Item 1. Business - ----------------
Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the "Registrant") is a limited partnership formed in 1984 under the laws of the State of Illinois. The Registrant raised $83,936,000 from sales of Limited Partnership Interests. The Registrant's operations consist exclusively of investment in and operation of real property, and all information included in this report relates to this industry segment.
The Registrant utilized the net offering proceeds to acquire thirteen real property investments and a minority joint venture interest in one additional property. The Registrant disposed of twelve of these properties and the minority joint venture interest as of December 31, 1996. The Registrant owns the remaining property described under "Item 2.
Item 2. Properties - ------------------
As of December 31, 1996, the Registrant owned in fee simple the Steeplechase Apartments located in Lexington-Fayette, Kentucky. This property is a 296-unit apartment complex located on approximately 16 acres. See Note 2 of Notes to the Financial Statements for additional information.
The average occupancy rates and effective average rent per unit for each of the last five years for the remaining property owned by the Registrant at December 31, 1996, are described below.
1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Steeplechase Apartments Occupancy rate 93% 94% 95% 95% 95% Effective rent $541 $528 $514 $494 $479
Apartment units in this property are rented with leases of one year or less, with no tenant occupying greater than ten percent of the property. Real estate taxes incurred in 1996 for this property totaled $77,949.
The Federal tax basis of the Registrant's property totaled $8,581,391 as of December 31, 1996. For Federal income tax purposes, the acquisition cost of this property is depreciated over its useful life of 18 years, using the ACRS method. Other minor assets are depreciated over their applicable recovery periods.
Steeplechase Apartments is held subject to mortgage financing as described in more detail in Note 5 of Notes to the Financial Statements.
In the opinion of the General Partner, the Registrant provided for adequate insurance coverage for its real estate investment property.
See Notes to Financial Statements for other information regarding this real property investment.
Item 3.
Item 3. Legal Proceedings - -------------------------
Proposed class action - ---------------------
On February 29, 1996, a proposed class action complaint was filed, Raymond Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of the State of New York, County of New York). The Registrant, additional limited partnerships which were sponsored by The Balcor Company, three limited partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together with the Registrant and the affiliated partnerships, the "Defendant Partnerships"), Lehman Brothers, Inc. and Smith Barney Holdings, Inc. are defendants. The complaint alleges, among other things, common law fraud and deceit, negligent misrepresentation and breach of fiduciary duty relating to the disclosure of information in the offering of limited partnership interests in the Defendant Partnerships. The complaint seeks judgment for compensatory damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages for injuries arising from the defendants' alleged actions; recovery from the defendants of all profits received by them as a result of their alleged actions relating to the Defendant Partnerships; exemplary damages; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been certified as of this date. The Registrant believes it has meritorious defenses to contest the claims. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the Registrant.
Proposed class action - ---------------------
On August 30, 1996, a proposed class action complaint was filed, Lenore Klein vs. Lehman Brothers, Inc., et al., Superior Court of New Jersey, Law Division, Union County, Docket No. Unn-L-5162-96). The Registrant, additional limited partnerships which were sponsored by The Balcor Company (together with the Partnership, the "Affiliated Partnerships"), American Express Company, Lehman Brothers, Inc., additional limited partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together with the Registrant and the Affiliated Partnerships, the "Defendant Partnerships") and Smith Barney Holdings, Inc. are the named defendants in the action. The complaint was amended on October 18, 1996 to add additional plaintiffs. The amended complaint alleges, among other things, common law fraud and deceit, negligent misrepresentation, breach of contract, breach of fiduciary duty and violation of certain New Jersey statutes relating to the disclosure of information in the offering of limited partnership interests in the Defendant Partnerships. The amended complaint seeks judgment for compensatory damages equal to the amount invested in the Defendant Partnerships by the proposed class plus interest; general damages for injuries arising from the defendants' alleged actions; equitable relief, including rescission, on certain counts; punitive damages; treble damages on certain counts; recovery from the defendants of all profits received by them as a result of their alleged actions relating to the Defendant Partnerships; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been certified as of this date. The Registrant believes it has meritorious defenses to contest the claims. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the Registrant.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant during 1996.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------------------------------------------------------------------------- Matters - -------
There has not been an established public market for Limited Partnership Interests and it is not anticipated that one will develop. For information regarding distributions, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
As of December 31, 1996, the number of record holders of Limited Partnership Interests of the Registrant was 7,348.
Item 6.
Item 6. Selected Financial Data - -------------------------------
Year ended December 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ------------ Total income $13,452,971 $13,107,902 $12,877,418 $13,143,237 $14,216,484 Income (loss) before gain on sale of properties and extra- ordinary items 1,835,074 (1,479,430) (2,019,363) (2,299,675) (2,647,166) Net income (loss) 27,848,238 (1,479,430) (2,019,363) 1,348,884 (2,647,166) Net income (loss) per Limited Partnership Interest 328.46 (17.45) (23.82) 15.91 (31.22) Total assets 18,507,810 51,038,768 52,186,795 54,690,993 65,783,386 Mortgage notes payable 7,249,433 53,469,385 53,346,903 57,225,506 65,457,125
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - -------------
Operations - ----------
Summary of Operations - ---------------------
During 1996, Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the "Partnership") sold seven properties and recognized significant gains on these sales. The Partnership also recognized its share of the gain on the June 1996 sale of the Rosehill Pointe Apartments, which was owned by a joint venture consisting of the Partnership and an affiliate. These events resulted in the recognition of net income during 1996 as compared to a net loss during 1995 and 1994. Improved property operations at several of the properties owned by the Partnership was the primary reason the net loss decreased during 1995 as compared to 1994. Further discussion of the Partnership's operations is summarized below.
1996 Compared to 1995 - --------------------- Rental and service income decreased in 1996 as compared to 1995 primarily due to the sales of the Forest Ridge - Phase II, Country Oaks, Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake, and Park Crossing apartment complexes during 1996.
Higher average cash balances due to the investment of the proceeds from the property sales prior to distribution to Limited Partners in January 1997, resulted in an increase in interest income on short-term investments during 1996 as compared to 1995.
Rosehill Pointe Apartments, in which the Partnership held a minority joint venture interest, was sold during June 1996. As a result of the Partnership's share of the gain recognized during 1996 in connection with the sale, income from participation in joint venture with an affiliate increased in 1996 when compared to 1995. In connection with the sale, the Partnership also recognized its share of debt extinguishment expense of $20,945 which is classified as an extraordinary item.
Interest expense on mortgage notes payable decreased in 1996 as compared to 1995 primarily due to the repayment of mortgage loans with proceeds from the property sales.
The repayment of the General Partner loans during 1996 along with lower interest rates resulted in a decrease in interest expense on short-term loans from affiliate during 1996 as compared to 1995.
Depreciation expense decreased in 1996 as compared to 1995 due to the 1996 property sales.
Amortization of deferred expenses related to mortgage loans on properties decreased in 1996 as compared to 1995 due to the 1996 property sales.
Property operating expenses decreased during 1996 as compared to 1995 due to the property sales. This decrease of approximately $807,000 was partially offset by increased repair and maintenance expenditures in 1996 at the Hunters Glen Apartments of approximately $133,000 relating to basin work and painting in preparation for the sale.
Real estate tax expense decreased during 1996 as compared to 1995 due to the property sales.
Property management fees decreased in 1996 as compared to 1995 due to the property sales.
Higher professional fees resulted in an increase in administrative expenses during 1996 when compared to 1995.
The Partnership sold the Forest Ridge - Phase II, Country Oaks, Chestnut Ridge - - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake, and Park Crossing apartment complexes and recognized gains totaling $25,641,050 during 1996.
As a result of the 1996 property sales, the Partnership wrote-off the remaining unamortized deferred expenses in the amount of $709,329. In addition, in connection with the sales of the Chestnut Ridge - Phase I, Hunters Glen, Willow Bend Lake and Park Crossing apartment complexes, the Partnership paid $804,428 in prepayment penalties. These amounts were recognized as an extraordinary item and classified as debt extinguishment expenses during 1996.
In connection with the sale of the Chestnut Ridge - Phase I Apartments, the Partnership recognized an extraordinary gain on forgiveness of debt of $1,864,919 in 1996.
1995 Compared to 1994 - ---------------------
The Partnership was able to achieve higher rental rates at most of the Partnership's properties in 1995. As a result, rental and service income increased at these properties during 1995 as compared to 1994.
Rental income increased at the Rosehill Pointe Apartments due to higher rental rates, resulting in participation in income of joint venture with an affiliate during 1995 as compared to participation in loss of joint venture with an affiliate in 1994.
During 1994, the Partnership reached a settlement with defendants in the litigation relating to the Park Crossing Apartments and received $300,000 in settlement of all claims due to the Partnership.
In connection with the 1994 refinancing of certain of the properties' mortgage loans, the Partnership retired $2,274,269, including deferred interest, and replaced $4,215,546 of affiliate mortgage notes payable related to the Chestnut Ridge - Phase I and Forest Ridge - Phase II apartment complexes with proceeds from both third party mortgage loans and short-term loans from the General Partner. As a result, interest expense on mortgage notes payable decreased and interest expense on short-term loans from affiliates increased during 1995 as compared to 1994. The Partnership paid a prepayment penalty of $54,805 in connection with the Country Oaks Apartments refinancing in June 1995 which partially offset the decrease in interest expense on mortgage notes payable.
Due to the refinancing of the mortgage loans collateralized by Chestnut Ridge - Phase I in 1994, the Partnership wrote-off the remaining unamortized deferred expenses related to the previous loan. As a result, amortization of deferred expenses decreased during 1995 as compared to 1994.
Professional fees incurred in 1994 related to refinancings and legal fees relating to the Park Crossing Apartments settlement incurred in 1994 resulted in a decrease in administrative expenses during 1995 as compared to 1994.
Liquidity and Capital Resources - -------------------------------
The cash position of the Partnership increased by approximately $11,332,000 as of December 31, 1996 when compared to December 31, 1995 primarily as a result of the proceeds received in connection with the property sales in 1996. The Partnership's cash used in operating activities of approximately $306,000 was primarily due to the operations of its properties and interest income on short-term investments, which were offset by administrative expenses and the payment of accrued interest on short-term loans from an affiliate. Cash provided by investing activities of approximately $61,724,000 consisted of proceeds received in connection with the sales of the Forest Ridge - Phase II, Country Oaks, Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake, and Park Crossing apartment complexes, net of selling costs, plus net distributions received from the joint venture with an affiliate, which primarily represent the Partnership's share of the proceeds from the sale of Rosehill Pointe Apartments. Cash used in financing activities of approximately $50,086,000 consisted primarily of the repayment in full of approximately $11,901,000 of loans payable to an affiliate and the repayment of mortgage
notes payable of approximately $38,272,000 with proceeds from property sales. In January 1997, the Partnership made a distribution from sales proceeds to Limited Partners as discussed below.
The Partnership classifies the cash flow performance of its properties as either positive, a marginal deficit or a significant deficit, each after consideration of debt service payments, unless otherwise indicated. A deficit is considered to be significant if it exceeds $250,000 or 20% of the property's rental and service income. The Partnership defines cash flow generated from its properties as an amount equal to the property's revenue receipts less property related expenditures, which include debt service payments. During 1996 and 1995, Steeplechase Apartments generated positive cash flow. As of December 31, 1996, the occupancy rate at the property was 96%.
The Forest Ridge - Phase II Apartments, which was sold in June 1996, generated positive cash flow prior to its sale in 1996 and generated a marginal deficit during 1995. The Chestnut Ridge - Phase I Apartments, which was sold in September 1996, generated a marginal deficit prior to its sale in 1996 and during 1995. The Hunters Glen and Country Oaks apartment complexes, which were sold in September 1996, both generated positive cash flow prior to their sales in 1996 and during 1995. The Marbrisa and Willow Bend Lake apartment complexes, which were sold in October 1996, both generated positive cash flow prior to their sales in 1996 and during 1995. The Park Crossing apartment complex, which was sold in November 1996, generated positive cash flow prior to its sale in 1996 and during 1995. The Rosehill Pointe Apartments, in which the Partnership held a minority joint venture interest, was sold in June 1996 and generated positive cash flow prior to its sale in 1996 and during 1995.
During 1996, the Partnership sold the Forest Ridge - Phase II, Country Oaks, Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake and Park Crossing apartment complexes. During 1996, the General Partner also sold the Rosehill Pointe Apartments, in which the Partnership held a minority joint venture interest. The Partnership has entered into a contract for the sale of its remaining property, the Steeplechase Apartments, for a sale price of $10,100,000. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Partnership including, but not limited to the lawsuits discussed in "Item 3. Legal Proceedings." In the absence of any such contingency, the reserves will be paid within twelve months of the last property being sold. In the event a contingency arises, reserves may be held by the Partnership for a longer period of time.
The Rosehill Pointe Apartments was owned by a joint venture consisting of the Partnership and an affiliate. In June 1996, the joint venture sold the property in an all cash sale for $20,700,000. From the proceeds of the sale, the joint venture paid $15,537,677 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $170,250 in selling costs. The net proceeds of the sale were $4,992,073, of which $1,915,958 was the Partnership's share. Pursuant to the terms of the sale, $500,000 of the proceeds were retained by the joint venture until October 1996. The full amount of the holdback was released in October 1996. The Partnership's share of the remaining proceeds was used to repay a portion of the General Partner loan. See Note 7 of Notes to Financial Statements for additional information.
In June 1996, the Partnership sold the Forest Ridge - Phase II Apartments complex in an all cash sale for $11,100,000. From the proceeds of the sale, the Partnership paid $7,870,116 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $126,000 in selling costs. Pursuant to the terms of the sale, $500,000 of the proceeds were retained by the Partnership until October 1996. The full amount of the holdback was released in October 1996. The remaining proceeds were used to repay a portion of the General Partner loan. See Note 10 of Notes to Financial Statements for additional information.
In September 1996, the Partnership sold the Country Oaks Apartments for $8,250,000. The purchaser of the Country Oaks Apartments took title subject to the existing first mortgage in the amount of $5,946,893. From the proceeds of the sale, the Partnership paid $154,436 in selling costs. The remaining proceeds were used to repay a portion of the General Partner loan in October 1996. See Note 10 of Notes to Financial Statements for additional information.
In September 1996, the Partnership sold the Chestnut Ridge - Phase I Apartments in an all cash sale for $5,513,400. From the proceeds of the sale, the Partnership paid $3,629,161 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $199,601 in selling costs and $181,458 in prepayment penalties, resulting in the Partnership receiving net proceeds of $1,503,180 from the sale. However, the terms of the 1994 refinancing of this property provided that minimum net proceeds of $1,646,000 were to be received from the sale of this property. As a result, $142,820 was contributed to the Partnership through an increase to the balance of the junior loan outstanding from The Balcor Company ("TBC"). Pursuant to the terms of the sale, $250,000 of the proceeds were retained by the Partnership until December 1996. The full amount of the holdback was released in December 1996. The remaining proceeds were used to repay a portion of the General Partner loan in October 1996. See Notes 10 and 12 of Notes to Financial Statements for additional information.
In September 1996, the Partnership sold the Hunters Glen Apartments in an all cash sale for $9,100,000. From the proceeds of the sale, the Partnership paid $4,541,552 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $270,215 in selling costs and $90,832 in prepayment penalties. Pursuant to the terms of the sale, $500,000 of the proceeds were retained by the Partnership until January 1997. The full amount of the holdback was released in January 1997. A portion of the remaining proceeds was used to repay a portion of the General Partner loan in October 1996 and the remainder was distributed to the Limited Partners in January 1997. See Note 10 of Notes to Financial Statements for additional information.
In October 1996, the Partnership sold the Marbrisa Apartments in an all cash sale for $7,800,000. From the proceeds of the sale, the Partnership paid $5,361,230 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $325,361 in selling costs. Pursuant to the terms of the sale, $500,000 of the proceeds were retained by the Partnership until February 1997. The full amount of the holdback was released in February 1997. The remainder of the proceeds were distributed to the Limited Partners in January 1997. See Note 10 of Notes to Financial Statements for additional information.
In October 1996, the Partnership sold the Willow Bend Lake Apartments in an all cash sale for $14,350,000. From the proceeds of the sale, the Partnership paid $9,737,486 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $366,660 in selling costs and $389,499 in prepayment penalties. Pursuant to the terms of the sale, $250,000 of the proceeds were retained by the Partnership until February 1997. The full amount of the holdback was released to the Partnership in February 1997. The remainder of the proceeds were distributed to the Limited Partners in January 1997. See Note 10 of Notes to Financial Statements for additional information.
In November 1996, the Partnership sold the Park Crossing Apartments in an all cash sale for $11,350,000. From the proceeds of the sale, the Partnership paid $7,131,987 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $191,995 in selling costs and $142,639 in prepayment penalties. The majority of the remaining proceeds were distributed to the Limited Partners in January 1997. See Note 10 of Notes to Financial Statements for additional information.
Steeplechase Apartments is located in Lexington, Kentucky, in the southeast sub-market. This area offers a wide range of pricing at its various apartment complexes. Steeplechase's pricing positions it toward the upper end of the market. Approximately 1,500 new units were completed in the sub-market in 1996, which has had a softening effect on occupancy and rental rates at Steeplechase Apartments. In 1996, the property's average occupancy was 93%; the southeast sub-market's average occupancy was 91%.
During January 1997, the Partnership made its initial cash distribution and paid $9,232,960 ($110 per Interest) to the holders of Limited Partnership Interests representing a special distribution of Net Cash Proceeds from the sales of the Hunters Glen, Marbrisa, Willow Bend Lake and Park Crossing apartment complexes. To date, Limited Partners have received cash distributions of Net Cash Proceeds of $110 per $1,000 interest, as well as certain tax benefits. The Partnership will distribute available proceeds from the sale of the Steeplechase Apartments in 1997. In light of results to date, investors will not recover a substantial portion of their original investment.
Inflation has several types of potentially conflicting impacts on real estate investments. Short-term inflation can increase real estate operating costs which may or may not be recovered through increased rents and/or sales prices depending on general or local economic conditions. In the long-term, inflation can be expected to increase operating costs and replacement costs and may lead to increased rental revenues and real estate values.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
See Index to Financial Statements and Financial Statement Schedule in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K is not applicable.
The net effect of the differences between the financial statements and the tax returns is summarized as follows:
December 31, 1996 December 31, 1995 ----------------------- ------------------------- Financial Tax Financial Tax Statements Returns Statements Returns ---------- --------- ---------- --------- Total assets $18,507,810 $16,292,048 $51,038,768 $30,235,662 Partners' capital (deficit): General Partner (643,026) (169,038) (921,508) (14,587,833) Limited Partners 11,121,829 17,169,649 (16,228,370) (16,576,162) Net income (loss): General Partner 278,482 14,418,795 (14,794) (38,483) Limited Partners 27,569,756 33,965,368 (1,464,636) (2,212,271) Per Limited Part- nership Interest 328.46 404.66 (17.45) (26.36)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - --------------------
There have been no changes in or disagreements with accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Partners-XVII, its General Partner, has a Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers and significant employees of the General Partner of the Registrant are as follows:
TITLE OFFICERS ----- -------- Chairman, President and Chief Thomas E. Meador Executive Officer Senior Vice President Alexander J. Darragh Senior Vice President James E. Mendelson Senior Vice President John K. Powell, Jr. Managing Director, Chief Jayne A. Kosik Financial Officer, Treasurer and Assistant Secretary
Thomas E. Meador (age 49) joined Balcor in July 1979. He is Chairman, President and Chief Executive Officer and has responsibility for all ongoing day-to-day activities at Balcor. He is a Director of The Balcor Company. He is also Senior Vice President of American Express Company and is responsible for its real estate operations worldwide. Prior to joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in the commercial real estate division where he was involved in various lending activities. Mr. Meador received his M.B.A. degree from the Indiana University Graduate School of Business.
Alexander J. Darragh (age 42) joined Balcor in September 1988 and is responsible for due diligence analysis and real estate advisory services for Balcor and American Express Company. He also has supervisory responsibility for Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban Geography from Queen's University and in Urban Planning from Northwestern University.
James E. Mendelson (age 34) joined Balcor in July 1984 and is responsible for Balcor's property sales activities. He also has supervisory responsibility for Balcor's accounting, financial, treasury, investor services and investment administration functions. From 1989 to 1995, Mr. Mendelson was Vice President - Transaction Management and Vice President - Senior Transaction Manager and had responsibility for various asset management matters relating to real estate investments made by Balcor, including negotiations for the restructuring of mortgage loan investments. Mr. Mendelson received his M.B.A. degree from the University of Chicago.
John K. Powell, Jr. (age 46) joined Balcor in September 1985 and is responsible for portfolio and asset management matters relating to Balcor's partnerships. Mr. Powell also has supervisory responsibility for Balcor's risk management function. He received a Master of Planning degree from the University of Virginia. Mr. Powell has been designated a Certified Real Estate Financier by the National Society for Real Estate Finance and is a full member of the Urban Land Institute.
Jayne A. Kosik (age 39) joined Balcor in August 1982 and, as Chief Financial Officer, is responsible for Balcor's financial, human resources and treasury functions. From June 1989 until October 1996, Ms. Kosik had supervisory responsibility for accounting functions relating to Balcor's public and private partnerships. She is also Treasurer and a Managing Director of The Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any material legal proceedings nor were any such proceedings terminated during the fourth quarter of 1996.
Item 11.
Item 11. Executive Compensation - -------------------------------
The Registrant paid $1,366 in 1996 with respect to one of the executive officers and directors of Balcor Partners-XVII, the General Partner. The Registrant has not paid and does not propose to pay any remuneration to the remaining executive officers and directors of the General Partner. Certain of these remaining officers receive compensation from The Balcor Company (but not from the Registrant) for services performed for various affiliated entities, which may include services performed for the Registrant. However, the General Partner believes that any such compensation attributable to services performed for the Registrant is immaterial to the Registrant. See Note 9 of Notes to Financial Statements for the information relating to transactions with affiliates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(a) No person owns of record or is known by the Registrant to own beneficially more than 5% of the outstanding Limited Partnership Interests of the Registrant.
(b) Balcor Partners-XVII and its officers and partners own as a group the following Limited Partnership Interests of the Registrant:
Amount Beneficially Title of Class Owned Percent of Class - -------------- --------------- ---------------- Limited Partnership Interest 1,235 Interests 1.47%
Relatives and affiliates of the partners and officers of the General Partner own 26 additional Interests.
(c) The Registrant is not aware of any arrangements, the operation of which may result in a change of control of the Registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
(a & b) See Note 4 of Notes to Financial Statements for information relating to the Partnership Agreement and the allocation of distributions and profits and losses.
See Note 9 of Notes to Financial Statements for information relating to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K - ------------------------------------------------------------------------
(a) (1 & 2) See Index to Financial Statements and Financial Statement Schedule in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership set forth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated March 12, 1985 (Registration No. 2-95000) is incorporated herein by reference.
(4) Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated March 12, 1985 (Registration No. 2-95000) and Form of Confirmation regarding Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1992 are incorporated herein by reference.
(10) Material Contracts:
(a)(i) Agreement of Sale and attachment thereto relating to the sale of the Forest Ridge - Phase II apartment complex, Arlington, Texas previously filed as Exhibit 2 to the Registrant's Report on Form 8-K dated April 23, 1996 is incorporated herein by reference.
(ii) Master Amendment and Agreement relating to the sales of the Forest Ridge - Phase II, apartment complex, Arlington, Texas and Rosehill Pointe apartment complex, Lenexa, Kansas previously filed as Exhibit 2(b)(i) to the Registrant's Report on Form 8-K dated May 31, 1996 is incorporated herein by reference.
(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the sales of the Forest Ridge - Phase II, apartment complex, Arlington, Texas and Rosehill Pointe apartment complex, Lenexa, Kansas previously filed as Exhibit 2(b)(ii) to the Registrant's Report on Form 8-K dated May 31, 1996 is incorporated herein by reference.
(b)(i) Agreement of Sale relating to the sale of the Hunter's Glen Apartments, St. Louis County, Missouri previously filed as Exhibit 2(a) to the Registrant's Report on Form 8-K dated June 28, 1996 is incorporated herein by reference.
(ii) Letter Agreement dated June 28, 1996, relating to the sale of Hunter's Glen apartment complex, St. Louis County, Missouri, previously filed as Exhibit 99 to the Registrant's Report on Form 8-K dated July 15, 1996 is incorporated herein by reference.
(iii) Letter Agreement dated August 2, 1996, relating to the sale of Hunter's Glen apartment complex, St. Louis County, Missouri previously filed as Exhibit 10(b)(iii) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(iv) Letter Agreement dated August 16, 1996 relating to the sale of Hunter's Glen Apartments previously filed as Exhibit (99)(d) to the Registrant's Report on Form 8-K dated August 16, 1996 is incorporated herein by reference.
(c)(i) Agreement of Sale and attachment thereto relating to the sale of Willow Bend Lake Apartments, East Baton Rouge Parish, Louisiana previously filed as Exhibit 2 to the Registrant's Report on Form 8-K dated September 30, 1996 is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the sale of Willow Bend Lake Apartments, East Baton Rouge Parish, Louisiana, previously filed as Exhibit (10)(c)(ii) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996 is incorporated herein by reference.
(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to the sale of Willow Bend Lake Apartments, East Baton Rouge Parish, Louisiana, previously filed as Exhibit (10)(c)(iii) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996 is incorporated herein by reference.
(d)(i) Agreement of Sale and letter agreements thereto relating to the sale of Marbrisa apartment complex, Hillsborough County, Florida previously filed as Exhibit 2(a) to the Registrant's Report on Form 8-K dated July 15, 1996 is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale dated August 16, 1996 relating to the sale of Marbrisa Apartments, Hillsborough County, Florida, previously filed as Exhibit (99)(a)(i) to the Registrant's Report on Form 8-K dated August 16, 1996 is incorporated herein by reference.
(iii) Letter Agreement dated August 20, 1996 relating to the sale of Marbrisa Apartments, Hillsborough County, Florida, previously filed as Exhibit (99)(a)(ii) to the Registrant's Report on Form 8-K dated August 16, 1996 is incorporated herein by reference.
(iv) Letter Agreements relating to the sale of Marbrisa Apartments, Hillsborough County, Florida, previously filed as Exhibit (99)(b) to the Registrant's Report on Form 8-K dated September 30, 1996 is incorporated herein by reference.
(e)(i) Agreement of Sale dated September 3, 1996 relating to the sale of Chestnut Ridge - Phase I Apartments, Fort Worth, Texas previously filed as Exhibit 2 to the Registrant's Report on Form 8-K dated August 16, 1996 is incorporated herein by reference.
(ii) Letter Agreement relating to the sale of Chestnut Ridge - Phase I Apartments, Fort Worth, Texas, previously filed as Exhibit (99)(a) to the Registrant's Report on Form 8-K dated September 30, 1996 is incorporated herein by reference.
(f)(i) Agreement of Sale and attachment thereto relating to the sale of Park Crossing Apartments, Gwinnett County, Georgia previously filed as Exhibit 2(a) to the Registrant's Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale relating to the Sale of Park Crossing Apartments, Gwinnett County, Georgia previously filed as Exhibit 2(b) to the Registrant's Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.
(iii) Letter relating to the sale of Park Crossing Apartments, Gwinnett County, Georgia previously filed as Exhibit 2(c) to the Registrant's Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.
(g)(i) Agreement of Sale and attachment thereto relating to the sale of Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as Exhibit (2)(i) to the Registrant's Report on Form 8-K dated December 20, 1996, is incorporated herein by reference.
(ii) Due Diligence Termination Notice relating to the sale of Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as Exhibit (2)(ii) to the Registrant's Report on Form 8-K dated December 20, 1996, is incorporated herein by reference.
(iii) Reinstatement of, and First Amendment to, Agreement of Sale, relating to the sale of Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as Exhibit (2)(iii) to the Registrant's Report on Form 8-K dated December 20, 1996, is incorporated herein by reference.
(iv) Letter Agreement dated December 20, 1996, relating to the sale of Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as Exhibit (2)(iv) to the Registrant's Report on Form 8-K dated December 20, 1996, is incorporated herein by reference.
(v) Letter Agreement dated January 22, 1997 relating to the sale of Steeplechase Apartments, Lexington-Fayette, Kentucky, is attached hereto.
(27) Financial Data Schedule of the Registrant for 1996 is attached hereto.
(b) Reports on Form 8-K: A Current Report on Form 8-K dated December 20, 1996 was filed reporting a contract to sell Steeplechase Apartments, located in Lexington-Fayette, Kentucky.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedule: See Index to Financial Statements and Financial Statement Schedule in this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of l934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BALCOR REALTY INVESTORS 85-SERIES II A REAL ESTATE LIMITED PARTNERSHIP
By:/s/Jayne A. Kosik -------------------------------- Jayne A. Kosik Managing Director and Chief Financial Officer (Principal Accounting and Financial Officer) of Balcor Partners-XVII, the General Partner
Date: March 26, 1997 --------------
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 - --------------------- ------------------------------ -------------- President and Chief Executive Officer (Principal Executive Officer) of Balcor Partners-XVII, /s/Thomas E. Meador the General Partner March 26, 1997 - -------------------- -------------- Thomas E. Meador
Managing Director and Chief Financial Officer (Principal Accounting and Financial Officer) of Balcor Partners XVII, the General /s/Jayne A. Kosik Partner March 26, 1997 - -------------------- -------------- Jayne A. Kosik
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1996 and 1995
Statements of Partners' Capital (Deficit), for the years ended December 31, 1996, 1995 and 1994
Statements of Income and Expenses, for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows, for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Financial Statement Schedule:
III - Real Estate and Accumulated Depreciation, as of December 31, 1996
Financial Statement Schedules, other than that listed, are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein. Audited Financial Statements for significant subsidiary investment in joint venture are omitted since the property was sold and the Partnership is in its liquidation phase.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Balcor Realty Investors 85-Series II A Real Estate Limited Partnership:
We have audited the financial statements and the financial statement schedule of Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (An Illinois Limited Partnership) as listed in the index of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Balcor Realty Investors 85-Series II A Real Estate Limited Partnership at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
As described in Note 2 to the financial statements, the Partnership Agreement provides for the dissolution of the Partnership upon the disposition of all its real estate interests. The Partnership is presently marketing for sale its remaining real estate asset. Upon disposition of its remaining real estate asset and resolution of the litigation described in Note 15 to the financial statements, the Partnership intends to cease operations and dissolve.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
March 24, 1997 Chicago, Illinois
BALCOR REALTY INVESTORS 85 - SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALANCE SHEETS December 31, 1996 and 1995
ASSETS
1996 1995 -------------- -------------- Cash and cash equivalents $ 12,457,760 $ 1,125,457 Escrow deposits 82,469 1,693,209 Accounts and accrued interest receivable 532,365 143,573 Prepaid expenses 19,833 137,929 Deferred expenses, net of accumulated amortization of $113,839 in 1996 and $429,418 in 1995 140,314 1,013,846 -------------- -------------- 13,232,741 4,114,014 -------------- -------------- Investment in real estate: Land 1,436,769 10,525,187 Buildings and improvements 7,276,630 62,537,549 -------------- -------------- 8,713,399 73,062,736 Less accumulated depreciation 3,438,330 26,137,982 -------------- -------------- Investment in real estate, net of accumulated depreciation 5,275,069 46,924,754 -------------- -------------- $ 18,507,810 $ 51,038,768 ============== ==============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Loans payable - affiliate $ 11,900,605 Accounts payable $ 633,881 142,159 Due to affiliates 114,934 756,004 Accrued liabilities, principally interest and real estate taxes 480,390 Security deposits 30,759 233,034 Loss in excess of investment in joint venture with an affiliate 1,207,069 Mortgage notes payable - affiliate 1,673,215 Mortgage notes payable 7,249,433 51,796,170 -------------- -------------- Total liabilities 8,029,007 68,188,646 -------------- -------------- Commitments and Contingencies Limited Partners' capital (deficit) (83,936 Interests issued and outstanding) 11,121,829 (16,228,370) General Partner's deficit (643,026) (921,508) -------------- -------------- Total Partners' capital (deficit) 10,478,803 (17,149,878) -------------- -------------- $ 18,507,810 $ 51,038,768 ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) for the years ended December 31, 1996, 1995, and 1994
Partners' Capital (Deficit) Accounts --------------------------------------------- General Limited Total Partner Partners --------------- -------------- -------------- Balance at December 31, 1993 $ (13,651,085) $ (886,520) $ (12,764,565) Net loss for the year ended December 31, 1994 (2,019,363) (20,194) (1,999,169) --------------- -------------- -------------- Balance at December 31, 1994 (15,670,448) (906,714) (14,763,734) Net loss for the year ended December 31, 1995 (1,479,430) (14,794) (1,464,636) --------------- -------------- -------------- Balance at December 31, 1995 (17,149,878) (921,508) (16,228,370) Deemed distribution to Limited Partners (A) (219,557) (219,557) Net income for the year ended December 31, 1996 27,848,238 278,482 27,569,756 --------------- -------------- -------------- Balance at December 31, 1996 $ 10,478,803 $ (643,026) $ 11,121,829 =============== ============== ==============
(A) This amount represents a state withholding tax paid on behalf of Limited Partners relating to the gain on the sale of Park Crossing Apartments.
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1996, 1995, and 1994
1996 1995 1994 ------------- -------------- -------------- Income: Rental and service $ 10,194,675 $ 13,021,575 $ 12,521,580 Interest on short-term investments 229,901 65,886 67,424 Participation in income (loss) of joint venture with an affiliate 3,070,292 20,441 (11,586) Settlement income 300,000 --------------- -------------- -------------- Total income 13,494,868 13,107,902 12,877,418 --------------- -------------- -------------- Expenses: Interest on mortgage notes payable 3,629,339 4,899,174 5,138,352 Interest on short-term loans from affiliate 477,434 815,156 572,915 Depreciation 1,461,603 1,885,984 1,885,983 Amortization of deferred expenses 164,203 209,065 274,282 Property operating 3,975,275 4,649,658 4,716,555 Real estate taxes 747,563 988,743 1,039,756 Property management fees 517,242 644,856 626,989 Adminstrative 645,238 494,696 641,949 --------------- -------------- -------------- Total expenses 11,617,897 14,587,332 14,896,781 --------------- -------------- -------------- Income (loss) before gain on sales of properties and extraordinary items 1,876,971 (1,479,430) (2,019,363) Gain on sales of properties 25,641,050 --------------- -------------- -------------- Income (loss) before extraordinary items 27,518,021 (1,479,430) (2,019,363) --------------- -------------- -------------- Extraordinary items: Debt extinguishment expenses (1,513,757) Gain on forgiveness of debt 1,864,919 Participation in debt extinguishment expense from joint venture with an affiliate (20,945) --------------- Total extraordinary items 330,217 --------------- -------------- -------------- Net income (loss) $ 27,848,238 $ (1,479,430) $ (2,019,363) =============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1996, 1995, and 1994 (Continued)
1996 1995 1994 ------------- -------------- -------------- Income (loss) before extraordinay items allocated to General Partner $ 275,180 $ (14,794) $ (20,194) =============== ============== ============== Income (loss) before extraordinary items allocated to Limited Partners $ 27,242,841 $ (1,464,636) $ (1,999,169) =============== ============== ============== Income (loss) before extraordinary items per Limited Partnership Interest (83,936 Interests issued and outstanding) $ 324.57 $ (17.45) $ (23.82) =============== ============== ============== Extraordinary items allocated to General Partner $ 3,302 $ None $ None =============== ============== ============== Extraordinary items allocated to Limited Partners $ 326,915 $ None $ None =============== ============== ============== Extraordinary items per Limited Partnership Interest (83,936 issued and outstanding) $ 3.89 $ None $ None =============== ============== ============== Net income (loss) allocated to General Partner $ 278,482 $ (14,794) $ (20,194) =============== ============== ============== Net income (loss) allocated to Limited Partners $ 27,569,756 $ (1,464,636) $ (1,999,169) =============== ============== ============== Net income (loss) per Limited Partnership Interest (83,936 issued and $ 328.46 $ (17.45) $ (23.82) outstanding) =============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995, and 1994
1996 1995 1994 --------------- -------------- -------------- Operating activities: Net income (loss) $ 27,848,238 $ (1,479,430) $ (2,019,363) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sales of properties (25,641,050) Debt extinguishment expenses 709,329 Gain on forgiveness of debt (1,864,919) Participation in (income) loss of joint venture with an affiliate (3,070,292) (20,441) 11,586 Participation in debt extinguishment expense from joint venture with an affiliate 20,945 Depreciation 1,461,603 1,885,984 1,885,983 Amortization of deferred expenses 164,203 209,065 274,282 Deferred interest expense 196,599 Payment of deferred interest expense (681,731) Net change in: Escrow deposits 1,119,748 (643,654) 178,438 Accounts and accrued interest receivable (388,792) 40,002 165,810 Prepaid expenses 118,096 (137,929) Accounts payable 491,722 (101,599) 150,525 Due to affiliates (641,070) 539,549 107,590 Accrued liabilities (431,506) 56,423 (10,388) Security deposits (202,275) 4,461 (17,400) --------------- -------------- -------------- Net cash (used in) or provided by operating activities (306,020) 352,431 241,931 --------------- -------------- -------------- Investing activities: Redemption of restricted investments 480,000 Distributions from joint venture with an affiliate 1,997,578 125,528 93,467 Contribution to joint venture with an affiliate (155,300) Proceeds from sales of properties 61,516,507 Payment of selling costs (1,634,268) --------------- -------------- -------------- Net cash provided by investing activities 61,724,517 605,528 93,467 --------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85 - SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995, and 1994 (Continued)
1996 1995 1994 --------------- -------------- -------------- Financing activities: Proceeds from issuance of mortgage notes payable $ 6,010,000 $ 11,664,000 Repayment of mortgage notes payable $ (38,271,532) (5,480,512) (9,389,731) Proceeds from loans payable - affiliate 85,000 827,114 Repayment of loans payable - affiliate (11,900,605) (480,000) (1,499,140) Proceeds from issuance of mortgage notes payable - affiliate 142,820 Repayment of mortgage notes payable - affiliates (1,592,538) Principal payments on mortgage notes payable (328,312) (407,006) (344,788) Funding of repair escrows (157,500) (287,150) Releases from escrows 490,992 149,407 4,463 Payment of deferred expenses (152,840) (308,817) Deemed distribution to Limited Partners (219,557) --------------- -------------- -------------- Net cash used in financing activities (50,086,194) (433,451) (926,587) --------------- -------------- -------------- Net change in cash and cash equivalents 11,332,303 524,508 (591,189) Cash and cash equivalents at beginning of year 1,125,457 600,949 1,192,138 --------------- -------------- -------------- Cash and cash equivalents at end of year $ 12,457,760 $ 1,125,457 $ 600,949 =============== ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR REALTY INVESTORS 85-SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the "Partnership") is engaged principally in the operation of residential real estate investment located in various markets within the United States. The Partnership's remaining property is located in Lexington-Fayette, Kentucky.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon the occurrence of certain events, including the disposition of all interests in real estate. During 1996, the Partnership sold the Forest Ridge - Phase II, Country Oaks, Chestnut Ridge - Phase I, Hunters Glen, Marbrisa, Willow Bend Lake and Park Crossing apartment complexes. During 1996, the General Partner also sold the Rosehill Pointe Apartments, in which the Partnership held a minority joint venture interest. The Partnership has entered into a contract to sell its remaining property, the Steeplechase Apartments. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Partnership including, but not limited to, the lawsuits discussed in Note 15 of Notes to the Financial Statements. In the absence of any such contingency, the reserves will be paid within twelve months of the last property being sold. In the event a contingency arises, reserves may be held by the Partnership for a longer period of time.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
(b) Depreciation expense is computed using the straight-line method. Rates used in the determination of depreciation are based upon the following estimated useful lives:
Buildings and improvements 30 years Furniture and fixtures 5 years
Maintenance and repairs are charged to expense when incurred. Expenditures for improvements are charged to the related asset account.
Interest incurred while properties were under construction was capitalized.
As properties are sold, the related costs and accumulated depreciation are removed from the respective accounts. Any gain or loss on disposition is recognized in accordance with generally accepted accounting principles.
(c) Effective January 1, 1995 the Partnership adopted Statement of Financial Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". Under SFAS 121, the Partnership records its investments in real estate at the lower of cost or fair value, and periodically assesses, but not less than on an annual basis, possible impairment to the value of its properties. The General Partner estimates the fair value of its remaining property based on the current estimated sales price less estimated closing costs. In the event the General Partner determines an impairment in value has occurred, and the carrying amount of the real estate asset will not be recovered, a provision is recorded to reduce the carrying basis of the property to its estimated fair value. The General Partner considers the method referred to above to result in a reasonable measurement of a property's fair value, unless other factors affecting the property's value indicate otherwise.
(d) Deferred expenses consist of financing fees which are amortized over the terms of the respective agreements. Upon sale, any remaining balance is recognized as debt extinguishment expense and classified as an extraordinary item.
(e) Investment in joint venture with an affiliate represented the recording of the Partnership's 38.38% interest, under the equity method of accounting, in a joint venture with an affiliated partnership. Under the equity method of accounting, the Partnership recorded its initial investment at cost and adjusted its investment account for additional capital contributions, distributions and its share of joint venture income or loss. Depreciation recognized in connection with the ownership of real estate by the joint venture resulted in the Partnership's share of cumulative losses exceeding the net amounts invested in the joint venture. This resulted in the classification of the investment as "Loss in excess of investment in joint venture with an affiliate" in the accompanying 1995 financial statements.
(f) The Financial Accounting Standard Board's Statement No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. Since quoted market prices are not available for the Partnership's financial instruments, fair values have been based on estimates using present value techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Statement No. 107 does not apply to all balance sheet items and excludes certain financial instruments and all non-financial instruments such as real estate and investment in joint ventures from its disclosure requirements.
(g) Revenue is recognized on an accrual basis in accordance with generally accepted accounting principles.
(h) Cash and cash equivalents include all unrestricted, highly liquid investments with an original maturity of three months or less. Cash is held or invested in one financial institution.
(i) The Partnership is not liable for Federal income taxes, and each Partner recognizes his proportionate share of the Partnership income or loss in his tax return; therefore, no provision for income taxes is made in the financial statements of the Partnership.
(j) A reclassification has been made to the previously reported 1994 financial statements to conform with the classification used in 1996 and 1995. This reclassification has not changed the 1994 results.
4. Partnership Agreement:
The Partnership was organized in October 1984. The Partnership Agreement provides for Balcor Partners-XVII to be the General Partner and for the admission of Limited Partners through the sale of up to 84,000 Limited Partnership Interests at $1,000 per Interest, 83,936 of which were sold through August 22, 1985, the termination date of the offering.
The Partnership Agreement generally provides that the General Partner will be allocated 1% and the Limited Partners will be allocated 99% of the profits and losses from operations. One hundred percent of Net Cash Receipts available for distribution shall be distributed to the holders of Interests in proportion to their participating percentages as of the record date for such distributions. In addition, there shall be accrued for the benefit of the General Partner as its distributive share from operations, an amount equivalent to approximately 1% of the total Net Cash Receipts being distributed, which will be paid only as a part of the General Partner's share of Net Cash Proceeds. Under certain circumstances, the General Partner may participate in the Net Cash Proceeds
from the sale or refinancing of Partnership properties. The General Partner's participation is equal to 15% of further Net Cash Proceeds distributed after holders of Interests have received a return of Original Capital plus any deficiency in a Cumulative Distribution of 6% on Adjusted Original Capital, as defined in the Partnership Agreement.
5. Mortgage Notes Payable:
Mortgage notes payable at December 31, 1996 and 1995 consisted of the following:
Carrying Carrying Current Final Property Amount of Amount of Inter- Matur- Current Estimated Pledged as Note at Notes at est ity Monthly Balloon Collateral 12/31/96 12/31/95 Rate Date Payment Payment - -------------- ---------- ---------- ------ ------ ------- ---------- Mortgage Notes Payable - Non-affiliates Apartment Complexes
Chestnut Ridge I (a) None $3,648,475 Country Oaks(b)(d) None 5,983,640 Forest Ridge II(c)(d) None 7,894,311 Hunter's Glen(d) None 4,567,048 Marbrisa (d) None 5,404,320 Park Crossing (d) None 7,188,734 Steeplechase $7,249,433 7,312,127 9.13% 2001 $60,643 $6,893,000 Willow Bend Lake(d) None 9,797,515 ----------- ----------- Subtotal $7,249,433 51,796,170 ----------- -----------
Mortgage Notes Payable - Affiliates Apartment Complexes
Chestnut Ridge I(a) None 1,673,215 ----------- ----------- Subtotal None 1,673,215 ----------- ----------- Total $7,249,433 $53,469,385 =========== ===========
(a) In March 1994, the Partnership completed the refinancing of these mortgage loans. The original loans consisted of a $3,029,731 first mortgage loan from an unaffiliated lender and a junior mortgage loan and an unsecured loan from affiliates of the Partnership totaling $3,983,484, including deferred interest of $450,185. The proceeds from the new first mortgage loan of $3,694,000 from an unaffiliated lender were used to repay the previous first mortgage loan, the deferred interest on the affiliated loans and $214,084 of the outstanding loans from affiliates. As required by the unaffiliated lender, $1,646,000 of the remaining balance of the affiliate loans was retired and replaced with a General Partner loan and the remainder was re-characterized as a junior nonrecourse loan of $1,473,215 and a preferred limited partnership interest of $200,000 in the subsidiary partnership which holds title to the property, both of which were included in mortgage notes payable - affiliates on the balance sheet. The Limited Partners' position was unaffected by this conversion of a portion of the affiliated loan to an equity position, as Limited Partners' equity was subordinate to the preferred interest just as it was subordinated to the affiliate loans prior to the re-characterization.
The affiliate loan and preferred equity interest were subordinate to the Partnership's receipt of sale or refinancing proceeds in the amount of $1,646,000. The property was sold in September 1996 and the mortgage note payable - nonaffiliate was repaid with a portion of the proceeds. The junior nonrecourse affiliate loan was increased by $142,820 in order to provide the minimum net proceeds of $1,646,000 required from the sale of this property. Subsequently, this $1,816,035 loan, along with accrued interest expense of $48,884, was forgiven in connection with the sale. See Notes 10 and 12 of Notes to the Financial Statements for additional information.
(b) In June 1995, this loan was refinanced. A portion of the proceeds from the new $6,010,000 first mortgage loan were used to repay the existing first mortgage loan of $5,480,512.
(c) In July 1994, the Partnership completed the refinancing of the mortgage loans. The original loans consisted of a $6,360,000 first mortgage loan from an unaffiliated lender and an unsecured loan from an affiliate of the Partnership of $4,179,546, including deferred interest of $231,546. The proceeds from the new first mortgage loan of $7,970,000 from an unaffiliated lender were used to repay the previous first mortgage loan, the deferred interest on the affiliate loan and $1,378,454 of the outstanding affiliate loan. As required by the unaffiliated lender, the remaining $2,569,546 balance of the affiliate loan was retired and replaced with a General Partner loan.
(d) This property was sold in 1996. See Note 10 of Notes to the Financial Statements for additional information.
The Steeplechase Apartments' loan described above requires monthly payments of principal and interest.
See Note 11 of Notes to Financial Statements for additional information on cash collateral pledges.
Real estate with an aggregate carrying value of $5,275,069 at December 31, 1996 was pledged as collateral for repayment of the remaining mortgage loan.
Approximate principal maturities of the above mortgage note payable during the next five years are as follows:
1997 $ 68,700 1998 75,200 1999 82,400 2000 90,200 2001 6,892,900
During the years ended December 31, 1996, 1995 and 1994, the Partnership incurred and paid interest expense on nonaffiliated mortgage notes payable of $3,510,851, $4,742,339 and $4,680,137, respectively.
6. Management Agreements:
As of December 31, 1996, the Partnership's remaining property was under a management agreement with a third-party management company. This management agreement provided for annual fees of 5% of gross operating receipts.
7. Investment in Joint Venture with an Affiliate:
The Rosehill Pointe Apartments was owned by a joint venture consisting of the Partnership and an affiliate. The joint venture partner was an affiliate with investment objectives similar to those of the Partnership. The Partnership and the affiliate held participating percentages in the joint venture of 38.38% and 61.62%, respectively. In June 1996, the joint venture sold the property in an all cash sale for $20,700,000. From the proceeds of the sale, the joint venture paid $15,537,677 to the third party mortgage holders in full satisfaction of the first and second mortgage loans, and paid $170,250 in selling costs. The joint venture recognized a gain of $7,920,199 from the sale of this property, of which $3,055,484 was the Partnership's share. During 1996, 1995 and 1994, the Partnership received distributions of $1,997,578, $125,528 and $93,467, respectively, and made a capital contribution of $155,300 to the joint venture in 1996.
The following information has been summarized from the financial statements of the joint venture: ----------- Total Income $4,967,399 Loss before gain on sale (15,995) Gain on sale 7,920,199 Net income 7,904,204
8. Tax Accounting:
The Partnership keeps its books in accordance with the Internal Revenue Code, rules and regulations promulgated thereunder and existing interpretations thereof. The accompanying financial statements, which are prepared in accordance with generally accepted accounting principles, will differ from the tax returns due to the different treatment of various items as specified in the Internal Revenue Code. The net effect of these accounting differences is that the net income for 1996 in the financial statements is $20,265,925 less than the tax income of the Partnership for the same period.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended 12/31/96 12/31/95 12/31/94 -------------- -------------- -------------- Paid Payable Paid Payable Paid Payable ------ ------- ------ ------- ------ ------- Property management fees None None None None $572,620 None Reimbursement of expenses to the General Partner at cost: Accounting $16,454 $16,162 $46,401 $2,528 70,337 $25,737 Data processing 8,080 3,487 42,184 2,976 54,271 15,312 Investor communica- tions None None 6,252 None 19,725 5,681 Legal 13,521 13,243 30,317 3,090 14,649 8,055 Portfolio management 64,566 60,741 107,761 11,525 40,873 25,281 Other 21,302 21,301 11,185 1,304 17,062 4,912
The Partnership participates in an insurance deductible program with other affiliated partnerships in which the program pays claims up to the amount of the deductible under the master insurance policies for its properties. The program is administered by an affiliate of the General Partner who receives no fee for administering the program, however, the General Partner is reimbursed for expenses. The Partnership paid premiums to the deductible insurance program of $16,968, $85,753 and $120,176 in 1996, 1995 and 1994, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner, managed the Partnership's properties, including the property in which the Partnership held a minority joint venture interest, until the affiliate was sold to a third party in November 1994.
The Partnership had a junior loan outstanding from The Balcor Company ("TBC"), an affiliate of the General Partner, relating to the Chestnut Ridge - Phase I Apartments. In September 1996, the junior loan was increased by $142,820 in order to provide the minimum net proceeds required from the sale of this property. Subsequently, this $1,816,035 loan, along with accrued interest of $48,884 was forgiven in connection with the sale. See Notes 10 and 12 of Notes to Financial Statements for additional information. During 1996, 1995 and 1994, the Partnership incurred interest expense on the loan from The Balcor Company of $118,488, $156,835 and $458,215 and paid interest expense of $130,580, $175,241 and $943,347, respectively. As of December 31, 1995 interest expense of $12,092 was payable and was included in accrued liabilities on the balance sheet.
During 1996, the Partnership repaid the General Partner loan, which had an outstanding balance of $11,900,605 plus interest expense payable of $734,581 at December 31, 1995 with the proceeds received from the sales of properties. The Partnership incurred interest expense of $477,434, $815,156 and $572,915 and paid interest expense of $1,212,015, $212,052 and $480,500 on this loan during 1996, 1995 and 1994, respectively. Interest expense is computed at the American Express Company cost of funds rate plus a spread to cover administrative costs.
10. Property Sales:
(a) In June 1996, the Partnership sold the Forest Ridge - Phase II Apartments in an all cash sale for $11,100,000. From the proceeds of the sale, the Partnership paid $7,870,116 to the third party mortgage holder in full satisfaction of the first mortgage loan, and paid $126,000 in selling costs. The basis of the property was $7,911,304, which is net of accumulated depreciation of $4,265,862. For financial statement purposes, the Partnership recognized a gain of $3,062,696 from the sale of this property.
(b) In September 1996, the Partnership sold the Country Oaks Apartments for $8,250,000. The purchaser of the Country Oaks Apartments took title subject to the existing first mortgage loan in the amount of $5,946,893. From the proceeds of the sale, the Partnership paid $154,436 in selling costs. The basis of the property was $4,191,573, which is net of accumulated depreciation of $2,937,967. For financial statement purposes, the Partnership recognized a gain of $3,903,991 from the sale of this property.
(c) In September 1996, the Partnership sold the Chestnut Ridge - Phase I Apartments in an all cash sale for $5,513,400. From the proceeds of the sale, the Partnership paid $3,629,161 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $199,601 in selling costs and $181,458 in prepayment penalties. The Partnership received net proceeds of $1,503,180 from the sale. However, the terms of the 1994 refinancing of this property provided that minimum net proceeds of $1,646,000 were to be received from the sale of this property. As a result, $142,820 was contributed to the Partnership through an increase to the balance of the junior loan outstanding from TBC. The basis of the property was $4,336,015, which is net of accumulated depreciation of $2,622,209. For financial statement purposes, the Partnership recognized a gain of $977,784 from the sale of this property.
(d) In September 1996, the Partnership sold the Hunters Glen Apartments in an all cash sale for $9,100,000. From the proceeds of the sale, the Partnership paid $4,541,552 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $270,215 in selling costs and $90,832 in prepayment penalties. The basis of the property was $4,156,017, which is net of accumulated depreciation of $2,403,728. For financial statement purposes, the Partnership recognized a gain of $4,673,768 from the sale of this property.
(e) In October 1996, the Partnership sold the Marbrisa Apartments in an all cash sale for $7,800,000. From the proceeds of the sale, the Partnership paid $5,361,230 to the third party mortgage holder in full satisfaction of the first mortgage loan and paid $325,361 in selling costs. The basis of the property was $4,565,345, which is net of accumulated depreciation of $2,706,669. For financial statements purposes, the Partnership recognized a gain of $2,909,294 from the sale of this property.
(f) In October 1996, the Partnership sold the Willow Bend Lake Apartments in an all cash sale for $14,350,000. From the proceeds of the sale, the Partnership paid $9,737,486 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $366,660 in selling costs and $389,499 in prepayment penalties. The basis of the property was $7,745,500, which is net of accumulated depreciation of $4,896,205. For financial statements purposes, the Partnership recognized a gain of $6,237,840 from the sale of this property.
(g) In November 1996, the Partnership sold the Park Crossing Apartments in an all cash sale for $11,350,000. From the proceeds of the sale, the Partnership paid $7,131,987 to the third party mortgage holder in full satisfaction of the first mortgage loan, paid $191,995 in selling costs and $142,639 in prepayment penalties. In addition, the Partnership paid a state withholding tax of $219,557 on behalf of the Limited Partners relating to the gain on the sale of the property which has been recorded as a deemed distribution for financial statement purposes. The basis of the property was $7,282,328, which is net of accumulated depreciation of $4,328,615. For financial statements purposes, the Partnership recognized a gain of $3,875,677 from the sale of this property.
11. Restricted Investments:
During 1995, a restricted investment of $480,000, which partially collateralized the Country Oaks mortgage loan, was released. The amount pledged as collateral had been invested in short-term instruments pursuant to the terms of the pledge agreement with the lending institution, and the accumulated interest was paid to the Partnership upon release.
12. Extraordinary Items:
(a) In connection with the sales of properties during 1996, the Partnership wrote-off the remaining unamortized deferred expenses in the amount of $709,329. In addition, in connection with the sales of the Chestnut Ridge - Phase I and Hunters Glen, Willow Bend Lake and Park Crossing apartment complexes, the Partnership paid $804,428 in prepayment penalties. These amounts were recognized as an extraordinary item and classified as debt extinguishment expenses.
(b) In June 1996, the joint venture consisting of the Partnership and an affiliate sold the Rosehill Pointe Apartments. In connection with the sale, the joint venture wrote-off the remaining unamortized deferred expenses. The Partnership's share of this amount of $20,945 was recognized as an extraordinary item and classified as debt extinguishment expense.
(c) In connection with the sale of the Chestnut Ridge - Phase I Apartments, the junior loan due to TBC, which had an outstanding balance of $1,864,919, including accrued interest of $48,884, was forgiven which resulted in an extraordinary gain on forgiveness of debt.
13. Settlement Income:
The Partnership had ongoing litigation with the seller and certain of its principals and affiliates on claims under terms of the original management and guarantee agreement on the Park Crossing Apartments. During 1994, the Partnership accepted $300,000 as settlement in full on all remaining amounts owed to the Partnership.
14. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments at December 31, 1996 and 1995 are as follows:
The carrying amounts of cash and cash equivalents, accounts and accrued interest receivable and accounts payable approximates fair value.
Based on borrowing rates available to the Partnership at the end of 1996 and 1995 for mortgage loans with similar terms and maturities, the fair value of the mortgage notes payable approximates the carrying value.
15. Contingencies:
The Partnership is currently involved in two lawsuits whereby the Partnership and certain affiliates have been named as defendants alleging substantially similar claims involving certain federal securities law violations with regard to the adequacy and accuracy of disclosures of information concerning, as well as marketing efforts related to the offering of the Limited Partnership Interests of the Partnership. The defendants continue to vigorously contest these actions. A plaintiff class has not been certified in either action and, no determinations of the merits have been made. It is not determinable at this time whether or not an unfavorable decision in either action would have a material adverse impact on the financial position, operations and liquidity of the Partnership. The Partnership believes that it has meritorious defenses to contest the claims.
16. Subsequent Event:
In January 1997, the Partnership made its first distribution to Limited Partners of $9,232,960 ($110 per Interest) representing a special distribution of Net Cash Proceeds from the 1996 property sales.
BALCOR REALTY INVESTORS 85-SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALCOR REALTY INVESTORS 85-SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
BALCOR REALTY INVESTORS 85-SERIES II A REAL ESTATE LIMITED PARTNERSHIP (An Illinois Limited Partnership)
NOTES TO SCHEDULE III
(a) Consists of legal fees, appraisal fees, title costs, other related professional fees and capitalized construction-period interest.
(b) Guaranteed income earned on properties under the terms of certain management and guarantee agreements was recorded by the Partnership as a reduction of the basis of the property to which the guaranteed income relates.
(c) The cost of land for Federal income tax purposes is $1,490,548 and the cost of buildings and improvements for Federal income tax purposes is $7,090,843. The total of these is $8,581,391.
(d) Reconciliation of Real Estate -----------------------------
1996 1995 1994 ---------- ---------- ---------- Balance at beginning of year $73,062,736 $73,062,736 $73,062,736
Reductions during the year: Cost of properties sold (64,349,337) None None ----------- ----------- ----------- Balance at end of year $8,713,399 $73,062,736 $73,062,736 =========== =========== ===========
Reconciliation of Accumulated Depreciation -------------------------------------------
1996 1995 1994 ---------- ---------- ---------- Balance at beginning of year $26,137,982 $24,251,998 $22,366,015
Depreciation expense for the year 1,461,603 1,885,984 1,885,983 Accumulated depreciation of properties sold (24,161,255) None None ---------- ---------- ---------- Balance at end of year $3,438,330 $26,137,982 $24,251,998 =========== =========== ===========
(e) See description of Mortgage Notes Payable in Note 5 of Notes to Financial Statements.
(f) Depreciation expense is computed based upon the following estimated useful lives:
Years ----- Buildings and improvements 30 Furniture and fixtures 5