Item 1. Business (Cont'd.)
During 1996, the Partnership made certain capital improvements that resulted in a corresponding increase in the properties' valuation allowance. At December 31, 1996, the General Partner compared the carrying value of each property to its appraised value as of January 1, 1997 and determined that Creek Edge, Northtech and Martinazzi Square had carrying values greater than their respective appraised values. As a result, during the year ended December 31, 1996, the carrying values were adjusted by $548,000, $1,068,000 and $119,000, to $4,160,000, $12,968,000 and $5,500,000, respectively, as of December 31, 1996.
On February 18, 1997, the General Partner mailed a Consent Solicitation to the Limited Partners which sought their consent to dissolve the Partnership and sell and liquidate all of its remaining properties as soon as practicable, consistent with obtaining reasonable value for the Partnership's properties. A majority in interest of the Limited Partners consented by March 13, 1997. As a result, the Partnership adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material.
Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded.
Since the approval of the February 18, 1997 Consent Solicitation, the General Partner has been evaluating possible sales of Partnership properties, individually and as a portfolio, to liquidate and wind up the Partnership. On April 30, 1998 the General Partner accepted an offer to purchase all of the Partnership's properties for $12,560,000 from Abbey Investments, Inc. ("Abbey"), which was subject to certain customary contingencies, including due diligence review by the purchaser and negotiation of a definitive Purchase and Sale Agreement. On November 9, 1998, the Partnership and Abbey entered into a definitive Purchase and Sale Agreement, for an adjusted purchase price of $12,300,000. Abbey thereafter requested a material reduction in the purchase price, which the Partnership did not agree to. Therefore, in late January 1999, the sale to Abbey was terminated. Since that time, the Partnership has been actively soliciting buyers for its properties.
The Partnership derives most of its revenue from rental income. Penril, Inc. ("Penril") represented a significant portion of such income until Northtech was sold in January 1997. Rental income from Penril totaled $1,319,000 in 1996 or approximately 27% of the Partnership's total rental income.
The Partnership's investments in real estate are subject to competition for tenants from similar types of properties in the vicinities in which they are located. The Partnership has no investments in real estate located outside the United States.
The Partnership has no employees and, accordingly, the General Partner and its affiliates perform services on behalf of the Partnership in connection with administering the affairs of the Partnership and operating the Partnership's properties. The General Partner and its affiliates receive compensation in connection with such activities. See Item 11 and Note 4 to the Financial Statements in Item 8 for a description of such charges.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 2.
Item 2. PROPERTIES
SEE NOTES TO TABLE ON THE FOLLOWING PAGE.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 2. PROPERTIES (Cont'd.)
NOTES TO TABLE ON THE PRECEDING PAGE
(1) The purchase price does not include an allocable share of acquisition fees of $991,000 paid to the General Partner. Also, for certain properties, the purchase price has been reduced by cash received after acquisition under rental agreements for non-occupied space.
(2) An interest in Cooper Village was acquired by the Partnership through a general partnership, Cooper Village Partners ("CV Partners") consisting of the Partnership and Damson/Birtcher Realty Income Fund-II, Limited Partnership, an affiliated limited partnership. At December 31, 1998, the Partnership had a 42% interest in CV Partners. (See Note 3 to Financial Statements in Item 8 for a further discussion of the Partnership's interest in CV Partners.) The amounts shown herein for approximate purchase price and net rentable square feet represent 42% of the respective amounts for CV Partners.
Item 3.
Item 3. LEGAL PROCEEDINGS
So far as is known to the General Partner, neither the Partnership nor its properties are subject to any material pending legal proceedings, except for the following:
On March 25, 1997, a limited partner named Bigelow/Diversified Secondary Partnership Fund 1990 filed a purported class action lawsuit in the Court of Common Pleas of Philadelphia County against Damson/Birtcher Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P., Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging breach of fiduciary duty and breach of contract and seeking to enjoin the Consent Solicitation dated February 18, 1997. On April 18, 1997, the court denied the plaintiff's motion for a preliminary injunction. On June 10, 1997, the court dismissed the plaintiff's complaint on the basis of lack of personal jurisdiction and forum non conveniens.
On June 13, 1997, the Partnership, its affiliated partnership, Damson/Birtcher Realty Income Fund-II, and their general partner, Birtcher/Liquidity Properties, filed a complaint for declaratory relief in the Court of Chancery in Delaware against Bigelow/Diversified Secondary Partnership Fund 1990 L.P. The complaint seeks a declaration that the vote that the limited partners of the Partnership and Damson/Birtcher Realty Income Fund-II took pursuant to the respective consent solicitations dated February 18, 1997 was effective to dissolve the respective partnerships and complied with applicable law, that the actions of the General Partner in utilizing the consent solicitations to solicit the vote of the limited partners did not breach any fiduciary or contractual duty to such limited partners, and an award of costs and fees to the plaintiffs. The parties have initiated discovery. The defendant has answered the complaint. No motions are pending at this time.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 3. LEGAL PROCEEDINGS (Cont'd.)
In September 1998, Bigelow/Diversified Secondary Partnership 1990 informed the Partnership that it was filing suit in the Delaware Chancery Court against Damson/Birtcher Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging a purported class action on behalf of the limited partners of Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners III alleging breach of fiduciary duty and incorporating the allegations set forth in the previously dismissed March 25, 1997 complaint filed in the Court of Chancery of Philadelphia County. Plaintiff has engaged in preliminary discovery and the parties have held settlement discussions. No motions are pending at this time.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS
There is no public market for the limited partnership interests and a market is not expected to develop as such limited partnership interests are not publicly traded or freely transferable.
As of February 28, 1999, the number of holders of the Partnership's interests is as follows:
The Partnership makes cash distributions to its partners out of distributable cash pursuant to the Partnership's Agreement of Limited Partnership. Distributable cash is generally paid 99% to the Limited Partners and 1% to the General Partner.
The Partnership has paid the following quarterly cash distributions to its Limited Partners:
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS (Cont'd.)
The Limited Partners and the General Partner are entitled to receive quarterly cash distributions, as available, in the future.
In June 1996, the Partnership made a $2,159,000 special distribution to its limited partners from a portion of the proceeds from the sale of Flaircentre. See Item 7, Liquidity and Capital Resources, for further discussion.
In February 1997, the Partnership made a $11,708,000 special distribution to its limited partners from a portion of the proceeds from the sale of Northtech. See Item 7, Liquidity and Capital Resources, for further discussion.
In October 1997, the Partnership made a $5,605,000 special distribution to its limited partners from the proceeds of the sale of Martinazzi Square. See Item 7, Liquidity and Capital Resources, for further discussion.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following summary of financial data is for the period since the Partnership adopted the liquidation basis of accounting.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Since the completion of its acquisition program in December 1988, the Partnership has been primarily engaged in the operation of its properties. The Partnership's original objective had been to hold its properties as long-term investments. However, an Information Statement, dated May 5, 1993, mandated that the General Partner seek a vote of the Limited Partners no later than December 31, 1996, regarding prompt liquidation of the Partnership in the event that properties with appraised values as of January 1993, which constituted at least one-half of the aggregate appraised values of all Partnership properties as of that date are not sold or under contract for sale by the end of 1996. Given the mandate of the May 5, 1993 Information Statement, at December 31, 1995, the General Partner decided to account for the Partnership's properties as assets held for sale instead of for investment. In a Consent Solicitation dated February 18, 1997, the Partnership solicited and received the consent of the Limited Partners to dissolve the Partnership and gradually settle and close the Partnership's business and dispose of and convey the Partnership's property as soon as practicable, consistent with obtaining reasonable value for the properties. The Partnership's properties were held for sale throughout 1997 and 1998 and continue to be held for sale.
Working capital is and will be principally provided from the operation of the Partnership's properties and the working capital reserve established for the properties. The Partnership may incur mortgage indebtedness relating to such properties by borrowing funds primarily to fund capital improvements or to obtain financing proceeds for distribution to the partners.
Regular distributions for the year ended December 31, 1998, represent net cash flow from operations of the Partnership's properties and interest earned on the temporary investment of working capital, net of capital reserve requirements. The Partnership made special distributions of $5,605,000 in October 1997 (sale of Martinazzi Square), $11,708,000 in February 1997 (sale of Northtech) and $2,159,000 in June 1996 (sale of Flaircentre). Future cash distributions will be made principally to the extent of cash flow attributable to the operations and sales of the Partnership's properties after capital reserve requirements. See Item 5 for a description of the Partnership's distribution history. The Partnership believes that the cash generated from its operations will provide the Partnership the funds necessary to meet all of its ordinary obligations.
Certain of the Partnership's properties are not fully leased. The Partnership is actively marketing the vacant space in these properties, subject to the competitive environment in each of the market areas. To the extent the Partnership is not successful in maintaining or increasing occupancy levels at these properties, the Partnership's future cash flow and distributions may be reduced.
On October 1, 1997, the Partnership sold Martinazzi Square for $6,100,000. The Partnership realized approximately $5,824,000 after accounting for brokerage
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Capital Resources and Liquidity (Cont'd.)
commissions, closing costs and prorations of $276,000. Since the sale price exceeded the January 1, 1993 appraised value ($5,400,000), pursuant to the 1993 amendment of the Partnership agreement the General Partner earned, and was paid, a property disposition fee of $153,000 in connection with the sale. The Partnership distributed the net proceeds of approximately $5,605,000 from the sale of Martinazzi Square Shopping Center to the Limited Partners on October 15, 1997.
On January 24, 1997 the Partnership sold Northtech for a sales price of $13,600,000. The Partnership realized approximately $13,079,000 from the sale, after accounting for closing costs and prorations of approximately $521,000. The purchaser of Northtech has for three years had a preexisting relationship with an affiliate of Birtcher Investors, pursuant to which the purchaser had contracted with Birtcher to locate, acquire and manage real property for the purchaser's account. No broker was paid a commission as part of the transaction. Since the sale price exceeded the January 1, 1993 appraised value ($12,900,000), pursuant to the 1993 Amendment of the Partnership Agreement, the General Partner earned and was paid a property disposition fee of approximately $340,000 in connection with the sale. The purchaser paid a net investment advisory fee of approximately $52,000 to the affiliate of Birtcher Investors and has retained Birtcher Property Services to manage the property.
The Partnership distributed proceeds of the sale of Northtech to the Limited Partners on February 28, 1997, together with the Partnership's normal quarterly distribution. After paying the property disposition fee and holding back approximately $1,000,000 to replenish and increase the Partnership's reserves, the Partnership distributed approximately $11,700,000 to the Limited Partners.
The large reserve fund is prudent because after the sale of Flaircentre and Northtech, the Partnership's asset base was effectively half its former size. The Partnership's remaining assets will generate less cash flow, necessitating a larger reserve fund to cover potential emergencies or demands for capital expenditures. Since Northtech generated approximately 68% of the cash flow that funded the Partnership's regular operations and distributions for the year ended December 31 1996, future distributions to Limited Partners of net cash from operations are expected to be significantly reduced.
The sales of Flaircentre, Northtech, and Martinazzi Square have reduced the Partnership's real estate assets to Creek Edge, The Forum, plus its 42% interest in Cooper Village Shopping Center. Since Northtech had generated over two-thirds of the cash flow that funded the Partnership's regular operations and distributions for the year ended December 31, 1996, and Martinazzi Square generated approximately $145,000 per quarter in net operating income, or approximately 31% of the cash flow that funded the Partnership's regular operations and distributions since the sale of Northtech in January 1997, future distributions to the Limited Partners of cash from operations will be significantly reduced.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Capital Resources and Liquidity (Cont'd.)
In June 1993, the Partnership completed its solicitation of written consents from its Limited Partners. A majority in interest of the Partnership's Limited Partners approved each of the proposals contained in the Information Statement, dated May 5, 1993. Those proposals have been implemented by amending the Partnership Agreement as contemplated by the Information Statement. The amendments include, among other things, the payment of asset management and leasing fees to the General Partner and the elimination of the General Partner's residual interest and deferred leasing fees that were previously subordinated to return of the Limited Partners' 9% Preferential Return. See Item 8, Note 4 to the Financial Statements for discussion of fees paid to the General Partner for the years ended December 31, 1998, 1997 and 1996.
On February 18, 1997, the General Partner mailed a Consent Solicitation to the Limited Partners which sought their consent to dissolve the Partnership and sell and liquidate all of its remaining properties as soon as practicable, consistent with selling the Partnership's properties to the best advantage under the circumstances. A majority in interest of the Limited Partners consented by March 13, 1997. As a result, the Partnership has adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material.
Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded.
Since the approval of the February 18, 1997 Consent Solicitation, the General Partner has been evaluating possible sales of Partnership properties, individually and as a portfolio, to liquidate and wind up the Partnership. On April 30, 1998 the General Partner accepted an offer to purchase all of the Partnership's properties for $12,560,000 from Abbey Investments, Inc. ("Abbey"), which was subject to certain customary contingencies, including due diligence review by the purchaser and negotiation of a definitive Purchase and Sale Agreement. On November 9, 1998, the Partnership and Abbey entered into a definitive Purchase and Sale Agreement, for an adjusted purchase price of $12,300,000. Abbey thereafter requested a material reduction in the purchase price, which the Partnership did not agree to. Therefore, in late January 1999, the sale to Abbey was terminated. Since that time, the Partnership has been actively soliciting buyers for its properties.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Capital Resources and Liquidity (Cont'd.)
Property Appraisals and Net Asset Value
In accordance with the terms of the Partnership Agreement, each year the Partnership secures an independent appraisal of each of the Partnership's properties as of January 1. Prior to the January 1, 1995 appraisals, the independent appraiser had estimated each property's "Investment Value," utilizing a seven to ten-year cash flow model to estimate value based upon an income approach.
The amendment to the Partnership Agreement consented to by the Limited Partners in June 1993 mandated, among other things, that the General Partner seek a vote of (and provide an analysis and recommendation to) the Limited Partners no later than December 31, 1996 regarding the prompt liquidation of the Partnership in the event that properties with (then) current appraised values (constituting at least one-half of the total (then) current appraised values) of all of the Partnership's properties are not sold or under contract for sale by the end of 1996.
Given this mandate, the General Partner requested that the appraiser provide an assessment of value that reflects a shorter investment holding term. Although the General Partner does not know how long it will take to sell the Partnership's remaining properties, it requested that the appraiser assume that the entire portfolio would be sold over four years, in connection with the January 1995 appraisals, over three years in connection with the January 1996 appraisals, over approximately two years for the January 1997 appraisals and over one year for the 1998 appraisals.
The General Partner has been evaluating multiple proposals to acquire the properties (both individually and in bulk) over the past several months. In lieu of obtaining appraisals as of January 1, 1999, the General Partner calculated an estimated selling price net of estimated selling costs by taking an average of the offer prices, net of estimated selling costs, from those proposals. The General Partner utilized those averages to estimate fair value. The General Partner estimated the fair value of the Partnership's remaining properties at January 1, 1999 to be $12,111,000, net of estimated selling costs and disposition fees.
The foregoing estimated fair value net of selling costs of the Partnership's remaining properties indicates an estimated net asset value in liquidation of $12,605,000 or $198 per $1,000 of original investor subscription. Net assets in liquidation represents the estimated selling price of the Partnership's properties, (net of estimated closing costs and disposition fees), cash and all other assets less other liabilities including accrued expenses for liquidation.
Other Matters
The Partnership is in the process of liquidating its remaining assets. It is anticipated that a sale of those assets will occur on or before January 1, 2000. It is the opinion of the General Partner that the value of those assets is not subject to any valuation risk as a result of year 2000 issues, other than general economic
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Other Matters (Cont'd.)
climate issues that may arise. Based on current information, the cost of addressing potential year 2000 problems is not expected to have a material adverse impact on the Partnership's financial position, results of operations or cash flows in future periods. As of December 31, 1998, the investor services system used to track the limited partners' interests, distributions and tax information has been tested and appears to be free of year 2000 bugs. The Partnership's properties are under review utilizing the Building Owners and Managers Association industry ("BOMA") standards as a guideline for necessary corrections and the Partnership's accounting systems are scheduled for a software upgrade to correct any of its year 2000 issues in July of 1999. The cost of the upgrades will be borne by the General Partner and will not be reimbursed by the Partnership. In addition, the General Partner has made inquiries of its banks, all of which indicate that any problems have been addressed adequately by those institutions.
Even if attempts to correct any deficiencies in the Partnership's software are unsuccessful, the General Partner anticipates that in the short term it could convert its systems to standard spreadsheet or data base programs at nominal cost.
Results of Operations
Year Ended December 31, 1998
Because the Partnership adopted the liquidation basis of accounting on March 31, 1997, a comparison of the results of operations is not practical. The Statements of Net Assets in Liquidation and Statements of Changes of Net Assets in Liquidation reflect the Partnership in the process of liquidation. Prior financial statements reflect the Partnership as a going concern. As the Partnership's assets (properties) are sold, the results of operations will be generated from a smaller asset base and are therefore not comparable. The Partnership's operating results have been reflected on the Statements of Changes of Net Assets in Liquidation since March 31, 1997 (the date of adoption of the liquidation basis of accounting) and Statement of Operations for the three months ended March 31, 1997.
For the year ended December 31, 1998, the Partnership generated $1,006,000 of net operating income from operation of its properties (exclusive of Cooper Village Partners), which was slightly lower than 1997. The decrease in operating income for the year ended December 31, 1998, when compared to 1997 was primarily attributable to the following: 1) the sale of Northtech in January 1997 which caused a decrease in 1998 rental revenue of $108,000, offset by a $584,000 write off of deferred rent in 1997 related to the sale; 2) the sale of Martinazzi Square in October 1997 that caused a decrease in rental revenue of $479,000; the decrease in operating expenses of $617,000 related to the sale of Northtech; and 4) the write off of $178,000 at The Forum related to the early termination of a lease arrangement.
Interest income resulted from the temporary investment of Partnership working capital. For the year ended December 31, 1998, interest income was approximately
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1998 (Cont'd.)
$65,000. The decrease, when compared to 1997, was due to the lower average cash balance on hand during 1998.
General and administrative expenses for the year ended December 31, 1998, included charges of $158,000 from the General Partner and its affiliates for services rendered in connection with administering the affairs of the Partnership and operating the Partnership's properties. Also included in general and administrative expenses for the year ended December 31, 1998, are direct charges of $328,000 relating to audit fees, tax preparation fees, cost of legal and professional fees, insurance expenses, costs incurred in providing information to the Limited Partners and other miscellaneous costs. The decrease in general and administrative expenses for the year ended December 31, 1998, as compared to 1997, was primarily attributable to decreases in wage reimbursements, asset management fees, legal and professional services, insurance and appraisal fees incurred in 1998.
During 1998, the carrying value of Creek Edge was increased by $236,000 to its estimated net realizable value of $4,432,000. In addition, the carrying value of real estate in the Partnership's investment in Cooper Village Partners was also adjusted as the General Partners of Cooper Village Partners determined that the carrying value of real estate was in excess of its net realizable value. The Partnership's portion (42%) of the adjustment was $236,000.
Accrued expenses for liquidation as of December 31, 1998, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees and professional services. The actual costs could vary significantly from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution and the complexities which may arise in disposing of the Partnership's remaining assets.
Year Ended December 31, 1997
Because the Partnership adopted the liquidation basis of accounting on March 31, 1997, a comparison of the results of operations is not practical. The Statement of Net Assets in Liquidation and Statement of Changes of Net Assets in Liquidation reflect the Partnership in the process of liquidation. Prior financial statements reflect the Partnership as a going concern. As the Partnership's assets (properties) are sold, the results of operations will be generated from a smaller asset base and are therefore not comparable. The Partnership's operating results have been reflected in the Statement of Changes of Net Assets in Liquidation since March 31, 1997 (the date of adoption of the liquidation basis of accounting) and Statement of Operations for the three months ended March 31, 1997.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1997 (Cont'd.)
For the year ended December 31, 1997, the Partnership generated $1,018,000 of net operating income from operation of its properties (exclusive of Cooper Village Partners), which was lower than 1996. The decrease in net operating income was primarily attributable to the sale of Northtech in January 1997 and the sale of Martinazzi Square in October 1997, and the sale of Flaircentre in June 1996.
Interest income resulted from the temporary investment of Partnership working capital. For the year ended December 31, 1997, interest income was approximately $150,000. The increase is due to the temporary investment of proceeds from the sale of Northtech.
General and administrative expenses for the year ended December 31, 1997, included charges of $248,000 from the General Partner and its affiliates for services rendered in connection with administering the affairs of the Partnership and operating the Partnership's properties. Also included in general and administrative expenses for the year ended December 31, 1997, are direct charges of $661,000 relating to audit fees, tax preparation fees, legal and professional fees, insurance expenses, costs incurred in providing information to the Limited Partners and other miscellaneous costs. The increase in general and administrative expenses for the year ended December 31, 1997, as compared to 1996, was primarily attributable to the increase in legal and professional services, printing costs, postage and mailing expenses associated with the Partnership's solicitation of the Limited Partners consent for the liquidation of the Partnership in February 1997.
Accrued expenses for liquidation, as reflected in the Statement of Net Assets in Liquidation as of December 31, 1997, are not included in results of operations for the three month period ended March 31, 1997. The liquidation basis of accounting was adopted on March 31, 1997 therefore, it was not appropriate to include such adjustments in the results of operations for prior periods. Accrued expenses for liquidation as of December 31, 1997, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees, professional services and the general partner's liability insurance. The actual costs could vary significantly from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution and the complexities which may arise in disposing of the Partnership's remaining assets.
Year Ended December 31, 1996
The decrease in rental income for the year ended December 31, 1996, as compared to 1995, was primarily attributable to the loss of rental income associated with the sale of Flaircentre on June 4, 1996. The aforementioned decrease was partially offset by an increase in revenue at Northtech with the commencement of a new lease in March 1996 that brought the project to 100% occupancy.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1996 (Cont'd.)
Interest income resulted from the temporary investment of Partnership working capital. The decrease for the year ended December 31, 1996, as compared to 1995, was primarily attributable to a corresponding decrease in the average level of working capital available for investment during the year.
On June 4, 1996, the Partnership sold Flaircentre, an office complex composed of 11 one-story buildings in El Monte, California to an unaffiliated third party. The sales price was $2,300,000 and the net proceeds of the sale amounted to approximately $2,159,000. In December 1995, the General Partner had adjusted the carrying value of the property in accordance with the guidelines of FAS 121, which resulted in a write-down of $600,000 and an adjusted carrying value of $2,166,000 upon disposition. The resulting loss on sale, after taking into consideration all costs of the disposition, amounted to $13,000 as reflected on the Statement of Operations. The General Partner was not paid a commission or disposition fee as part of this transaction.
The decrease in operating expenses for the year ended December 31, 1996, as compared to 1995, was primarily attributable to the overall reduction in expenses resulting from the sale of Flaircentre in June 1996.
The decrease in real estate taxes for the year ended December 31, 1996, as compared to 1995, was primarily attributable to the sale of Flaircentre. In addition, taxes were reduced in 1996 due to a successful tax appeal for Northtech that resulted in a $40,000 refund.
The decrease in depreciation and amortization expenses for the year ended December 31, 1996, as compared to 1995, was attributable to the adoption at December 31, 1995, of Statement of Financial Accounting Standards, No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," pursuant to which "assets held for sale" are not depreciated.
During 1996, the Partnership made certain capital improvements to properties held for sale that resulted in a corresponding increase in the properties' valuation allowance. At December 31, 1996, the General Partner compared the carrying value of each property to its appraised value as of January 1, 1997 (or in the case of Northtech, its sales price) and determined that Creek Edge, Northtech and Martinazzi Square had carrying values greater than their respective appraised values. As a result, during the year ended December 31, 1996, the carrying values were adjusted by $548,000, $1,068,000 and $119,000, respectively to $4,160,000, $12,968,000 and $5,500,000, respectively.
General and administrative expenses for the year ended December 31, 1996, include charges of $402,000 from the General Partner and its affiliates for services rendered in connection with administering the affairs of the Partnership and operating the Partnership's properties. Also included in general and administrative expenses were direct charges of $366,000 relating to audit fees,
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.)
Results of Operations (Cont'd.)
Year Ended December 31, 1996 (Cont'd.)
legal fees, appraisals fees, insurance expense, costs incurred in providing information to the Limited Partners and other miscellaneous costs.
The increase in general and administrative expenses for the year ended December 31, 1996, as compared to 1995, was primarily attributable to the increases in leasing fees, legal fees and professional services associated with the increased leasing activity. These increases were partially offset by lower asset management fees and administrative expense reimbursements charged by affiliates of the General Partner.
The increase in equity in earnings of Cooper Village Partners for the year ended December 31, 1996, as compared to 1995, was primarily attributable to the Partnership's portion (42%) of depreciation expenses incurred during 1995 that were not incurred in 1996. As previously discussed, the Partnership no longer depreciates its assets due to the adoption of Financial Accounting Standard No. 121. In addition, during 1996, a lease termination settlement in the amount of $127,000 was collected from The Boston Stores and accordingly, was taken into income in 1996. Finally, the adjustment to the carrying value of real estate in 1996 decreased to $412,000 from $1,360,000 in 1995.
Item 7a.
Item 7a. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
Not applicable because the Partnership does not have any financial instruments subject to market risk.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Information required by other schedules called for under Regulation S-X is either not applicable or is included in the financial statements.
COOPER VILLAGE PARTNERS (a General Partnership)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
COOPER VILLAGE PARTNERS (a General Partnership)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE (CONTINUED)
Information required by other schedules called for under Regulation S-X is either not applicable or is included in the financial statements.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
INDEPENDENT AUDITORS' REPORT
To Birtcher/Liquidity Properties, as General Partner of Real Estate Income Partners III, Limited Partnership:
We have audited the financial statements of Real Estate Income Partners III, Limited Partnership as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation as of December 31, 1998 and 1997 of Real Estate Income Partners III, Limited Partnership, and the changes of net assets in liquidation for the year ended December 31, 1998 and for the nine months ended December 31, 1997 and the results of its operations and its cash flows for the three months ended March 31, 1997 and the year ended December 31, 1996, in conformity with generally accepted accounting principles applied on the bases of accounting as discussed in note 2. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in notes 1 and 2 to the financial statements, Real Estate Income Partners III changed its basis of accounting as of March 31, 1997 from the going-concern basis to the liquidation basis.
KPMG LLP
Orange County, California March 9, 1999, except as to the second through the fifth paragraphs of note 10, which are as of March 25, 1999
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
STATEMENTS OF NET ASSETS IN LIQUIDATION
The accompanying notes are an integral part of these financial statements.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
The accompanying notes are an integral part of these financial statements.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Financial Statements.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
STATEMENTS OF PARTNERS' CAPITAL
The accompanying notes are an integral part of these Financial Statements.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Financial Statements.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Operations
Real Estate Income Partners III, Limited Partnership (the "Partnership") was formed on December 9, 1985, under the laws of the State of Delaware, for the purpose of acquiring and operating specified income-producing retail, commercial and industrial properties. The Partnership acquired its properties for cash. The General Partner of the Partnership is Birtcher/Liquidity Properties, a general partnership consisting of LF Special Fund I, L.P. ("LF-I"), a California limited partnership and Birtcher Investors, a California limited partnership. Birtcher Investors, or its affiliates, provides day-to-day administration, supervision and management of the Partnership and its properties.
The General Partner filed an Information Statement with the Securities and Exchange Commission seeking consent of the Limited Partners to amend the Partnership Agreement. On June 24, 1993, the Partnership completed its solicitation of written consent from its Limited Partners. A majority in interest of the Partnership's Limited Partners approved each of the proposals contained in the Information Statement, dated May 5, 1993. Those proposals have been implemented by the Partnership as contemplated by the Information Statement as amendments to the Partnership Agreement, and are reflected in these financial statements as such.
The amendment modified the Partnership Agreement to eliminate the General Partner's 1% subordinated interest in distributions of Distributable Cash (net cash from operations) and reduce its subordinated interest in such distributions from 10% to 1%. The amendment also modified the Partnership Agreement to eliminate the General Partner's 1% subordinated interest in Sale or Financing Proceeds (net cash from sale or financing of Partnership property) and to reduce its subordinated interest in such proceeds from 15% to 1%. In lieu thereof, the Partnership Agreement now provides for the Partnership's payment to the General Partner of an annual asset management fee equal initially to .75% of the aggregate appraised value of the Partnership's properties. The factor used to calculate the annual asset management fee is reduced by .10% each year beginning after December 31, 1996 (e.g., from .65% in 1997 to .55% in 1998 and to .45% in 1999).
At January 1, 1998 the portfolio was appraised at an estimated value of approximately $12,252,000 net of estimated selling costs (unaudited), which included the Partnership's interest in Cooper Village Partners which was appraised at $2,667,000 (unaudited). The General Partner has been evaluating multiple proposals to acquire the properties (both individually and in bulk) over the past several months. In lieu of obtaining appraisals as of January 1, 1999, the General Partner calculated an estimated selling price net of estimated selling costs by taking an average of the offer prices, net of estimated selling costs, from those proposals. The General Partner utilized those averages to estimate fair value. From those valuations, at January 1, 1999, the General Partner estimated the fair value, net of estimated selling costs, of the portfolio to be $12,111,000 (inclusive of the Partnership's interest in Cooper Village Partners).
The amendment modified the Partnership Agreement to eliminate the subordination provisions with respect to future leasing fees. Such fees for future leasing services rendered by the General Partner or its affiliates will be payable by the Partnership on a current basis and will not be subordinated to the Limited Partners Preferred Return and Adjusted Invested Capital or any other amount. The amendment eliminated the deferred leasing fees earned by the General Partner or its affiliates (approximately $490,000 as of December 31, 1992) on and after the effective date of the amendment.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(1) Organization and Operations (Cont'd.)
The amendment modified the Partnership Agreement to eliminate subordination provisions with respect to future property disposition fees payable under that section. The amendment authorized payment to the General Partner and its affiliates of the property disposition fees as earned. The fees will not be subordinated to the Limited Partners Preferred Return and Adjusted Invested Capital or any other amount. The disposition fees are to be paid to the General Partner and its affiliate in an amount equal to 50% of the competitive real estate brokerage commission that would be charged by unaffiliated third-parties providing comparable services in the area in which a property is located, but in no event more than three percent of the gross sale price of the property, and are to be reduced by the amount by which any brokerage or similar commissions paid to any unaffiliated third-parties in connection with the sale of the property exceed three percent of the gross sale price. This amount is not payable, unless and to the extent that the sale price of the property in question, net of any other brokerage commissions (but not other costs of sale), exceeds the appraised value of the property as of January 1, 1993.
The amendment states that the Partnership is no longer authorized to pay the General Partner or its affiliates any insurance commissions or any property financing fees. No such commissions or fees have been paid or accrued by the Partnership since its inception.
The amendment modified the provisions of the Partnership Agreement regarding allocations of Partnership income, gain and other tax items between the General Partner and the Limited Partners primarily to conform to the changes in the General Partner's interest in distributions of Distributable Cash and Sale or Financing Proceeds as defined, effected by the amendment. It is not anticipated that the adoption and implementation of the amendment will have any material adverse effect on future allocations of income, gain, loss or other tax items to the Limited Partners.
The Limited Partners have certain priorities in the allocation of cash distributions by the Partnership. Out of each distribution of net cash, the Limited Partners generally have certain preferential rights to receive payments that, together with all previous payments to them, would provide an overall 9% per annum (cumulative non-compounded) return (a "9% Preferential Return") on their investment in the Partnership. Any distributions not equaling this 9% Preferential Return in any quarter are to be made up in subsequent periods if and to the extent distributable cash is available.
Distributable cash from operations is paid out each quarter in the following manner: 99% to the Limited Partners and 1% to the General Partner. These payments are made each quarter to the extent that there is sufficient distributable cash available.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(1) Organization and Operations (Cont'd.)
Sale or financing proceeds are to be distributed, to the extent available, as follows: (i) to the Limited Partners until all cash distributions to them amount to a 9% Preferential Return on their investment cumulatively from the date of their admission to the Partnership; (ii) then to the Limited Partners in an amount equal to their investment; and (iii) the remainder, 99% to Limited Partners and 1% to the General Partner.
Although the unpaid 9% Preferential Return to the Limited Partners aggregates $22,356,000 as of December 31, 1998, it is anticipated that the limited partners will not realize this return due to the Partnership's estimated liquidation value of $12,217,000.
Income or loss for financial statement purposes is allocated 99% to the Limited Partners and 1% to the General Partner.
The amendment modified the Partnership Agreement so as to restrict the Partnership from entering into a future "Reorganization Transaction" (as defined in the amendment) sponsored by the General Partner or any of its affiliates unless such transaction is approved by a "supermajority" of at least 80% in interest of the Limited Partners and the General Partner. The amendment also prohibits the modification of this restriction on Reorganization Transactions without the approval of at least 80% in interest of the Limited Partners.
The Partnership's original investment objectives contemplated that it would hold its properties for a period of at least five years, with decisions about the actual timing of property sales or other dispositions to be left to the General Partner's discretion based on the anticipated remaining economic benefits of continued ownership and other factors.
On February 18, 1997, the General Partner mailed a Consent Solicitation to the Limited Partners which sought their consent to dissolve the Partnership and sell and liquidate all of its remaining properties as soon as practicable, consistent with obtaining reasonable value for the Partnership's properties. A majority in interest of the Limited Partners consented by March 13, 1997. As a result, the Partnership adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material.
Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(1) Organization and Operations (Cont'd.)
The Partnership adopted the liquidation basis of accounting on March 31, 1997. Comparison of results to prior years, therefore, is not practical. The Statements of Net Assets in Liquidation and Statements of Changes of Net Assets in Liquidation reflect the Partnership in the process of liquidation. Prior financial statements reflect the Partnership as a going concern.
As of December 31, 1995 the General Partner decided to treat its properties as held for sale, instead of for investment, for financial statement purposes. Since adoption of the 1993 amendment, the General Partner has considered several preliminary indications of interest from third parties to acquire some or all of the Partnership's properties. Apart from the sales of Flaircentre, Northtech and Martinazzi Square, these transactions never materialized, primarily because the General Partner rejected as too low the valuations of the Partnership's remaining properties as proposed by the potential purchasers. The Partnership's properties were held for sale throughout 1997 and 1998 and continue to be held for sale.
Since the approval of the February 18, 1997 Consent Solicitation, the General Partner has been evaluating possible sales of Partnership properties, individually and as a portfolio, to liquidate and wind up the Partnership. On April 30, 1998 the General Partner accepted an offer to purchase all of the Partnership's properties for $12,560,000 from Abbey Investments, Inc. ("Abbey"), which was subject to certain customary contingencies, including due diligence review by the purchaser and negotiation of a definitive Purchase and Sale Agreement. On November 9, 1998, the Partnership and Abbey entered into a definitive Purchase and Sale Agreement, for an adjusted purchase price of $12,300,000. Abbey thereafter requested a material reduction in the purchase price, which the Partnership did not agree to. Therefore, in late January 1999, the sale to Abbey was terminated. Since that time, the Partnership has been actively soliciting buyers for its properties.
In accordance with the liquidation basis of accounting adopted on March 31, 1997 (see Note 2), the carrying value of these properties was evaluated to ensure that each property is carried on the Partnership's Statements of Net Assets in Liquidation at estimated net realizable value. The General Partner estimated net realizable value by using an average of recent offers to acquire the properties, net of estimated selling costs, in lieu of obtaining appraisals at December 31, 1998 and based upon appraisals as of January 1, 1998 at December 31, 1997. Fair value can only be determined based upon sales to third parties, and sales proceeds could differ substantially from internal estimates of fair value or appraised values.
(2) Summary of Significant Accounting Policies
Liquidation Basis
The Partnership adopted the liquidation basis of accounting as of March 31, 1997. The liquidation basis of accounting is appropriate when liquidation appears imminent, the Partnership can no longer be classified as a going concern and the net realizable values of the Partnership's assets are reasonably determinable. Under this method of accounting, assets and liabilities are stated at their estimated net realizable values and costs of liquidating the Partnership are provided to the extent reasonably determinable.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Liquidation Basis (Cont'd.)
For the year ended December 31, 1998, the General Partner determined that the carrying value of Creek Edge was below its estimated net realizable value. As a result, its carrying value was adjusted by $236,000, to $4,432,000. In addition, the carrying value of real estate in the Partnership's investment in Cooper Village Partners was also adjusted as the General Partners of Cooper Village Partners determined that the carrying value of real estate was in excess of its net realizable value. The Partnership's portion (42%) of the adjustment was $236,000.
Carrying Value of Real Estate (prior to adoption of the liquidation basis of accounting)
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121"). This Statement requires that if the General Partner believes factors are present that may indicate long-lived assets are impaired, the undiscounted cash flows, before debt service, related to the assets should be estimated. If these estimated cash flows are less than the carrying value of the asset, then impairment is deemed to exist. If impairment exists, the asset should be written down to the estimated fair value.
Further, assets held for sale, including any unrecoverable accrued rent receivable or capitalized leasing commissions, should be carried at the lower of carrying value or fair value less estimated selling costs. Any adjustment to carrying value is recorded as a valuation allowance against property held for sale. Each reporting period, the General Partner reviews its estimates of fair value, which are decreased or increased up to the original carrying value. Finally, assets held for sale are no longer depreciated.
As noted above, as of December 31, 1995, the General Partner decided to account for the Partnership's properties as assets held for sale, assuming a 12 month holding period, instead of for investment. Accordingly, the General Partner compared the carrying value for each property to its appraised value as of January 1, 1997 at December 31, 1996. If the carrying value of the property and certain related assets were greater than its appraised value, less estimated selling costs, the General Partner reduced the carrying value of the property by the difference. Using this methodology, the General Partner determined that Creek Edge, Northtech and Martinazzi Square had carrying values greater than their respective appraised values (or in the case of Northtech, its sales price). As a result, the carrying value was adjusted by $548,000, $1,068,000 and $119,000, respectively to $4,160,000, $12,968,000 and $5,500,000, respectively, as of December 31, 1996.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Segment Reporting
The Partnership adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. The adoption of SFAS 131 did not have an impact on the Partnership's financial reporting.
Rental income from Penril, Inc., totaled $1,319,000 in 1996 or approximately 27% of total rental income for 1996. Penril, Inc. represented a significant portion of rental income until Northtech was sold in January 1997.
Cash and Cash Equivalents
The Partnership invests its excess cash balances in short-term investments (cash equivalents). These investments are stated at cost, which approximates market, and consist of money market, certificates of deposit and other non-equity-type cash investments. Cash equivalents at December 31, 1998 and 1997, totaled $702,000 and $1,701,000, respectively.
Cash equivalents are defined as temporary non-equity investments with original maturities of three months or less, which can be readily converted into cash and are not subject to changes in market value.
Revenue Recognition
Through March 31, 1997, rental income pertaining to operating lease agreements which specify scheduled rent increases or free rent periods, was recognized on a straight-line basis over the period of the related lease agreement. After March 31, 1997, rental income has been recognized according to the lease terms.
Income Taxes
Income taxes are not levied at the Partnership level, but rather on the individual partners; therefore, no provision or liability for Federal and State income taxes has been reflected in the accompanying financial statements.
Following are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles ("GAAP") (liquidation basis of accounting) and for federal income tax reporting purposes at December 31:
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Income Taxes (Cont'd.)
Following are the differences between Financial Statement and tax return income:
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Earnings and Distributions Per Unit
The Partnership Agreement does not designate investment interests in units. All investment interests are calculated on a "percent of Partnership" basis, in part to accommodate reduced rates on sales commissions for subscriptions in excess of certain specified amounts.
A Limited Partner who was charged a reduced sales commission or no sales commission was credited with proportionately larger Invested Capital and therefore had a disproportionately greater interest in the capital and revenues of the Partnership than a Limited Partner who paid commissions at a higher rate. As a result, the Partnership has no set unit value as all accounting, investor reporting and tax information is based upon each investor's relative percentage of Invested Capital. Accordingly, earnings or loss per unit is not presented in the accompanying Financial Statements.
Estimations
The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses or changes in net assets during the reporting period. Actual results could differ from those estimates.
Investment in Cooper Village Partners
The Partnership uses the equity method of accounting to account for its investment in Cooper Village Partners inasmuch as control of Cooper Village Partners is shared jointly between the Partnership and Damson/Birtcher Realty Income Fund-II, Limited Partnership. The accounting policies of Cooper Village Partners are consistent with those of the Partnership.
(3) Investment in Cooper Village Partners
During 1987 and 1988, Cooper Village Partners ("CV Partners"), a California general partnership consisting solely of the Partnership and Damson/Birtcher Realty Income Fund-II, Limited Partnership ("Fund II"), an affiliated limited partnership, acquired Cooper Village. In connection therewith, the Partnership and Fund-II contributed capital of $4,300,000 (42%) and $5,937,000 (58%), respectively, and share in the profits, losses and distributions of CV Partners in proportion to their respective ownership interests.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(3) Investment in Cooper Village Partners (Cont'd.)
Condensed summary financial information for CV Partners is presented below.
Condensed Statements of Net Assets in Liquidation:
The carrying value of real estate in the Partnership's investment in Cooper Village Partners was adjusted as the General Partners of Cooper Village Partners determined that the carrying value of real estate was in excess of its estimated net realizable value. The Partnership's portion (42%) of the adjustment was $236,000.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(4) Transactions with Affiliates
The Partnership has no employees and, accordingly, the General Partner and its affiliates perform services on behalf of the Partnership in connection with administering the affairs of the Partnership. The General Partner and affiliates are reimbursed for their general and administrative costs actually incurred and associated with services performed on behalf of the Partnership. For the years ended December 31, 1998, 1997 and 1996, the Partnership was charged with approximately $88,000, $131,000 and $131,000, respectively, of such expenses. An affiliate of the General Partner provides property management services with respect to the Partnership's properties and receives a fee for such services not to exceed 6% of the gross receipts from the properties under management, provided that leasing services are performed, otherwise not to exceed 3%. Such fees amounted to approximately $55,000, $93,000 and $187,000 for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, an affiliate of the General Partner received $39,000, $53,000 and $56,000, respectively, for the years ended December 31, 1998, 1997 and 1996, as reimbursement of costs for on-site property management personnel and other reimbursable costs. In addition to the aforementioned, an affiliate of the General Partner was also paid $40,000, $37,000 and $39,000, related to the Partnership's portion (42%) of property management fees, leasing fees, reimbursement of on-site property management personnel and other reimbursable expenses for Cooper Village Partners for the years ended December 31, 1998, 1997 and 1996, respectively.
The amended Partnership Agreement provides for the Partnership's payment to the General Partner of an annual asset management fee equal to .55% (65% in 1997) of the aggregate appraised value of the Partnership's properties as determined by independent appraisal undertaken in January of each year. Such fees for the year ended December 31, 1998, 1997 and 1996, amounted to $53,000, $93,000 and $224,000, respectively. In addition, the amended Partnership Agreement provides for payment to the General Partner of a leasing fee for services rendered in connection with leasing space in a Partnership property after the expiration or termination of any lease of such space. Fees for leasing services for the year ended December 31, 1998, 1997 and 1996, amounted to $17,000, $24,000 and $47,000 respectively. In addition, to the aforementioned, the General Partner was also paid $15,000, $17,000 and $20,000, related to the Partnership's portion (42%) of asset management fees for Cooper Village Partners for the years ended December 31, 1998, 1997 and 1996, respectively.
(5) Gains and Losses on Disposition of Assets
On October 1, 1997, the Partnership sold Martinazzi Square Shopping Center for $6,100,000. The Partnership realized approximately $5,824,000 after accounting for brokerage commissions, closing costs and prorations of $276,000. Since the sale price exceeded the January 1, 1993 appraised value ($5,400,000), pursuant to the 1993 amendment of the Partnership agreement the General Partner earned, and was paid, a property disposition fee of $153,000 in connection with the sale.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(5) Gains and Losses on Disposition of Assets (Cont'd.)
On January 24, 1997 the Partnership sold Northtech for a sale price of $13,600,000. The Partnership realized approximately $13,079,000 from the sale, after accounting for closing costs and prorations of approximately $521,000. The purchaser of Northtech has for three years had a preexisting relationship with an affiliate of Birtcher Investors, pursuant to which the purchaser had contracted with Birtcher to locate, acquire and manage real property for the purchaser's account. No broker was paid a commission as part of the transaction. Since the sale price exceeded the January 1, 1993 appraised value ($12,900,000), pursuant to the 1993 amendment of the Partnership Agreement, the General Partner earned and was paid a property disposition fee of approximately $340,000 in connection with the sale. The purchaser paid a net investment advisory fee of approximately $52,000 to the affiliate of Birtcher Investors and has retained Birtcher Property Services to manage the property.
On June 4, 1996, the Partnership sold Flaircentre, an office complex composed of eleven one-story buildings in El Monte, California to an unaffiliated third party. The sales price was $2,300,000 and the net proceeds of the sale amounted to approximately $2,159,000. In December 1995, the General Partner had adjusted the carrying value of the property in accordance with the guidelines of FAS 121, which resulted in a write-down of $600,000 and an adjusted carrying value of $2,166,000 upon disposition. The resulting loss on sale, after taking into consideration all costs of the disposition, amounted to $13,000 as reflected on the Statement of Operations. The General Partner was not paid a commission or disposition fee as part of this transaction.
(6) Commitments and Contingencies
Future Minimum Annual Rentals
The Partnership has determined that all leases which had been executed as of December 31, 1998, are properly classified as operating leases for financial reporting purposes.
Future minimum annual rental income to be received under such leases as of December 31, 1998, is as follows:
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(6) Commitments and Contingencies (Cont'd.)
Future Minimum Annual Rentals (Cont'd.)
Certain of these leases also provide for, among other things: tenant reimbursements to the Partnership of certain operating expenses; payments of additional rents in amounts equal to a set percentage of the tenant's annual revenue in excess of specified levels; and escalations in annual rents based upon the Consumer Price Index.
Litigation
So far as is known to the General Partner, neither the Partnership nor its properties are subject to any material pending legal proceedings, except for the following:
On March 25, 1997, a limited partner named Bigelow/Diversified Secondary Partnership Fund 1990 filed a purported class action lawsuit in the Court of Common Pleas of Philadelphia County against Damson/Birtcher Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P., Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging breach of fiduciary duty and breach of contract and seeking to enjoin the Consent Solicitation dated February 18, 1997. On April 18, 1997, the court denied the plaintiff's motion for a preliminary injunction. On June 10, 1997, the court dismissed the plaintiff's complaint on the basis of lack of personal jurisdiction and forum non conveniens.
On June 13, 1997, the Partnership, its affiliated partnership, Damson/Birtcher Realty Income Fund-II, and their general partner, Birtcher/Liquidity Properties, filed a complaint for declaratory relief in the Court of Chancery in Delaware against Bigelow/Diversified Secondary Partnership Fund 1990 L.P. The complaint seeks a declaration that the vote that the limited partners of the Partnership and Damson/Birtcher Realty Income Fund-II took pursuant to the respective consent solicitations dated February 18, 1997 were effective to dissolve the respective partnerships and complied with applicable law, that the actions of the General Partner in utilizing the consent solicitations to solicit the vote of the limited partners did not breach any fiduciary or contractual duty to such limited partners, and an award of costs and fees to the plaintiffs. The defendant has answered the complaint. No motions are pending at this time.
In September 1998, Bigelow/Diversified Secondary Partnership 1990 informed the Partnership that it was filing suit in the Delaware Chancery Court against Damson/Birtcher Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging a purported class action on behalf of the limited partners of Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income Fund-II and Real Estate Income Partners III alleging breach of fiduciary duty and incorporating the allegations set forth in the previously dismissed March 25, 1997 complaint filed in the Court of Chancery of Philadelphia County. Plaintiff has engaged in preliminary discovery and the parties have held settlement discussions. No motions are pending at this time.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(7) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
(8) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of December 31, 1998, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees and other professional services.
(9) Allowance for Doubtful Accounts
(10) Subsequent Events
On February 28, 1999, the Partnership made an aggregate regular cash distribution of $153,000 to its Limited Partners.
On March 25, 1999, the Partnership signed a letter of intent with Praedium Performance Fund IV ("Praedium") to sell The Forum to Praedium for $4,500,000. Praedium is a New York-based investment firm affiliated with CS First Boston. Praedium is not affiliated in any way with the Partnership or the General Partner, or any of the General Partner's principals or affiliates.
The Partnership and Praedium expect to sign a definitive Purchase and Sale Agreement within two weeks, or by approximately April 8, 1999. Praedium will then have 45 days to complete its due diligence investigation and 30 days thereafter to complete the purchase. Upon execution of the definitive Purchase and Sale Agreement, Praedium will deposit $35,000 into an escrow account, which deposit shall be fully refundable at any time before the expiration of the due diligence period.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(10) Subsequent Events (Cont'd.)
Praedium will hire Birtcher or an affiliate as asset manager for The Forum, and pay an annual fee equal to .30% of the value of The Forum for asset management services. Also, Praedium will hire Birtcher or an affiliate as property manager for The Forum for a fee that is approximately the same as the current fee paid to the General Partner for property management.
The letter of intent is nonbinding. Completion of the transaction is conditioned upon Praedium completing its due diligence and formal approval of the transaction by Praedium's "Investment Committee". The Partnership has agreed that until the earlier of April 8, 1999 or the execution of a definitive Purchase and Sale Agreement or Praedium terminates the letter of intent, the Partnership will not offer to sell or solicit any offer to purchase or negotiate for the sale of The Forum.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
SCHEDULE III REAL ESTATE IN LIQUIDATION AS OF DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS)
NOTE: Columns B, F, G and I are either none or are not applicable.
See notes to table on following page.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
NOTES TO SCHEDULE III
(a) For a description of the properties, see "Item 2. Properties." This schedule does not include the investment in Cooper Village Partners which is accounted for under the equity method of accounting.
(b) Upon adoption of the liquidation basis of accounting on March 31, 1997, accumulated depreciation was deleted through an adjustment to the cost of the properties.
For the year ended December 31, 1998, the General Partner determined that the carrying value of Creek Edge was below its estimated net realizable value. As a result, its carrying value was adjusted by $236,000, to $4,432,000.
At December 31, 1996, the General Partner determined that Creek Edge had a carrying value greater than its respective appraised value. As a result, the carrying value was adjusted by $548,000 to $4,160,000 as of December 31, 1996.
The aggregate cost of land, buildings and improvements for Federal income tax purposes (unaudited) was $14,831,000 as of December 31, 1998. The differences between the aggregate cost of land, buildings and improvements for tax reporting purposes as compared to costs for financial reporting purposes are primarily attributable to: 1) amounts received under rental agreements for non-occupied space, which were recorded as income for tax reporting purposes but were recorded as a reduction of the corresponding property basis for financial reporting purposes, and; 2) the adjustments to the carrying value of real estate for financial statement purposes have no effect for tax reporting purposes.
(c) The initial cost to the Partnership includes acquisition fees paid to the General Partner.
(d) Amounts represent funds received from the sellers subsequent to acquisition under rental agreements for non-occupied space and include adjustments to carrying value of real estate.
(e) RECONCILIATION OF REAL ESTATE
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
(*) Results from reclassification of deferred rent receivable and leasing commissions to real estate and deletion of accumulated depreciation upon the adoption of the liquidation basis of accounting on March 31, 1997.
RECONCILIATION OF ACCUMULATED DEPRECIATION
COOPER VILLAGE PARTNERS (a General Partnership)
INDEPENDENT AUDITORS' REPORT
To Damson/Birtcher Realty Income Fund-II, Limited Partnership and Real Estate Income Partners III, Limited Partnership as General Partners of Cooper Village Partners:
We have audited the financial statements of Cooper Village Partners, a general partnership, as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation as of December 31, 1998 and 1997 of Cooper Village Partners, and the changes of net assets in liquidation for the year ended December 31, 1998 and the nine months ended December 31, 1997 and the results of its operations and its cash flows for the three months ended March 31, 1997 and the year ended December 31, 1996, in conformity with generally accepted accounting principles applied on the bases of accounting as discussed in note 2. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in notes 1 and 2 to the financial statements, the Partnership changed its basis of accounting as of March 31, 1997 from the going-concern basis to the liquidation basis.
KPMG LLP
Orange County, California March 9, 1999
COOPER VILLAGE PARTNERS (a General Partnership)
STATEMENTS OF NET ASSETS IN LIQUIDATION
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (a General Partnership)
STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION
The accompanying notes are an integral part of these financial statements.
COOPER VILLAGE PARTNERS (a General Partnership)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (a General Partnership)
STATEMENTS OF PARTNERS' CAPITAL
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (a General Partnership)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Financial Statements.
COOPER VILLAGE PARTNERS (a General Partnership)
NOTES TO FINANCIAL STATEMENTS
(1) Organization
Cooper Village Partners, (the "Partnership") was formed on December 18, 1987 under the laws of the State of California. The General Partners of the Partnership are Damson Birtcher Realty Income Fund II, Limited Partnership ("Fund II") and Real Estate Income Partners III, Limited Partnership ("Fund III"). During 1987 and 1988, The Partnership acquired Cooper Village Shopping Center in Mesa, Arizona. In connection with this acquisition, Fund II and Fund III contributed capital of $5,937,000 (58%) and $4,300,000 (42%), respectively. Fund II and Fund III share in the profits, losses and distributions of the Partnership in proportion to their respective ownership interests. The Partnership maintains its accounting records and prepares its financial statements in accordance with generally accepted accounting principles.
On February 18, 1997, the General Partners mailed a Consent Solicitation to the Limited Partners of Funds II and III which sought their consent to dissolve those Partnerships and sell and liquidate all of their remaining properties (including the Partnership's property) as soon as practicable, consistent with obtaining reasonable value for the Partnership's property. A majority in interest of the Limited Partners of Funds II and III consented by March 13, 1997. As a result, the General Partners, as well as the Partnership, adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material.
Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded.
The Partnership adopted the liquidation basis of accounting on March 31, 1997. Comparison of results to prior years, therefore, is not practical. The Statements of Net Assets in Liquidation and Statements of Changes of Net Assets in Liquidation reflect the Partnership in the process of liquidation. Prior financial statements reflect the Partnership as a going concern.
As of December 31, 1995, the General Partners decided to treat their properties, as well as the Partnership's property, as held for sale, instead of for investment, for financial statement purposes. Since 1993, the General Partners have considered several preliminary indications of interest from third parties to acquire the Partnership's property. The Partnership's sole property was held for sale throughout 1997 and 1998 and it is currently held for sale.
In accordance with the liquidation basis of accounting (see Note 2), the carrying value of the Partnership's property was evaluated to ensure it is carried on the Partnership's Statements of Net Assets in Liquidation at net realizable value. The General Partners estimated net realizable value for this purpose by using an average of recent offers to acquire Cooper Village Shopping Center net of estimated selling costs, in lieu of obtaining appraisals at December 31, 1998 and appraisals performed as of January 1, 1998 at December 31, 1997. Fair value can only be determined based upon sales to third parties, and sales proceeds could differ substantially from internal estimates of fair value or appraised values.
COOPER VILLAGE PARTNERS (a General Partnership)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies
Liquidation Basis
The Partnership adopted the liquidation basis of accounting as of March 31, 1997. The liquidation basis of accounting is appropriate when liquidation appears imminent, the Partnership can no longer be classified as a going concern and the net realizable values of the Partnership's assets are reasonably determinable. Under this method of accounting, assets and liabilities are stated at their estimated net realizable values and costs of liquidating the Partnership are provided to the extent reasonably determinable.
For the year ended December 31, 1998, the General Partners determined that the carrying value of Cooper Village Shopping Center was in excess of its estimated net realizable value. As a result, the carrying value was adjusted by $564,000 to $5,633,000.
Carrying Value of Real Estate (prior to adoption of the liquidation basis of accounting)
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121"). This Statement requires that if management believes factors are present that may indicate long-lived assets are impaired, the undiscounted cash flows, before debt service, related to the assets should be estimated. If these estimated cash flows are less than the carrying value of the asset, then impairment is deemed to exist. If impairment exists, the asset should be written down to the estimated fair value.
Further, assets held for sale, including any unrecoverable accrued rent receivable or capitalized leasing commissions, should be carried at the lower of carrying value or fair value less estimated selling costs. Any adjustment to carrying value is recorded as a valuation allowance against property held for sale. Each reporting period, the General Partners review their estimate of fair value, which is decreased or increased up to the original carrying value. Finally, assets held for sale are no longer depreciated.
As noted above, as of December 31, 1995 the General Partners decided to account for the Partnership's property as an asset held for sale, assuming a 12 month holding period, instead of for investment. Accordingly, the General Partners compared the carrying value of the property to its appraised value as of January 1, 1997 at December 31, 1996. The carrying value of the property and certain related assets was greater than it's appraised value, less selling costs, and the General Partner reduced the carrying value of the property by the difference of $412,000 at December 31, 1996.
COOPER VILLAGE PARTNERS (a General Partnership)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Segment Reporting
The Partnership adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. The adoption of SFAS 131 did not have an impact on the Partnership's financial reporting.
Cash and Cash Equivalents
The Partnership invests its excess cash balances in short-term investments ("cash equivalents"). These investments are stated at cost, which approximates market, and consist of money market accounts, certificates of deposit and other nonequity-type cash investments. Cash equivalents at December 31, 1998 and 1997, totaled $297,000 and $289,000, respectively. Cash equivalents are defined as temporary non-equity investments with original maturities of three months or less, which can be readily converted into cash and are not subject to changes in market value.
Revenue Recognition
Through March 31, 1997, rental income pertaining to operating lease agreements which specify scheduled rent increases or free rent periods, is recognized on a straight-line basis over the period of the related lease agreement. After March 31, 1997, rental income has been recognized according to the lease terms.
Estimations
The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partners to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses or changes in net assets during the reporting period. Actual results could differ from those estimates.
COOPER VILLAGE PARTNERS (a General Partnership)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(2) Summary of Significant Accounting Policies (Cont'd.)
Income Taxes
Income taxes are not levied at the Partnership level, therefore, no provision or liability for Federal and State income taxes has been reflected in the accompanying financial statements.
Following are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles ("GAAP") (liquidation basis of accounting) and for federal income tax reporting purposes at December 31:
Following are the differences between Financial Statement and tax return income:
(3) Transactions with Affiliates
The Partnership has no employees and, accordingly, Birtcher Properties, an affiliate of the General Partner of Fund II and Fund III and its affiliates perform services on behalf of the Partnership in connection with administering the affairs of the Partnership. Birtcher Properties and affiliates are reimbursed for their general and administrative costs
COOPER VILLAGE PARTNERS (a General Partnership)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(3) Transactions with Affiliates (Cont'd.)
actually incurred and associated with services performed on behalf of the Partnership. For the years ended December 31, 1998, 1997 and 1996, the Partnership was charged with approximately $1,000, $1,000 and $1,000, respectively, of such expenses.
An affiliate of the General Partner of Fund II and Fund III provides property management services with respect to the Partnership's property and receives a fee for such services not to exceed 6% of the gross receipts from the property under management provided that leasing services were performed, otherwise not to exceed 3%. Such fees amounted to approximately $53,000 in 1998, $47,000 in 1997, and $54,000 in 1996. In addition, as reimbursement of costs for on-site property management personnel and other related costs, an affiliate of the General Partner received $37,000 in 1998, $37,000 in 1997 and $35,000 in 1996, as reimbursement of costs for on-site property management personnel and other reimbursable costs.
The amended Partnership Agreements for Fund II and Fund III provide for payments to Birtcher Properties or its affiliates of an annual asset management fee equal to .55% (.65% in 1997 and .75% in 1996) of the aggregate appraised value of Cooper Village as determined by independent appraisal undertaken in January of each year. Such fees for the years ended December 31, 1998, 1997 and 1996, amounted to $35,000, $39,000 and $48,000, respectively. In addition, the amended Partnership Agreements for Fund II and Fund III provide for payment to the General Partner or its affiliates of a leasing fee for services rendered in connection with leasing space in the Partnership property after the expiration or termination of any lease of such space including renewal options. Fees for leasing services for the years ended December 31, 1998, 1997 and 1996, amounted to $4,000, $6,000 and $3,000, respectively.
(4) Commitments and Contingencies
Litigation
The Partnership is not a party to any material pending legal proceedings other than ordinary routine litigation incidental to its business. It is the General Partners' belief, that the outcome of these proceedings will not be material to the business, financial condition, or results of operations of the Partnership.
Future Minimum Annual Rentals
The Partnership has determined that all leases which had been executed as of December 31, 1998, are properly classified as operating leases for financial reporting purposes. Future minimum annual rental income to be received under such leases as of December 31, 1998 are as follows:
COOPER VILLAGE PARTNERS (a General Partnership)
NOTES TO FINANCIAL STATEMENTS (Cont'd.)
(4) Commitments and Contingencies (Cont'd.)
Future Minimum Annual Rentals (Cont'd.)
Certain of these leases also provide for, among other things: tenant reimbursements to the Partnership of certain operating expenses; payments of additional rents in amounts equal to a set percentage of the tenant's annual revenue in excess of specified levels; and escalations in annual rents based upon the Consumer Price Index.
(5) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
(6) Accrued Expenses for Liquidation
Accrued expenses for liquidation as of December 31, 1998, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees, other professional services and the general partner's liability insurance.
(7) Subsequent Event
On February 28, 1999, the Partnership made an aggregate cash distribution of $140,000 to its General Partners.
COOPER VILLAGE PARTNERS (a General Partnership)
SCHEDULE III REAL ESTATE IN LIQUIDATION AS OF DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS)
NOTE: Columns B, F, G and I are either none or are not applicable.
COOPER VILLAGE PARTNERS (a General Partnership)
NOTES TO SCHEDULE III
(a) For a description of the property, see "Item 2. Properties."
(b) Upon adoption of the liquidation basis of accounting on March 31, 1997, accumulated depreciation was deleted through an adjustment to the cost of the property.
At December 31, 1996, the General Partner determined that the Partnership's property had a carrying value greater than its appraised value less selling cost, and therefore provided an additional valuation allowance of $412,000 against property held for sale.
For the year ended December 31, 1998, the General Partners determined that the carrying value of Cooper Village Shopping Center was in excess of its estimated net realizable value. As a result, the carrying value was adjusted by $564,000 to $5,632,000.
The aggregate cost of land, buildings and improvements for Federal income tax purposes (unaudited) was $7,823,000 as of December 31, 1998. The differences between the aggregate cost of land, buildings and improvements for tax reporting purposes as compared to costs for financial reporting purposes are primarily attributable to: 1) amounts received under rental agreements for non-occupied space, which were recorded as income for tax reporting purposes but were recorded as a reduction of the corresponding property basis for financial reporting purposes, and; 2) the adjustments to the carrying value of real estate for financial statement purposes no effect for tax reporting purposes.
(c) The initial cost to the Partnership includes acquisition fees paid to Birtcher Investments and Equity Properties Inc.
COOPER VILLAGE PARTNERS (a General Partnership)
PART III
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership and the General Partner have no directors or executive officers. The General Partner of the Partnership is Birtcher/Liquidity Properties, a California general partnership of which Birtcher Investors, a California limited partnership, and LF Special Fund I, L.P., a California limited partnership, are the general partners. Under the terms of the Partnership Agreement, Birtcher Investors is responsible for the day-to-day management of the Partnership's assets.
The general partner of LF Special Fund I, L.P., is Liquidity Fund Asset Management, Inc., a California corporation affiliated with Liquidity Financial Group, L.P. The principals and officers of Liquidity Fund Asset Management, Inc. are as follows:
- Richard G. Wollack, Chairman of the Board - Brent R. Donaldson, President - Deborah M. Richard, Financial Officer
The general partner of Birtcher Investors is Birtcher Investments, a California general partnership. Birtcher Investments' general partner is Birtcher Limited, a California limited partnership and its general partner is BREICORP, a California corporation. The principals and relevant officers of BREICORP are as follows:
- Ronald E. Birtcher, Co-Chairman of the Board - Arthur B. Birtcher, Co-Chairman of the Board - Robert M. Anderson, Executive Director
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the fees, compensation and other expense reimbursements paid to the General Partner and its affiliates in all capacities for each year in the three-year period ended December 31, 1998.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of January 31, 1999 there was no entity or individual holding more than 5% of the Limited Partnership interests of the Registrant.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning transactions to which the Registrant was or is to be a party in which the General Partner or its affiliates had or are to have a direct or indirect interest, see Notes 1, 3 and 4 to the Financial Statements in Item 8, which information is incorporated herein by reference.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. and 2. Financial Statements and Financial Statements Schedules:
See accompanying Index to Financial Statements and Schedules to Item 8, which information is incorporated herein by reference.
Exhibits:
3. Articles of Incorporation and Bylaws
(a) Agreement of Limited Partnership incorporated by reference to Exhibit No. 3.1 to the Partnership's registration statement on Form S-11 (Commission File No. 33-2132), dated December 13, 1985, filed under the Securities Act of 1933.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Cont'd.)
10. Material Contracts
(a) Agreement of Purchase and Sale of Real Property (Cooper Village, Phase I) dated November 13, 1987, by and between Broadway Village Partners and Birtcher Acquisition Corporation incorporated by reference to Form 8-K, as filed December 30, 1987.
(b) Agreement of General Partnership, dated December 15, 1987, by and between Damson/Birtcher Realty Income Fund-II, Limited Partnership and Real Estate Income Partners III, Limited Partnership, incorporated by reference to Form 8-K, as filed December 30, 1987.
(c) Agreement of Purchase and Sale of Real Property (Martinazzi Square), dated December 22, 1987, by and between Hayden-Woodbury Tualatin and Birtcher Acquisition Corporation incorporated by reference to Form 8-K, as filed December 23, 1987.
(d) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and the Registrant for Creek Edge Business Center, Flaircentre Office Park, The Forum, Martinazzi Square Shopping Center and Northtech. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 20, 1991. (SUPERSEDED)
(e) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
(f) Agreement for Partnership Administrative Services dated October 24, 1991, between Glenborough Management Corporation and the Registrant for the services described therein. Incorporated by reference to Exhibit 3 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
(g) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and the Registrant for Creek Edge Business Center, Flaircentre, The Forum, Martinazzi Square Shopping Center and Northtech. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Cont'd.)
10. Material Contracts (Cont'd.)
(h) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
27. Financial Data Schedule
99. Additional Exhibits
(a) Registrant's prospectus (Commission File No. 33-2132), dated April 7, 1986, as supplemented November 5, 1986, filed pursuant to Rule 424(c) under the Securities Act of 1933 is incorporated herein by reference.
b) Reports on Form 8-K:
None filed for the year ended December 31, 1998, however, reference has been incorporated for the Form 8-K filed on February 4, 1999 reporting that the agreement to sell all of Real Estate Income Partners III's properties to Abbey Investments, Inc. had been terminated.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP --------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized.
REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP
By: BIRTCHER/LIQUIDITY By: BIRTCHER INVESTORS, PROPERTIES a California limited partnership (General Partner) By: BIRTCHER INVESTMENTS, a California general partnership, General Partner of Birtcher Investors
By: BIRTCHER LIMITED, a California limited partnership, General Partner of Birtcher Investments
By: BREICORP, a California corporation, formerly known as Birtcher Real Estate Inc., General Partner of Birtcher Limited
Date: March 30, 1999 By: /s/Robert M. Anderson --------------------- Robert M. Anderson Executive Director BREICORP
By: LF Special Fund I, L.P., a California limited partnership
By: Liquidity Fund Asset Management, Inc., a California corporation, General Partner of LF Special Fund I, L.P.
Date: March 30, 1999 By: /s/ Brent R. Donaldson ----------------------------- Brent R. Donaldson President Liquidity Fund Asset Management, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Birtcher/Liquidity Properties (General Partner of the Registrant) and in the capacities and on the dates indicated.
EXHIBIT INDEX
3. Articles of Incorporation and Bylaws
(a) Agreement of Limited Partnership incorporated by reference to Exhibit No. 3.1 to the Partnership's registration statement on Form S-11 (Commission File No. 33-2132), dated December 13, 1985, filed under the Securities Act of 1933.
10. Material Contracts
(a) Agreement of Purchase and Sale of Real Property (Cooper Village, Phase I) dated November 13, 1987, by and between Broadway Village Partners and Birtcher Acquisition Corporation incorporated by reference to Form 8-K, as filed December 30, 1987.
(b) Agreement of General Partnership, dated December 15, 1987, by and between Damson/Birtcher Realty Income Fund-II, Limited Partnership and Real Estate Income Partners III, Limited Partnership, incorporated by reference to Form 8-K, as filed December 30, 1987.
(c) Agreement of Purchase and Sale of Real Property (Martinazzi Square), dated December 22, 1987, by and between Hayden-Woodbury Tualatin and Birtcher Acquisition Corporation incorporated by reference to Form 8-K, as filed December 23, 1987.
(d) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and the Registrant for Creek Edge Business Center, Flaircentre Office Park, The Forum, Martinazzi Square Shopping Center and Northtech. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 20, 1991. (SUPERSEDED)
(e) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
(f) Agreement for Partnership Administrative Services dated October 24, 1991, between Glenborough Management Corporation and the Registrant for the services described therein. Incorporated by reference to Exhibit 3 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED)
(g) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and the Registrant for Creek Edge Business Center, Flaircentre, The Forum, Martinazzi Square Shopping Center and Northtech. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(h) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
27. Financial Data Schedule
99. Additional Exhibits
(a) Registrant's prospectus (Commission File No. 33-2132), dated April 7, 1986, as supplemented November 5, 1986, filed pursuant to Rule 424(c) under the Securities Act of 1933 is incorporated herein by reference.