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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 0-8952
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SB Partners
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(Exact name of registrant as specified in its charter)
New York 13-6294787
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
666 Fifth Avenue, N.Y., N.Y. 10103
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(Address of Principal Executive Offices) Zip Code
(212) 408-2900
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interests
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(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT
THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES
OF THE REGISTRANT. (THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY
REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND
ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR TO
THE DATE OF FILING.)
Not Applicable
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE (APPLICABLE
ONLY TO CORPORATE REGISTRANTS).
Not Applicable
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K (x).
DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF
INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE
DOCUMENT IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS; (2)
ANY PROXY OR INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED PURSUANT
TO RULE 424(b) OR (c) UNDER THE SECURITIES ACT OF 1933. (THE LISTED
DOCUMENTS SHOULD BE CLEARLY DESCRIBED FOR IDENTIFICATION PURPOSES.)
None
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Page 1 of 45
2
PART I
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ITEM 1. BUSINESS
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Description of SB Partners (the "Registrant")
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The Registrant is an existing New York limited partnership, which has been
engaged in acquiring, operating and holding for investment a varying
portfolio of real properties since April, 1971. The Registrant's initial
public offering was in 1971. As of December 31, 1997, the Registrant
owned an office center in Cherry Hill, New Jersey; apartment projects in
Holiday, Florida, Reno, Nevada and Atlanta, Georgia; and 13.9 acres of
land adjacent to the apartment project in Holiday, Florida.
The principal objectives of the Registrant are, first, to obtain capital
appreciation through equity investments in real estate; second, to
generate cash available for distribution, a portion of which may not be
currently taxable; and third, to the extent still permitted under the
Internal Revenue Code of 1986, as amended, to generate tax losses which
may offset the Limited Partners' income from the Registrant and certain
other sources. In recent years, the ability of the Registrant to meet
these objectives has been impacted negatively by factors discussed
elsewhere in this annual report on Form 10-K, as well as other factors.
The Registrant incurred losses before extraordinary gain during each of
the five years prior to 1997, as compared to net income of $400,000 for
the current year. The accumulated tax losses and accumulated financial
statement losses before gain on sale of investments in real estate as of
December 31, 1997 were $161,814,019 and $112,021,287, respectively. The
accumulated tax gains and the accumulated financial statement gains on
sale of investments in real estate as of December 31, 1997, were
$146,391,819 and $105,781,575, respectively. Aggregate cash
distributions made to partners as of December 31, 1997 were $97,752,882.
Refer to the Registrant's 1997 Annual Audited Consolidated Financial
Statements, which are contained in this annual report on Form 10-K,
Note 7 of Notes to Consolidated Financial Statements, for a
reconciliation of net income (loss) for financial reporting purposes
to net income (loss) for Federal income tax reporting purposes for
each of the three years in the period ended December 31, 1997.
3
Recent Developments and Real Estate Investment Factors
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In the last few years, many markets and real estate asset classes have
experienced significant improvement over conditions that existed in the
late 1980's and early 1990's. During the early part of this decade, most
asset classes suffered greatly from significant overbuilding in many
markets, changes in government regulations with respect to lending
practices, changes in federal income tax regulations, a lack of buyers of
real estate, and a lack of equity and debt capital. This lack of
available capital had serious negative consequences for owners who
required funds to refinance capital structures created in the 1980's, to
properly maintain and improve properties for tenant occupancy, or to cover
shortfalls where real estate operating, financing and capital costs
exceeded rental revenue generated. In addition, real estate development
and construction activity declined dramatically as a result of the
overbuilding that was prevalent in many markets.
The recent resurgence of many real estate asset classes has been partly
due to the availability of new sources of debt and equity capital combined
with the return of more traditional sources; improvement in the national
and many local economies; and a significant decrease in interest rates
available to potential borrowers, among other factors. Growth of new
public market financing vehicles such as real estate investment trusts
(REITs), commercial mortgage backed securities (CMBS), along with private
"opportunity funds", as well as the return of traditional lending sources
such as banks and life insurance companies, have significantly increased
the amount of capital available to real estate investors and developers.
This increased availability of capital has allowed the Registrant to
refinance the mortgage notes on certain of its properties.
Renewed strength in the national and many local economies has increased
the demand for space in all asset classes. In some markets, recent
increases in prices for many real estate asset classes have been due, in
part, to the limited availability of investment opportunities. As a
result, significant real estate development and construction is underway
again in many markets. In some markets, the increase in the supply of
space has not been sufficient to satisfy demand, and rents paid by new and
renewing tenants, as well as occupancies, have increased. However, in
other markets, supply has been greater than demand and rents and
occupancies have decreased of late, including some markets where the
Registrant owns properties.
Due to the tendency of real estate to be relatively non-liquid, the
ability of the Registrant and other owners of real estate to vary their
portfolios in response to changing general and local economic, financial
and investment conditions has been limited in the past and may be limited
in the future. (Refer also to Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
4
General Real Estate Risks
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This report on Form 10-K includes statements that constitute "forward
looking statements" within the meaning of Section 27(A) of the Securities
Act of 1933 and Section 21(E) of the Securities Exchange Act of 1934 and
that are intended to come within the safe harbor protection provided by
those sections. By their nature, all forward looking statements involve
risks and uncertainties. Actual results may differ materially from those
contemplated by the forward looking statements for a number of reasons,
including, but not limited to, those risks described below:
General
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The Registrant's investments generally consist of investments in real
property and as such will be subject to varying degrees of risk generally
incident to the ownership of real estate assets. The underlying value of
the Registrant's real estate investments and the Registrant's financial
condition will be dependent upon its ability to operate its properties in
a manner sufficient to maintain or increase revenues and to generate
sufficient income in excess of operating expenses. Income from the
properties may be adversely affected by changes in national and local
economic conditions such as oversupply of apartment units or a reduction
in demand for apartment units in the Registrant's markets, the
attractiveness of the properties to tenants, changes in interest rates and
in the availability, cost and terms of mortgage financings, the ongoing
need for capital improvements, particularly in older structures, changes
in real estate tax rates or operating expenses, adverse changes in
governmental rules and fiscal policies, adverse changes in zoning laws,
civil unrest, acts of God, including natural disasters (which may result
in uninsured losses), and other factors which are beyond the control of
the Registrant. If the Registrant were unable to promptly renew or relet
the leases of a significant number of tenants, or, if the rental rates
upon such renewal or reletting were significantly lower than expected
rates, the Registrant's results of operations, financial condition and
ability to make distributions to Unitholders may be adversely affected.
Risks of Liability and Loss
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The development and ownership of real estate may result in liability to
third parties, due to conditions existing on a property which result in
injury. Such liability may be uninsurable in some circumstances or may
exceed the limits of insurance maintained at typical amounts for the type
and condition of such property. In addition, real estate may suffer a
loss in value due to casualties such as fire or hurricane. Such loss may
be uninsurable in some circumstances or may exceed the limits of insurance
maintained at typical amounts for the type and condition of the property.
Real estate may also be taken, in whole or in part, by public authorities
for public purposes in eminent domain proceedings. Awards resulting from
such proceedings may not adequately compensate the Registrant for the
value lost.
5
Value and Non-liquidity of Real Estate
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Real estate investments are relatively non-liquid. The Registrant's
ability to vary its portfolio in response to changes in economic and other
conditions will therefore be limited. If the Registrant must sell an
investment, there can be no assurance that it will be able to dispose of
the investment in the time period it desires or that the sales price of
the investment will recoup or exceed the amount of the Registrant's cost
for the investment.
Potential Adverse Effect on Results of Operations Due to Operating Risks
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The Registrant's properties are subject to operating risks common to real
estate in general, any and all of which may adversely affect occupancy or
rental rates. The Registrant's properties are subject to increases in
operating expenses such as cleaning, electricity, heating, ventilation and
air conditioning and maintenance; insurance and administrative costs; and
other general costs associated with security, landscaping, repairs and
maintenance. The Registrant's tenants in its commercial properties
generally are obligated to pay these escalating costs, although there can
be no assurance that tenants will agree to pay such costs upon renewal or
that new tenants will agree to pay such costs. In the case of apartment
communities, the Registrant must bear such increased expenses. If
operating expenses increase, the local rental market may limit the extent
to which rents may be increased to meet such increased expenses without
decreasing occupancy rates. While the Registrant implements cost-saving
incentive measures at each of its properties, if any of the foregoing
occurs, the Registrant's results of operations, financial condition and
its ability to pay distributions to Unitholders could be adversely
affected.
Debt Servicing and Financing
----------------------------
If the Registrant does not have funds sufficient to repay its indebtedness
at maturity, the Registrant may need to refinance indebtedness through
additional debt financing or equity offerings. If the Registrant is
unable to refinance this indebtedness on acceptable terms, the Registrant
may be forced to dispose of properties upon disadvantageous terms, which
could result in losses to the Registrant and adversely affect the amount
of cash available for distribution to Unitholders. If prevailing interest
rates or general economic conditions result in higher interest rates at a
time when the Registrant must refinance its indebtedness, the Registrant's
interest expense would increase, which would adversely affect the
Registrant's results of operations, financial condition and its ability to
pay expected distributions to Unitholders. Further, if any of the
Registrant's properties are mortgaged to secure payment of indebtedness
and the Registrant is unable to meet mortgage payments, the mortgagee
could foreclose or otherwise transfer the property, with a consequent loss
of income and asset value to the Registrant.
6
Increase in Market Interest Rates on Variable Interest Rates
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The Registrant has one loan that bears interest at a variable rate. The
Registrant may incur additional variable rate indebtedness in the future.
Accordingly, increases in interest rates could increase the Registrant's
interest expense, which could adversely affect the Registrant's results of
operations and financial condition.
Environmental Issues
--------------------
Under various Federal, state and local environmental laws, ordinances and
regulations, an owner or operator of real estate may be liable for the
costs of removal or remediation of certain hazardous or toxic substances
on such property. These laws often impose environmental liability without
regard to whether the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. The presence of such
substances, or the failure to properly remediate such substances, may
adversely affect the owner's or operator's ability to sell or rent the
property or to borrow using the property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of such substances
at a disposal or treatment facility, whether or not such facility is owned
or operated by such person. Certain third parties may seek recovery from
owners or operators of such properties or persons who arranged for the
disposal or treatment of hazardous or toxic substances and, therefore, are
potentially liable for removal or remediation costs, as well as certain
other related costs, including governmental fines and injuries to persons
and property.
Competition
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The Registrant competes for tenants with many other real estate owners.
The success of the Registrant in attracting tenants for its properties
will depend upon its ability to maintain its properties and their
attractiveness to tenants, neighborhood conditions, and changing
demographic trends, et cetera. All of the Registrant's properties are
located in developed areas that include other, similar properties. The
number of competitive properties in a particular area could have a
material effect on the Registrant's ability to lease space at its
properties and on the rents charged at such properties. In addition,
other forms of housing, including manufactured housing community
properties and single-family housing provide alternatives to potential
residents of multifamily residential properties. Furthermore, the
inability of existing tenants to meet their obligations under the terms of
their leases, may in turn adversely affect the performance and financial
condition of the Registrant.
7
Tax Matters
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In August 1993, Congress passed and President Clinton signed into law the
Omnibus Budget Reconciliation Act of 1993 (the "Act"). The Act includes
several provisions designed to help revive the real estate industry,
including relaxed rules for pension fund investments in real estate,
passive-loss relief for developers, extension of the low-income housing
credit, and an easing of the rules on recognizing cancellation of certain
real estate debt. On the negative side, the Act extended the recovery
period by 7.5 years (from 31.5 to 39) for nonresidential real estate
purchased subsequent to the effective date of the Act.
The Act relaxes the "per se" passive characterization of certain rental
real estate operations. For tax years beginning after 1993, eligible
taxpayers, who materially participate in rental real estate activities,
are able to deduct losses from rental activities against other income.
For all other nonmaterial participating taxpayers, the provisions enacted
as part of the Tax Reform Act of 1986 and the Technical and Miscellaneous
Revenue Act of 1988 (as discussed below) continue to apply. The Act also
provides some relief by allowing taxpayers, other than corporations, to
elect to exclude from income some cancellation of "qualified real property
business indebtedness", effective for certain discharges after December
31, 1992. The amount of the exclusion is limited to the basis of the
taxpayer's business real property or the excess of the principal amount of
the debt over the fair market value of business real property that secures
the debt, whichever is less. The basis of the taxpayer's business real
property must be reduced by the amount of excluded income. The provision
does not apply to foreclosures or "deeds in lieu" with respect to
nonrecourse debt.
8
Tax Reform Act of 1986 and the Technical
and Miscellaneous Revenue Act of 1988
----------------------------------------
On October 22, 1986, the Tax Reform Act of 1986 (the "1986 Act") was
signed into law. The Technical and Miscellaneous Revenue Act of 1988
("TAMRA 88") was enacted on November 10, 1988. Generally the principal
provisions of the 1986 Act and TAMRA 88 impacting the Registrant and its
Limited Partners are:
-Passive activity loss limitations have limited the ability of the
partners to offset their allocated share of taxable passive losses
(essentially losses from rental real estate operations) of the
Registrant against other earned or portfolio income.
-The limitation of losses to amounts that partners have "at risk" was
extended to passive real estate investments. The amount a partner
has "at risk" generally includes their proportionate share of
qualified non-recourse financing, and is also subject to other
limitations.
-The 1986 Act limits the deduction of investment interest expense, as
defined, to the amount of net investment income generated for the
year, as defined, with an unlimited carryover for excess expense.
The effect of these and other changes in income tax laws will vary
depending upon each partner's individual tax situation. The Registrant
believes that its characterization of, and allocation of, passive and
portfolio income and losses from its operations are in compliance with
existing regulations, but it can provide no assurances that the Internal
Revenue Service ("IRS") will not challenge such treatment and allocations
in the event of an audit.
Recent Legislation
------------------
The Taxpayer Relief Act of 1997 contains significant changes to the
taxation of capital gains of individuals, trusts and estates. For gains
realized after July 28, 1997, and subject to certain exceptions, the
maximum rate of tax on net capital gains of individuals, trusts and
estates from the sale or exchange of capital assets held for more than 18
months has been reduced to 20%, and the maximum rate is reduced to 18% for
assets acquired after December 31, 2000 and held for more than five years.
However, the maximum rate for long-term capital gains attributable to the
sale of depreciable real property held for more than 18 months is 25% to
the extent of the deductions for depreciation with respect to such
property. Therefore, that portion of capital gain that is attributable to
depreciation previously allocated to the Unitholders will be subject to
the 25% rate. The maximum rate of capital gains tax for capital assets
held for more than one year (but not more than 18 months) remains at 28%.
The taxation of capital gains of corporations was not changed by the
Taxpayer Relief Act.
Unitholders are urged to consult their own tax advisors with respect to
the tax consequences arising under the federal law and the laws of any
state, municipality or other taxing jurisdiction, including tax
consequences arising from such Unitholder's own tax characteristics.
9
Other Tax Matters
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The Revenue Act of 1987 retroactively changed the treatment of income and
loss of publicly-traded partnerships ("PTP") to characterize a partner's
share of income as portfolio instead of passive, and limits the current
deductibility of losses.
The term PTP refers to any partnership whose interests are traded on an
established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). The Registrant believes
that it is not a PTP pursuant to such definition and therefore its holders
will not be subject to the Revenue Act of 1987 provisions. However, due
to the complexities of the regulations, no assurance can be provided that
the IRS may not challenge the treatment of income and losses in the event
of an audit.
In 1989, the Registrant made an election under IRC Section 754 which
provides for an adjustment of the adjusted tax basis of depreciable
property which may result in additional depreciation deductions to
purchasing partners and those partners who inherit their interests in the
Registrant. These adjustments, however, are subject to the passive loss
rules discussed above and may or may not provide current benefit to a
particular partner. The Registrant will be bound by the Section 754
election for all subsequent years.
General
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Efforts required in complying with Federal, state and local environmental
regulations may have and may continue to have an adverse effect on the
Registrant's operations in the future, although such costs have not
historically been significant in amount.
There are approximately 36 full and part-time on-site project personnel
employed at the Registrant's properties.
The Registrant's real estate investments are not generally subject to
seasonal fluctuations, although net income (loss) may vary somewhat from
quarter to quarter based upon changes in utility consumption and seasonal
maintenance expenditures at each property.
The Registrant considers itself to be engaged in only one industry
segment, real estate investment, and therefore information regarding
industry segments is not applicable and has not been provided.
10
ITEM 2.PROPERTIES
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The properties owned by the Registrant as of December 31, 1997 are set
forth on the Summary of Properties schedule on the page immediately
following.
ITEM 3.LEGAL PROCEEDINGS
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The Registrant is a party to certain actions directly arising from its
normal business operations. While the ultimate outcome is not presently
determinable with certainty, the Registrant believes that the resolution
of these matters will not have a material effect on its financial position
or results of operations.
On November 6, 1997, Hugh Spencer, a limited partner who holds two units
in the Registrant, filed a purported class action complaint, on behalf of
himself and other persons similarly situated, against the Registrant and
its general partner and other affiliates in the Supreme Court of the State
of New York, County of New York, entitled Spencer v. SB Partners et. al.,
Index No. 120673/97. The complaint alleges, inter alia, that the business
of the Registrant can only be carried on at a loss, and that the general
partner breached the partnership agreement and its fiduciary duties, and
seeks a court decree of dissolution of the partnership pursuant to
Sections 63 and 99 of the New York Partnership Law, an accounting from the
general partner, the appointment of a receiver to wind up the Registrant's
affairs and an award of costs and attorneys' fees to the plaintiff and the
putative class. The Registrant believes that it has meritorious defenses
to the action and that the final outcome will not have a material adverse
effect on its financial position or results of operations.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS
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NONE.
11
SB PARTNERS
Summary of Properties
As of December 31, 1997
Description Acquisition Percent Mortgage
Property Location Sq. Ft. Units Acres Date Ownership Occupancy Payable
Apartments:
Holiday Park Apts. Holiday, FL 220,000 244 21.5 Jan 1991 100% 98.8% $ 3,517,983
Riverbend Apts. (1)(2) Atlanta, GA 557,000 594 49.8 Dec 1997 100% 88.9% 4,000,000
Meadowwood Apts. Reno, NV 529,000 704 30.0 May 1983 100% 84.8% 21,223,992
--------- ----- -----
1,306,000 1,542 101.3
Office: ========= ===== =====
Cherry Hill Office Center(2) Cherry Hill, NJ 138,000 n/a 3.4 Sep 1993 100% 79.0% -
Land:
Unimproved land (3) Holiday, FL n/a n/a 13.9 Jul 1978 100% n/a -
Additional information regarding properties owned by the Registrant:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Average Occupancy
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Holiday Park Apts. 93.2% 91.0% 91.6% 93.5% 92.9%
Riverbend Apts. 87.4% 88.8% 92.6% 86.1% 80.3%
Meadowwood Apts. 88.8% 94.9% 96.9% 96.3% 96.3%
Cherry Hill Office Center 79.0% 82.0% 75.0% 81.0% 81.0%
Effective Annual Rent
--------------------
Holiday Park Apts.(a) $4,604 $4,335 $4,238 $4,237 $4,094
Riverbend Apts.(a) $6,236 $6,413 $6,116 $5,168 $4,557
Meadowwood Apts.(a) $5,987 $6,372 $6,140 $5,914 $5,604
Cherry Hill Office Center(b) $13.71 $13.28 $13.45 $14.27 $14.27
(a) Per unit
(b) Per square foot
(1) The Registrant purchased the 40% interest formerly held by its co-venturer on December 15, 1997, becoming the sole owner
of the property. Refer also to the Registrant's 1997 Annual Audited Consolidated Financial Statements.
(2) These properties are included in "real estate assets held for sale" in the 1997 Annual Audited Consolidated Financial
Statements.
(3) Land is adjacent to Holiday Park Apartments.
12 PART II
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ITEM 5.MARKET FOR REGISTRANT'S UNITS OF PARTNERSHIP
INTEREST AND RELATED UNITHOLDER MATTERS
--------------------------------------------
The transfer of Units or Participations (equivalent to one-half Unit) is
subject to certain limitations, including the consent of the General
Partner. There is no public market for the Units and it is not
anticipated that any such public market will develop. The number of
Unitholders as of December 31, 1997 was 3,844.
At various times the Registrant has generated and distributed cash to the
Unitholders totalling $97,752,882, however, there is no requirement to
make such distributions nor can there be any assurance that future
operations will generate cash available for distribution. Although the
Registrant has not paid distributions since 1990, the improving real
estate markets and repositioning of the Registrant's portfolio may allow
it to recommence paying distributions.
ITEM 6.SELECTED FINANCIAL DATA
-----------------------
Selected Financial Data is set forth on the table on the following page.
This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations, included
elsewhere in this annual report on Form 10-K.
13
SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding the Registrant's
financial condition and results of operations determined in accordance with
generally accepted accounting principles. This data should be read in conjunction
with the Audited Consolidated Financial Statements and Notes thereto included elsewhere in this
annual report on Form 10-K.
For the Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands, Except Unit Data)
Income Statement Data:
Rental, Interest and Other Revenues $ 9,066 $ 15,430 $ 23,324 $ 25,544 $ 27,019
Operating Expenses, including
Depreciation and Amortization (10,386) (23,495) (31,356) (35,648) (35,424)
Provision for loan losses, net of recoveries 0 0 0 0 (129)
Writedown and Reserves of Investments in Real Estate 0 0 0 (4,162) 0
-------- -------- -------- -------- ---------
Loss from Operations (1,320) (8,065) (8,032) (14,266) (8,534)
Gain (Loss) on Sale of Investments in Real Estate 1,404 0 3,964 6,859 (72)
Equity in Net Income (Loss) of Joint Venture 316 426 725 (352) (372)
-------- -------- -------- -------- ---------
Net Income (Loss) before Extraordinary Gain 400 (7,639) (3,343) (7,759) (8,978)
Gain on Dispositions of Investments in Real Estate
through Discharge of Indebtedness 0 11,951 0 0 0
-------- -------- -------- --------- ---------
Net Income (Loss) $ 400 $ 4,312 ($ 3,343) ($ 7,759) ($ 8,978)
======== ======== ======== ========= =========
Net Income (Loss) per Unit of Partnership Interest:
Net Income (Loss) before Extraordinary Gain $ 52 ($ 985) ($ 431) ($ 1,001) ($ 1,158)
Extraordinary Gain $ 0 $ 1,541 $ 0 $ 0 $ 0
Net Income (Loss) $ 52 $ 556 ($ 431) ($ 1,001) ($ 1,158)
Weighted Average Number of
Partnership Units Outstanding 7,754 7,754 7,754 7,754 7,754
Balance Sheet Data at Year End:
Real Estate, net $18,502 $32,357 $106,893 $116,253 $136,749
Real Estate Assets Held for Sale $24,926 $ 0 $ 0 $ 0 $ 0
Investment in Joint Venture $ 0 $10,742 $ 10,697 $ 11,134 $ 11,635
Mortgage Notes Receivable, net $ 0 $ 0 $ 0 $ 0 $ 5,934
Total Assets $45,667 $47,775 $127,259 $135,238 $163,370
Mortgage Notes Payable, net $28,742 $30,752 $103,408 $112,254 $136,004
14
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As of December 31, 1997, the Registrant had cash and cash equivalents of
approximately $550,000 in addition to $702,000 of deposits held in escrow
by certain lenders for the payment of insurance, real estate taxes and
certain capital and maintenance costs. These balances are approximately
$1,359,000 less than cash, cash equivalents and deposits held in escrow on
December 31, 1996. Total cash and cash equivalents decreased primarily
due to the expenditure of approximately $899,000 for capital additions to
existing properties during the year. In addition, the Registrant made
payment of approximately $306,000 of principal to retire a mortgage note
and approximately $354,000 of mortgage principal paid through regularly
scheduled payments.
During 1997, the Registrant sold Plantation Shopping Center for
$11,000,000 in an all cash transaction. Upon the sale, the $5,350,000
mortgage note which had been secured by the property was retired. The
balance of the proceeds of sale after closing costs were applied to the
purchase of the former co-venturer's 40% interest in Riverbend Apartments,
whereby the Registrant became the sole owner of the apartment community.
The Registrant secured a $4,000,000 demand loan from a bank to finance the
balance of the $9,800,000 cost of this acquisition. The note carries
interest at LIBOR plus 2.00% and expires in April of 1998. The Registrant
expects to complete a sale of the property, or extend the term of the
note, or to refinance the note with more conventional long-term financing
prior to the expiration of the note. If it fails to do so, the Registrant
may be required to secure funds from other sources to retire the note.
Riverbend Apartments, located in Atlanta, Georgia, and Cherry Hill Office
Center, located in Cherry Hill, New Jersey, have been classified as real
estate assets held for sale on the December 31, 1997 consolidated balance
sheet. As of March 31, 1998, the Registrant has entered into a contract
for the sale of Cherry Hill Office Center for $4,825,000. This sale is
scheduled to close in April, 1998. The Registrant is in negotiations for
the sale of Riverbend Apartments and while there can be no assurance that
the sale of the apartments will occur, if both properties are sold, it is
estimated that the amount of cash and cash equivalents available for
reinvestment by the Registrant will increase by approximately $21 million,
which will allow the resumption of acquisition activities to rebuild the
portfolio. Investigations of appropriate new acquisitions are underway.
Outstanding debt at December 31, 1997 consisted of approximately
$24,742,000 of nonrecourse first mortgage notes secured by real estate
owned by the Registrant and a $4,000,000 short-term loan from a bank.
Scheduled maturities through regularly scheduled monthly payments will be
$366,000 in 1998. The terms of certain mortgage notes require monthly
escrow of estimated annual real estate tax, insurance and reserves for
repairs, maintenance and improvements to the secured property, in addition
to the payment of principal and interest. The Registrant has no other
debt except normal trade accounts payable and accrued interest on mortgage
notes payable.
15
In December, 1996, the Registrant successfully refinanced the existing
mortgage loan secured by Meadowwood Apartments with the existing lender.
The maturity of the loan was extended through January 2004, the loan
amount was increased to $21,500,000, and the interest rate was reduced
from 9.50% to 7.55% per annum. In January, 1998, the Registrant
successfully refinanced the mortgage note secured by Holiday Park
Apartments with the existing lender. The loan amount was increased to
$3,800,000, the maturity was extended to 2008, and the interest rate was
reduced from 9.00% to 6.895% per annum for the term of the loan.
Inflation and changing prices during the current period did not
significantly affect the markets in which the Registrant conducts its
business. In view of the moderate rate of inflation, its impact on the
Registrant's business has not been significant.
The Registrant's properties, including those properties classified as held
for sale, are expected to generate sufficient cash flow to cover
operating, financing, capital improvement costs, and other working capital
requirements of the Registrant for the foreseeable future.
MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
------------------------------------------------
1997 VS. 1996
-------------
Total revenues decreased $6,364,000 to $9,066,000 in 1997 from $15,430,000
in 1996. Loss from operations decreased $6,744,000 to $1,321,000 in 1997
from $8,065,000 in 1996. Net income before extraordinary gain increased
$8,039,000 to $400,000 in 1997 from a net loss of $7,639,000 in 1996.
Net income for 1996 includes extraordinary gain on dispositions of
investments in real estate through discharge of indebtedness of
$11,951,000. Because of the extraordinary gain in 1996, net income after
extraordnary gain decreased $3,912,000 to $400,000 in 1997 from $4,312,000
in 1996.
The decrease in revenues from 1996 to 1997 is primarily attributable to
the dispositions of International Jewelry Center and 1010 Market Street
Office Building in 1996. Together, these two properties accounted for
$6,474,000 of the revenues reported in 1996. Similarly, decreases in
interest expense of $4,686,000, real estate operating expenses of
$2,761,000, write-off of uncollectible accounts of $2,100,000,
depreciation and amortization expense of $1,440,000, real estate taxes of
$260,000, management fees of $395,000, and other expenses of $165,000 are
directly attributable to the dispositions and discontinuance of operations
of these two large commercial properties.
16
Meadowwood Apartments (Reno, Nevada)
---------------------
Total revenues decreased $271,000 to $4,402,000 in 1997 from $4,673,000 in
1996. Net loss after depreciation and mortgage interest expense increased
$87,000 to $128,000 in 1997 from $41,000 in 1996.
The decrease in total revenues was primarily due to a decrease in average
occupancy to 88.8% in 1997 from 94.9% in 1996, which decreased revenues
$312,000, and an increase in tenant concessions which decreased revenues
$52,000. These decreases in revenues were partially offset by increased
rental rates charged at the property which increased revenues $93,000.
The decrease in occupancy and increase in tenant concessions are a result
of the increasingly competitive Reno apartment market. Reno is currently
experiencing an oversupply of housing as new construction is completed and
apartments become available. This is especially true in the northwest and
southeast section of the area. Meadowwood is located in the southeast
section and is working to maintain its market share, although it has
experienced a decrease in occupancy and increased turnover of renters.
The increase in net loss after depreciation and mortgage interest expense
is primarily due to the decrease in revenues and an increase of $156,000
in repairs and maintenance expense due to, among other things, increased
maintenance costs associated with the higher turnover of tenants at the
property. The decreases in net income were partially offset by a decrease
in total financing expenses of $341,000. Interest expense decreased
$93,000 from the prior year resulting from the refinancing of the mortgage
note encumbering the property which decreased the interest rate to 7.55%
from 9.5%. Unamortized financing fees of $135,000 associated with the old
loan were written off in 1996, and that, coupled with reduced amortization
expense of the decreased costs of the new loan, decreased the amortization
of financing costs $248,000.
Holiday Park Apartments (Holiday, Florida)
-----------------------
Total revenues increased $68,000 to $1,165,000 in 1997 from $1,097,000 in
1996. Net loss after depreciation and mortgage interest expense decreased
$45,000 to $56,000 in 1997 from $101,000 in 1996.
The increase in total revenues was primarily due to the continued strength
of the Tampa Bay area apartment market, as evidenced by increases in
rental rates charged at the property which increased revenues $30,000,
while an increase in average occupancy at the property increased revenues
$37,000. The decrease in net loss was primarily due to the increased
revenues, partially offset by increased payroll expenses of $12,000 and
repairs and maintenance expense of $14,000. Repairs and maintenance
expense increased in connection with a higher rate of turnover at the
property. The increase in payroll and related costs was the result of the
hiring of two maintenance staff at the property. For a portion of 1996,
the property was not fully staffed and the hiring of these two new
employees during 1997 fully staffed the property.
17
Plantation Shopping Center (Plantation, Florida)
--------------------------
Plantation Shopping Center was sold on December 8, 1997 for $11,000,000.
Proceeds from the sale were used to retire the mortgage note secured by
the property and interest accumulated to the date of sale, together
totaling $5,358,000. The balance of the proceeds were used to acquire the
former co-venture's 40% interest in Riverbend Apartments. (Refer also to
the Liquidity and Capital Resources Section and Footnote 4 of the
Financial Statements.)
Total revenues increased $274,000 to $1,699,000 in 1997 from $1,425,000 in
1996. Net income after depreciation and mortgage interest expense
increased $169,000, to net income before gain on sale of investment in
real estate of $1,000 in 1997 as compared with a net loss of $168,000 in
1996.
The increase in total revenues was primarily due to increases in rental
rates charged at the property which increased revenues $109,000, increases
in escalation income which increased revenues $133,000, and increases in
miscellaneous income which increased revenues $29,000. The increase in
net income was primarily due to the increase in revenues and decreases in
various expenses. Mortgage interest expense decreased $108,000 as a
result of the refinancing of the mortgage note secured by the property at
a substantially reduced balance and lower interest rate during 1996.
There was a decrease in depreciation expense of $81,000, since the
property was classified as "real estate held for sale" as of September 30,
1997. In accordance with generally accepted accounting principles, no
depreciation was charged to expense after this time. Roofing repairs were
substantially completed in 1996, resulting in a decrease in repairs and
maintenance costs of $24,000 in 1997 versus the prior year. A decrease of
$19,000 in real estate tax expense is directly attributable to the
shortened period that the property was owned by the Registrant in 1997.
These decreases in expenses were partially offset by an increase of
$11,000 in professional fees resulting from additional tenant related
matters as the occupancy of the property increased over the prior year.
Also included in the activity for the reporting period is a write-off of
approximately $329,000 of uncollectible accounts, originally recorded
pursuant to the straight-lining of rents in accordance with FAS 13, which
partially offset the increased revenues and decreases in other expenses of
the property.
18
Cherry Hill Office Center (Cherry Hill, New Jersey)
-------------------------
Total revenues decreased $2,000 to $1,504,000 in 1997 from $1,506,000 in
1996. Net income after depreciation and mortgage interest expense
increased $204,000 to $232,000 in 1997 from $28,000 in 1996.
Total revenues remained virtually unchanged as increases in escalation
income of $55,000, other income of $3,000, and rental revenues of $41,000
resulting from increased average occupancy, were offset by decreases in
base rent charged to tenants which decreased revenue $102,000. The
increase in net income was primarily due to decreased property operating
costs, including decreased utility costs of $76,000 due to the mild winter
of 1997 as compared to the excessively harsh winter of 1996. Other
decreases in expenses included a decrease in repairs and maintenance costs
of $44,000 primarily due to reduced snow removal costs in 1997. The
property experienced some turnover of personnel during the year, which
enabled the Registrant to hire new employees at lower salaries and realize
a decrease in payroll costs of $37,000. Depreciation expense decreased
$24,000 since the property was classified as "real estate held for sale"
as of September 30, 1997. In accordance with generally accepted
accounting principles, no depreciation was charged to expense after this
time. Because the mortgage note secured by the property was paid in full
on June 30,1997, interest expense decreased $21,000 for the year.
Investment in Joint Venture (Riverbend Apartments; Atlanta, Georgia)
-------------------------------------------------------------------
Equity in net income of joint venture decreased $110,000 to $316,000 in
1997 from $426,000 in 1996. The decrease in net income was primarily due
to decreased rental revenues resulting from decreased demand for housing
in the Atlanta area following the conclusion of the Olympic Games in 1996.
A higher vacancy rate in the current year reduced income $113,000, and
diminished receipts of miscellaneous income reduced revenues $46,000.
These reductions in revenue were partially offset by a decrease in
utilities expense of $147,000. Depreciation expense also decreased as the
Venture classified the property as "real estate held for sale" as of
September 30, 1997. In accordance with generally accepted accounting
principles, no depreciation was charged to the accounts after this time,
reducing depreciation expense $181,000 from the prior year. These
decreased expenses were partially offset by increases in other expenses
incurred in connection with the higher rate of turnover at the property,
including increases in repairs and maintenance of $61,000 and advertising
costs of $22,000. Payroll expense increased $49,000, reflecting the costs
of compensation paid to employees through a housing program implemented
early in 1997, and an increase in real estate tax expense of $34,000 also
contributed to the decrease in net income for the year.
On December 15, 1997, the Registrant purchased the 40% interest in
Riverbend Apartments formerly owned by its co-venturer, and became sole
owner of the property. For the remainder of 1997, the Registrant recorded
$184,000 of revenues and net income of $50,000 from this investment. The
property is included in "real estate assets held for sale" on the
Registrant's 1997 consolidated balance sheet and is expected to be sold
within the year (see also the Liquidity and Capital Resources section).
19
MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
------------------------------------------------
1996 VS. 1995
-------------
Total revenues decreased $7,894,000 to $15,430,000 in 1996 from
$23,324,000 in 1995. Loss from operations increased $33,000 to $8,065,000
in 1996 from $8,032,000 in 1995. Net income increased $7,655,000 to net
income of $4,312,000 in 1996 from a net loss of $3,343,000 in 1995.
Net income for 1996 includes an extraordinary gain on dispositions of
investments in real estate through discharge of indebtedness of
$11,951,000. The net loss for 1995 is net of a gain on sale of investment
in real estate of $3,964,000.
Total revenues decreased by a third as a result of the changes in the
composition of the portfolio of properties owned by the Partnership during
1996 as compared to 1995. Total revenues at Sahara Palms Apartments
decreased to $-0- in 1996 from $2,001,000 in 1995 after the property was
sold at the end of December, 1995. Total revenues at International
Jewelry Center and 1010 Market Street Office building decreased $3,929,000
and $2,156,000, respectively, due to the shortened holding periods of the
properties in 1996 as compared to the full year of 1995. These decreases
in total revenues were partially offset by increases in total revenue at
other properties owned by the Registrant, in particular, an increase in
total revenues of $191,000 at Meadowwood Apartments. Loss from operations
remained virtually unchanged from the prior year as reductions in expenses
offset the loss of income from the properties disposed. The largest cost
reduction was realized through decreases in interest expense totalling
$4,246,000, most notably at International Jewelry Center which had a
decrease of $2,469,000 in interest expense. Interest expense decreased
$838,000 and $382,000 at Sahara Palms and 1010 Market Street,
respectively, due to the dispositions of these properties, and $510,000
for Plantation Shopping Center due to the refinancing of the mortgage note
in 1996. Also due to the dispositions of the properties, real estate
operating expenses decreased $1,668,000, $583,000 and $782,000;
depreciation expense decreased $1,040,000, $351,000, and $397,000; and
real estate tax expense decreased $607,000, $233,000 and $104,000 at
International Jewelry Center, 1010 Market Street, and Sahara Palms
Apartments, respectively. Partially offsetting these decreases in expense
were write-offs to bad debt expense of $1,931,000 and $600,000 for
International Jewelry Center and 1010 Market Street Office building,
respectively.
20
Meadowwood Apartments (Reno, Nevada)
---------------------
Total revenues increased $191,000 to $4,673,000 in 1996 from $4,482,000 in
1995. Net loss after depreciation and mortgage interest expense increased
$1,000 to $41,000 in 1996 from $40,000 in 1995.
The increase in total revenues was primarily due to the strong apartment
market, evidenced by increases in rental rates implemented at the property
which increased revenues $269,000, and increases in miscellaneous income
which increased revenues $28,000. However, the rental increases were
partially offset by decreases in occupancy in the early part of the year
which decreased revenues $106,000. Net loss after depreciation and
amortization remained approximately unchanged from 1995 since the
increased revenues were offset by increased expenses, primarily the
acceleration of the amortization of $135,000 of costs associated with the
loan which was replaced, (see also the Liquidity and Capital Resources
Section). Other increases in operating expenses in 1996 included an
increase in repair and maintenance costs of $79,000. The increases in
costs were partially offset by decreases in other expenses, including a
decrease in depreciation expense of $21,000.
Holiday Park Apartments (Holiday, Florida)
-----------------------
Total revenues increased $26,000 to $1,097,000 in 1996 from $1,071,000 in
1995. Net loss after depreciation and mortgage interest expense decreased
$19,000 to $101,000 in 1996 from $120,000 in 1995.
The increase in total revenues was primarily due to the strength of the
Tampa Bay area apartment market, as evidenced by increases in rental rates
charged at the property which increased revenues $18,000, while occupancy
at the property increased moderately increasing revenues $4,000. The
decrease in net loss was primarily due to the increased revenues, and
decreased mortgage interest expense of $3,000, partially offset by
increased depreciation expense of $10,000.
Plantation Shopping Center (Plantation, Florida)
--------------------------
Total revenues decreased $96,000 to $1,425,000 in 1996 from $1,521,000 in
1995. Net loss after depreciation and mortgage interest expense decreased
$267,000 to $168,000 in 1996 from $435,000 in 1995.
The decrease in total revenues was primarily due to decreases in rental
rates charged at the property which decreased income $76,000, decreases in
average occupancy which decreased income $10,000, and decreases in
escalation income which decreased income $27,000, partially offset by
increased percentage rents of $20,000. The decrease in net loss was
primarily due to decreased interest expense of $510,000 as a result of the
refinancing of the mortgage note securing the property at a substantially
reduced balance and lower interest rate. (See also the Liquidity and
Capital Resources Section.) The decreased interest expense was partially
offset by the decreased revenues and increases of $74,000 in depreciation
expense and $73,000 in real estate tax expense.
21
1010 Market Street (St. Louis, Missouri)
------------------
The office building at 1010 Market Street was sold in a foreclosure sale
on August 28, 1996 effectively extinguishing the mortgage note
outstanding, which resulted in a net gain of approximately $4,415,000.
(Refer also to the Liquidity and Capital Resources Section and Footnote 4
of the Financial Statements.)
Total revenues decreased $2,156,000 to $3,816,000 in 1996 from $5,972,000
in 1995. Net loss before gain on disposition and after depreciation and
mortgage interest expense increased $1,169,000 to $1,687,000 in 1996 from
$518,000 in 1995.
Due to the disposition of the property by the Registrant, the reporting
period for 1010 Market Street office building ended on August 28, 1996.
The changes in revenues and net loss are substantially due to the
shortened reporting periods. Also included in the activity for the
reporting period is a write-off to bad debt expense of approximately
$600,000 of uncollectible accounts receivable, originally recorded
pursuant to the straight-lining of rents in accordance with FAS 13, which
increased the net loss reported for the year.
Cherry Hill Office Center (Cherry Hill, New Jersey)
-------------------------
Total revenues increased $123,000 to $1,506,000 in 1996 from $1,383,000 in
1995. Net income after depreciation and mortgage interest expense
decreased $95,000 to $28,000 in 1996 from $123,000 in 1995.
The increase in total revenue was primarily due to increases in base rent
charged to tenants which increased income $68,000, and increased average
occupancy which increased income $38,000, and an increase in escalation
income of $16,000. The decrease in net income was primarily due to
increased property operating costs, including increased utility costs of
$125,000 due both to the excessively harsh winter of 1996, and a general
rate increase imposed by the utility company in 1996. Other increases in
expenses included an increase in repairs and maintenance costs of $54,000,
and increased depreciation and amortization expense of $39,000.
22
International Jewelry Center (Los Angeles, California)
----------------------------
Through negotiations with the former lender, the Registrant transferred
title to the International Jewelry Center on May 22, 1996, in full
satisfaction of the mortgage note outstanding, which resulted in a net
gain on disposition of approximately $7,536,000. (Please refer also to
the Liquidity and Capital Resources Section and Footnote 4 of the
Financial Statements.)
Total revenues decreased $3,930,000 to $2,849,000 in 1996 from $6,779,000
in 1995. Net loss before gain on disposition and after depreciation and
mortgage interest expense increased $100,000 to $3,487,000 in 1996 from
$3,387,000 in 1995.
Due to the disposition of the property by the Registrant, the reporting
period for the International Jewelry Center ended on May 22, 1996. The
changes in revenues and net loss are substantially due to the shortened
reporting period. Also included in the reporting period is a write-off to
bad debt expense of approximately $1,931,000 of uncollectible accounts
receivable, originally recorded pursuant to the straight-lining of rents
in accordance with FAS 13, which increased the net loss for the year.
Investment in Joint Venture
---------------------------
Equity in net income of joint venture decreased $299,000 to $426,000 in
1996 from $725,000 in 1995. The decrease in net income was primarily due
to a decrease in average occupancy of 9% during the latter half of the
year ended December 31, 1996 to approximately 84% from approximately 93%
during the year ended December 31, 1995. This lower occupancy,
attributable to decreased demand for housing in the Atlanta area due to
the conclusion of the Olympic Games, reduced income $167,000 as compared
to the prior year. In addition, net income was lower due to increases in
operating expenses, primarily increases in utilities expense of $156,000,
professional fees of $64,000, and real estate tax expense of $54,000.
23
ITEM 7.(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
NONE.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Financial Statements required by this item, together with the Report
of Independent Public Accountants, thereon, are contained herein on pages
29 through 41 of this annual report on Form 10-K. Supplementary financial
information required by this item is contained herein on pages 42 through
45 of this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
NONE.
24
PART III
--------
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Registrant has no executive officers or directors. All of its
business affairs are handled by its General Partner, SB Partners Real
Estate Corporation ("General Partner").
The directors and executive officers of the General Partner are elected by
Sentinel Holdings Corporation ("SHC") as its sole shareholder to serve
until their successors are duly elected and qualified. The limited
partners of the Registrant are not entitled to vote in their election.
The directors and executive officers of the General Partner who are active
in the Registrant's operations are:
Name Age Position
John H. Streicker 55 President & Director
Michael J. Weinberger 62 Director
Millie C. Cassidy 52 Director
David Weiner 62 Director
Christine Kurtz 43 Director
Elizabeth B. Longo 46 Treasurer
Noel Belli 44 Senior Vice President and
Assistant Secretary
Mr. Streicker joined the General Partner in May, 1976. He has been
President since April, 1984. He is President of SHC and its parent
company, J.H. Streicker & Co., Inc.
Mr. Weinberger, a Certified Property Manager, joined the General Partner
in February, 1973. He is the residential portfolio manager for the
Western region.
Ms. Cassidy joined the General Partner in August, 1982. She has been a
Director of the General Partner since March, 1988.
Mr. Weiner joined the General Partner in April, 1984. He is a portfolio
manager and manager of investor relations. He has been a Director of the
General Partner since March, 1988.
Ms. Kurtz joined the General Partner in 1980. Ms. Kurtz is a Director and
portfolio manager responsible for commercial property transactions and
management.
Ms. Longo joined the General Partner in 1988 and serves as its chief
financial officer. She is a certified public accountant with over twenty-
three years of real estate related financial experience.
Mr. Belli joined the General Partner in 1985. He is a managing director
and the portfolio manager responsible for residential property
transactions and management for the Eastern region.
25
ITEM 11.EXECUTIVE COMPENSATION
----------------------
The Registrant has no executive officers or directors.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN
-----------------------------
BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------
(a) At December 31, 1997, an institutional investor of record owned 7.13%
of the outstanding Units of Limited Partnership Interests. On January
13, 1993, a group of unitholders of record, including the
institutional investor referred to above, entered into a collective
agreement with respect to their ownership interest in the Registrant.
The aggregate number of Units beneficially owned by the group is 676
Units, representing 8.7% of the total number of outstanding Units of
Limited Partnership Interest on that date. Each unitholder has
disclaimed beneficial ownership of all Units owned by the other
unitholders in this group. The foregoing information is based upon a
13-D filing made by the respective unitholders.
(b) As of December 31, 1997, none of the Directors of the General Partner
owned any outstanding Units of Limited Partnership Interest. However,
an Assistant Secretary of the General Partner owned four Units of
Limited Partnership Interest. No officers or Directors of SHC owned
any outstanding Units of Limited Partnership Interest. SRE Clearing
Services, Inc. (formerly known as SRE Investor Services, Inc.), an
affiliate of the General Partner, owned 453.5 Units of Limited
Partnership Interest representing 5.8% of the outstanding number of
Units on December 31, 1997. In accordance with SEC regulations, SRE
Clearing Services filed Form 13-D on July 14, 1997, after the total
number of units held surpassed 5% of the outstanding number of units.
(c) During the year ended December 31, 1997, there have been no changes in
control of the Registrant or the General Partner.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The General Partner, among other things, furnishes services and advice to
the Registrant and is paid a variable annual fee for such services based
on calculations prescribed in the Registrant's Partnership Agreement. For
these services, the General Partner receives a management fee equal to 2%
of the average amount of capital invested in real estate plus cumulative
mortgage amortization payments and 0.5% of capital not invested in real
estate, as defined in the partnership agreement. The management fee
amounted to $1,196,611, $1,634,397, and $1,929,127, for the years ended
December 31, 1997, 1996 and 1995, respectively. In addition, the General
Partner is entitled to 25% of cash distributions in excess of the annual
distribution preferences, as defined in the partnership agreement. No
such amounts were due for the years ended December 31, 1997, 1996, and
1995.
26
Certain affiliates of the General Partner oversee the management and
operations of various real estate properties, including those owned by the
Registrant. Services performed by these affiliates applicable to the
Registrant's properties are billed at actual or allocated cost, or
percentage of revenues. The costs of such services are believed to be
competitive with charges for similar services provided by unrelated
management companies. Fees charged by these affiliates totaled $492,992,
$1,196,395, and $1,839,832, in 1997, 1996, and 1995, respectively.
In connection with the mortgage financing of certain properties, the
respective lenders required the Registrant to place the assets and
liabilities of these properties into single asset limited partnerships
which hold, or held, title to these properties. A trust company
affiliated with the General Partner holds, or held, the general partner
interest in each single asset limited partnership as trustee for the
Registrant. For its services, the affiliate is paid an annual fee, which
aggregated $44,327, $54,227, and $129,580, in 1997, 1996, and 1995,
respectively, and is based upon the trust company's standard rate
schedule.
Reference is made to Items 10 and 11, and Notes 2 and 8 in the
consolidated financial statements.
PART IV
-------
ITEM 14.EXHIBITS, FINANCIAL STATEMENT
-----------------------------
SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------
(a) (1) Financial statements - The Registrant's 1997 Annual Audited
Consolidated Financial Statements are included in this annual
report on Form 10-K.
(2) Financial statement schedules - See Index to Consolidated
Financial Statement Schedules on page 28. All other financial
statement schedules are inapplicable or the required subject
matter is contained in the consolidated financial statements or
notes thereto.
(b) On December 23, 1997, the Registrant filed Form 8-K to report the sale
of Plantation Shopping Center and the acquisition of the 40% interest
of its former co-venturer in Riverbend Apartments. Pro-forma
financial statements were included in the filing.
(c) Financial data schedule
(d) Exhibits Incorporated by Reference -
Incorporated by
Description Reference to
----------- ---------------
Agreement of Exhibit A to Registration Statement
Limited Partnership on Form S-11 as filed with the
Securities and Exchange Commission
on May 16, 1985.
27
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SB PARTNERS
-----------
By: SB PARTNERS REAL ESTATE CORPORATION
-----------------------------------
GENERAL PARTNER
March 31, 1998 /s/ John H. Streicker
----------------------------------
By: John H. Streicker
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Position Date
--------- -------- ----
/s/ John H. Streicker Chief Executive Officer
--------------------- and Director March 31, 1998
John H. Streicker
/s/ Elizabeth B. Longo Chief Financial Officer March 31, 1998
----------------------
Elizabeth B. Longo
/s/ George N. Tietjen III Vice President March 31, 1998
-------------------------
George N. Tietjen III
28
SB PARTNERS
ITEMS 8 and 14 (a) (1) and (2)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
----------------------------------------------
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
-----------------------------------------
Report of Independent Public Accountants . . . . . . . . . . . 29
Consolidated Balance Sheets as of December 31, 1997 and 1996 . 30
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . 31
Consolidated Statements of Changes in Partners' Capital for the
years ended December 31, 1997, 1996 and 1995 . . . . . . 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . 33
Notes to Consolidated Financial Statements . . . . . . . . . . 34
Supplemental Financial Statement Schedule:
Schedule III -- Real Estate and Accumulated
Depreciation -- December 31, 1997 . . . . . . . . . . . 42
29
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of SB Partners:
We have audited the accompanying consolidated balance sheets of SB
Partners (a New York limited partnership) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in partners' capital and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements and the
schedule referred to below are the responsibility of the general partner.
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 the
general partner, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SB Partners
and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the
index to financial statements is presented for purposes of complying with
the Securities and Exchange Commission rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ Arthur Andersen LLP
New York, New York
February 11, 1998
30
SB PARTNERS
CONSOLIDATED BALANCE SHEETS
As of December 31,
1997 1996
----------------------------
ASSETS:
Investments -
Real Estate, at cost
Land $ 2,924,653 $ 5,113,690
Buildings, furnishings and improvements 28,867,658 45,521,700
Less - accumulated depreciation (13,290,104) (18,278,229)
----------- -----------
18,502,207 32,357,161
Real estate assets held for sale 24,925,795 0
Investment in joint venture 0 10,742,193
----------- -----------
43,428,002 43,099,354
Other Assets -
Cash and cash equivalents 549,760 2,019,321
Other 1,689,366 2,656,255
----------- -----------
Total assets $45,667,128 $47,774,930
=========== ===========
LIABILITIES:
Mortgage notes and other loans payable $28,741,975 $30,752,378
Accounts payable and accrued expenses 628,938 1,113,122
Tenants' security deposits 309,836 322,821
----------- -----------
Total liabilities 29,680,749 32,188,321
----------- -----------
PARTNERS' CAPITAL:
Units of partnership interest without par value;
Limited partners - 7,753 units 16,002,752 15,603,034
General partner - 1 unit (16,373) (16,425)
----------- -----------
Total partners' capital 15,986,379 15,586,609
----------- -----------
Total liabilities and partners' capital $45,667,128 $47,774,930
=========== ===========
The accompanying notes are an integral part of these consolidated balance sheets.
31
SB PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1997 1996 1995
------------------------------------------
REVENUES
Rental income $ 8,647,671 $14,940,374 $22,618,843
Interest on short-term investments 110,680 50,615 73,984
Other 307,301 439,063 631,381
----------- ----------- -----------
Total revenues 9,065,652 15,430,052 23,324,208
----------- ----------- -----------
EXPENSES
Real estate operating expenses 3,826,057 6,993,394 10,307,816
Interest on mortgage notes and other loans payable 2,213,440 7,215,718 11,462,066
Depreciation and amortization 1,723,683 3,465,840 5,176,543
Management fees 1,196,611 1,634,397 1,929,127
Real estate taxes 815,086 1,086,477 1,936,253
Write-off of uncollectible accounts 369,635 2,531,517 0
Other 241,951 567,553 544,592
----------- ----------- -----------
Total expenses 10,386,463 23,494,896 31,356,397
----------- ----------- -----------
Loss from operations (1,320,811) (8,064,844) (8,032,189)
Equity in net income of joint venture 316,320 425,725 725,118
Gain on sale of investments in real estate 1,404,261 0 3,963,791
----------- ----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 399,770 (7,639,119) (3,343,280)
Gain on dispositions of investments in real estate
through discharge of indebtedness 0 11,951,098 0
----------- ----------- -----------
NET INCOME (LOSS) 399,770 4,311,979 (3,343,280)
Income (loss) allocated to general partner 52 556 (431)
----------- ----------- -----------
Income (loss) allocated to limited partners $ 399,718 $ 4,311,423 ($ 3,342,849)
=========== =========== ===========
NET INCOME (LOSS) PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Net income (loss) before extraordinary gain $ 52 ($ 985) ($ 431)
=========== =========== ===========
Extraordinary gain $ 0 $ 1,541 $ 0
=========== =========== ===========
Net income (loss) $ 52 $ 556 ($ 431)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF UNITS OF LIMITED
PARTNERSHIP INTEREST OUTSTANDING 7,753 7,753 7,753
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
32
SB PARTNERS
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Limited Partners:
Units of
Partnership
Interest Cumulative Accumulated
-------------------- Cash Earnings
Number Amount Distributions (Losses) Total
------------------------------------------------------------------------
Balance, December 31, 1994 7,753 $119,968,973 ($97,728,323) ($7,606,190) $14,634,460
Net loss for the year 0 0 0 (3,342,849) (3,342,849)
----- ------------ ------------ ----------- -----------
Balance, December 31, 1995 7,753 119,968,973 (97,728,323) (10,949,039) 11,291,611
Net income for the year 0 0 0 4,311,423 4,311,423
----- ------------ ------------ ----------- -----------
Balance, December 31, 1996 7,753 119,968,973 (97,728,323) (6,637,616) 15,603,034
Net income for the year 0 0 0 399,718 399,718
----- ------------ ------------ ----------- -----------
Balance, December 31, 1997 7,753 $119,968,973 ($97,728,323) ($6,237,898) $16,002,752
===== ============ ============ =========== ===========
General Partner:
Units of
Partnership
Interest Cumulative Accumulated
-------------------- Cash Earnings
Number Amount Distributions (Losses) Total
-----------------------------------------------------------------------
Balance, December 31, 1994 1 $10,000 ($24,559) ($1,991) ($16,550)
Net loss for the year 0 0 0 (431) (431)
--- ------- -------- ------- --------
Balance, December 31, 1995 1 10,000 (24,559) (2,422) (16,981)
Net income for the year 0 0 0 556 556
--- ------- -------- ------- --------
Balance, December 31, 1996 1 10,000 (24,559) (1,866) (16,425)
Net income for the year 0 0 0 52 52
--- ------- -------- ------- --------
Balance, December 31, 1997 1 $10,000 ($24,559) ($1,814) ($16,373)
=== ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated statements.
33
SB PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1997 1996 1995
-------------------------------------------
Cash Flows From Operating Activities:
Net Income (Loss) $ 399,770 $ 4,311,979 ($3,343,280)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Extraordinary gain on dispositions of investments
in real estate through discharge of indebtedness 0 (11,951,098) 0
Gain on sale of investments in real estate (1,404,261) 0 (3,963,791)
Equity in net income of joint venture (316,320) (425,725) (725,118)
Write-off of uncollectible accounts 369,635 2,531,517 0
Depreciation and amortization 1,723,683 3,465,840 5,176,543
Amortization of discount on mortgage notes payable 0 0 310,904
Distributions of earnings received from joint venture 100,000 425,725 725,118
Decrease in other assets 365,384 400,875 187,050
Increase (decrease) in other liabilities (518,880) 985,378 3,886,240
----------- ----------- -----------
Net cash provided by (used in) operating activities 719,011 (255,509) 2,253,666
----------- ----------- -----------
Cash Flows From Investing Activities:
Net proceeds from sales/dispositions of investments in real estate 10,520,801 92,327 12,000,190
Cash paid on acquisition of joint venture interest (9,800,000) 0 0
Capital additions to real estate (898,970) (2,077,599) (3,024,145)
Distributions received from joint venture
in excess of current year's equity in net income 0 148,132 157,631
----------- ----------- ----------
Net cash provided by (used in) investing activities (178,169) (1,837,140) 9,133,676
----------- ----------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgage notes and other loans payable 4,000,000 26,850,000 0
Proceeds from short-term loan 0 1,038,370 0
Retirement of mortgage notes and other loans payable (5,656,378) (23,037,409) (8,431,000)
Principal payments on mortgage notes and other loans payable (354,025) (3,005,589) (726,359)
Repayment of short-term loan 0 (1,038,370) 0
----------- ----------- ----------
Net cash provided by (used in) financing activities (2,010,403) 807,002 (9,157,359)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents (1,469,561) (1,285,647) 2,229,983
Cash and cash equivalents at beginning of year 2,019,321 3,304,968 1,074,985
----------- ----------- ----------
Cash and cash equivalents at end of year $ 549,760 $ 2,019,321 $3,304,968
=========== =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 2,241,162 $ 5,434,319 $8,043,301
=========== =========== ==========
Supplemental disclosures of non-cash investing and financing activities:
The dispositions of International Jewelry Center and 1010 Market Street in 1996, to the extent of the release
from liability from the underlying mortgage notes which had been secured by the properties with outstanding balances
of $33,899,000 and $39,564,000, respectively, represent non-cash investing and financing activities and have been
excluded from the statements of cash flows.
See also Note 4 to Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
34
SB PARTNERS
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
SB Partners, a New York limited partnership, and its subsidiaries,
(collectively, the "Partnership") have been engaged since April 1971
in acquiring, operating and holding for investment a varying
portfolio of real properties. SB Partners Real Estate Corporation
(the "General Partner") serves as the general partner of the
Partnership. The significant accounting and financial reporting
policies of the Partnership are as follows:
(a) The accompanying consolidated financial statements include
the accounts of SB Partners and its subsidiaries. All
significant intercompany accounts and transactions have
been eliminated. The consolidated financial statements are
prepared using the accrual basis of accounting under
generally accepted accounting principles. Revenues are
recognized as earned and expenses are recognized as
incurred. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain prior
year amounts have been reclassified to make them comparable
to the current year presentation.
(b) Each partner is individually responsible for reporting his
share of the Partnership's taxable income or loss.
Accordingly, no provision has been made in the accompanying
financial statements for Federal, state or local income
taxes.
(c) Depreciation of buildings, furnishings and improvements is
computed using the straight-line method of depreciation,
based upon the estimated useful lives of the related
properties, as follows:
Buildings and improvements 5 to 40 years
Furnishings 5 to 7 years
Investments in real estate are carried at historical cost
and reviewed periodically for impairment. Expenditures for
maintenance and repairs are expensed as incurred.
Expenditures for improvements, renewals and betterments,
which increase the useful life of the real estate, are
capitalized. Upon retirement or sale of property, the
related cost and accumulated depreciation are removed from
the accounts. Amortization of deferred financing and
refinancing costs is computed by amortizing the cost over
the term of the related mortgage notes. Amortization of
leasing commissions and tenant improvements is computed by
amortizing the cost over the term of the related lease.
35
(d) Gains on sales of investments in real estate are recognized
in accordance with generally accepted accounting principles
applicable to sales of real estate, which require minimum
levels of initial and continuing investment by the
purchaser, and certain other tests be met, prior to the
full recognition of profit at the time of the sale. When
the tests are not met, gains on sales are recognized on
either the installment or cost recovery methods.
(e) Net income (loss) per unit of partnership interest has been
computed based on the weighted average number of units of
partnership interest outstanding during each year. There
were no potentially dilutive securities outstanding during
each year.
(f) For financial reporting purposes, the Partnership considers
all highly liquid, short-term investments with maturities
of three months or less to be cash equivalents.
(g) The Partnership accounted for its investment in a joint
venture using the equity method. Pursuant to the special
allocations of cash flow contained in the joint venture
agreement, it recognized income or loss to the extent of
its allocable share of the change in the net assets of the
joint venture, after taking into account preference
distributions, as defined, for the period.
(h) In connection with the mortgage financing on certain of its
properties, the Partnership placed the assets and
liabilities of these properties into single asset limited
partnerships and limited liability companies which hold, or
held, title to the properties. In these limited
partnerships, the Partnership holds a 99% limited partner
interest, and an affiliate of the General Partner holds a
1% general partner interest as trustee for the Partnership.
The Partnership has the power to remove the trustee, thus
retaining full control of the subsidiaries. The financial
statements of these subsidiaries are consolidated with
those of the Partnership.
(i) Real estate properties are regularly evaluated on a
property by property basis to determine if it is
appropriate to write down carrying values to recognize an
impairment of value. Impairment is determined by
calculating the sum of the estimated undiscounted future
cash flows including the projected undiscounted future net
proceeds from the sale of the property. In the event such
sum is less than the net carrying value of the property,
the property will be written down to estimated fair market
value. Real estate investments which are under a binding
contract of sale or are otherwise expected to be disposed
of within one year of the balance sheet date are reflected
on the accompanying consolidated balance sheets as real
estate assets held for sale. Real estate assets held for
sale are carried at the lower of depreciated historical
cost or fair value less cost to dispose. Additionally,
upon classification as a real estate asset held for sale,
the property is no longer depreciated.
36
(2) INVESTMENT MANAGEMENT AGREEMENT
The Partnership has entered into a management agreement with the
General Partner. Under the terms of this agreement, the General
Partner is responsible for the acquisition, management and
disposition of all investments, as well as performance of the day-
to-day administrative operations and provision of office space for
the Partnership.
For these services, the General Partner receives a management fee
equal to 2% of the average amount of capital invested in real
estate plus cumulative mortgage amortization payments and 0.5% of
capital not invested in real estate, as defined in the partnership
agreement. The management fee amounted to $1,196,611, $1,634,397,
and $1,929,127, for the years ended December 31, 1997, 1996 and
1995, respectively. In addition, the General Partner is entitled
to 25% of cash distributions in excess of the annual distribution
preferences, as defined in the partnership agreement. No such
amounts were due for the years ended December 31, 1997, 1996, and
1995.
(3) INVESTMENTS IN REAL ESTATE AND REAL ESTATE ASSETS HELD FOR SALE
As of December 31, 1997, the Partnership owned an office center in
Cherry Hill, New Jersey; apartment projects in Holiday, Florida,
Reno, Nevada, and Atlanta, Georgia; and 13.9 acres of land in
Holiday, Florida. The following is the cost basis and accumulated
depreciation of the real estate investments owned by the
Partnership at December 31, 1997 and 1996, and the net carrying
value of the real estate assets held for sale at December 31,
1997:
Held for Sale Real Estate at Cost
No.of Year of ------------- -------------------
Type Prop. Acquisition Description 1997 1997 1996
---- ----- ----------- ----------- ---- ---- ----
Residential properties 3 1983-97 1,542 Apt. Units $20,832,762 $31,747,924 $31,741,606
Shopping center 1 1981 238,410 Sq. Ft. 0 0 14,294,724
Office property 1 1984-93 138,333 Sq. Ft. 4,093,033 0 4,554,673
Undeveloped land 1 1978 13.9 Acres 0 44,387 44,387
----------- ----------- -----------
24,925,795 31,792,311 50,635,390
Less: Accumulated depreciation 0 13,290,104 18,278,229
----------- ----------- -----------
$24,925,795 $18,502,207 $32,357,161
=========== =========== ===========
Note: Information is provided for all properties owned as of the end of the periods presented. The carrying amount of real
estate assets held for sale is the lower of depreciated cost or fair market value and is included above at the net carrying
amount.
37
(4) REAL ESTATE TRANSACTIONS
In January, 1997, the Partnership sold its 10% interest in an
apartment project in Orlando, Florida. The Partnership had been
using the cost method to account for this investment. In
connection with this sale, the Partnership recognized a loss on
sale of real estate investment of $65,000 for the year ended
December 31, 1997. In December 1997, the Partnership sold
Plantation Shopping Center for $11,000,000 in an all cash
transaction. In connection with the sale, the underlying mortgage
note payable of $5,350,000 was retired and the Partnership
recognized a gain on sale of real estate investment of $1,469,000
for the year ended December 31, 1997.
The Partnership ceased paying scheduled debt service on the
mortgage note secured by International Jewelry Center, located in
Los Angeles, California, in May, 1993, and since then had been
paying debt service based on available cash flow from the
building. The loan was declared in default by the lender in
November 1993, and the lender filed a Notice of Default and
Election to Sell on March 3, 1995 and a Notice of Trustee's Sale
on April 24, 1996. Negotiations with the lender were concluded on
May 22, 1996, when the title to the property was transferred to a
designee of the lender. Consideration for this conveyance was
$238,000, subject to the first leasehold note and deed of trust,
the balance of which was $33,899,000, and the assumption by the
designee of the ground lease. The Partnership recognized an
extraordinary gain of $7,536,000 associated with the disposition.
The Partnership stopped making regularly scheduled payments on the
mortgage note secured by 1010 Market Street office building in
May, 1996. The lender filed a Notice of Default on May 9, a
notice of Acceleration of Debt on May 22, and a Notice of
Foreclosure Sale on August 1, 1996. The property was sold on
August 28, 1996 in a foreclosure sale. The balance of the
mortgage note at the date of foreclosure was $39,564,000, which
resulted in a net gain through discharge of indebtedness of
$4,415,000.
In December 1995, the Partnership sold Sahara Palms Apartments for
$12,000,000 in an all cash transaction. The underlying mortgage
note payable of $8,431,000 was retired and the Partnership
recognized a net gain on sale of real estate investments of
$3,964,000 for the year ended December 31, 1995.
38
(5) INVESTMENT IN JOINT VENTURE
During 1992, the Partnership and an institutional investor (the
"Investor") entered into a joint venture agreement where the
Partnership contributed Riverbend Apartments for an agreed equity
value of $14,250,000 and the Investor contributed $9,500,000 in
cash. The Partnership and the Investor held interests in the
venture of 60% and 40%, respectively, and the Investor was
entitled to a guaranteed return of 9.5% of its average investment,
as defined in the joint venture agreement. For financial
reporting purposes, the Partnership recorded its investment in the
joint venture at its net carrying amount of the property
contributed, and no gain or loss was recognized. All significant
matters affecting the joint venture required the unanimous consent
of the venturers.
The following are the condensed financial statements (000's
omitted) of the joint venture as of and for the period from
January 1, 1997 through December 14, 1997 and the years ended
December 31, 1996 and 1995 (See Note 1):
BALANCE SHEETS
1997 1996 1995
---- ---- ----
Investment in real estate, net $ -- $19,414 $19,935
Current assets -- 127 138
Current liabilities -- (313) (461)
------- ------- -------
Venturers' capital $ -- $19,228 $19,612
======= ======= =======
STATEMENTS OF OPERATIONS
Rent and other income $ 4,253 $ 4,580 $ 4,395
Real estate operating expenses (3,388) (3,680) (3,353)
------- ------- -------
Net income $ 865 $ 900 $ 1,042
======= ======= =======
On December 15, 1997, the Partnership purchased the 40% interest of its
former co-venturer for $9,800,000 through a wholly owned limited liability
company, and effectively became the sole owner of the property. The
assets and liabilities associated with ownership of the property are
included in the consolidated balances of the Partnership at December 31,
1997. The Partnership expects to consummate the sale of the property
within the next year, and accordingly, has included this investment in
"real estate assets held for sale" on the accompanying consolidated
balance sheet.
39
(6) MORTGAGE NOTES AND OTHER LOANS PAYABLE
Mortgage notes and other loans payable consist of the following first
liens:
Net Carrying Amount
Annual December 31,
Original Interest Maturity Installment Amount Due ------------
Property Principal(c) Rate Date Payments(d) at Maturity 1997 1996
------------------------------------------------------------------------------------------------------------------------------
Holiday Park $ 3,700,000 9.00% March 1999 $ 357,252 $ 3,494,467 $ 3,517,983 $ 3,556,683
Meadowwood 21,500,000 7.55 January 2004 1,914,996 18,979,461 21,223,992 21,500,000
Riverbend (a) 4,000,000 Variable April 1998 Interest Only 4,000,000 4,000,000 ---
Plantation Center
Shopping Plaza (b) 5,350,000 Variable December 1997 Interest Only --- --- 5,350,000
Cherry Hill 2,900,000 9.50 September 2000 109,941 --- --- 345,695
----------- -----------
$28,741,975 $30,752,378
=========== ===========
(a) Unsecured demand note bearing interest at LIBOR plus 2.00%. The interest rate charged at December 31, 1997 was 8.00%.
(b) Property was sold and the underlying mortgage note was retired in December, 1997.
(c) The mortgages are nonrecourse to the Partnership with the exceptions of the unsecured demand note (see (a) above)
and the short-term note secured by Plantation Center (see (b) above).
(d) Annual installment payments include principal and interest.
Scheduled principal payments on mortgage notes payable are $4,365,963
for 1998; $3,824,581 for 1999; $376,205 for 2000; $405,612 for 2001;
$437,318 for 2002; and $19,332,296 thereafter.
40
(7) FEDERAL INCOME TAX INFORMATION
A reconciliation of net income (loss) for financial reporting purposes
to net income (loss) for Federal income tax reporting purposes is as
follows:
For the Years Ended December 31,
1997 1996 1995
----------- ----------- -----------
Net income (loss) for financial reporting purposes $ 399,770 $ 4,311,979 ($3,343,280)
Adjustment to net gain on sales/dispositions of investments in real estate
to reflect differences between tax and financial reporting bases
of assets and liabilities disposed 4,437,640 23,749,150 3,772,180
Adjustment for provision for loan and reserves for real estate losses - - 103,122
Difference between tax and financial statement equity in net income
or loss of joint venture (566,673) 200,293 (275,132)
Adjustment to interest expense to reflect non-deductibility of interest and
amortization of discount on mortgage notes payable recognized for
financial reporting purposes - 1,793,018 3,496,154
Difference between tax and financial statement depreciation (640,157) (2,356,788) (4,196,258)
---------- ----------- -----------
Net income (loss) for Federal income tax reporting purposes $3,630,580 $27,697,652 ($ 443,214)
========== =========== ===========
Net income (loss) per weighted average limited partnership unit
for Federal income tax reporting purposes:
Net ordinary loss per unit of Partnership interest ($ 285) ($ 1,032) ($ 1,055)
Average Capital (Sec.1231) gain per unit of
Partnership interest 753 4,605 998
---------- ----------- ------------
$ 468 $ 3,573 ($ 57)
========== =========== ============
Weighted average number of units of limited partnership
interest outstanding 7,753 7,753 7,753
=========== =========== ============
As of December 31, 1997 and 1996, the tax bases of the Partnership's
assets and liabilities amounted to $39,804,000 and $38,681,000 of
assets, and $29,681,000 and $32,188,000 of liabilities, respectively.
(8) PROPERTY MANAGEMENT SERVICES
Certain affiliates of the General Partner oversee the management and
operations of various real estate properties, including those owned by
the Partnership. Services performed by affiliates are billed at
actual or allocated cost, percentage of revenues or net equity. For
the years ended December 31, 1997, 1996 and 1995, such billings to the
Partnership amounted to $537,319, $1,250,622, and $1,969,412,
respectively, and are included in real estate operating expenses.
41
(9) COMMITMENTS AND CONTINGENCIES
The Partnership is a party to certain actions directly arising from
its normal business operations. While the ultimate outcome is not
presently determinable with certainty, the Partnership believes that
the resolution of these matters will not have a material effect on its
financial position or results of operations.
The Partnership had secured irrevocable letters of credit in the
amount of approximately $1,038,000 which primarily served as
additional collateral securing certain financing. These letters of
credit were called upon in connection with the foreclosure of the 1010
Market Street office building, and were repaid and retired in 1996.
On November 6, 1997, Hugh Spencer, a limited partner who holds two
units in the Partnership, filed a purported class action complaint, on
behalf of himself and other persons similarly situated, against the
Partnership and its general partner and other affiliates in the
Supreme Court of the State of New York, County of New York, entitled
Spencer v. SB Partners et. al., Index No. 120673/97. The complaint
alleges, inter alia, that the business of the Partnership can only be
carried on at a loss, and that the general partner breached the
partnership agreement and its fiduciary duties, and seeks a court
decree of dissolution of the Partnership pursuant to Sections 63 and
99 of the New York Partnership Law, an accounting from the general
partner, the appointment of a receiver to wind up the Partnership's
affairs and an award of costs and attorneys' fees to the plaintiff and
the putative class. The Partnership believes that it has meritorious
defenses to the action and that the final outcome will not have a
material adverse effect on its financial position or results of
operations.
(10) COMMERCIAL OPERATING LEASES
The minimum rentals received on noncancelable commercial operating
leases for the year ended December 31, 1997 was $2,752,851. Minimum
future rentals on noncancelable commercial operating leases for each
of the four succeeding fiscal years are as follows: 1998 - $1,225,017;
1999 - $969,889; 2000 - $603,143; 2001 - $434,929. There are no
minimum future rentals on noncancelable commercial operating leases
for years ending after 2001.
42
SB PARTNERS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
Column A Column B Column C Column D
Initial Cost to the Registrant Costs
-------------------------------------- Capitalized
Buildings and Subsequent to
Description Encumbrances Land Improvements Total Acquisition
C>
MULTI FAMILY RESIDENTIAL
Nevada -
Reno (Meadowwood) $21,223,992 $2,466,311 $19,057,859 $21,524,170 $5,060,187
Florida -
Holiday (Holiday Park -
including undeveloped land) 3,517,983 458,342 4,043,354 4,501,696 706,258
----------- ---------- ----------- ----------- -----------
24,741,975 2,924,653 23,101,213 26,025,866 5,766,445
----------- ---------- ----------- ----------- -----------
Real Estate Assets Held for Sale
MULTI FAMILY RESIDENTIAL
Georgia -
Atlanta (Riverbend) 4,000,000 3,764,385 17,068,377 20,832,762 0
OFFICE BUILDINGS
New Jersey -
Cherry Hill (Cherry Hill Office Park) 0 647,867 3,163,115 3,810,982 857,863
----------- ---------- ----------- ----------- -----------
4,000,000 4,412,252 20,231,492 24,643,744 857,863
----------- ---------- ----------- ----------- -----------
$28,741,975 $7,336,905 $43,332,705 $50,669,610 $6,624,308
=========== ========== =========== =========== ===========
43
SB PARTNERS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
DECEMBER 31, 1997
Column A Column E Column F
Gross amount at which Carried at End of Year
(Notes a & c)
Accumulated
Buildings and Depreciation
Description Land Improvements Total (Notes b & d)
MULTI FAMILY RESIDENTIAL
Nevada -
Reno (Meadowwood) $2,466,311 $24,118,046 $26,584,357 $11,982,227
Florida -
Holiday (Holiday Park -
including undeveloped land) 458,342 4,749,612 5,207,954 1,307,877
---------- ----------- ----------- -----------
2,924,653 28,867,658 31,792,311 13,290,104
---------- ----------- ----------- -----------
Real Estate Assets Held for Sale
MULTI FAMILY RESIDENTIAL
Georgia -
Atlanta (Riverbend) 3,764,385 17,068,377 20,832,762 0
OFFICE BUILDINGS
New Jersey -
Cherry Hill (Cherry Hill Office Park) 647,867 3,445,166 4,093,033 0
---------- ----------- ----------- -----------
4,412,252 20,513,543 24,925,795 0
---------- ----------- ----------- -----------
$7,336,905 $49,381,201 $56,718,106 $13,290,104
========== =========== =========== ===========
44
SB PARTNERS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
DECEMBER 31, 1997
Column A Column G Column H Column I
Life on which
Depreciation in
Latest Statement
Date of Date of Operations
Description Construction Acquired is Computed
MULTI FAMILY RESIDENTIAL
Nevada -
Reno (Meadowwood) 1974 - 1977 May 1983 5 to 30 years
Florida -
Holiday (Holiday Park -
including undeveloped land) 1972 - 1975 Jan 1991 7 to 27.5 years
Real Estate Assets Held for Sale
MULTI FAMILY RESIDENTIAL
Georgia -
Atlanta (Riverbend) 1965 Dec 1997 N/A
OFFICE BUILDINGS
New Jersey -
Cherry Hill (Cherry Hill Office Park) 1970 Sept 1993 40 years*
*until reclassified on September 30, 1997
45
NOTES TO SCHEDULE III:
1997 1996 1995
---- ---- ----
(a)Reconciliation of amounts shown in Column E:
Balance at beginning of year $50,635,390 $152,423,911 $161,848,427
Additions -
Acquisitions (including cost of investment in joint venture
reclassified to cost of Riverbend Apartments - see below) 20,832,762 0 0
Cost of improvements 898,970 2,077,599 3,024,145
Deductions -
Dispositions of property (15,073,204) (103,866,120) (12,448,661)
Reclassification of accumulated depreciation of
real estate asset held for sale (575,812) 0 0
------------ ------------ ------------
Balance at end of year $ 56,718,106 $ 50,635,390 $152,423,911
============ ============ ============
.
(b)Reconciliation of amounts shown in Column F:
Balance at beginning of year $ 18,278,229 $ 45,560,951 $ 45,595,714
Additions -
Depreciation expense for year 1,566,062 3,014,931 4,707,563
Deductions -
Accumulated depreciation on property disposed (5,978,375) (30,297,653) (4,742,326)
Reclassification of accumulated depreciation of
real estate asset held for sale (575,812) 0 0
------------ ------------ ------------
Balance at end of year $ 13,290,104 $ 18,278,229 $ 45,560,951
============ ============ ============
(c)Aggregate cost basis for Federal
income tax reporting purposes $ 70,024,970 $ 58,977,612 $160,374,153
============ ============ ============
(d)Accumulated depreciation for Federal
income tax reporting purposes $ 32,460,117 $ 36,899,911 $ 93,726,561
============ ============ ============
On December 15, 1997, the Registrant purchased the forty percent interest of its former co-venturer in
Riverbend Apartments, becoming the sole owner of the apartment community. The cost of the 40% interest was $9,800,000
and included the interest in the other assets of the Venture as well as the real estate, net of the outstanding
liabilities. The balance of the Registrant's investment in joint venture, $10,958,513 was reclassified to the cost of
the real estate acquired, and the entire balance was reclassified as real estate assets held for sale. (See also the
Liquidity and Capital Resources section of Management's Discussion and Analysis and Form 8-K, as amended, filed by the
Registrant in connection with the purchase.)