Item 1. Business
Paine Webber Income Properties Seven Limited Partnership (the "Partnership") is a limited partnership formed in January 1985 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a diversified portfolio of income-producing real properties including apartments, shopping centers and office buildings. The Partnership sold $37,969,000 in Limited Partnership units (the "Units"), representing 37,969 Units at $1,000 per Unit, from May 14, 1985 to May 13, 1986 pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933 (Registration No. 2-95562). Limited Partners will not be required to make any additional capital contributions.
The Partnership originally invested the net proceeds of the public offering, through five joint venture partnerships, in seven operating properties, comprised of five multi-family apartment complexes, one mixed-use office and retail property and one shopping center. As discussed further below, during fiscal 1997 three of the multi-family properties were sold. A fourth multi-family property was sold on December 18, 1997. In addition, subsequent to the end of fiscal 1998, on November 10, 1998, the retail portion of the Concourse property was sold. The office portion of this mixed-use property had been lost through foreclosure proceedings on December 17, 1992. The shopping center property was also sold subsequent to year-end, on November 17, 1998. Subsequent to these transactions, the Partnership has only one remaining real estate investment, the Colony Apartments. As of September 30, 1998, the Partnership owned, through joint venture partnerships, interests in the operating properties set forth in the following table:
Name of Joint Venture Date of Name and Type of Property Acquisition Location Size of Interest Type of Ownership (1) - -------- ---- ----------- ---------------------
Chicago Colony Apartments 783 12/27/85 Fee ownership of land Associates units and improvements The Colony Apartments (through joint venture) Mount Prospect, Illinois
West Palm Beach Concourse 30,473 7/31/85 Fee ownership of land Associates (2) (3) gross and improvements The Concourse leasable through joint venture) Retail Plaza sq. ft. West Palm Beach, Florida
Chicago Colony Square 39,572 12/27/85 Fee ownership of land Associates (4) gross and improvements Colony Square Shopping Center leasable (through joint venture) Mount Prospect, Illinois sq. ft.
(1) See Notes to the Consolidated Financial Statements filed with this Annual Report for a description of the long-term mortgage indebtedness secured by the Partnership's operating property investments and for a description of the agreements through which the Partnership has acquired these real estate investments.
(2) On October 29, 1992, West Palm Beach Concourse Associates entered into a settlement agreement with its mortgage lenders which resulted in the retention of the ownership of the retail component of the original investment property (30,473 square feet) and the foreclosure of the two office towers (70,000 square feet each) by the first mortgage lender. The foreclosure of the office towers was completed on December 17, 1992. West Palm Beach Concourse Associates had been in default of the first and second mortgage loans secured by the venture's mixed-use, office and retail operating properties since May 1991. The inability of the venture to service its debt obligations resulted from a significant deterioration in leasing levels and effective rental rates for the office towers caused by severely depressed local market conditions.
(3) Subsequent to year-end, on November 10, 1998, West Palm Beach Concourse Associates sold its operating investment property, The Concourse Retail Plaza, to an unrelated party for $2 million. The sale generated net proceeds of approximately $225,000, after the assumption of the outstanding first mortgage loan of approximately $1,539,000, accrued interest of approximately $4,000, net closing proration adjustments of approximately $2,000 and closing costs of approximately $230,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement.
(4) Subsequent to year-end, on November 17, 1998, Chicago Colony Square Associates sold its operating investment property, the Colony Square Shopping Center, to an unrelated party for $2.3 million. The sale generated net proceeds of approximately $1,014,000, after the repayment of the outstanding first mortgage loan of approximately $864,000, accrued interest of approximately $13,000 (including a prepayment penalty of $9,000), closing proration adjustments of approximately $221,000 and closing costs of approximately $188,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement.
The Partnership previously had an interest in HMF Associates, a joint venture which owned three multi-family apartment properties and Daniels Meadows Partnership, a joint venture which owned the Meadows on the Lakes Apartments. On June 27, 1997, HMF Associates sold the properties known as The Hunt Club Apartments located in Seattle, Washington and The Marina Club Apartments located in Des Moines, Washington to an unrelated third party for approximately $5.3 million and $3.1 million, respectively. The Partnership received net proceeds of approximately $288,000 in connection with the sale of these two assets in accordance with a discounted mortgage loan payoff agreement reached with the lender in April 1997. On September 9, 1997, HMF Associates sold the property known as The Enchanted Woods Apartments located in Federal Way, Washington to an unrelated third party for approximately $9.2 million. The Partnership received net proceeds of approximately $261,000 in connection with the sale in accordance with the discounted mortgage loan payoff agreement. On December 18, 1997, Daniel Meadows Partnership sold its operating investment property, The Meadows on the Lakes Apartments, to an unrelated party for $9.525 million. The sale generated net proceeds of approximately $4.4 million after repayment of the outstanding first mortgage loan of approximately $4.7 million and closing costs of approximately $310,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement.
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some extent, would not constitute taxable income; (ii) preserve and protect Limited Partners' capital; (iii) achieve long-term appreciation in the value of its properties; and (iv) provide a build up of equity through the reduction of mortgage loans on its properties.
Regular quarterly distributions of excess operating cash flow, which had been suspended in 1990, were reinstated during fiscal 1997. Through September 30, 1998, the Limited Partners had received cumulative cash distributions totalling approximately $18,928,000, or approximately $515 per original $1,000 investment for the Partnership's earliest investors. Of this total, $40 per original $1,000 investment represents a distribution made in February 1997 of an amount of Partnership cash reserves which exceeded expected future requirements, $50 per original investment represents a Special Capital Distribution made on August 15, 1997 to unitholders of record as of June 27, 1997 and $165 per original investment represents a special distribution made on February 13, 1998 to unitholders of record on December 18, 1997. Of the August 15, 1997 special distribution amount, $7.60 per original $1,000 investment represented net sale proceeds from the disposition of The Hunt Club Apartments and The Marina Club Apartments, $41.48 per original $1,000 investment represented proceeds from the settlements of litigation covering construction-related defects at the Hunt Club, Marina Club and Enchanted Woods properties and $0.92 per original $1,000 investment represented an additional amount of cash reserves that exceeded expected future requirements. Of the February 13, 1998 special distribution amount, $116.39 per original $1,000 investment represented net proceeds from the sale of The Meadows on the Lake Apartments, $13.52 per original $1,000 investment represented net proceeds from the sale of the Enchanted Woods Apartments and $35.09 per original $1,000 investment represented Partnership reserves that exceeded future requirements. The remaining distributions made through September 30, 1998 have been from operating cash flow of the Partnership. A substantial portion of such cash distributions has been sheltered from current taxable income. Subsequent to year-end, on December 15, 1998, the Partnership distributed approximately $1,253,000, or $33 per original $1,000 investment, which included the net proceeds from the sales of The Concourse Retail Plaza ($5.92 per Unit) and the Colony Square Shopping Center ($26.69 per Unit) and an amount of reserves that exceeded future requirements ($0.39 per Unit).
The loss of the Concourse Office Towers to foreclosure in fiscal 1993 and the minimal proceeds from the sale of the three properties owned by HMF Associates means that the Partnership will be unable to return the full amount of the original invested capital to the Limited Partners. The two office towers represented 28% of the Partnership's original investment portfolio. The three apartment complexes owned by HMF Associates comprised another 13% of the original investment portfolio. The amount of capital which will be returned will depend upon the proceeds received from the final liquidation of the remaining investment. The amount of such proceeds will ultimately depend upon the value of the underlying investment property at the time of its final disposition, which cannot be determined with certainty at the present time. The Partnership is currently focusing on potential disposition strategies for the remaining investment in its portfolio. Although no assurances can be given, it is currently contemplated that the sale of the Partnership's Colony Apartments investment could be completed during the first half of calendar year 1999. The sale of the remaining property would be followed by an orderly liquidation of the Partnership.
Colony Apartments is located in a real estate market in which it faces significant competition for the revenues it generates. It competes with numerous projects of similar types generally on the basis of price, location and amenities as well as with the local single family home market for prospective tenants. The continued availability of low interest rates on home mortgage loans has increased the level of this competition in all parts of the country over the past several years. However, the impact of the competition from the single-family home market has been offset by the lack of significant new construction activity in the multi-family apartment market over most of this period. Over the past 2 years, development activity for multi-family properties in many markets has escalated significantly.
The Partnership has no real estate investments outside the United States. The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable.
The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly owned subsidiary of PaineWebber Group, Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Seventh Income Properties Fund, Inc. and Properties Associates 1985, L.P. Seventh Income Properties Fund, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General Partner of the Partnership. The Associate General Partner of the Partnership is Properties Associates 1985, L.P., a Virginia limited partnership, certain limited partners of which are also officers of the Adviser and the Managing General Partner. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions.
Item 2.
Item 2. Properties
As of September 30, 1998, the Partnership owned interests in three operating properties through joint venture partnerships. The joint venture partnerships and the related properties are referred to under Item 1 above to which reference is made for the name, location and description of each property.
Occupancy figures of each fiscal quarter during 1998, along with an average for the year, are presented below for each property.
Percent Occupied At ------------------------------------------------- Fiscal 12/31/97 3/31/98 6/30/98 9/30/98 Average -------- ------- ------- ------- -------
The Colony Apartments 97% 97% 97% 97% 97%
The Concourse Retail Plaza 90% 90% 34% 34% 62%
Colony Square Shopping Center 100% 92% 92% 92% 94%
Item 3.
Item 3. Legal Proceedings
The Partnership is not subject to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters
At September 30, 1998 there were 2,228 record holders of Units in the Partnership. There is no public market for the resale of Units, and it is not anticipated that a public market for the Units will develop. Upon request, the Managing General Partner will endeavor to assist a Unitholder desiring to transfer his Units and may utilize the services of PWI in this regard. The price to be paid for the Units will be subject to negotiation by the Unitholder. The Managing General Partner will not redeem or repurchase Units.
Reference is made to Item 6
Item 6. Selected Financial Data Paine Webber Income Properties Seven Limited Partnership (In thousands except per unit data)
(1) The Partnership's operating loss for the year ended September 30, 1997 includes an impairment loss of $1,000,000 related to the consolidated Concourse Retail Plaza. See Note 2 to the accompanying financial statements for a further discussion of this writedown.
(2) The Partnership's operating loss for the year ended September 30, 1998 includes an impairment loss of $418,000 related to the consolidated Concourse Retail Plaza. See Note 2 to the accompanying financial statements for a further discussion of this writedown.
The above selected financial data should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this Annual Report.
The above per Limited Partnership Unit information is based upon the 37,969 Limited Partnership Units outstanding during each year.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Information Relating to Forward-Looking Statements - --------------------------------------------------
The following discussion of financial condition includes forward-looking statements which reflect management's current views with respect to future events and financial performance of the Partnership. These forward-looking statements are subject to certain risks and uncertainties, including those identified below under the heading "Certain Factors Affecting Future Operating Results", which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which were made based on facts and conditions as they existed as of the date of this report. The Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Liquidity and Capital Resources - -------------------------------
The Partnership offered units of limited partnership interests to the public from May 14, 1985 to May 13, 1986 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $37,969,000 were received by the Partnership, and after deducting selling expenses and offering costs, approximately $32,602,000 was invested in five joint venture partnerships which owned seven operating properties, comprised of five multi-family apartment complexes, one mixed-use office and retail property and one shopping center. During fiscal 1997 three of the multi-family properties were sold. A fourth multi-family property was sold on December 18, 1997. In addition, subsequent to year-end, on November 10, 1998, the retail portion of the Concourse property was sold. As previously reported, the office portion of this mixed-use property had been lost through foreclosure proceedings on December 17, 1992. In addition, the Colony Square Shopping Center property was sold on November 17, 1998. Subsequent to these transactions, the Partnership has only one remaining real estate investment, the Colony Apartments. The Partnership does not have any commitments for additional investments but may be called upon to fund its share of operating deficits or capital needs of its existing investment in accordance with the joint venture agreement.
As previously reported, in early fiscal 1997 the Partnership and its co-venture partner had received unsolicited offers from prospective purchasers to acquire The Meadows on the Lake Apartments, located in Birmingham, Alabama. After carefully reviewing the offers, the Partnership determined that the property should sell at a higher price and directed the co-venture partner to market the property for sale. During the fourth quarter of fiscal 1997, several offers were received. One of these offers was from a qualified buyer and met the Partnership's sale criteria. This offer was accepted by the Partnership and its co-venture partner; however, a sale agreement could not be finalized with this prospective buyer. Negotiations were then undertaken with one of the other potential buyers, resulting in a purchase and sale agreement which was signed on November 12, 1997. On December 18, 1997, The Meadows on the Lake Apartments was sold to an unrelated third party for $9.525 million. The sale generated net proceeds of approximately $4.4 million, after repayment of the outstanding first mortgage loan of approximately $4.7 million and closing costs of approximately $310,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement. The Partnership made a special distribution to the Limited Partners totalling approximately $6,265,000, or $165 per original $1,000 investment, on February 13, 1998. Of this amount, $116.39 per original $1,000 investment represented the net proceeds from the sale of The Meadows on the Lake Apartments, $13.52 per original $1,000 investment represented net proceeds from the disposition of the Enchanted Woods Apartments, which was sold on September 9, 1997, and $35.09 per original $1,000 investment represented Partnership reserves that exceeded expected future requirements.
As previously reported, the Partnership had reviewed its options for The Concourse Retail Plaza at the beginning of fiscal 1998 and determined that it was the appropriate time to market the property for sale. For the past several years, 80% of the Plaza's 30,473 square feet has been leased to four restaurant operators which have performed poorly. One of these restaurant tenants was paying rent on space that was vacated in 1996 under a lease that can be terminated in July 1999. Two other of these restaurant tenants closed their operations at the property during the quarter ended September 30, 1998 as a result of poor sales. One of the options reviewed for the property was the development of a leasing plan that would put an emphasis on a greater mixture of office and retail uses. This would have involved the likely conversion of one of the larger restaurant out parcel buildings into professional/service office space. Another option was to market the property for sale currently, with the net proceeds from any such potential sale transaction being carefully evaluated in comparison to the risks of holding the property and completing the conversion. The Partnership decided on the second option and began marketing the property for sale. During the second quarter of fiscal 1998, the Partnership initiated discussions with area real estate firms concerning potential marketing strategies for selling The Concourse and solicited marketing proposals from several of these firms. After reviewing their respective proposals and conducting interviews to determine their expertise and track record in selling properties similar to The Concourse, the Partnership selected a Florida-based firm. During the third quarter, a marketing package was finalized and comprehensive sale efforts began in early May. On August 14, 1998, a purchase and sale agreement was signed with an unrelated third party. Subsequent to year-end, on November 10, 1998, West Palm Beach Concourse Associates sold The Concourse Retail Plaza property to this unrelated party for $2 million. The sale generated net proceeds of approximately $225,000, after the assumption of the outstanding first mortgage loan of approximately $1,539,000, accrued interest of approximately $4,000, net closing proration adjustments of approximately $2,000 and closing costs of approximately $231,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement. The mortgage loan, which was assumable, contains a prohibition on prepayment through January 10, 2000. As a result, any sale transaction completed prior to such date had to involve an assumption of this mortgage loan which carries an interest rate of 11.12% per annum. The sale price was discounted to reflect this above-market interest rate. Nonetheless, the Managing General Partner believed that a current sale was in the best interests of the Limited Partners. As discussed further below, the Partnership has recorded an impairment writedown of $418,000 in fiscal 1998 to reflect the net proceeds received from the sale subsequent to year-end.
As previously reported, the Partnership and its co-venture partner had begun exploring potential opportunities for the sale of the Colony Square property in early fiscal 1998. As part of that plan, discussions were held with real estate brokerage firms with a specialty in small retail centers like Colony Square. During the third quarter of fiscal 1998, the Partnership and its co-venture partner selected a real estate brokerage firm to begin marketing this asset for sale. Subsequently, an offer was received to purchase the Colony Square Shopping Center from a prospective third-party buyer that met the Partnership's and co-venture partner's sale criteria. A purchase and sale agreement was signed on July 9, 1998 with this prospective buyer. On November 17, 1998, Chicago Colony Square Associates sold the Colony Square Shopping Center to this unrelated party for $2.3 million. The sale generated net proceeds of approximately $1,014,000, after the repayment of the outstanding first mortgage loan of approximately $864,000, accrued interest of approximately $13,000 (including a prepayment penalty of $9,000), closing proration adjustments of approximately $221,000 and closing costs of approximately $188,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement. As a result of the sales of The Concourse Retail Plaza and Colony Square Shopping Center, a Special Distribution of approximately $1,253,000, or $33 per original $1,000 investment, was made on December 15, 1998. Of this total, $5.92 represented net proceeds from the sale of The Concourse Retail Plaza, $26.69 represented net proceeds from the sale of Colony Square Shopping Center and $0.39 represented Partnership reserves that exceeded future requirements.
With the sales of The Concourse and Colony Square, the Partnership now has one remaining real estate investment, the Colony Apartments, a 783-unit complex located in Mount Prospect, Illinois. The occupancy level at Colony Apartments averaged 97% for fiscal 1998, up from the average occupancy level of 96% for the prior fiscal year. In addition, the average monthly rental rate per apartment unit has increased by approximately 4% over the past twelve months. With the improvements in the apartment segment of the real estate market and the strong local job market in this northwest Chicago suburb, the Partnership and its co-venture partner decided to market the Colony Apartments for sale during the third quarter of fiscal 1998. A national real estate firm was selected to market the property and comprehensive sale efforts began in late June. As a result of these sale efforts, ten offers were received. As part of the Partnership's sale efforts to reduce the prospective buyers' due diligence work and the time required to complete it, updated operating reports as well as building evaluation and environmental information of the property were provided to the top six prospective buyers, who were asked to submit best and final offers and did so. Subsequent to year-end, the Partnership and its co-venture partner selected an offer and are currently negotiating a purchase and sale agreement. The Partnership currently expects to have a signed purchase and sale agreement by January 31, 1999 and to close on the sale transaction shortly thereafter. This should allow the Partnership to complete a liquidation of the Partnership by March 31, 1999. However, since the sale of the Colony Apartments property remains contingent upon, among other things, negotiation of a definitive sales agreement and satisfactory completion of the buyer's due diligence, there are no assurances that the sale of the final asset and the liquidation of the Partnership will be completed within this time frame.
At September 30, 1998, the Partnership and its consolidated venture had cash and cash equivalents of approximately $1,530,000. Such cash and cash equivalents will be utilized as needed for Partnership requirements such as the payment of operating expenses, distributions to partners, as discussed further above, and the funding of operating deficits or capital improvements of the remaining joint venture, in accordance with the terms of the joint venture agreement. The source of future liquidity and distributions to the partners is expected to be from available net cash flow generated by the operations of the Partnership's investment property and from the net proceeds from the sale or refinancing of such property. Such sources of liquidity are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis.
As noted above, the Partnership expects to be liquidated by the end of calendar year 1999. Notwithstanding this, the Partnership believes that it has made all necessary modifications to its existing systems to make them year 2000 compliant and does not expect that additional costs associated with year 2000 compliance, if any, will be material to the Partnership's results of operations or financial position.
Results of Operations 1998 Compared to 1997 - ---------------------
The Partnership reported net income of $5,048,000 for the year ended September 30, 1998, as compared to net income of $10,496,000 for the prior year. This unfavorable change in the Partnership's net operating results is primarily attributable to the gains recognized by the Partnership in fiscal 1997 on the sales of the Hunt Club, Marina Club and the Enchanted Woods Apartments and the related extraordinary gains from settlement of debt obligations. The Partnership recognized gains from the forgiveness of indebtedness in connection with the sales of the Enchanted Woods, Hunt Club and Marina Club properties in the aggregate amount of $7,463,000 as a result of the fiscal 1997 sale transactions and the discounted loan payoff agreement with the lender. The venture also recognized gains in the aggregate amount of $4,210,000 for the amount by which the sales prices, net of closing costs, exceeded the net carrying values of the operating investment properties. During fiscal 1998, the Partnership recognized a gain of $4,591,000 on the sale of the Meadows on the Lake Apartments.
The impact of the fiscal 1997 extraordinary gains from forgiveness of debt was partially offset by an increase in the Partnership's share of unconsolidated ventures' income of $930,000 and a decrease in the Partnership's operating loss of $700,000 in fiscal 1998. The favorable change in the Partnership's share of unconsolidated ventures' income is primarily attributable to the sale of the properties owned by the HMF joint venture during the third and fourth quarters of fiscal 1997. The HMF joint venture had been generating sizable operating losses prior to the sales of its assets. In addition, net income increased by $349,000 at the Colony Apartments joint venture for the current year mainly due to an increase in rental income as a result of the improved occupancy and rental rates discussed further above.
The decrease in the Partnership's operating loss was primarily attributable to a $582,000 decrease in the impairment loss recognized by the consolidated Concourse Retail Plaza in the current year. The Partnership recognized an impairment loss of $418,000 during fiscal 1998 in order to write down the net carrying value of the Concourse property to $1,769,000, which is equal to the $2 million sales price for the property on November 10, 1998 less selling costs of $231,000. An impairment loss of $1,000,000 had been recorded by the consolidated venture in fiscal 1997 to write down the property to management's estimate of its then current market value. An increase in interest and other income of $158,000 as well as a decrease in depreciation expense of $47,000 also contributed to the reduction in the Partnership's operating loss for fiscal 1998. The increase in interest and other income was attributable to the receipt of a residual cash distribution from the HMF joint venture of $272,000 in the current year in connection with the final liquidation of the joint venture. The reduction in depreciation expense was attributable to the decrease in the asset value of the consolidated operating investment property as a result of the impairment write down recognized at the end of fiscal 1997. An increase of $64,000 in interest expense in fiscal 1998 partially offset the favorable changes in the Partnership's operating loss. The increase in interest expense was the result of the write-off of the unamortized balance of the deferred financing costs related to the consolidated Concourse joint venture in the current year due to the subsequent sale of the venture's operating property.
1997 Compared to 1996 - ---------------------
The Partnership reported net income of $10,496,000 for the year ended September 30, 1997, as compared to a net loss of $404,000 in fiscal 1996. This favorable change in the Partnership's net operating results was primarily attributable to the gains recognized by the Partnership on the sale of the Hunt Club, Marina Club and the Enchanted Woods Apartments and the related extraordinary gains from settlement of debt obligations, as discussed further above. The HMF joint venture recognized gains from the forgiveness of indebtedness in connection with the sales of the Enchanted Woods, Hunt Club and Marina Club properties in the aggregate amount of $7,552,000 as a result of the fiscal 1997 sale transactions. The venture also recognized gains in the aggregate amount of $4,291,000 for the amount by which the sales prices, net of closing costs, exceeded the net carrying values of the operating investment properties. The Partnership's share of such gains totalled approximately $7,463,000 and $4,210,000, respectively. The Partnership's net loss, prior to the effect of these gains, increased by $773,000 for the year ended September 30, 1997 mainly as a result of the impairment loss of $1,000,000 recognized on the Concourse operating property in fiscal 1997, as discussed further above. The impact of the impairment loss was partially offset as a result of the Partnership realizing income of $36,000 from its share of unconsolidated ventures' operations in fiscal 1997 as compared to losses of $276,000 during fiscal 1996.
The favorable change in the operations of the unconsolidated joint ventures was primarily a result of the sale of the HMF Associates properties during fiscal 1997. HMF Associates had been generating net losses from operations prior to the sale transactions. The elimination of the net losses from HMF Associates was partially offset by the recognition of a gain on settlement of insurance proceeds by the Meadows joint venture during fiscal 1996 of $197,000. This gain was recognized due to a change in the original estimate for the completion of required structural repairs to the Meadows on the Lake Apartments.
An increase in bad debt expense of the consolidated Concourse Retail Plaza of $61,000 and an increase in management fee expense of $58,000 also contributed to the increase in the Partnership's net loss prior to the effect of the HMF gains in fiscal 1997. Bad debt expense increased due to a financially troubled tenant at Concourse defaulting on a previous workout arrangement during fiscal 1997. Management fee expense increased due to the reinstatement of distributions during fiscal 1997, upon which management fees are based. The increases in bad debt expense and management fee expense were partially offset by an increase in interest and other income of $23,000. Interest and other income increased primarily as a result of a larger average outstanding balance of cash and cash equivalents during fiscal 1997 prior to the distribution of excess reserves to the Limited Partners in February 1997.
1996 Compared to 1995 - ---------------------
The Partnership reported a net loss of $404,000 for the year ended September 30, 1996, as compared to net income of $400,000 in fiscal 1995. This change in the Partnership's net operating results was attributable to a $27,000 increase in the Partnership's operating loss and an extraordinary gain of $1,600,000 recognized in fiscal 1995 which were partially offset by a decrease of $824,000 in the Partnership's share of unconsolidated ventures' losses. The $1,600,000 extraordinary gain resulted from the discounts obtained on the repayment of the Concourse second mortgage loan and the refinancing of the Colony Apartments first mortgage debt obligation during fiscal 1995. The consolidated Concourse joint venture recognized an extraordinary gain on settlement of debt obligation of $530,000 in fiscal 1995 resulting from the November 1994 discounted repayment of the second mortgage note secured by the Concourse Retail Plaza. In addition, the unconsolidated Colony Apartments joint venture received a discount of $1,070,000 on the pay-off of the venture's wraparound mortgage loan in connection with an August 1995 refinancing transaction. This discount was recorded as an extraordinary gain on settlement of debt obligation and was allocated 100% to the Partnership in accordance with the joint venture agreement.
The Partnership's share of unconsolidated ventures' losses decreased by $824,000 in fiscal 1996, when compared to fiscal 1995, partly due to a gain of $197,000 recognized by the Meadows joint venture in fiscal 1996, along with a $306,000 increase in combined revenues and a $507,000 decrease in combined interest expense. As of September 30, 1995, management of the Meadows joint venture had estimated that the costs to complete the required structural repairs to the Meadows on the Lake Apartments would exceed the insurance settlement proceeds by $300,000, and the venture recognized a loss of such amount in fiscal 1995. During fiscal 1996, management revised its plans for completing the renovations resulting in the required repairs being accomplished for substantially less than the prior estimates. This change in estimate resulted in a gain of $197,000 for financial reporting purposes which was reflected in the venture's fiscal 1996 income statement. Combined revenues increased by $306,000 due to a $250,000 increase in rental revenues and a $56,000 increase in other income. Rental revenues at Colony Apartments and Colony Square increased by $272,000 and $43,000, respectively, due to increases in rental rates while combined rental revenues from the three properties owned by HMF Associates decreased by $63,000 due to declines in average occupancy at two of the three properties. The decrease in combined interest expense in fiscal 1996 was primarily attributable to a $540,000 decrease in interest expense at the Colony Apartments joint venture due to the lower interest rate obtained as a result of the August 1995 refinancing. The impact of the accounting for the Meadows insurance settlement, the increase in revenues and the decline in interest expense were partially offset by increases in deprecation and amortization and repairs and maintenance expenses during fiscal 1996. Depreciation and amortization increased by $119,000 primarily due to the additional depreciation associated with the capital improvements completed at the Colony Apartments, Meadows Apartments, and the properties owned by HMF Associates during fiscal 1995 and 1996. Repairs and maintenance expenses increased by $112,000 due to higher expenses incurred at three of the four unconsolidated joint ventures during fiscal 1996.
The Partnership's operating loss increased by $27,000 when compared to fiscal 1995 primarily due to a $88,000 decrease in interest income and a slight increase in the net loss of the consolidated Concourse joint venture which were partially offset by a decrease in the Partnership's general and administrative expenses. The Partnership's interest income decreased by $88,000 due to the recognition in fiscal 1995 of $175,000 of previously unrecorded interest received on an optional loan to a joint venture which was repaid in fiscal 1995. Interest income without the effect of this optional loan repayment increased by $87,000 in fiscal 1996 as a result of higher average outstanding cash balances during fiscal 1996. General and administrative expenses decreased by $79,000 primarily due to additional professional fees incurred in fiscal 1995 associated with an independent valuation of the Partnership's portfolio of real estate assets and legal fees associated with the Concourse refinancing transaction. The net loss of the consolidated Concourse joint venture increased by $6,000 in fiscal 1996 primarily due to a bad debt of $89,000 recognized in fiscal 1996 in connection with a rental obligation forgiveness. The fiscal 1996 bad debt expense was partially offset by a $20,000 decrease in interest expense, a $16,000 decline in property operating expenses, a $5,000 reduction in real estate taxes and a $10,000 decrease in depreciation expense. Interest expense decreased by $20,000 due to the lower interest rate on the venture's first mortgage loan which was refinanced in January 1995.
Certain Factors Affecting Future Operating Results - --------------------------------------------------
The following factors could cause actual results to differ materially from historical results or those anticipated:
Real Estate Investment Risks. Real property investments are subject to varying degrees of risk. Revenues and property values may be adversely affected by the general economic climate, the local economic climate and local real estate conditions, including (i) the perceptions of prospective tenants of the attractiveness of the property; (ii) the ability to retain qualified individuals to provide adequate management and maintenance of the property; (iii) the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise; and (iv) increased operating costs. Real estate values may also be adversely affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing.
Effect of Uninsured Loss. The Partnership carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its remaining property with insured limits and policy specifications that management believes are customary for similar properties. There are, however, certain types of losses (generally of a catastrophic nature such as wars, floods or earthquakes) which may be either uninsurable, or, in management's judgment, not economically insurable. Should an uninsured loss occur, the Partnership could lose both its invested capital in and anticipated profits from the property.
Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances on, under, in or migrating from such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.
The Partnership is not aware of any notification by any private party or governmental authority of any non-compliance, liability or other claim in connection with environmental conditions at its remaining property that it believes will involve any expenditure which would be material to the Partnership, nor is the Partnership aware of any environmental condition with respect to any of its properties that it believes will involve any such material expenditure. However, there can be no assurance that any non-compliance, liability, claim or expenditure will not arise in the future.
Competition. The financial performance of the Partnership's remaining real estate investment will be significantly impacted by the competition from comparable properties in its local market area. The occupancy levels and rental rates achievable at the property are largely a function of supply and demand in the market. In many markets across the country, development of new multi-family properties has increased significantly over the past 2 years. Existing apartment properties in such markets could be expected to experience increased vacancy levels, declines in effective rental rates and, in some cases, declines in estimated market values as a result of the increased competition. There are no assurances that these competitive pressures will not adversely affect the operations and/or market value of the Partnership's remaining investment property in the future.
Impact of Joint Venture Structure. The ownership of the remaining investment through a joint venture partnership could adversely impact the timing of the Partnership's planned disposition of the remaining asset and the amount of proceeds received from such a disposition. It is possible that the Partnership's co-venture partner could have economic or business interests which are inconsistent with those of the Partnership. Given the rights which both parties have under the terms of the joint venture agreement, any conflict between the partners could result in delays in completing a sale of the related operating property and could lead to an impairment in the marketability of the property to third parties for purposes of achieving the highest possible sale price.
Availability of a Pool of Qualified Buyers. The availability of a pool of qualified and interested buyers for the Partnership's remaining asset is critical to the Partnership's ability to realize the estimated fair market value of such property at the time of its final disposition. Demand by buyers of multi-family apartment properties is affected by many factors, including the size, quality, age, condition and location of the subject property, the quality and stability of the tenant roster, potential environmental liability concerns, the existing debt structure, the liquidity in the debt and equity markets for asset acquisitions, the general level of market interest rates and the general and local economic climates.
Inflation - ---------
The Partnership completed its thirteenth full year of operations in fiscal 1998 and the effects of inflation and changes in prices on the Partnership's operating results to date have not been significant.
Inflation in future periods may increase revenues, as well as operating expenses, at the Partnership's operating investment properties. Tenants at the Partnership's remaining apartment property have short-term leases, generally of six-to-twelve months in duration. Rental rates at this property can be adjusted to keep pace with inflation, as market conditions allow, as the leases are renewed or turned over. Such increases in rental income would be expected to at least partially offset the corresponding increases in Partnership and property operating expenses caused by future inflation.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14 of this Annual 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 Partnership
The Managing General Partner of the Partnership is Seventh Income Properties Fund, Inc., a Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates 1985, L.P., a Virginia limited partnership, certain limited partners of which are also officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operation, however, the day-to-day business of the Partnership is managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive officers of the Managing General Partner of the Partnership are as follows:
Date elected Name Office Age to Office ---- ------ --- ---------
Bruce J. Rubin President and Director 39 8/22/96 Terrence E. Fancher Director 45 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 51 10/29/85 David F. Brooks First Vice President and Assistant Treasurer 56 1/15/85* Timothy J. Medlock Vice President and Treasurer 37 6/1/88 Thomas W. Boland Vice President and Controller 36 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors and executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which Paine Webber Properties Incorporated serves as the Adviser. The business experience of each of the directors and principal executive officers of the Managing General Partner is as follows:
Bruce J. Rubin is President and Director of the Managing General Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real estate workout specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford Law School.
Terrence E. Fancher was appointed a Director of the Managing General Partner in October 1996. Mr. Fancher is the Managing Director in charge of PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible for the origination and execution of all of PaineWebber's REIT transactions, advisory assignments for real estate clients and certain of the firm's real estate debt and principal activities. He joined Kidder, Peabody in 1985 and, beginning in 1989, was one of the senior executives responsible for building Kidder, Peabody's real estate department. Mr. Fancher previously worked for a major law firm in New York City. He has a J.D. from Harvard Law School, an M.B.A. from Harvard Graduate School of Business Administration and an A.B. from Harvard College.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and a Senior Vice President and Chief Financial Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice President and Controller since 1978, and where he continued until joining the Adviser. He began his career in 1974 with Arthur Young & Company in Houston. Mr. Arnold is a Certified Public Accountant licensed in the state of Texas.
David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and a Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983 and received his Masters in Accounting from New York University in 1985.
Thomas W. Boland is a Vice President and Controller of the Managing General Partner and a Vice President and Controller of the Adviser which he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings which are material to an evaluation of his or her ability or integrity as a director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Managing General Partner, and persons who own more than ten percent of the Partnership's limited partnership units, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the Partnership believes that, during the year ended September 30, 1998, all filing requirements applicable to the officers and directors of the Managing General Partner and ten-percent beneficial holders were complied with.
Item 11.
Item 11. Executive Compensation
The directors and officers of the Partnership's Managing General Partner receive no direct remuneration from the Partnership. The Partnership is required to pay certain fees to the Adviser, and the General Partners are entitled to receive a share of Partnership cash distributions and a share of profits and losses. These items are described under Item 13.
Regular quarterly distributions to the Partnership's Unitholders were suspended from fiscal 1990 through fiscal 1996. Distributions were reinstated at an annual rate of 2.5% on remaining invested capital effective for the first quarter of fiscal 1997. Distributions were increased to an annual rate of 2.65% for the fourth quarter of fiscal 1997 and increased again to an annual rate of 2.75% effective for the second quarter of fiscal 1998. However, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of limited partnership interest, not voting securities. All the outstanding stock of the Managing General Partner, Seventh Income Properties Fund, Inc. is owned by PaineWebber. Properties Associates 1985, L.P., the Associate General Partner, is a Virginia limited partnership, certain limited partners of which are also officers of the Adviser and the Managing General Partner. No Limited Partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership.
(b) The directors and officers of the Managing General Partner do not directly own any Units of limited partnership interest of the Partnership. No director or officer of the Managing General Partner, nor any limited partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of limited partnership interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of which may, at a subsequent date, result in a change in control of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Seventh Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate General Partner"), a Virginia limited partnership, certain limited partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI").
The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration for various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments.
In connection with the acquisition of properties, the Adviser received acquisition fees in an amount equal to 5% of the gross proceeds from the sale of the Partnership Units. In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to the lesser of 1% of the aggregate sales price of the property or 50% of the standard brokerage commissions, subordinated to the payment of certain amounts to the Limited Partners.
Under the terms of the Partnership Agreement, as amended, any taxable income or tax loss (other than from a Capital Transaction) of the Partnership will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided, however, that the General Partners shall not be allocated aggregate gain as a result of all sales or refinancings in excess of the aggregate net losses previously allocated to them and the total cash distributed to them; provided further, however, that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the General Partners and 3.99% to the Adviser, as an asset management fee. Under the advisory contract, the Adviser has specific management responsibilities: to administer day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser will be paid a basic management fee (3% of adjusted cash flow, as defined in the Partnership Agreement) and an incentive management fee (2% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contributions), in addition to the asset management fee described above, for services rendered. Basic and asset management fees totalling $61,000 were earned by the Adviser for the year ended September 30, 1998.
An affiliate of the Managing General Partner performs certain accounting, tax preparation, securities law compliance and investor communications and relations services for the Partnership. The total costs incurred by this affiliate in providing such services are allocated among several entities, including the Partnership. Included in general and administrative expenses for the year ended September 30, 1998 is $88,000, representing reimbursements to this affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $8,000 (included in general and administrative expenses) for managing the Partnership's cash assets during the year ended September 30, 1998. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page.
(3) Exhibits:
The exhibits listed on the accompanying Index to Exhibits at Page IV-3 are filed as part of this Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of fiscal 1998. Current Reports on Form 8-K dated November 10, 1998 and November 17, 1998 were filed subsequent to year-end to report the sales of The Concourse Retail Plaza and the Colony Square Shopping Center, respectively, and are hereby incorporated herein by reference.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
By: Seventh Income Properties Fund, Inc. ------------------------------------ Managing General Partner
By: /s/ Bruce J. Rubin ------------------ Bruce J. Rubin President and Chief Executive Officer
By: /s/ Walter V. Arnold -------------------- Walter V. Arnold Senior Vice President and Chief Financial Officer
By: /s/ Thomas W. Boland -------------------- Thomas W. Boland Vice President and Controller
Dated: January 13, 1999
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 Partnership in the capacity and on the dates indicated.
By:/s/ Bruce J. Rubin Date: January 13, 1999 ----------------------- ---------------- Bruce J. Rubin Director
By:/s/ Terrence E. Fancher Date: January 13, 1999 ----------------------- ---------------- Terrence E. Fancher Director
ANNUAL REPORT ON FORM 10-K Item 14(a)(3)
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
INDEX TO EXHIBITS
ANNUAL REPORT ON FORM 10-K Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference ---------
Paine Webber Income Properties Seven Limited Partnership:
Report of independent auditors
Consolidated balance sheets as of September 30, 1998 and 1997
Consolidated statements of operations for the years ended September 30, 1998, 1997 and 1996
Consolidated statements of changes in partners' capital (deficit) for the years ended September 30, 1998, 1997 and 1996
Consolidated statements of cash flows for the years ended September 30, 1998, 1997 and 1996
Notes to consolidated financial statements
Schedule III - Real estate and accumulated depreciation
Combined Joint Ventures of Paine Webber Income Properties Seven Limited Partnership:
Report of independent auditors
Combined balance sheets as of September 30, 1998 and 1997
Combined statements of operations and changes in venturers' capital (deficit) for the years ended September 30, 1998, 1997 and 1996
Combined statements of cash flows for the years ended September 30, 1998, 1997 and 1996
Notes to combined financial statements
Schedule III - Real estate and accumulated depreciation
Other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners of Paine Webber Income Properties Seven Limited Partnership:
We have audited the accompanying consolidated balance sheets of Paine Webber Income Properties Seven Limited Partnership as of September 30, 1998 and 1997, and the related consolidated statements of operations, changes in partners' capital (deficit), and cash flows for each of the three years in the period ended September 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Paine Webber Income Properties Seven Limited Partnership at September 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLP
Boston, Massachusetts December 18, 1998
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS September 30, 1998 and 1997 (In thousands, except per Unit amounts)
ASSETS 1998 1997 ---- ---- Operating investment property: Land $ 391 $ 486 Buildings and improvements 2,421 2,990 Equipment and fixtures 61 75 -------- -------- 2,873 3,551 Less accumulated depreciation (1,104) (1,257) -------- -------- 1,769 2,294
Investments in unconsolidated ventures, at equity 1,239 1,406 Cash and cash equivalents 1,530 2,856 Escrowed funds 76 72 Accounts receivable, net 8 26 Deferred expenses, net of accumulated amortization of $75 in 1997 - 103 Other assets 34 32 ------- -------- $ 4,656 $ 6,789 ======= ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage note payable $ 1,550 $ 1,614 Accounts payable and accrued expenses 90 84 Accounts payable - affiliates 7 7 Accrued interest payable 14 15 Accrued real estate taxes 62 58 Other liabilities 4 9 -------- -------- Total liabilities 1,727 1,787
Partners' capital: General Partners: Capital contributions 1 1 Cumulative net loss (312) (365) Cumulative cash distributions (298) (289)
Limited Partners ($1,000 per Unit; 37,969 Units issued): Capital contributions, net of offering costs 33,529 33,529 Cumulative net loss (11,063) (16,058) Cumulative cash distributions (18,928) (11,816) -------- -------- Total partners' capital 2,929 5,002 -------- -------- $ 4,656 $ 6,789 ======== ========
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended September 30, 1998, 1997 and 1996 (In thousands, except per Unit amounts)
1998 1997 1996 ---- ---- ---- Revenues: Rental income and expense recoveries $ 537 $ 535 $ 523 Interest and other income 431 273 250 -------- ------- ------- 968 808 773
Expenses: Loss on impairment of operating investment property 418 1,000 - Mortgage interest 252 188 195 Property operating expenses 102 92 103 Depreciation expense 107 154 139 Real estate taxes 84 80 77 General and administrative 285 287 285 Bad debt expense 147 150 89 Management fee expense 61 58 - Amortization expense 26 13 13 -------- ------- ------- 1,482 2,022 901 -------- ------- ------- Operating loss (514) (1,214) (128)
Partnership's share of unconsolidated ventures' income (losses) 966 36 (276)
Partnership's share of gains on sale of operating investment properties 4,591 4,210 -
Venture partner's share of consolidated venture's operations 5 1 - -------- ------- -------
Income (loss) before extraordinary gain 5,048 3,033 (404)
Partnership's share of extraordinary gain from settlement of debt obligations - 7,463 - -------- ------- ------- Net income (loss) $ 5,048 $10,496 $ (404) ======== ======= =======
Net income (loss) per Limited Partnership Unit: Income (loss) before extraordinary gain $ 131.57 $ 79.04 $(10.53) Partnership's share of extraordinary gain from settlement of debt obligations - 194.50 - -------- ------- ------- Net income (loss) $ 131.57 $273.54 $(10.53) ======== ======= =======
Cash distributions per Limited Partnership Unit $ 187.30 $108.25 $ - ======== ======= =======
The above per Limited Partnership Unit information is based upon the 37,969 Limited Partnership Units outstanding during each year.
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended September 30, 1998, 1997 and 1996 (In thousands)
General Limited Partners Partners Total -------- -------- -----
Balance at September 30, 1995 $ (752) $ (221) $ (973)
Net loss (4) (400) (404) ------- -------- ---------
Balance at September 30, 1996 (756) (621) (1,377)
Net income 110 10,386 10,496
Cash distributions (7) (4,110) (4,117) ------- -------- ---------
Balance at September 30, 1997 (653) 5,655 5,002
Net income 53 4,995 5,048
Cash distributions (9) (7,112) (7,121) ------- -------- ---------
Balance at September 30, 1998 $ (609) $ 3,538 $ 2,929 ======= ======== =========
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, 1998, 1997 and 1996 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
See accompanying notes.
PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP Notes to Consolidated Financial Statements
1. Organization and Nature of Operations -------------------------------------
Paine Webber Income Properties Seven Limited Partnership (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in January 1985 for the purpose of investing in a diversified portfolio of income-producing properties. The Partnership authorized the issuance of Partnership units (the "Units"), at $1,000 per Unit, of which 37,969 were subscribed and issued between May 14, 1985 and May 13, 1986.
The Partnership originally invested the net proceeds of the public offering, through five joint venture partnerships, in seven operating properties, comprised of five multi-family apartment complexes, one mixed-use office and retail property and one shopping center. During fiscal 1997, three of the multi-family properties were sold. A fourth multi-family property was sold on December 18, 1997. In addition, subsequent to the end of fiscal 1998, on November 10, 1998, the retail portion of the Concourse property was sold. The office portion of this mixed-use property had been lost through foreclosure proceedings on December 17, 1992. The shopping center property was also sold subsequent to year-end, on November 17, 1998. Subsequent to these transactions, the Partnership has only one remaining real estate investment, the Colony Apartments. See Notes 4 and 5 for a description of these transactions and of the remaining real estate investment. The Partnership is currently focusing on potential disposition strategies for the remaining investment in its portfolio. Although no assurances can be given, it is currently contemplated that the sale of the Partnership's Colony Apartments investment could be completed during the first half of calendar year 1999. The sale of the remaining property would be followed by an orderly liquidation of the Partnership.
2. Use of Estimates and Summary of Significant Accounting Policies ---------------------------------------------------------------
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of September 30, 1998 and 1997 and revenues and expenses for each of the three years in the period ended September 30, 1998. Actual results could differ from the estimates and assumptions used.
As of September 30, 1998, the accompanying consolidated financial statements include the Partnership's investments in three joint venture partnerships (four at September 30, 1997) which own operating investment properties. Except as described below, the Partnership accounts for its investments in joint venture partnerships using the equity method because the Partnership does not have a voting control interest in the ventures. Under the equity method, the venture is carried at cost adjusted for the Partnership's share of the venture's earnings or losses and distributions. See Note 5 for a description of these unconsolidated joint venture partnerships.
As further discussed in Note 4, on September 14, 1990, the co-venture partner of West Palm Beach Concourse Associates assigned its 15% general partnership interest to Seventh Income Properties Fund, Inc., the Managing General Partner of the Partnership (see Note 3). The assignment gave the Partnership control over the affairs of the joint venture. Accordingly, this joint venture, which had been accounted for under the equity method in years prior to fiscal 1990, is presented on a consolidated basis in the accompanying financial statements. All transactions between the Partnership and the joint venture have been eliminated in consolidation.
The operating investment property owned by the consolidated joint venture is carried at cost, net of accumulated depreciation and certain guaranteed payments, or an amount less than cost if indicators of impairment are present in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was adopted in fiscal 1997. SFAS 121 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. The Partnership generally assesses indicators of impairment by a review of independent appraisal reports on the operating investment property. Such appraisals make use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparable sales analysis. During fiscal 1997, the independent appraisal of the Concourse operating investment property indicated that certain operating assets, consisting of land, buildings and improvements, and equipment and fixtures were impaired. In accordance with SFAS No. 121, the consolidated Concourse joint venture recorded a reduction in the net carrying value of such assets amounting to $1,000,000 relating to the land ($212,000), buildings and improvements ($1,304,000), equipment and fixtures ($32,000) and accumulated depreciation ($548,000). During fiscal 1998, the consolidated Concourse joint venture recorded an additional reduction in the net carrying value of such assets amounting to $418,000 relating to land ($95,000), buildings and improvements ($569,000), equipment and fixtures ($14,000) and accumulated depreciation ($260,000). The resulting net carrying value of such assets of $1,769,000 equals the net proceeds after closing costs realized from the sale of the Concourse property on November 10, 1998 (see Note 4).
Depreciation expense on the operating investment property is computed using the straight-line method over an estimated useful life of thirty years for the buildings and improvements and five years for the equipment and fixtures. Acquisition fees have been capitalized and are included in the cost of the operating investment property.
Deferred expenses at September 30, 1997 included leasing commissions and deferred refinancing costs related to The Concourse Retail Plaza. The leasing commissions were being amortized on a straight-line basis over the terms of the related leases. The deferred refinancing costs were being amortized on the effective interest method. Amortization of deferred refinancing costs is included in interest expense on the accompanying statements of operations. Unamortized deferred expenses were written off in fiscal 1998 in connection with the subsequent sale of The Concourse Retail Plaza (see Note 4).
The consolidated joint venture leases retail space at the operating investment property under short-term and long-term operating leases. Rental revenues are recognized on a straight-line basis over the term of the respective leases.
For the purposes of reporting cash flows, cash and cash equivalents include all highly liquid debt instruments which have original maturities of 90 days or less.
The cash and cash equivalents and escrowed funds appearing on the accompanying balance sheets represent financial instruments for purposes of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The carrying amount of these assets approximates their fair value as of September 30, 1998 and 1997 due to the short-term maturities of these instruments. The mortgage note payable is also a financial instrument for purposes of SFAS 107. The fair value of the mortgage note payable is estimated using discounted cash flow analysis based on the current market rate for a similar type of borrowing arrangement (see Note 6).
No provision for income taxes has been made in the accompanying financial statements as the liability for such taxes is that of the individual partners rather than the Partnership. Upon sale or disposition of the Partnership's investments, the taxable gain or the tax loss incurred will be allocated among the partners. The principal difference between the Partnership's accounting on a federal income tax basis and the accompanying financial statements prepared in accordance with generally accepted accounting principals (GAAP) relates to the methods used to determine the depreciation expense on the consolidated and unconsolidated operating investment properties. As a result of the difference in depreciation, the gains calculated upon the sale of the operating investment properties for GAAP purposes differ from those calculated for federal income tax purposes.
3. The Partnership Agreement and Related Party Transactions ---------------------------------------------------------
The General Partners of the Partnership are Seventh Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates 1985, L.P. (the "Associate General Partner"), a Virginia limited partnership, certain limited partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration for various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments.
In connection with the acquisition of properties, the Adviser received acquisition fees in an amount equal to 5% of the gross proceeds from the sale of the Partnership Units. In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to the lesser of 1% of the aggregate sales price of the property or 50% of the standard brokerage commissions, subordinated to the payment of certain amounts to the Limited Partners.
Under the terms of the Partnership Agreement, as amended, any taxable income or tax loss (other than from a Capital Transaction) of the Partnership will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided, however, that the General Partners shall not be allocated aggregate gain as a result of all sales or refinancings in excess of the aggregate net losses previously allocated to them and the total cash distributed to them; provided further, however, that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 98.94802625% to the Limited Partners and 1.05197375% to the General Partners. Notwithstanding this, the Partnership Agreement provides that the allocation of taxable income and tax losses arising from the sale of a property which leads to the dissolution of the Partnership shall be adjusted to the extent feasible so that neither the General or Limited Partners recognize any gain or loss as a result of having either a positive or negative balance remaining in their capital accounts upon the dissolution of the Partnership. If the General Partner has a negative capital account balance subsequent to the sale of a property which leads to the dissolution of the Partnership, the General Partner may be obligated to restore a portion of such negative capital account balance as determined in accordance with the provisions of the Partnership Agreement. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 95% to the Limited Partners, 1.01% to the General Partners and 3.99% to the Adviser, as an asset management fee. The Partnership reinstated its quarterly distribution payments in fiscal 1997. Such distributions had been suspended since 1990. Under the advisory contract, the Adviser has specific management responsibilities: to administer day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser will be paid a basic management fee (3% of adjusted cash flow, as defined in the Partnership Agreement) and an incentive management fee (2% of adjusted cash flow subordinated to a noncumulative annual return to the Limited Partners equal to 6% based upon their adjusted capital contributions), in addition to the asset management fee described above, for services rendered. The Adviser earned basic and asset management fees totalling $61,000 and $58,000 for the years ended September 30, 1998 and 1997, respectively. No basic or asset management fees were earned by the Adviser for the year ended September 30, 1996. No incentive management fees have been earned to date.
Included in general and administrative expenses for the years ended September 30, 1998, 1997 and 1996 is $88,000, $86,000 and $81,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $8,000, $17,000 and $13,000 (included in general and administrative expenses) for managing the Partnership's cash assets during fiscal 1998, 1997 and 1996, respectively.
4. Operating Investment Property -----------------------------
Operating investment property at September 30, 1998 and 1997 represents the fixed assets of West Palm Beach Concourse Associates, a joint venture in which the Partnership has a controlling interest. The Partnership acquired an interest in West Palm Beach Concourse Associates (the "Joint Venture"), a Florida general partnership organized on July 31, 1985 in accordance with a joint venture agreement between the Partnership and Palm Beach Lake Associates (co-venturer), to own and operate The Concourse Towers I and II and Retail Plaza (the "Properties"). The Properties originally consisted of two office towers with 140,000 square feet of rentable space and a 30,473 rentable square foot retail plaza located in West Palm Beach, Florida. On September 14, 1990, the co-venture partner of West Palm Beach Concourse Associates assigned its general partnership interest to Seventh Income Properties Fund, Inc. ("SIPF"), the Managing General Partner of the Partnership, in return for a release from any further obligations or duties called for under the terms of the joint venture agreement. As a result, the Partnership assumed control over the affairs of the joint venture.
The aggregate cash investment made by the Partnership for its original interest in West Palm Beach Concourse Associates was approximately $11,325,000 (including an acquisition fee of $663,000 paid to the Adviser). At September 30, 1992, the Properties were encumbered by three separate nonrecourse first mortgage loans and a nonrecourse second mortgage loan with an aggregate balance of approximately $12,873,000. The Concourse joint venture suspended payments to the second mortgage lender in May of 1991 and suspended payments to the first mortgage lender in January of 1992 due to the continued deterioration of operating results that reduced the venture's net cash flow below levels required to cover the scheduled mortgage loan payments. The venture's cash flow problems resulted from a significant decline in market rental rates, as a result of the oversupply of competing office space in the West Palm Beach, Florida market. The venture's net cash flow dropped dramatically upon the expiration, in August of 1991, of a master lease which had covered all of Tower II. Upon expiration of the master lease, which had been in effect since the time of the property's acquisition, several sub-lessees decided to vacate the building and the leased percentage of the Tower II space fell from 100% to less than 50%. Upon suspending debt service payments, management requested certain concessions and modifications from the lenders necessary for the venture to be able to compete effectively in the marketplace for tenants and service its debt obligations. After protracted negotiations, the first mortgage lender was ultimately unwilling or unable to grant the sought-after modifications and filed suit against the venture to foreclose on the entire mixed-use complex, under the cross-collateralization provisions of the three first mortgage loans.
On October 29, 1992, the Partnership consummated a settlement agreement with the first mortgage lender regarding the foreclosure suits on the Concourse office towers and retail plaza whereby the foreclosure action against the retail plaza was dismissed and the first mortgage loan on the retail property was reinstated. In return for this reinstatement, the Partnership agreed not to contest a stipulated order of foreclosure on the two office towers. The foreclosure of the two office towers was completed on December 17, 1992. In conjunction with this settlement agreement, the second mortgage lender, in return for a payment of $100,000 from the venture, agreed to release the two office towers from the second mortgage lien, to reduce the principal balance on the second mortgage on the retail plaza to $750,000, and to extend the maturity date of this loan to July 1997.
Subsequent to the end of fiscal 1998, on November 10, 1998, West Palm Beach Concourse Associates sold its operating investment property, The Concourse Retail Plaza, to an unrelated party for $2 million. The sale generated net proceeds of approximately $225,000, after the assumption of the outstanding first mortgage loan of approximately $1,539,000, accrued interest of approximately $4,000, net closing proration adjustments of approximately $2,000 and closing costs of approximately $230,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement. The mortgage loan, which was assumable, contains a prohibition on prepayment through January 10, 2000. As a result, any sale transaction completed prior to such date had to involve an assumption of this mortgage loan which carries an interest rate of 11.12% per annum. The sale price was discounted to reflect this above-market interest rate. Nonetheless, the Managing General Partner believed that a current sale was in the best interests of the Limited Partners.
The following is a summary of property operating expenses for the years ended September 30, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 ---- ---- ---- Property operating expenses: Repairs and maintenance $ 42 $ 50 $ 59 Utilities 4 5 5 Insurance 5 6 6 General and administrative 36 16 18 Management fees 15 15 15 ------- ------- ------ $ 102 $ 92 $ 103 ======= ======= ======
5. Investments in Unconsolidated Joint Venture Partnerships --------------------------------------------------------
At September 30, 1998, the Partnership had investments in two unconsolidated joint ventures (three at September 30, 1997) which owned operating investment properties. On December 18, 1997, the Daniel Meadows Partnership sold the The Meadows on the Lake Apartments. Subsequent to the end of fiscal 1998, on November 17, 1998, the Chicago Colony Square Associates sold the Colony Square Shopping Center. HMF Associates, a joint venture in which the Partnership had an interest, owned three multi-family apartment properties located in the Seattle, Washington area. On June 27, 1997, HMF Associates sold the properties known as The Hunt Club Apartments and The Marina Club Apartments, and then, on September 9, 1997, HMF Associates sold the remaining property known as The Enchanted Woods Apartments. Subsequent to the sale of Enchanted Woods, HMF Associates was liquidated. See below for a further discussion of these sale transactions. The unconsolidated joint ventures are accounted for on the equity method in the Partnership's financial statements.
Condensed combined financial statements of these joint ventures follow:
Condensed Combined Balance Sheets September 30, 1998 and 1997 (in thousands) Assets 1998 1997 ---- ---- Current assets $ 3,193 $ 3,445 Operating investment properties, net 17,840 22,481 Other assets, net 135 238 -------- ------- $ 21,168 $26,164 ======== =======
Liabilities and Partners' Capital (Deficit) -------------------------------------------
Current liabilities $ 3,434 $ 3,069 Long-term debt, less current portion 17,138 22,185 Partnership's share of combined capital (deficit) 795 1,167 Co-venturers' share of combined capital (deficit) (199) (257) -------- ------- $ 21,168 $26,164 ========= =======
Reconciliation of Partnership's Investment ------------------------------------------
1998 1997 ---- ----
Partnership's share of combined capital (deficit), as shown above $ 795 $ 1,167 Prepaid distributions to Partnership - (76) Partnership's share of distributions payable to venturers 427 168 Excess basis due to investment in ventures, net (1) 17 147 -------- -------- Investment in unconsolidated ventures, at equity $ 1,239 $ 1,406 ======== ========
(1) At September 30, 1998 and 1997, the Partnership's investment exceeded its share of the joint venture partnerships' capital accounts by approximately $17,000 and $147,000, respectively. This amount, which relates to certain expenses incurred by the Partnership in connection with acquiring its joint venture investments, is being amortized over the estimated useful life of the investment properties.
Condensed Combined Summary of Operations For the years ended September 30, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 ---- ---- ----
Rental revenues and expense recoveries $ 7,348 $ 10,391 $ 10,372 Interest and other income 315 466 521 Gain on insurance settlement - - 197 -------- --------- -------- 7,663 10,857 11,090
Mortgage interest 1,532 3,652 3,961 Property operating expenses 3,642 5,539 5,609 Depreciation and amortization 1,109 1,649 1,780 -------- --------- -------- 6,283 10,840 11,350 -------- --------- -------- Operating income (loss) 1,380 17 (260)
Gain on sale of operating investment properties 4,992 4,291 - Income (loss) before extraordinary gain 6,372 4,308 (260)
Extraordinary gain from settlement of debt obligations - 7,552 - -------- --------- -------- Net income (loss) $ 6,372 $ 11,860 $ (260) ======== ========= ========
Net income (loss): Partnership's share of combined net income (loss) $ 5,687 $ 11,746 $ (269) Co-venturers' share of combined net income (loss) 685 114 9 ------- --------- --------
$ 6,372 $ 11,860 $ (260) ======= ========= ========
Reconciliation of Partnership's Share of Operations (in thousands)
1998 1997 1996 ---- ---- ---- Partnership's share of combined net income (loss), as shown above $ 5,687 $ 11,746 $ (269) Amortization of excess basis (130) (37) (7) ------- --------- -------- Partnership's share of unconsolidated ventures' net income (losses) $ 5,557 $ 11,709 $ (276) ======= ========= ========
The Partnership's share of the unconsolidated ventures' net income (losses) is presented as follows in the consolidated statements of operations (in thousands):
Partnership's share of unconsolidated ventures' income (losses) $ 966 $ 36 $ (276) Partnership's share of gains on sale of operating investment properties 4,591 4,210 - Partnership's share of extraordinary gain on settlement of debt obligations - 7,463 - ------- --------- -------- $ 5,557 $ 11,709 $ (276) ======= ========= ========
The unconsolidated joint ventures are subject to partnership agreements which determine the distribution of available funds, the disposition of the ventures' assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the venture. Substantially all of the Partnership's investments in these unconsolidated joint ventures are restricted as to distributions.
Investments in unconsolidated joint ventures, at equity, on the balance sheet is comprised of the following equity method carrying values (in thousands): 1998 1997 ---- ----
Chicago Colony Apartments Associates $ 11 $ 77 Chicago Colony Square Associates 1,228 1,256 Daniel Meadows Partnership - 73 -------- -------- $ 1,239 $ 1,406 ======== ========
The Partnership received cash distributions from the unconsolidated joint ventures during fiscal 1998, 1997 and 1996 as set forth below (in thousands):
1998 1997 1996 ---- ---- ----
Chicago Colony Apartments Associates $ 1,100 $ 774 $ 1,517 Chicago Colony Square 142 - - Daniel Meadows Partnership 4,482 567 345 HMF Associates - 549 - -------- ------- ------- $ 5,724 $ 1,890 $ 1,862 ======== ======= =======
A description of the ventures' properties and the terms of the joint venture agreements are summarized as follows:
a. Chicago Colony Apartments Associates ------------------------------------
On December 27, 1985, the Partnership acquired a general partnership interest in Chicago Colony Apartments Associates (the "Joint Venture"), an Illinois general partnership that purchased and operates The Colony Apartments; a 783-unit apartment complex located in Mount Prospect, Illinois. The Partnership's co-venture partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest was approximately $11,848,000 (including an acquisition fee of $687,500 paid to the Adviser). On August 1, 1995, the $16.75 million non-recourse wraparound mortgage note secured by the Colony Apartments property was refinanced with a new $17.4 million non-recourse mortgage note at a fixed interest rate of 7.6% per annum. The joint venture received a discount of approximately $1,070,000 on the pay-off of the wraparound mortgage loan under the terms of the loan agreement and did not require any contributions from the venture partners to complete the refinancing transaction. The discount was recorded by the venture as an extraordinary gain on settlement of debt obligation. The Partnership was allocated 100% of such extraordinary gain. As a condition of the new loan, the Colony Apartments joint venture was required to establish an escrow account in the amount of $685,000 for the completion of agreed upon repairs, $156,600 for capital replacement reserves and $600,000 for real estate taxes. The outstanding balance of the first mortgage loan, which is scheduled to mature in August 2002, was $16,589,000 as of September 30, 1998.
The Joint Venture Agreement provides that cash flow for any year shall first be distributed to the Partnership in the amount of $1,100,000, payable monthly (the Partnership preference return). The Partnership's preference return is cumulative monthly but not annually. The next $317,500 thereafter will be distributed to the co-venturer on a noncumulative annual basis, payable quarterly. Any cash flow not previously distributed at the end of each fiscal year will be applied in the following order of priority: first to the payment of all unpaid accrued interest on all outstanding operating notes, if any, the next $425,000 of cash flow in any year will be distributed 80% to the Partnership and 20% to the co-venturer, the next $425,000 of cash flow in any year will be distributed 70% to the Partnership and 30% to the co-venturer, and any remaining balance will be distributed 65% to the Partnership and 35% to the co-venturer. After the end of each month during the year in which the Partnership has not received its cumulative preference return, the co-venturer shall distribute to the Partnership the lesser of (a) the excess, if any, of the cumulative Partnership preference return over the aggregate amount of net cash flow previously distributed to the Partnership during the year or (b) any net cash flow distributed to the co-venturer during the year.
The Joint Venture Agreement further provides that net sale or refinancing proceeds shall be distributed (after payment of mortgage debt and other indebtedness of the Joint Venture) as follows and in the following order of priority: (1) the Partnership and the co-venturer shall receive amounts due for operating loans or additional cash contributions, if any, made to the Joint Venture, (2) the amount of any undistributed preference payments to the Partnership, (3) the Partnership shall receive $12,680,281, (4) the next $3,619,500 of such proceeds shall be distributed to the co-venturer, (5) the Manager of the apartment complex shall receive any subordinated management fees not previously paid, (6) the next $8,750,000 of such proceeds shall be distributed 80% to the Partnership and 20% to the co-venturer, (7) any remaining balance shall then be distributed 85% to the Partnership and 15% to the co-venturer until the Partnership receives an amount equal to the sum of net losses allocated to the Partnership through 1989 times a percentage equal to 50% less the weighted average maximum Federal income tax rate for individuals plus a simple rate of return equal to 8% per annum; (8) the next $4,000,000 of such proceeds shall be distributed 70% to the Partnership and 30% to the co-venturer, and (9) the balance of such proceeds, if any, shall be distributed 65% to the Partnership and 35% to the co-venturer.
Taxable income and tax losses from operations in each year shall be allocated to the Partnership and the co-venturer in any year in the same proportions as actual cash distributions, except that, through December 31, 1987, all net losses shall be allocated to the Partnership, and thereafter, in no event, shall the co-venturer be allocated less than 10% of the taxable income or losses nor shall the co-venturer be allocated income without a like cash distribution. Allocations of income and loss for financial accounting purposes have been made in conformity with the actual allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with the Joint Venture after December 31, 1988, it will be provided 80% by the Partnership and 20% by the co-venturer as interest-bearing loans to the Joint Venture.
The Joint Venture originally entered into a property management contract with an affiliate of the co-venturer, cancellable at the option of the Partnership upon the occurrence of certain events. The management fee payable to this affiliated manager was 5% of gross receipts collected from the property (excluding interest on certain Joint Venture reserve funds), and 40% of such fee was subordinated to the receipt by the Partnership and the co-venturer of their preferred returns during the period through December 31, 1988. Cumulative subordinated management fees at September 30, 1998 totalled approximately $275,000. On April 1, 1997, management of the property was transferred to an unrelated third party.
b. Chicago Colony Square Associates --------------------------------
On December 27, 1985, the Partnership also acquired a general partnership interest in Chicago Colony Square Associates (the "Joint Venture") an Illinois general partnership that purchased and operates Colony Square Shopping Center; a shopping center consisting of two one-story buildings with 39,572 net rentable square feet, located in Mount Prospect, Illinois. The Partnership's co-venture partner was an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its investment was approximately $1,416,000 (including an acquisition fee of $81,250 paid to the Adviser). The shopping center is encumbered by a nonrecourse assumable first mortgage loan with a balance of approximately $937,000 at September 30, 1998. This mortgage loan was scheduled to mature in November 2006.
Subsequent to the end of fiscal 1998, on November 17, 1998, Chicago Colony Square Associates sold its operating investment property, the Colony Square Shopping Center to an unrelated party for $2.3 million. The sale generated net proceeds of approximately $1,014,000, after the repayment of the outstanding first mortgage loan of approximately $864,000, accrued interest of approximately $13,000 (including a prepayment penalty of $9,000), closing proration adjustments of approximately $221,000 and closing costs of approximately $188,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement.
c. Daniel Meadows Partnership --------------------------
On June 19, 1986, the Partnership acquired a general partnership interest in Daniel Meadows Partnership (the "Joint Venture"), a Virginia general partnership which was formed to develop, own and operate The Meadows on the Lake Apartments, a 200-unit apartment complex located in Birmingham, Alabama. The Partnership's co-venture partner was an affiliate of Daniel Realty Company. The aggregate cash investment by the Partnership for its interest was approximately $3,807,000 (including an acquisition fee of $207,000 paid to the Adviser). The apartment complex was encumbered by a mortgage note with a balance of approximately $4,719,000 at September 30, 1997. The mortgage debt, in the initial principal amount of $4,850,000, bore interest at a variable rate of 2.25% over the 30-day LIBOR rate (equivalent to a rate of approximately 7.90625% per annum as of September 30, 1997). The loan required monthly interest and principal payments based on a 25-year amortization schedule and was scheduled to mature on February 5, 2000.
On December 18, 1997, the Joint Venture sold the operating investment property to an unrelated third party for $9,525,000. The Partnership received net proceeds of approximately $4.4 million after paying off the outstanding mortgage loan of approximately $4.7 million and closing costs of approximately $310,000. The Partnership received 100% of the net proceeds in accordance with the terms of the Joint Venture Agreement. On February 13, 1998, the net proceeds from the sale of The Meadows property was distributed to the Limited Partners of record on December 18, 1997 in the amount of $116.39 per original $1,000 investment.
During fiscal 1991, the Partnership discovered that certain materials used to construct The Meadows on the Lake Apartments were installed incorrectly and would require substantial repairs. During fiscal 1992, the Meadows joint venture engaged local legal counsel to seek recoveries from the venture's insurance carrier, as well as various contractors and suppliers, for the venture's claim of damages, which were estimated at approximately $1 million, not including legal fees and other incidental costs. During fiscal 1993, the insurance carrier deposited approximately $38,000 into an escrow account controlled by the venture's mortgage lender in settlement of the undisputed portion of the venture's claim. During fiscal 1994, the insurer agreed to enter into non-binding mediation towards settlement of the disputed claims out of court. On October 3, 1994, the joint venture agreed to settle its claims against the insurance carrier, architect, general contractor and the surety/completion bond insurer for $1,076,000, which was in addition to the $38,000 previously paid by the insurance carrier. These settlement proceeds were escrowed with the mortgage holder, which agreed to release such funds as needed for structural renovations. The venture's mortgage loan described above was to be fully recourse to the joint venture and to the partners of the joint venture until the repairs were completed, at which time the entire obligation becomes non-recourse. Through September 30, 1996, a total of $103,000 in excess of the available settlement proceeds had been spent for the renovations, which were completed during fiscal 1996. The venture had recognized a loss of $300,000 in fiscal 1995 equal to the amount by which the total repair costs, including estimated costs to complete, exceeded the total settlement proceeds. During fiscal 1996, management revised its plans for completing the renovations resulting in the required repairs being accomplished for substantially less than the prior estimates. This change in estimate resulted in a gain of $197,000 for financial reporting purposes which was reflected in the venture's fiscal 1996 income statement.
d. HMF Associates --------------
On March 5, 1987, the Partnership formed a joint venture with Pacific Union Investment Corporation (the co-venturer) pursuant to a joint venture agreement. The joint venture was formed as a California general partnership and purchased and operated the Enchanted Woods (formerly Forest Ridge), Hunt Club and Marina Club apartment complexes, all of which are located in the Seattle, Washington area. The Enchanted Woods property is a 217-unit garden apartment complex and contains approximately 212,463 net rentable square feet. The Hunt Club property is a 130-unit garden apartment complex and contains approximately 101,912 net rentable square feet, and the Marina Club property is a 77-unit garden court apartment complex and contains approximately 60,331 net rentable square feet. The original aggregate cash investment by the Partnership for its interest was approximately $4,206,000 (including an acquisition fee of $259,700 paid to the Adviser).
Construction-related defects were discovered at all three apartment complexes prior to fiscal 1991. During 1991, HMF Associates participated as a plaintiff in a lawsuit filed against the developer, which also involved certain other properties constructed by the developer. The joint venture's claim against the developer was settled during fiscal 1991 for $4,189,000. Such funds were received in December of 1991 and were recorded by the venture as a reduction to the basis of the operating properties. Of the settlement proceeds, $1,397,000 was paid to legal counsel in connection with the litigation and was capitalized as an addition to the carrying value of the operating investment properties. In addition to the cash received at the time of the settlement, the venture received a note of approximately $584,000 from the developer which was due in 1994. During fiscal 1993, the venture agreed to accept a discounted payment of approximately $409,000 in full satisfaction of the note if payment was made by December 31, 1993. The developer made this discounted payment to the venture in the first quarter of fiscal 1994. In addition, during fiscal 1994 the venture received additional settlement proceeds totalling approximately $1,270,000 from its pursuit of claims against certain subcontractors of the development company and other responsible parties. Additional settlement proceeds totalling approximately $1,444,000 were collected during fiscal 1995. As of September 30, 1995, all claims had been settled and no additional proceeds were anticipated. Per the terms of the joint venture agreement, as amended, available net litigation proceeds, after payment of all associated expenses, were distributed 90% to the Partnership and 10% to the co-venturer. During fiscal 1994, the Partnership received a distribution of $1,000,000 from the joint venture, representing its share of the available settlement proceeds. During fiscal 1995, the Partnership received a repayment of a $400,000 optional loan, plus approximately $175,000 in accrued interest on such loan, from its share of the additional settlement proceeds. The repairs to the operating investment properties, which were completed during fiscal 1994, net of insurance proceeds, were capitalized or expensed in accordance with the joint venture's normal accounting policy for such items.
As part of the initial settlement, the venture also negotiated a loan modification agreement which provided the remainder of the funds required to complete the repairs of the operating investment properties. Under the terms of the HMF Associates loan modification executed in fiscal 1992, all accrued and unpaid interest outstanding as of March 31, 1992 was converted to principal. The loans and additional advances bore interest at a rate of 9% per annum. Monthly payments were made in an amount equal to the "net operating income', as defined, for the prior month. Unpaid interest was added to the principal balance of the indebtedness on a monthly basis. The final maturity date of the loan secured by the Enchanted Woods Apartments was June 1, 1997, while the maturity date of the loans secured by the Hunt Club and Marina Club properties was July 1, 1997, at which time all unpaid principal, interest and advances were due. Despite the successful lease-up of all three properties owned by HMF Associates following the completion of the construction-related repairs, the net operating income from the properties was not sufficient to fully cover the interest accruing on the outstanding debt obligations. As a result, the total obligation due to the mortgage lender had continued to increase since the date of the fiscal 1992 loan modification agreement. The balance of the original mortgage loans on the Hunt Club, Marina Club and Enchanted Woods properties at the time of their fiscal 1987 acquisition dates totalled $13,035,000. After advances from the lender to pay for costs to repair the construction defects of approximately $4.8 million and interest deferrals totalling approximately $6.2 million, the total obligation to the mortgage lender totalled approximately $24 million as of the fiscal 1997 maturity dates. As a result, the aggregate estimated fair value of the operating investment properties was substantially lower than the outstanding obligations to the first mortgage holder. In April 1997, the lender agreed to another modification agreement which provided the joint venture with an opportunity to complete a sale transaction prior to the loan maturity dates. Under the terms of the agreement, the Partnership and the co-venture partner could qualify to receive a nominal payment from the sales proceeds at a specified level if a sale was completed by June 30, 1997 and certain other conditions were met. In May 1997, the agreement with the lender was modified to reflect the terms and conditions of a sale involving only the Hunt Club and Marina Club properties. On June 27, 1997, HMF Associates sold The Hunt Club Apartments and The Marina Club Apartments to an unrelated third party for approximately $5.3 million and $3.1 million, respectively. The Partnership received net proceeds of approximately $288,000 in connection with the sale of these two assets in accordance with the discounted mortgage loan payoff agreement. The joint venture also obtained a four-month extension from the lender of the discounted loan pay off agreement with respect to the Enchanted Woods Apartments, and, in July 1997, entered into an agreement with another third-party buyer for the sale of this remaining asset for $9.2 million. The sale, which closed on September 9, 1997, satisfied the conditions in the loan modification agreement which allowed the Partnership to share in the net proceeds from the sale transaction even though the sale price was below the amount of the debt obligation. The Partnership received net proceeds of approximately $261,000 from the sale of Enchanted Woods. As a result of these sale transactions, the Partnership no longer has any interest in these properties.
The joint venture recognized gains from the forgiveness of indebtedness in connection with the sales of the Enchanted Woods, Hunt Club and Marina Club properties in the aggregate amount of $7,552,000 as a result of the fiscal 1997 sale transactions. The venture also recognized gains in the aggregate amount of $4,291,000 for the amount by which the sales prices, net of closing costs, exceeded the net carrying values of the operating investment properties. The Partnership's share of such gains totalled approximately $7,463,000 and $4,210,000, respectively.
6. Mortgage note payable ---------------------
Mortgage note payable on the consolidated balance sheets relates to the Partnership's consolidated joint venture, West Palm Beach Concourse Associates, and was secured by the venture's operating investment property. At September 30, 1998 and 1997, mortgage note payable consists of the following (in thousands):
1998 1997 ---- ----
11.12% first mortgage, payable in installments of $20 per month, including interest, through January 1, 2005. The fair value of this note payable approximated $1,685 as of September 30, 1998. $ 1,550 $ 1,614 ======= =======
In accordance with the Concourse mortgage loan agreements, certain insurance premiums and real estate taxes were required to be held in escrow. The balance of escrowed funds on the accompanying balance sheets at September 30, 1998 and 1997 consist of such escrowed insurance premiums and real estate taxes in the aggregate amounts of $76,000 and $72,000, respectively. As discussed in Note 4, subsequent to year-end, on November 10, 1998, the Concourse operating property was sold and this mortgage loan was assumed by the buyer.
7. Leases ------
The Partnership's consolidated joint venture, West Palm Beach Concourse Associates, derived its revenues from non cancelable operating leases. The initial terms of the leases range from 1 to 40 years with the majority of leases providing for the pass through of certain property expenses to the tenants.
Approximate minimum future rentals due to be received on existing non cancelable leases of the retail plaza owned by the consolidated venture for the next five years ending September 30 and thereafter were as follows (in thousands):
1999 $ 334 2000 298 2001 184 2002 134 2003 74 Thereafter 1,173 -------- $ 2,197 ========
The above amounts do not include contingent rentals based on cost-of-living increases and rentals which may be received under certain leases on the basis of a percentage of sales in excess of stipulated minimums. No percentage rents were received during fiscal 1998, 1997 and 1996.
8. Subsequent event ----------------
On November 13, 1998, the Partnership distributed $194,000 to the Limited Partners, $2,000 to the General Partners and $8,000 to the Adviser as an asset management fee for the quarter ended September 30, 1998. In addition, on December 15, 1998 the Partnership distributed $1,253,000, or $33 per original $1,000 investment, to the Limited Partners which represented the Partnership's share of the proceeds from the sales of the Concourse Retail Plaza (see Note 4) and the Colony Square Shopping Center (see Note 5) and the release of certain cash reserves that exceeded expected future requirements.
REPORT OF INDEPENDENT AUDITORS
The Partners of Paine Webber Income Properties Seven Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined Joint Ventures of Paine Webber Income Properties Seven Limited Partnership as of September 30, 1998 and 1997, and the related combined statements of operations and changes in venturers' capital (deficit), and cash flows for each of the three years in the period ended September 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Joint Ventures of Paine Webber Income Properties Seven Limited Partnership at September 30, 1998 and 1997, and the combined results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLP
Boston, Massachusetts November 17, 1998
COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS September 30, 1998 and 1997 (In thousands)
Assets 1998 1997 ---- ----
Current assets: Cash and cash equivalents $ 2,067 $ 1,844 Escrow deposits 1,057 1,302 Other current assets 69 299 -------- -------- Total current assets 3,193 3,445
Operating investment properties Land 3,861 4,563 Buildings, improvements and equipment 28,547 35,763 -------- -------- 32,408 40,326 Less accumulated depreciation (14,568) (17,845) -------- -------- Net operating investment properties 17,840 22,481
Deferred expenses, net of accumulated amortization of $108 ($120 in 1997) 135 173 Other assets - 65 -------- -------- $ 21,168 $ 26,164 ======== ========
Liabilities and Venturers' Capital
Current liabilities: Current portion of long-term debt $ 388 $ 418 Real estate taxes payable 1,952 1,872 Accounts payable and accrued liabilities 73 144 Accounts payable - affiliates - 3 Accrued interest 116 143 Tenant security deposits 281 273 Distributions payable to venturers 624 216 -------- -------- Total current liabilities 3,434 3,069
Long-term debt 17,138 22,185
Venturers' capital 596 910 -------- -------- $ 21,168 $ 26,164 ======== ========
See accompanying notes.
COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' CAPITAL (DEFICIT) For the years ended September 30, 1998, 1997 and 1996 (In thousands)
1998 1997 1996 ---- ---- ----
Revenues: Rental revenues and expense recoveries $ 7,348 $ 10,391 $ 10,372 Interest and other income 315 466 521 Gain on insurance settlement - - 197 -------- -------- -------- 7,663 10,857 11,090
Expenses: Interest expense 1,532 3,652 3,961 Depreciation expense 1,106 1,635 1,766 Real estate taxes 1,624 1,835 1,830 Repairs and maintenance 383 741 780 Management fees 234 537 541 Utilities 273 607 620 Salaries and related expenses 769 1,026 979 General and administrative 359 793 859 Amortization expense 3 14 14 -------- -------- -------- 6,283 10,840 11,350 -------- -------- -------- Operating income (loss) 1,380 17 (260)
Gains on sale of operating investment properties 4,992 4,291 - -------- -------- --------
Income (loss) before extraordinary gain 6,372 4,308 (260)
Extraordinary gain from settlement of debt obligations - 7,552 -
Net income (loss) 6,372 11,860 (260)
Distributions to venturers (6,686) (2,049) (1,254)
Contributions from partners - 391 -
Venturers' capital (deficit), beginning of year 910 (9,292) (7,778) -------- -------- --------
Venturers' capital (deficit), end of year $ 596 $ 910 $ (9,292) ======== ======== ========
See accompanying notes.
See accompanying notes.
COMBINED JOINT VENTURES OF PAINE WEBBER INCOME PROPERTIES SEVEN LIMITED PARTNERSHIP Notes to Combined Financial Statements
1. Organization and Nature of Operations -------------------------------------
The accompanying financial statements of the Combined Joint Ventures of Paine Webber Income Properties Seven Limited Partnership (the "Combined Joint Ventures") include the accounts of Chicago Colony Apartments Associates, an Illinois general partnership; Chicago Colony Square Associates, an Illinois general partnership; Daniel Meadows Partnership, a Virginia general partnership; and HMF Associates, a California general partnership. The financial statements of the Combined Joint Ventures are presented in combined form, rather than individually, due to the nature of the relationship between the co-venturers and Paine Webber Income Properties Seven Limited Partnership ("PWIP7") which owns a majority financial interest but does not have voting control in each joint venture.
The dates of PWIP7's acquisition of interests in the joint ventures are as follows:
Date of Acquisition Joint Venture of Interest ------------- -------------------
Chicago Colony Apartments Associates 12/27/85 Chicago Colony Square Associates 12/27/85 Daniel Meadows Partnership 6/19/86 HMF Associates 5/29/87
On June 27, 1997, HMF Associates sold the properties known as The Hunt Club Apartments located in Seattle, Washington and The Marina Club Apartments located in Des Moines, Washington to an unrelated third party for approximately $5.3 million and $3.1 million, respectively. PWIP 7 received net proceeds of approximately $288,000 in connection with the sale of these two assets in accordance with a discounted mortgage loan payoff agreement reached with the lender in April 1997. On September 9, 1997, HMF Associates sold its remaining asset, the property known as The Enchanted Woods Apartments located in Federal Way, Washington, to an unrelated third party for approximately $9.2 million. PWIP 7 received net proceeds of approximately $261,000 in connection with the sale in accordance with the discounted mortgage loan payoff agreement. See Note 5 for a further discussion of these transactions. On December 18, 1997, Daniel Meadows Partnership sold its operating investment property, The Meadows on the Lakes Apartments, located in Birmingham, Alabama, to an unrelated party for $9.525 million. The sale generated net proceeds of approximately $4.4 million after repayment of the outstanding first mortgage loan of approximately $4.7 million and closing costs of approximately $310,000. PWIP 7 received 100% of the net proceeds in accordance with the terms of the joint venture agreement. Subsequent to year-end, on November 17, 1998, Chicago Colony Square Associates sold its operating investment property, the Colony Square Shopping Center to an unrelated party for $2.3 million. The sale generated net proceeds of approximately $1,014,000, after the repayment of the outstanding first mortgage loan of approximately $864,000, accrued interest of approximately $13,000 (including a prepayment penalty of $9,000), closing proration adjustments of approximately $221,000 and closing costs of approximately $188,000. The Partnership received 100% of the net proceeds in accordance with the terms of the joint venture agreement.
2. Use of Estimates and Summary of Significant Accounting Policies ---------------------------------------------------------------
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of September 30, 1998 and 1997 and revenues and expenses for each of the three years in the period ended September 30, 1998. Actual results could differ from the estimates and assumptions used.
Basis of presentation ---------------------
Generally, the records of the Combined Joint Ventures are maintained on the income tax basis of accounting and adjusted to generally accepted accounting principles for financial reporting purposes, principally for depreciation.
Operating investment properties -------------------------------
The operating investment properties are carried at cost, less accumulated depreciation, certain guaranteed payments from partners (see Note 3) and insurance proceeds, or an amount less than cost if indicators of impairment are present in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was adopted in fiscal 1997. SFAS No. 121 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. Management generally assesses indicators of impairment by a review of independent appraisal reports on each operating investment property. Such appraisals make use of a combination of certain generally accepted valuation techniques, including direct capitalization, discounted cash flows and comparable sales analysis. Depreciation expense is computed on a straight-line basis over the estimated useful lives of the buildings, improvements and equipment, generally five to thirty years. Professional fees, including deferred acquisition fees paid to an affiliate of PWIP7 (see Note 4), and other costs incurred in connection with the acquisition of the properties have been capitalized and are included in the cost of the land and buildings.
Deferred expenses -----------------
Deferred expenses consist primarily of loans fees which are being amortized using the effective interest method over the terms of the related loans. Such amortization expense is included in interest expense on the accompanying statements of operations.
Revenue Recognition -------------------
The Combined Joint Ventures lease space at the operating investment properties under short-term and long-term operating leases. Rental revenues are recognized on a straight-line basis as earned pursuant to the terms of the leases.
Reclassifications -----------------
Certain prior year balances have been reclassified to conform to the current year presentation.
Income tax matters ------------------
The Combined Joint Ventures are comprised of entities which are not taxable and accordingly, the results of their operations are included on the tax returns of the various partners. Accordingly, no income tax provision is reflected in the accompanying combined financial statements.
Cash and Cash Equivalents -------------------------
For purposes of the statement of cash flows, the Combined Joint Ventures consider all short-term investments with original maturity dates of 90 days or less to be cash equivalents.
Escrow deposits ---------------
In accordance with the mortgage loan agreements of the Combined Joint Ventures, certain building repair reserves, capital improvement reserves, insurance premiums and real estate taxes are required to be held in escrow. The escrow deposit amounts on the balance sheet at September 30, 1998 and 1997 are principally comprised of such escrowed amounts.
Fair Value of Financial Instruments -----------------------------------
The carrying amounts of cash and cash equivalents and escrow deposits approximate their fair values as of September 30, 1998 and 1997 due to the short-term maturities of these instruments. It is not practicable for management to estimate the fair value of the loans from venturers without incurring excessive costs because the obligations were provided in non-arm's length transactions without regard to fixed maturities, collateral issues or other traditional conditions and covenants. The fair value of long-term debt is estimated, where applicable, using discounted cash flow analyses, based on the current market rate for similar types of borrowing arrangements (see Note 6).
3. Joint Ventures --------------
See Note 5 to the financial statements of PWIP7 included in this Annual Report for a more detailed description of the joint venture partnerships. Descriptions of the ventures' properties are summarized below:
a. Chicago Colony Apartments Associates ------------------------------------
The joint venture owns and operates The Colony Apartments, a 783-unit apartment complex located in Mount Prospect, Illinois.
b. Chicago Colony Square Associates --------------------------------
The joint venture owned and operated the Colony Square Shopping Center, a 39,572 gross leasable square foot shopping center, located in Mount Prospect, Illinois. As discussed in Note 1, on November 17, 1998, Chicago Colony Square Associates sold the Colony Square Shopping Center and distributed the net proceeds to PWIP7.
c. Daniel Meadows Partnership --------------------------
The joint venture owned and operated The Meadows on the Lake Apartments, a 200-unit apartment complex, located in Birmingham, Alabama. As discussed in Note 1, on December 18, 1997 the joint venture sold its operating investment property and distributed the net proceeds to PWIP7.
During fiscal 1991, the venture had discovered that certain materials used to construct the operating property were installed incorrectly and would require substantial repairs. During fiscal 1992, the Meadows joint venture engaged local legal counsel to seek recoveries from the venture's insurance carrier, as well as various contractors and suppliers, for the venture's claim of damages, which were estimated at approximately $1 million, not including legal fees and other incidental costs. During fiscal 1993, the insurance carrier deposited approximately $38,000 into an escrow account controlled by the venture's mortgage lender in settlement of the undisputed portion of the venture's claim. During fiscal 1994, the insurer agreed to enter into non-binding mediation towards settlement of the disputed claims out of court. On October 3, 1994, the joint venture verbally agreed to settle its claims against the insurance carrier, architect, general contractor and the surety/completion bond insurer for $1,076,000, which was in addition to the $38,000 previously paid by the insurance carrier. These settlement proceeds were escrowed with the mortgage holder, which agreed to release such funds as needed for structural renovations. The loan was to be fully recourse to the joint venture and to the partners of the joint venture until the repairs were completed, at which time the entire obligation becomes non-recourse. As of September 30, 1996, a total of $103,000 in excess of the available settlement proceeds had been spent for the renovations, which were completed during fiscal 1996. The venture had recognized a loss of $300,000 in fiscal 1995 equal to the amount by which the total repair costs, including estimated costs to complete, exceeded the total settlement proceeds. During fiscal 1996, management revised its plans for completing the renovations resulting in the required repairs being accomplished for substantially less than the prior estimates. This change in estimate resulted in a gain of $197,000 for financial reporting purposes which is reflected in the accompanying fiscal 1996 statement of operations.
d. HMF Associates --------------
The joint venture owned and operated three properties, Enchanted Woods (formerly Forest Ridge) Apartments, a 217-unit apartment complex, The Marina Club Apartments, a 77-unit apartment complex, and The Hunt Club Apartments, a 130-unit apartment complex, all located in the Seattle, Washington area. As discussed in Note 1, during fiscal 1997 the joint venture sold all three of its operating investment properties and distributed the net proceeds to the venture partners in accordance with a discounted loan payoff agreement which is described further in Note 5. The joint venture recognized gains from the forgiveness of indebtedness in connection with the sales of the Enchanted Woods, Hunt Club and Marina Club properties in the aggregate amount of $7,552,000 as a result of the fiscal 1997 sale transactions. The venture also recognized gains in the aggregate amount of $4,291,000 for the amount by which the sales prices, net of closing costs, exceeded the net carrying values of the operating investment properties. PWIP7's share of such gains totalled approximately $7,463,000 and $4,210,000, respectively.
Construction-related defects had been discovered at all three apartment complexes owned by HMF Associates prior to fiscal 1991. During 1991, HMF Associates participated as a plaintiff in a lawsuit filed against the developer, which also involved certain other properties constructed by the developer. The joint venture's claim against the developer was settled during fiscal 1991 for $4,189,000. Such funds were received in December of 1991 and were recorded by the venture as a reduction to the basis of the operating properties. Of the settlement proceeds, $1,397,000 was paid to legal counsel in connection with the litigation and was capitalized as an addition to the carrying value of the operating investment properties. In addition to the cash received at the time of the settlement, the venture received a note of approximately $584,000 from the developer which was due in 1994. During fiscal 1993, the venture agreed to accept a discounted payment of approximately $409,000 in full satisfaction of the note if payment was made by December 31, 1993. The developer made this discounted payment to the venture in the first quarter of fiscal 1994. In addition, during fiscal 1995 and 1994 the venture received additional settlement proceeds totalling approximately $1,444,000 and $1,270,000 respectively, from its pursuit of claims against certain subcontractors of the development company and other responsible parties. As of September 30, 1995, the venture had settled all of the outstanding litigation related to the construction defects and no additional litigation proceeds were expected. The repairs to the operating investment properties, which were completed during fiscal 1994, net of insurance proceeds, were capitalized or expensed in accordance with the joint venture's normal accounting policy for such items. Per the terms of the joint venture agreement, as amended, available net litigation proceeds, after payment of all associated expenses, were distributed 90% to the Partnership and 10% to the co-venturer.
The following description of the joint venture agreements provides certain general information.
Allocations of net income and loss ----------------------------------
The agreements generally provide that taxable income and tax losses (other than those resulting from sales or other dispositions of the projects) will be allocated between PWIP7 and the co-venturers in the same proportions as cash flow distributed or distributable for such year, except for certain items which are specifically allocated to the partners as set forth in the joint venture agreements. Internal Revenue Service regulations require partnership allocations of income and loss to the respective partners to have "substantial economic effect". For certain of the joint ventures this requirement resulted in joint venture losses for the years ended September 30, 1998, 1997 and 1996 being allocated in a manner different from that provided in the joint venture agreements. Allocations of income and loss for financial reporting purposes have been made in accordance with the actual allocations of taxable income and tax loss.
Gains or losses resulting from sales or other dispositions of the projects shall be allocated as specified in the joint venture agreements.
Distributions -------------
Subsequent to the Guaranty Periods, distributable funds will generally be distributed first, to repay accrued interest and principal on certain loans; second, to pay specified amounts to PWIP7; third, to pay specified amounts to the co-venturers; and fourth, to distribute the balance in proportions ranging from 80% to 60% to PWIP7 and 20% to 40% to the co-venturers, as set forth in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects shall be made in accordance with formulas provided in the joint venture agreements.
Guaranty Periods ----------------
The joint venture agreements generally provided that during the Guaranty Periods (as defined in the joint venture agreements), in the event that net cash flow was insufficient to fund operations including amounts necessary to pay PWIP7 preferred distributions, the co-venturers were required to fund amounts equal to such deficiencies. The co-venturers obligation to fund such amounts pursuant to their guarantees was generally to be in the form of capital contributions to the joint ventures.
4. Related party transactions --------------------------
The Combined Joint Ventures originally entered into property management agreements with affiliates of the co-venturers, cancellable at the joint ventures' option upon the occurrence of certain events. The original management fees were generally equal to 5% of gross receipts, as defined in the agreements. As of April 1, 1997, the management for Chicago Colony Apartments Associates and Chicago Colony Square Associates was transferred to an unrelated third party.
The Meadows joint venture was required to pay a yearly investor servicing fee to PWIP7 of $2,500.
Accounts payable - affiliates at September 30, 1997 consisted primarily of management fees and reimbursements owed to the property managers of the operating properties. Included in interest expense for the years ended September 30, 1997 and 1996 is $25,000 and $17,000, respectively, of interest on loans payable to the partners of the HMF Associates joint venture which were converted to capital contributions during fiscal 1997 in connection with the liquidation of the joint venture subsequent to the sale of the venture's operating properties (see Note 3).
5. Long-term debt --------------
Long-term debt at September 30, 1998 and 1997 consists of the following (in thousands):
1998 1997 ---- ----
7.6% mortgage loan, secured by the Colony Apartments property, payable in monthly installments, including principal and interest of $130 through August 1, 2002, at which time the final principal installment of $15,277 plus any accrued interest is due. The fair value of this note payable approximated its carrying value as of September 30, 1998 and 1997. $16,589 $16,873
9-1/2% mortgage loan, secured by the Colony Square Shopping Center property, payable in monthly installments of $14 through October 1, 2006 with the remaining balance ($10,581) due and payable on November 1, 2006. The fair value of this note payable approximated its carrying value as of September 30, 1998 and 1997. This loan was repaid in full subsequent to year-end in connection with a sale of the operating investment property (see Note 1). 937 1,011
First mortgage loan, secured by the Meadows on the Lake Apartments property. Monthly installments of principal, based on a 25-year amortization schedule, and interest, based on LIBOR plus 2.25% (7.90625% at September 30, 1997), were due through maturity on February 5, 2000. The fair value of this note payable approximated its carrying value as of September 30, 1997. This loan was repaid in full in fiscal 1998 in connection with a sale of the operating investment property (see Note 1). - 4,719 ------- -------
17,526 22,603
Less current portion (388) (418) ------- ------- $17,138 $22,185 ======= =======
Scheduled maturities of long-term debt for each of the next five fiscal years and thereafter are as follows (in thousands):
1999 $ 388 2000 420 2001 455 2002 15,703 2003 118 Thereafter 442 -------- $ 17,526 ========
6. Leases ------
Chicago Colony Square Associates leased shopping center space to retail tenants under operating leases. Lease effective dates ranged from 12 to 192 months. Approximate future minimum payments due to be received by the joint venture under non-cancelable operating lease agreements were as follows (in thousands):
1999 $ 521 2000 439 2001 401 2002 184 2003 11 -------- $ 1,557 ========