres of undeveloped land near Crowell, Texas and the personal guarantee of the borrower. The loan bore interest at 10.0% per annum and matured in December 1998. All principal and interest were due at maturity. The borrower did not make the required payments and the loan was placed in non-accrual. The Partnership has begun foreclosure proceedings. The Partnership expects to incur no loss on foreclosure as the fair value of the collateral property less estimated costs of sale, exceeds the carrying value of the note.
In August 1998, the Partnership funded a $3.7 million loan to JNC. The loan was secured by a contract to purchase 387 acres of land in Collin County, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 12.0% per annum and matured the earlier of termination of the contract or February 1999. All principal and interest were due at maturity. This loan was cross-collateralized with the Cuchara/Ski Rio loan and other JNC loans. In January 1999, ART purchased the contract from JNC and acquired the land. In connection with the purchase, GCLP funded an additional $6.0 million of a $95.0 million loan commitment to ART. A portion of the funds were used to payoff the $3.7 million loan, including accrued but unpaid interest, paydown by $1.3 million the JNC line of credit and paydown by $820,000 the JNC Frisco Panther Partners Ltd. loan, discussed below. See "Related Party".
Also in August 1998, the Partnership funded a $635,000 loan to La Quinta Partners, LLC. The loan is secured by interest bearing accounts prior to being used as escrow deposits toward the purchase of a total of 956 acres of land in La Quinta, California. The loan bore interest at 10.0% per annum and matured in November 1998. All principal and interest were due at maturity. In November and December 1998, the Partnership received $250,000 in principal paydowns and in the second quarter of 1999, the remaining $385,000 was expected to be collected.
In October 1998, the Partnership funded a $350,000 loan to Four "J" International Corp., 5J-CTMS, Ltd. and an individual. The loan was secured by 1.1 million Class A limited partnership units in Grapevine American Ltd., which are convertible into shares of Series G Cumulative Convertible Preferred Stock of ART. The loan bore interest at 15.0% per annum and matured in February 1999. All principal and interest were due at maturity. In January 1999, the note was collected in full.
In July 1997, the Partnership funded a $700,000 loan to an individual. In February 1998, the Partnership funded an additional $40,000 and the loan was modified, increasing the principal balance to $740,000. The loan is secured by a security interest in an oil, gas and mineral lease in Anderson County, Texas and by a second lien mortgage on a ranch in Henderson County, Texas. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and originally matured in December 1998. In October 1998, the loan was modified, extending the maturity date to September 1999.
Related Party. In November and December 1998, GCLP funded $50.0 million of $95.0 million loan commitment to ART. The loan is secured by second liens on six ART properties in Minnesota, Mississippi and Texas, the stock of ART Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,349,535 National Realty units of limited partner interest and by the stock of NMC. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in November 2003. In January 1999, the Partnership funded an additional $6.0 million.
In December 1998, in connection with the Moorman lawsuit settlement, NMC, a wholly-owned subsidiary of ART and the new general partner of the Partnership, assumed responsibility for repayment to the Partnership
of the $12.2 million paid by the Partnership to the Moorman Class Members and legal counsel. The loan bears interest at the 90 day LIBOR (London InterBank Offered Rate) plus 2.0% per annum, currently 7.0% per annum, adjusted every 90 days and requires annual payments of accrued interest plus principal payments of $500,000 in each of the first three years, $750,000 in each of the next three years, $1.0 million in each of the next three years, with payment in full of the remaining balance in the tenth year. The note is guaranteed by ART. The note matures upon the earlier of the liquidation or dissolution of the Partnership, NMC ceasing to be the General Partner or 10 years from March 31, 1999, the date of the first cash distribution to the Moorman Class Members. See ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Moorman Settlement
The Partnership entered into a settlement agreement, dated as of May 9, 1990, relating to the action entitled Moorman, et al. v. Southmark Corporation, et al. Such action was filed on September 2, 1987, in the Superior Court of the State of California, County of San Mateo. The Partnership agreed to settle such action pursuant to the terms of a written agreement (the "Moorman Settlement Agreement").
The Moorman Settlement Agreement provided for a plan (the "Moorman Settlement Plan") consisting of, among other things, the following: (1) the appointment and operation of a committee (the "Oversight Committee") to oversee the implementation of the Moorman Settlement Plan, and (2) the establishment of specified annually increasing targets (each a "Target") for each of the five years through May 1995, relating to the price of the units of limited partner interest.
If the Targets were not met for any two successive years of the Moorman Settlement Plan or for the final year of the Moorman Settlement Plan, Syntek Asset Management, L.P. ("SAMLP") was required to withdraw as general partner effective at the time a successor general partner was elected. The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, the Moorman Settlement Agreement required that SAMLP resign as general partner, effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years.
Upon, among other things, the withdrawal of SAMLP as general partner and the due election and taking office of a successor, the Moorman Settlement Plan would terminate. Withdrawal of SAMLP as general partner pursuant to the Moorman Settlement Agreement required unitholders to elect a successor general partner by majority vote.
The Moorman Settlement Agreement provided that the withdrawal of SAMLP as general partner would require the Partnership to acquire its interest in the Partnership (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation, as provided in the Partnership Agreement and the Moorman Settlement Agreement. Under the Moorman Settlement Agreement, payment for such Redeemable General Partner Interest, fees and other compensation could have, at the Oversight Committee's option, been paid over a three year period pursuant to a secured promissory note bearing interest at a financial institution's prime rate and containing commercially reasonable terms and collateral. Under the Moorman Settlement Plan, the purchase price for Redeemable General Partner Interest would have been calculated as of the time SAMLP withdrew as general partner under the Partnership's governing documents. The Redeemable General Partner Interest was calculated at December 31, 1997, to be $49.6 million. The Partnership would have been entitled to offset against any such payment the then outstanding principal balance ($4.2 million at December 31, 1997) plus all accrued but unpaid interest ($7.2 million at December 31, 1997) on the note receivable from SAMLP for its capital contribution to the Partnership. In the accompanying December 31, 1997, Consolidated Balance Sheet, the Redeemable General Partner Interest is shown as a reduction of Partners' Equity, and the note receivable from the General Partner was offset against the Redeemable General Partner Interest. The Oversight Committee had previously informed the Partnership that it had calculated such Redeemable General Partner Interest to be a lesser amount.
On July 15, 1998, National Realty, SAMLP and the Oversight Committee executed an Agreement for Cash Distribution and Election of Successor General Partner (the "Cash Distribution Agreement") which provides for the nomination of NMC, which is an entity affiliated with SAMLP, to be the successor general partner of the Partnership, for the distribution of $11.4 million to the Moorman Class Members and for the resolution of all related matters under the Moorman Settlement Agreement. The Cash Distribution Agreement was submitted to the Court on July 23, 1998. On August 4, 1998, the Court entered an order granting preliminary approval of the Cash Distribution Agreement. On September 9, 1998, a notice was mailed to the Moorman Class Members describing the Cash Distribution Agreement. On October 16, 1998, a hearing was held to consider any objections to the Cash Distribution Agreement. On October 23, 1998, the Court entered an order granting final approval of the Cash Distribution Agreement. The Court also entered orders requiring the Partnership to pay $404,000 in attorney's fees to Joseph B. Moorman's legal counsel, $30,000 to Joseph B. Moorman and $404,000 in attorney's fees to Robert A. McNeil's legal counsel.
Pursuant to the order, $11.4 million was deposited by the Partnership into an escrow account and then transferred to the control of an independent settlement administrator. The distribution of the cash shall be made to the Moorman Class Members pro rata based upon the number of units originally issued to each Moorman Class Member upon the formation of the Partnership in 1987. On March 10, 1999, the Court entered an order providing for the initial distribution of the cash not later than March 31, 1999. The distribution of cash is under the control of the independent settlement administrator.
The proposal to elect NMC as the successor general partner was submitted to the unitholders of National Realty for a vote at a special meeting of unitholders held on December 18, 1998. All units of the Partnership owned by affiliates of SAMLP (approximately 61.8% of the outstanding units of National Realty as of the November 27, 1998 record date) were voted pro rata with the vote of the other limited partners. NMC was elected by a majority vote of the unitholders. The Moorman Settlement Plan remained in effect until December 18, 1998, when SAMLP resigned as general partner and NMC was elected successor general partner and took office.
Under the Cash Distribution Agreement, SAMLP waived its right under the Moorman Settlement Agreement to receive any payment from the Partnership for its Redeemable General Partner Interest and fees it was entitled to receive upon the election of a successor general partner. As of December 31, 1997, the Redeemable General Partner Interest was calculated to be $49.6 million. In addition, pursuant to the Cash Distribution Agreement, the Partnership Agreement was amended to provide that, upon voluntary resignation of the general partner, the resigning general partner shall not be entitled to the repurchase of its general partner interest under Paragraph 17.9 of the Partnership Agreement.
Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's note for its capital contribution to the Partnership. In addition, NMC assumed liability for a note which requires the repayment to
the Partnership of the $11.4 million paid by the Partnership under the Cash Distribution Agreement plus the $808,000 in court ordered attorney's fees and the $30,000 paid to Joseph B. Moorman. This note requires repayment over a ten-year period, bears interest at a variable rate, currently 7.0% per annum, and is guaranteed by ART, which is the parent of NMC and which owns approximately 55.4% of the outstanding units of the Partnership.
Other. The Partnership is involved in various lawsuits arising in the ordinary course of business. Management of the Partnership is of the opinion that the outcome of these lawsuits would have no material impact on the Partnership's financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Partnership held a special meeting of unitholders on December 18, 1998, at which meeting the Partnership's unitholders were asked to consider and vote upon (1) the election of NMC as successor general partner of the Partnership, (2) an amendment to the partnership agreement of National Realty to facilitate SAMLP's withdrawal as the general partner of National Realty, and (3) an amendment to the Partnership Agreement of the Operating Partnership to facilitate SAMLP's withdrawal as the general partner of the Operating Partnership. At such meeting the Partnership's unitholders elected NMC as the successor general partner with 4,742,925 votes for the proposal, 145,900 votes against the proposal and 54,720 votes abstaining; approved an amendment to the Partnership Agreement of National Realty to facilitate SAMLP's withdrawal as the general partner of National Realty with 4,864,225 votes for the proposal, 21,250 votes against the proposal and 58,070 votes abstaining and approved an amendment to the Partnership Agreement of the Operating Partnership to facilitate SAMLP's withdrawal as general partner of the Operating Partnership with 4,863,319 votes for the proposal, 22,057 votes against the proposal and 58,169 votes abstaining.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNER INTEREST AND RELATED SECURITY HOLDER MATTERS
National Realty's units of limited partner interest are traded on the American Stock Exchange ("AMEX") using the symbol "NLP."
The following table sets forth high and low sale prices of National Realty's units of limited partner interest as reported by the AMEX:
As of March 5, 1999, the closing price of National Realty's units of limited partner interest on the AMEX was $22.50 per unit.
As of March 5, 1999, National Realty's units of limited partner interest were held by 5,101 holders of record.
The Partnership has paid quarterly distributions since the fourth quarter of 1993. During 1998, the Partnership declared quarterly distributions of $.125 per unit, a total of $.50 per unit or $3.2 million.
The distributions paid by the Partnership in 1998 and 1997 were as follows:
- -------- * Special distribution.
In March 1999, the Board of Directors of the General Partner affirmed National Realty's unit repurchase program which was established in 1987. The Board also established a new authorization for the repurchase of up to 500,000 additional units in open-market transactions. Through December 31, 1998, the Partnership had purchased a total of 402,960 units under the prior authorization at a total cost of $5.1 million. The Partnership has not purchased any units under such purchase program since January 1993.
In May 1996, the Partnership announced an offer to buy back its units of limited partner interest from unitholders owning 99 or fewer units. The Partnership paid a premium of $.50 per unit over the average closing price of its units as reported on the AMEX from May 10, 1996 through June 28, 1996, the expiration date of the offer. On July 12, 1996, the Partnership purchased 77,725 units at a total cost of $841,000. The Partnership extended this purchase offer through August 5, 1996. On August 16, 1996, the Partnership purchased an additional 9,677 units at a cost of $113,000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Units and per unit data have been restated for the three for one forward unit split, effected January 2, 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
National Realty, L.P. ("National Realty") is a Delaware limited partnership formed on January 29, 1987, the primary business which is owning and operating through National Operating, L.P., also a Delaware limited partnership (the "Operating Partnership"), a portfolio of real estate and financing real estate and real estate activities through investments in mortgage loans. Most of the Operating Partnership's properties were acquired in transactions consummated on September 18, 1987, pursuant to which National Realty acquired all of the assets, and assumed all of the liabilities, of 35 public and private limited partnerships. National Realty and the Operating Partnership operate as an economic unit and, unless the context otherwise requires, all references herein to the "Partnership" shall constitute references to National Realty and the Operating Partnership as a unit.
In November 1992, the Operating Partnership, in conjunction with a refinancing of 52 of its apartment complexes and a wraparound note receivable, transferred such assets to Garden Capital, L.P. ("GCLP"), a Delaware limited partnership in which the Operating Partnership holds a 99.3% limited partner interest. See NOTE 7. "NOTES AND INTEREST PAYABLE."
Liquidity and Capital Resources
The General Partner has discretion in determining methods of obtaining funds for the Partnership's operations. The Partnership's governing documents place no limitation on the amount of leverage that the Partnership may incur either in the aggregate or with respect to any particular property or other investment. At December 31, 1998, the aggregate loan-to-value ratio of the Partnership's real estate portfolio, computed on the basis of the ratio of total property-related debt to aggregate estimated current values, was 63.5% compared to 43.4% at December 31, 1997.
Cash and cash equivalents aggregated $9.0 million at December 31, 1998 as compared with $17.2 million at December 31, 1997.
The Partnership's principal sources of cash have been and will continue to be from property operations and externally generated funds. Externally generated funds include borrowings, proceeds from the sale of the Partnership's properties and other assets and proceeds from borrowings secured by the Partnership's properties or mortgage notes receivable. The Partnership expects that cash flow from property operations together with externally generated funds will be sufficient to meet the Partnership's various cash needs in 1999, including, but not limited to, the payment of distributions, debt service obligations coming due and property maintenance and improvements, as more fully discussed in the paragraphs below.
Currently, all but nine of the Partnership's properties are encumbered by mortgage debt. In 1999, mortgage debt totaling $20.7 million comes due. The Partnership intends to seek to refinance certain mortgages that either mature in the next two years or where there is an interest rate advantage to the Partnership, and use excess refinancing proceeds for working capital purposes.
The Partnership's cash flow from property operations (rents collected less payments for property operating expenses) decreased to $42.9 million in 1998 from $50.5 million in 1997. A decrease of $4.2 million was due to properties sold in 1998 and in 1997. The remaining decrease is due to the payment in 1998 of expenses accrued at December 31, 1997, and decreases in occupancy, partially offset by an increase of $2.6 million primarily due to the Partnership's continued success in increasing rental rates during 1998. Rental rates at the Partnership's apartments, which account for over 80% of the Partnership's properties, increased an average of 4% in 1998 over 1997, although occupancy rates decreased an average of 1%. At the Partnership's commercial properties, rental rates increased an average of 4% over 1997, although occupancy rates decreased an average of 3.5%. Management believes that this trend in rental rates will continue, particularly in the Partnership's apartments, if the economy remains stable or improves and expects that occupancy rates will improve in 1999.
Interest collected on mortgage notes receivable of $4.1 million in 1998 approximated 1997. Interest is expected to increase as a source of cash to the Partnership as it originates additional mortgage loans and as loans mature in 1999 that require interest be paid only at maturity.
Interest paid on the Partnership's notes payable decreased to $27.9 million in 1998 from $30.3 million in 1997. Of this decrease, $2.3 million was due to loans paid off in 1998 and an additional $2.3 million was due to properties sold in 1997 and 1998. These decreases were offset in part by an increase of $1.4 million due to properties refinanced and unencumbered properties financed in 1998.
General and administrative expenses paid decreased to $7.8 million in 1998 from $9.5 million in 1997. The decrease was due to a decrease in legal fees related to the Southern Palms litigation of $754,000, a decrease of $256,000 in legal and other fees related to the Moorman litigation, a decrease of $580,000 in overhead
reimbursements to Basic Capital Management, ("BCM") and a decrease of $200,000 due to a decrease in insurance deductibles.
The Partnership was involved in significant investing activities during 1998. The Partnership originated 16 mortgage or other loans totaling $97.8 million, funded $870,000 on an existing loan and collected $24.2 million on its mortgage notes receivable, primarily from the payoff of five notes. In connection with two of the payoffs, the Partnership paid off underlying notes payable in the amount of $18.1 million, including a prepayment penalty. Also in 1998, the Partnership made improvements to its properties totaling $2.8 million and sold 10 apartments, two commercial properties and one parcel of unimproved land, for $81.0 million, receiving net cash of $49.7 million after the payoff of mortgage debt and the payment of various closing costs.
In 1998, the Partnership received net cash of $25.3 million from mortgage financing secured by four unencumbered apartments, by seven notes receivable and by a second lien mortgage on an apartment. In addition, the Partnership refinanced the mortgages secured by three apartments, receiving net cash of $2.5 million after paying off $7.1 million in mortgage debt and the payment of various closing costs. Also in 1998, the Partnership made scheduled principal payments on mortgages totaling $3.3 million.
In November 1992, in conjunction with the transfer of the net assets of 52 apartments and a wraparound note receivable to GCLP, such assets were refinanced under a $223.0 million blanket mortgage loan. The blanket mortgage loan required that cash flow from the GCLP properties be used to fund various escrow and reserve accounts and limited the payment of distributions to the Partnership.
In January 1997, GCLP replaced the credit enhancement escrow with an $18.5 million letter of credit. The letter of credit provided by a financial institution in the amount of $18.5 million was for a term of not less than two years. The letter of credit could be drawn upon to pay operating shortfalls of GCLP's properties. The available amount under the letter of credit would be reduced by the amount of each draw on the letter of credit. The Partnership received net cash of $11.3 million from the released credit enhancement escrow, after the payment of various costs.
In July 1998, GCLP commenced a three-phase refinancing of the blanket mortgage loan secured by the 50 properties then held by it. Phase I consisted of 18 of the properties, in Arizona, Florida, Illinois, Indiana, Kansas, Missouri, Oklahoma and Texas, which were refinanced in the amount of $150.0 million. GCLP received net cash of $33.6 million after paying off $102.9 million in mortgage debt, the funding of required escrows and the payment of various closing costs associated with the Phase I refinancing. The Partnership received $32.1 million of the net cash from the GCLP Phase I refinancing. The new $150.0 million mortgage loan requires that cash flow from the 18 properties be used to fund various escrow and reserve accounts and limits the payment of distributions to the Partnership. Phase II consisted of short-term bridge financing of 29 of the properties, in Arizona, Arkansas, California, Colorado, Florida, Georgia, Kansas, Louisiana, Michigan, Missouri, Nebraska, Ohio, Oklahoma, Tennessee, Texas and Virginia, which were refinanced in the amount of $86.2 million. GCLP received net cash of $1.4 million after paying off $80.0 million in mortgage debt, the funding of required escrows and the payment of various closing costs associated with the Phase II refinancing. The Partnership used $13.2 million of the net cash received from the Phase I refinancing to pay off debt secured by the Operating Partnership's interest in GCLP.
In September 1998, GCLP completed Phase III of the refinancing by refinancing the properties secured by the Phase II bridge loan. The mortgage debt secured by 16 of the properties, in Arizona, California, Colorado, Florida, Georgia, Kansas, Michigan, Missouri, Nebraska, Tennessee, Texas and Virginia was refinanced in the total amount of $90.7 million. GCLP received net cash of $1.7 million after paying off $83.4 million of Phase II principal and interest and funding of required escrows and the payment of various closing costs associated with the Phase III refinancing.
In 1998, the Partnership received from GCLP, in addition to the GCLP refinancing proceeds discussed above, excess cash flow and property sales proceeds totaling $71.6 million.
The Partnership has paid quarterly distributions since the fourth quarter of 1993. The Partnership declared total distributions of $.50 per unit or $3.2 million in 1998.
Management reviews the carrying values of the Partnership's properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. In those instances where impairment is found to exist, a provision for loss is recorded by a charge against earnings. The Partnership's mortgage note receivable review includes an evaluation of the collateral property securing such note. The property review generally includes selective property inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of maintenance requirements, a review of the property's cash flow, discussions with the manager of the property and a review of properties in the surrounding area.
As more fully discussed in NOTE 15. "COMMITMENTS AND CONTINGENCIES--Moorman Settlement," the Moorman litigation settlement agreement (the "Moorman Settlement Agreement") set forth certain aggressive, annually increasing targets relating to the price of the Partnership's units of limited partner interest which were not achieved, resulting in, among other things, the required withdrawal of the Partnership's General Partner upon election of a successor.
Pursuant to the Partnership Agreement and the Moorman Settlement Agreement, the withdrawal of the General Partner required the Partnership to acquire the General Partner's interest in the Partnership (the "Redeemable General Partner Interest") at its then fair value, and to pay certain fees and other compensation. The Moorman Settlement Agreement provided that any payment for such Redeemable General Partner Interest, fees and other compensation during the pendency of the Moorman Settlement Agreement could have, at the option of the Oversight Committee (also established under the Moorman Settlement Agreement), been paid over three years pursuant to a secured promissory note bearing interest at a financial institution's prime rate. The fair value of the Redeemable General Partner Interest at December 31, 1997 was calculated to be $49.6 million. The Partnership would have been entitled to offset against such payment the then outstanding principal balance of the note receivable ($4.2 million at December 31, 1997) plus all accrued and unpaid interest ($7.2 million at December 31, 1997) on the note receivable from the General Partner representing its capital contribution to the Partnership.
In the accompanying December 31, 1997 Consolidated Balance Sheet, the Redeemable General Partner Interest is shown as a reduction of Partners' Equity and the note receivable from the General Partner was offset against the Redeemable General Partner Interest.
On July 15, 1998, National Realty, Syntek Asset Management, L.P. ("SAMLP") and the Oversight Committee executed an Agreement for Cash Distribution and Election of Successor General Partner (the "Cash Distribution Agreement") which provided for the nomination of NRLP Management Corp. ("NMC"), which is an entity affiliated with SAMLP, to be the successor general partner of the Partnership, for the distribution of $11.4 million to the Moorman Class Members and for the resolution of all related matters under the Moorman Settlement Agreement. The Cash Distribution Agreement was submitted to the Court on July 23, 1998. On August 4, 1998, the Court entered an order granting preliminary approval of the Cash Distribution Agreement. On September 9, 1998, a notice was mailed to the Moorman Class Members describing the Cash Distribution Agreement. On October 16, 1998, a final hearing was held to consider any objections to the Cash Distribution Agreement. On October 23, 1998, the Court entered an order granting final approval of the Cash Distribution Agreement. The Court also entered orders requiring the Partnership to pay $404,000 in attorney's fees to Joseph B. Moorman's legal counsel, $30,000 to Joseph B. Moorman and $404,000 in attorney's fees to Robert A. McNeil's legal counsel.
Pursuant to the order, $11.4 million was deposited by the Partnership into an escrow account and then transferred to the control of an independent settlement administrator. The distribution of the cash shall be made to the Moorman Class Members pro rata based upon the number of units originally issued to each Moorman Class Member upon the formation of the Partnership in 1987. On March 10, 1999, the Court entered an order providing for the initial distribution of the cash not later than March 31, 1999. The distribution of cash is under the control of the independent settlement administrator.
The proposal to elect NMC as the successor general partner was submitted to the unitholders of National Realty for a vote at a special meeting of unitholders held on December 18, 1998. All units of the Partnership owned by affiliates of SAMLP (approximately 61.8% of the outstanding units of National Realty as of the November 27, 1998, record date) were voted pro rata with the vote of the other limited partners. NMC was elected by a majority vote of the unitholders. The Moorman Settlement Plan remained in effect until December 18, 1998, when SAMLP resigned as general partner and NMC was elected successor general partner and took office.
Under the Cash Distribution Agreement, SAMLP waived its right under the Moorman Settlement Agreement to receive any payment from the Partnership of the fees it was entitled to receive upon the election of a successor general partner. As of December 31, 1997, the Redeemable General Partner Interest was calculated to be $49.6 million. In addition, pursuant to the Cash Distribution Agreement, the Partnership Agreement was amended to provide that, upon voluntary resignation of the general partner, the resigning general partner shall not be entitled to the repurchase of its general partner interest under Paragraph 17.9 of the Partnership Agreement.
Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's note for its capital contribution to the Partnership. In addition, NMC assumed liability for a note which requires the repayment to the Partnership of the $11.4 million paid by the Partnership under the Cash Distribution Agreement plus the $808,000 in court ordered attorney's fees and the $30,000 paid to Joseph B. Moorman. This note requires repayment over a ten-year period, bears interest at a variable rate, currently 7.0% per annum, and is guaranteed by American Realty Trust, Inc. ("ART"), which is the owner of approximately 55.4% of the outstanding units of the Partnership.
In March 1999, the Board of Directors of the General Partner affirmed National Realty's unit repurchase program which was established in 1987. The Board also established a new authorization for the repurchase of up to 500,000 additional units in open-market transactions. Through December 31, 1998, the Partnership had purchased a total of 402,960 units under the prior authorization at a total cost of $5.1 million. The Partnership has not purchased any additional units under such purchase program since January 1993.
In 1999, the Partnership has committed to fund $62.7 million in loans under three agreements including $45.2 million to ART.
In May 1996, the Partnership announced an offer to buy back its units of limited partner interest from unitholders owning 99 or fewer units. The Partnership paid a premium of $.50 per unit over the average closing price of its units as reported on the AMEX from May 10, 1996 through June 28, 1996, the expiration date of the offer. On July 12, 1996, the Partnership repurchased 77,725 units at a total cost of $841,000. The Partnership extended this repurchase offer through August 5, 1996. On August 16, 1996, the Partnership repurchased an additional 9,677 units at a total cost of $113,000.
Results of Operations
1998 Compared to 1997. The Partnership had net income of $47.5 million for 1998 as compared to net income of $8.7 million for 1997. Included in the Partnership's 1998 net income are gains on the sale of real estate of $52.6 million. Included in the Partnership's 1997 net income are gains on the sale of real estate of $8.4 million. The primary factors affecting the Partnership's operating results are discussed in the following paragraphs.
Rents decreased to $107.1 million for 1998, from $112.9 million for 1997. This decrease was primarily due to a decrease of $9.6 million from the sale of an apartment and three commercial properties in 1997 and ten apartments, two commercial properties and one parcel of undeveloped land in 1998. This decrease was partially offset by an increase of $3.7 million due to increased rental rates at the Partnership's apartment and commercial properties. Rents are expected to continue to decrease during 1999 as the Partnership continues to selectively sell properties.
Interest income increased to $6.7 million for 1998, from $4.5 million for 1997. An increase of $3.5 million was attributable to loans funded in 1997 and 1998 and an additional $865,000 was due to increased short-term investment income. These increases were partially offset by a decrease of $2.2 million due to loans paid off during 1997 and 1998. Interest income for 1999 is expected to increase due to the funding of additional mortgage loans.
Interest expense decreased to $26.7 million for 1998 from $34.2 million for 1997. A decrease of $5.0 million was due to loans paid off in 1997 and 1998, secured by mortgage notes receivable. A decrease of $1.2 million was due to the payoff of the pension notes in September 1997. A decrease of $2.3 million was due to a total of 16 properties being sold, subject to debt, in 1997 and 1998. These decreases were partially offset by increases of $1.2 million due to interest expense recorded on borrowings in 1997, secured by mortgages on four unencumbered commercial properties, the Operating Partnership's interest in GCLP and six notes receivable and four unencumbered apartments and seven notes receivable in 1998, the refinancing of 47 of the GCLP apartments and the refinancing of mortgages in 1997 and 1998 where the loan balance was increased. Interest expense is expected to decline in 1999 as a result of the refinancing of the GCLP debt at a lower interest rate and the expected continued sale of selected properties by the Partnership.
Deferred borrowing costs for 1998 were the unamortized borrowing costs associated with the November 1992 blanket mortgage refinancing of the GCLP properties. The mortgage debt was refinanced in July 1998, as described in "Liquidity and Capital Resources," above. See NOTE 7. "NOTES AND INTEREST PAYABLE."
Property taxes and insurance, utilities, property level payroll and other operating expenses for 1998 declined from 1997 due to the sale of 10 apartments and two commercial properties in 1998 and an apartment and three commercial properties in 1997. Repairs and maintenance and property management fees approximated that of 1997. These costs are expected to continue to decrease during 1999 as the Partnership continues to selectively sell properties.
General and administrative expenses decreased to $6.8 million in 1998 from $7.9 million in 1997. The decrease is due to a decrease in legal fees related to the Southern Palms litigation of $754,000, a decrease of $256,000 in legal and other fees related to the Moorman settlement, a decrease of $580,000 related to the Partnership overhead reimbursements to BCM and a decrease of $125,000 is due to a decrease in audit and tax preparation costs.
For 1998, gains on sale of real estate totaled $52.6 million, including $3.1 million on the sale of Brookview Apartments in April 1998, $2.9 million on the sale of Creekwood Apartments in April 1998, $772,000 on the sale of Indian Meadows land in April 1998, $8.5 million on the sale of Alexandria Apartments in May 1998, $1.1 million on the sale of Countryside Plaza in June 1998, $1.7 million on the sale of Lakewood Park Apartments in July 1998, $3.9 million on sale of the Royal Oaks Apartments in July 1998, $5.0 million on the sale of Skipper's Pond Apartments in October 1998, $2.9 million on the sale of Towne Oaks Apartments in December 1998, $4.2 million on the sale of Oakmont Apartments in December 1998, $3.8 million on the sale of River Glen Apartments in December 1998, $2.7 million on the sale of Wisperwood Apartments in December 1998 and $1.0 million from the early payoff as well as an $11.2 million deferred gain on the prior year sale of the Warner Creek Apartments, on the collection in June 1998 of the $17.5 million financing provided by the Partnership at the time of sale. See NOTE 3. "REAL ESTATE AND DEPRECIATION" and NOTE 4. "NOTES RECEIVABLE." For 1997, gains on sale of real estate totaled $8.4 million, including $3.6 million on the sale of the Tollhill East Office Building, a $2.1 million deferred gain recognized on the payoff of the Nellis
Bonanza note receivable, a gain of $563,000 on the sale of Crestview Shopping Center and a gain of $2.1 million on the sale of Village Square Apartments.
1997 Compared to 1996. The Partnership reported net income of $8.7 million for 1997 as compared to net loss of $375,000 for 1996. Contributing to the Partnership's 1997 net income were gains on sale of real estate of $8.4 million. The primary factors affecting the Partnership's operating results are discussed in the following paragraphs.
Rents increased from $109.4 million in 1996 to $112.9 million in 1997. This increase is primarily attributable to a 3.0% increase in average rental rates combined with a 1.0% increase in average occupancy rates at the Partnership's apartment complexes and an average 1.0% increase in commercial rental rates combined with a 3.0% increase in occupancy rates as compared to 1996. These increases are partially offset by a decrease of $750,000 due to the sale of the Tollhill East Office Building in April 1997, the Fondren Office Building in June 1997, Crestview Shopping Center in November 1997 and Village Square Apartments in December 1997.
Interest income increased from $3.3 million in 1996 to $4.5 million in 1997. This increase is due to 13 mortgage and other loans being funded in 1997.
Interest expense increased from $33.8 million in 1996 to $34.2 million in 1997. Of this increase, $802,000 is due to an increase in interest expense on the variable rate portion of the blanket mortgage secured by the GCLP properties. An additional increase of $657,000 is due to mortgage debt which was refinanced in 1996 and 1997. These increases are partially offset by a decrease of $741,000 due to loans paid in full, including the pension notes, and a decrease of $117,000 due to the sale of the Tollhill East Office Building in April 1997, the Crestview Shopping Center in November 1997, and the Village Square Apartments in December 1997.
Depreciation, property taxes and insurance, utilities, property-level payroll costs, repairs and maintenance, other property operation expenses and property management fees for 1997 approximated those of 1996.
General and administrative expenses increased from $6.0 million in 1996 to $7.9 million in 1997. This increase is primarily attributable to an increase in legal and consulting fees related to the Southern Palms Associates litigation of $892,000, an increase of $151,000 related to insurance deductibles and an increase of $1.0 million in the Partnership's overhead reimbursements to BCM. These increases are partially offset by a decrease of $180,000 due to a decrease in legal fees relating to the Moorman litigation and a decrease of $237,000 related to a decrease in appraisals and other professional fees.
In 1996, the Partnership recognized a gain on the sale of real estate of $61,000 on the sale of unimproved land in Colorado, compared to gains on the sale of real estate totaling $8.4 million in 1997, $3.6 million on the sale of the Tollhill East Office Building, a $2.1 million deferred gain recognized on the payoff of the Nellis Bonanza note receivable, a gain of $563,000 on the sale of Crestview Shopping Center and a gain of $2.1 million on the sale of Village Square Apartments. See NOTE 3. "REAL ESTATE AND DEPRECIATION" and NOTE 4. "NOTES RECEIVABLE."
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, the Partnership may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from the Partnership for personal injury associated with such materials.
The General Partner is not aware of any environmental liability relating to the above matters that would have a material adverse effect on the Partnership's business, assets or results of operations.
Impact of Inflation
The effects of inflation on the Partnership's operations are not quantifiable. Revenues from property operations fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of the Partnership's properties and, the ultimate gains to be realized by the Partnership from property sales. Inflation also has an effect on the Partnership's earnings from short-term investments, and on its interest income and interest expense to the extent that such income and expense depend on floating interest rates.
Taxes
National Realty is a publicly traded limited partnership and, for federal income tax purposes, all income or loss generated by the Partnership is included in the income tax returns of the individual partners. Under Internal Revenue Service guidelines generally applicable to publicly traded partnerships and thus to the Partnership, a limited partner's use of his or her share of partnership losses is subject to special limitations.
Year 2000
BCM has informed management that its computer hardware operating system and computer software have been certified as year 2000 compliant.
Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM that performs property management services for the Partnership's properties, has informed management that effective January 1, 1999, it began using year 2000 compliant computer hardware and property management software for the Partnership's commercial properties. With regard to the Partnership's apartments, Carmel, Ltd. has informed management that its subcontractors either have in place or will have in place in the first quarter of 1999, year 2000 compliant computer hardware and property management software.
The Partnership has not incurred nor does it expect to incur any costs related to its computer hardware and accounting and property management computer software being modified, upgraded or replaced to make them year 2000 compliant. Such costs have been or will be borne by either BCM, Carmel, Ltd. or the property management subcontractors of Carmel, Ltd.
Management has completed its evaluation of the Partnership's computer controlled building systems, such as security, elevators, heating and cooling, etc., to determine what systems are not year 2000 compliant. Management believes that necessary modifications are insignificant and do not require significant expenditures to make the affected systems year 2000 compliant, as enhanced operating systems are readily available.
The Partnership has or will have in place the year 2000 compliant systems that will allow it to operate. The risks the Partnership faces are that certain of its vendors will not be able to supply goods or services and that financial institutions and taxing authorities will not be able to accurately apply payments made to them. Management believes that other vendors are readily available and that financial institutions and taxing authorities will, if necessary, apply monies received manually. The likelihood of the above having a significant impact on the Partnership's operations is negligible.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements or the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners National Realty, L.P.
We have audited the accompanying consolidated balance sheets of National Realty, L.P., a limited partnership, as of December 31, 1998 and 1997, and the related consolidated statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Partnership's General Partner. Our responsibility is to express an opinion on these financial statements and schedules 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 and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. 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 consolidated financial position of National Realty, L.P. at 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.
Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.
BDO Seidman, LLP
Dallas, Texas March 24, 1999
NATIONAL REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
The accompanying notes are an integral part of these Consolidated Financial Statements.
NATIONAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of National Realty, L.P. and controlled subsidiaries and partnerships (the "Partnership") have been prepared in conformity with generally accepted accounting principles, the most significant of which are described in NOTE 2. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," and are, along with the remainder of the Notes to Consolidated Financial Statements, an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year or for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per unit amounts.
Certain balances for 1996 and 1997 have been reclassified to conform to the 1998 presentation.
NOTE 1. ORGANIZATION
General. National Realty, L.P. ("National Realty") is a Delaware limited partnership which commenced operations on September 18, 1987 when it acquired through National Operating, L.P. (the "Operating Partnership" or "NOLP") all of the assets, and assumed all of the liabilities, of 35 public and private limited partnerships.
National Realty is the sole limited partner of the Operating Partnership and owns 99% of the beneficial interest in the Operating Partnership. The general partner of and owner of 1% of the beneficial interest in each of, National Realty and the Operating Partnership, is NRLP Management Corp. (the "General Partner" or "NMC"). NMC is a wholly-owned subsidiary of American Realty Trust, Inc. ("ART"), a publicly held real estate investment company. As of March 5, 1999, ART owned approximately 55.4% of National Realty's outstanding units of limited partner interest.
NMC, as General Partner, manages the affairs of the Partnership. All decisions relating to the Partnership, including all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the Partnership's properties or other investments, are made by the General Partner. The executive officers of NMC also serve as executive officers of ART.
In November 1992, the Partnership refinanced 52 of its apartments and a wraparound mortgage note receivable with a financial institution. To facilitate the refinancing, the Operating Partnership transferred those assets to Garden Capital, L.P. ("GCLP"), a Delaware limited partnership. The Operating Partnership is the sole limited partner with a 99.3% limited partner interest in GCLP. GCLP transferred the acquired net apartment assets, in exchange for a 99% limited partner interest in each of 52 single asset limited partnerships which were formed for the purpose of operating, refinancing and holding title to the apartments. Each of the single asset limited partnerships has no significant assets other than an apartment encumbered by mortgage debt. Garden National Realty, Inc. ("GNRI"), a Nevada corporation and wholly-owned subsidiary of ART, is currently the .7% general partner of GCLP and 1% general partner of the single asset partnerships. In July 1998, the GCLP debt was refinanced. See NOTE 7. "NOTES AND INTEREST PAYABLE."
Basic Capital Management, Inc. ("BCM"), performs certain administrative functions for the Partnership, such as accounting services, mortgage servicing and portfolio review and analysis, on a cost reimbursement basis. BCM is a company owned by a trust for the benefit of the children of Gene E. Phillips. Since February 1, 1990, BCM or affiliates of BCM have provided property management services for the Partnership. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM, performs such property management services for the Partnership. BCM or affiliates of BCM also perform loan placement services, leasing services and real estate brokerage and acquisition services and other services for the Partnership for fees and commissions. See NOTE 10. "GENERAL PARTNER FEES AND COMPENSATION."
Participation in net income, net loss and distributions. The limited partners of National Realty have a 99% interest and the General Partner has 1% interest in the net income or net loss of National Realty. National Realty has a 99% and the General Partner has a 1% interest in the net income or net loss of the Operating Partnership. The 1% General Partner interest in each of National Realty and the Operating Partnership is equal to a 1.99% interest on a combined basis. The Operating Partnership has a 99.3% limited partner interest and GNRI has a .7% general partner interest in the net income or net loss and distributions of GCLP. GCLP has a 99% interest and GNRI has a 1% interest in the net income or net loss and distributions of the single asset partnerships. GNRI's .7% general partner interest in GCLP and its 1% general partner interest in the single asset partnerships is equal to a 1.68% interest on a combined basis. For tax purposes limited partners are allocated their proportionate share of net income or net loss commencing with the calendar month subsequent to their entry into the Partnership. The General Partner receives base compensation equal to 10% of the distributions to unitholders from the Partnership's cash from operations.
General Partner's capital contribution. In return for its 1% interest in National Realty, the General Partner was required to make aggregate capital contributions to the Partnership in an amount equal to 1.01% of the total initial capital contributions to the Partnership. The General Partner contributed $500,000 in cash with the remaining contribution evidenced by a promissory note bearing interest at the rate of 10% per annum compounded semi- annually payable on the earlier of September 18, 2007 or liquidation of the Partnership or termination of the General Partner's interest in the Partnership. The principal balance of such promissory note was $4.2 million at December 31, 1998 and 1997.
In the accompanying December 31, 1997, Consolidated Balance Sheet, the note receivable from the General Partner is offset against the Redeemable General Partner Interest as described in NOTE 15. "COMMITMENTS AND CONTINGENCIES-- Moorman Settlement." The General Partner received its 1% interest in the Operating Partnership in exchange for its agreement to serve as general partner of the Operating Partnership. If National Realty issues additional units of limited partner interest, the General Partner is entitled to maintain its aggregate 1% interest in each of National Realty and the Operating Partnership without payment of additional consideration.
GNRI received its .7% general partner interest in GCLP in exchange for a mortgage note receivable. National Realty subsequently purchased the mortgage note receivable for a $900,000 note payable. GNRI received its 1% general partner interest in the single asset partnerships in exchange for agreeing to manage the apartments owned by each of the single asset partnerships.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation. The Consolidated Financial Statements include the accounts of National Realty, the Operating Partnership, and controlled partnerships and subsidiaries. All significant intercompany balances and transactions have been eliminated. Minority interests (which are not significant) are included in other liabilities.
Accounting estimates. In the preparation of the Partnership's Consolidated Financial Statements in conformity with generally accepted accounting principles it was necessary for 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 Consolidated Financial Statements and the reported amounts of revenues and expenses for the year then ended. Actual results could differ from these estimates.
Revenue recognition on the sale of real estate. Sales of real estate are recognized when and to the extent permitted by Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until the requirements of SFAS No. 66 for full profit recognition have been met, transactions are accounted for using either the deposit, the installment, the cost recovery or the financing method, whichever is appropriate.
Real Estate Held for Investment and Depreciation. Real estate held for investment is carried at cost. Statement of Financial Accounting Standards No. 121 ("SFAS No. 121") requires that a property be considered impaired, if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value of the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property's remaining useful life. Depreciation is provided by the straight- line method over estimated useful lives, which range from 5 to 40 years.
Real Estate Held for Sale. Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. SFAS No. 121 also requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale property's carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property's estimated fair value less costs of sale is recorded as an adjustment to the property's carrying amount, but not in excess of the property's carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated.
Allowance for estimated losses. A valuation allowance is provided for estimated losses on notes receivable considered to be impaired. Impairment is considered to exist when it is probable that all amounts due under the terms of the note will not be collected. Valuation allowances are provided for estimated losses on notes receivable to the extent that the Partnership's investment in the note exceeds the Partnership's estimate of the fair value of the collateral securing such note.
Interest recognition on notes receivable. It is the Partnership's policy to cease recognizing interest income on notes receivable that have been delinquent for 60 days or more. In addition, accrued but unpaid interest income is only recognized to the extent that the net realizable value of underlying collateral exceeds the carrying value of the receivable.
Operating Segments. Management has determined that the Partnership's reportable operating segments are those that are based on the Partnership's method of internal reporting, which disaggregates its operations by type of real estate.
Deferred financing costs. Deferred financing costs, which include bank, legal, appraisal and consulting fees, are capitalized and amortized on the interest method over the term of the related loans.
Present value discounts. The Partnership provides for present value discounts on notes receivable or payable that have interest rates that differ substantially from prevailing market rates and amortizes such discounts by the interest method over the lives of the related notes. The factors considered in determining a market rate for receivables include the borrower's credit standing, nature of the collateral and payment terms of the note.
Marketable equity securities of affiliate. Marketable equity securities are considered to be available-for-sale and are carried at fair value, defined as period end closing market value. Net unrealized holding gains are reported as a separate component of partners' equity until realized.
Fair value of financial instruments. The Partnership used the following assumptions in estimating the fair value of its notes receivable, marketable equity securities and notes payable. For performing notes receivable, the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For nonperforming notes receivable, the estimated fair value of the Partnership's interest in the collateral property was used. For marketable equity securities, fair value was the year end closing market price of each security. For notes payable, the fair value was estimated using current rates for mortgages with similar terms and maturities, which, at December 31, 1998 and 1997, approximated carrying value.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, the Partnership considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Earnings per unit. Income (loss) per unit is presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Income (loss) per unit of limited partner interest is derived by multiplying the Partnership's net income (loss) by 98.01% and dividing the result by the weighted average number of units outstanding in each year, 6,321,425, 6,327,418, 6,387,270 units in 1998, 1997 and 1996, respectively.
NOTE 3. REAL ESTATE AND DEPRECIATION
In 1998, the Partnership sold 10 apartments with a total of 2,581 units: Brookview Apartments in Smyrna, Georgia; Creekwood Apartments in College Park, Georgia; Alexandria Apartments in Decatur, Georgia; Lakewood Apartments in St. Petersburg, Florida; Royal Oaks Apartments in Stone Mountain, Georgia; Skipper's Pond Apartments and Wisperwood Apartments in Tampa, Florida; Towne Oaks Apartments and Oakmont Apartments in Monroe, Louisiana; and River Glen Apartments in Tulsa, Oklahoma; the 184,878 sq. ft. Countryside Plaza Shopping Center in Clearwater, Florida; and a 338 acre parcel of unimproved land in Granby, Colorado. The Partnership received $40.5 million in net cash from the sales after paying off $18.8 million in mortgage debt and the payment of various closing costs. An aggregate gain of $39.3 million was recognized.
In December 1998, the Partnership acquired an undivided interest in one of the ground leases under the Westwood Shopping Center for $507,000 in cash.
The Partnership had a 75% general partner interest in Southern Palms Associates ("Southern Palms"), which owned the Southern Palms Shopping Center. In December 1997, the Partnership entered into an agreement with the 25% general partner, which provided the partner with an option to purchase the Partnership's 75% interest in Southern Palms. The 25% general partner exercised his option in May 1998 and acquired the Partnership's interest in Southern Palms for $5.5 million in cash. No gain or loss was recognized.
In 1997, the Partnership sold two office buildings with a total of 128,923 sq. ft.: Tollhill East in Dallas, Texas; and Fondren in Houston, Texas; the 80,679 sq. ft. Crestview Shopping Center in Crestview, Texas; and the 310 unit Village Square Apartments in Stone Mountain, Georgia. The Partnership received $8.8 million in net cash from the sales, after paying off $5.0 million in mortgage debt and the payment of various closing costs. An aggregate gain of $6.3 million was recognized.
NOTE 4. NOTES RECEIVABLE
Notes and interest receivable consisted of the following:
Interest income is recognized on nonperforming notes receivable on a cash basis. For the years 1998 and 1997, unrecognized interest income on nonperforming notes receivable totaled $716,000 and $127,000.
Notes receivable mature from 1999 through 2009 with interest rates ranging from 7.21% to 18.0% with a weighted average interest rate of 11.9% at December 31, 1998. Discounts were based on interest rates at the time of origination. Notes receivable are generally collateralized by real estate or interests in real estate and personal guarantees of the borrower. A majority of the notes receivable provide for interest to be paid at the note's maturity.
Deferred gains result from property sales where the buyer has either made an inadequate down payment or has not met the continuing investment test of SFAS No. 66. See NOTE 2. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Revenue recognition on the sale of real estate."
Effective December 1993, the Partnership ceased accruing interest income in excess of the "pay rate" (cash received) on the note receivable secured by the Warner Creek Apartments in Woodland Hills, California, as the carrying value of the note receivable approximated the fair value of the collateral securing such note. Unrecognized interest income was $195,000, $598,000 and $541,000 in 1998, 1997 and 1996, respectively. The note was paid off in 1998.
Beginning in 1997 and through December 1998, the Partnership funded $1.5 million of a $1.6 million loan commitment to Bordeaux Investments Two, L.L.C. ("Bordeaux"). The loan is secured by (1) a 100% limited partnership interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma; (2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of the Bordeaux partners. The loan bears interest at 14.0% per annum. Until November 1998, the loan required monthly payments of interest only at the rate of 12.0% per annum, with the deferred interest payable at maturity in January 1999. In November 1998, the loan was modified to allow payments based on monthly cash flow of the collateral property and the maturity date was extended to December 1999. The property has had no cash flow. The remaining $50,000 of the loan was funded in January 1999.
During 1998, the Partnership funded a total of $8.0 million of a $23.8 million loan commitment to Centura Tower, Ltd. The loan is secured by 2.244 acres of land and an office building under construction in Dallas, Texas. The loan bears interest at 12.0% per annum, requires monthly payments based on net revenues after development of the land and building and matures in January 2003. The borrower has not obtained a construction loan,
therefore, the Partnership may be required to fund construction costs in excess of its loan commitment, in order to preserve its collateral interest. Estimated cost to construct the office building is in excess of $60.0 million. Through February 1999, the Partnership funded an additional $2.5 million.
During 1998, the Partnership funded $2.1 million of a $2.2 million loan commitment to Varner Road Partners, L.L.C. The loan is secured by 129.77 acres of land in Riverside County, California and a pledge of the stock of the borrower. The loan bears interest at 15.0% per annum and matures in November 1999. All principal and interest are due at maturity.
During the first and second quarters of 1998, the Partnership funded a $356,000 loan to Ellis Development Company, Inc. The loan is secured by 4.5 acres of land in Abilene, Texas. The loan bears interest at 14.0% per annum and had an original maturity of April 1999. All principal and interest are due at maturity. In August 1998, the loan was modified and extended, increasing the loan commitment to $946,000, of which $942,000 has been funded and extending the maturity date to August 1999. In exchange for the modification and extension the borrower pledged additional collateral consisting of the personal guarantees of the principal owners of the borrower and a collateral assignment of a $220,000 note receivable. All other terms of the loan remained unchanged.
In May 1998, the Partnership funded $713,000 of an original $836,000 loan commitment to Warwick of Summit, Inc., of which $619,000 was used to repay an affiliate's loan from the Partnership. The new loan is secured by a second lien on a shopping center in Rhode Island, by 100% of the stock of the borrower and by the personal guarantee of the principal shareholder of the borrower. The loan bears interest at 14.0% per annum and matures in December 1999. All principal and interest are due at maturity. In June 1998, the Partnership funded the remaining $123,000 of the initial loan commitment and in July 1998, an additional $301,000 was funded, increasing the loan balance to $1.1 million. In August 1998, the loan was modified, increasing the commitment to $1.8 million, which has been fully funded. All other terms of the loan remained unchanged.
In June 1998, the Partnership funded a $365,000 loan to RB Land & Cattle, L.L.C. The loan is secured by a pledge of a note secured by 7,200 acres of undeveloped land near Crowell, Texas, and the personal guarantee of the borrower. The loan bore interest at 10.0% per annum and matured in December 1998. All principal and interest were due at maturity. The borrower did not make the required payments and the loan was placed in non-accrual. The Partnership has begun foreclosure proceedings. The Partnership expects to incur no loss on foreclosure as the fair value of the collateral property less estimated costs of sale, exceeds the carrying value of the note.
Also in June 1998, the Partnership funded a $2.4 million loan to Cuchara Partners, Ltd. and Ski Rio Partners, Ltd., affiliates of JNC Enterprises, Ltd. ("JNC"). The loan is secured by (1) a first lien on approximately 1,000 acres of land in Huerfano County, Colorado, known as Cuchara Valley Mountain Ski Resort; (2) assignment of a $2.0 million promissory note which is secured by approximately 2,623 acres of land in Taos County, New Mexico, known as Ski Rio Resort; and (3) a pledge of all related partnership interests. The loan bears interest at 16.0% per annum and matures in June 1999. All principal and interest are due at maturity. In July 1998, the Partnership funded an additional $1.8 million, increasing the loan balance to $4.2 million. All other terms of the loan remained unchanged. In the fourth quarter of 1998, the Partnership received $109,000 on the sale of 11 parcels of the collateral property in Taos, New Mexico. This loan is cross-collateralized with other JNC loans discussed below.
In the second quarter of 1998, the Partnership received a total of $3.7 million on the collection of two of its mortgage notes receivable. The Partnership also made a $3.5 million paydown of a mortgage partially secured by another of the paid off notes.
In June 1998, GCLP collected $18.5 million in full payment of a mortgage note receivable, receiving net cash of $3.9 million after paying off a $14.6 million underlying lien including a prepayment penalty. GCLP recognized a gain of $1.0 million on the early collection, as well as a previously deferred gain of $11.2 million
related to the 1988 sale of the property, the gain having been deferred until the seller provided financing was paid off.
In July 1998, the Partnership paid in full two mortgage loans in the total amount of $3.5 million secured by six of the Partnership's mortgage notes receivable.
In August 1998, the Partnership funded a $6.0 million loan to Centura Holdings, LLC, a subsidiary of Centura Tower, Ltd. The loan is secured by 6.4109 acres of land in Dallas, Texas. The loan bears interest at 15.0% per annum and matures in August 2000. All principal and interest are due at maturity.
Also in August 1998, the Partnership funded a $3.7 million loan to JNC. The loan was secured by a contract to purchase 387 acres of land in Collin County, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 12.0% per annum and matured the earlier of termination of the purchase contract or February 1999. All principal and interest were due at maturity. This loan was cross-collateralized with the Cuchara/Ski Rio loan and other JNC loans. In January 1999, ART purchased the contract from JNC and acquired the land. In connection with the purchase, GCLP funded an additional $6.0 million of a $95.0 million loan commitment to ART. A portion of the funds were used to payoff the $3.7 million loan, including accrued but unpaid interest, paydown by $1.3 million the JNC line of credit and paydown a portion of the $820,000 of the JNC Frisco Panther Partners, Ltd. loan, discussed below. See "Related Party."
Further in August 1998, the Partnership funded a $635,000 loan to La Quinta Partners, LLC. The loan is secured by interest bearing accounts prior to being used as escrow deposits toward the purchase of a total of 956 acres of land in La Quinta, California. The loan bore interest at 10.0% per annum and matured in November 1998. All principal and interest were due at maturity. In November and December 1998, the Partnership received $250,000 in principal paydowns and in the second quarter of 1999, the remaining $385,000 was expected to be collected.
In September 1998, the Partnership received payment in full of an $800,000 note receivable which had matured.
In December 1997, the Partnership funded a $3.4 million loan to Stratford & Graham Developers, L.L.C. The loan is secured by 1,485 acres of unimproved land in Riverside County, California. The loan bears interest at 15.0% per annum and matures in June 1999. All principal and interest are due at maturity. In the second, third and fourth quarters of 1998, the Partnership funded an additional $370,000, increasing the loan balance to $3.8 million. In January and February 1999, the Partnership funded an additional $105,000, increasing the loan balance to $3.9 million.
In October 1998, the Partnership funded three loans to JNC or affiliated entities. The first JNC loan of $1.0 million is secured by a second lien on 3.5 acres of land in Dallas, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bears interest at 14.0% per annum and matures in October 1999. All principal and interest are due at maturity. The second loan, also $1.0 million, was secured by a second lien on 2.92 acres of land in Dallas, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bore interest at 14.0% per annum and matured in October 1999. All principal and interest were due at maturity. This loan was paid in full in March 1999. The third loan, in the amount of $2.1 million was to Frisco Panther Partners, Ltd. The loan is secured by a second lien on 408.23 acres of land in Frisco, Texas, the guaranty of the borrower and the personal guarantees of its partners. The loan bears interest at 14.0% per annum and matures in October 1999. All principal and interest are due at maturity. These loans are cross-collateralized with the Cuchara/Ski Rio and other JNC loans funded by the Partnership. In January 1999, the Partnership received a paydown of $820,000 on the Frisco Panther Partners, Ltd. loan.
Also in October 1998, the Partnership funded a $350,000 loan to Four "J" International Corp., 5J-CTMS, Ltd. and an individual. The loan was secured by 1.1 million Class A limited partnership units in Grapevine American Ltd., which are convertible into shares of Series G Cumulative Convertible Preferred Stock of ART.
The loan bore interest at 15.0% per annum and matured in February 1999. All principal and interest were due at maturity. The loan was collected in full in January 1999.
In March 1998, the Partnership ceased receiving the required payments on a $3.0 million note receivable secured by an office building in Dallas, Texas. In October 1998, the Partnership began foreclosure proceedings. In March 1999, the Partnership received payment in full, including accrued but unpaid interest.
In December 1998, the Partnership funded $3.3 million of a $5.0 million loan commitment to JNC. The loan is secured by a second lien on 1,791 acres of land in Denton County, Texas, and a second lien of 220 acres of land in Tarrant County, Texas. The loan bears interest at 12.0% per annum and matures in December 1999. All principal and interest are due at maturity. The loan is cross-collateralized with the Cuchara/Ski Rio and other JNC loans funded by the Partnership. In January 1999, the Partnership received a $1.3 million paydown on the loan, as discussed below. In January and February 1999, the Partnership funded an additional $2.0 million.
At December 31, 1998, the Partnership's one wraparound mortgage note receivable was in default. The Partnership has been vigorously pursuing its rights regarding the loan. The Partnership expects to incur no loss in excess of reserve previously provided if it is unable to collect the balance due.
In July 1997, the Partnership funded a $700,000 loan to an individual. In February 1998, the Partnership funded an additional $40,000 and the loan was modified, increasing the principal balance to $740,000. The loan is secured by a security interest in an oil, gas and mineral lease in Anderson County, Texas and by a second lien mortgage on a ranch in Henderson County, Texas. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and originally matured in December 1998. In October 1998, the loan was modified, extending the maturity date to September 1999.
In 1997, the Partnership originated 13 mortgage or other loans totaling $22.9 million, secured by land, an office building, a single-family residence, a security interest in an oil, gas and mineral lease, partnership interests in entities owning real property, personal guarantees and by second liens on a ranch and a shopping center. The loans bore interest rates ranging from 10.0% to 18.0% per annum, required either monthly, quarterly, or at maturity, payments of interest, and matured from October 1997 to December 1999.
Also in 1997, the Partnership collected $13.5 million on its mortgage notes receivable from the payoff of six notes. In connection with one of the payoffs, the Partnership paid off an underlying note payable in the amount of $1.0 million and recognized a deferred gain of $2.1 million from the Partnership's 1986 sale of the property securing such loan.
Related Party. In November and December 1998, GCLP funded $50.0 million of a $95.0 million loan commitment to ART. The loan is secured by second liens on (1) an office building in Minnesota, (2) three apartments in Mississippi, and (3) one apartment and 130.54 acres of land in Texas, (4) by the stock of ART Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,349,535 National Realty units of limited partnership, and (5) by the stock of NMC. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in November 2003. In January 1999, the Partnership funded an additional $6.0 million.
In December 1998, in connection with the Moorman lawsuit settlement, NMC, a wholly-owned subsidiary of ART, and the new general partner of the Partnership, assumed responsibility for repayment to the Partnership of the $12.2 million paid by the Partnership to the Moorman Class Members and legal counsel. The loan bears interest at the 90 day LIBOR (London InterBank Offered Rate) plus 2.0% per annum, currently 7.0% per annum, adjusted every 90 days and requires annual payments of accrued interest plus principal payments of $500,000 in each of the first three years, $750,000 in each of the next three years, $1.0 million in each of the next three years, with payment in full of the remaining balance in the tenth year. The note is guaranteed by ART. The note matures upon the earlier of the liquidation or dissolution of the Partnership, NMC ceasing to be general partner or ten years from March 31, 1999, the date of the first cash distribution to the Moorman Class Members. See NOTE 15. "COMMITMENTS AND CONTINGENCIES."
NOTE 5. ALLOWANCE FOR ESTIMATED LOSSES
The allowance for estimated losses was as follows:
NOTE 6. INVESTMENTS IN MARKETABLE EQUITY SECURITIES OF AFFILIATE
The Partnership owns 195,732 shares of ART common stock, which the Partnership acquired in open market purchases in 1990 at an adjusted cost of $269,000. ART is a publicly held real estate investment company. The Partnership considers the ART common stock to be available-for-sale and the shares are carried at fair value (period end market value). The market value of the ART common stock was $3.2 million at December 31, 1998 and $2.8 million at December 31, 1997. See NOTE 1. "ORGANIZATION."
NOTE 7. NOTES AND INTEREST PAYABLE
Notes and interest payable consist of the following:
Scheduled notes payable principal payments are due as follows:
Notes payable at December 31, 1998 and 1997 are collateralized by land, buildings and improvements and are generally nonrecourse to the partnership. The GCLP Phase I mortgage debt, as discussed below, is cross-collateralized and cross-defaulted among the 18 apartments that serve as collateral for such debt. Notes payable at December 31, 1998, bear interest at stated rates ranging from 6.2% to 10.0% per annum with a weighted average rate of 8.6% per annum and such notes have maturities or call dates ranging from one to 25 years.
In 1998, the Partnership refinanced the mortgage debt secured by three apartments, obtained a second lien mortgage on another apartment and obtained mortgage financing for four unencumbered apartments and seven notes receivable in the total amount of $37.4 million. The Partnership received net cash of $27.8 million after paying off $7.1 million in mortgage debt, the funding of escrows and the payment of various closing costs. The mortgages bear interest rates ranging from 6.2% to 14.0% per annum, require monthly payments of principal and interest of $277,000 and mature from December 1999 to September 2009.
In addition, in July 1998, the Partnership paid in full two mortgage loans in the total amount of $7.0 million secured by six of the Partnership's mortgage notes receivable.
Also in July 1998, GCLP commenced a three-phase refinancing of the mortgage debt secured by the 50 properties held by it. Phase I consisted of 18 of the properties, in Arizona, Florida, Illinois, Indiana, Kansas, Missouri, Oklahoma and Texas, which were refinanced in the total amount of $150.0 million. GCLP received net cash of $33.6 million after paying off $102.9 million in mortgage debt, the funding of required escrows and the payment of various closing costs. This new mortgage bears interest at 6.88% per annum, requires monthly payments of principal and interest of $1.0 million and matures in July 2003. The new $150.0 million mortgage loan requires that the cash flow from the 18 properties be used to fund various escrow and reserve accounts and limits the payment of distributions to the Partnership.
Phase II consisted of a bridge financing of 29 of the properties, in Arizona, Arkansas, California, Colorado, Florida, Georgia, Kansas, Louisiana, Michigan, Missouri, Nebraska, Ohio, Oklahoma, Tennessee, Texas and Virginia, which were refinanced in the total amount of $86.2 million. GCLP received net cash of $1.4 million after paying off $80.0 million in existing mortgage debt, the funding of required escrows and the payment of various closing costs. This bridge financing bore interest at a variable rate, required monthly payments of interest only. Three GCLP properties are unencumbered.
In September 1998, GCLP completed Phase III of the refinancing by refinancing the properties secured by the Phase II bridge loan. The mortgage debt secured by 16 of the properties, in Arizona, California, Colorado, Florida, Georgia, Kansas, Michigan, Missouri, Nebraska, Tennessee, Texas and Virginia was refinanced in the total amount of $90.7 million. GCLP received net cash of $1.7 million after paying off $83.4 million of Phase II principal and interest and funding of required escrows and the payment of various closing costs. The new mortgages bear interest at rates ranging from 6.535% to 6.77% per annum, require monthly payments of principal and interest totaling $582,690 and mature in October 2008. Thirteen Phase II properties were unencumbered after the payoff of the bridge loan.
The Partnership used $13.2 million of the net cash received from the refinancings to pay off debt secured by NOLP's interest in GCLP.
In 1997, the Partnership refinanced the mortgage debt secured by three apartments and obtained mortgage financing for four unencumbered office buildings and six notes receivable in the total amount of $33.1 million. The Partnership received net cash of $21.7 million after paying off $10.0 million in mortgage debt, the funding of escrows and the payment of various closing costs. The mortgages bore interest rates ranging from 7.5% to 13.0% per annum, required monthly payments of principal and interest of $261,000 and matured from December 1998 to November 2007. In addition, the Partnership modified and extended the mortgage secured by the Cross County Mall in Mattoon, Illinois. In conjunction with the modification, the Partnership made a principal reduction payment of $137,500. The modified and extended mortgage bears interest at a variable rate, currently 8.8% per annum, requires monthly payments of principal and interest of $71,262 and has an extended maturity of April 2002. Also in 1997, the Partnership modified the mortgage debt secured by the Club Mar Apartments in Sarasota, Florida, under the Housing and Urban Development ("HUD") Partial Payment of Claim ("PPC") program. Under the PPC program, $736,000 of the original principal balance and $871,000 of accrued but unpaid interest were rolled into a new second lien mortgage. The first mortgage was reduced to $5.2 million, the interest rate was reduced to 8.18% per annum, the monthly payments were reduced to $40,800 and the maturity date of July 2023 remained unchanged. The new second lien mortgage of $1.6 million bears interest at 6.91% per annum, requires monthly payments of 50% of the property's net cash flow as defined and matures in July 2023. In conjunction with the modification, the Partnership funded improvement escrows of $381,000 and paid $345,000 as a principal paydown on the second lien mortgage from accumulated cash flow that had been held by the servicer.
In conjunction with the 1997 refinancing of the Pheasant Ridge and Regency Apartments, the Partnership purchased the Federal National Mortgage Association ("FNMA") insured mortgage backed securities issued by the lender to finance the loans. These securities bear interest at 6.84% per annum and mature in July 2007. The Partnership borrowed 97% of the face amount of the securities from FNMA. The effect of these purchases was
to lower the effective interest rate on the refinancings. In July 1998, the Partnership sold the securities for $9.4 million in cash, receiving net cash of $579,000 after paying off the associated financing.
The Partnership holds a wraparound mortgage note receivable secured by a shopping center in La Crosse, Wisconsin. The underlying note payable has matured.
NOTE 8. PENSION NOTES
In connection with its formation, the Partnership issued $4.7 million of 8% subordinated Pension Notes to certain investors in exchange for their interest in the net assets of certain of the "rolled-up" partnerships. The Pension Notes were unsecured, subordinated obligations of the Partnership and bore interest at the rate of 8% compounded annually. Principal and accrued interest were paid at maturity on September 18, 1997. The 8% stated interest rate on the Pension Notes was different than the assumed market rate at the time of issuance. Such discount was amortized over the term of the Pension Notes using the interest method. Interest expense of $1,167,000 and $1,444,000 was recognized on the Pension Notes in 1997 and 1996, respectively.
NOTE 9. WARRANTS
Pursuant to the Moorman Settlement Agreement, on February 14, 1992, the Partnership issued warrants to purchase an aggregate of 2,019,579 of its units of limited partner interest. Each warrant entitled the holder to purchase three quarters of one unit at the exercise price of $16.00 per unit. The warrants were exercisable for five years from the date of issuance and expired on February 14, 1997. Prior to their expiration a total of 1,631 warrants were exercised for the purchase of 1,226 units. See NOTE 15. "COMMITMENTS AND CONTINGENCIES--Moorman Settlement."
NOTE 10. GENERAL PARTNER FEES AND COMPENSATION
General. NMC is the general partner of the Partnership. The executive officers of NMC also serve as officers or directors of various other real estate entities. These entities may have the same objectives and may be engaged in activities similar to those of the Partnership.
Property Management Fees. As compensation for providing property management services to the Partnership's properties, as provided in the Partnership Agreement, the General Partner or an affiliate of the General Partner is to receive a reasonable property management fee. Currently, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of the General Partner, provides such property management services for a fee of 5% of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (1) First Equity Properties, Inc. ("First Equity"), which is 50% owned by a subsidiary of BCM, (2) Gene E. Phillips and (3) a trust for the benefit of the children of Mr. Phillips. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Partnership's commercial properties to Carmel Realty, Inc. ("Carmel Realty") which is a company owned by First Equity. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd.
Leasing Commissions. As compensation for providing leasing and rent-up services for a Partnership property, as provided in the Partnership Agreement, the General Partner or an affiliate of the General Partner shall be paid a reasonable leasing commission.
Reimbursement of Administrative Expenses. To the extent that officers or employees of the general partner or any of their affiliates participate in the operation or administration of the Partnership, the general partner and its affiliates are to be reimbursed under the Partnership Agreement for salaries, travel, rent, depreciation, utilities and general overhead items incurred and properly allocable to such services. Such amounts are included in General and Administrative expense in the accompanying Consolidated Statements of Operations.
General Partner Compensation. As base compensation for providing administrative and management services under the Partnership Agreement, the General Partner is entitled to receive from the Partnership, an annual partnership management fee equal to 10% of distributions made in each calendar year of Cash from Operations, as defined in the Partnership Agreement, for the calendar year, payable within 90 days after the end of that calendar year. As additional incentive compensation, the General Partner is entitled to receive in each calendar year an amount equal to 1% of the Average Unit Market Price, as defined in the Partnership Agreement, for that calendar year. Provided, however, that no incentive compensation is payable unless distributions of Cash from Operations exceed 6% of the Exchange Value of the original assets, also as defined in the Partnership Agreement. The General Partner waived its base compensation during the pendency of the Moorman Settlement Agreement.
Real Estate Brokerage Commissions. The General Partner or an affiliate of the General Partner may, pursuant to the Partnership Agreement, charge a reasonable real estate brokerage commission, payable at the time the Partnership acquires title to, or beneficial ownership in, an acquired property. Upon the sale of any Property by the Partnership, the General Partner or an affiliate of the General Partner may, pursuant to the Partnership Agreement, charge a reasonable real estate brokerage commission, payable at the time the Partnership transfers title to the property. In each case, such commissions are payable only if the General Partner or such affiliate actually performed brokerage services.
Incentive Disposition Fee. Under the Partnership Agreement, the General Partner or an affiliate of the General Partner is paid a fee equal to 10% of the amount, if any, by which the Gross Sales Price, as defined in the Partnership Agreement, of any property sold by the Partnership exceeds 110% of the Adjusted Cost, also as defined in the Partnership Agreement, of such property.
Acquisition Fees. As compensation under the Partnership Agreement for services rendered in structuring and negotiating the acquisition by the Partnership of any property, other than an Initial Property, as defined in the Partnership Agreement, the General Partner or an affiliate of the General Partner is paid a fee in an amount equal to 1% of the Original Cost, also as defined in the Partnership Agreement, of such property.
Fees For Additional Services. Under the Partnership Agreement, the General Partner or an affiliate of the General Partner may provide services other than those set out above for the Partnership in return for reasonable compensation.
Fees and cost reimbursement to NMC and its affiliates:
- -------- * Net of property management fees paid to subcontractors, other than Carmel Realty.
NOTE 11. RENTS UNDER OPERATING LEASES
The Partnership's operations include the leasing of commercial properties (office buildings and shopping centers). The leases thereon expire at various dates through 2013. The following is a schedule of minimum future rents on non-cancelable operating leases as of December 31, 1998:
NOTE 12. INCOME TAXES
The Partnership's partners include their share of partnership income or loss in their respective tax returns and, accordingly, no income taxes have been provided in the accompanying Consolidated Statements of Operations.
In December 1987, Congress passed legislation requiring that partnership losses for certain publicly traded partnerships be suspended for limited partners and carried forward to offset future income or gain from the partnership's operations or gain upon a limited partner's disposition of all units held. Any remaining income will be taxed as portfolio income.
NOTE 13. OPERATING SEGMENTS
Significant differences among the accounting policies of the segments as compared to the Partnership's consolidated financial statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of its operating segments and allocates resources to them based on net operating income and cash flow. The Partnership based reconciliation of expenses that are not reflected in the segments is $6.8 million of administrative expenses. There are no intersegment revenues and expenses and the Partnership conducts all of its business within the United States.
The Partnership has not disclosed prior years' operating segment information on a comparative basis, because it was impractical to obtain the necessary data.
The table below presents information about the reported operating income of the Partnership for 1998. Asset information by operating segment is also presented below.
Property sales:
NOTE 14. QUARTERLY DATA
The following is a tabulation of the Partnership's quarterly results of operations for the years 1998 and 1997 (unaudited).
During the second quarter of 1998, the Partnership sold three apartments, two shopping centers and 338 acres of undeveloped land for gains totaling $16.4 million and recognized a gain of $1.0 million, as well as a deferred gain of $11.2 million on the payoff of a note receivable. During the third quarter of 1998, the Partnership sold two apartments for gains totaling $5.6 million. During the fourth quarter of 1998, the Partnership sold five apartments for gains totaling $18.4 million. See NOTE 3. "REAL ESTATE AND DEPRECIATION" and NOTE 4. "NOTES RECEIVABLE."
In the second quarter of 1997, the Partnership sold an office building for a gain of $3.6 million. In the third quarter of 1997, the Partnership recognized a deferred gain of $2.1 million on the payoff of a note receivable. In the fourth quarter of 1997, the Partnership sold an apartment complex and a shopping center for gains totaling $2.7 million. See NOTE 3. "REAL ESTATE AND DEPRECIATION" and NOTE 4. "NOTES RECEIVABLE."
NOTE 15. COMMITMENTS AND CONTINGENCIES
Moorman Settlement
The Partnership entered into a settlement agreement, dated as of May 9, 1990, relating to the action entitled Moorman, et al. v. Southmark Corporation, et al. Such action was filed on September 2, 1987, in the Superior Court of the State of California, County of San Mateo. The Partnership agreed to settle such action pursuant to the terms of a written agreement (the "Moorman Settlement Agreement").
The Moorman Settlement Agreement provided for a plan (the "Moorman Settlement Plan") consisting of, among other things, the following: (1) the appointment and operation of a committee (the "Oversight Committee"), to oversee the implementation of the Moorman Settlement Plan, and (2) the establishment of specified annually increasing targets (each a "Target") for each of the five years through May 1995, relating to the price of the units of limited partner interest.
If the Targets were not met for any two successive years of the Moorman Settlement Plan or for the final year of the Moorman Settlement Plan, Syntek Asset Management, L.P. ("SAMLP") was required to withdraw as general partner effective at the time a successor general partner was elected. The Targets for the first and second anniversary dates were not met. Since the Targets were not met for two successive years, the Moorman Settlement Agreement required that SAMLP resign as general partner, effective upon the election and qualification of its successor. On July 8, 1992, SAMLP notified the Oversight Committee of the failure to meet the Target for two successive years.
Upon, among other things, the withdrawal of SAMLP as General Partner and the due election and taking office of a successor, the Moorman Settlement Plan would terminate. Withdrawal of SAMLP as general partner pursuant to the Moorman Settlement Agreement required unitholders to elect a successor general partner by majority vote.
The Moorman Settlement Agreement provided that withdrawal of SAMLP as general partner would require the Partnership to acquire its interest in the Partnership (the "Redeemable General Partner Interest") at its then fair value, and to pay certain fees and other compensation, as provided in the Partnership Agreement and the Moorman Settlement Agreement. Under the Moorman Settlement Agreement, payment for such Redeemable General Partner Interest, fees and other compensation could have, at the Oversight Committee's option, been paid over a three year period pursuant to a secured promissory note bearing interest at a financial institution's prime rate and containing commercially reasonable terms and collateral. Under the Moorman Settlement Plan, the purchase price for Redeemable General Partner Interest would have been calculated, as of the time SAMLP withdrew as general partner under the Partnership's governing documents. The Redeemable General Partner Interest was calculated at December 31, 1997, to be $49.6 million. The Partnership would have been entitled to offset against any such payment the then outstanding principal balance ($4.2 million at December 31, 1997) plus all accrued but unpaid interest ($7.2 million at December 31, 1997) on the note receivable from SAMLP described in NOTE 1. "ORGANIZATION." In the accompanying December 31, 1997, Consolidated Balance Sheet, the Redeemable General Partner Interest is shown as a reduction of Partners' Equity, and the note receivable from the General Partner being offset against the Redeemable General Partner Interest. The Oversight Committee had previously informed the Partnership that it had calculated the amount of such Redeemable General Partner Interest to be a lessor amount.
On July 15, 1998, National Realty, SAMLP and the Oversight Committee executed an Agreement for Cash Distribution and Election of Successor General Partner (the "Cash Distribution Agreement") which provided for the nomination of NMC, which is an entity affiliated with SAMLP, to be the successor general partner of the Partnership, for the distribution of $11.4 million to the Moorman Class Members and for the resolution of all related matters under the Moorman Settlement Agreement. The Cash Distribution Agreement was submitted to the Court on July 23, 1998. On August 4, 1998, the Court entered an order granting preliminary approval of the Cash Distribution Agreement. On September 9, 1998, a notice was mailed to the Moorman Class Members
describing the Cash Distribution Agreement. On October 16, 1998, a hearing was held to consider any objections to the Cash Distribution Agreement. On October 23, 1998, the Court entered an order granting final approval of the Cash Distribution Agreement. The Court also entered orders requiring the Partnership to pay $404,000 in attorney's fees to Joseph B. Moorman's legal counsel, $30,000 to Joseph B. Moorman and $404,000 in attorney's fees to Robert A. McNeil's legal counsel.
Pursuant to the order, $11.4 million was deposited by the Partnership into an escrow account and then transferred to the control of an independent settlement administrator. The distribution of the cash shall be made to the Moorman Class Members pro rata based upon the number of units originally issued to each Moorman Class Member upon the formation of the Partnership in 1987. On March 10, 1999, the Court entered an order providing for the initial distribution of the cash not later than March 31, 1999. The distribution of cash is under the control of the independent settlement administrator.
The proposal to elect NMC the successor general partner was submitted to the unitholders of National Realty for a vote. All units of the Partnership owned by affiliates of SAMLP (approximately 61.8% of the outstanding units of National Realty as of the November 27, 1998, record date) were voted pro rata with the vote of the other limited partners. NMC was elected by a majority of the unitholders. The Moorman Settlement Plan remained in effect until December 18, 1998, when SAMLP resigned as general partner and NMC was elected and took office.
Under the Cash Distribution Agreement, SAMLP waived its right under the Moorman Settlement Agreement to receive any payment from the Partnership for its Redeemable General Partner Interest or fees it was entitled to receive upon the election of a successor general partner. As of December 31, 1997, the Redeemable General Partner Interest was calculated to be $49.6 million. In addition, pursuant to the Cash Distribution Agreement, the Partnership Agreement was amended to provide that, upon voluntary resignation of the general partner, the resigning general partner shall not be entitled to the repurchase of its general partner interest under Paragraph 17.9 of the Partnership Agreement.
Under the Cash Distribution Agreement, NMC assumed liability for SAMLP's note for its capital contribution to the Partnership. In addition, NMC assumed liability for a note receivable which will require the repayment to the Partnership of the $11.4 million paid by the Partnership under the Cash Distribution Agreement plus the $808,000 in court ordered attorney's fees and the $30,000 paid to Joseph B. Moorman. This note requires repayment over a ten-year period, bears interest at a variable rate, currently 7.0% per annum, and is guaranteed by ART, which is the parent of NMC, and owns approximately 55.4% of the outstanding units of the Partnership.
Other Litigation. The Partnership is also involved in various other lawsuits arising in the ordinary course of business. In the opinion of management, the outcome of these lawsuits will not have a material effect on the Partnership's financial condition, results of operations or liquidity.
NOTE 16. SUBSEQUENT EVENTS
In January 1999, GCLP sold the 199 unit Olde Towne Apartments in Middleton, Ohio, for $4.6 million, receiving net cash of $4.4 million after the payment of various closing costs. A gain will be recognized on the sale.
In February 1999, the Partnership obtained mortgage financing secured by the unencumbered 56 Expressway Office Building in Oklahoma City, Oklahoma, in the amount of $1.7 million, receiving net cash of $1.7 million after the payment of various closing costs. The mortgage bears interest at a variable rate, currently 8.5% per annum, requires monthly payments of principal and interest of $15,000 and matures in February 2019.
Also in February 1999, the Partnership obtained mortgage financing secured by the unencumbered Melrose Business Park in Oklahoma City, Oklahoma, in the amount of $900,000, receiving net cash of $870,000 after the
payment of various closing costs. The mortgage bears interest at a variable rate, currently 8.5% per annum, requires monthly payments of principal and interest of $8,000 and matures in February 2019.
Further in February 1999, GCLP sold the 225 unit Santa Fe Apartments in Kansas City, Missouri, for $4.6 million, receiving net cash of $4.3 million after the payment of various closing costs. A gain will be recognized on the sale.
In February 1999, GCLP sold the 480 unit Mesa Ridge Apartments in Mesa, Arizona, for $19.5 million, receiving net cash of $793,000 after the payment of various closing costs, including a real estate brokerage commission of $585,000 to Carmel Realty and remitting $17.8 million to the lender to hold in escrow pending a substitution of collateral. Such funds will be released when substitute collateral is approved. If substitute collateral is not provided by August 1999, $13.0 million of the escrow will be applied against the mortgage's principal balance, approximately $885,000 will be retained by the lender as a prepayment penalty and the remaining $3.9 million will be returned to GCLP. A gain will be recognized on the sale. NMC will earn an incentive sales fee on the sale in accordance with the partnership agreement.
Also in February 1999, GCLP funded a $5.0 million unsecured loan to Davister Corp., which at December 31, 1998, owned approximately 15.8% of the outstanding shares of ART's common stock. The loan bears interest at 12.0% per annum and matures in February 2000. All principal and interest are due at maturity. The loan is guaranteed by BCM.
SCHEDULE III NATIONAL REALTY, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
SCHEDULE III--(Continued) NATIONAL REALTY, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
SCHEDULE III--(Continued) NATIONAL REALTY, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
- --------------------------------------------------------------------------------
(1) The aggregate cost for financial statement purposes approximates that for federal tax purposes. (2) Does not include mortgages payable totaling $2,472 on real estate which has been sold but for which the Partnership remains liable on the underlying mortgage note. (3) Write-down of property to estimated net realizable value. (4) Acquisition of ground lease.
SCHEDULE III--(Continued)
NATIONAL REALTY, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE IV
NATIONAL REALTY, L.P. SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE December 31, 1998
SCHEDULE IV--(Continued)
NATIONAL REALTY, L.P.
MORTGAGE LOANS ON REAL ESTATE December 31, 1998
SCHEDULE IV--(Continued)
NATIONAL REALTY, L.P.
MORTGAGE LOANS ON REAL ESTATE December 31, 1998
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(1) The aggregate cost for financial statement purposes approximates that for federal tax purposes. (2) Cross-collateralized and cross-defaulted. (3) Cross-collateral securing a $6.1 million note payable.
SCHEDULE IV--(Continued)
NATIONAL REALTY, L.P.
MORTGAGE LOANS ON REAL ESTATE
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10.
ITEM 10. GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER
As partnerships, neither National Realty, L.P. ("National Realty" or the "Registrant") nor National Operating, L.P. (the "Operating Partnership" or "NOLP") (collectively the "Partnership") has officers or directors. The General Partner of the Partnership is NRLP Management Corp. ("NMC" or the "General Partner"). The General Partner manages the day-to-day affairs of the Partnership which includes all decisions with respect to the acquisition, disposition, improvement, financing or refinancing of the Partnership's properties. Basic Capital Management, Inc. ("BCM"), an affiliate of the General Partner, performs certain administrative functions and other services for the Partnership for cost reimbursements and fees as described in ITEM 1. "BUSINESS--Management and Operations." The Directors of NMC are listed below, together with their ages, terms of service, their principal occupations, business experience, and directorships with other companies during the last five years or more.
Directors
Karl L. Blaha: Age 51, Director (since December 1998) and Executive Vice President--Commercial Asset Management (since January 1998) of NMC.
Executive Vice President--Commercial Asset Management (since July 1997), and Executive Vice President and Director of Commercial Management (April 1992 to August 1995) of BCM, Syntek Asset Management, Inc. ("SAMI"), Continental Mortgage and Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI") and Transcontinental Realty Investors, Inc. ("TCI"); Director (since June 1996), President (since October 1993) and Executive Vice President and Director of Commercial Management (April 1992 to October 1993) of American Realty Trust, Inc. ("ART"); Director (since November 1998) of SAMI and Garden National Realty, Inc.; Executive Vice President (October 1992 to July 1997) of Carmel Realty, Inc. ("Carmel Realty"), a company owned by First Equity Properties, Inc. ("First Equity"), a company 50% owned by BCM; Director and President (since 1996) of First Equity; Executive Vice President and Director of Commercial Management (April 1992 to February 1994) of National Income Realty Trust ("NIRT") and Vinland Property Trust ("VPT"); Partner--Director of National Real Estate Operations (August 1988 to March 1992) of First Winthrop Corporation; and Vice President (April 1984 to August 1988) of Southmark Corporation ("Southmark").
Collene Currie: Age 50, Director (since April 1998).
Vice President and Senior Relationship Manager (since February 1996) of NationsBank Private Client Group of Dallas; Director (since February 1999) of ART; Director of Marketing and Communications (October 1993 to January 1999) of the Dallas Opera; and Business Transformation Consultant (August 1988 to October 1993) for IBM.
Randall K. Gonzalez: Age 36, Director (since April 1998).
Chief Executive Officer and President (since October 1989) of The Gonzalez Company, formerly TMC Realty Advisors (retail and multi-family development and investment and property management services); shopping center developer (1987 to 1989) with Dunning Development Co.; real estate broker (1983 to 1987)
with Hammond-Williams; Director (1989 to 1993) of IORI and TCI; Trustee (1989 to 1993) of CMET; and Director (since 1981) of AGE Refining, Inc. Randall K. Gonzalez is the son of Al Gonzalez, who serves as a director of ART.
BOARD COMMITTEES
Fairness Committee. National Realty's Fairness Committee periodically reviewed certain transactions between the Partnership and its affiliates. The Partnership Agreement requires Fairness Committee approval of the interest rate to be paid on loans from the General Partner or its affiliates, the terms of any property sales to or purchases from the General Partner or its affiliates, the purchase of securities from the General Partner or its affiliates and, upon any withdrawal of the General Partner, the purchase price of the General Partner's interest in the Partnership and in the fees and other compensation to be paid under the Partnership Agreement.
The Partnership Agreement provides that the Fairness Committee shall consist of two or more natural persons, none of whom shall be affiliates (as defined in the Partnership Agreement) of the General Partner except as directors of the General Partner. The Fairness Committee has had no members since August 1995.
Audit Committee. An Audit Committee was established effective August 3, 1990, pursuant to the Moorman Settlement Agreement. Until January 11, 1999, the chairman and only member of the Audit Committee was Harry J. Reidler, an attorney in private practice in Englewood, New Jersey. On January 11, 1999, the Board of Directors of NMC established a new Audit Committee. The members of the Audit Committee are Ms. Currie and Mr. Gonzalez.
Mr. Reidler has performed legal services for the Partnership.
EXECUTIVE OFFICERS
The following persons currently serve as executive officers of NMC: Randall M. Paulson, President; Karl L. Blaha, Executive Vice President--Commercial Asset Management; Bruce A. Endendyk, Executive Vice President; Thomas A. Holland, Executive Vice President and Chief Financial Officer; and Steven K. Johnson, Executive Vice President--Residential Asset Management. Their positions with NMC are not subject to a vote of unitholders. Their ages, terms of service, all positions and offices with NMC, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below (except for Mr. Blaha).
RANDALL M. PAULSON: Age 52, President (since January 1998) and Director (January 1998 to December 1998) of NMC.
President (since August 1995) and Executive Vice President (January 1995 to August 1995) of CMET, IORI, TCI and SAMI; President (since August 1995) and Executive Vice President (October 1994 to August 1995) of BCM; Executive Vice President (since January 1995) of ART; Director (August 1995 to November 1998) of SAMI; Vice President (1993 to 1994) of GSSW, LP, a joint venture of Great Southern Life and Southwestern Life; Vice President (1990 to 1993) of Property Company of America Realty, Inc.; and President (1990) of Paulson Realty Group.
BRUCE A. ENDENDYK: Age 50, Executive Vice President (since January 1998) of NMC.
President (since January 1995) of Carmel Realty; Executive Vice President (since January 1995) of BCM, ART, CMET, IORI, TCI and SAMI; Management Consultant (November 1990 to December 1994); Executive Vice President (January 1989 to November 1990) of Southmark; and President and Chief Executive Officer (March 1988 to January 1989) of Southmark Equities Corporation.
Thomas A. Holland: Age 56, Executive Vice President and Chief Financial Officer (since January 1998) of NMC.
Executive Vice President and Chief Financial Officer (since August 1995), Secretary (since February 1997) and Senior Vice President (July 1990 to August 1995) of CMET, IORI, TCI and SAMI; Executive Vice President and Chief Financial Officer (since August 1995) and Senior Vice President and Chief Accounting Officer (July 1990 to August 1995) of BCM and ART; and Senior Vice President and Chief Accounting Officer (July 1990 to February 1994) of NIRT and VPT.
Steven K. Johnson: Age 41, Executive Vice President--Residential Asset Management (since August 1998).
Executive Vice President--Residential Asset Management (since August 1998) and Vice President (August 1990 to August 1991) of BCM, SAMI, ART, CMET, IORI and TCI; Chief Operating Officer (January 1993 to August 1998) of Garden Capital, Inc.; Executive Vice President (December 1994 to August 1998) of Garden Capital Management, Inc.; Vice President (August 1991 to January 1993) of SHL Properties Realty Advisors, Inc. and SHL Acquisition Corporation II and III; and Vice President (August 1990 to August 1991) of NIRT and VPT.
Officers
Although not executive officers of NMC, the following persons currently serve as officers of NMC: Robert A. Waldman, Senior Vice President and General Counsel; and Drew D. Potera, Vice President and Treasurer. Their positions with NMC are not subject to a vote of unitholders. Their ages, terms of service, all positions and offices with NMC, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below.
Robert A. Waldman: Age 46, Senior Vice President, Secretary and General Counsel (since January 1998) of NMC.
Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997) of CMET, IORI, TCI and SAMI; Vice President and Corporate Counsel (November 1989 to November 1994), and Secretary (since November 1989) of BCM; and Senior Vice President and General Counsel (since January 1995), Vice President (April 1990 to January 1995) and Secretary (since December 1990) of SAMI.
Drew D. Potera: Age 39, Vice President and Treasurer (since January 1998) of NMC.
Vice President (since December 1996) and Treasurer (since December 1990) of CMET, IORI, TCI and SAMI; Vice President (since December 1996); Vice President, Treasurer and Securities Manager (since July 1990) of BCM; Vice President and Treasurer (since February 1992) of SAMI; Treasurer (December 1990 to February 1994) of NIRT and VPT; and Financial Consultant with Merrill Lynch, Pierce, Fenner & Smith Incorporated (June 1985 to June 1990).
In addition to the foregoing officers, NMC has several vice presidents and assistant secretaries who are not listed herein.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, the directors and executive officers of National Realty's General Partner, and any persons holding more than 10% of National Realty's units of limited partner interest are required to report their ownership of National Realty's units and any changes in that ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established and National Realty is required to report any failure to file by these dates during 1998. All of these filing requirements were satisfied by the directors and executive officers of National Realty's General Partner
and 10% holders. In making these statements, National Realty has relied on the written representations of the directors and executive officers of National Realty's General Partner and its ten percent holders and copies of the reports that they have filed with the Commission.
Administrative Agent. BCM performs certain administrative functions such as accounting services, mortgage servicing and real estate portfolio review and analysis for the Partnership on a cost reimbursement basis.
Affiliates of BCM perform property management, loan placement, leasing and real estate brokerage and acquisition services, and may perform other services, for the Partnership for fees and commissions. BCM's principal business activity is the providing of advisory services for real estate companies. See ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The directors and principal officers of BCM are set forth below.
Mickey N. Phillips is Gene E. Phillips' brother and Ryan T. Phillips is Gene E. Phillips' son.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Neither National Realty nor the Operating Partnership has any employees, payroll or benefit plans and pays no salary or other cash compensation directly to any person other than (1) $50,000 per year to each member of the Oversight Committee plus $48,000 per year to an analyst engaged by the Oversight Committee, (2) $4,000 per year to each member of the Fairness and Audit Committees and (3) fees and expense reimbursements in accordance with the Partnership Agreement to the General Partner or its affiliates for services provided to the Partnership. See ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
NMC also has no employees, payroll or benefit plans and pays no compensation to its officers. It does, however, pay compensation to the Independent Directors of NMC, its general partner. Each Independent Director receives compensation in the amount of $5,000 per year, plus reimbursement for expenses.
The Moorman Settlement Agreement provided that effective May 1, 1990 the Partnership's future reimbursement of any salaries which may be paid to Messrs. Phillips and Friedman shall be limited to an aggregate of $500,000 per year, for any such reimbursement of salaries to be deferred until such time as a Target,
as defined in the Moorman Settlement Agreement, may be met and, if SAMLP resigns as General Partner during the pendency of the Moorman Settlement Plan, for the waiver of any reimbursement of salary so deferred. Accordingly, no reimbursement for the salaries of Messrs. Phillips and Friedman was charged to or paid by the Partnership in the period January 1, 1991 through December 31, 1998. Mr. Friedman resigned as a general partner of SAMLP on March 4, 1994. SAMLP resigned as General Partner of the Partnership on December 18, 1998.
Mr. Phillips may indirectly benefit from other payments made by the Partnership to certain related parties.
Mr. Reidler received $4,000 in 1998 for serving on the Partnership's Audit Committee. See ITEM 10. "GENERAL PARTNER OF THE REGISTRANT AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER."
Pursuant to an agreement with the Partnership, Invenex, of which Mr. Baker is a principal, received $15,000 per month from December 1997 until the agreement was terminated in November 1998. The Partnership also reimbursed Invenex for its reasonable costs and expenses incurred in negotiating and completing the transaction contemplated under the agreement, conducting due diligence, inspecting properties and retaining experts. In addition, Invenex received payments totaling $480,000 from SAMLP in connection with the compromise of any settlement of any claims relating to the termination of the agreement.
[This space intentionally left blank.]
Performance Graph
The following performance graph compares the cumulative total unitholder return on the Partnership's units of limited partner interest with the Dow Jones Market Equity Index ("DJ Equity Index") and the Dow Jones Real Estate Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1993 in the Partnership's units of limited partner interest and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.
[PERFORMANCE GRAPH APPEARS HERE]
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets forth the ownership of National Realty's units of limited partner interest, both beneficially and of record, both individually and in the aggregate, for those persons known by National Realty to be beneficial owners of more than 5% of its units of limited partner interest, as of the close of business on March 5, 1999.
- -------- (1) Percentage is based upon 6,321,609 units of limited partner interest outstanding at March 5, 1999.
Security Ownership of Management. The following table sets forth the ownership of National Realty's units of limited partner interest, both beneficially and of record, both individually and in the aggregate, by NMC and the executive officers and directors of NMC, as of the close of business on March 5, 1999.
- -------- (1) Percentage is based upon 6,321,609 units of limited partner interest outstanding as of March 5, 1999.
(2) Includes 3,502,669 units owned by ART and 480,775 units owned by BCM, of which the directors and executive officers of NMC, ART and BCM may be deemed to be the beneficial owners by virtue of their positions as directors and executive officers of NMC, ART and BCM. The directors and executive officers of NMC, ART and BCM disclaim beneficial ownership of such units.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
National Realty is the sole limited partner of the Operating Partnership and owns 99% of the beneficial interest in the Operating Partnership. NMC is the general partner of, and owner of a 1% beneficial interest in, each of National Realty and the Operating Partnership.
On December 18, 1998, NMC was elected General Partner of National Realty and the Operating partnership, replacing SAMLP. NMC is a wholly-owned subsidiary of ART. Gene E. Phillips and SAMI are the general partners of SAMLP, Mr. Phillips with a combined 1.95% general and limited partner interest and SAMI with .10% general partner interest. Mr. Friedman has 1.95% limited partner interest in SAMLP and ART has a 96% limited partner interest in SAMLP. SAMI serves as the Managing General Partner of SAMLP. SAMLP resigned as General Partner of National Realty and the Operating Partnership on December 18, 1998.
Since February 1, 1990, affiliates of the General Partner have provided property management services to the Partnership. Currently, Carmel, Ltd. provides property management services for a fee of 5% of the monthly gross rents collected on the properties under its management. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership at various rates. The general partner of Carmel, Ltd. is BCM. The limited partners of Carmel, Ltd. are (1) First Equity, which is 50% owned by a subsidiary of BCM,
(2) Mr. Phillips and (3) a trust for the benefit of Mr. Phillips' children. BCM is a company which is owned by a trust for the benefit of the children of Mr. Phillips. BCM performs certain administrative and other functions for the Partnership. See ITEM 1. "BUSINESS--Management and Operations" and ITEM 11. "EXECUTIVE COMPENSATION."
Messrs. Paulson, Blaha, Endendyk, Holland and Johnson serve as executive officers of BCM. Mr. Phillips served as a director until December 1989 and Chief Executive Officer until September 1, 1992, of BCM. Messrs. Paulson, Blaha, Endendyk, Holland and Johnson serve as executive officers of CMET, IORI, TCI and ART. BCM serves as advisor to CMET, IORI, TCI and ART.
Related Party Transactions
The Partnership has engaged in business transactions with certain related parties and may continue to do so. The Partnership believes that all of the related party transactions were at least as advantageous to the Partnership as could have been obtained from unrelated third parties.
The Partnership has paid and pays cost reimbursements, property management fees or other cash compensation to the General Partner and its affiliates and other related parties as described in ITEM 11. "EXECUTIVE COMPENSATION" and ITEM 1. "BUSINESS--Management and Operations." BCM, an affiliate of the General Partner, performs certain administrative functions for the Partnership on a cost reimbursement basis. The Fairness Committee has approved the formula for computing the Partnership's proportionate share of certain of BCM's reimbursable costs. Since February 1, 1990, affiliates of the General Partner have provided property management services to the Partnership. Currently, Carmel, Ltd., provides such property management services. Carmel, Ltd. subcontracts with other entities for the property-level management services to the Partnership. Carmel, Ltd. subcontracts the property-level management and leasing of nine of the Partnership's commercial properties to Carmel Realty, which is a company owned by First Equity. Carmel Realty is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Carmel, Ltd. Carmel, Ltd. and Carmel Realty also perform similar services for ART, CMET, IORI and TCI. See NOTE 10. "GENERAL PARTNER FEES AND COMPENSATION" included in Notes to Consolidated Financial Statements at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA," for a summary of fees paid and costs reimbursed by the Partnership.
The Partnership's Fairness Committee periodically reviewed certain transactions between the Partnership and its affiliates. See ITEM 1. "BUSINESS--Management and Operations." The Fairness Committee approved the terms of the Partnership's contracts and terms for services and reimbursements with affiliates. The Fairness Committee has had no members since August 1995.
Related Party. In November and December 1998, GCLP funded $50.0 million of $95.0 million loan commitment to ART. The loan is secured by second liens on six ART properties in Minnesota, Mississippi and Texas the stock of ART Holdings, Inc., a wholly-owned subsidiary of ART that owns 3,349,535 National Realty units of limited partner interest and by the stock of NMC. The loan bears interest at 12.0% per annum, requires monthly payments of interest only and matures in November 2003. In January 1999, the Partnership funded an additional $6.0 million.
In December 1998, in connection with the Moorman lawsuit settlement, NMC, a wholly-owned subsidiary of ART, and the new general partner of the Partnership, assumed responsibility for repayment to the Partnership of the $12.2 million paid by the Partnership to the Moorman Class Members and legal counsel. The loan bears interest at the 90 day LIBOR (London InterBank Offered Rate) plus 2.0% per annum, currently 7.0% per annum, adjusted every 90 days and requires annual payments of accrued interest plus principal payments of $500,000 in each of the first three years, $750,000 in each of the next three years, $1.0 million in each of the next three years, with payment in full of the remaining balance in the tenth year. The note is guaranteed by ART. The note matures upon the earlier of the liquidation or dissolution of the Partnership, NMC ceasing to be the General Partner or ten years from March 31, 1999, the date of the first cash distribution to the Moorman Class Members. See ITEM 3. "LEGAL PROCEEDINGS."
In February 1999, GCLP funded a $5.0 million unsecured loan to Davister Corp., which at December 31, 1998 owned approximately 15.8% of the outstanding shares of ART's common stock. The loan bears interest at 12.0% per annum and matures in February 2000. All principal and interest are due at maturity. The loan is guaranteed by BCM.
INDEBTEDNESS OF MANAGEMENT
In return for its 1% interest in National Realty, the General Partner was required to make aggregate capital contributions to National Realty in an amount equal to 1.01% of the total initial capital contributions to the Partnership. The General Partner contributed $500,000 cash with the remaining portion evidenced by a promissory note in the principal amount of $4.2 million, bearing interest at the rate of 10% per annum compounded semi- annually and payable on the earlier of September 18, 2007, liquidation of the Partnership or a termination of the General Partner's interest in the Partnership. As of December 31, 1998, no payments had been received on such note. At December 31, 1998, accrued and unpaid interest on the note totaled $7.2 million. In connection with the election and taking office of NMC as the new general partner on December 18, 1998, NMC assumed liability under the note.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Operations--Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Partners' Equity (Defici)>-- Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows--Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation
Schedule IV --Mortgage Loans on Real Estate
All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this Report:
(b) Reports on Form 8-K
None.
NATIONAL REALTY, L.P.
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.
NATIONAL REALTY, L.P.
By its General Partner:
NRLP MANAGEMENT CORP.
By: /s/ Randall M. Paulson _ ------------------------------- Randall M. Paulson President
By: /s/ Thomas A. Holland ------------------------------- Thomas A. Holland Executive Vice President and Chief Financial 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 NRLP Management Corp., as General Partner of the Registrant and in the capacities and on the dates indicated.
NATIONAL REALTY, L.P.
EXHIBITS TO ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1998
Exhibit Number Description - ------- -----------------
3.1 Restated Certificate of Limited Partnership of National Realty, L.P. dated as of January 22, 1996.
3.2 Certificate of Amendment to Amended and Restated Certificate of Limited Partnership of National Realty, L.P.
3.5 Second Amendment to First Amended and Restated Agreement of Limited Partnership of National Realty, L.P. dated as of December 18, 1998.
3.6 Third Amendment to First Amended and Restated Agreement of Limited Partnership of National Realty, L.P. dated as of December 18, 1998.
11.0 Computation of Earnings Per Unit.
21.0 Subsidiaries of the Registrant.
27.0 Financial Data Schedule
99.1 Certificate of Amendment of Limited Partnership Agreement of National Operating, L.P. dated as of May 14, 1990.
99.2 Second Amendment to Second Restated and Amended Agreement of Limited Partnership of National Operating, L.P. dated as of December 18, 1998.
99.3 Third Amendment to Second Restated and Amended Agreement of Limited Partnership of National Operating, L.P. dated as of December 18, 1998.
99.4 Amended and Restated Certificate of Limited Partnership of National Operating, L.P. dated as of December 18, 1998.
99.8 Agreement for Cash Distribution and Election of Successor General Partner dated as of July 15, 1998.