Item 1. BUSINESS
The Taubman Realty Group Limited Partnership
The Taubman Realty Group Limited Partnership ("TRG"), which was organized in 1985, is an operating partnership that engages in the ownership, operation, management, leasing, acquisition, development, redevelopment, expansion, financing, and refinancing of regional shopping centers. TRG owns as its primary assets interests in regional retail shopping centers (the "Taubman Shopping Centers" or the "Centers"). TRG also owns development projects for future regional shopping centers (the "Development Projects") and approximately 99% of The Taubman Company Limited Partnership (the "Manager"), which manages the Taubman Shopping Centers and provides services to TRG and its managing general partner, Taubman Centers, Inc. ("TCO"). Certain Taubman Shopping Centers are partially owned through joint ventures (the "Joint Ventures"). See the table on pages 12 and 13 of this report for information regarding the Taubman Shopping Centers and TRG's interests in them.
TCO is a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the "Code"). In order to satisfy the provisions of the Code applicable to REITs, TCO must distribute to its shareholders at least 95% of its REIT taxable income and meet certain other requirements. TRG's partnership agreement provides that TRG will distribute, at a minimum, sufficient amounts to its partners such that TCO's pro rata share will enable TCO to pay shareholder dividends (including capital gains dividends that may be required upon TRG's sale of an asset) that will satisfy the REIT provisions of the Code.
Recent Developments
For a discussion of business developments that occurred in 1996, see the response to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Shopping Center Business
There are several types of retail shopping centers, varying primarily by size and marketing strategy. Retail shopping centers range from neighborhood centers of less than 100,000 square feet of GLA to regional and super-regional shopping centers. Retail shopping centers in excess of 400,000 square feet of GLA are generally referred to as "regional" shopping centers, while those centers having in excess of 800,000 square feet of GLA are generally referred to as "super-regional" shopping centers. In this annual report on Form 10-K, the term "regional shopping centers" refers to both regional and super-regional shopping centers. The term "GLA" refers to gross retail space, including anchors and mall tenant areas, and the term "Mall GLA" refers to gross retail space, excluding anchors. The term "anchor" refers to a department store or other large retail store. The term "mall tenants" refers to stores (other than anchors) that are typically specialty retailers and lease space in shopping centers.
Most regional shopping centers compete for consumer retail dollars by offering fashion merchandise, hard goods, and services, generally in an enclosed, climate controlled environment with convenient parking. Regional shopping centers have differing strategies with regard to price levels of the merchants and merchandise offered, from very high-end presentations, on the one extreme, to a strategy of leasing exclusively to outlet stores, at the other.
Regional shopping centers usually have two or more anchors. Anchors either own their stores, the land under them, and adjacent parking areas, or they lease the ground or buildings from shopping center owners for long periods at rates that are substantially lower than the rents charged to mall tenants. In enclosed regional shopping centers, anchors are usually located at the ends of enclosed common area corridors. This layout is intended to maximize pedestrian traffic for the mall tenant stores. Mall GLA is leased to a wide variety of smaller stores. In a regional shopping center, substantially all revenues are derived from Mall GLA.
The anchors and the owner of the shopping center typically enter into an agreement among themselves, generally referred to as a reciprocal easement agreement, covering, among other things, operational matters, initial construction, and future expansions.
Mall tenants usually pay rent comprised of several elements. The first element is a fixed base, or "minimum", rent, often subject to increases according to a schedule agreed upon at the time of lease inception. In addition, this base rent is often supplemented by increases based upon inflation, often tied to changes in the Consumer Price Index. Finally, tenants generally are required to pay a percentage of their sales in addition to these other elements of rent, to the extent sales of the tenant exceed certain negotiated levels.
Both anchors and mall tenants generally contribute funds to pay for upkeep of common areas, property taxes, advertising, and other expenditures (such as security, utilities, and cleaning) that are related to the day-to-day operations of the shopping center.
As lease terms expire, shopping center owners may have the opportunity to change base rents, to revise lease terms and conditions, to relocate existing tenants, to reconfigure or expand tenant spaces, and to introduce new retailers and retail concepts to the shopping center.
The regional shopping center industry in the United States has significant barriers to entry. In addition, new regional shopping center developments are inhibited by several factors. Such barriers and inhibiting factors include the following:
o most major markets are already served by regional retail centers;
o land for suitable sites has become more difficult and more expensive to assemble;
o due to growing environmental concerns and demands from local governments and citizen groups, zoning and environmental approvals have become increasingly time consuming, expensive, and difficult to obtain;
o many of the strong national specialty retailers needed to occupy Mall GLA are already well represented in existing regional shopping centers; and
o department stores are generally not willing to deal with non-established developers.
While consumers make purchases through a variety of retail formats, TRG believes that the Taubman Shopping Centers, and other dominant regional and super-regional shopping centers, will continue in the future to be an attractive shopping destination for significant numbers of consumers. By providing a convenient shopping environment offering access to a broad selection of retailers, services, and food establishments, these centers have generated high levels of customer traffic and, as a consequence, high tenant sales. The ability of tenants to achieve higher sales levels than are generally achieved at smaller centers or stand-alone locations in turn supports higher levels of rent than at less productive locations.
Business of TRG
TRG is engaged in the ownership, operation, management, leasing, acquisition, development, redevelopment, expansion, financing, and refinancing of regional shopping centers and interests therein.
The Taubman Shopping Centers:
o are strategically located in major metropolitan areas, many in communities that are among the most affluent in the country, including New York City, Chicago, Los Angeles, San Francisco, Detroit, Phoenix, and Washington, D.C.;
o range in size between 438,000 and 2.3 million square feet of GLA and between 133,000 and 971,000 square feet of Mall GLA. The smallest Center has approximately 50 stores, and the largest has approximately 250 stores. Of the 21 Centers, 18 are super-regional shopping centers;
o have approximately 2,900 stores operated by its mall tenants under approximately 1,000 trade names;
o have 77 anchors, operating under 18 trade names;
o lease approximately 79% of Mall GLA to national chains, including subsidiaries or divisions of The Limited (The Limited, Limited Express, Victoria's Secret, and others), The Gap (The Gap, Banana Republic, and others), and Woolworth Corporation (Footlocker, Kinney Shoes, and others); and
o are among the most productive (measured by mall tenants' average per square foot sales) in the United States. In 1996, mall tenants in the Taubman Shopping Centers portfolio as of December 31, 1996 had average per square foot sales of $365, which is substantially greater than the average for all regional shopping centers.
The most important factor affecting the revenues generated by the Taubman Shopping Centers is leasing to mall tenants (primarily specialty retailers), which represents over 90% of revenues. Anchors account for approximately 5% of revenues because many own their stores and, in general, those that lease their stores do so at rates substantially lower than those in effect for mall tenants.
TRG's ownership is concentrated in large and highly productive regional shopping centers. Of its 21 Centers, 15 had annual rent rolls in 1996 of over $10 million and 17 had sales-per-square-foot in excess of $300. TRG believes that this level of productivity in the Taubman Shopping Centers is indicative of their strong competitive position and is, in significant part, attributable to TRG's business strategy and philosophy. TRG believes that large shopping centers (including regional and especially super-regional shopping centers) are the least susceptible to direct competition because (among other reasons) anchors and large specialty retail stores do not find it economically attractive to open additional stores in the immediate vicinity of an existing location for fear of competing with themselves. In addition to the advantage of size, TRG believes that the Centers' success can be attributed in part to their other physical characteristics, such as design, layout, and amenities.
Business Strategy And Philosophy
TRG believes that the regional shopping center business is not simply a real estate development business, but rather an operating business in which a retailing approach to the on-going management and leasing of the Taubman Shopping Centers is essential. Thus TRG:
o offers a large, diverse selection of retail stores in each Center to give customers a broad selection of consumer goods and variety of price ranges;
o endeavors to increase overall mall tenants' sales, and thereby increase achievable rents, by leasing space to a constantly changing mix of tenants; and
o seeks to anticipate trends in the retailing industry and emphasizes ongoing introductions of new retail concepts into the Centers. Due in part to this strategy, a number of successful retail trade names have opened their first mall stores in the Taubman Shopping Centers. TRG believes that its execution of this leasing strategy is unique in the industry and is an important element in building and maintaining customer loyalty and increasing mall productivity.
The Taubman Shopping Centers compete for retail consumer spending through diverse, in-depth presentations of predominantly fashion merchandise in an environment intended to facilitate customer shopping. While some Taubman Shopping Centers include stores that target high-end, upscale customers, each Center is individually merchandised in light of the demographics of its potential customers within convenient driving distance.
TRG's leasing strategy involves assembling a diverse mix of mall tenants in each of the Taubman Shopping Centers in order to attract customers, thereby generating higher sales by mall tenants. High sales by mall tenants make the Taubman Shopping Centers attractive to prospective tenants, thereby increasing the rental rates that prospective tenants are willing to pay. TRG implements an active leasing strategy to increase the Taubman Shopping Centers' productivity and to set minimum rents at higher levels. Elements of this strategy include terminating leases of under-performing tenants, renegotiating existing leases, and not leasing space to prospective tenants that (though viable or attractive in certain ways) would not enhance a Taubman Shopping Center's retail mix.
TRG's strategy is carried out by the Manager, which is more than 99% beneficially owned by TRG and which has been engaged to provide property management and leasing services for each Taubman Shopping Center (including wholly and partially owned Centers) and to provide corporate, development, administrative, and acquisition services for TRG and TCO. The Manager's predecessor was a leading developer and manager in the regional shopping center business for more than 25 years.
Potential For Growth
TRG's strategy is to increase the amount of cash flow. In addition to increased cash flow through the growth in mall tenant sales and market rental rates, TRG believes that its cash flow will increase over time due to expansions of the Centers, acquisitions, and development of new centers.
Expansions of the Taubman Shopping Centers - ------------------------------------------
Most of the Taubman Shopping Centers have been designed to accommodate expansions. Expansion projects can be as significant as new shopping center construction in terms of scope and cost, requiring governmental and existing anchor store approvals, design and engineering activities, including rerouting utilities, providing additional parking areas or decking, acquiring additional land, and relocating anchors and mall tenants (all of which must take place with a minimum of disruption to existing tenants and customers). In 1996, for example, Sears became the fourth anchor at Marley Station and the fifth anchor at Stoneridge. Additionally, construction is in process on expansions of three of the Taubman Shopping Centers:
o Westfarms -- the addition of approximately 135,000 square feet of Mall GLA and Nordstrom as an anchor will open in the summer of 1997;
o Biltmore Fashion Park -- over 30,000 square feet of new Mall GLA is scheduled to open beginning in the spring of 1997; and
o Cherry Creek -- a newly constructed Lord & Taylor will open in the fall of 1997. Additionally, a 132,000 square foot expansion of the Mall GLA will open in the fall of 1998.
Consolidation of department stores has also strengthened TRG's portfolio, as retailers continue to be attracted to TRG's dominant and highly productive locations. Recent department store conversions include Macy's at both Biltmore Fashion Park and Paseo Nuevo, and Lord & Taylor at both Lakeforest and Fair Oaks. Also, Bloomingdale's at Beverly Center opened in March of 1997. When these projects are completed, 13 of TRG's 21 properties will have benefited from expansions or anchor conversions since 1995.
Acquisitions - ------------
In 1996, TRG completed three acquisitions totaling over $150 million. TRG has completed approximately $400 million of acquisitions in the four years since TCO has been public.
In December 1996, TRG acquired La Cumbre Plaza (La Cumbre), a regional shopping center located 3.5 miles north of downtown Santa Barbara, California. The 478,000 square foot open-air Center is anchored by Robinsons-May and Sears. In June 1996, TRG acquired Paseo Nuevo, a regional shopping center located in downtown Santa Barbara. The 438,000 square foot open-air Center is anchored by Macy's and Nordstrom. Together, La Cumbre and Paseo Nuevo dominate an affluent market that stretches 60 miles along the California coastline.
Additionally, in July 1996, TRG completed transactions that resulted in the acquisition of the 75% interest in Fairlane Town Center previously held by a Joint Venture Partner. In connection with the transaction, TRG issued units of partnership interest to the former Joint Venture Partner.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Acquisitions and Disposition" and Note 3 to the Consolidated Financial Statements of TRG for further discussion of these acquisitions.
TRG believes it will have additional opportunities to acquire regional shopping centers, or interests therein, and will have certain advantages in doing so.
o First, the management expertise of the Manager will enhance the leasing and operation of newly acquired regional shopping centers. If opportunities exist to expand, remodel, or re-merchandise the center through new leasing, the Manager's expertise will assist TRG in making an informed and timely evaluation of the economic consequences of such activities prior to acquisition, as well as facilitate implementation of such activities.
o Second, a center can be acquired for any combination of cash or equity interests in TRG or (subject to certain limitations) TCO, possibly creating the opportunity for tax-advantaged transactions for the seller, thereby reducing the price that might otherwise have to be paid in an all cash transaction or making an opportunity available that would not otherwise exist. TRG is able to offer partnership interests in itself in exchange for shopping center interests, allowing sellers to diversify their interests, attain liquidity not otherwise available, possibly defer taxes that might otherwise be due if the interests were instead sold for cash, maintain an investment in the regional shopping center business, and resolve concerns sellers otherwise may have regarding future management of their properties. For instance, Biltmore Fashion Park's selling group included private investors who found it tax efficient to accept TRG partnership units as part of the consideration when TRG acquired the Center in 1994.
Development of New Centers - --------------------------
TRG believes that it has attractive development opportunities and intends to continue to pursue an active program of regional shopping center development. TRG believes that it has the expertise, through the Manager, to develop economically attractive regional shopping centers through intensive analysis of local retail opportunities, and that its expertise in this regard is more important than macroeconomic conditions in determining the scope and number of opportunities available to it.
Development of new Taubman Shopping Centers is expected to be an important source of growth in revenues and operating income before interest, depreciation and amortization. In 1996, two projects moved forward from the pre-development phase. Construction began on Arizona Mills in Tempe, Arizona (20 miles southwest of downtown Phoenix) with the August 1996 groundbreaking. Arizona Mills, a 1.2 million square foot value-oriented mall, will open in November 1997. The project is a joint venture in which TRG has a 37% interest. In January 1996, groundbreaking ceremonies were held for MacArthur Center, a new center being developed by TRG in Norfolk, Virginia, which is expected to total 1.1 million square feet. The three-level center, scheduled to open in the spring of 1999, will initially be anchored by Nordstrom and Virginia's first Dillard's Department Store. The project is a joint venture in which TRG has a 70% interest. Construction also continued on The Mall at Tuttle Crossing (northwest Columbus, Ohio), which will open in July 1997. Sears, JCPenney, Lazarus and Marshall Field's will anchor this new 980,000 square foot center.
TRG's policies with respect to development activities are designed to limit the risks otherwise associated with development. For instance, TRG entered into an agreement to lease Memorial City Mall, a center adjacent to one of the most affluent residential areas in Houston, Texas, while TRG investigates the redevelopment opportunities of the center (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Capital Spending" for further discussion of the transaction). Also, TRG generally does not intend to acquire land early in the development process, but will instead generally acquire options on land or form partnerships with landholders holding potentially attractive development sites, typically exercising options only once it is prepared to begin construction. In addition, TRG does not intend to begin construction until a sufficient number of anchor stores have agreed to operate in the shopping center, such that TRG is confident that the projected sales and rents from Mall GLA are sufficient to earn a return on invested capital in excess of TRG's cost of capital. Having historically followed these two principles, TRG's experience indicates that less than 20% of the costs of the development of a regional shopping center will be incurred prior to the construction period; however, no assurance can be given that TRG will continue to be able to so minimize pre-construction costs.
While TRG anticipates that it will continue to evaluate development projects using criteria, including financial criteria for rates of return, similar to those employed in the past, no assurances can be given that the adherence to these policies will produce comparable results in the future. In addition, the costs of shopping center development opportunities that are explored but ultimately abandoned will, to some extent, diminish the overall return on development projects.
Major Tenants
The combined operations of The Limited, Inc. accounted for approximately 11% of leased Mall GLA as of December 31, 1996 and for approximately 10% of the 1996 base rent. The largest of these, in terms of square footage and rent, is The Limited, which accounted for approximately 2.5% of leased Mall GLA and 1996 base rent. No other single retail company accounted for more than 4% of leased Mall GLA or more than 5% of the 1996 base rent.
Lease Expirations
The following table shows lease expirations (based on information available as of December 31, 1996) for the next ten years for the Taubman Shopping Centers in operation at that date:
TRG believes that the information in the table is not indicative of what will occur in the future because of several factors, but principally because TRG's leasing policies and practices create a significant level of early lease terminations at the Taubman Shopping Centers. For example, the average remaining term of the leases that were terminated during the period 1991 to 1996 was approximately 1.9 years. The average term of leases signed during 1995 and 1996 was approximately 7.4 years.
In addition, mall tenants at Taubman Shopping Centers may seek the protection of the bankruptcy laws, which could result in the termination of such tenants' leases and thus cause a reduction in the cash flow generated by the Taubman Shopping Centers. Prior to 1992, such bankruptcies had not affected more than 3% of leases in the Taubman Shopping Centers in any one calendar year. In 1996, approximately 2.8% of leases were so affected compared to 3.2% in 1995, 3.1% in 1994, 4.0% in 1993 and 4.5% in 1992. Since 1991, the annual provision for losses on accounts receivable has been less than 2% of TRG's annual revenues.
Occupancy
Average Mall GLA occupancy rates of the Taubman Shopping Centers for the last five years are as follows:
Year Average Mall GLA Occupancy ---- -------------------------- 1992 88.1% 1993 86.5% 1994 86.6% 1995 88.0% 1996 87.4%
Historically, average annual occupancy for TRG as a whole has been within a narrow band. In the last ten years, average annual occupancy has ranged between 86.5% and 88.8%.
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. In a period of increasing sales, rents on new leases will tend to rise as tenants' expectations of future growth become more optimistic. In periods of declining sales, rents on new leases will grow more slowly or will decline for the opposite reason. However, Center revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases negotiated at current rental rates that are usually higher than the average rates for existing leases. The following table contains certain information regarding per square foot base rent, excluding renewals, at Taubman Shopping Centers that have been owned and open for five years.
Store Store Difference All Closings Openings Between Mall During During Opening and Tenants Year Year Closing Rents -------- ----------- ----------- ------------ Average Average Average Average Base Annualized Annualized Annualized Rent Base Rent Base Rent Base Rent -------- ----------- ----------- ------------ 1992 (1)................... $30.61 $27.91 $38.16 $10.25 1993 (1)................... $32.64 $29.56 $35.86 $ 6.30 1994 (2)................... $34.72 $30.46 $41.02 $10.56 1995 (3)................... $36.33 $32.96 $41.27 $ 8.31 1996 (3)................... $37.90 $33.39 $42.39 $ 9.00
(1) Includes 16 centers owned and open prior to January 1, 1989. (2) Includes 17 centers owned and open prior to January 1, 1990. (3) Includes 18 centers owned and open prior to January 1, 1991.
TRG anticipates that the spread between opening and closing rents will narrow in 1997. This statistic is difficult to predict in part because TRG's leasing policies and practices may result in early lease terminations with actual average closing rents which may vary from the average rent per square foot of scheduled lease expirations. In addition, the opening or closing of large tenant spaces, which generally pay a lower rent per square foot, can significantly change the spread in a given year. The spread between opening and closing store rents narrowed in 1993, principally due to the timing of openings and closings of certain large tenants.
Anchors
The following table summarizes certain information regarding the anchors at the Taubman Shopping Centers.
Number of 1996 GLA Name Anchor Stores (Thousands) % of GLA ---- ------------- ----------- -------- Sears 13(1) 2,788 12.0%
Federated Macy's 11 1,926 Lazarus 1(1) 480 Bloomingdale's 2 379 --- ----- Total 14 2,785 12.0%
JCPenney 13(1) 2,423 10.5%
May Company Lord & Taylor 8 1,016 Hecht's 3 525 Filene's 2 379 Filene's Men's Store/ Furniture Gallery 1 80 Foley's 1 178 Robinsons-May 1 150 --- ----- Total 16 2,328 10.0%
Dayton Hudson Hudson's 5 1,040 Marshall Field's 2(1) 508 --- ----- Total 7 1,548 6.7%
Nordstrom 4(1) 702 3.0%
Saks 5 450 1.9%
Jacobson's 2 221 1.0%
Neiman Marcus 2 216 0.9%
Crowley's 1 115 0.5% --- ------ ----
Total 77 13,576 58.6% === ====== ====
- ------------------------
(1) One or more additional stores will be added in connection with an expansion or development of a new Center. See "Business -- Business of TRG -- Potential for Growth -- Expansions of the Taubman Shopping Centers" and " -- Development of New Centers."
Although during the past eight years department store companies owning 18 anchors at 11 Centers have filed for bankruptcy, none of the anchors at Taubman Shopping Centers are now owned by companies in bankruptcy. Of those 18 anchors, 12 are now owned and operated by Federated Department Stores, Inc. ("Federated"). Federated closed the Emporium at Hilltop in 1996. TRG is considering alternate uses of the anchor space. Two other anchor stores formerly owned by Woodward & Lothrop Incorporated were acquired by the May Department Stores Company ("May Company"). After remodeling, these stores, which closed in November 1995, reopened in 1996 as Lord & Taylor stores (an existing Lord & Taylor store at one of these Centers has closed, and May Company and TRG are considering various options for the store). The former sites of two other anchors, B. Altman and Bonwit Teller, are part of the completed expansion of The Mall at Short Hills, which added approximately 100,000 square feet of Mall GLA and three anchors: Nordstrom; Neiman Marcus; and Saks Fifth Avenue. The former site of another anchor (Sage-Allen at Westfarms) opened as a Filene's Men's Store/Furniture Gallery in 1995.
Environmental Matters
All of the Taubman Shopping Centers presently owned by TRG (not including option interests in the Development Projects or any of the real estate managed by the Manager but not included in TRG's portfolio) have been subject to environmental assessments. TRG and the Manager are not aware of any environmental liability relating to the Taubman Shopping Centers or any other property in which they have or had an interest (whether as an owner or operator) that TRG believes would have a material adverse effect on TRG's business, assets, or results of operations. No assurances can be given, however, that all environmental liabilities have been identified or that no prior owner, operator, or current occupant has created an environmental condition not known to TRG or the Manager. Moreover, no assurances can be given that (i) future laws, ordinances, or regulations will not impose any material environmental liability or that (ii) the current environmental condition of the Taubman Shopping Centers will not be affected by tenants and occupants of the Taubman Shopping Centers, by the condition of properties in the vicinity of the Taubman Shopping Centers (such as the presence of underground storage tanks), or by third parties unrelated to TRG or the Manager.
With respect to the matters described below, while there can be no assurances, TRG believes that such matters will not have a material adverse effect on TRG's business, assets, or results of operations.
Hilltop is located in a region in Richmond, California that has been used extensively to store various petroleum products. Three petroleum storage tanks were previously located on Hilltop's site. In connection with the construction of Hilltop, numerous borings and drillings were conducted, and no evidence of petroleum discharges was identified. In addition, extensive grading and excavation were performed during such construction, and no material residual contamination from the storage tanks was noted. TRG is not aware of any environmental liability associated with the storage tanks that were formerly located on the Hilltop site.
Beverly Center is located over an oil field and several abandoned oil wells, and is adjacent to an active oil production facility that operates numerous oil and gas wells. In the Los Angeles basin, where Beverly Center is located, pockets of methane gas may be found in oil fields; however, elevated levels of methane have not been detected at Beverly Center.
Cherry Creek is situated on land that was used as a landfill prior to 1950. Because of the past use of the site as a landfill, the site is listed on the United States Environmental Protection Agency's ("EPA") Comprehensive Environmental Response, Compensation and Liability Information System list. Various soil and groundwater samples have been taken on and near the Cherry Creek site since 1979. In addition, in 1991 and 1992, as part of a review of all former landfill sites in the Denver area, including the Cherry Creek site, the EPA and the Colorado Department of Health completed a series of groundwater, soil, and surface water tests around the border of the Cherry Creek property. Although a single sample taken in 1988 found elevated levels of cadmium in the groundwater at Cherry Creek, and groundwater samples taken in connection with a former gasoline station on the property indicate elevated levels of benzene, no other samples taken have indicated any levels of contamination that exceeded applicable environmental standards. In addition, the results of the samples taken by the EPA and the Colorado Department of Health indicate no evidence of contamination.
Paseo Nuevo is located in an area of known groundwater contamination by tetrachloroethylene ("PCE"). The groundwater under and around the site has been monitored for six years before, during, and after construction of the center. No on-site sources of PCE were identified during construction. The Regional Water Quality Control Board has given approval to discontinue the monitoring program, because the PCE levels remained relatively constant over the six-year period and do not exceed the state standard for PCE in drinking water.
There are asbestos containing materials ("ACMs") at most of the Taubman Shopping Centers, primarily in the form of floor tiles, roof coatings and mastics. The floor tiles, roof coatings and mastics are generally in good condition. Fire-proofing material containing asbestos is present at some of the Taubman Shopping Centers in limited concentrations or in limited areas. The Manager has developed and is implementing an operations and maintenance program that details operating procedures with respect to ACMs prior to any renovation and that requires periodic inspection for any change in condition of existing ACMs.
Personnel
TRG has engaged the Manager to provide all real estate management, acquisition, development, and administrative services required by (or of) TRG or any of its properties.
As of December 31, 1996, the Manager had 410 full-time employees. The following table provides a breakdown of employees by operational areas as of December 31, 1996:
Number Of Employees -------------------
Property Management............... 173 Leasing........................... 63 Development....................... 40 Financial Services................ 72 Other ............................ 62 ---- Total....................... 410 ====
The Manager considers its relations with its employees to be good.
Item 2.

Item 2. PROPERTIES
Taubman Shopping Centers
Ownership
The following table sets forth certain information about each of the Taubman Shopping Centers. The table is in alphabetical order. The Joint Venture partners have ongoing rights with regard to the disposition of TRG's interest in the Joint Ventures, as well as the approval of major matters.
Mortgage Debt
The following table sets forth certain information regarding the mortgages encumbering the Taubman Shopping Centers as of December 31, 1996. All mortgage debt in the table below is nonrecourse to TRG. Biltmore, Hilltop and Stoneridge are also encumbered by assessment bonds totaling approximately $5.5 million, which are not included in the table.
For additional information regarding the Taubman Shopping Centers and their operation, see the responses to Item 1 of this report.
Item 3.

Item 3. LEGAL PROCEEDINGS
Neither TRG, the Consolidated Businesses, nor any of the Joint Ventures is presently involved in any material litigation nor, to TRG's knowledge, is any material litigation threatened against TRG or any of their properties. Except for routine litigation involving present or former tenants of Taubman Shopping Centers (generally eviction or collection proceedings), substantially all litigation is covered by TRG's and the Joint Ventures' liability insurance.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None
Item 6.

Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for TRG and should be read in conjunction with the financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report.
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
The following discussion should be read in conjunction with Selected Financial Data and the Consolidated Financial Statements of The Taubman Realty Group Limited Partnership (TRG) and the Notes thereto.
General Background and Performance Measurement
The Taubman Realty Group Limited Partnership (TRG) is an operating partnership that engages in the full range of activities of the regional shopping center business. These activities include the ownership, operation, management, leasing, expansion, acquisition, development, redevelopment, financing, and refinancing of regional shopping centers. TRG's Managed Businesses include: (i) wholly owned Taubman Shopping Centers, development projects for future regional shopping centers (Development Projects) and The Taubman Company Limited Partnership (the Manager), (collectively, the Consolidated Businesses); and (ii) Taubman Shopping Centers partially owned through joint ventures (Joint Ventures).
TRG consolidates the wholly owned Taubman Shopping Centers, the Development Projects, and the Manager. The Joint Ventures are accounted for under the equity method in TRG's Consolidated Financial Statements.
Certain aspects of the performance of the Managed Businesses are best understood by measuring their performance as a whole, without regard to TRG's ownership interest. For example, mall tenant sales and shopping center occupancy trends fit this category and are so analyzed below. In addition, trends in certain items of revenue and expense are often best understood in the same fashion, and the discussions following take this approach when appropriate. When relevant, these items are also discussed separately with regard to the Consolidated Businesses and the Joint Ventures.
Mall Tenant Sales and Center Revenues
Over the long term, the level of mall tenant sales is the single most important determinant of revenues of the Taubman Shopping Centers because mall tenants provide over 90% of these revenues and because mall tenant sales determine the amount of rent, percentage rent, and recoverable expenses (together, total occupancy costs) that mall tenants can afford to pay. However, levels of mall tenant sales can be considerably more volatile in the short run than total occupancy costs.
TRG believes that the ability of tenants to pay occupancy costs and earn profits over long periods of time increases as sales per square foot increase, whether through inflation or real growth in customer spending. Because most mall tenants have certain fixed expenses, the occupancy costs that they can afford to pay and still be profitable are a higher percentage of sales at higher sales per square foot.
The following table summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of mall tenant sales.
1994 1995 1996 ---- ---- ---- Mall tenant sales (in thousands) $2,561,555 $2,739,393 $2,827,245 Sales per square foot 335 346 (1) 365
Minimum rents 10.2% 10.4% 10.4% Percentage rents 0.3 0.3 0.3 Expense recoveries 4.3 4.4 4.5 ---- ---- ---- Mall tenant occupancy costs 14.8% 15.1% 15.2% ==== ==== ====
(1) Sales per square foot was $352, excluding Bellevue Center.
Occupancy
Historically, average annual occupancy for TRG as a whole has been within a narrow band. In the last ten years, average annual occupancy has ranged between 86.5% and 88.8%.
Rental Rates
As leases have expired in the Taubman Shopping Centers, TRG has generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. In a period of increasing sales, rents on new leases will tend to rise as tenants' expectations of future growth become more optimistic. In periods of slower growth or declining sales, rents on new leases will grow more slowly or will decline for the opposite reason. However, Center revenues nevertheless increase as older leases roll over or are terminated early and replaced with new leases negotiated at current rental rates that are usually higher than the average rates for existing leases. The following table contains certain information regarding per square foot base rent, excluding renewals, at Taubman Shopping Centers that have been owned and open for five years.
Store Store Difference All Closings Openings Between Mall During During Opening and Tenants Year Year Closing Rents -------- ----------- ----------- ------------ Average Average Average Average Base Annualized Annualized Annualized Rent Base Rent Base Rent Base Rent -------- ----------- ----------- ------------ 1994 (1) $34.72 $30.46 $41.02 $10.56 1995 (2) $36.33 $32.96 $41.27 $ 8.31 1996 (2) $37.90 $33.39 $42.39 $ 9.00
(1) Includes 17 centers owned and open prior to January 1, 1990. (2) Includes 18 centers owned and open prior to January 1, 1991.
TRG anticipates that the spread between opening and closing rents will narrow in 1997. This statistic is difficult to predict in part because TRG's leasing policies and practices may result in early lease terminations with actual average closing rents which may vary from the average rent per square foot of scheduled lease expirations. In addition, the opening or closing of large tenant spaces, which generally pay a lower rent per square foot, can significantly change the spread in a given year.
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant sales highest in the fourth quarter due to the Christmas season, and with lesser, though still significant, sales fluctuations associated with the Easter holiday and back-to-school events. While minimum rents and recoveries are generally not subject to seasonal factors, most leases are scheduled to expire in the first quarter, and the majority of new stores open in the second half of the year in anticipation of the Christmas selling season. Accordingly, revenues and occupancy levels are generally highest in the fourth quarter.
The following table summarizes certain quarterly operating data for TRG's Managed Businesses for 1996:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total 1996 1996 1996 1996 1996 -------------------------------------------------- (in thousands) Mall tenant sales $591,677 $617,821 $627,791 $989,956 $2,827,245 Revenues 129,764 128,497 129,730 138,250 526,241
Occupancy Average occupancy 87.8% 87.3% 86.8% 87.6% 87.4% Ending occupancy 87.7% 87.3% 86.8% 88.0% 88.0% Leased space 89.5% 88.2% 87.6% 89.0% 89.0%
Because the seasonality of sales contrasts with the generally fixed nature of minimum rents and recoveries, mall tenant occupancy costs (the sum of minimum rents, percentage rents and expense recoveries) relative to sales are considerably higher in the first three quarters than they are in the fourth quarter. The following table summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of sales for each quarter of 1996:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total 1996 1996 1996 1996 1996 -------------------------------------------------- Minimum rents 12.3% 11.7% 11.7% 7.6% 10.4% Percentage rents 0.3 0.3 0.3 0.3 0.3 Expense recoveries 5.6 5.0 4.6 3.5 4.5 ---- ---- ---- ---- ---- Mall tenant occupancy costs 18.2% 17.0% 16.6% 11.4% 15.2% ==== ==== ==== ==== ====
Results of Operations
Equity Transactions
In December 1996, TRG issued 3,048 units of partnership interest to its managing general partner, Taubman Centers, Inc. (TCO), for the $75 million proceeds from TCO's December 1996 offering of 5.97 million shares of common stock. TRG bore all expenses of TCO's offering which have been accounted for as a reduction of the proceeds from TRG's issuance of units. TRG used the net proceeds to pay down short term floating rate debt and to acquire La Cumbre Plaza (see below). Also in December 1996, TCO exchanged common shares for TRG units of partnership interest newly issued under TRG's incentive option plan. Additionally in 1996, TRG issued 3,096 units of partnership interest in connection with the acquisition of the remaining interest in Fairlane Town Center (see below). As a result of these transactions, at December 31, 1996 TRG had 69,998 units of partnership interest outstanding.
Acquisitions and Disposition
The following discussion of TRG's acquisitions contains forward-looking statements regarding the impact of these acquisitions on EBITDA (EBITDA is defined and described in Liquidity and Capital Resources -- Distributions). The actual impact may vary based on a variety of factors, including actual occupancy, rents achieved and operating expenses of the Centers. See Note 3 to TRG's consolidated financial statements for further discussion of the acquisitions.
Acquisition of La Cumbre Plaza - ------------------------------
In December 1996, TRG acquired a 100% leasehold interest in La Cumbre Plaza (La Cumbre) located in Santa Barbara, California for $22.25 million in cash. The acquisition was funded with proceeds from an issuance of TRG units of partnership interest (see Equity Transactions above). The operating results of La Cumbre have been consolidated in TRG's financial statements from the acquisition date. The acquisition had an immaterial effect on net income in 1996. The acquisition is expected to add EBITDA in excess of $2.8 million in 1997.
Acquisition of Remaining Interest in Fairlane Town Center - ---------------------------------------------------------
In July 1996, TRG completed transactions that resulted in the acquisition of the 75% interest in Fairlane Town Center (Fairlane) previously held by a Joint Venture Partner. In connection with the transaction, TRG issued to the former Joint Venture Partner 3,096 units of partnership interest, exchangeable for approximately 6.1 million shares of TCO's common stock, which had a closing price of $10.75 per share on the day prior to the issuance date. TRG also assumed mortgage debt of approximately $26 million, representing the former Joint Venture Partner's beneficial interest in the $34.6 million mortgage encumbering the property. TRG used unsecured debt to fund the repayment of the 9.73% mortgage and the prepayment penalty of approximately $1.2 million. The operating results of Fairlane have been consolidated in TRG's financial statements from the acquisition date. Prior to the acquisition date, TRG's interest in Fairlane was accounted for under the equity method as a Joint Venture. The acquisition is expected to incrementally add approximately $11 million to EBITDA over the twelve months following the purchase date.
Acquisition of Paseo Nuevo - --------------------------
In June 1996, TRG acquired a 100% leasehold interest in Paseo Nuevo, located in Santa Barbara, California, for $37 million in cash. TRG borrowed under its existing lines of credit to fund the acquisition. The operating results of Paseo Nuevo have been consolidated in TRG's financial statements from the acquisition date. The acquisition had an immaterial effect on net income in 1996. The acquisition is expected to produce EBITDA of over $3.7 million in its first twelve months following the purchase date.
Disposition of Bellevue Center - ------------------------------
In December 1995, the bank group holding the $99.5 million nonrecourse mortgage encumbering Bellevue Center acquired title to the Center through a nonjudicial foreclosure sale. The mortgage matured on November 1, 1995. TRG ceased to recognize the results of Bellevue Associates (Bellevue), TRG's 60% owned Joint Venture that owned the Center, as of November 1, 1995. TRG's share of Bellevue's net loss from operations for 1994 and the ten months ended October 31, 1995, was $1.1 million and $0.7 million, respectively.
In 1995, TRG recognized an extraordinary gain of $18.9 million on the extinguishment of debt and an ordinary gain of $5.0 million on the disposition of the Center, which was based on the carrying value of TRG's investment in Bellevue.
Bellevue's operations, which included the effect of the below current market mortgage interest rate of 5.91%, contributed in 1994 and the ten months ended October 31, 1995, $1.4 million and $1.1 million, respectively, to Distributable Cash Flow (Distributable Cash Flow is defined and discussed in Liquidity and Capital Resources -- Distributions).
Memorial City Mall Lease
In November 1996, TRG entered into an agreement to lease Memorial City Mall (Memorial City), a 1.4 million square foot shopping center located in Houston, Texas. The lease of this unencumbered property grants TRG the exclusive right to manage, lease and operate the property. TRG has the option to terminate the lease after the third full lease year by paying $2 million to the lessor. TRG will use this option period to evaluate the redevelopment opportunities of the Center. As a development project, Memorial City has been excluded from all operating statistics in this report, and Memorial City's results of operations have been presented as a net line item in the following tabular comparison of TRG's 1996 results of operations to the prior year. Memorial City is expected to have an immaterial effect on EBITDA and net income during the option period.
Comparison of Fiscal Year 1996 to Fiscal Year 1995
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 87.4% in 1996 versus 88.0% in 1995. Ending occupancy for the Taubman Shopping Centers at December 31, 1996 was 88.0% versus 89.4% at December 31, 1995. Leased space at December 31, 1996 was 89.0% compared to 90.6% at the same date in 1995. Average occupancy for 1996 was somewhat less than the previous year's level but comfortably within TRG's historic range of average annual occupancy. TRG expects that it will not achieve year over year increases in average occupancy before the fourth quarter of 1997.
Total sales for Taubman Shopping Center mall tenants increased in 1996 by 3.2% to $2.83 billion from $2.74 billion in 1995. Tenant sales per square foot increased by 5.2% to $365 in 1996 from $346 in 1995. Sales per square foot in 1995 was $352, excluding Bellevue. Mall tenant sales for Centers that were owned and open for all of 1996 and 1995 (which excludes Paseo Nuevo and Bellevue) were $2.81 billion, a 3.9% increase over 1995. Sales statistics for the fourth quarter of 1996 were negatively affected by new competition near certain Centers. TRG expects that the effect of the competition on sales will moderate after the anniversary date of the opening of the competing centers.
Occupancy and mall tenant sales statistics for 1996, other than ending occupancy and leased space, do not include La Cumbre.
Comparison of Fiscal Year 1996 to Fiscal Year 1995
The following table sets forth operating results for TRG's Managed Businesses for 1995 and 1996, showing the results of the Consolidated Businesses and Joint Ventures:
TRG --Consolidated Businesses
Total revenues for 1996 were $260.9 million, a $32.0 million or 14.0% increase from 1995. Minimum rents for 1996 increased $18.8 million, of which $8.7 million was caused by the Fairlane and Paseo Nuevo acquisitions. The results of Fairlane have been consolidated in TRG's results subsequent to the acquisition date (prior to that date Fairlane was accounted for under the equity method as a Joint Venture). Minimum rent also increased due to the expansions at Short Hills and Meadowood and tenant rollovers. The increase in expense recoveries was also primarily due to the Fairlane and Paseo Nuevo acquisitions and recoveries of increased maintenance costs and property taxes. The increase in other revenues of $3.0 million was primarily due to increases in revenue from management, leasing, and development services, rental fees on exterior advertising signs and gains on sales of peripheral land, partially offset by a decrease in lease cancellation revenue.
Total operating costs increased $22.1 million, or 10.7%, to $229.2 million. The increase in recoverable expenses for 1996 was due to Fairlane and Paseo Nuevo and to increases in maintenance costs and property taxes, including those related to the expansion at Short Hills. Other operating expenses increased due to Fairlane and Paseo Nuevo, and an increase in the charge to operations for development pre-construction reserves. General and administrative expenses increased $2.0 million due primarily to increases in compensation, including costs of the new long-term performance compensation plan and the allocation of internal acquisition costs, travel, and professional fees in 1996, offset by a decrease resulting from a $0.8 million charge in 1995 for severance and termination benefits. Interest expense increased $4.7 million due primarily to an increase in debt levels, including debt used to finance the acquisition of Paseo Nuevo and capital expenditures and the assumption of debt relating to the Fairlane acquisition, and a decrease in capitalized interest, partially offset by decreased interest rates. The increase in depreciation and amortization was due primarily to the acquisitions of Fairlane and Paseo Nuevo and the expansions at Short Hills and Meadowood.
Revenues and expenses as presented in the preceding table differ from the amounts shown in TRG's consolidated income statements by the amounts representing Memorial City's revenues and expenses, which are presented in the preceding table as a net amount.
Joint Ventures
Total revenues for 1996 were $265.3 million, a $25.8 million or 8.9% decrease from 1995, primarily representing a $23.8 million decrease caused by the change in Fairlane from a Joint Venture to a Consolidated Business and by the November 1995 disposition of Bellevue. Minimum rent decreases due to Fairlane and Bellevue were offset by increases due to the expansion at Woodfield and tenant rollovers. Expense recoveries decreased primarily due to Fairlane and Bellevue, offset by increases at other Centers. Other income decreased due to a gain on the sale of peripheral land in 1995 and decreased interest income in 1996, offset by an increase in lease cancellation revenue in 1996.
Total operating costs decreased by $12.7 million, or 6.9%, to $171.1 million for 1996, representing a $19.9 million decrease due to Fairlane and Bellevue, offset by increases at other Centers. Recoverable expenses decreased $6.4 million due to Fairlane and Bellevue, offset by increases in maintenance costs and property taxes. Other operating costs increased $0.5 million reflecting increases in property management costs, promotion and advertising costs, bad debt expense and a nonrecurring $0.5 million payment to an anchor at one of the Centers, offset by decreases due to Bellevue and Fairlane. Interest expense decreased $5.1 million due to a decrease in debt related to Fairlane and Bellevue and an increase in capitalized interest, partially offset by increases due to an increase in debt used to finance capital expenditures and to higher interest rates on certain debt refinanced in 1995. Operating costs as presented in the preceding table differ from the amounts shown in the combined, summarized financial statements of the unconsolidated Joint Ventures (Note 4 to TRG's financial statements) by the amount of intercompany profit.
As a result of the foregoing, income before extraordinary items of the Joint Ventures was $94.3 million in 1996, a decrease of 12.1% from 1995. TRG's equity in income before extraordinary items of the Joint Ventures decreased $5.7 million, or 9.8%, to $52.2 million for 1996.
Net Income
As a result of the foregoing, TRG's income before extraordinary items increased by $4.4 million, or 5.5%, to $84.1 million for 1996. In 1996, TRG recognized a $(1.3) million extraordinary charge related to the prepayment of Fairlane's debt. In 1995, TRG recognized an $18.9 million extraordinary gain related to the disposition of Bellevue and $(2.2) million in extraordinary charges related to the prepayment of debt at TRG and at one of its Joint Ventures. Net income for 1996 was $82.8 million, compared to $96.3 million in 1995.
Comparison of Fiscal Year 1995 to Fiscal Year 1994
Occupancy and Mall Tenant Sales
Average occupancy in the Taubman Shopping Centers was 88.0% in 1995 versus 86.6% in 1994. Ending occupancy for the Taubman Shopping Centers at December 31, 1995 was 89.4% versus 89.3% at December 31, 1994. Leased space at December 31, 1995 was 90.6% compared to 90.9% at the same date in 1994.
Occupancy rates increased in part due to a change in the method of calculating occupancy statistics to be consistent with International Council of Shopping Centers guidelines. The change increased reported average occupancy for the year by approximately one percent. The acquisition of Biltmore also contributed to the increases.
Total sales for Taubman Shopping Centers mall tenants increased in 1995 by 6.9% to $2.74 billion from $2.56 billion in 1994. Tenant sales per square foot increased by 3.3% to $346 in 1995 from $335 in 1994. Tenant sales per square foot reached $352 in 1995, excluding Bellevue. Mall tenant sales for Centers that were owned and open for all of 1995 and 1994 (which excludes Bellevue and Biltmore) were $2.61 billion, a 4.0% increase over 1994.
Comparison of Fiscal Year 1995 to Fiscal Year 1994
The following table sets forth operating results for TRG's Managed Businesses for 1994 and 1995, showing the results of the Consolidated Businesses and Joint Ventures:
TRG --Consolidated Businesses - -----------------------------
In December 1994, TRG acquired Biltmore, a regional shopping center located in Phoenix, Arizona, for $81.5 million in cash and 1,540 TRG units of partnership interest (exchangeable for approximately three million shares of TCO's common stock). TRG borrowed $81.5 million to fund the cash portion of the purchase price. The operating results of Biltmore have been consolidated in TRG's financial statements from the acquisition date. The acquisition had an immaterial effect on net income in 1994 and 1995.
Total revenues for 1995 were $228.9 million, a $31.8 million or 16.1% increase from 1994, of which $13.7 million was due to Biltmore. Minimum rents for 1995 increased $19.1 million, of which $7.8 million was due to Biltmore. Additionally, minimum rents increased because of tenant rollovers and the expansion at Short Hills. The increase in percentage rent was due primarily to Biltmore. The increase in expense recoveries was caused by higher recoverable expenses and Biltmore. Other income increased primarily due to lease cancellation income, interest income, and insurance recoveries.
Total operating costs increased by $30.9 million or 17.5%, to $207.1 million for 1995, of which $4.7 million was due to Biltmore's operating expenses, excluding interest and depreciation and amortization. The $4.5 million increase in recoverable expenses for 1995 was primarily due to Biltmore and increases in property taxes and maintenance costs. General and administrative expenses increased by $1.9 million, primarily due to a $0.8 million charge for severance and termination benefits and increases in professional fees and office rent. Interest expense for 1995 increased by $18.1 million primarily due to an increase in debt levels, including debt used to finance the acquisition of Biltmore and capital expenditures, and to increases in interest rates. Depreciation and amortization also increased, primarily due to the acquisition of Biltmore and the expansion at Short Hills.
Joint Ventures - --------------
Total revenues for 1995 were $291.1 million, a $22.3 million or 8.3% increase from 1994, of which $8.3 million was due to a gain on the disposition of Bellevue. The increase in minimum rents was caused by tenant rollovers and the expansions at Woodfield and Cherry Creek, offset by an approximately $1.4 million decrease due to Bellevue. The increase in expense recoveries was due to the increase in recoverable expenses. Other income increased primarily due to lease cancellation income and interest income. The $8.3 million gain related to the disposition of Bellevue represents the difference between the fair value and the carrying value of the Center (net of accumulated intercompany profit). As a result, this amount differs from the amount included in revenues in the combined, summarized financial statements of the unconsolidated Joint Ventures (Note 4 to TRG's financial statements).
Total operating costs increased by $8.9 million, or 5.1%, to $183.8 million for 1995. Recoverable expenses increased $4.7 million, primarily due to increases in property taxes and maintenance costs. Interest expense increased $6.3 million, primarily due to increased debt levels and interest rates. Operating costs as presented in the preceding table differ from the amounts shown in the combined, summarized financial statements of the unconsolidated Joint Ventures (Note 4 to TRG's financial statements) by the amount of intercompany profit.
As a result of the foregoing, income before extraordinary items of the Joint Ventures was $107.3 million in 1995, an increase of 14.3% from 1994. TRG's equity in income before extraordinary items of the Joint Ventures was $57.9 million in 1995, an increase of 12.9% from 1994.
Net Income - ----------
As a result of the foregoing, TRG's income before extraordinary items for 1995 increased by $7.5 million, or 10.4%, to $79.7 million. In 1995, TRG recognized an $18.9 million extraordinary gain related to the extinguishment of debt at Bellevue and $(2.2) million in extraordinary charges related to the prepayment of debt at TRG and at one of its Joint Ventures. TRG also recognized $(44.7) million in extraordinary charges in 1994, consisting primarily of prepayment penalties, related to the extinguishment of debt. Net income in 1995 was $96.3 million, compared to $27.5 million in 1994.
Liquidity and Capital Resources
As of December 31, 1996, TRG had a cash balance of $7.9 million. TRG had available for general partnership purposes an unsecured revolving credit facility of $200 million, which was scheduled to expire in May 1998. In March 1997, TRG completed the renegotiation of terms increasing the facility to $300 million, reducing the current contractual interest rate by 60 basis points to LIBOR plus 90 basis points and extending the maturity until March 2000. Included in the credit facility is a competitive bid option program which allows TRG to hold auctions, among the banks participating in the facility, for short term borrowings of up to $150 million. There were no borrowings under this facility at December 31, 1996. TRG also has available an unsecured bank line of credit of up to $30 million with borrowings of $10.1 million at December 31, 1996. This line expires in August 1998. TRG also has available a secured commercial paper facility of up to $75 million, with borrowings of $45 million at December 31, 1996. Commercial paper is generally sold with a 30 day maturity. This facility is supported by a line of credit facility, which is renewable quarterly for a twelve month period.
Proceeds from short term borrowings of $121.2 million provided funding for 1996 compared to $67.7 million in 1995. The proceeds in 1996 were used primarily for the $37 million acquisition in June 1996 of Paseo Nuevo and the $65.6 million acquisition in July 1996 of the 75% interest in Fairlane previously held by TRG's Joint Venture Partner, and related acquisition costs. Proceeds of $65.6 million from the issuance of TRG units of partnership interest to the former Joint Venture Partner were used to repay short term borrowings. Also during 1996, proceeds of $81.4 million from the issuance of TRG units of partnership interest were used to pay down short term floating rate debt and for the $22.3 million acquisition of La Cumbre (see Results of Operations - Equity Transactions and Acquisitions and Disposition).
During 1996, TRG issued $154 million of unsecured notes under its medium-term note program compared to $133.4 million in 1995. In 1996, the notes were used to pay down TRG's floating rate bank lines as well as to pay off the $34.6 million mortgage on Fairlane and the related prepayment penalty of approximately $1.2 million, leaving the wholly owned property unencumbered. In 1995, the notes were used to pay down floating rate debt under TRG's revolving credit facilities as well as to pay off the $22.6 million mortgage securing a wholly owned Center. TRG has issued a total of $287 million of medium-term notes since the program's inception in 1995 under TRG's $500 million shelf registration statement.
Scheduled principal payments on installment notes were $793 thousand and $897 thousand in 1996 and 1995, respectively.
At December 31, 1996, TRG's debt and its beneficial interest in the debt of its Joint Ventures (excluding $42.3 million of capital lease obligations) totaled $1,398.4 million. As shown in the following table, there was no unhedged floating rate debt at December 31, 1996. Interest rates shown do not include amortization of debt issuance costs and interest rate hedging costs. These items are reported as interest expense in TRG's results of operations. In the aggregate, these costs accounted for 0.37% of the effective rate of interest on TRG's beneficial interest in debt at December 31, 1996. Included in TRG's beneficial interest in debt at December 31, 1996 is debt used to fund development and expansion costs. TRG's beneficial interest in assets on which interest is being capitalized totaled $157.0 million as of December 31, 1996. TRG's beneficial interest in capitalized interest was $8.9 million for 1996.
Beneficial Interest in Debt ------------------------------------------------ Amount Interest LIBOR Frequency LIBOR (In millions Rate at Cap of Rate at of dollars) 12/31/96 Rate Resets 12/31/96 ---------- -------- ---- ------ ---------
Total beneficial interest in fixed rate debt 1,113.2(1) 7.55%(2) Floating rate debt hedged via interest rate caps: Through July 1997 31.6(3) 6.77 (2) 9.60% Monthly 5.53% Through January 1998 100.0 6.17 (2) 6.50 Monthly 5.53 Through January 1998 65.0 6.31 6.50 Monthly 5.53 Through July 1998 24.3 6.17 (2) 8.35 Monthly 5.53 Through October 1998 39.3 6.06 6.00 Three Months 5.56 Through October 2001 25.0 6.06 8.55 Monthly 5.53 ------- Total beneficial interest in debt 1,398.4 7.29 (2) =======
(1) Includes TRG's $100 million floating rate notes due in November 1997, which were swapped to a fixed rate of 6.15% until maturity. The interest rate on the refinancing of this debt is hedged via an interest rate cap for the period November 1997 to December 1998 at a three month LIBOR cap rate of 6.5%. (2) Denotes weighted average interest rate. (3) This debt is additionally hedged via an interest rate cap for the period July 1997 through July 2002 at a one month LIBOR cap rate of 9.95%.
TRG's loan agreements and indenture contain various restrictive covenants including limitations on the amount of secured and unsecured debt and minimum debt service coverage ratios, the latter being the most restrictive. TRG is in compliance with all of such covenants.
In January 1997, Arizona Mills, L.L.C. closed on a secured $145 million construction facility maturing in 2002. The loan bears interest at one month LIBOR plus 1.3%. The loan is hedged until maturity at a one month LIBOR cap rate of 9.5%. The payment of the principal and interest is recourse to each of the owners of Arizona Mills, L.L.C. to the extent of their ownership percentage. TRG owns a 37% interest in Arizona Mills, L.L.C.
Distributions
A principal factor considered by TRG in deciding upon distributions to partners is an amount, which TRG defines as Distributable Cash Flow, equal to EBITDA less TRG's Beneficial Interest Expense and non-real estate depreciation and amortization. This measure of performance is influenced not only by operations but also by capital structure. EBITDA is defined as TRG's beneficial interest in revenues, less operating costs before interest, depreciation and amortization, meaning TRG's pro rata share of this result for each of the Managed Businesses, after recording appropriate intercompany eliminations. TRG's Beneficial Interest Expense is defined as 100% of the interest expense of TRG's Consolidated Businesses and TRG's pro rata share of the interest expense on the debt of the Joint Ventures. EBITDA and Distributable Cash Flow do not represent cash flows from operations, as defined by generally accepted accounting principles, and should not be considered to be an alternative to net income as an indicator of operating performance or to cash flows from operations as a measure of liquidity.
In March 1995, the National Association of Real Estate Investment Trusts (NAREIT) issued a clarification of the definition of Funds from Operations. Because Distributable Cash Flow is intended to be equivalent to Funds from Operations, beginning in 1996, TRG modified its calculation of Distributable Cash Flow to be consistent with NAREIT's clarified definition. As a result, TRG adjusted the depreciation and amortization amount added back to net income to include only depreciation and amortization of assets uniquely significant to the real estate industry. Distributable Cash Flow for 1995 has been restated in the table below to reflect the clarified definition.
The following table summarizes TRG's Distributable Cash Flow for the years ended December 31, 1995 and 1996:
For 1996, EBITDA and Distributable Cash Flow were $229.8 million and $129.7 million, compared to $216.1 million and $117.8 million, as restated, in 1995. TRG distributed $119.1 million to its partners in 1996, compared to $116.2 million in 1995.
The Partnership Committee of TRG makes an annual determination of appropriate distributions for each year. The determination is based on anticipated Distributable Cash Flow, as well as financing considerations and such other factors as the Partnership Committee considers appropriate. Further, the Partnership Committee has decided that the growth in distributions will be less than the growth in Distributable Cash Flow for the immediate future.
Except under unusual circumstances, TRG's practice is to distribute equal monthly installments of the determined amount of distributions throughout the year. Due to seasonality and the fact that cash available to TRG for distributions may be more or less than net cash provided from operating activities plus distributions from Joint Ventures during the year, TRG may borrow from unused credit facilities (described above) to enable it to distribute the amount decided upon by the TRG Partnership Committee.
Distributions by each Joint Venture may be made only in accordance with the terms of its partnership agreement. TRG acts as the managing partner in each case and, in general, has the right to determine the amount of cash available for distribution from the Joint Venture. In general, the provisions of these agreements require the distribution of all available cash (as defined in each partnership agreement), but most do not allow borrowing to finance distributions without approval of the Joint Venture Partner.
As a result, distribution policies of many Joint Ventures will not parallel those of TRG. While TRG may not, therefore, receive as much in distributions from each Joint Venture as it intends to distribute with respect to that Joint Venture, TRG does not believe this will impede its intended distribution policy because of TRG's overall access to liquid resources, including borrowing capacity.
Any inability of TRG or its Joint Ventures to secure financing as required to fund maturing debts, capital expenditures and changes in working capital, including development activities and expansions, may require the utilization of cash to satisfy such obligations, thereby possibly reducing distributions to partners of TRG.
In addition, if the GM Trusts exercise their rights under the Cash Tender Agreement (see Liquidity and Capital Resources -- Cash Tender Agreement below), TRG will be required to pay the GM Trusts $10.9 million and may borrow to finance such expenditures.
Capital Spending
Capital spending for routine maintenance of the Taubman Shopping Centers is generally recovered from tenants. Capital spending by the Managed Businesses not recovered from tenants is summarized in the following table:
-------------------------------------------- Consolidated Joint TRG's Share of Businesses Ventures(1) Joint Ventures(1) -------------------------------------------- (in millions of dollars)
Development, renovation, and expansion: Existing centers 33.2 41.7 25.4 New centers 15.0 Pre-construction development activities, net of charge to operations 9.8 Mall tenant allowances 3.5 1.9 1.0 Corporate office improvements 1.5 Other 0.3 0.6 0.2 ---- ---- ---- Total 63.3 44.2 26.6 ==== ==== ====
-------------------------------------------- Consolidated Joint TRG's Share of Businesses Ventures(1) Joint Ventures(1) -------------------------------------------- (in millions of dollars)
Development, renovation, and expansion: Existing centers 5.2 40.3 30.5 New centers 6.6 66.7 27.2 Pre-construction development activities, net of charge to operations 4.1 Mall tenant allowances 4.5 5.2 2.5 Corporate office improvements 1.5 Other 2.3 1.4 0.8 ---- ----- ---- Total 24.2 113.6 61.0 ==== ===== ====
(1) Costs are net of intercompany profits
In 1995 and 1996, TRG's share of mall tenant allowances per square foot leased during the year, excluding expansion space and new developments, was $7.72 and $9.96, respectively. In addition, TRG's share of its Consolidated Businesses' and Joint Ventures' capitalized leasing costs, excluding new developments, was $6.7 million, or $10.40 per square foot leased during the year in 1995, and $8.5 million or $10.47 per square foot leased during the year in 1996.
An expansion at Westfarms, which will open in the summer of 1997, will add approximately 135,000 square feet of mall GLA and Nordstrom as an anchor. Approximately 75% of this space has been leased or has leases out for signatures. The expansion is expected to cost approximately $100 million. An expansion at Cherry Creek will include a newly constructed Lord & Taylor store, which will open in the fall of 1997, and the addition of 132,000 square feet of mall GLA, which will open in the fall of 1998. The expansion is expected to cost approximately $50 million. TRG has a 79% and 50% ownership interest in Westfarms and Cherry Creek, respectively.
Additionally, a project is now under construction to add over 30,000 square feet of new mall tenant space in the building vacated when Saks Fifth Avenue moved to the I. Magnin site at Biltmore. The new stores are presently expected to open beginning in the spring of 1997. The project is expected to cost between $5 and $10 million.
The Mall at Tuttle Crossing, a 980,000 square foot Center in northwest Columbus, Ohio, will be anchored by Marshall Field's, Lazarus, JCPenney and Sears. TRG is leasing the land and mall buildings from Tuttle Holding Co., which owns the land on which the Center is being built. TRG will make ninety annual minimum lease payments of $4.4 million beginning when the Center opens in July 1997. Substantially all of each payment in the first ten years of operation will be recognized as interest expense. TRG will also pay additional rent based on achieved levels of net operating income, a measure of operating performance before rent payments, as specified in the agreement (NOI); 100% of the portion of NOI which is over $11.6 million but less than or equal to $14.4 million, 30% of the portion of NOI between $14.4 million and $18.3 million, and 50% of the portion of NOI over $18.3 million. TRG estimates this additional rent, which will be recognized as other operating expense, will approximate $2 million to $3 million annually beginning in 1999. Substantially all of the Center's mall GLA has been leased. The Center is expected to cost approximately $115 million, including capital lease assets of $55 million.
Arizona Mills, an enclosed value super-regional mall in Tempe, Arizona, is opening in November 1997. TRG has a 37% ownership interest in Arizona Mills. The 1.2 million square foot value-oriented mall is expected to cost approximately $180 million.
MacArthur Center, a new Center being developed by TRG in Norfolk, Virginia, is expected to open in the spring of 1999. The Center is expected to total 1.1 million square feet and will initially be anchored by Nordstrom and Dillard's. This Center will be owned by a joint venture in which TRG has a 70% interest and is projected to cost approximately $150 million.
In 1996, TRG entered into an agreement to lease Memorial City Mall, a 1.4 million square foot shopping center located in Houston, Texas. Memorial City is anchored by Sears, Foley's, Montgomery Ward and Mervyn's. TRG has the option to terminate the lease after the third full year by paying $2 million to the lessor. TRG is using this option period to evaluate the redevelopment opportunities of the Center. Under the terms of the lease, TRG has agreed to invest a minimum of $3 million during the three year option period. If the redevelopment proceeds, TRG is required to invest an additional $22 million in property expenditures not recoverable from tenants during the first 10 years of the lease term.
Assuming no acquisitions, planned capital spending by the Managed Businesses not recovered from tenants for 1997 is summarized in the following table:
-------------------------------------------- Consolidated Joint TRG's Share of Businesses Ventures(1) Joint Ventures(1) -------------------------------------------- (in millions of dollars)
Development, renovation, and expansion 61.5 (2) 225.1 (3) 120.3 Mall tenant allowances 5.8 3.7 2.2 Pre-construction development and other 10.7 (4) 1.0 0.6 ---- ----- -----
Total 78.0 229.8 123.1 ==== ===== =====
(1) Costs are net of intercompany profits. (2) Includes costs related to leasehold improvements at The Mall at Tuttle Crossing; excludes capital lease assets (see Note 9 to TRG's consolidated financial statements). (3) Includes costs related to expansion projects at Westfarms and Cherry Creek. Also includes construction costs for MacArthur Center and Arizona Mills. (4) Includes costs to explore the possibilities of building an enclosed 1.7 million square foot value super-regional mall in Auburn Hills, Michigan. Also includes the costs to evaluate the redevelopment of Memorial City and required property expenditures under the terms of the lease.
TRG's share of costs for development and expansion projects scheduled to be completed in 1998 and 1999 is anticipated to be as much as $60 million in 1998 and $19 million in 1999.
TRG's estimates regarding capital expenditures presented above are forward-looking statements and certain significant factors could cause the actual results to differ materially, including but not limited to: 1) actual results of negotiations with anchors, tenants and contractors; 2) changes in the scope of projects; 3) cost overruns; 4) timing of expenditures; and 5) actual time to complete projects.
Capital Resources
TRG believes that its net cash provided by operating activities, together with distributions from the Joint Ventures, the unutilized portion of its credit facilities and its ability to generate cash from the issuance of medium-term notes under TRG's shelf registration statement, other securities offerings or mortgage financings, assure adequate liquidity to conduct its operations in accordance with its distribution and financing policies.
The financing of TRG is intended to maintain an investment grade credit rating for TRG and (i) minimize, to the extent practical, secured indebtedness encumbering TRG's wholly owned properties, (ii) mitigate TRG's exposure to increases in floating interest rates, (iii) assure that the amount of debt maturing in any future year will not pose a significant refinancing risk, (iv) provide for additional capital and liquidity resources, and (v) maintain average maturities for TRG's debt obligations of between five and ten years. TRG's intent to continue to minimize secured indebtedness is dependent on actions taken by credit rating agencies and market conditions.
TRG expects to finance its capital requirements, including development, expansions and working capital, with available cash, borrowings under its lines of credit and cash from future securities offerings under its medium-term note program, other securities offerings, or mortgage financings. TRG's acquisition activities are discretionary in nature, and will only be undertaken by TRG after arranging adequate financing on terms that are consistent with TRG's financing policies. TRG's Joint Ventures expect to finance development and expansion spending with secured debt to the extent it is available.
Cash Tender Agreement
A. Alfred Taubman and the GM Trusts each have the annual right to tender to TCO units of partnership interest in TRG (provided that the aggregate value is at least $50 million) and cause TCO to purchase the tendered interests at a purchase price based on a market valuation of TCO on the trading date immediately preceding the date of the tender (the Cash Tender Agreement). At A. Alfred Taubman's election, his family, and Robert C. Larson and his family may participate in tenders. The GM Trusts will be entitled to receive from TRG an amount (not to exceed $10.9 million in the aggregate over the term of the Partnership) equal to 5.5% of the amounts that TCO pays to the GM Trusts under the Cash Tender Agreement.
Although certain partners in TRG have pledged, and other partners may pledge, their units of partnership interest, TRG is not aware of any present intention of any partner to sell its interest in TRG.
Item 8.

Item 8. FINANCIAL STATEMENTS
The Financial Statements of The Taubman Realty Group Limited Partnership, and the Independent Auditors' Reports thereon are filed pursuant to this Item 8 and are included in this report at Item 14.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material appearing in the TCO Proxy Statement under the caption "Management--Directors and Executive Officers" is incorporated by reference as part of the information requested by this item. TRG is managed by a Partnership Committee consisting of 13 members, 10 of whom also serve as Directors of TCO, TRG's Managing General Partner. One additional member has been nominated to serve as a Director. The following is information concerning members of TRG's Partnership Committee that is not contained in the TCO Proxy Statement.
Joseph F. Azrack, 49, is a GM Trusts Designee and a member of the Executive Committee. Mr. Azrack is President and Chief Executive Officer of AEW Capital Management, L.P., a Boston based real estate investment advisory firm. He is also a member of that firm's Board of Directors. Mr. Azrack is a Director of LaQuinta Inns and; Evans Withycombe Residential, Inc., which is engaged in the investment and development of apartments; and UDC Homes, Inc., a homebuilder active in Arizona and California. He is past Chairman of the Pension Real Estate Association. Mr. Azrack is also a member of the National Realty Committee, a Trustee of the Urban Land Institute, and past adjunct professor of Real Estate Finance at Columbia University's Graduate School of Business Administration.
Thomas H. Nolan, Jr., 39, is a GM Trusts Designee and a Director of AEW Capital Management, L.P. He is a Director of Portfolio Management and is responsible for overseeing the management of large, multi-asset investment portfolios. Mr. Nolan joined AEW in 1984. Mr. Nolan is also a Director of Bedford Property Investors, Inc. and UDC Homes, Inc., a homebuilder active in Arizona and California. He is a Certified Public Accountant.
Item 11.

Item 11. EXECUTIVE COMPENSATION
The information required is hereby incorporated by reference to the material appearing in the TCO Proxy Statement under the caption "Management--Compensation of Executive Officers" and "--Compensation of Directors".
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to the material appearing in the table and related footnotes of the TCO Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management". TCO owns 25,676 Units of Partnership interest, representing 36.68% of TRG. The members of the Partnership Committee not listed in the table incorporated by reference do not own any interests in TRG.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested by this item is hereby incorporated by reference to the material appearing in the TCO Proxy Statement under the caption "Management--Certain Transactions" and "--Certain Employment Arrangements".
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1) The following financial statements of The Taubman Realty Group Limited Partnership and the Independent Auditors' Report thereon are filed with this report:
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Independent Auditors' Report ..................................F-2 Consolidated Balance Sheet as of December 31, 1995 and 1996....F-3 Consolidated Statement of Operations for the years ended December 31, 1994, 1995 and 1996.............................F-4 Consolidated Statement of Accumulated Deficiency in Assets for the years ended December 31, 1994, 1995 and 1996.............F-5 Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1995 and 1996.............................F-6 Notes to Consolidated Financial Statements.....................F-7
14(a)(2) The following is a list of the financial statement schedules required by Item 14(d).
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Schedule II - Valuation and Qualifying Accounts...............F-25 Schedule III - Real Estate and Accumulated Depreciation.......F-26
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Independent Auditors' Report..................................F-29 Combined Balance Sheet as of December 31, 1995 and 1996.......F-30 Combined Statement of Operations for the years ended December 31, 1994, 1995 and 1996............................F-31 Combined Statement of Accumulated Deficiency in Assets for the three years ended December 31, 1994, 1995 and 1996..........F-32 Combined Statement of Cash Flows for the years ended December 31, 1994, 1995 and 1996............................F-33 Notes to Combined Financial Statements........................F-34
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Schedule II - Valuation and Qualifying Accounts...............F-42 Schedule III - Real Estate and Accumulated Depreciation.......F-43
14(a)(3)
* 2(a) -- Purchase and Sale Agreement By and Between The Pacific Telesis Group Master Pension Trust and The Taubman Realty Group Limited Partnership, dated July 17, 1996 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 2(a) filed with the Registrant's Current Report on Form 8-K dated July 19, 1996).
* 2(b) -- Subscription Agreement By and Between The Pacific Telesis Group Master Pension Trust and The Taubman Realty Group Limited Partnership dated July 18, 1996 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 2(b) filed with the Registrant's Current Report on Form 8-K dated July 19, 1996).
3(a) -- The Amended and Restated Agreement of Limited Partnership of The Taubman Realty Group Limited Partnership (excluding exhibits filed separately) (incorporated herein by reference to Exhibit 3(a) filed with the Registrant's Registration Statement on Form S-4 (File No. 33-73988) (the "Registration Statement")).
4(a) -- Amended and Restated Indenture dated as of March 4, 1994 between The Taubman Realty Group Limited Partnership and Chemical Bank, as Trustee (incorporated herein by reference to Exhibit 4(a) filed with Amendment No. 1 to the Registration Statement).
4(b) -- Officers' Certificate designating the terms of the 7% Notes due 2003 (incorporated herein by reference to Exhibit 4(b) filed with Amendment No. 1 to the Registration Statement).
4(c) -- Officers' Certificate designating the terms of the 8% Notes due 1999 (incorporated herein by reference to Exhibit 4(f) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "1994 Second Quarter Form 10-Q")).
4(d) -- Indenture dated as of July 22, 1994 among Beverly Finance Corp., La Cienega Associates, the Borrower, and Morgan Guaranty Trust Company of New York, as Trustee (incorporated herein by reference to Exhibit 4(g) filed with the 1994 Second Quarter Form 10-Q).
4(e) -- Deed of Trust, with assignment of Rents, Security Agreement and Fixture Filing, dated as of July 22, 1994, from La Cienega Associates, Grantor, to Commonwealth Land Title Company, Trustee, for the benefit of Morgan Guaranty Trust Company of New York, as Trustee, Beneficiary (incorporated herein by reference to Exhibit 4(h) filed with the 1994 Second Quarter Form 10-Q).
4(f) -- Revolving Loan Agreement dated as of April 29, 1994, among The Taubman Realty Group Limited Partnership, as Borrower, Union Bank of Switzerland, (New York Branch), as Bank and Union Bank of Switzerland (New York Branch), as Administrative Agent (the "Revolving Loan Agreement") (incorporated herein by reference to Exhibit 4(i) filed with the 1994 Second Quarter Form 10-Q), as amended by an Amendment to the Revolving Loan Agreement dated August 10, 1994 (incorporated herein by reference to Exhibit 4(g) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (the "1994 Third Quarter Form 10-Q")) and as modified by a Letter Agreement modifying the Revolving Loan Agreement dated June 20, 1995 (incorporated herein by reference to exhibit 4(g) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (the "1995 Second Quarter Form 10-Q")).
4(g) -- Officers' Certificate designating the terms of the Floating Rate Notes due 1997 (incorporated herein by reference to Exhibit 4(h) filed with the 1994 Third Quarter Form 10-Q).
4(h) -- Medium-Term Notes due June 15, 2002 (incorporated herein by reference to Exhibit 4(i) filed with the 1995 Second Quarter Form 10-Q).
** 10(a) -- The Taubman Realty Group Limited Partnership 1992 Incentive Option Plan (incorporated herein by reference to Exhibit 10(a) filed with the Registration Statement).
10(b) -- Corporate Services Agreement between Taubman Centers, Inc. and The Taubman Company Limited Partnership (the "Manager") (incorporated herein by reference to Exhibit 10(b) filed with the Registration Statement).
10(c) -- Master Services Agreement between The Taubman Realty Group Limited Partnership and the Manager (incorporated herein by reference to Exhibit 10(c) filed with the Registration Statement).
** 10(d) -- Financial Performance Incentive Plan (incorporated herein by reference to Exhibit 10(d) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K")). ** 10(e) -- Supplemental Retirement Savings Plan (incorporated herein by reference to Exhibit 10(e) filed with the 1994 Form 10-K).
** 10(f) -- The Taubman Company Long-Term Performance Compensation Plan (incorporated herein by reference to Exhibit 10(g) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
12 -- Statement Re: Computation of Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of The Taubman Realty Group Limited Partnership.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
* Certain portions of this document have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.
** A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.
14(b) Current Reports on Form 8-K.
TRG voluntarily filed a current report on Form 8-K dated May 14, 1996 to report that TRG had signed an agreement to acquire Paseo Nuevo shopping center, which is located in Santa Barbara, California.
TRG voluntarily filed a current report on Form 8-K dated June 27, 1996 to report the completion of TRG's acquisition of Paseo Nuevo.
TRG filed a current report of Form 8-K dated July 19, 1996, (the "8-K"), to report the acquisition of interests in Fairlane Town Center ("Fairlane"), a regional shopping center located in Dearborn, Michigan. The 8-K included the following financial statements and pro forma information regarding the acquisition of Fairlane:
Independent Auditors' Report.
Fairlane Town Center, Historical Summaries of Revenues and Direct Operating Expenses for Each of the Three Years in the Period Ended December 31, 1995.
The Taubman Realty Group Limited Partnership, Pro Forma Condensed Consolidated Balance Sheet, March 31, 1996 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed Consolidated Statement of Operations, Year Ended December 31, 1995 (unaudited).
The Taubman Realty Group Limited Partnership, Pro Forma Condensed Consolidated Statement of Operations, Three Months Ended March 31, 1996 (unaudited).
The Taubman Realty Group Limited Partnership, Statement of Estimated Taxable Operating Results of Fairlane Town Center and Estimated Cash to be Made Available by Operations of Fairlane Town Center for a Twelve Month Period Ended March 31, 1996 (unaudited).
14(c) The list of exhibits filed with this report is set forth in response to Item 14(a)(3). The required exhibit index has been filed with the exhibits.
14(d) The financial statement schedules of The Taubman Realty Group Limited Partnership and the financial statements and the financial statement schedules of the Unconsolidated Joint Ventures of The Taubman Realty Group Limited Partnership listed at Item 14(a)(2) are filed pursuant to this Item 14(d).
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1996 AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
INDEPENDENT AUDITORS' REPORT
Partners The Taubman Realty Group Limited Partnership
We have audited the accompanying consolidated balance sheets of The Taubman Realty Group Limited Partnership and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, accumulated deficiency in assets, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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, such consolidated financial statements present fairly, in all material respects, the financial position of The Taubman Realty Group Limited Partnership and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan February 17, 1997
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET (in thousands)
December 31 ---------------------- 1995 1996 ---- ----
Assets: Properties (Notes 5 and 8) $ 926,207 $1,126,873 Accumulated depreciation and amortization 200,440 234,030 ---------- ---------- $ 725,767 $ 892,843
Cash and cash equivalents 16,836 7,902 Accounts and notes receivable, less allowance for doubtful accounts of $381 and $393 in 1995 and 1996 14,192 20,751 Accounts receivable from related parties (Note 10) 5,234 6,293 Deferred charges and other assets (Notes 6 and 9) 42,327 41,494 ---------- ---------- $ 804,356 $ 969,283 ========== ==========
Liabilities: Unsecured notes payable (Note 8) $ 632,575 $ 786,705 Mortgage notes payable (Note 8) 160,496 159,703 Other notes payable (Note 8) 162,178 54,997 Capital lease obligation (Note 9) 14,418 39,849 Accounts payable and other liabilities (Note 7) 82,603 84,505 Distributions in excess of net income of unconsolidated Joint Ventures (Note 4) 154,933 135,662 ---------- ---------- $1,207,203 $1,261,421
Commitments and Contingencies (Notes 9, 11, 13 and 15)
Accumulated Deficiency in Assets (402,847) (292,138) ---------- ---------- $ 804,356 $ 969,283 ========== ==========
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except unit data)
Year Ended December 31 ------------------------------- 1994 1995 1996 ---- ---- ----
Revenues: Minimum rents $111,373 $130,418 $150,577 Percentage rents 3,788 5,617 6,073 Expense recoveries 68,075 75,293 85,502 Other 8,981 12,227 13,044 Revenue from management, leasing and development services (Note 10) 4,917 5,363 7,533 -------- -------- -------- $197,134 $228,918 $262,729 -------- -------- --------
Operating Costs: Recoverable expenses $ 58,355 $ 62,910 $ 72,093 Other operating 20,974 22,512 26,518 Management, leasing and development services 3,538 3,696 4,212 General and administrative 17,942 19,790 21,803 Interest expense 47,732 65,858 70,454 Depreciation and amortization 27,653 32,393 35,770 -------- -------- -------- $176,194 $207,159 $230,850 -------- -------- -------- Income before equity in income of unconsolidated Joint Ventures and before extraordinary items $ 20,940 $ 21,759 $ 31,879 Equity in income before extraordinary items of unconsolidated Joint Ventures (including $5,005 in 1995, related to the disposition of Bellevue) (Note 4) 51,263 57,940 52,215 -------- -------- -------- Income before extraordinary items $ 72,203 $ 79,699 $ 84,094 Extraordinary items (Notes 4 and 8) (44,731) 16,627 (1,328) -------- -------- -------- Net Income $ 27,472 $ 96,326 $ 82,766 ======== ======== ========
Allocation of net income: General Partners $ 22,489 $ 77,077 $ 64,804 Limited Partners 4,983 19,249 17,962 -------- -------- -------- $ 27,472 $ 96,326 $ 82,766 ======== ======== ========
Earnings per Unit of Partnership Interest (Note 1): Income before extraordinary items $ 1,164 $ 1,255 $ 1,290 Extraordinary items (721) 261 (20) -------- -------- -------- Net Income $ 443 $ 1,516 $ 1,270 ======== ======== ========
Weighted Average Number of Units of Partnership Interest Outstanding 62,028 63,521 65,109 ======== ======== ========
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF ACCUMULATED DEFICIENCY IN ASSETS Years Ended December 31, 1994, 1995 and 1996 (in thousands)
General Limited Partners Partners Total ---------- ---------- ----------
Balance, January 1, 1994 $(267,826) $(58,771) $(326,597) Change of ownership (Notes 2 and 3) 31,973 (2,317) 29,656 Distributions (93,059) (20,420) (113,479) Net income 22,489 4,983 27,472 --------- -------- --------- Balance, December 31, 1994 $(306,423) $(76,525) $(382,948) Distributions (93,000) (23,225) (116,225) Net income 77,077 19,249 96,326 --------- -------- --------- Balance, December 31, 1995 $(322,346) $(80,501) $(402,847) Change of ownership (Notes 2 and 3) 124,813 22,229 147,042 Distributions (93,513) (25,586) (119,099) Net income 64,804 17,962 82,766 --------- -------- --------- Balance, December 31, 1996 $(226,242) $(65,896) $(292,138) ========= ======== =========
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 ------------------------------- 1994 1995 1996 ---- ---- ----
Cash Flows From Operating Activities: Income before extraordinary items $ 72,203 $ 79,699 $ 84,094 Adjustments to reconcile income before extraordinary items to net cash provided by operating activities: Depreciation and amortization 27,653 32,393 35,770 Income before extraordinary items in excess of distributions from unconsolidated Joint Ventures (206) Provision for losses on accounts receivable 1,323 818 1,295 Amortization of deferred financing costs 1,900 2,250 2,024 Other 785 3,062 615 Gains on sales of land (891) (818) (1,041) Increase (decrease) in cash attributable to changes in assets and liabilities: Receivables, deferred charges and other assets (9,909) (11,254) (8,448) Accounts payable and other liabilities 11,096 5,501 (1,275) --------- --------- --------- Net Cash Provided By Operating Activities $ 104,160 $ 111,445 $ 113,034 --------- --------- ---------
Cash Flows From Investing Activities: Purchase of interests in Centers (Note 3) $ (82,096) $(125,904) Additions to properties (67,752) $ (70,691) (25,472) Proceeds from sales of land 1,767 1,966 1,936 Contributions to unconsolidated Joint Ventures (21,397) Distributions from unconsolidated Joint Ventures in excess of income before extraordinary items 32,020 11,720 --------- --------- --------- Net Cash Used In Investing Activities $(116,061) $ (68,725) $(159,117) --------- --------- ---------
Cash Flows From Financing Activities: Debt proceeds $ 613,117 $ 200,747 $ 275,212 Debt payments (67,853) (13,689) (229,212) Extinguishment of debt (415,010) (105,827) (35,964) Debt issuance costs (5,408) (1,599) (830) Issuance of units of partnership interest (Notes 2 and 3) 147,042 Cash distributions (113,479) (116,225) (119,099) --------- --------- --------- Net Cash Provided By (Used In) Financing Activities $ 11,367 $ (36,593) $ 37,149 --------- --------- ---------
Net Increase (Decrease) In Cash $ (534) $ 6,127 $ (8,934)
Cash and Cash Equivalents at Beginning of Year 11,243 10,709 16,836 --------- --------- ---------
Cash and Cash Equivalents at End of Year $ 10,709 $ 16,836 $ 7,902 ========= ========= =========
See notes to financial statements.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Years Ended December 31, 1996
Note 1 - Summary of Significant Accounting Policies
General
The Taubman Realty Group Limited Partnership (TRG) engages in the ownership, operation, management, leasing, acquisition, development, redevelopment, expansion, financing and refinancing of regional retail shopping centers (Taubman Shopping Centers) and interests therein. The Taubman Shopping Centers are located primarily in major metropolitan areas in the United States including New York City, Chicago, Los Angeles, San Francisco, Detroit, Washington, D.C. and Phoenix. Taubman Centers, Inc. (TCO) is the managing general partner of TRG. The GMPTS Limited Partnership (GMPTS), TG Partners Limited Partnership (TG) and Taub-Co Management, Inc. are also general partners.
At December 31, 1996, TRG had 69,998 units of partnership interest outstanding, of which 54,209 units represent general partnership interests. At December 31, 1996, TRG was owned 36.68% by TCO, 36.18% by GMPTS, 20.23% by certain present and former key executives (and certain of their family members) of the predecessor to The Taubman Company Limited Partnership, the Manager (collectively, the Taubman Group), and TG, and 6.91% by certain former joint venture partners and certain of the former owners of Biltmore. The members of the Taubman Group (other than TG and Taub-Co Management, Inc.), the former joint venture partners and the former owners of Biltmore are limited partners of TRG.
At both December 31, 1994 and 1995, TRG had 63,521 units of partnership interest outstanding (of which 50,828 units at December 31, 1994 and 1995 represented general partnership interests). At both December 31, 1994 and 1995, TRG was owned 35.10% by TCO, 39.87% by GMPTS, 22.29% by the Taubman Group and TG, and 2.74% by a former joint venture partner and certain of the former owners of Biltmore.
Net income and losses and distributions of TRG are allocated to the general and limited partners of TRG in accordance with their percentage ownership. The financial statements include only those assets, liabilities, and results of operations which relate to the business of TRG. No provision has been made for income taxes since these taxes are the responsibility of the individual partners.
Basis of Presentation
The consolidated financial statements include the accounts of TRG and its consolidated subsidiaries. Investments in entities unilaterally controlled by ownership or contractual agreements are consolidated; investments in entities not unilaterally controlled (Joint Ventures) are accounted for under the equity method.
The Manager, which is approximately 99% beneficially owned by TRG, provides all property management and leasing services for all Taubman Shopping Centers and provides corporate, development and acquisition services. Intercompany balances and profits are eliminated in consolidation.
Dollar amounts presented in tables within the notes to the consolidated financial statements are stated in thousands of dollars, except for unit data in Notes 3, 11 and 14 or as otherwise noted.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under short and intermediate term leases which are accounted for as operating leases. Minimum rents are recognized on an accrual basis as earned, the result of which does not differ materially from a straight-line method. Percentage rents are recognized on an accrual basis as earned. Expense recoveries, which include an administrative fee, are recognized as revenue in the period applicable costs are chargeable to tenants.
Depreciation and Amortization
Buildings, improvements and equipment, stated at cost, are depreciated on straight-line or double-declining balance bases over the estimated useful lives of the assets, which range from 5 to 50 years. Tenant allowances and deferred leasing costs are amortized on a straight-line basis over the lives of the related leases.
Earnings Per Unit of Partnership Interest
The computation of net income per unit of partnership interest is based on net income and the weighted average number of partnership units outstanding. The TRG units of partnership interest issuable under TRG's incentive option plan (Note 11) have not been included in the computation because the number of units issuable (using the treasury stock method) had a minimal effect on earnings per partnership unit.
Capitalization
Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest costs are capitalized until construction is substantially complete. Properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amounts of the properties may not be recoverable. Costs of potentially unsuccessful development pre-construction activities are provided for by charges to operations and written off if abandoned.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90 days or less at the date of purchase.
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis over the terms of the agreements to which they relate.
Stock-based Compensation Plans
Stock-based compensation plans are accounted for under APB Opinion 25 and related interpretations.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over the terms of the cap agreements. Amounts received under the cap agreements are accounted for on an accrual basis, and recognized as a reduction of interest expense. The differential to be paid or received on swap agreements is accounted for on an accrual basis and recognized as an adjustment to interest expense.
Use of Estimates
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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments:
The carrying value of cash and cash equivalents, accounts and notes receivable, and accounts payable approximates fair value due to the short maturity of these instruments.
The fair value of TRG's debt is estimated based on quoted market prices if available, or on the current rates available to TRG for debt of similar terms and maturity and the assumption that debt will be prepaid at the earliest possible date.
The fair value of interest rate hedging instruments is the amount that TRG would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates.
Note 2 - Equity Transactions
In December 1996, TRG issued 3,048 units of partnership interest to TCO for the $75 million proceeds from TCO's December 1996 equity offering. TRG bore all expenses of TCO's offering, which have been accounted for as a reduction of the proceeds from TRG's issuance of units. Also in December 1996, TRG issued 333 units of partnership interest in connection with the exercise of incentive options (Note 11). Concurrently under TCO's continuing offer to exchange shares of common stock for certain partnership interests in TRG, TCO exchanged 652 thousand shares of common stock for the newly issued 333 units of TRG partnership interest. TRG used the net proceeds from the issuance of units to pay down short term floating rate debt and to acquire La Cumbre Plaza (Note 3). Additionally in 1996, TRG issued 3,096 units of partnership interest in connection with the acquisition of the remaining interest in Fairlane Town Center (Note 3).
In December 1994, TRG issued 1,540 units of partnership interest in connection with the acquisition of Biltmore Fashion Park (Biltmore) (Note 3).
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Acquisitions
Acquisition of La Cumbre Plaza
In December 1996, TRG acquired La Cumbre Plaza (La Cumbre) in Santa Barbara, California for $22.25 million in cash. The Center is subject to four ground leases (three of which are participating). The leases expire in 2028. The acquisition was accounted for at fair value. The operating results of La Cumbre have been consolidated in TRG's financial statements from the acquisition date. The pro forma effect of the acquisition on 1995 and 1996 operating results was immaterial.
Acquisition of Remaining Interest in Fairlane Town Center
In July 1996, TRG completed transactions that resulted in the acquisition of the 75% interest in Fairlane Town Center (Fairlane), previously held by a Joint Venture Partner. In connection with the transactions, TRG issued to the former Joint Venture Partner 3,096 units of partnership interest, exchangeable for approximately 6.1 million shares of TCO common stock, which had a closing price of $10.75 per share on the day prior to the issuance date. The units issued represent limited partnership units. TRG also assumed mortgage debt of approximately $26 million, representing the former Joint Venture Partner's beneficial interest in the $34.6 million mortgage encumbering the property. TRG used unsecured debt to fund the repayment of the 9.73% mortgage and prepayment penalty of approximately $1.2 million. The acquisition, which resulted in TRG owning 100% of Fairlane, was accounted for at fair value. The operating results of Fairlane have been consolidated in TRG's financial statements from the acquisition date. Prior to the acquisition date, TRG's interest in Fairlane was accounted for under the equity method as a Joint Venture.
Pro forma results of TRG's operations, assuming the Fairlane acquisition had occurred on January 1, 1995, are as follows: Pro Forma --------------------- Year Ended December 31 ----------- 1995 1996 ---- ----
Revenues $ 257,258 $ 277,739 Income before extraordinary items 87,029 87,158 Net income 103,656 85,830
Earnings per unit of partnership interest: Income before extraordinary items $ 1,306 $ 1,304 Net income 1,556 1,284
The pro forma results are not necessarily indicative of what actual results would have been had the acquisition occurred on January 1, 1995, nor are they necessarily indicative of future results.
Acquisition of Paseo Nuevo
In June 1996, TRG acquired Paseo Nuevo located in Santa Barbara, California, for $37 million in cash. The Center is owned subject to two participating ground leases with remaining terms of approximately 70 years. The acquisition was recorded at fair value. The operating results of Paseo Nuevo have been consolidated in TRG's financial statements from the acquisition date. The pro forma effect of the acquisition on 1995 and 1996 net income was immaterial.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Acquisition of Biltmore Fashion Park
In December 1994, TRG acquired Biltmore Fashion Park (Biltmore), a regional shopping center located in Phoenix, Arizona, for $81.5 million in cash and 1,540 TRG units of partnership interest (exchangeable for approximately three million shares of TCO common stock, having a closing price of $9.875 on the day prior to the purchase date). The units issued represent limited partnership interests. TRG also assumed assessment bond obligations of approximately $3.6 million encumbering the Center. The bond service costs are recovered from tenants. The acquisition was accounted for at fair value. The operating results of Biltmore have been consolidated in TRG's financial statements from the acquisition date. The pro forma effect of the acquisition on 1994 operating results was immaterial.
Note 4 - Investments in Joint Ventures
Following are TRG's investments in various real estate Joint Ventures which own regional retail shopping centers. TRG is also the managing general partner of these Joint Ventures. TRG's interest in each Joint Venture is as follows:
TRG's % Ownership as of Joint Venture Taubman Shopping Center December 31, 1996 --------------------- ----------------------- ------------------
Arizona Mills, L.L.C. Arizona Mills (under 35% (Note 15) construction) Fairfax Associates Fair Oaks 50 Lakeside Mall Limited Lakeside 50 Partnership Rich-Taubman Associates Stamford Town Center 50 Taubman-Cherry Creek Cherry Creek 50 Limited Partnership Taubman MacArthur MacArthur Center (under 70 Associates Limited construction) Partnership Twelve Oaks Mall Twelve Oaks Mall 50 Limited Partnership West Farms Associates Westfarms 79 Woodfield Associates Woodfield 50 Woodland Woodland 50
Arizona Mills, L.L.C. is developing Arizona Mills, a value super-regional mall in Tempe, Arizona, which will open in November 1997. Taubman MacArthur Associates Limited Partnership is developing MacArthur Center in Norfolk, Virginia. MacArthur Center is expected to open in the spring of 1999. TRG transferred to these Joint Ventures its accumulated pre-construction costs related to these projects (Note 5).
In December 1995, the bank group holding the $99.5 million nonrecourse mortgage encumbering Bellevue Center acquired title to the Center through a nonjudicial foreclosure sale. The mortgage matured on November 1, 1995. TRG ceased to recognize the results of Bellevue Associates (Bellevue), TRG's 60% owned Joint Venture that owned the Center, as of November 1, 1995. TRG's share of Bellevue's net loss from operations for 1994 and the ten months ended October 31, 1995, was $1.1 million and $0.7 million, respectively.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As a result of the foreclosure and debt extinguishment, Bellevue recognized an extraordinary gain of approximately $31.4 million, representing the difference between the carrying value of the debt and the fair value of the Center, net of related transaction costs on the extinguishment of debt, and an ordinary gain of approximately $4.4 million, representing the excess of the fair value of the Center over its carrying value. TRG's share of the extraordinary gain and its gain on the disposition of the Center, which was based on the carrying value of TRG's investment in Bellevue, were $18.9 million and $5.0 million, respectively. The carrying value of TRG's investment in Bellevue differed from TRG's 60% share of Bellevue's net deficiency in assets due to the elimination of intercompany profits on sales of services.
In May 1994, West Farms Associates (Westfarms) redeemed a portion of a deceased Joint Venture Partner's interest for $12.7 million. As a result, TRG's ownership of Westfarms increased to approximately 79%.
TRG reduces its investment in Joint Ventures to eliminate intercompany profits on sales of services that are capitalized by the Joint Ventures. As a result, the carrying value of TRG's investment in Joint Ventures is less than TRG's share of the deficiency in assets reported in the Balance Sheet of the Unconsolidated Joint Ventures of the Taubman Realty Group Limited Partnership by $4.8 million and $8.6 million in 1995 and 1996. These differences are amortized over the useful lives of the related assets.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Combined balance sheet and results of operations information is presented below for all Joint Ventures, followed by TRG's beneficial interest in the combined information. Beneficial interest is calculated based on TRG's ownership interest in each of the Joint Ventures.
December 31 ---------------------- 1995 1996 ---- ---- Assets: Properties $ 373,803 $ 461,658 Other assets 109,668 71,278 --------- --------- $ 483,471 $ 532,936 ========= ========= Liabilities and partners' accumulated deficiency in assets: Debt $ 741,121 $ 724,162 Capital lease obligation 5,000 Other liabilities 50,227 53,817 TRG accumulated deficiency in assets (150,117) (127,097) Joint Venture Partners' accumulated deficiency in assets (157,760) (122,946) --------- --------- $ 483,471 $ 532,936 ========= =========
TRG accumulated deficiency in assets (above) $(150,117) $(127,097) Elimination of intercompany profit (4,816) (8,565) --------- --------- Distributions in excess of net income of unconsolidated Joint Ventures $(154,933) $(135,662) ========= =========
Year Ended December 31 ------------------------------ 1994 1995 1996 ---- ---- ---- Revenues $268,815 $287,180 $265,337 -------- -------- -------- Recoverable and other operating expenses $103,784 $106,859 $100,164 Interest expense 51,836 57,857 52,994 Depreciation and amortization 24,177 25,471 23,837 -------- -------- -------- Total operating costs $179,797 $190,187 $176,995 -------- -------- -------- Income before extraordinary items $ 89,018 $ 96,993 $ 88,342 Extraordinary items (3,468) 30,761 -------- -------- -------- Net income $ 85,550 $127,754 $ 88,342 ======== ======== ========
Net income attributable to TRG $ 43,266 $ 68,498 $ 47,413 Extraordinary items attributable to TRG 1,949 (18,327) Realized intercompany profit 6,048 7,769 4,802 -------- -------- -------- Equity in income before extraordinary items of unconsolidated Joint Ventures $ 51,263 $ 57,940 $ 52,215 ======== ======== ========
Year Ended December 31 ------------------------------ 1994 1995 1996 ---- ---- ---- TRG's beneficial interest in unconsolidated Joint Ventures' operations: Revenues less recoverable and other operating expenses $ 90,332 $ 96,120 $ 91,708 Ordinary gain on disposition of Bellevue 5,005 Interest expense (26,590) (30,396) (27,738) Depreciation and amortization (12,479) (12,789) (11,755) -------- -------- -------- Income before extraordinary items $ 51,263 $ 57,940 $ 52,215 ======== ======== ========
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Properties
Properties, including peripheral land and development pre-construction costs, at December 31, 1995 and 1996 are summarized as follows:
1995 1996 ---- ---- Land $ 49,468 $ 65,127 Buildings, improvements and equipment 798,553 957,185 Construction in process 28,135 32,886 Assets under capital lease (Note 9) 14,418 39,849 Peripheral land 9,959 7,414 --------- ---------- $ 900,533 $1,102,461 Development pre-construction costs (See below) 25,674 24,412 --------- ---------- $ 926,207 $1,126,873 ========= ==========
Depreciation expense for 1994, 1995 and 1996 was $21.8 million, $26.6 million and $29.6 million. Peripheral land consists primarily of undeveloped land generally adjacent to the Taubman Shopping Centers. Construction in process includes costs related to expansions and other improvements at various existing centers and leasehold improvements for The Mall at Tuttle Crossing (Note 9).
TRG actively pursues opportunities for the development of new regional shopping centers. Development pre-construction activities, including market research, site location, environmental work, zoning permits and obtaining of anchor commitments, may take years to accomplish and ultimately may be abandoned. TRG provides a reserve for the cost of such potentially unsuccessful pre-construction activities.
The activity in development pre-construction costs and the related reserve for 1995 and 1996 is summarized as follows:
Costs Reserve Net ----- ------- --- Balance, January 1, 1995 $31,536 $ (8,348) $23,188 Costs incurred 16,595 16,595 Charged to operations (6,814) (6,814) Transfers to construction in process (7,295) (7,295) Costs of projects written off (4,964) 4,964 ------- -------- ------- Balance, December 31, 1995 $35,872 $(10,198) $25,674 Costs incurred 12,556 12,556 Charged to operations (8,501) (8,501) Transfers to investments in Joint Ventures (5,317) (5,317) Costs of projects written off (6,223) 6,223 ------- -------- ------- Balance, December 31, 1996 $36,888 $(12,476) $24,412 ======= ======== =======
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1995 and 1996 are summarized as follows:
1995 1996 ---- ---- Leasing $ 34,173 $ 38,353 Accumulated amortization (19,618) (21,284) -------- -------- $ 14,555 $ 17,069 Prepaid ground rent (Note 9) 10,911 6,122 Deferred financing costs, net 9,494 9,343 Other, net 7,367 8,960 -------- -------- $ 42,327 $ 41,494 ======== ========
Note 7 - Other Liabilities
In November 1992, the General Motors Hourly-Rate Employes Pension Trust and the General Motors Salaried Employes Pension Trust (GM Trusts), which indirectly own interests in TRG, entered into an agreement with TCO (the Cash Tender Agreement) pursuant to which the GM Trusts have certain rights to cause TCO to purchase their interests in TRG. TRG will pay the GM Trusts an amount (not to exceed $10.9 million in the aggregate over the term of the Partnership) equal to 5.5% of the amounts that TCO pays to the GM Trusts under the Cash Tender Agreement.
Note 8 - Debt
Unsecured Notes Payable
Unsecured notes payable at December 31, 1995 and 1996 consists of the following:
1995 1996 ---- ----
7% Notes due 2003 $199,644 $199,679 8% Notes due 1999 199,933 199,950 Floating Rate Notes due 1997 99,900 99,955 Medium-Term Notes: Floating rate notes: Three month LIBOR plus 0.80% due 1998 $ 20,000 Three month LIBOR plus 0.77% due 1998 14,000 Three month LIBOR plus 0.90% due 1999 20,000 Three month LIBOR plus 1.05% due 2001 30,000 Fixed rate notes: 7.38% Notes due 2000 $ 13,000 13,000 7.31% Notes due 2000 2,000 2,000 7.19% Notes due 2000 5,000 5,000 7.22% Notes due 2001 8,400 8,400 8.00% Notes due 2001 69,976 7.40% Notes due 2002 5,000 5,000 7.50% Notes due 2002 99,698 99,745 -------- -------- Total Medium-Term Notes $133,098 $287,121 -------- -------- Total Unsecured Notes Payable $632,575 $786,705 ======== ========
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In 1995, TRG entered into a swap agreement to effectively change the character of its Floating Rate Notes due 1997 to a fixed rate obligation at a rate of 6.15% from three month LIBOR plus 0.5%.
TRG has issued $287 million of Medium-Term Notes since the program's inception in 1995 under TRG's $500 million shelf registration statement.
TRG's loan agreements and indenture contain various restrictive covenants including limitations on the amount of secured and unsecured debt and minimum debt service coverage ratios, the latter being the most restrictive. TRG is in compliance with all covenants.
Mortgage Notes Payable
Mortgage notes payable at December 31, 1995 and 1996 consists of the following:
1995 1996 ---- ----
Fixed rate, amortizing $ 14,496 $ 13,703 Fixed rate, nonamortizing 146,000 146,000 -------- -------- $160,496 $159,703 ======== ========
Mortgage debt is collateralized by properties with a net book value of $148.2 million as of December 31, 1996. Of the December 31, 1996 balance, $13.7 million is due in monthly installments with maturities at various dates through 2019, and fixed interest rates between 6.00% and 7.20% or a weighted average rate of 6.79%. The remainder of the balance represents an 8.36% note due in 2004.
The following table presents scheduled principal payments on mortgage debt as of December 31, 1996.
1997 $ 838 1998 896 1999 738 2000 563 2001 602 Thereafter 156,066 -------- Total $159,703 ========
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Notes Payable
Other notes payable at December 31, 1995 and 1996 consists of the following:
1995 1996 ---- ---- Commercial paper, face amount of $45 million, supported by a line of credit facility up to $75 million, secured by deed of trust on one Taubman Shopping Center, 5.50% stated interest rate at December 31, 1996 $ 74,878 $ 44,897 Notes payable to banks Line of credit, unsecured, maximum borrowing available of $200 million, interest at LIBOR plus 1.50%, maturing May 1998 (see below) 76,500 Line of credit, unsecured, maximum borrowing available of $30 million, interest based on a variable bank borrowing rate, 6.50% at December 31, 1996, maturing August 1998 10,800 10,100 -------- -------- $162,178 $ 54,997 ======== ========
Commercial paper is generally sold with a 30 day maturity. The underlying credit facility is renewable quarterly for a twelve month period.
As of December 31, 1996, TRG had available for general partnership purposes an unsecured revolving credit facility of $200 million, which was scheduled to expire in May 1998. In March 1997, TRG completed the renegotiation of terms increasing the facility to $300 million, reducing the current contractual interest rate by 60 basis points to LIBOR plus 90 basis points and extending the maturity until March 2000. Included in the credit facility is a competitive bid option program which allows TRG to hold auctions, among the banks participating in the facility, for short term borrowings of up to $150 million. The facility agreements contain various restrictive covenants, including limitations on the amount of secured and unsecured debt and minimum debt service coverage ratios, the latter being the most restrictive. TRG is in compliance with all covenants.
Interest Expense
Interest paid in 1994, 1995 and 1996, net of amounts capitalized of $7.1 million, $6.9 million and $5.7 million in 1994, 1995 and 1996, approximated $47.7 million, $62.2 million and $69.8 million.
Extraordinary Items
In 1996, TRG recognized an extraordinary charge to income of $1.3 million primarily consisting of a prepayment penalty related to the extinguishment of debt at a wholly owned Center. In 1995, TRG recognized an extraordinary gain of approximately $18.9 million, related to the extinguishment of debt at Bellevue (Note 4) and $2.2 million of extraordinary charges, consisting primarily of prepayment penalties, related to the extinguishment of debt of TRG and a Joint Venture. TRG recognized extraordinary charges to income in 1994, consisting of prepayment penalties of approximately $44.7 million related to the extinguishment of secured debt of TRG and certain of its Joint Ventures.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest Rate Hedging Instruments
TRG enters into interest rate agreements to reduce its exposure to changes in the cost of its floating rate debt. As of December 31, 1996, the following interest rate cap agreements were outstanding:
Notional Frequency Amount LIBOR of Rate (in millions) Cap Rate Resets Term ------------- -------- -------- ------------------------------ $ 100 6.0% Monthly January 1996 to January 1997 75 6.0% Monthly January 1996 to January 1997 100 6.5% Monthly January 1997 to January 1998 100 6.5% Three Months November 1997 to December 1998
TRG also has a swap agreement which hedges TRG's Floating Rate Notes due 1997 (see Unsecured Notes Payable above).
TRG is exposed to credit risk in the event of nonperformance by the counterparties to its interest rate cap and swap agreements, but has no off-balance sheet risk of loss. TRG anticipates that its counterparties will fully perform their obligations under the agreements.
Fair Value of Financial Instruments Related to Debt
The estimated fair values of TRG's financial instruments at December 31, 1995 and 1996 are as follows:
December 31 -------------------------------------------- 1995 1996 -------------------- --------------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- Unsecured notes payable $632,575 $651,200 $786,705 $794,828 Mortgage notes payable 160,496 175,018 159,703 168,229 Other notes payable 162,178 162,178 54,997 54,997 Interest rate instruments: In a receivable position 294 33 964 412 In a payable position 19 (718) (17) (76)
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Beneficial Interest in Debt and Interest
TRG's beneficial interest in the debt (excluding capital lease obligations), capitalized interest, and interest expense (net of capitalized interest) of TRG, its consolidated subsidiaries and its unconsolidated Joint Ventures (Note 4) is summarized as follows:
TRG's Share TRG's TRG's Joint of Joint Consolidated Beneficial Ventures Ventures Subsidiaries Interest -------- -------- ------------ ------- Debt as of: December 31, 1995 $741,121 $ 390,680 $ 955,249 $1,345,929 December 31, 1996 724,162 396,962 1,001,405 1,398,367
Capitalized interest: 1994 $ 3,604 $ 1,801 $ 7,098 $ 8,899 1995 3,481 1,799 6,852 8,651 1996 4,790 3,187 5,682 8,869
Interest expense (net of capitalized interest): 1994 $ 51,836 $ 26,590 $ 47,732 $ 74,322 1995 57,857 30,396 65,858 96,254 1996 52,994 27,738 70,454 98,192
Note 9 - Leases
Operating Leases
Shopping center space is leased to tenants and certain anchors pursuant to lease agreements. Tenant leases typically provide for guaranteed minimum rent, percentage rent and other charges to cover certain operating costs. Future minimum rent under operating leases in effect at December 31, 1996 for operating centers, assuming no new or renegotiated leases or option extensions on anchor agreements, is summarized as follows:
1997 $ 169,067 1998 160,302 1999 146,228 2000 123,528 2001 106,405 Thereafter 338,880
Minimum rent received from former related parties was $2.1 million in 1994.
Revenues derived from the combined operations of The Limited provided approximately 9.5%, 8.2% and 8.0% of total revenues in 1994, 1995 and 1996, respectively. Amounts due from The Limited at December 31, 1995 were $134 thousand. There were no amounts due from The Limited at December 31, 1996.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Certain Taubman Shopping Centers, as lessees, have ground leases expiring at various dates through the year 2076. In addition, the Manager leases its office facilities. Rental payments under ground and office leases were $7.1 million, $7.3 million and $8.0 million in 1994, 1995 and 1996. Included in these amounts are related party office rental payments of $2.3 million, $2.8 million and $3.0 million in 1994, 1995 and 1996.
The following is a schedule of future minimum rental payments required under operating leases. These amounts exclude adjustments every five years based on the Consumer Price Index or a factor defined in the lease for one property, a 10% participation in cash flow for years 2022 to 2076 and supplemental ground rent under the lease of another property, and participation in cash flows over amounts specified in leases of two other properties. Contingent rental expense was $65 thousand in 1996. Future minimum rental payments are summarized as follows:
1997 $ 9,205 1998 8,318 1999 8,388 2000 8,219 2001 7,890 Thereafter 199,970
The table above includes $2.6 million, $2.8 million, $2.9 million, $2.8 million, $2.5 million and $8.4 million of related party amounts in 1997, 1998, 1999, 2000, 2001 and thereafter.
Included in deferred charges is approximately $6.1 million representing lump-sum payments for base rent on two parcels of adjacent land (a leasehold interest in a third parcel was sold in 1996). These costs are being charged to operations over the 87 and 99 year terms of the leases.
Memorial City Mall Lease
In November 1996, TRG entered into an agreement to lease Memorial City Mall, located in Houston, Texas. The lease of this unencumbered property grants TRG the exclusive right to manage, lease and operate the property. The annual rent is initially $7 million. TRG has the option to terminate the lease after the third full lease year by paying $2 million to the lessor. Accordingly, the lease will be accounted for as an operating lease during the option period. TRG will use this option period to evaluate the redevelopment opportunities of the center.
If TRG does not exercise its option to terminate the lease at the end of the third full lease year, the lease continues for another 52 years and provides for increases in rent every ten years based on 75% of the increase in the Consumer Price Index between 1996 and the then current year. Under the terms of the lease, TRG has agreed to invest a minimum of $3 million during the three year option period. If the redevelopment proceeds, TRG is required to invest an additional $22 million in property expenditures not recoverable from tenants during the first 10 years of the lease term.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Capital Lease Obligation
In November 1995, TRG completed an agreement with Tuttle Holding Co., which owns the land on which The Mall at Tuttle Crossing is located, to lease the land and mall buildings, which are currently under construction. The term of the lease is from the date of signing the lease to 90 years from the date of the opening of the Center. The Center will open in July 1997. Minimum lease payments of $4.4 million will be due annually after the opening of the Center. TRG will also pay additional rent based on achieved levels of net operating income as specified in the agreement (NOI); 100% of the portion of NOI which is over $11.6 million but less than or equal to $14.4 million, 30% of the portion of NOI between $14.4 million and $18.3 million, and 50% of the portion of NOI over $18.3 million.
As of December 31, 1996, future minimum lease payments for this capital lease are as follows:
1997 $ 1,943 1998 4,430 1999 4,430 2000 4,430 2001 4,430 Remainder 379,037 --------- Total minimum obligation $ 398,700 Less interest (343,379) --------- Net minimum obligation $ 55,321 Less amounts related to assets not yet constructed (15,472) --------- Capital lease obligation at December 31, 1996 $ 39,849 =========
Note 10 - Transactions with Affiliates
The revenue from management, leasing and development services is derived primarily from transactions with affiliates. Accounts receivable from related parties includes amounts related to reimbursement of third-party (non-affiliated) costs.
Other related party transactions are described in Notes 9, 11 and 15.
Note 11 - The Manager
The Manager, The Taubman Company Limited Partnership, provides property management, leasing and development services to the Taubman Shopping Centers and affiliates.
The Manager has a voluntary retirement savings plan established in 1983 and amended and restated effective January 1, 1994 (the Plan). The Plan is qualified in accordance with Section 401(k) of the Internal Revenue Code (the Code). The Manager contributes an amount equal to 2% of the qualified wages of all qualified employees and matches employee contributions in excess of 2% up to 7% of qualified wages. In addition, the Manager may make discretionary contributions within the limits prescribed by the Plan and imposed in the Code. Costs relating to the Plan were $1.5 million in each of the three years ended December 31, 1994, 1995 and 1996.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
TRG has an incentive option plan for employees of the Manager. Currently, 4,500 units of partnership interest may be issued under the plan. Incentive options generally become exercisable to the extent of one-third of the units on each of the third, fourth, and fifth anniversaries of the date of grant. Options expire ten years from the date of grant.
A summary of the status of the plan as of December 31, 1994, 1995, and 1996, and changes during the years ending on those dates is presented below:
The weighted average fair value per unit of options granted during 1995 was $2.7 thousand. There were no grants in 1996. TRG used a binomial option price model to determine the grant date fair values of the 1995 grants. The 1995 calculations of fair value are based on the following assumptions: a volatility rate of 22%, a risk-free rate of return of approximately 8%, and a dividend yield of approximately 9%. Options outstanding at December 31, 1996 have a remaining weighted-average contractual life of 6.3 years and range in exercise price from $18.5 thousand to $27.4 thousand.
TRG applies APB Opinion 25 and related Interpretations in accounting for the plan. The exercise price of all outstanding options granted under the plan was equal to market value on the date of grant. Accordingly, no compensation expense has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates for 1995 awards (there were no grants in 1996) under the plan consistent with the method of FASB Statement 123, the pro forma effect on TRG's earnings and earnings per unit of partnership interest would not have been material.
Effective January 1, 1996, the Manager adopted The Taubman Company Long-Term Performance Compensation Plan. Annually, eligible employees will be granted contingent notional TRG units of partnership interest, the ultimate number of which will be based on the employee's performance. These awards, which will vest on the third anniversary of the date of grant, will also accrue deemed distributions in the form of additional notional units each time TRG makes a distribution to its partners. Upon vesting, additional notional units may be granted based on the performance of the employee and the Manager and/or TRG. The awards will be paid to the employee in cash upon vesting, based on the value of TRG's units of partnership interest, unless the employee elects to defer payment as provided in the plan. The cost of this plan was approximately $2.0 million for 1996.
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 12 - Supplemental Disclosures of Non-Cash Activities
Supplemental disclosures of non-cash investing and financing activities:
Year Ended December 31 ---------------------------- 1994 1995 1996 ---- ---- ----
Issuance of units of partnership interest in connection with the purchase of Biltmore Fashion Park $ 29,656 Capital lease obligation $ 14,418 $ 25,431
Note 13 - Contingencies
TRG is currently involved in certain litigation arising in the ordinary course of business. Management believes that this litigation will not have a material adverse effect on TRG's assets or results of operations.
Note 14 - Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for 1995 and 1996.
---------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------- (in thousands, except unit data)
Revenues $53,485 $55,602 $58,052 $61,779 Equity in income of unconsolidated Joint Ventures 14,028 12,690 11,867 19,355 Income before extraordinary items 19,460 17,260 17,809 25,170 Net Income 19,460 15,035 17,809 44,022 Per Unit of Partnership Interest: Income before extraordinary items $306 $272 $280 $397 Net Income 306 237 280 693
---------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------- (in thousands, except unit data)
Revenues $59,732 $59,817 $66,077 $77,103 Equity in income of unconsolidated Joint Ventures 13,363 12,748 13,552 12,552 Income before extraordinary item 20,868 18,500 20,940 23,786 Net Income 20,868 18,500 19,612 23,786 Per Unit of Partnership Interest: Income before extraordinary item $329 $291 $317 $353 Net Income 329 291 297 353
THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15 - Subsequent Event
TRG's ownership interest in Arizona Mills, L.L.C. increased in January 1997 to 37% as a result of Arizona Mills, L.L.C.'s redemption of a former owner's 5% interest for $2.8 million (the former owner is an affiliate of a partner in TRG). Also in January 1997, Arizona Mills, L.L.C. closed on a secured $145 million construction facility maturing in 2002. The loan bears interest at one month LIBOR plus 1.3%. The loan is hedged until maturity at a one month LIBOR cap rate of 9.5%. The payment of the principal and interest is recourse to each of the owners of Arizona Mills to the extent of their ownership percentage.
Schedule II THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Valuation and Qualifying Accounts For the years ended December 31, 1994, 1995 and 1996 (in thousands)
(Schedule III (cont.))
The changes in total real estate assets for the three years ended December 31, 1996 are as follows:
1994 1995 1996 ---- ---- ----
Balance, beginning of year $665,978 $843,960 $ 926,207 Acquisitions 114,864 150,522 New development and improvements 67,752 85,109 50,903 Disposals (4,634) (2,862) (3,808) Transfers In, net (3) 3,049 -------- -------- ---------- Balance, end of year $843,960 $926,207 $1,126,873 ======== ======== ==========
The changes in accumulated depreciation and amortization for the three years ended December 31, 1996 are as follows:
1994 1995 1996 ---- ---- ----
Balance, beginning of year $(156,524) $(175,358) $(200,440) Depreciation for year (21,770) (26,574) (29,570) Disposals 2,936 1,492 1,290 Transfers In (3) (5,310) --------- --------- --------- Balance, end of year $(175,358) $(200,440) $(234,030) ========= ========= =========
(Schedule III (cont.))
(1) Includes assessment bonds payable encumbering the Centers of $3,183 at Biltmore, $982 at Hilltop, and $1,363 at Stoneridge. (2) Encumbrances include $44,897 of commercial paper, secured by a deed of trust on Stoneridge, classified as "Other Notes Payable" in the December 31, 1996 Balance Sheet of The Taubman Realty Group Limited Partnership. (3) Primarily represents consolidation in 1996 of TRG's original 25% interest in Fairlane's assets (costs of acquiring the remaining 75% interest are included in Acquisitions above), net of transfers of pre-construction costs to construction in process of two Joint Ventures.
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND 1996 AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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INDEPENDENT AUDITORS' REPORT
Partners The Taubman Realty Group Limited Partnership
We have audited the accompanying combined balance sheets of Unconsolidated Joint Ventures of The Taubman Realty Group Limited Partnership (the "Partnership") as of December 31, 1995 and 1996, and the related combined statements of operations, accumulated deficiency in assets, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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, such combined financial statements present fairly, in all material respects, the financial position of Unconsolidated Joint Ventures of The Taubman Realty Group Limited Partnership as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic combined financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan February 17, 1997
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED BALANCE SHEET (in thousands)
December 31 --------------------- 1995 1996 ---- ---- Assets: Properties (Notes 2, 4 and 6) $ 570,066 $ 650,149 Accumulated depreciation and amortization 196,263 188,491 -------- ------- $ 373,803 $ 461,658
Cash and cash equivalents 51,344 25,924 Accounts and notes receivable, less allowance for doubtful accounts of $157 and $90 in 1995 and 1996 12,892 7,142 Note receivable from Joint Venture Partner (Note 6) 1,900 1,600 Deferred charges and other assets (Notes 3 and 6) 43,532 36,612 --------- --------- $ 483,471 $ 532,936 ========= =========
Liabilities: Mortgage notes payable (Note 4) $ 738,468 $ 721,809 Other notes payable (Note 4) 2,653 2,353 Capital lease obligation (Note 5) 5,000 Accounts payable and other liabilities 50,227 53,817 --------- --------- $ 791,348 $ 782,979 Commitments (Note 5)
Accumulated deficiency in assets: TRG $(150,117) $(127,097) Joint Venture Partners (157,760) (122,946) --------- --------- $(307,877) $(250,043) --------- --------- $ 483,471 $ 532,936 ========= =========
See notes to financial statements.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED STATEMENT OF OPERATIONS (in thousands)
Year Ended December 31 ------------------------------ 1994 1995 1996 ---- ---- ----
Revenues: Minimum rents $157,374 $166,244 $157,212 Percentage rents 4,808 3,629 3,951 Expense recoveries 96,711 101,455 95,244 Other 9,922 11,444 8,930 Gain on disposition of Bellevue (Note 1) 4,408 -------- -------- -------- $268,815 $287,180 $265,337 -------- -------- -------- Operating Costs: Recoverable expenses (Note 6) $ 83,531 $ 88,250 $ 81,799 Other operating (Note 6) 20,253 18,609 18,365 Interest expense (Note 4) 51,836 57,857 52,994 Depreciation and amortization 24,177 25,471 23,837 -------- -------- -------- $179,797 $190,187 $176,995 -------- -------- --------
Income before extraordinary items $ 89,018 $ 96,993 $ 88,342 Extraordinary items (Notes 1 and 4) (3,468) 30,761 -------- -------- -------- Net Income $ 85,550 $127,754 $ 88,342 ======== ======== ========
Allocation of net income: Attributable to TRG $ 43,266 $ 68,498 $ 47,413 Attributable to Joint Venture Partners 42,284 59,256 40,929 -------- -------- -------- $ 85,550 $127,754 $ 88,342 ======== ======== ========
See notes to financial statements.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED STATEMENT OF ACCUMULATED DEFICIENCY IN ASSETS Years ended December 31, 1994, 1995 and 1996 (in thousands)
Joint Venture TRG Partners Total --- ------------- -----
Balance, January 1, 1994 $(132,488) $(138,321) $(270,809) Cash contributions 1,132 1,166 2,298 Cash distributions (77,238) (75,363) (152,601) Redemption of Joint Venture Partner's interest (Note 1) 2,631 2,631 Net income 43,266 42,284 85,550 --------- --------- --------- Balance, December 31, 1994 $(165,328) $(167,603) $(332,931) Cash distributions (53,287) (49,413) (102,700) Net income 68,498 59,256 127,754 --------- --------- --------- Balance, December 31, 1995 $(150,117) $(157,760) $(307,877) Cash contributions 21,201 24,958 46,159 Non-cash contributions (Note 1) 5,942 9,750 15,692 Cash distributions (55,146) (51,654) (106,800) TRG purchase of Fairlane interest (Note 1) 3,610 10,831 14,441 Net income 47,413 40,929 88,342 --------- --------- --------- Balance, December 31, 1996 $(127,097) $(122,946) $(250,043) ========= ========= =========
See notes to financial statements.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31 ---------------------------------- 1994 1995 1996 ---- ---- ----
Cash Flows From Operating Activities: Income before extraordinary items $ 89,018 $ 96,993 $ 88,342 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,177 25,471 23,837 Provision for losses on accounts receivable 1,274 974 1,303 Gains on sales of land (815) (1,303) Gain on disposition of Bellevue (Note 1) (4,408) Other 1,755 2,493 2,922 Increase (decrease) in cash attributable to changes in assets and liabilities: Receivables, deferred charges and other assets (10,233) (10,128) (1,811) Accounts payable and other liabilities 1,913 4,258 6,491 --------- --------- --------- Net Cash Provided By Operating Activities $ 107,089 $ 114,350 $ 121,084 --------- --------- ---------
Cash Flows From Investing Activities: Additions to properties $ (46,128) $ (48,320) $(105,031) Restricted cash for expansion (Note 4) 25,954 40,879 1,309 Proceeds from sales of land 869 1,390 Redemption of Joint Venture Partner's Interest (Note 1) (12,743) --------- --------- --------- Net Cash Used In Investing Activities $ (32,048) $ (6,051) $(103,722) --------- --------- ---------
Cash Flows From Financing Activities: Debt proceeds $ 180,768 $ 235,030 $ 20,529 Debt payments (3,379) (6,665) (2,670) Extinguishment of debt (94,616) (189,705) Debt issuance costs (6,828) (6,198) Cash contributions from partners 2,298 46,159 Cash distributions to partners (152,601) (102,700) (106,800) --------- --------- --------- Net Cash Used In Financing Activities $ (74,358) $ (70,238) $ (42,782) --------- --------- ---------
Net Increase (Decrease) In Cash $ 683 $ 38,061 $ (25,420)
Cash and Cash Equivalents at Beginning of Year 12,600 13,283 51,344 --------- --------- ---------
Cash and Cash Equivalents at End of Year $ 13,283 $ 51,344 $ 25,924 ========= ========= =========
See notes to financial statements.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS Three Years Ended December 31, 1996
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The Taubman Realty Group Limited Partnership (TRG) owns interests in joint ventures (Joint Ventures) which in turn own regional retail shopping centers (Taubman Shopping Centers). TRG has engaged the Manager (The Taubman Company Limited Partnership, which is approximately 99% beneficially owned by TRG) to provide all property management and leasing services for all of the Taubman Shopping Centers and to provide corporate, development, and acquisition services. For financial statement reporting purposes, the accounts of the Joint Ventures have been combined in these financial statements. Generally, net profits and losses of the Joint Ventures are allocated to TRG and the outside partners (Joint Venture Partners) in accordance with their ownership percentages.
Dollar amounts presented in tables within the notes to the combined financial statements are stated in thousands.
Investments in Joint Ventures
TRG's interest in each of the Joint Ventures at December 31, 1996, is as follows:
TRG's % Joint Venture Taubman Shopping Center Ownership --------------------- ----------------------- ---------
Arizona Mills, L.L.C. Arizona Mills (under 35% (Note 7) construction) Fairfax Associates Fair Oaks 50 Lakeside Mall Limited Lakeside 50 Partnership Rich-Taubman Associates Stamford Town Center 50 Taubman-Cherry Creek Cherry Creek 50 Limited Partnership Taubman MacArthur MacArthur Center (under 70 Associates Limited construction) Partnership Twelve Oaks Mall Twelve Oaks Mall 50 Limited Partnership West Farms Associates Westfarms 79 Woodfield Associates Woodfield 50 Woodland Woodland 50
Arizona Mills, L.L.C. is developing Arizona Mills, a value super-regional mall in Tempe, Arizona, which will open in November 1997. In 1996, Arizona Mills, L.L.C. purchased for $24.8 million approximately 116 acres of land on which the Center is being constructed from an affiliate of a partner in TRG and of a former owner in Arizona Mills (Note 7). Taubman MacArthur Associates Limited Partnership (MacArthur) is developing MacArthur Center in Norfolk, Virginia. MacArthur Center is expected to open in the spring of 1999. Also in 1996, TRG and the other owners of Arizona Mills and MacArthur contributed non-cash pre-construction costs related to these projects totaling $15.7 million.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
In July 1996, TRG completed transactions that resulted in it acquiring the 75% interest in Fairlane Town Center (Fairlane) previously held by a Joint Venture Partner. TRG also assumed mortgage debt of approximately $26 million, representing the former Joint Venture Partner's beneficial interest in the $34.6 million mortgage encumbering the property. The accounts of Fairlane are included in these combined financial statements until the acquisition date. On the acquisition date, the book values of Fairlane's assets and liabilities were approximately $25 million and $39 million, respectively.
In December 1995, the bank group holding the $99.5 million nonrecourse mortgage encumbering Bellevue Center acquired title to the Center through a nonjudicial foreclosure sale. The mortgage matured on November 1, 1995. TRG ceased to recognize the results of Bellevue Associates (Bellevue), TRG's 60% owned Joint Venture that owned the Center, as of November 1, 1995, and, accordingly, the accounts of Bellevue Associates are not included in these combined financial statements from that date.
As a result of the foreclosure and debt extinguishment, Bellevue recognized in 1995 an extraordinary gain of approximately $31.4 million, representing the difference between the carrying value of the debt and the fair value of the Center, net of related transaction costs, and an ordinary gain of approximately $4.4 million, representing the excess of the fair value of the Center over its carrying value. The extinguishment of the debt and write off of the Center's carrying value represent non-cash transactions.
In May 1994, West Farms Associates redeemed a portion of a deceased Joint Venture Partner's interest for $12.7 million. As a result, TRG's ownership increased to approximately 79%, up from 68%. The excess of the redemption price over the book value of the interests was allocated to properties.
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under short and intermediate term leases which are accounted for as operating leases. Minimum rents are recognized on an accrual basis as earned, the result of which does not differ materially from a straight-line method. Percentage rents are recognized on an accrual basis as earned. Expense recoveries, which include an administrative fee, are recognized as revenue in the period applicable costs are chargeable to tenants.
Depreciation and Amortization
Buildings, improvements and equipment, stated at cost, are depreciated on straight-line or double-declining balance bases over the estimated useful lives of the assets which range from 3 to 55 years. Tenant allowances and deferred leasing costs are amortized on a straight-line basis over the lives of the related leases.
Capitalization
Costs related to the acquisition, development, construction, and improvement of properties are capitalized. Interest costs are capitalized until construction is substantially complete. Properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amounts of the properties may not be recoverable.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90 days or less at the date of purchase.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized over the terms of the related agreements as a component of interest expense. Direct costs related to leasing activities are capitalized and amortized on a straight-line basis over the lives of the related leases. All other deferred charges are amortized on a straight-line basis over the terms of the agreements to which they relate.
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over the terms of the cap agreements. Amounts received under the cap agreements are accounted for on an accrual basis, and recognized as a reduction of interest expense. The differential to be paid or received on swap agreements is accounted for on an accrual basis and recognized as an adjustment to interest expense.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of financial instruments:
The carrying value of cash and cash equivalents, accounts and notes receivable, and accounts payable approximates fair value due to the short maturity of these instruments.
The fair value of mortgage notes and other notes payable is estimated based on quoted market prices if available, or on the current rates available to the Joint Ventures for debt of similar terms and maturity and the assumption that debt will be prepaid at the earliest possible date.
The fair value of interest rate hedging instruments is the amount the Joint Venture would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates.
Use of Estimates
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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 2 - Properties
Properties, at December 31, 1995 and 1996, are summarized as follows:
1995 1996 ------- ---------
Land $ 25,773 $ 23,287 Buildings, improvements and equipment 503,124 476,283 Construction in process 40,502 149,912 Peripheral land 667 667 -------- -------- $570,066 $650,149 ======== ========
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Depreciation expense for 1994, 1995 and 1996 was $17.1 million, $18.4 million and $18.0 million. Peripheral land primarily consists of undeveloped land generally adjacent to the Taubman Shopping Centers. Construction in process includes costs related to expansions and other improvements at various centers. Assets under capital lease of $5.0 million are included in the table above in buildings, improvements and equipment.
Note 3 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1995 and 1996 are summarized as follows:
1995 1996 ---- ----
Leasing $42,582 $39,924 Accumulated amortization (19,133) (19,298) ------- ------- $23,449 $20,626 Deferred financing, net 14,544 11,810 Other, net 5,539 4,176 ------- ------- $43,532 $36,612 ======= =======
Note 4 - Debt
Mortgage Notes Payable
Mortgage notes payable at December 31, 1995 and 1996 consists of the following:
1995 1996 ---- ----
Fixed rate, amortizing $132,560 $ 96,156 Fixed rate, nonamortizing 254,000 254,000 Fixed rate by swap agreement 93,500 93,500 Floating rate, swapped to fixed to August 1996 130,000 Floating rate, capped to maturity 128,408 278,153 -------- -------- $738,468 $721,809 ======== ========
Mortgage debt is collateralized by substantially all real estate. The December 31, 1996 balance includes two fixed rate, amortizing notes totaling $96.2 million. One of these notes has a fixed rate of 9.0% and matures in 2016. The second note, which matures in 2017, has a fixed rate of 11.69% and also requires payment of additional interest ($1.3 million, $1.4 million and $1.6 million in 1994, 1995, and 1996) based on operating results. The December 31, 1996 fixed rate, nonamortizing balance includes a 6.47%, $88 million note due in 2000, an 8.2%, $66 million note due in 2004, and a 7.85%, $100 million note due in 2002. In addition to the $100 million note due in 2002, a Joint Venture has a $55 million construction facility to be used to finance expansion costs. At December 31, 1996, $19.7 million was outstanding under this facility which matures in 2002 and floats at a rate of one month LIBOR plus 1.5%. The construction facility was capped at 9.6% until July 1997, and thereafter until maturity at 9.95%, plus credit spread.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
The December 31, 1996 balance also includes a $172 million note due in 1998. The interest rate on $93.5 million of this note was swapped to maturity at an effective annual rate of 5.4%. The rate on the balance of the financing, which was capped to maturity at a maximum annual rate of 6.5%, including credit spread, floats at a rate of three month LIBOR plus 0.5%. A portion of the proceeds of this financing was restricted to fund expansion costs.
An additional floating rate financing of $50 million is due in 2001. The rate on the financing floats at LIBOR plus 0.45%. The Joint Venture purchased a cap instrument with a notional amount of $50 million and a seven year term. The cap rate, including credit spread, from December 1996 until maturity is 9.00%. Up to $50 million in additional notes may be issued in the future.
A $130 million secured bank financing maturing in 1998 has options to extend the loan up to an additional three years. The facility has an interest rate of LIBOR plus 0.75%. The rate has been capped at 7.25% from November 1996 to February 1998 and then at 9.1% until maturity, including credit spread.
Scheduled principal payments on mortgage debt are as follows as of December 31, 1996:
1997 $ 1,407 1998 303,559 1999 1,727 2000 89,914 2001 52,121 Thereafter 273,081 -------- Total $721,809 ========
Other Notes Payable
Other notes payable at December 31, 1995 and 1996 consists of the following:
1995 1996 ---- ---- Notes payable to banks, line of credit, interest generally at prime (8.25% at December 31, 1996), maximum borrowings available up to $7.5 million to fund tenant loans, allowances and buyouts and working capital. $2,584 $2,293 Other 69 60 ------ ------ $2,653 $2,353 ====== ======
Interest Expense
Interest paid on mortgages and other notes payable in 1994, 1995 and 1996, net of amounts capitalized of $3.6 million, $3.5 million and $4.8 million, approximated $49.6 million, $55.6 million and $49.9 million.
Extraordinary Items
In 1995, Bellevue Associates recognized an extraordinary gain of approximately $31.4 million (Note 1). Other extraordinary charges to income totaling $3.5 million in 1994 and $0.6 million in 1995 primarily represent prepayment penalties relating to the extinguishment of mortgage debt.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Interest Rate Hedging Instruments
Certain of the Joint Ventures have entered into interest rate swap and cap agreements to reduce their exposure to changes in the cost of floating rate debt. These Joint Ventures are exposed to credit risk in the event of nonperformance by their counterparties to the agreements, but have no off-balance sheet risk of loss. These Joint Ventures anticipate that their counterparties will be able to fully perform their obligations under the agreements.
Fair Value of Debt Instruments
The estimated fair values of financial instruments at December 31, 1995 and 1996 are as follows:
December 31 ----------------------------------------------- 1995 1996 ----------------------- --------------------- Carrying Fair Carrying Fair Value Value Value Value --------- -------- --------- -------- Mortgage notes payable $738,468 $789,960 $721,809 $757,438 Other notes payable 2,653 2,653 2,353 2,353 Interest rate instruments: In a receivable position 4,765 3,331 4,065 3,263 In a payable position 23 (247) 0 0
Note 5 - Leases
Shopping center space is leased to tenants and certain anchors pursuant to lease agreements. Tenant leases typically provide for guaranteed minimum rent, percentage rent and other charges to cover certain operating costs. Future minimum rent under operating leases in effect at December 31, 1996 for operating centers, assuming no new or renegotiated leases or option extensions on anchor agreements, is summarized as follows:
1997 $151,705 1998 146,381 1999 135,721 2000 120,401 2001 103,685 Thereafter 290,246
Minimum rent received from former related parties was $2.1 million and $0.9 million in 1994 and 1995. There are no related party amounts in the table above.
One Joint Venture, as lessee, has a ground lease expiring in 2083. Rental payments under the lease were $1.7 million in each of 1994, 1995 and 1996. All of the ground lease rental payments and scheduled future payments represent minimum rental expense payable to its Joint Venture Partner.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
The following is a schedule of future minimum rental payments required under the lease.
1997 $ 1,790 1998 1,984 1999 1,984 2000 1,984 2001 1,984 Thereafter 658,475
Capital Lease Obligation
A joint venture has entered into a lease agreement for property improvements with a five year term ending December 2001. As of December 31, 1996, future minimum lease payments for this capital lease are as follows:
1997 $ 1,246 1998 1,245 1999 1,246 2000 1,245 2001 1,246 ------- Total minimum lease payments $ 6,228 Less amount representing interest (1,228) ------- Capital lease obligation $ 5,000 =======
Note 6 - Transactions with Affiliates
Charges from the Manager and affiliates under various written agreements were as follows for the years ended December 31: 1994 1995 1996 ---- ---- ----
Management and leasing services $18,156 $18,668 $16,720 Security and maintenance services 15,635 15,468 11,608 Development services 5,335 5,708 8,782 ------- ------- ------- $39,126 $39,844 $37,110 ======= ======= =======
In 1994, Westfarms loaned $2.4 million to one of its Joint Venture Partners to purchase a portion of a deceased Joint Venture Partner's interest. The note bears interest at Westfarms' average borrowing rate and requires monthly principal payments of $25 thousand, plus accrued interest. The balance at December 31, 1995 and 1996 was $1.9 million and $1.6 million, respectively. Interest income related to the loan was approximately $0.1 million in 1994, 1995 and 1996.
Other related party transactions are described in Notes 1, 5, and 7.
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UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Note 7 - Subsequent Events
TRG's ownership interest in Arizona Mills, L.L.C. increased in January 1997 to 37% as a result of Arizona Mills, L.L.C. redemption of a former owner's 5% interest for $2.8 million. The former owner is an affiliate of a partner in TRG. Also in January 1997, Arizona Mills, L.L.C. closed on a secured $145 million construction facility maturing in 2002. The loan bears interest at LIBOR plus 1.3%. The facility is hedged until maturity at a one month LIBOR cap rate of 9.5%. The payment of principal and interest is recourse to each of the owners of Arizona Mills to the extent of their ownership percentage.
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F - 42
The changes in total real estate assets for the three years ended December 31, 1996 are as follows:
1994 1995 1996 ---- ---- ----
Balance, beginning of year $544,743 $600,877 $570,066 Acquisitions 17,446 Improvements 46,128 48,320 119,781 (2) Disposals (7,440) (79,131)(1) (4,775) Transfers Out (34,923)(3) -------- -------- -------- Balance, end of year $600,877 $570,066 $650,149 ======== ======== ========
The changes in accumulated depreciation and amortization for the three years ended December 31, 1996 are as follows:
1994 1995 1996 ---- ---- ----
Balance, beginning of year $(184,913) $(198,103) $(196,263) Depreciation for year (17,118) (18,378) (17,976) Disposals 3,928 20,218 (1) 4,564 Transfers Out 21,184(3) --------- --------- --------- Balance, end of year $(198,103) $(196,263) $(188,491) ========= ========= =========
(1)Includes amounts related to the disposition of Bellevue Center. Subsequent to October 31, 1995, TRG ceased recognition of Bellevue's operations, consequently, the accounts of Bellevue are no longer included in these combined financial statements. (2)Includes TRG's transfer to Arizona Mills and MacArthur Center of TRG's accumulated pre-construction costs related to these projects. (3)Subsequent to TRG's purchase of the Joint Venture Partner's interest, the accounts of Fairlane are no longer included in these combined financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP
By: Taubman Centers, Inc., its Managing General Partner
Date: March 27, 1997 By: /s/ ROBERT S. TAUBMAN --------------------------------------------- Robert S. Taubman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
* Chairman of the Board March 27, 1997 - ---------------------- -------------- A. Alfred Taubman
* Vice Chairman of the Board March 27, 1997 - ---------------------- -------------- Robert C. Larson
/s/ ROBERT S. TAUBMAN President, Chief Executive March 27, 1997 - ---------------------- Officer, and Director -------------- Robert S. Taubman
/s/ LISA A. PAYNE Chief Financial Officer March 27, 1997 - ---------------------- and Director -------------- Lisa A. Payne
/s/ RICHARD B. MCGLINN Chief Accounting Officer March 27, 1997 - ---------------------- -------------- Richard B. McGlinn
* Director March 27, 1997 - ---------------------- -------------- Graham Allison
* Director March 27, 1997 - ---------------------- -------------- Claude M. Ballard
* Director March 27, 1997 - ---------------------- -------------- Allan J. Bloostein
* Director March 27, 1997 - ---------------------- -------------- Jerome A. Chazen
* Director March 27, 1997 - ---------------------- -------------- S. Parker Gilbert
* Director March 27, 1997 - ---------------------- -------------- W. Allen Reed
*By: /s/ LISA A. PAYNE ----------------- Lisa A. Payne, as Attorney-in-Fact
EXHIBIT INDEX
Exhibit Number
* 2(a) -- Purchase and Sale Agreement By and Between The Pacific Telesis Group Master Pension Trust and The Taubman Realty Group Limited Partnership, dated July 17, 1996 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 2(a) filed with the Registrant's Current Report on Form 8-K dated July 19, 1996).
* 2(b) -- Subscription Agreement By and Between The Pacific Telesis Group Master Pension Trust and The Taubman Realty Group Limited Partnership dated July 18, 1996 (without exhibits or schedules, which will be supplementally provided to the Securities and Exchange Commission upon its request) (incorporated herein by reference to Exhibit 2(b) filed with the Registrant's Current Report on Form 8-K dated July 19, 1996).
3(a) -- The Amended and Restated Agreement of Limited Partnership of The Taubman Realty Group Limited Partnership (excluding exhibits filed separately) (incorporated herein by reference to Exhibit 3(a) filed with the Registrant's Registration Statement on Form S-4 (File No. 33- 73988) (the "Registration Statement")).
4(a) -- Amended and Restated Indenture dated as of March 4, 1994 between The Taubman Realty Group Limited Partnership and Chemical Bank, as Trustee (incorporated herein by reference to Exhibit 4(a) filed with Amendment No. 1 to the Registration Statement).
4(b) -- Officers' Certificate designating the terms of the 7% Notes due 2003 (incorporated herein by reference to Exhibit 4(b) filed with Amendment No. 1 to the Registration Statement).
4(c) -- Officers' Certificate designating the terms of the 8% Notes due 1999 (incorporated herein by reference to Exhibit 4(f) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "1994 Second Quarter Form 10-Q")).
4(d) -- Indenture dated as of July 22, 1994 among Beverly Finance Corp., La Cienega Associates, the Borrower, and Morgan Guaranty Trust Company of New York, as Trustee (incorporated herein by reference to Exhibit 4(g) filed with the 1994 Second Quarter Form 10-Q).
EXHIBIT INDEX
Exhibit Number
4(e) -- Deed of Trust, with assignment of Rents, Security Agreement and Fixture Filing, dated as of July 22, 1994, from La Cienega Associates, Grantor, to Commonwealth Land Title Company, Trustee, for the benefit of Morgan Guaranty Trust Company of New York, as Trustee, Beneficiary (incorporated herein by reference to Exhibit 4(h) filed with the 1994 Second Quarter Form 10-Q).
4(f) -- Revolving Loan Agreement dated as of April 29, 1994, among The Taubman Realty Group Limited Partnership, as Borrower, Union Bank of Switzerland, (New York Branch), as Bank and Union Bank of Switzerland (New York Branch), as Administrative Agent (the "Revolving Loan Agreement") (incorporated herein by reference to Exhibit 4(i) filed with the 1994 Second Quarter Form 10-Q), as amended by an Amendment to the Revolving Loan Agreement dated August 10, 1994 (incorporated herein by reference to Exhibit 4(g) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (the "1994 Third Quarter Form 10-Q")) and as modified by a Letter Agreement modifying the Revolving Loan Agreement dated June 20, 1995 (incorporated herein by reference to exhibit 4(g) filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (the "1995 Second Quarter Form 10-Q")).
4(g) -- Officers' Certificate designating the terms of the Floating Rate Notes due 1997 (incorporated herein by reference to Exhibit 4(h) filed with the 1994 Third Quarter Form 10-Q).
4(h) -- Medium-Term Notes due June 15, 2002 (incorporated herein by reference to Exhibit 4(i) filed with the 1995 Second Quarter Form 10-Q).
**10(a) -- The Taubman Realty Group Limited Partnership 1992 Incentive Option Plan (incorporated herein by reference to Exhibit 10(a) filed with the Registration Statement).
10(b) -- Corporate Services Agreement between Taubman Centers, Inc. and The Taubman Company Limited Partnership (the "Manager") (incorporated herein by reference to Exhibit 10(b) filed with the Registration Statement).
10(c) -- Master Services Agreement between The Taubman Realty Group Limited Partnership and the Manager (incorporated herein by reference to Exhibit 10(c) filed with the Registration Statement).
EXHIBIT INDEX
Exhibit Number
**10(d) -- Financial Performance Incentive Plan (incorporated herein by reference to Exhibit 10(d) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K")).
**10(e) -- Supplemental Retirement Savings Plan (incorporated herein by reference to Exhibit 10(e) filed with the 1994 Form 10-K).
**10(f) -- The Taubman Company Long-Term Performance Compensation Plan (incorporated herein by reference to Exhibit 10(g) filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
12 -- Statement Re: Computation of Ratio of Earnings to Fixed Charges.
21 -- Subsidiaries of The Taubman Realty Group Limited Partnership.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
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* Certain portions of this document have been omitted and separately filed with the Securities and Exchange Commission with a request for confidential treatment.
** A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.