ITEM 1. BUSINESS
(a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Institutional Properties V (the "Partnership") is a California limited partnership that was formed in October 1985 for the purpose of acquiring, developing, and operating commercial and industrial real estate.
The Partnership acquired land in August 1987 for the development of an 88,073 square foot office property in San Diego, California known as Sierra Sorrento II. This development consists of two separate buildings; a two-story building consisting of 29,500 usable square feet that was completed in November 1988 and a two-story building consisting of 58,573 usable square feet that was completed in May 1989.
The Partnership sold the Sierra Sorrento II land holdings to Lincoln National Life Insurance Company for $3,000,000 on February 1, 1989. Upon ownership transfer, the Partnership entered into a 40 year ground lease with the insurance company. The Sierra Sorrento II land lease requires initial minimum payments of $25,000 per month commencing February 1989. The terms of the ground lease require scheduled rent increases over the lease term and additional ground rent. Subject to the provisions of the ground lease, the Partnership has the right to sell the property (land and buildings) to a third party. Upon ownership transfer the ground lease will terminate. Upon sale, the Ground Lessor is entitled to remuneration of the $3,000,000 investment prior to distribution of proceeds to the Partnership. The Ground Lessor will also participate in the appreciation of the property (upon sale) based on a formula contained in the ground lease agreement. On July 8, 1997, the land was purchased by CGS Real Estate Company, Inc., an affiliate of the General Partner. On September 24, 1997, all rights, title and interest in the ground lease were transferred and assigned to CGS Real Estate Company, Inc. ("Ground Lessor").
On October 1, 1993, the Partnership created a California general partnership (Sorrento II Partners or "SIIP") with Sierra Mira Mesa Partners ("SMMP"), an affiliate, to facilitate cash contributions by SMMP for the continued development and operation of the Sorrento II property. The Partnership contributed the Sierra Sorrento II property and $115,000 in cash and SMMP contributed cash ($2,015,800, net, through December 31, 1997) in exchange for a 33.55% interest in Sorrento II Partners. Such interest was computed based upon the estimated fair value of SIIP's net assets at the date of formation of the joint venture. SMMP made additional cash contributions amounting to $228,700 and received distributions amounting to $85,657 during 1998. The percentage interests of the Partnership and Sierra Mira Mesa Partners are to be adjusted every January 1st during the term of Sorrento II Partners, beginning January 1, 1995. Accordingly, as of January 1, 1999, the Partnership's interest in SIIP will be decreased to 64.90%, and SMMP's interest will be increased to 35.10%.
(b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owns and operates Sierra Sorrento II, an office project in San Diego, California. Success of the office building is dependent upon the timely payment of rent by two tenants which occupied 100% of the building at December 31, 1998.
The Sierra Sorrento II property consists of two adjacent office buildings. There is significant competition in the rental market in the Partnership's trade area. A 1994 appraisal identified just over seven million square feet of competing research and development space in the property's market area.
(c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF THE PARTNERSHIP. In the Partnership's prospectus dated January 6, 1986, the investment objectives were described as follows:
"The Partnership has been formed to acquire and operate on an all-cash basis commercial and industrial real properties, including both properties which are to be developed by the Partnership or are under development or construction ("development properties") and properties which are newly-constructed or have operating histories ("existing properties"). A minimum of 75% of the cash invested in properties by the Partnership will be invested in properties which are in the development or lease-up stage. The properties in which the Partnership will invest will be located in areas in the western and southwestern United States which are expected to experience high population and/or economic growth levels during the Partnership's period of operations. The principal investment objectives of the Partnership are to: (i) preserve, protect and return the Partnership's invested capital; (ii) generate sufficient cash from operations to provide for distributions of Available Cash to the Limited Partners, a portion of which will be tax-sheltered to the holders of Taxable Entity Units; (iii) obtain maximum long-term appreciation in the value of the Partnership's real estate investments; and (iv) sell the Partnership's real estate investments for cash after an approximate three to five year holding period. There can be no assurance that such objectives will be attained."
Operations of the Partnership through 1998 have been consistent with the intent of the original prospectus in that the Partnership has invested in real estate projects that had the potential for capital gains, preservation of capital, and providing distributable cash flow partially sheltered from Federal Income Tax. However, the Partnership and its real estate have been adversely affected by the Tax Reform Act of 1986, aggressive lending by banks that resulted in commercial real estate overbuilding, and subsequent severe recessions. The original intention to sell its real estate investments after a five year holding period was delayed indefinitely. As of December 31, 1998, the Partnership had paid cash distributions of $2.69 for each $250 unit investment and remaining partners' equity was computed at $64.90 per unit. Thus, if the Partnership were to be liquidated at the end of 1998 at book value, each $250 investment would have returned a total of $67.59.
The General Partner's goal is to continue operating the Sierra Sorrento II property until such time as rental rates return to the level necessary to support new office building development. At that time, the property may be sold at a price substantially greater than current book value.
ITEM 2.
ITEM 2. PROPERTY
During 1998, the Partnership owned a 66.45% interest in Sierra Sorrento II, an office property located in San Diego, California. (See Item 1. Business for discussion of percentage ownership changes.) The property includes two separate buildings comprising 88,073 rentable square feet and is 100% occupied at December 31, 1998. There are no material liens or encumbrances against the property at December 31, 1998. The average effective annual rent per square foot at December 31, 1998 is $10.95. The property has only two tenants whose principal businesses are electronics manufacturing and media and marketing. Details of these significant tenants and their leases follow.
SUMMARY OF TENANTS/LEASES
DEPRECIABLE PROPERTY Reference is made to Schedule III of the Form 10-K.
REAL ESTATE TAXES The real estate tax obligation for 1998 is approximately 1.13% of the assessed value or $80,768.
INSURANCE It is the opinion of management that the property is adequately covered by insurance.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not involved in any material legal proceedings.
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 PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 1998, the number of security holders is as follows:
NUMBER OF NUMBER RECORD OF UNITS HOLDERS --------- --------- Limited Partners ................................... 30,777 1,485 ========= =========
These securities are all of the same class, namely, limited partnership interests (units) and were sold pursuant to a registration statement filed under the Securities Act of 1933, as amended. The total offering was 140,000 units at $250.00 per unit.
No broker or dealer currently makes a market in the units of the Partnership. Accordingly, there are no published price or trading volume figures available for the units. The units have been transferred on an extremely limited extent from time-to-time since the inception of the Partnership; however, the market for the units is highly restricted and sporadic, especially in view of the investor suitability requirements imposed on new purchasers by the various state blue sky laws and the restrictions on transfer contained in the Partnership Agreement.
The Partnership has neither paid nor declared any cash or other distributions to the General or Limited Partners during the three most recent years. There are no contractual or other restrictions on the Partnership's ability to make such distributions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data for the Partnership is filed by reference to the Annual Report to the Limited Partners attached as an Exhibit.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations includes certain forward looking statements reflecting the Partnership's expectations in the near future; however, many factors which may affect the actual results, especially changing regulations, are difficult to predict. Accordingly, there is no assurance that the Partnership's expectations will be realized.
Overview:
The following discussion should be read in conjunction with the Selected Financial Data and the Partnership's Consolidated Financial Statements and Notes thereto incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. As of December 31, 1998, the Partnership owned a 66.45% interest in Sierra Sorrento II, an industrial property located in San Diego, California.
Results of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997.
Rental income decreased by $164,000, or 17%, primarily due to lower occupancy during the first seven months of 1998. One tenant, whose lease accounted for 22,150 square feet of the Property, expired December 31, 1997. This vacant space was re-leased to a tenant in the second quarter of 1998 and rent commenced in late August. This same tenant began leasing an additional 7,000 square feet in December 1998. The Property was 100% occupied at December 31, 1998. The weighted-average annual rent per square foot, on an accrual basis, increased from $10.12 at December 31, 1997 to $10.95 at December 31, 1998 as a result of higher rental rates.
Total operating expenses increased by $26,000, or 2%, when compared to the prior year. Depreciation and amortization, maintenance and repairs, and other operating expenses increased due to costs associated with the new tenant. Further, property taxes were higher due to an increase in the assessed value of the Property. The increase in total operating expenses was partially offset due to a decrease in management fees and legal fees. Management fees were lower as a result of the decrease in rental income. Legal fees were higher in 1997 due to professional fees associated with the property's ground lease.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996.
Rental income decreased by $12,000, or 1%, primarily as a result of lower common area maintenance billings. The occupancy rate of the Property remained unchanged at 92% throughout 1997. The weighted-average annual rent per square foot, on an accrual basis, remained unchanged at $10.12 at December 31, 1997.
Operating expenses decreased by $5,000, principally due to lower maintenance and repair costs and a decrease in general and administrative expenses resulting from cost cutting measures implemented by management. This decrease was partially offset by an increase in legal fees due to professional fees associated with the property's ground lease.
Liquidity and Capital Resources:
On October 1, 1993, the Partnership created a California general partnership (Sorrento II Partners) with Sierra Mira Mesa Partners ("SMMP"), an affiliate, to facilitate cash contributions by SMMP for the continued development and operation of the Sorrento II property. SMMP has adequate resources to make the necessary advances during the foreseeable future.
In October 1997, the Partnership prepaid its ground lease $900,000 in return for a reduction in future miniumum rent. These funds were contributed to the Partnership by SMMP in 1997. During 1998, SMMP contributed a total of $228,700 to the Partnership and received distributions of $85,657 from the Partnership.
During 1998, the Partnership generated cash flows from operations of $177,000 and paid $556,000 for property additions and lease commissions. The Partnership is in an illiquid position at December 31, 1998 with cash of $3,000 and current liabilities of $246,000.
The Partnership's primary capital requirements will be for construction of new tenant space. It is anticipated that these requirements and any operating capital requirements will be funded from operations of the Property and SMMP.
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the adverse impact of inflation on its results from operations. Such provisions may include escalation clauses related to Consumer Price Index increases.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Partnership's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with Year 2000 requirements.
The Partnership employs a property management company to manage, operate and lease the property. The management company believes it will be ready for the Year 2000 date change by the end of 1999. The impact of Year 2000 non-compliance by other third parties cannot accurately be gauged.
The total cost to the Partnership of activities associated with Year 2000 Compliance is not anticipated to be material to its financial position or results of operations in any given year. In January 1999, the Partnership began utilizing a new software program to maintain books and records. The new software program is Year 2000 compliant.
The total amount of potential risk that would be reasonably likely to result from Year 2000 failures cannot presently be estimated. In the event the Partnership does not properly identify Year 2000 issues in a timely manner, there can be no assurance that Year 2000 issues will not materially affect the Partnership's results.
The Partnership's contingency plan should systems fail due to the Year 2000 date change is to temporarily convert to a manual system. The Partnership believes it could temporarily operate on a manual system without adversely impacting operations.
The preceding Year 2000 discussion contains various forward-looking statements which represent the Partnership's beliefs or expectations regarding future events. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from projected results.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' report are incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit.
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1998 and 1997
3. Consolidated Statements of Operations - for the years ended December 31, 1998, 1997 and 1996
4. Consolidated Statements of Changes in Partners' Equity - for the years ended December 31, 1998, 1997 and 1996
5. Consolidated Statements of Cash Flows - for the years ended December 31, 1998, 1997 and 1996
6. Notes to Consolidated Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Registrant is a California Limited Partnership and has no officers or directors.
S-P Properties, Inc., a California corporation, is the General Partner of the Registrant. In December 1994, Finance Factors, Inc., a subsidiary of CGS Real Estate Company, Inc., purchased the common stock TCP, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., a subsidiary of CGS Real Estate Company, Inc. CGS Real Estate Company, Inc. and its affiliates are engaged in real estate management, leasing, ownership, and sales. The companies own or manage more than ten million square feet of commercial real estate in Texas, Arizona, Colorado, Missouri, California and the Carolinas.
The executive officers and directors of S-P Properties, Inc. are:
APPROXIMATE NAME POSITION AGE TIME IN OFFICE - ----------------- ---------------------- ----- -------------- Thomas N. Thurber President and Director 48 4 years
Dawson L. Davenport Vice President 43 4 years
Steven M. Speier Secretary/Treasurer and 48 4 years Director
William J. Carden Assistant Secretary/ 54 4 years Treasurer and Director
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is a Certified Public Accountant who began his career with Arthur Andersen & Co. in 1972. In 1979, he joined a major publicly traded real estate development firm (Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber served as Director of Real Estate for a developer of retail properties, and Chief Financial Officer of a trust with significant investments in commercial real estate. Mr. Thurber also serves as a director of Property Secured Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from Florida State University.
Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the founder of WD Real Estate Services, a full service property management firm that became part of the Banc Commercial family of companies in 1992. Mr. Davenport has been responsible for the management, development and rehabilitation of substantial commercial, industrial, retail, and residential projects during the past seventeen years. Mr. Davenport specializes in leasing and turning around distressed properties.
Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Speier who after spending two years in public accounting, went into the banking industry in 1975. During his sixteen year banking career, Mr. Speier managed a real estate loan portfolio of approximately $1.5 billion secured by properties throughout the United States. Mr. Speier brings to S-P Properties, Inc. a broad real estate background that includes management, leasing, and disposition of all categories of commercial real estate. Mr. Speier also serves as a director of IDM Corporation. Mr. Speier is a licensed real estate broker, is registered as a Certified Public Accountant, and has a masters degree in business administration from Grand Valley State University in Michigan.
William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc., which owns over one million square feet of commercial real estate. Mr. Carden founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of retail, office, industrial, and commercial real estate. Mr. Carden is a former Director of Bay Financial, a New York Stock Exchange company, and currently serves as a director of Property Secured Investments, Inc. and IDM Corporation.
There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any director or officer during the past five years.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION
The Registrant is a California Limited Partnership and has no officers or directors. No options to purchase securities of the Registrant have been granted to any person.
In accordance with the terms of the Partnership Agreement, certain affiliates of the General Partner receive real estate brokerage commissions in connection with the leasing of properties by the Partnership and receive from the Partnership certain management and administrative services fees. These amounts are set forth in the Annual Report to the Limited Partners attached as an Exhibit.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership pays a management fee of 6% of the gross rental income collected from the property to American Spectrum Real Estate Services, Inc. (ASRE), formerly Banc Commercial California. These fees for the year ended December 31, 1998 were $49,919. Bancor Real Estate Company, Inc. (Bancor) provides services to the Partnership such as accounting, legal, data processing and similar services and is entitled to reimbursement for expenses incurred to provide such services. Amounts so reimbursed totaled $77,844 during the year ended December 31, 1998. The Partnership also reimbursed ASRE for construction supervision costs. These fees for the year ended December 31, 1998 were $22,511. In consideration for services rendered with respect to initial leasing of Partnership properties, ASRE is paid initial leasing costs. For the year ended December 31, 1998, a total of $74,504 was paid for initial leasing costs. Bancor and ASRE are both wholly owned subsidiaries of CGS Real Estate Company, Inc. William J. Carden, an officer and director of S-P Properties, Inc., the general partner of the Partnership, owns 50% of CGS Real Estate Company, Inc.
The Partnership sold the Sierra Sorrento II land holdings to Lincoln National Life Insurance Company for $3,000,000 on February 1, 1989. Upon ownership transfer, the Partnership entered into a 40 year ground lease with the insurance company. The Sierra Sorrento II land lease requires initial minimum payments of $25,000 per month commencing February 1989. The terms of the ground lease require scheduled rent increases over the lease term and additional ground rent. Subject to the provisions of the ground lease, the Partnership has the right to sell the property (land and buildings) to a third party. Upon ownership transfer the ground lease will terminate. Upon sale, the Ground Lessor is entitled to remuneration of its $3,000,000 investment prior to distribution of proceeds to the Partnership. The Ground Lessor will also participate in the appreciation of the property (upon sale) based on a formula contained in the ground lease agreement. On July 8, 1997, the land was purchased by CGS Real Estate Company, Inc., an affiliate of the General Partner. On September 24, 1997, all rights, title and interest in the ground lease were transferred and assigned to CGS Real Estate Company, Inc. ("Ground Lessor").
In October 1997, the Partnership prepaid $900,000 of the ground lease to CGS Real Estate Company, Inc. in exchange for an amendment reducing the minimium rent required under the lease from $360,000 to $330,000 per year from 1999 to 2008. The minimum basic rent effective January 1, 2009 through December 31, 2028 remained unchanged at $360,000 per year. The November 1997, December 1997, and January 1998 rent amounts payable under the terms of the lease were applied against the prepaid balance. Effective February 1998, rent amounts shall be paid at the rate of $18,000 per month until such time that the prepaid balance is extinguished. For the year ended December 31, 1998, the Partnership paid $198,000 to CGS Real Estate Company, Inc. and $162,000 was applied against the prepaid balance. The prepaid balance as of December 31, 1998 was $683,000.
Future minimum basic rent required under the ground lease is as follows:
MINIMUM YEAR ENDING DECEMBER 31, BASIC RENT - ------------------------- ----------- 1999........... $ 330,000 2000........... 330,000 2001........... 330,000 2002........... 330,000 2003........... 330,000 Thereafter...... 8,850,000 ----------- Total......... $10,500,000 ===========
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS
1. Annual Report to the Limited Partners
2. Exhibit Number 27 - Selected Financial Data
B. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule and the report of the independent auditors thereon are included herein:
1. Schedule III - Real Estate and Accumulated Depreciation - December 31,
All other schedules are omitted as they either are not required or are not applicable, or the required information is set forth in the financial statements and notes thereto.
C. REPORTS ON FORM 8-K
None
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.
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V a California Limited Partnership S-P PROPERTIES, INC. General Partner
Date: March 19, 1999 /S/THOMAS N. THURBER ---------------------------- -------------------------------------- Thomas N. Thurber President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 19, 1999 /S/THOMAS N. THURBER ---------------------------- -------------------------------------- Thomas N. Thurber President and Director S-P Properties, Inc.
Date: March 19, 1999 /S/WILLIAM J. CARDEN ---------------------------- -------------------------------------- William J. Carden Assistant Secretary/Treasurer and Director S-P Properties, Inc.
Date: March 19, 1999 /S/G. ANTHONY EPPOLITO ---------------------------- -------------------------------------- Anthony Eppolito Chief Accountant S-P Properties, Inc.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Partners of Sierra Pacific Institutional Properties V
We have audited the consolidated financial statements of Sierra Pacific Institutional Properties V, a California limited partnership, (the "Partnership") as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998 and have issued our report thereon dated February 26, 1999. Such consolidated financial statements and report are included in your 1998 Annual Report to the Limited Partners and are incorporated herein by reference. Our audits also included the financial statement schedule of Sierra Pacific Institutional Properties V, listed in Item 14. This financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas February 26, 1999
SCHEDULE III - FORM 10-K
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
(1) The initial cost represents the original purchase price of the property.
(2) The Partnership has capitalized property development costs.
(3) On February 1, 1989, the Sierra Sorrento II land was sold for $3,000,000 and leased back from the buyer. Sales and Leaseback costs of $149,629 were capitalized. Because the sale and leaseback transaction contains many characteristics of a joint venture, the Partnership accounts for this arragement under the method of accounting described in Note 4 to the consolidated financial statements incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. On October 1, 1993, the property was transferred to a general partnership, Sorrento II Partners. The Partnership has an equity interest of 66.45% and Sierra Mira Mesa Partners, an affiliate, has a 33.55% interest at December 31, 1998.
(4) For Federal Income Tax purposes, the total cost of the Property (net of the ground lessor's equity) is $5,331,615.
(5) Construction on a two-story building ("Building B"), 29,500 usable square footage, was completed in November 1988. Construction on a two-story building ("Building A") 58,573 usable square footage, was completed in May 1989.
(6) Reconciliation of total real estate carrying value and accumulated depreciation for the three years ended December 31, 1998 is as follows:
TOTAL REAL ESTATE ACCUMULATED CARRYING VALUE DEPRECIATION ----------------- ------------ Balance - January 1, 1996 .................. $ 7,938,712 $ 1,606,003 Additions during the year ............... 51,877 392,151 ----------------- ------------ Balance - December 31, 1996 ................ 7,990,589 1,998,154 Additions during the year .............. 29,313 392,152 ----------------- ------------ Balance - December 31, 1997 ................ 8,019,902 2,390,306 Additions during the year .............. 340,376 399,246 Deductions: Write off fully depreciated assets ... (28,663) (28,663) ----------------- ------------ Balance - December 31, 1998 ................ $ 8,331,615 $ 2,760,889 ================= ============
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V (A CALIFORNIA LIMITED PARTNERSHIP)
SELECTED FINANCIAL DATA For the Years Ended December 31, 1998, 1997, 1996, 1995, and 1994
The following table sets forth certain selected historical financial data of the Partnership. The selected operating and financial position data as of and for each of the five years ended December 31, 1998 have been derived from the audited consolidated financial statements of the Partnership. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto which are incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit.
(1) The net loss, limited partners' equity and distributions per unit are based upon the limited partnership units outstanding at the end of the year, 30,777 in all years. The cumulative distributions per limited partnership unit from inception to December 31, 1998 equal $2.69.
INDEPENDENT AUDITORS' REPORT
To the Partners of Sierra Pacific Institutional Properties V
We have audited the accompanying consolidated balance sheets of Sierra Pacific Institutional Properties V, a California limited partnership, (the "Partnership") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in partners' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sierra Pacific Institutional Properties V as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas February 26, 1999
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
SEE ACCOMPANYING NOTES
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
SEE ACCOMPANYING NOTES
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
SEE ACCOMPANYING NOTES
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
SEE ACCOMPANYING NOTES
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Pacific Institutional Properties V (the "Partnership") was organized on October 8, 1985 in accordance with the provisions of the California Uniform Limited Partnership Act to acquire and operate commercial and industrial real properties. S-P Properties, Inc. is the General Partner and manager of the Partnership. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc.
The Partnership acquired land in August 1987 for the development of an 88,073 square foot office property in San Diego, California known as Sierra Sorrento II. This development consists of two separate buildings; a two-story building consisting of 29,500 usable square feet that was completed in November 1988 and a two-story building consisting of 58,573 usable square feet that was completed in May 1989.
On October 1, 1993, the Partnership created a California general partnership (Sorrento II Partners) with Sierra Mira Mesa Partners ("SMMP"), an affiliate, to facilitate cash contributions by SMMP for the continued development and operation of the Sorrento II property. The Partnership contributed the Sierra Sorrento II property and cash and SMMP contributed cash to the newly formed partnership. At December 31, 1998, the Partnership's remaining asset is a 66.45% interest in Sorrento II Partners.
On July 8, 1997, the Sorrento II land was purchased from Lincoln National Life Insurance Company by CGS Real Estate Company, Inc., an affiliate of the General Partner. On September 24, 1997, all rights, title and interest in the ground lease were transferred and assigned to CGS Real Estate Company, Inc. ("Ground Lessor") (See Note 3).
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, the Partnership prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Partnership and Sorrento II Partners, a majority owned California general partnership (see Note 4). All significant intercompany balances and transactions have been eliminated in consolidation.
Sierra Pacific Institutional Properties V Notes to Consolidated Financial Statements Page two
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1998 and 1997 consist of cash and cash equivalents, receivables, due from affiliates, and accounts payable. The fair value of cash and cash equivalents, receivables, and accounts payable approximates the carrying value due to the short term nature of these items. The amounts due from affiliates are not fair valued due to the related party nature of these receivables.
INCOME-PRODUCING PROPERTY
Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from three to thirty years. Tenant improvements incurred at the initial leasing of the property are depreciated over ten years and tenant improvements incurred at the re-leasing of the property are depreciated over the life of the related lease.
Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income.
Prior to 1995, the Partnership assessed impairment of income-producing properties based upon appraised values and established provisions for impairment where appraisals indicated other than temporary declines in value. Effective January 1, 1995, the Partnership implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Partnership shall recognize an impairment loss in accordance with the Statement. No such impairment has been recognized by the Partnership.
Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 1998. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change.
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease using the straight line method of accounting.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases".
Sierra Pacific Institutional Properties V Notes to Consolidated Financial Statements Page three
Unbilled rent receivable represents the difference between rent recognized on the straight-line method and actual cash due.
GROUND LEASE PAYABLE
Ground lease payable represents the difference between rent recognized on the straight-line method in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases" and actual cash due and paid by that date.
CALCULATION OF EQUITY AND NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
Equity and net income (loss) per limited partnership unit are determined by dividing the Limited Partners' equity and net income (loss) by 30,777, the number of limited partnership units outstanding.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." These SFAS's, which are effective for the Partnership's fiscal year ending December 31, 1998, establish additional disclosure requirements but do not affect the measurement of the results of operations. During the periods presented, the Partnership did not have any items of comprehensive income. The adoption of SFAS No. 131 had no effect on the Partnership's financial statements as the Partnership operates in only one segment, the acquisition, development and operation of commercial real estate.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31, 1998 and 1997, is as follows:
1998 1997 -------- -------- Other assets: Prepaid expenses ............................ $ 45,741 $ 37,106 Deferred leasing costs, net of accumulated amortization of $225,616 in 1998 and $204,574 in 1997 .............. 339,338 182,540 -------- -------- $385,079 $219,646 ======== ======== Accrued and other liabilities: Accounts payable ............................ $ 83,801 $ 40,319 Unearned rental income ...................... 152,150 0 Security deposits ........................... 7,249 7,249 Other ....................................... 9,564 818 -------- -------- $252,764 $ 48,386 ======== ========
Sierra Pacific Institutional Properties V Notes to Consolidated Financial Statements Page four
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner may receive a management fee of 6% of the gross rental income collected from the properties. Management fees paid to affiliates for the years ended December 31, 1998, 1997 and 1996 were $49,919, $59,515 and $54,102, respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses incurred by the affiliate for services provided to the Partnership such as accounting, legal, data processing and similar services. The affiliate was reimbursed $77,844, $69,720 and $67,428 for such services for the years ended December 31, 1998, 1997, and 1996, respectively. In consideration for services rendered with respect to initial leasing of Partnership properties, an affiliate is paid initial leasing costs. For the year ended December 31, 1998, a total of $74,504 was paid for initial leasing costs. No such costs were incurred in 1997 and 1996. Additionally, the Partnership reimbursed the affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1998 and 1997, the affiliate received $22,511 and $1,998, respectively, for tenant improvements supervisory costs. No such costs were incurred in 1996.
The Partnership sold the Sierra Sorrento II land holdings to Lincoln National Life Insurance Company for $3,000,000 on February 1, 1989. Upon ownership transfer, the Partnership entered into a 40 year ground lease with the insurance company. The Sierra Sorrento II land lease requires initial minimum payments of $25,000 per month commencing February 1989. The terms of the ground lease require scheduled rent increases over the lease term and additional ground rent. Subject to the provisions of the ground lease, the Partnership has the right to sell the property (land and buildings) to a third party. Upon ownership transfer the ground lease will terminate. Upon sale, the Ground Lessor is entitled to remuneration of the prior $3,000,000 investment prior to distribution of proceeds to the Partnership. The Ground Lessor will also participate in the appreciation of the property (upon sale) based on a formula contained in the ground lease agreement. On July 8, 1997, the land was purchased from Lincoln National Life Insurance Company by CGS Real Estate Company, Inc., an affiliate of the General Partner. On September 24, 1997, all rights, title and interest in the ground lease were transferred and assigned to CGS Real Estate Company, Inc. ("Ground Lessor").
In October 1997, the Partnership prepaid $900,000 of the ground lease to CGS Real Estate Company, Inc. in exchange of an amendment reducing the minimum rent required under the lease from $360,000 to $330,000 per year from 1999 to 2008. The minimum basic rent effective January 1, 2009 through December 31, 2028 remained unchanged at $360,000 per year. The November 1997, December 1997, and January 1998 rent amounts payable under the terms of the lease were applied against the prepaid balance. Effective February 1998, rent amounts shall be paid at the rate of $18,000 per month until such time that the prepaid balance is extinguished. For the years ended December 31, 1998 and 1997, the Partnership paid $198,000 and $35,000, respectively, to CGS Real Estate Company, Inc. and $162,000 and $55,000, respectively, was applied against the prepaid balance. Hence, at December 31, 1998 the prepaid balance was $683,000.
Future minimum basic rent required under the ground lease is as follows:
MINIMUM YEAR ENDING DECEMBER 31, BASIC RENT ------------------------ ----------- 1999........... $ 330,000 2000........... 330,000 2001........... 330,000 2002........... 330,000 2003........... 330,000 Thereafter...... 8,850,000 ----------- Total......... $10,500,000 ===========
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During 1996, the Partnership made a non-interest bearing loan to an affiliate in the amount of $18,995. Repayment is expected in 1999.
4. INCOME-PRODUCING PROPERTY
At December 31, 1998 and 1997 the total cost and accumulated depreciation of the property are as follows:
1998 1997 ----------- ----------- Land ................................... $ 2,569,815 $ 2,569,815 Building and improvements .............. 5,761,800 5,450,087 ----------- ----------- Total ......................... 8,331,615 8,019,902
Accumulated depreciation ............... (2,760,889) (2,390,306) ----------- ----------- Net ........................... $ 5,570,726 $ 5,629,596 =========== ===========
Sierra Sorrento II experienced a land ownership transfer during 1997 (See Note 3).
On October 1, 1993, the Partnership formed a joint venture with SMMP, an affiliate. The joint venture, known as Sorrento II Partners ("SIIP"), was formed as a California general partnership to develop and operate the Sierra Sorrento II property. The Partnership had an 83.2% equity interest with its contribution of Sierra Sorrento II and $115,000 in cash. Such interest was computed based upon the estimated fair value of SIIP's net assets at the date of formation of the joint venture. SMMP was allocated a 16.8% initial equity interest in SIIP in exchange for its $710,000 cash contribution ($1,470,400, net, through December 31, 1995). SMMP made additional cash contributions amounting to $44,500, $953,400 and $228,700, and received distributions amounting to $190,500, $262,000 and $85,657 during 1996, 1997 and 1998, respectively. The percentage interests of the Partnership and SMMP are to be adjusted every January 1st during the term of SIIP, beginning January 1, 1995. Accordingly, as of January 1, 1996, 1997 and 1998, the Partnership's interest in SIIP was changed to 73.08%, 75.09% and 66.45%, respectively, and SMMP's interest was changed to 26.92%, 24.91% and 33.55%, respectively. On January 1, 1999, the Partnership's interest will be decreased to 64.90% and SMMP's interest will be increased to 35.10% to reflect the 1998 contributions and distributions. Under the terms of the SIIP joint venture agreement, SMMP will receive preferential cash distributions of available "Distributable Funds" from the operation of SIIP or sale of its property to the extent of its capital contributions. Additional Distributable Funds are allocable to the Partnership to the extent of the deemed fair value of its property contribution, and the remainder to the Partnership and SMMP in proportion to their respective equity interests.
Sierra Pacific Institutional Properties V Notes to Consolidated Financial Statements Page six
Future minimum base rental income, under the existing operating leases for the Sierra Sorrento II property, to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows:
STRAIGHT-LINE CASH YEAR ENDING DECEMBER 31, BASIS BASIS ------------------------ ------------- ------------ 1999........... $ 964,485 $ 1,004,441 2000........... 964,485 1,050,272 2001........... 964,485 1,081,755 2002........... 964,485 1,110,726 2003........... 443,200 486,301 Thereafter...... 561,738 615,621 ------------- ------------ Total......... $ 4,862,878 $ 5,349,116 ============= ============
In 1998, the Partnership relied on two tenants to generate all rental income; 82% was from an electronics manufacturer and the remaining 18% was from a media and marketing company. In 1997 and 1996, two tenants generated all rental income; 65% from the electronics manufacturer and 35% from a healthcare administrator.
5. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership are allocated 99% to the Limited Partners and 1% to the General Partner. Currently, the Partnership does not meet the criteria for distributing cash to the General Partner, and it cannot reasonably predict when the criteria will be met. Accordingly, no accrual basis profits and losses from operations were allocated to the General Partner.
Upon any sale or other disposition of the Partnership's real properties, distributions will be made to the Limited Partners until they have received distributions from sales proceeds in an amount equal to 100% of their unreturned capital. Thereafter, distributions generally will be divided 1% to the General Partner and 99% to the Limited Partners until the Limited Partners have received distributions from all sources equal to the sum of their respective priority distributions (an amount equal to not less than 12% per annum cumulative, but not compounded, on each Limited Partners' unreturned capital). Thereafter, the General Partner will be entitled to receive incentive distributions which, when aggregated with the 1% distributions to the General Partner described above, are equal to 10% of the total net sale proceeds available for distribution to the Partners. Any remaining sale proceeds will be distributed to the Limited Partners.
EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The Executive Officers of S-P Properties, Inc., the General Partner are as follows:
NAME POSITION
Thomas N. Thurber President and Director
Dawson L. Davenport Vice President
Steven M. Speier Secretary/Treasurer and Director
William J. Carden Assistant Secretary/Treasurer and Director
The 10-K Report sent to the Securities and Exchange Commission contains additional information on the Partnership's operations and is available to Limited Partners upon request.