Item 1. Business
(a) General Development of Business
Eastpoint Mall Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed on June 26, 1985. The affairs of the Partnership are conducted by Eastern Avenue Inc. (the "General Partner," formerly Shearson Lehman Eastern Avenue Inc.), a Delaware corporation and affiliate of Lehman Brothers Inc. ("Lehman"). The Partnership was formed to acquire a general partnership interest in Bellwether Properties, L.P., a New York limited partnership, from Corporate Property Investors, the sole asset of which is Eastpoint Mall (the "Mall") located in Baltimore County, Maryland. Concurrent with the acquisition, Bellwether Properties, L.P. was reconstituted under the name of Eastpoint Partners L.P. (the "Owner Partnership"), and the Partnership became the managing general partner of the Owner Partnership. The Owner Partnership consists of the Partnership which holds a 90.9% interest in the Owner Partnership, the General Partner which holds a .1% interest and SFN Limited Partnership ("SFN"), a Maryland limited partnership which is an affiliate of The Shopco Company which holds a 9% interest in the Mall (collectively the "Owner Partners"). Shopco Management Corp. has been retained by the Owner Partnership as managing and leasing agent for the Mall.
On November 22, 1985, the Partnership commenced investment operations with the acceptance of subscriptions of 4,575 limited partnership units, the maximum authorized by the limited partnership agreement ("Limited Partnership Agreement"). Upon the admittance of the additional limited partners, the initial limited partner withdrew from the Partnership.
On November 29, 1985, the Owner Partnership acquired the Mall by purchasing all of the general partnership interests in Bellwether Properties, L.P., for a purchase price of $28,634,598.
In December 1989, the Partnership obtained first mortgage financing (the "First Mortgage Note") in the maximum amount of $50,000,000 secured by the Mall to: (1) repay the existing indebtedness of the Owner Partnership, (ii) make certain capital improvements to the Mall, including the construction of a Sears department store and the acquisition of the underlying real estate, the creation of additional Mall shops in the area previously occupied by Hutzler's, a former anchor tenant, and an overall renovation of the Mall, and (iii) make a cash distribution to each limited partner on February 1, 1990 of $2,500 for each $5,000 interest owned. The renovation of the Mall and construction of the Sears store were completed during 1991.
The First Mortgage Note was scheduled to mature on December 28, 1994. In December 1993, the Partnership obtained new first mortgage financing in the amount of $51,000,000 from CBA Associates, Inc., an entity which placed the new mortgage into a pool of mortgages to be held by a Real Estate Mortgage Investment Conduit (the "REMIC Lender"). For the terms of the new financing, see Note 5 to the Notes to the Consolidated Financial Statements.
The Partnership intends to begin marketing the Mall for sale in 1997; however, it is not certain whether appropriate offers will be received. At such time as the Mall is sold and all obligations are fulfilled, the Partnership will wind up its affairs and be dissolved. The exact timing of these events is dependent on the success of the sale effort.
(b) Financial Information About Industry Segments
All of the Partnership's revenues, operating profit or loss and assets relate solely to its interest as the general partner of the Owner Partnership. All of the Owner Partnership's revenues, operating profit or losses and assets relate solely to its ownership interest in and operation of the Mall.
(c) Narrative Description of Business
The Partnership's sole business is acting as the managing general partner of the Owner Partnership. The Owner Partnership's sole business is the ownership and operation of the Mall. See Item 2
Item 2. Properties
Eastpoint Mall is an enclosed regional shopping center located on approximately 67.1 acres in Baltimore County, Maryland, approximately one mile east of the city limits of Baltimore. The Mall consists of a central enclosed mall anchored by four major department stores - J.C. Penney, Inc. ("J.C. Penney"), Schottenstein Stores Corporation, doing business as Value City ("Value City"), Sears, Roebuck, and Co. ("Sears") and Ames Department Stores, Inc. ("Ames"). The retail space in the Mall is contained on one level; J.C. Penney and Value City are multi-level and there are five freestanding buildings. Office and storage areas are contained in the lower level of existing mall space, and in the lower and upper floor levels of the expansion mall space. Parking is provided for over 4,500 cars.
The Mall currently has gross leasable space totaling 864,993 square feet. Of this leasable space, 637,582 is owned by the Owner Partnership and 227,411 square feet of gross leasable space area is owned by the tenants who have leased portions of land pursuant to ground leases with the Owner Partnership. Upon expiration of such ground leases, ownership of the buildings thereon will revert to the Owner Partnership.
On December 28, 1989, the Partnership purchased 5.1 acres of land adjacent to the Mall for a contract sales price of $640,125 on which a one-story, 79,000 square foot Sears department store and an 8,734 square foot automotive center were constructed. The Sears department store and automotive center, located adjacent to the new food court, opened in October 1991. As described below, the Partnership owns the store and leases it to Sears, which serves as a replacement anchor tenant for Hutzler's, which vacated the Mall on January 22, 1990, after expiration of its lease on July 31, 1989. The space previously occupied by Hutzler's was converted into new mall shops, a food court and seating area, and office space. The construction of the new space was completed in 1991, as was a renovation program at the Mall which replaced skylights and floors and refurbished Mall common areas.
On November 8, 1996, the Owner Partnership purchased for $975,000 the leasehold interest in a vacant, free-standing, 17,340 square foot building and the underlying land located adjacent to the J.C. Penney anchor tenant at the Mall from J.C. Penney Company, Inc. The acquisition of the leasehold interest in this parcel allows for expansion of the center or the addition of parking by the Partnership or a subsequent owner.
The total building area of the Mall is allocated as shown in the table below.
Percent of Square Feet Total Area Anchors: J.C. Penney 151,629 17% Value City 140,000 16 Sears 87,734 10 Ames 58,442 7 Specialty Retailers(1) 362,028 42 Atrium and Office Space 65,160 8
Total 864,993 100%
(1) Includes outparcel stores and outdoor tenants.
Anchor Tenants
J.C. Penney leases a parcel of land pursuant to a ground lease on which it has constructed the largest of the Mall's four anchor stores containing an aggregate of approximately 151,629 square feet of building area, or 17% of the gross leasable building area of the Mall. On November 8, 1996, the Owner Partnership purchased the leasehold interest in a vacant, free- standing, 17,340 square foot building and the underlying land located adjacent to the J.C. Penney anchor tenant from J.C. Penney Company, Inc. Ownership of the anchor store, currently owned and occupied by J.C. Penney, will revert to the Owner Partnership upon the expiration of the ground lease. The initial term of the J.C. Penney ground lease expires on August 31, 2001. Two 5-year renewal options, two 10-year renewal options, and two 5-year renewal options are available on the same terms and conditions. The minimum rent payable thereunder is $1,219 annually plus a percentage rent of .5% of gross sales.
The ground lease with J.C. Penney provides that J.C. Penney does not have to operate if (i) at least 250,000 square feet of the total retail space of the Mall, including the space occupied by Value City, the space previously occupied by Hutzler's and certain other space, is not being used for retail use, or (ii) neither Schottenstein Stores Corporation (or any successor) nor Hutzler's (or any successor) are operating retail department stores in their premises. If at any time, J.C. Penney discontinues the use of its anchor store as a retail department store and assigns its lease or sublets the premises within a certain period of time, the Owner Partnership, as landlord, has the right to purchase the lease at fair market value.
Value City, the second largest anchor store, leases approximately 140,000 square feet, or 16% of the gross leasable building area of the Mall, and is located at the western end of the Mall. The initial term of the Value City lease was scheduled to expire on November 30, 1999. On September 14, 1995, the expiration date of the lease was extended until November 30, 2009. A 10-year renewal option is available on the same terms and conditions. Per the terms of the September 14, 1995 amendment to the lease, the minimum rent payable thereunder was increased from $220,000 to $585,000 per annum, with increases based on the following increments in annual sales: 3 1/2% of the first 4.2 million in sales; 3 1/4% of sales in excess of $4.2 million but not in excess of $7 million; 3% of sales in excess of $7 million but not exceeding $8.4 million, and 2 1/2% of sales in excess of $8.4 million.
Ames (previously G.C. Murphy) leases a parcel of land pursuant to a ground lease on which it has constructed a building containing approximately 58,442 square feet of building area, or 7% of the gross leasable building area of the Mall. The initial term of the Ames ground lease expires on May 30, 2004. One 10-year renewal option is available on the same terms and conditions. Ownership of the building now owned and occupied by Ames will revert to the Owner Partnership upon the expiration of the ground lease. The minimum rent payable under the Ames ground lease is $204,000 annually with a percentage rent of .5% of gross sales above the breakpoint of $4,800,000 until January 31, 1999. Commencing on February 1, 1999, minimum rent payable will increase to $257,000 per annum. In the event that Ames exercises its renewal option, the minimum rent payable is $257,000 per year with a percentage rent of .5% of gross sales above the breakpoint of $6,000,000. Ames is not required to operate if (i) less than 150,000 square feet in the Mall is used for retail use, or (ii) any two of Value City, Hutzler's or J.C. Penney (or any successor) cease operations as an anchor store in the Mall.
On April 26, 1990, Ames filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. By filing its bankruptcy petition, Ames was in default under the deed of trust held by Consolidated Fidelity Life Insurance Company ("Consolidated") and secured by the Ames parcel. In July 1994, the Partnership entered into a settlement agreement with Consolidated regarding the Ames parcel. At December 31, 1996, total payments received from Ames were $1,009,458 of which approximately $222,000, is payable to Consolidated. Please refer to Item 3, Item 7 and Note 3 to the Notes to the Consolidated Financial Statements for a description of the Ames bankruptcy and the Release Agreement negotiated by the Partnership and Consolidated.
Sears leases approximately 79,000 square feet of gross leasable area in a new anchor store opened in October 1991, together with a freestanding store, containing an aggregate of approximately 87,734 square feet of building area or 10% of the gross leasable building area of the Mall. The initial term of the lease expires on October 16, 2006. The tenant has the right to extend the lease term for seven additional periods of five years each under the same terms, by providing the landlord written notice no less than twelve months prior to the end of the lease term. Rent is based on a percentage of net sales, with the tenant paying a sum equal to 1.75% of net sales in excess of $1 but less than $16,000,000 and a sum equal to 1.5% of net sales that exceed $16,000,000.
The lease with Sears provides that Sears does not have to operate if (i) less than 60% of the gross leasable area of the Mall (excluding anchor stores) is not operating and (ii) at least two of the anchor stores are not operating. If such events occurred, the landlord has twelve months in which to remedy any condition which would enable Sears to terminate the lease agreement.
Mall, Outparcel Tenants and Atrium Space
During 1996, 14 leases totaling 20,245 square feet of space were executed with new and existing tenants. Due to the sluggish commercial real estate market in eastern Baltimore County, the leasing of additional Atrium office space is anticipated to be a lengthy and capital intensive process. Costs associated with maintaining the space consist primarily of utility expenses which are included in property operating expenses. These costs, as well as costs associated with marketing the space for lease, are funded from the Partnership's cash flow and cash reserves.
Staples leases an outparcel store with 36,000 square feet of building area or 4.2% of the gross leasable building area of the Mall. The primary lease term runs through the year 2004, plus two lease renewal options for five years each. The fixed minimum rent during the primary term begins at $7.50 per square foot and escalates throughout the term of the lease reaching $8.25 per square foot for years eleven through fifteen, subject to certain cost-of-living adjustments.
During 1996, the retail industry, particularly apparel merchants and other mall-based retail chains, continued to suffer from changes in shoppers' buying patterns which have primarily benefited discount retailers and superstores. The continuing difficulties in the retail industry are evidenced by the increasing number of bankruptcy filings by many companies. As of the date for which this report is filed, 4 tenants, or their parent corporations, at the Mall have filed for protection under the U.S. Federal Bankruptcy Code. These tenants currently occupy approximately 3% of the Mall's leasable area (exclusive of anchor tenants), and at this point their plans to remain at the Mall remain uncertain. Please refer to Item 7 for a listing of Mall tenants which have filed for bankruptcy protection.
Competition
Eastpoint Mall is the only regional shopping center located within a 3 mile radius (the primary geographical area from which the Mall derives its repeat sales and regular customers). However, two shopping centers are directly competitive with the Mall. Golden Ring Mall, located slightly over three miles northeast of Eastpoint Mall, represents its principal competition. Golden Ring Mall is a two-story center containing approximately 737,000 square feet of gross leasable area. Golden Ring has three anchor tenants, Hecht's, Caldor and Montgomery Ward, as well as approximately 80 smaller mall stores. Golden Ring completed a cosmetic renovation of both the interior and exterior of the center during 1992.
White Marsh Mall is located approximately six miles north of the Mall and contains approximately 1,105,000 square feet of gross leasable space on two levels. Anchor stores include Macy's, J.C. Penney and Sears. There is an empty anchor space in the former site of Woodward & Lothrup. Ikea, a furniture store, is located on an outparcel site at the mall. White Marsh contains approximately 180 stores.
Temporary Tenants
A formal temporary tenant program was instituted in November 1992 in which kiosks and vacant spaces are used as temporary retail locations. The program generated revenues of $397,921 in 1996. The temporary tenant program is managed by Shopco Management Corp., the Mall's property manager.
Item 3.
Item 3. Legal Proceedings
Land leased to Ames by the Owner Partnership, together with the building constructed thereon by Ames, secured a deed of trust (the "Deed of Trust") held by Consolidated. In 1990, Ames filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code, thereby defaulting on the Deed of Trust. On December 18, 1992, the Bankruptcy Court confirmed a Plan of Reorganization for Ames (the "Plan") and the Plan was subsequently consummated. Pursuant to the Plan, Ames assumed the lease of its store at the Mall and continues its operations there.
In July 1994, the Partnership executed a Compromise and Mutual Release (the "Release Agreement") with Consolidated. Pursuant to the terms of the Release Agreement , the Partnership paid Consolidated $2 million in return for the assignment of the Deed of Trust and related Ames promissory note, as well as Consolidated's claim in the Ames bankruptcy case relating to such promissory note. Consolidated's total claims, in the face amount of approximately $2.3 million, consist of the balances due on the Ames promissory note, totaling $1.7 million, and another promissory note. Pursuant to the Release Agreement, the Partnership is entitled to any recovery based on the Ames promissory note; Consolidated will receive any recovery on the other note. Various trusts were established through Ames' Plan of Reorganization by which different classes of claims were to be paid from different pools of monies. The trustee for the trust responsible for payment of Consolidated's claim (the "Subsidiaries Trustee") had filed an objection to the allowance of Consolidated's claim, including that portion attributable to the Ames promissory note. The Partnership pursued legal action in opposition to the objection.
In mid-March 1996, the Trustee and the Partnership settled the Trustee's objection by reducing and allowing Consolidated's claim in the approximate amount of $2,050,000 (the "Claim"), of which approximately $1,530,142 is for amounts due under the Ames promissory note, and requiring Ames to make a payment of $10,000 to the Owner Partnership. An Agreed Order approving the settlement was entered by the Bankruptcy Court on May 1, 1996. Ames' $10,000 payment to the Owner Partnership was received on June 4, 1996. On August 7, 1996 and September 23, 1996, payments on the claim were received by the Owner Partnership from Ames in the amounts of $887,520 and $111,938, respectively. At December 31, 1996, the total payments received by the Owner Partnership from Ames were $1,009,458, of which approximately $222,000, is payable to Consolidated and is reflected in accounts payable and accrued expenses on the Partnership's December 31, 1996 consolidated balance sheet. It is uncertain at this time if there will be any additional payments from Ames to the Owner Partnership.
On August 21, 1996, the Owner Partnership retired the Ames promissory note secured by the Deed of Trust.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the Unit Holders during the fourth quarter of the year for which this report has been filed.
PART II
Item 5.
Item 5. Market for the Partnership's Limited Partnership Units and Related Security Holder Matters
(a) Market Price Information
There is no established trading market for the Units of the Partnership. The Partnership had 4,575 Units outstanding at December 31, 1996.
(b) Holders
There were 1,691 Limited Partners as of December 31, 1996.
(c) Distributions of Cash
Since inception, Limited Partners have received cumulative distributions of $6,154.52 per Unit, including a $2,500 return of capital in 1990.
For the years ended December 31, 1996 and 1995, the Partnership paid quarterly cash distributions of $62.50 per Unit per quarter. In addition the Partnership paid special cash distributions of $218.50 per Unit on June 7, 1995 and $546.25 per Unit on April 4, 1996. Both of these special cash distributions were paid from excess cash reserves. The level, timing and amount of future distributions, including special distributions, will be reviewed at a minimum on a quarterly basis after an evaluation of the Mall's performance and the Partnership's current and future cash needs. No assurances can be made regarding the size or continuance of future distributions.
Quarterly Cash Distributions Per Limited Partnership Unit
1996 (a) 1995 (a) First Quarter $ 62.50 $ 62.50 Second Quarter 608.75 (b) 281.00 (c) Third Quarter 62.50 62.50 Fourth Quarter 62.50 62.50
TOTAL $ 796.25 $ 468.50
(a) Distribution amounts are reflected in the period for which they are declared. The record date is the last day of each month of the respective quarter and the actual cash distributions are paid approximately 45 days after the record date.
(b) Includes the $546.25 per Unit special cash distribution paid on April 4, 1996.
(c) Includes the $218.50 per Unit special cash distribution paid on June 7, 1995.
Item 6.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes appearing elsewhere in this Form 10-K.
(in thousands except per Unit data) As of and for the years ended December 31, 1996 1995 1994 1993 1992 Total Rental and Percentage Rent Income $ 8,327 $ 8,104 $ 7,907 $ 7,404 $ 6,424 Escalation Income 3,706 3,585 3,143 3,049 2,898 Interest Income 341 406 265 80 25 Miscellaneous Income 170 113 150 210 73
Total Income 12,543 12,209 11,465 10,743 9,420
Net Income(Loss) 1,944 1,934 915 (658) (372) Net Income(Loss) per Unit (a) 420.62 418.44 198.00 (142.30) (80.40) Cash Distributions per Unit (a)(b) 796.25(c) 468.50(d) 187.50 -- -- Total Assets 53,306 55,367 55,625 56,458 49,689 Long-term Obligations 51,000 51,000 51,000 51,000 44,650
(a) There are 4,575 Units outstanding. (b) Distribution amounts are reflected in the period for which they are declared. Actual cash distributions are paid subsequent to such periods. (c) Includes a $ 546.25 per Unit special distribution paid on April 4, 1996.
(d) Includes a $ 218.50 per Unit special distribution paid on June 7, 1995.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
At December 31, 1996, the Partnership had cash and cash equivalents of $6,362,256, relatively unchanged in comparison to $6,254,501 at December 31, 1995. Restricted cash, which represents a loan reserve established under the terms of the Partnership's first mortgage loan, decreased from $2,100,000 at December 31, 1995 to $1,000,000 at December 31, 1996 due to the release to the Partnership of $1.1 million of the proceeds of its first mortgage loan which was withheld pending resolution of the Consolidated dispute (see "Ames Parcel and Consolidated Release Agreement" below). The remaining balance constitutes additional collateral which can be used for capital improvements and leasing commissions. Cash held in escrow totaled $535,313 at December 31, 1996 compared to $443,811 at December 31, 1995. The increase is primarily attributable to fundings made to the real estate tax and insurance escrows as specified under the terms of the Partnership's first mortgage loan exceeding payments made for real estate taxes and insurance premiums.
Accounts receivable increased from $638,436 at December 31, 1995 to $836,705 at December 31, 1996 primarily due to an increase in recoverable common area maintenance expenses and rent from temporary tenants.
Accrued interest receivable increased from $224,567 at December 31, 1995 to $346,091 at December 31, 1996 reflecting interest earned in 1996 on the loan reserve which is reflected as restricted cash on the Partnership's consolidated balance sheets at December 31, 1996 and 1995.
Note receivable decreased from $738,000 at December 31, 1995 to $0 at December 31, 1996 reflecting receipt from the Ames Trustee of payments on the Ames Bankruptcy Claim. Please refer to "Ames Parcel and Consolidated Release Agreement" below.
The increase in accounts payable and accrued expenses is attributable to the receipt from the Ames trustee of payment of that part of the Ames Bankruptcy Claim which is payable to Consolidated. Please refer to "Ames Parcel and Consolidated Release Agreement" below.
Accrued interest payable decreased from $340,425 at December 31, 1995 to $0 at December 31, 1996 due to the payment of debt service due in December 1996 prior to December 31, 1996. The debt service payment due on December 31, 1995 was paid on January 1, 1996.
As of the filing date of this report, the following current tenants at the Mall, or their parent corporations, have filed for protection under the U.S. Bankruptcy Code:
Tenant Square Footage Leased Marianne 3,750 Marianne Plus 3,000 Jeans West 2,400 Rave 2,000
As of December 31, 1996, these tenants occupied 11,150 square feet, or approximately 3% of the Mall's leasable area (exclusive of anchor tenants and office space). Pursuant to the provisions of the U.S. Federal Bankruptcy Code, these tenants may, with court approval, choose to reject or accept the terms of their leases. Should any of these tenants exercise the right to reject their leases, this could have an adverse impact on cash flow generated by the Mall and revenues received by the Partnership depending on the Partnership's ability to replace them with new tenants at comparable rents.
The Partnership intends to begin marketing the Mall for sale in 1997; however, it is not certain whether appropriate offers will be received. At such time as the Mall is sold and all obligations are fulfilled, the Partnership will wind up its affairs and be dissolved. The exact timing of these events is dependent on the success of the sale effort.
Ames Parcel and Consolidated Release Agreement On April 26, 1990, Ames filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. On December 18, 1992, the Bankruptcy Court confirmed the Plan pursuant to which Ames assumed its lease at the Mall. Land leased to Ames by the Owner Partnership, together with the building constructed thereon by Ames, secured a deed of trust held by Consolidated, as successor to Southwestern Life Insurance Company. By filing its bankruptcy petition, Ames was in default under the Consolidated deed of trust.
On July 14, 1994, the Partnership executed a Release Agreement with Consolidated (the "Release Agreement"). Pursuant to the terms of the Release Agreement, the Partnership paid Consolidated $2 million in return for the assignment of the deed of trust and related Ames promissory note, as well as Consolidated's claim in the Ames bankruptcy case relating to such promissory note. Consolidated's total claims, in the face amount of approximately $2.3 million, consist of the balances due on the Ames promissory note, totaling $1.7 million, and another promissory note. Pursuant to the Release Agreement, the Partnership is entitled to any recovery based on the Ames promissory note; Consolidated will receive any recovery on the other note. Various trusts were established through Ames' Plan of Reorganization by which different classes of claims were to be paid from different pools of monies. The Subsidiaries Trustee had filed an objection to the allowance of Consolidated's claim, including that portion attributable to the Ames promissory note. The Partnership pursued legal action in opposition to the objection. In mid-March 1996, the Trustee and the Partnership settled the Trustee's objection by reducing and allowing Consolidated's claim in the approximate amount of $2,050,000, of which approximately $1,530,142 is for amounts due under the Ames promissory note, and requiring Ames to make a payment of $10,000 to the Owner Partnership. An Agreed Order approving the settlement was entered by the Bankruptcy Court on May 1, 1996. Ames' $10,000 payment to the Owner Partnership was received on June 4, 1996. On August 7, 1996 and September 23, 1996, additional payments were received from Ames in the amounts of $887,520 and $111,938, respectively. At December 31, 1996, the total payments received from Ames were $1,009,458, of which $222,081 is payable to Consolidated and is reflected in accounts payable and accrued expenses on the Partnership's balance sheet. It is uncertain at this time if there will be any additional payments to the Owner Partnership.
The Partnership's mortgage lender withheld certain of the proceeds of the first mortgage loan until the Partnership resolved the Consolidated dispute. These funds, which totaled $1.1 million, were released to the Partnership in December 1996 following the extinguishment of the first mortgage secured by the Ames parcel.
Leasehold Purchase On November 8, 1996, the Owner Partnership purchased for $975,000 the leasehold interest in a vacant, free-standing building and the underlying land located adjacent to the J.C. Penney anchor tenant at the Mall from J.C. Penney Company, Inc. The acquisition of the leasehold interest in this parcel allows for expansion of the center or the addition of parking.
Cash Distributions A regular cash distribution for the fourth quarter of 1996, in the amount of $62.50 per Unit, was paid on February 10, 1997. The level, timing, and amount of future distributions will be reviewed on a quarterly basis after an evaluation of the Mall's performance and the Partnership's current and future cash needs.
On February 16, 1996, based upon, among other things, the advice of legal counsel, the General Partner adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partner may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partner. In determining the amount of the distribution, the General Partner may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner and no partner will be entitled to receive any distribution until the General Partner has declared the distribution and established a record date and distribution date for the distribution.
Results of Operations
1996 versus 1995 Net cash flow from operating activities totaled $3,596,613 in 1996, relatively unchanged in comparison to $3,732,467 in 1995. For the year ended December 31, 1996, the Partnership recognized net income of $1,943,774, also relatively unchanged in comparison to $1,933,722 for the year ended December 31, 1995.
Rental income increased from $6,894,097 for the year ended December 31, 1995 to $7,306,819 for the year ended December 31, 1996 primarily due to higher base rent billings resulting from a lease amendment with anchor tenant Value City, whereby Value City's base rent payments are increased and percentage rent payments are decreased, and the addition of new tenants during 1996.
Percentage rental income decreased from $1,209,752 for the year ended December 31, 1995 to $1,019,783 for the year ended December 31, 1996 primarily due to the lease amendment with anchor tenant Value City mentioned above.
Interest income decreased from $406,292 for the year ended December 31, 1995 to $340,504 for the year ended December 31, 1996 primarily due to a decrease in cash balances maintained by the Partnership as well as lower interest rates.
Property operating expenses increased from $3,160,271 at December 31, 1995 to $3,502,731 at December 31, 1996 primarily due to higher costs for snow removal and roof repairs and to increased bad debt expense related to the tenants that have filed for bankruptcy protection.
Total Mall tenant sales (exclusive of anchor tenants) were $74,747,000 for the year ended December 31, 1996, improved from $70,794,000 for the year ended December 31, 1995. Sales for tenants (exclusive of anchor tenants) which operated at the Mall for each of the last two years were $66,048,000 and $66,171,000 for the years ended December 31, 1996 and 1995, respectively. As of December 31, 1996, the Mall was 92.6% occupied, excluding anchor tenants and office space, compared to 94.1% at December 31, 1995.
1995 versus 1994 Net cash flow from operating activities totaled $3,732,467 in 1995 compared to $2,092,835 in 1994. The increase is primarily due to higher net income and increases in accounts payable and amounts due to affiliates partially offset by a decrease in accrued interest payable. Cash outflows from investing activities totaled $757,229 in 1995 and $1,990,343 in 1994. The decrease in cash outflows from investing activities for 1995 was due to the payment made pursuant to the Release Agreement in 1994.
For the year ended December 31, 1995, the Partnership recognized net income of $1,933,722 compared to $915,010 during 1994. The increase in net income was primarily attributable to increases in rental, escalation and interest income.
The Partnership generated total income for the year ended December 31, 1995 of $12,208,708 compared to $11,464,835 during 1994. Rental income increased for the year ended December 31, 1995 compared to 1994 reflecting lease renewals at higher rates and leases with new tenants. Escalation income represents the income received from Mall tenants for their proportionate share of common area maintenance and real estate tax expenses. Escalation income increased for the year ended December 31, 1995 compared to 1994 mainly due to credits issued to tenants during 1994 for 1993 reimbursable expenses.
Interest income increased for the year ended December 31, 1995 compared to 1994 primarily due to an increase in cash reserves and in interest rates earned on the Partnership's invested cash.
Total Mall tenant sales (exclusive of anchor tenants) were $70,794,000 for the year ended December 31, 1995, improved from $63,766,000 for the year ended December 31, 1994. Sales for tenants (exclusive of anchor tenants) which operated at the Mall for each of the last two years were $66,171,000 and $59,691,000, respectively. As of December 31, 1995, the Mall was 94.1% occupied, excluding anchor tenants and office space, compared to 94.2% at December 31, 1994.
Property Appraisal The appraised fair market value of the Mall at January 1, 1996 and 1997, as determined by Cushman & Wakefield, Inc., an independent third party appraisal firm, was $81,000,000. Limited Partners should note that appraisals are only estimates of current value and actual values realizable upon sale may be significantly different. A significant factor in establishing an appraised value is the actual selling price for properties which the appraiser believes are comparable. Because of the nature of the Partnership's property and the limited market for such property, there can be no assurance that the other properties reviewed by the appraiser are comparable. Additionally, the low level of liquidity as a result of the current restrictive capital environment has had the effect of limiting the number of transactions in real estate markets and the availability of financing to potential purchasers, which may have a negative impact on the value of an asset. Further, the appraised value does not reflect the actual costs which could be incurred in selling the property. As a result of these factors and the illiquid nature of an investment in Units of the Partnership, the variation between the appraised value of the Partnership's property and the price at which Units of the Partnership could be sold is likely to be significant. Fiduciaries of Limited Partners which are subject to ERISA or other provisions of law requiring valuation of Units should consider all relevant factors, including, but not limited to the net asset value per Unit, in determining the fair market value of the investment in the Partnership for such purposes.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Item 14(a) for a listing of the Consolidated Financial Statements and Supplementary data in this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The General Partner is an affiliate of Lehman and has offices at the same location as the Partnership and the Owner Partnership at 3 World Financial Center, 29th Floor, New York, NY, 10285-2900. All of the executive officers and directors of the General Partner are also officers and employees of Lehman.
On July 31, 1993, Shearson Lehman Brothers, Inc. ("Shearson") sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to this sale, Shearson changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the Partnership or the Partnership's General Partner. However, the assets acquired by Smith Barney included the name "Shearson." Consequently, the General Partner changed its name to "Eastern Avenue Inc." to delete any references to "Shearson."
Certain executive officers and directors of the General Partner are now serving (or in the past have served) as executive officers or directors of entities which act as general partners of a number of real estate limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which the real estate is located and, consequently, the partnerships sought the protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure.
The executive officers and directors of the General Partner as of December 31, 1996 are as follows:
Name Age Office Paul L. Abbott 51 Director, Chief Executive Officer, Chief Operating Officer Robert J. Hellman 42 President Joan Berkowitz 37 Vice President Elizabeth I. Rubin 30 Vice President, Chief Financial Officer
Paul L. Abbott is a Managing Director of Lehman Brothers. Mr. Abbott joined Lehman Brothers in August 1988, and is responsible for investment management of residential, commercial and retail real estate. Prior to joining Lehman Brothers, Mr. Abbott was a real estate consultant and a senior officer of a privately held company specializing in the syndication of private real estate limited partnerships. From 1974 through 1983, Mr. Abbott was an officer of two life insurance companies and a director of an insurance agency subsidiary. Mr. Abbott received his formal education in the undergraduate and graduate schools of Washington University in St. Louis.
Robert J. Hellman is a Senior Vice President of Lehman Brothers and is responsible for investment management of retail, commercial and residential real estate. Since joining Lehman Brothers in 1983, Mr. Hellman has been involved in a wide range of activities involving real estate and direct investments including origination of new investment products, restructurings, asset management and the sale of commercial, retail and residential properties. Prior to joining Lehman Brothers, Mr. Hellman worked in strategic planning for Mobil Oil Corporation and was an associate with an international consulting firm. Mr. Hellman received a bachelor's degree from Cornell University, a master's degree from Columbia University, and a law degree from Fordham University.
Joan B. Berkowitz is a Vice President of Lehman Brothers, responsible for investment management for retail, commercial and residential real estate within the Diversified Asset Group. Ms. Berkowitz joined Lehman Brothers in May 1986 as an accountant in the Realty Investment Group. From October 1984 to May 1986, she was an Assistant Controller to the Patrician Group. From November 1983 to October 1984, she was employed by Diversified Holdings Corporation. From September 1981 to November 1983, she was employed by Deloitte Haskins & Sells. Ms. Berkowitz, a Certified Public Accountant, received a B.S. degree from Syracuse University in 1981.
Elizabeth I. Rubin is a Vice President of Lehman Brothers in the Diversified Asset Group. Ms. Rubin joined Lehman Brothers in April 1992. Prior to joining Lehman Brothers, she was employed from September 1988 to April 1992 by the accounting firm of Kenneth Leventhal and Co. Ms. Rubin is a Certified Public Accountant and received a B.S. degree from the State University of New York at Binghamton in 1988.
Item 11.
Item 11. Executive Compensation
The directors and executive officers of the General Partner do not receive any salaries or other compensation from the Partnership. See Item 13 with respect to a description of certain transactions between the General Partner or its affiliates and the Registrant.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners
The Partnership knows of no person who beneficially owns more than 5% of its Units.
(b) Security ownership of management
As of December 31, 1996, neither the General Partner, nor any executive officer or director thereof, was the beneficial owner of any Units.
(c) Changes in control
There were no changes in control during the year ended December 31, 1996.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Partnership has no directors or executive officers. Its affairs are managed by the General Partner, which receives 1% of the distributions of income, profits, cash distributions and losses of the 90.9% received from the Owner Partnership each year.
The Limited Partnership Agreement specifies the allocation of operating income, profits, losses and cash distributions. For a description of such terms, please refer to Note 4 to the Notes to the Consolidated Financial Statements of this report.
Affiliates of the General Partner have been responsible for certain administrative functions of the Partnership. For amounts paid to such affiliates, see Note 6 of the Notes to the Consolidated Financial Statements.
CPR Realty Brokerage, Inc. ("CPR"), formerly Shearson Realty Brokerage, Inc., was paid $510,000 in 1994 in conjunction with the Partnership's 1993 refinancing. CPR is an affiliate of the General Partner.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(i) Index to Consolidated Financial Statements Page
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Partners' Capital (Deficit) for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Notes to the Consolidated Financial Statements
(a)(ii) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate and Accumulated Depreciation
(a)(iii) Exhibits
Subject to Rule 12b-32 under the Securities Exchange Act of 1934 on incorporation by reference, listed below are the exhibits that are filed as part of this report:
No. Title
3.1 Restated Agreement and Certificate of Limited Partnership of the Partnership dated as of June 25, 1985 is hereby incorporated by reference to Exhibit B to the Prospectus (the "Prospectus") contained in Registration Statement No. 2-98786, as amended (the "Registration Statement"), which Registration Statement was declared effective on August 19, 1985.
3.2 Form of Restated Agreement and Certificate of the Partnership is hereby incorporated reference to Exhibit B to the Prospectus.
3.3 Certificate of Limited Partnership of Bellwether Properties, L.P. ("Bellwether"), as amended, is hereby incorporated by reference to the Registration Statement.
3.4 Form of Amendment to Certificate of Limited Partnership of Bellwether is hereby incorporated by reference to the Registration Statement.
3.5 Form of Amended and Restated Agreement of Limited Partnership of the Owner Partnership is hereby incorporated by reference to Exhibit C to the Prospectus.
4.1 Form of certificate representing a limited partnership interest in the Partnership is hereby incorporated by reference to the Registration Statement.
10.1 Subscription Agreement and Signature Page is hereby incorporated by reference to Exhibit D to the Prospectus.
10.2 Escrow Agreement between the Partnership, Shearson Lehman Brothers Inc. ("Shearson") and Manufacturers Hanover Trust Company, dated as of August 12, 1985, is hereby incorporated by reference to the Registration Statement.
10.3 Form of Property Management and Leasing Agreement dated as of November 29, 1985, between the Owner Partnership and Shopco Management Corporation is hereby incorporated by reference to the Registration Statement.
10.4 Capital Contribution Agreement dated as of August 7, 1985, between Shearson Lehman Brothers Group Inc. and the General Partner is hereby incorporated by reference to the Registration Statement.
10.5 Letter Agreement, dated as of June 6, 1985, amending the Contract of Sale is hereby incorporated by reference to the Registration Statement.
10.6 Indemnification Agreement between Shearson, Shearson Holdings and the officers and directors of the General Partner is hereby incorporated by reference to the Registration Statement.
10.7 Amended and Restated Deed of Trust and Security Agreement between Eastpoint Partners, L.P. and CBA Associates, Inc. dated December 1, 1993, is hereby incorporated by reference to Exhibit 10.14 to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1993.
10.8 Compromise and Mutual Release Agreement dated as of July 14, 1994 by and between Eastpoint Partners, L.P. and Southwestern Life Insurance Company is hereby incorporated by reference to Exhibit 10.1 to the Partnership's report on Form 10-Q for the period ended June 30, 1994
27 Financial Data Schedule.
99 Limited Appraisal of Real Property for Eastpoint Mall as of January 1, 1997, as prepared by Cushman & Wakefield, Inc.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1997 EASTPOINT MALL LIMITED PARTNERSHIP
BY: Eastern Avenue, Inc. General Partner
BY: /s/ Paul L. Abbott Name: Paul L. Abbott Title: Director, Chief Executive Officer and Chief Operating 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 in the capacities and on the dates indicated.
EASTERN AVENUE INC. General Partner
Date: March 27, 1997 BY: /s/ Paul L. Abbott Paul L. Abbott Director, Chief Executive Officer and Chief Operating Officer
Date: March 27, 1997 BY: /s/ Robert J. Hellman Robert J. Hellman President
Date: March 27, 1997 BY: /s/ Joan Berkowitz Joan Berkowitz Vice President
Date: March 27, 1997 BY: /s/ Elizabeth Rubin Elizabeth Rubin Vice President & Chief Financial Officer
Independent Auditors' Report
The Partners Eastpoint Mall Limited Partnership
We have audited the consolidated financial statements of Eastpoint Mall Limited Partnership (a Delaware limited partnership) and consolidated partnership as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eastpoint Mall Limited Partnership and consolidated partnership as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related 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.
KPMG PEAT MARWICK LLP
Boston, Massachusetts March 21, 1997
Consolidated Balance Sheets At December 31, At December 31, 1996 1995 Assets Real estate, at cost (notes 2, 3 and 5): Land $ 4,409,980 $ 4,166,230 Building 43,972,310 43,241,060 Improvements 7,286,406 7,050,087 55,668,696 54,457,377 Less accumulated depreciation and amortization (13,529,644) (11,738,595) 42,139,052 42,718,782 Cash and cash equivalents 6,362,256 6,254,501 Restricted cash (note 5) 1,000,000 2,100,000 Cash-held in escrow (note 5) 535,313 443,811 Accounts receivable, net of allowance of $125,805 in 1996 and $80,405 in 1995 836,705 638,436 Accrued interest receivable (note 5) 346,091 224,567 Deferred rent receivable 343,990 356,656 Note receivable (note 3) -- 738,000 Deferred charges, net of accumulated amortization of $622,906 in 1996 and $423,597 in 1995 1,353,384 1,510,981 Prepaid expenses 389,559 381,278 Total Assets $ 53,306,350 $ 55,367,012 Liabilities, Minority Interest and Partners' Capital Liabilities: Accounts payable and accrued expenses $ 417,511 $ 212,779 Mortgage loan payable (note 5) 51,000,000 51,000,000 Accrued interest payable -- 340,425 Due to affiliates (notes 6 and 7) -- 2,226 Security deposits payable 46,819 46,819 Deferred income 424,580 415,081 Distribution payable 288,826 288,826 Total Liabilities 52,177,736 52,306,156 Minority interest (541,161) (344,786) Partners' Capital (Deficit) (note 4): General Partner (97,569) (80,211) Limited Partners (4,575 limited partnership units authorized, issued and outstanding) 1,767,344 3,485,853 Total Partners' Capital 1,669,775 3,405,642 Total Liabilities, Minority Interest and Partners' Capital $ 53,306,350 $ 55,367,012
Consolidated Statements of Operations For the years ended December 31, 1996 1995 1994 Income Rental income (note 3) $ 7,306,819 $ 6,894,097 $ 6,724,625 Percentage rental income 1,019,783 1,209,752 1,182,148 Escalation income (note 3) 3,706,381 3,585,193 3,143,108 Interest income 340,504 406,292 265,117 Miscellaneous income 169,512 113,374 149,837 Total Income 12,542,999 12,208,708 11,464,835 Expenses Interest expense 4,059,600 4,071,472 4,090,017 Property operating expenses 3,502,731 3,160,271 3,305,981 Settlement costs (note 3) -- 78,000 371,500 Depreciation and amortization 2,032,858 2,001,526 1,904,981 Real estate taxes 596,769 576,674 563,423 General and administrative 210,244 186,504 207,040 Total Expenses 10,402,202 10,074,447 10,442,942 Income before minority interest 2,140,797 2,134,261 1,021,893 Minority interest (197,023) (200,539) (106,883) Net Income $ 1,943,774 $ 1,933,722 $ 915,010 Net Income Allocated: To the General Partner $ 19,438 $ 19,337 $ 9,150 To the Limited Partners 1,924,336 1,914,385 905,860 $ 1,943,774 $ 1,933,722 $ 915,010 Per limited partnership unit (4,575 outstanding) $ 420.62 $ 418.44 $ 198.00
Consolidated Statements of Partners' Capital (Deficit) For the years ended December 31, 1996, 1995 and 1994
General Limited Partner Partners Total Balance at December 31, 1993 $ (78,385) $ 3,666,812 $ 3,588,427 Net income 9,150 905,860 915,010 Distributions (8,664) (857,814) (866,478) Balance at December 31, 1994 (77,899) 3,714,858 3,636,959 Net income 19,337 1,914,385 1,933,722 Distributions (21,649) (2,143,390) (2,165,039) Balance at December 31, 1995 (80,211) 3,485,853 3,405,642 Net income 19,438 1,924,336 1,943,774 Distributions (36,796) (3,642,845) (3,679,641) Balance at December 31, 1996 $ (97,569) $ 1,767,344 $ 1,669,775
Consolidated Statements of Cash Flows For the years ended December 31, 1996 1995 1994 Cash Flows From Operating Activities: Net income $ 1,943,774 $ 1,933,722 $ 915,010 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest 197,023 200,539 106,883 Depreciation and amortization 2,032,858 2,001,526 1,904,981 Settlement costs -- 78,000 371,500 Increase (decrease) in cash arising from changes in operating assets and liabilities: Cash-held in escrow (91,502) (72,818) (75,070) Accounts receivable (198,269) (88,894) (119,708) Accrued interest receivable (121,524) (134,370) (90,197) Deferred rent receivable 12,666 (98,755) (131,105) Deferred charges (41,712) (38,256) (30,413) Prepaid expenses (8,281) (37,762) (49,515) Accounts payable and accrued expenses 204,732 3,245 (834,877) Accrued interest payable (340,425) -- 340,425 Due to affiliates (2,226) 2,035 (237,716) Security deposits payable -- (12,837) 9,788 Deferred income 9,499 (2,908) 12,849 Net cash provided by operating activities 3,596,613 3,732,467 2,092,835 Cash Flows From Investing Activities: Additions to real estate (1,253,819) (757,229) (802,843) Proceeds from note receivable 738,000 -- -- Purchase of note receivable -- -- (1,187,500) Net cash used for investing activities (515,819) (757,229) (1,990,343) Cash Flows From Financing Activities: Release of restricted cash 1,100,000 -- -- Deferred charges -- -- (530,552) Distributions paid (3,679,641) (2,165,039) (577,652) Distributions paid-minority interest (393,398) (216,745) (57,831) Net cash used for financing activities (2,973,039) (2,381,784) (1,166,035) Net increase (decrease) in cash and cash equivalents 107,755 593,454 (1,063,543) Cash and cash equivalents, beginning of period 6,254,501 5,661,047 6,724,590 Cash and cash equivalents, end of period $ 6,362,256 $ 6,254,501 $ 5,661,047 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ 4,400,025 $ 4,071,472 $ 3,749,592
Notes to the Consolidated Financial Statements December 31, 1996, 1995 and 1994
1. Organization Eastpoint Mall Limited Partnership (the "Partnership") was formed as a limited partnership on June 26, 1985 under the laws of the State of Delaware. The Partnership is the managing general partner of Eastpoint Partners L.P. (the "Owner Partnership") a New York limited partnership, which owns Eastpoint Mall (the "Mall").
The general partner of the Partnership is Eastern Avenue Inc., (the "General Partner"), formerly Shearson Lehman Eastern Avenue Inc. (see below), an affiliate of Lehman Brothers Inc., formerly Shearson Lehman Brothers, Inc.
On July 31, 1993, Shearson Lehman Brothers, Inc. ("Shearson") sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson changed its name to Lehman Brothers, Inc. ("Lehman Brothers"). The transaction did not affect the ownership of the General Partner. However, the assets acquired by Smith Barney included the name "Shearson." Consequently, effective January 13, 1994, Shearson Lehman Eastern Avenue Inc., the General Partner, changed its name to Eastern Avenue Inc.
The Partnership commenced investment operations on November 22, 1985, with the acceptance of subscriptions for 4,575 limited partnership units, the maximum authorized by the limited partnership agreement ("Limited Partnership Agreement"). Upon the admittance of the additional limited partners, the initial limited partner withdrew from the Partnership.
On February 16, 1996, based upon, among other things, the advice of legal counsel, the General Partner adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partner may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partner. In determining the amount of the distribution, the General Partner may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner and no partner will be entitled to receive any distribution until the General Partner has declared the distribution and established a record date and distribution date for the distribution.
2. Summary of Significant Accounting Policies
Basis of Accounting The consolidated financial statements of the Partnership have been prepared on the accrual basis of accounting and include the accounts of the Partnership and Eastpoint Partners L.P. All significant intercompany accounts and transactions have been eliminated.
Real Estate Real estate investments, which consist of land, building and improvements, are recorded at cost less accumulated depreciation and amortization. Cost includes the initial purchase price of the property plus closing costs, acquisition and legal fees and capital improvements, including capitalized interest. Depreciation of the building is computed using the straight-line method based on an estimated useful life of 40 years. Depreciation of improvements is computed using the straight-line method over estimated useful lives of 7 to 12 years.
Accounting for Impairment In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting for long- lived assets that are expected to be disposed of. The Partnership adopted FAS 121 in the fourth quarter of 1995.
Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"), requires that the Partnership disclose the estimated fair values of its financial instruments. Fair values generally represent estimates of amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in forced liquidation.
Fair value estimates are subjective and are dependent on a number of significant assumptions based on management's judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. In addition, FAS 107 allows a wide range of valuation techniques, therefore, comparisons between entities, however similar, may be difficult.
Deferred Charges Deferred charges are amortized using the straight-line method over the following periods:
Period Fee for negotiating the acquisition of the ownership of the Mall 12 to 40 years Financing fees 10 years
Fees paid in connection with the acquisition of the property have been included in the purchase price of the property. Accordingly, such fees have been allocated to the basis of the land, building and improvements and are being depreciated over the estimated useful lives of the depreciable assets. Leasing commissions are amortized using the straight-line method over 7 years which approximates the average life of the leases.
Offering Costs Offering costs are non-amortizable and have been deducted from partners' capital.
Transfer of Units and Distributions Net income or loss from operations is allocated to registered holders ("Unit Holder"). Upon the transfer of a unit, net income (loss) from operations attributable to such unit generally is allocated between the transferor and the transferee based on the number of days during the year of transfer that each is deemed to have owned the unit. The Unit Holder of record on the first day of the calendar month is deemed to have transferred their interest on the first day of such month.
Distributions of operating cash flow, as defined in the Partnership Agreement, is payable on a quarterly basis to registered Unit Holders on record dates established by the Partnership, which generally fall 45 days after quarter end.
Income Taxes No provision is made for income taxes since such liability is the liability of the individual partners.
Net Income Per Limited Partnership Unit Net income per limited partnership unit is calculated based upon the number of limited partnership units outstanding during the year.
Rental Income and Deferred Rent The Partnership rents its property to tenants under operating leases with various terms. Deferred rent receivable consists of rental income which is recognized on the straight-line basis over the lease terms, but will not be received until later periods as a result of scheduled rent increases.
Cash and Cash Equivalents Cash and cash equivalents consist of money market investment accounts which invest in short-term highly liquid investments with maturities of three months or less from the date of issuance. The carrying amount approximates fair value because of the short maturity of those investments.
Concentration of Credit Risk Financial instruments which potentially subject the Partnership to a concentration of credit risk principally consist of cash and cash equivalents in excess of the financial institutions' insurance limits. The Partnership invests available cash with high credit quality financial institutions.
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 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 differ from those estimates.
Reclassifications Certain prior year amounts have been reclassified in order to conform to the current year's presentation.
3. Real Estate The Owner Partnership's real estate which was purchased on November 29, 1985, consists of a central enclosed mall plus five free standing buildings and is located on approximately 67.1 acres in Baltimore County, Maryland. The Mall consists of a central enclosed mall anchored by four major department stores - J.C. Penney, Inc. ("J.C. Penney"), Schottenstein Stores Corporation, doing business as Value City ("Value City"), Sears, Roebuck, and Co. ("Sears") and Ames Department Stores, Inc. (two of which are subject to ground leases), improvements and land. The retail space in the Mall is contained on one level; J.C. Penney and Value City are multi-level. Office and storage areas are contained in the basement level and on the second floor levels of the Mall. Parking is provided for over 4,500 cars.
The Mall currently has gross leasable space totaling 864,993 square feet. Of this leasable space, 637,582 is owned by the Owner Partnership and 227,411 square feet of the gross leasable space is owned by the tenants who have leased portions of land pursuant to ground leases with the Owner Partnership. Upon expiration of such ground leases, ownership of the buildings thereon will revert to the Owner Partnership.
J.C. Penney leases a parcel of land pursuant to a ground lease on which it constructed the largest of the Mall's anchor stores containing approximately 151,629 square feet of the gross leasable area. The initial term of the J.C. Penney ground lease expires on August 31, 2001.
Value City leases approximately 140,000 square feet of the gross leasable area of the Mall. The initial term of the lease was scheduled to expire on November 30, 1999 but has been extended until November 30, 2009.
Sears leases approximately 87,734 square feet of the gross leasable area of the Mall. The initial term of the lease expires on October 16, 2006.
Ames leases a parcel of land pursuant to a ground lease on which it has constructed a building containing approximately 58,442 square feet of the gross leasable area. The initial term of the Ames ground lease expires on May 30, 2004.
On November 8, 1996, the Owner Partnership purchased for $975,000 the leasehold interest in a vacant, free-standing building and the underlying land located adjacent to the J.C. Penney anchor tenant store at the Mall from J.C. Penney Company, Inc.
The following is a schedule of the remaining minimum lease payments as called for under the lease agreements:
Year Amount 1997 $ 6,397,641 1998 5,912,917 1999 5,551,453 2000 5,044,574 2001 4,285,557 Thereafter 12,252,077 $ 39,444,219
In addition to the minimum lease amounts, the leases provide for percentage rents, and escalation charges to tenants for common area maintenance and real estate taxes. For the years ended December 31, 1996, 1995 and 1994, temporary tenant income amounted to $397,921, $302,815 and $296,938, respectively, and are included in rental income.
For the year ended December 31, 1995, one tenant accounted for approximately 10% of the Partnership's rental and percentage rental income. No single tenant accounted for 10% or more of such income for the years ended December 31, 1996 and 1994.
On April 26, 1990, Ames Department Stores, Inc. ("Ames") filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. Land leased to Ames by the Owner Partnership together with the building constructed thereon by Ames secured a first priority deed of trust held by Consolidated Fidelity Life Insurance Company ("Consolidated") as successor to Southwestern Life Insurance Company. By filing its bankruptcy petition, Ames was in default under the Consolidated priority deed of trust. On December 18, 1992, the Bankruptcy Court confirmed a Plan of Reorganization for Ames (the "Plan") and the Plan was subsequently consummated. Pursuant to the Plan, Ames assumed the lease of its store at the Mall and continues its operations there.
On December 28, 1992, the Partnership received a Notice of Default from Consolidated. The Partnership and Consolidated negotiated a Settlement Agreement (the "Settlement Agreement") whereby, upon approval by the Bankruptcy Court and consummation of certain further agreements reached between Consolidated and Ames, the Partnership would make a payment of $812,500 to Consolidated in complete satisfaction of all claims Consolidated may have against the Ames parcel and the Partnership. As part of the Settlement Agreement, Consolidated withdrew its Notice of Default. The Settlement Agreement was effective through December 31, 1993.
The Settlement Agreement expired on December 31, 1993, as Bankruptcy Court approval of the outstanding claims between Consolidated and Ames had not then been obtained. Since Consolidated and Ames (and Ames' trustee in bankruptcy) had not resolved all claims among them, there still existed defaults under the Consolidated deed of trust and therefore, Consolidated had the right to foreclose on the Ames parcel. On January 7, 1994, Consolidated delivered another notice of default to the Partnership.
The delivery to the Partnership by Consolidated of the new Notice of Default constituted a technical default under the new first mortgage loan of the Partnership with the REMIC Lender (note 5). However, the REMIC Lender was aware of the Consolidated claim at the time the new first mortgage loan was closed, and the REMIC Lender held certain proceeds of the new first mortgage loan in escrow until such time as the Partnership resolved the Consolidated dispute and provided a release of Consolidated's outstanding deed of trust on the Ames parcel.
In July 1994, the Partnership executed a Compromise and Mutual Release (the "Release Agreement") with Consolidated. Pursuant to the terms of the Release Agreement , the Partnership paid Consolidated $2 million in return for the assignment of the Deed of Trust and related Ames promissory note, as well as Consolidated's claim in the Ames bankruptcy case relating to such promissory note. Consolidated's total claims, in the face amount of approximately $2.3 million, consist of the balances due on the Ames promissory note, totaling $1.7 million, and another promissory note. Pursuant to the Release Agreement, the Partnership is entitled to any recovery based on the Ames promissory note; Consolidated will receive any recovery on the other note. Various trusts were established through Ames' Plan of Reorganization by which different classes of claims were to be paid from different pools of monies. The trustee for the trust responsible for payment of Consolidated's claim (the "Subsidiaries Trustee") had filed an objection to the allowance of Consolidated's claim, including that portion attributable to the Ames promissory note. The Partnership pursued legal action in opposition to the objection.
In mid-March 1996, the Trustee and the Partnership settled the Trustee's objection by reducing and allowing Consolidated's claim in the approximate amount of $2,050,000 (the "Claim"), of which approximately $1,530,142 is for amounts due under the Ames promissory note, and requiring Ames to make a payment of $10,000 to the Owner Partnership. An Agreed Order approving the settlement was entered by the Bankruptcy Court on May 1, 1996. Ames' $10,000 payment to the Owner Partnership was received on June 4, 1996. On August 7, 1996, and September 23, 1996, payments on the Claim were received by the Owner Partnership from Ames in the amounts of $887,520 and $111,938, respectively. At December 31, 1996, the total payments received from Ames were $1,009,458, of which approximately $222,000, is payable to Consolidated and is reflected in accounts payable and accrued expenses on the Partnership's Consolidated Balance Sheet. It is uncertain at this time if there will be any additional payments made to the Owner Partnership.
On August 21, 1996, the Owner Partnership retired the Ames promissory note secured by the Deed of Trust.
The following is a schedule of the remaining minimum lease payments as called for under the ground lease agreements:
Year Amount 1997 $ 205,500 1998 205,500 1999 254,083 2000 258,500 2001 258,500 Thereafter 621,083 $ 1,803,166
The appraised fair market value of Eastpoint Mall at January 1, 1997 and 1996, as determined by an independent third party appraisal firm, was $81,000,000.
4. Partnership Agreement The Partnership has a 90.9% interest in the operating income, profits and cash distributions, and a 99% interest in the operating losses of the Owner Partnership. The limited partnership agreement provides that all operating income, losses, profits, and cash distributions are allocated 1% to the General Partner and 99% to the Limited Partners. The proceeds of sale and interim capital transactions will be distributed 100% to the Partnership (100% to the limited partners) until the Limited Partners have received distributions equal to a return of their original capital contribution plus a 10% cumulative return on capital ("Preferred Return"). Thereafter, any remaining proceeds will be allocated 86% to the Partnership (1% to the General Partner and 99% to the Limited Partners). As of December 31, 1996, the Limited Partners have not received distributions in excess of their Preferred Return and original capital contributions.
With respect to the Owner Partnership, the General Partner has a .1% interest and SFN Limited Partnership has a 9% interest in the income, profits, and cash distributions of the Mall. Losses from operations shall be allocated .1% to the General Partner, and .9% to the SFN Limited Partnership. Upon sale or interim capital transaction, the General Partner will receive 5% and SFN Limited Partnership will receive 9% after the limited partners of the Partnership receive their original capital contribution plus their 10% cumulative return.
5. Mortgage Loan Payable In December 1993, the Partnership obtained new first mortgage financing from CBA Conduit, Inc., an entity which placed the new mortgage into a pool of other mortgages to be held by a Real Estate Mortgage Investment Conduit (the "REMIC Lender"). The total amount of the new first mortgage is $51,000,000 which requires monthly interest payments at a rate of 8.01% per annum for the first five years and, thereafter, at a rate equal to 2.8% above the current yield on five-year Treasury Notes. The mortgage loan matures on December 22, 2003, at which time the entire outstanding principal balance is due. After repayment of the Partnership's former first mortgage loan from Kemper Investors Life Insurance Company and the establishment of certain loan reserves and payment of expenses, approximately $3,000,000 of the proceeds were available to the Partnership for tenant improvements, leasing commissions, capital improvements and costs attributable to leasing and re-leasing. Escrow accounts were also established for the collection of real estate taxes and various insurance expenses. They are currently presented on the consolidated balance sheets as cash-held in escrow.
Certain proceeds of the new first mortgage loan were placed into a restricted cash account to be funded to the Partnership at such time as the Partnership obtains a release of the first mortgage outstanding to Consolidated Fidelity Life Insurance Company on the parcel of real estate currently occupied by Ames. On December 16, 1996, $1,100,000 was released to the Partnership following the completion of certain administrative procedures required by the first mortgage lender.
Additionally, $1,000,000 of the loan proceeds has been placed into the restricted cash account which constitutes additional collateral for the new first mortgage and can be used by the Partnership for leasing expenses and capital improvements. The loan is secured by a first mortgage and an assignment of leases on Eastpoint Mall. Accrued interest receivable at December 31, 1996 and 1995 represents interest income on the restricted cash balance.
Based on the borrowing rates currently available to the Partnership for mortgage loans with similar terms and average maturities, the fair value of long-term debt approximates its carrying value as of the balance sheet date.
6. Transactions with Related Parties CPR Realty Brokerage, Inc. ("CPR, Inc.") formerly Shearson Realty Brokerage, Inc. was paid $510,000 in 1994 in conjunction with the Partnership's refinancing.
The General Partner was reimbursed $99,007 during 1994 from the Partnership and $138,900 from the Owner Partnership, for professional fees paid at inception of the Partnership.
Under the terms of the Partnership Agreement, the General Partner and its affiliates are entitled to be reimbursed for out-of- pocket expenses. For the years ended December 31, 1996, 1995 and 1994, out-of-pocket expenses were $5,048, $5,064, and $2,740, respectively. At December 31, 1996 and 1995, $0 and $2,226, respectively, remained unpaid.
Cash and Cash Equivalents Certain cash and cash equivalents were on deposit with an affiliate of the General Partner during a portion of 1996 and all of 1995. As of December 31, 1996, no cash and cash equivalents were on deposit with an affiliate of the General Partner or the Partnership.
7. Management Agreement On November 29, 1985, the Partnership entered into an agreement with Shopco Management Corporation, an affiliate of SFN Limited Partnership, for the management of the property. The agreement, which expired on December 31, 1990, provided for an annual fee equal to 3.0% of the gross rents collected from the Mall, as defined, payable monthly. The Partnership and Shopco Management Corporation agreed to the terms of the new management agreement effective January 1, 1991 through December 31, 1993, which included an increase in the annual fee to 4.5% of gross rents collected from the Mall. The new management agreement which expired on December 31, 1993 is automatically renewed for successive periods of one year. The management agreement has been renewed through December 31, 1997. For the years ended December 31, 1996, 1995 and 1994, management fee expense amounted to $368,435, $349,166 and $389,631, respectively.
8. Distributions to Limited Partners In 1996, 1995 and 1994, distributions to Limited Partners totaled $3,642,845, ($796.25 per limited partnership unit), $2,143,390, ($468.50 per limited partnership unit), and $857,814 ($187.50 per limited partnership unit), respectively.
9. Reconciliation of Consolidated Financial Statement Net Income and Partners' Capital to Federal Income Tax Basis Net Income and Partners' Capital (Deficit)
Reconciliations of consolidated financial statement net income and partners' capital to federal income tax basis net income and partners' capital (deficit) at December 31, follow:
1996 1995 1994 Financial statement net income $ 1,943,774 $ 1,933,722 $ 915,010 Tax basis recognition of deferred charges over financial statement recognition of deferred charges (37,875) (37,875) (46,334) Tax basis recognition of deferred income over (under) financial statement recognition of deferred income 2,821 (115,321) (119,650) Tax basis depreciation over financial statement depreciation (472,137) (456,095) (522,536) Financial statement basis recognition of Settlement cost over (under) tax basis (44,883) 70,902 337,695 Federal income tax basis net income $ 1,391,700 $ 1,395,333 $ 564,185
1996 1995 1994 Financial statement basis partners' capital $ 1,669,775 $ 3,405,642 $ 3,636,959 Current year financial statement net income over federal income tax basis net income (552,074) (538,389) (350,825) Cumulative federal income tax basis net income (loss) over cumulative financial statement net income (loss) (3,472,588) (2,934,199) (2,583,374) Federal income tax basis partners' capital (deficit) $ (2,354,887) $ (66,946) $ 702,760
Because many types of transactions are susceptible to varying interpretations under Federal and State income tax laws and regulations, the amounts reported above may be subject to change at a later date upon final determination by the respective taxing authorities.
Schedule II Valuation and Qualifying Accounts
Balance at Charged to Balance at Beginning Costs and End of of Period Expenses Deductions Period Allowance for doubtful accounts: Year ended December 31, 1994: $ 308,828 $ 129,193 $ 143,962 $ 294,059 Year ended December 31, 1995: 294,059 19,852 233,506 80,405 Year ended December 31, 1996: $ 80,405 $ 146,652 $ 101,252 $ 125,805
Schedule III - Real Estate and Accumulated Depreciation December 31, 1996
Eastpoint Description: Shopping Center Total
Location Baltimore County, MD na Construction date 1956-1981 na Acquisition date 11-29-85 na Life on which depreciation in latest income statements is computed Building - 40 years na Improvements - 7-12 years na Encumbrances $ 51,000,000 $ 51,000,000 Initial cost to Partnership: (A) Land $ 3,497,465 $ 3,497,465 Building and improvements $ 26,254,002 $ 26,254,002 Costs capitalized subsequent to acquisition: Land, building and improvements $ 25,917,229 $ 25,917,229 Gross amount at which carried at close of period: (B) Land $ 4,409,980 $ 4,409,980 Building and improvements 51,258,716 51,258,716 $ 55,668,696 $ 55,668,696
Accumulated depreciation $ 13,529,644 $ 13,529,644
(A) The initial cost of the Partnership represents the original purchase price of the property.
(B) For Federal income tax purposes, the cost basis for the land, building and improvements at December 31, 1996 is $51,772,419.
A reconciliation of the carrying amount of real estate and accumulated depreciation for the years ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994 Real estate investments: Beginning of year $ 54,457,377 $ 53,761,925 $ 52,996,871 Additions 1,253,819 757,229 802,843 Dispositions (42,500) (61,777) (37,789) End of year $ 55,668,696 $ 54,457,377 $ 53,761,925
Accumulated depreciation: Beginning of year $ 11,738,595 $ 9,997,420 $ 8,335,792 Depreciation expense 1,833,549 1,802,952 1,699,417 Dispositions (42,500) (61,777) (37,789) End of year $ 13,529,644 $ 11,738,595 $ 9,997,420