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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___ to ___
Commission file number: 0-14207
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 33-0016355
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1100 94402-1708
San Mateo, California (Zip Code)
(Address of principal executive offices)
Partnership's telephone number, including area code (650) 343-9300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
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]
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 ____
No market for the Limited Partnership Units exists and therefore a market value
for such Units cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE:
Prospectus dated December 29, 1986, as amended on January 5, 1987, filed
pursuant to Rule 424(b), File no. 2-90327, is incorporated by reference in Part
IV hereof.
Page 1 of 43
Part I
Item 1. Business
Rancon Realty Fund IV, a California Limited Partnership, ("the Partnership") was
organized in accordance with the provisions of the California Uniform Limited
Partnership Act for the purpose of acquiring, developing, operating and
ultimately selling real property. The Partnership was organized in 1984 and
reached final funding in July, 1987. The general partners of the Partnership are
Daniel L. Stephenson ("DLS") and Rancon Financial Corp. ("RFC"). RFC is wholly
owned by DLS. At December 31, 1997, 77,054 limited partnership units ("Units")
were outstanding. The Partnership has no employees.
In April, 1996, the Partnership formed Rancon Realty Fund IV Tri-City Limited
Partnership, a Delaware limited partnership ("RRF IV Tri-City") to satisfy
certain lender requirements for a loan obtained in 1996. This loan is secured by
three properties which have been contributed to RRF IV Tri-City by the
Partnership. The limited partner of RRF IV Tri-City is the Partnership and the
general partner is Rancon Realty Fund IV, Inc. ("RRF IV, Inc."), a corporation
wholly owned by the Partnership. Since the Partnership owns 100% of RRF IV, Inc.
and indirectly owns 100% of RRF IV Tri-City, the Partnership considers all
assets owned by RRF IV, Inc. and RRF IV Tri-City to be owned by the Partnership.
At December 31, 1997, the Partnership owns eight rental properties totaling
approximately 422,000 square feet of space in a master-planned development known
as Tri-City Corporate Centre ("Tri-City") in San Bernardino, California and a
240-unit apartment complex in Vista, California. Tri-City is zoned for mixed
commercial, office, hotel, transportation-related, and light industrial uses and
all of the parcels thereof are separately owned by the Partnership and Rancon
Realty Fund V ("Fund V"), a partnership sponsored by the general partners of the
Partnership. The Partnership also owns for development or sale approximately
26.0 acres in Tri-City, 24.8 acres in Lake Elsinore, California, 17.14 acres in
Perris, California and 3.87 acres in Temecula, California.
Competition Within the Market
Management believes that characteristics influencing the competitiveness of a
real estate project are the geographic location of the property, the
professionalism of the property manager and the maintenance and appearance of
the property, in addition to external factors such as general economic
circumstances, trends, and the existence of new, competing properties in the
vicinity. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities, such as parking, and the ability to provide rent concessions
and tenant improvements commensurate with local market conditions. Although
management believes the Partnership properties are competitive with comparable
properties as to those factors within the Partnership's control, over-building
and other external factors could adversely affect the ability of the Partnership
to attract and retain tenants. The marketability of the properties may also be
affected (either positively or negatively) by these factors as well as by
changes in general or local economic conditions, including prevailing interest
rates. Depending on market and economic conditions, the Partnership may be
required to retain ownership of its properties for periods longer than
anticipated, or may need to sell earlier than anticipated or refinance a
property, at a time or under terms and conditions that are less advantageous
than would be the case if unfavorable economic or market conditions did not
exist.
Page 2 of 43
Working Capital
The Partnership's practice is to maintain cash reserves for normal repairs,
replacements, working capital and other contingencies. The Partnership knows of
no statistical information, which allows comparison of its cash reserves to
those of its competitors.
Other Factors
Approximately 23 acres of the Tri-City Corporate Centre land owned by the
Partnership was part of a landfill operated by the City of San Bernardino ("the
City") from approximately 1950 to 1960. There are no records of which the
Partnership is aware disclosing that hazardous wastes exist at the landfill. The
Partnership's landfill monitoring program currently meets or exceeds all
regulatory requirements. The Partnership is currently working with the Santa Ana
Region of the California Regional Water Quality Control Board and the City to
determine the need and responsibility for any further testing. There is no
current requirement to ultimately clean up the site, however, no assurance can
be made that circumstances will not arise which could impact the Partnership's
responsibility related to the property.
Item 2. Properties
Tri-City Corporate Center
Between December 24, 1984 and August 19, 1985, the Partnership acquired a total
of 76.56 acres of partially developed land in Tri-City for an aggregate purchase
price of $9,917,000. During that time, Fund V acquired the remaining 76.21 acres
within Tri-City.
Tri-City is located at the northeastern quadrant of the intersection of
Interstate 10 (San Bernardino Freeway) and Waterman Avenue in the southernmost
part of the City of San Bernardino.
The Partnership has constructed and owns the following eight operating
properties in Tri-City:
Property Type Square Feet
---------------------------- ---------------------------------- -----------
One Vanderbilt Four story office building 73,730
Two Vanderbilt Four story office building 69,046
Carnegie Business Center I Two R & D buildings 62,539
Service Retail Center Two retail buildings 20,780
Promotional Retail Center Four strip center retail buildings 66,265
Inland Regional Center Two story office building 81,079
TGI Friday's Restaurant 9,386
Circuit City Retail building 39,123
These properties total approximately 422,000 leasable square feet and offer a
wide range of retail, commercial, R & D and office products to the market.
Page 3 of 43
The I-10/San Bernardino area consists of approximately 3,397,000 square feet of
office space, with a vacancy rate of 21% as of December 1997 (according to
research conducted by an independent broker). The abundance of land coupled with
relatively light development regulations have resulted in continued construction
of retail properties. At December 31, 1997 the vacancy rate for retail space was
12% with additional retail space expected to be built in 1998. There is no
comparable R & D space in the market.
Within the Tri-City Corporate Centre at December 31, 1997, the Partnership has
223,855 square feet of office space with an average vacancy rate of 10%, 135,554
square feet of retail space with an average vacancy rate of 1% and 62,539 square
feet of R & D space with a vacancy rate of 31%.
The following are the occupancy levels for the Partnership's Tri-City buildings
at December 31, 1997 and 1996, and October 31, 1995 and 1994, expressed as a
percentage of the total net rentable square feet:
December 31, October 31,
----------------- -------------------
1997 1996 1995 1994
------- ------- ------- --------
One Vanderbilt 80% 86% 70% 100%
Two Vanderbilt 93% 25% 95% 100%
Carnegie Business Center I 69% 90% 97% 100%
Service Retail Center 100% 100% 90% 98%
Promotional Retail Center 97% 98% 97% 94%
Inland Regional Center 100% 100% N/A N/A
(commenced June 1996)
TGI Friday's 100% N/A N/A N/A
(acquired February 1997)
Circuit City 100% N/A N/A N/A
(commenced May 1997)
In 1997, management renewed five leases totaling 14,796 square feet of space,
expanded two existing tenants by 16,733 square feet and executed six new leases
totaling 52,410 square feet of space. Slightly offsetting these increases in
occupancy were the vacancy of three tenants, which occupied a total of 22,362
square feet of space. At December 31, 1997, management was in various stages of
negotiations for two new leases totaling 19,114 square feet of space. During
1998, there are nine leases totaling 21,638 square feet that are due to expire.
Management has renewed one tenant occupying 1,732 square feet to a three year
lease and is currently negotiating lease renewals for three tenants occupying a
total of 12,203 square feet. However, one of these tenants currently occupying
3,987 square feet has indicated that they want to downsize the square footage
leased. Management believes that at least two tenants, occupying a total of
4,447 square feet will vacate when their leases expire in 1998. The remaining
three tenants occupying an aggregate 3,256 square feet have not indicated
whether they will renew their lease or vacate the premises.
Page 4 of 43
The annual effective rent per square foot for the years ended December 31, 1997
and 1996 and October 31, 1995 were:
1997 1996 1995
---- ------- ----
One Vanderbilt $ 17.13 $ 18.07 $ 20.94
Two Vanderbilt $ 15.35 $ 13.91 $ 19.16
Carnegie Business Center I $ 10.51 $ 10.02 $ 11.00
Service Retail Center $ 15.71 $ 14.37 $ 14.63
Promotional Retail Center $ 10.10 $ 9.85 $ 10.49
Inland Regional Center $ 13.62 $ 13.49 N/A
TGI Friday's $ 19.18 N/A N/A
Circuit City $ 13.38 N/A N/A
At December 31, 1997, the Partnership's annual rental rates ranged from $7.80 to
$22.80 per square foot for office space; $9.00 to $19.18 per square foot for
commercial space; and $10.20 to $14.45 per square foot for R & D space.
The annual effective rental rate at Two Vanderbilt increased by 10% in 1997
compared to 1996 due to the addition of two tenants in March and May 1997,
totaling 44,953 square feet of space. In addition, these leases resulted in an
increase in the occupancy at this property from 25% at December 31, 1996 to 93%
at December 31, 1997.
The annual effective rental rate at Two Vanderbilt decreased by 27% in 1996
compared to fiscal year 1995 due to the vacancy in November 1995 of a tenant who
occupied 73,914 total square feet of office space, 56,744 square feet of which
was in Two Vanderbilt.
According to research conducted by the property manager, the average annual
effective rent per square foot for office space in the Partnership's competitive
market ranges from $12.00 to $18.60. Since there is no comparable R & D space or
measurable commercial space available in the market, management has determined
the asking rents based on discussions with independent leasing brokers.
Page 5 of 43
The Partnership's Tri-City properties had the following six tenants which
occupied a significant portion of the net rentable square footage as of December
31, 1997:
Inland Regional ITT Educational Comp
Tenant Center Services USA
Inland Carnegie
Regional Business Promotional
Building Center Center I Retail
Nature of Business Social Services Educational Services Computer Retail
Lease Term 13 yrs. 12 yrs. 10 yrs.
Expiration Date 7/16/09 12/31/04 8/31/03
Square Feet 81,079 33,551 23,000
(% of rentable total) 19% 8% 5%
Annual Rent $1,104,000 $342,220 $207,000
Future Rent Increases 6% every 3% annually 10% in
2.5 years 1998
four 5-year one 5-year three 5-year
Renewal Options options option options
Circuit Inland Empire
Tenant PetsMart City Health Plan
Promotional Circuit Two
Building Retail City Vanderbilt
Nature of Business Pet Retail Electronics Retail HMO
Lease Term 15 yrs. 20 yrs. 5 yrs.
Expiration Date 1/10/09 1/31/18 3/31/02
Square Feet 25,015 39,123 35,758
(% of rentable total) 6% 9% 8%
Annual Rent $249,940 $383,416 $579,280
Future Rent Increases 5% in 1999 lesser of 10% none
and 2004 or 5 yr. CPI
every 5 years
during lease
term
one 5-year four 5-year
Renewal Options option options none
In the opinion of management, the properties are adequately covered by
insurance.
Page 6 of 43
The Partnership's Tri-City rental properties are owned by the Partnership, in
fee, subject to the following notes and deeds of trust:
Service Retail Center, Inland
One Carnegie Business Center Regional Circuit City
Security Vanderbilt and Promotional Retail Center Center and TGI Friday's
Principal balance
at December 31, 1997 $2,320,000 $6,377,000 $2,458,000 $5,000,000
Interest Rate 9% 8.74% 8.75% 1% in excess
of "Prime Rate"
Monthly Payment $20,141 $53,413 $20,771 Interest only
Maturity Date 1/1/05 5/1/06 4/23/01 4/30/99
During 1997, the Partnership's Tri-City rental properties were assessed $542,000
in property taxes based on an average realty tax rate of 1.80% (which includes
.69% in additional assessments).
Tri-City Land
Approximately 26 acres of the Tri-City property owned by the Partnership remain
undeveloped. It is the Partnership's intention to develop parcels of this land
as tenants become available or dispose of the property at the optimal time and
sales price. During 1997, management determined that the carrying value of the
land was in excess of its estimated fair value and, accordingly, recorded a
provision for impairment of the real estate. See footnote 4 in Item 14 for
further discussion.
During 1997, the Partnership's Tri-City land was assessed $282,000 in property
taxes based on an average realty tax rate of 5.13% (which includes 4.02% in
additional assessments and bonds).
Shadowridge Woodbend Apartments
On June 26, 1987, the Partnership acquired an apartment complex known as
Shadowridge Woodbend Apartments ("Shadowridge") in an all cash transaction for
$12,850,000. The apartment complex contains 240 units, consisting of 124
one-bedroom/one-bath units, 44 two-bedroom/one-bath units and 72
two-bedroom/two-bath units and is located in Vista, California. Some of the
amenities at the complex include pool and spa, indoor racquetball court, tennis
court, fitness center and laundry facilities.
Eight communities within the area are considered to be in competition with
Shadowridge. At December 31, 1997, Shadowridge is 96% leased, just slightly
under the average of its competition of 97% (according to research conducted by
the property manager).
The December 31, 1997 average rental rates at Shadowridge and the market rents
at the competing properties are as follows:
Shadowridge Competition
1 Bedroom/1 bath $630 $625-$700
2 Bedroom/1 bath $688 $690-$705
2 Bedroom/2 bath $745 $745-$815
Page 7 of 43
The occupancy rate and current average rental rates for Shadowridge are slightly
below the competition due to upgrades in amenities offered by competitors, such
as in-unit washer / dryers and gated communities. In 1998, the Partnership has
started increasing its rental rates upon lease expirations.
In the opinion of management, the property is adequately covered by insurance.
The Shadowridge property is secured by a note and first deed of trust with a
current balance of $5,849,000. The note bears interest at 7.95% payable in
monthly installments of principal and interest of $48,416 and matures on April
15, 1998. The property is currently being marketed for sale. The Partnership has
obtained a 90-day extension on the term of the loan from the existing lender.
During 1997, the Shadowridge property was assessed $139,000 in property taxes
based on an average realty tax rate of 1.42%.
Lake Elsinore Property
In 1988, the Partnership acquired 17 parcels, totaling approximately 24.8 acres
in Lake Elsinore, Riverside County, California for a purchase price of
$4,475,000.
The property is immediately west of Interstate 15 near the Lake Elsinore Outlet
Center. The undeveloped property is commercially zoned. The Partnership had
originally planned to develop this site as a neighborhood shopping center,
however, improvements to the property have been put on hold indefinitely. A
tentative parcel map expired and there is no development activity planned for
the near future.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Lake Elsinore property is unencumbered.
During 1997, the Lake Elsinore property was assessed $37,000 in property taxes
based on an average realty tax rate of 1.71%.
Perris Property
In 1988, the Partnership acquired 17.14 acres of unimproved land near Perris
Lake in Perris, Riverside County, California at a purchase price of $3,000,000.
There has been no development of this property to date. The Partnership
currently holds the property for sale to retail users and interested developers.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Perris property is unencumbered.
Page 8 of 43
During 1997, the Perris property was assessed $17,000 in property taxes based on
an average realty tax rate of 1.12%.
Temecula Property
In June 1992, the Partnership acquired 12.4 acres of undeveloped commercial
property in Temecula, Riverside County, California. On January 2, 1996, a final
map approval was received to divide the property into twelve parcels to
accommodate retail and commercial development. This enabled the Partnership to
market these smaller parcels for sale. The Partnership completed the street
utility and sewer improvements on this site, which greatly assisted in the
marketing efforts of the property. In March 1996, the Partnership sold a 1.11
acre parcel for a sales price of $275,000. From July through December 1997, the
Partnership sold eight parcels in five transactions, totaling approximately 7.42
acres for an aggregate sales price of $2,259,000. At December 31, 1997, the
Partnership had three remaining parcels held for sale. On January 27, 1998, a
1.06 acre parcel was sold for $270,000 leaving two remaining parcels to sell.
In the opinion of management, the property is adequately covered by insurance.
The Partnership is contingently liable for a subordinated note payable in
connection with the 3.87 acre property in Temecula, California, that the
Partnership reacquired in June, 1992 through a deed in lieu of foreclosure in
satisfaction of a $2,276,000 note receivable. The subordinated note payable and
accrued interest total $566,000 as of December 31, 1997. This amount is payable
upon the sale of the property only after the Partnership receives the full
amount of the prior note receivable with accrued and unpaid interest, costs of
development, costs of sale, and other amounts paid to obtain good title to the
property, subject to certain release provisions.
During 1997, the Temecula property was assessed $50,000 in property taxes based
on an average realty tax rate of 2.91% (including special assessments and
bonds).
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
On September 30, 1997, the Partnership entered into an agreement to sell all of
its real estate assets to Glenborough Realty Trust Incorporated ("GLB"), a
publicly traded real estate investment trust and Glenborough Properties, L.P.
("GPLP"), the operating partnership of GLB, for an aggregate price of
$48,204,500.
It was intended that if the sale to GLB and GPLP was completed, management would
then liquidate the Partnership as soon as possible following the sale. A Consent
Solicitation Statement (the "Solicitation") was sent to the Unitholders on
October 17, 1997, detailing these two transactions (incorporated by reference to
the Definitive Schedule 14A - Proxy Statement filed with the Securities and
Exchange Commission on October 17, 1997). A final tabulation of the results of
the
Page 9 of 43
Solicitation was made on November 21, 1997 with 47,837 Unitholders or 60% of the
total outstanding units in favor, 8,956 Unitholders or 11% against, 650
Unitholders or 1% abstaining, 235 Unitholders or less than 1% pending and no
response was received from the remaining 27% of the Unitholders.
Notwithstanding the foregoing, the Partnership's General Partner determined it
would be in the best interests of the Partnership to rescind the agreement to
sell all of the Partnership's real estate assets to GLB and GPLP for the
following reasons:
i. The greater than expected opposition to the timing of the sale by the
Limited Partners; and
ii. The holding of the real estate assets for an additional period of time
will provide the Partnership the opportunity to possibly recognize an
appreciation in the value of the real estate in the areas where the
Partnership's properties are located.
Page 10 of 43
Part II
Item 5. Market for Partnership's Common Equity and Related StockHolder Matters
Market Information
There is no established trading market for the Units issued by the Partnership.
Holders
As of December 31, 1997, there were 11,609 holders of Partnership Units.
Dividends
Distributions are paid from either Cash From Operations or Cash From Sales or
Refinancing.
Cash From Operations as defined in the Partnership Agreement includes all cash
receipts from operations in the ordinary course of business (except for the
sale, refinancing, exchange or other disposition of real property in the
ordinary course of business) after deducting payments for operating expenses.
All distributions of Cash From Operations are paid in the ratio of 90% to the
Limited Partners and 10% to the General Partners.
Cash From Sales or Refinancing as defined in the Partnership Agreement is the
net cash realized by the Partnership from the sale, disposition or refinancing
of any property after retirement of applicable mortgage debt and all expenses
related to the transaction, together with interest on any notes taken back by
the Partnership upon the sale of a property. All distributions of Cash From
Sales or Refinancing are generally allocated as follows (a more explicit
statement of these distribution policies is set forth in the Partnership
Agreement):
(i) First, 1 percent to the General Partners and 99 percent to the
Limited Partners until the Limited Partners have received an amount
equal to their capital contributions, plus a 12 percent return on their
unreturned capital contributions (less prior distributions of Cash from
Operations); (ii) Second, to Limited Partners who purchased their units
of limited partnership interest prior to April 1, 1985, to the extent
they receive an additional return (depending on the date on which they
purchased the units) on their unreturned capital of either 9 percent, 6
percent or 3 percent (calculated through October 31, 1985); and (iii)
Third, 20 percent to the General Partners and 80 percent to the Limited
Partners.
There were no distributions made by the Partnership during the three most recent
fiscal years (including the two-month stub period ended December 31, 1995).
Page 11 of 43
Item 6. Selected Financial Data
The following is selected financial data for the years ended December 31, 1997
and 1996, the two months ended December 31, 1995 and the years ended October 31,
1995, 1994 and 1993 (in thousands, except per Unit data):
For the two
For the years ended months ended
December 31, December 31, For the years ended October 31,
1997 1996 1995 1995 1994 1993
--------- -------- ------------ --------- --------- ---------
Rental Income $ 7,275 $ 5,149 $ 768 $ 5,784 $ 5,465 $ 5,294
Gain (loss) on sale of real estate $ (253) $ -- $ -- $ -- $ -- $ 150
Provision for impairment
of real estate investments $ (947) $ -- $ -- $(12,224) $ -- $ (1,800)
Net loss $ (3,066) $ (1,510) $ (308) $(13,417) $ (663) $ (2,027)
Net loss Allocable
to Limited Partners $ (3,066) $ (1,510) $ (308) $(13,417) $ (663) $ (2,034)
Net loss per Unit $ (38.40) $ (18.91) $ (3.86) $(168.03) $ (8.30) $ (25.44)
Total assets $ 53,401 $ 52,695 $ 48,282 $ 49,321 $ 59,537 $ 59,937
Long-term obligations $ 22,004 $ 17,256 $ 11,757 $ 11,766 $ 8,860 $ 8,647
Cash distributions per Unit $ ___ $ -- $ -- $ -- $ -- $ --
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL COMMITMENTS
General Matters
At December 31, 1997, the Partnership had cash of $788,000. The remainder of the
Partnership's assets consists primarily of its investments in real estate,
totaling approximately $49,814,000 which includes $32,659,000 in rental
properties, $4,941,000 of land held for development and $2,035,000 of
undeveloped land held for sale. A multifamily residential project in Vista,
California is carried on the books at $10,179,000 and is currently designated as
real estate held for sale. Development of the unimproved land will coincide with
market demand.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that the market
has flattened and is no longer falling in terms of sales prices. While prices
have not increased significantly, the Southern California real estate market
appears to be improving. Management continues to evaluate the real estate
markets in which the Partnership's assets are located in an effort to determine
the optimal time to dispose of them and realize their maximum value. Cash
generated from property sales may be utilized in the development of other
properties or distributed to the partners.
Page 12 of 43
On September 30, 1997, the Partnership entered into an agreement to sell all of
its real estate assets to Glenborough Realty Trust Incorporated {"GLB"), a real
estate investment trust publicly traded on the New York Stock Exchange, and
Glenborough Properties, L.P., the operating partnership of GLB. On October 17,
1997, the Partnership sent a proxy to its Unitholders (incorporated by reference
to the Definitive Schedule 14A - Proxy Statement filed on October 17, 1997),
requesting the Unitholders' consent to the proposed bulk sale of its real estate
assets and a subsequent liquidation of the Partnership. A final tabulation of
the results of the Solicitation was made on November 21, 1997 with 47,837
Unitholders or 60% of the total outstanding units in favor, 8,956 Unitholders or
11% against, 650 Unitholders or 1% abstaining, 235 Unitholders or less than 1%
pending and no response was received from the remaining 27% of the Unitholders.
Notwithstanding the foregoing, the Partnership's General Partner determined it
would be in the best interests of the Partnership to rescind the agreement to
sell all of the Partnership's real estate assets to GLB and Properties for the
following reasons:
i. The greater than expected opposition to the timing of the sale by the
Limited Partners; and
ii.The holding of the real estate assets for an additional period of time
will provide the Partnership the opportunity to possibly recognize an
appreciation in the value of the real estate in the areas where the
Partnership's properties are located.
Operationally, the Partnership's primary sources of funds consist of cash
provided by its rental activities. Other sources of funds may include permanent
financing, construction financing, property sales, interest income on
certificates of deposit and other deposits of funds invested temporarily,
pending their use in the development of properties.
The Partnership's restricted cash at December 31, 1997 consists of a $269,000
certificate of deposit ("CD") for Inland Regional Center's security deposit and
a $100,000 CD held as collateral for subdivision improvements and monument bonds
related to the 3.87 acres of land for sale in Temecula, California. Management
is currently attempting to obtain a release of this CD in 1998.
The Partnership's improved cash position at December 31, 1997 compared to
December 31, 1996 is largely due to the placement of the Inland Regional Center
into service in June 1996, the operations from TGI Friday's since February 1997,
the net proceeds from the sale of eight parcels in Rancon Towne Village from
July through December 1997, and the net proceeds from financing obtained in 1997
(see below).
The $148,000 or 21% decrease in accounts payable and other liabilities at
December 31, 1997 from December 31, 1996 is due to the timing of payments of
current liabilities.
In January 1997, the Partnership obtained an unsecured promissory note for a
$1,500,000 revolving line of credit from Glenborough Inland Realty Corporation,
to fund capital expenditures and miscellaneous charges. In February 1997, the
Partnership obtained a $1,200,000 unsecured loan to finance the acquisition of
the TGI Friday's property. In May 1997, permanent financing of $5,000,000 was
obtained from Wells Fargo Bank, secured by the TGI Friday's and Circuit City
properties. The Partnership used the proceeds to pay-off the $1,500,000 line of
credit and $1,221,000 on the unsecured Wells Fargo Bank loan. In addition, the
Partnership incurred approximately $193,000 in loan fees and closing costs and
$1,956,000 for a Circuit City tenant improvement allowance. The remaining net
proceeds of approximately $130,000 were added to the Partnership's cash
reserves.
Page 13 of 43
The Partnership is contingently liable for a subordinated note payable in
connection with the 3.87 acre property in Temecula, California, that the
Partnership reacquired in June, 1992 through a deed in lieu of foreclosure in
satisfaction of a $2,276,000 note receivable. The subordinated note payable and
accrued interest total $566,000 as of December 31, 1997. This amount is payable
upon the sale of the property only after the Partnership receives the full
amount of the prior note receivable with accrued and unpaid interest, costs of
development, costs of sale, and other amounts paid to obtain good title to the
property, subject to certain release provisions.
The Partnership also remains contingently liable for subordinated real estate
commissions payable to the Sponsor in the amount of $643,000 at December 31,
1997 for sales that transpired in previous years. The subordinated real estate
commissions are payable only after the Limited Partners have received
distributions equal to their original invested capital plus a cumulative
non-compounded return of 6% per annum on their adjusted invested capital.
Aside from the foregoing, the Partnership knows of no demands, commitments,
events or uncertainties which might effect its liquidity or capital resources in
any material respect. The effect of inflation on the Partnership's business
should be no greater than its effect on the economy as a whole.
Management believes that the Partnership's cash balance as of December 31, 1997
together with the cash from operations, sales and financing, will be sufficient
to finance the Partnership's and the properties' continued operations and
development plans. However, there can be no assurance that the Partnership's
results of operations will not fluctuate in the future and at times affect its
ability to meet its operating requirements.
RESULTS OF OPERATIONS
1997 versus 1996
Revenue
Rental income for the year ended December 31, 1997 increased $2,126,000 or 41%
compared to the year ended December 31, 1996 primarily as a result of: (i) the
commencement of operations of the Inland Regional Center in June 1996; (ii)
ground lease revenue earned from Circuit City as the project was under
construction from September 1996 through May 1997; (iii) the commencement of the
Circuit City operating lease in May 1997; (iv) the acquisition of the TGI
Friday's property in February 1997; (v) the increased occupancy at Two
Vanderbilt; and (vi) the general increased rental rates at most properties.
These sources of increased revenue were slightly offset with a decrease in
rental income associated with decreases in occupancy at Carnegie Business Center
I and One Vanderbilt.
Page 14 of 43
The Tri-City properties account for 74%, 68% and 72% of the Partnership's total
rental income during the years ended December 31, 1997 and 1996 and October 31,
1995 respectively. The Shadowridge Woodbend Apartments in Vista, California
accounted for 26%, 32% and 28% of the total rental income during the same
periods (and was 96% leased at December 31, 1997).
Occupancy rates at the Partnership's Tri-City properties as of December 31, 1997
and 1996, and October 31, 1995, 1994 and 1993 were as follows:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
One Vanderbilt 80% 86% 70% 100% 95%
Two Vanderbilt 93% 25% 95% 100% 100%
Carnegie Business Center I 69% 90% 97% 100% 89%
Service Retail Center 100% 100% 90% 98% 82%
Promotional Retail Center 97% 98% 97% 94% 94%
Inland Regional Center 100% 100% N/A N/A N/A
(commenced June 1996)
TGI Friday's 100% N/A N/A N/A N/A
(acquired February 1997)
Circuit City 100% N/A N/A N/A N/A
(commenced May 1997)
The sixty-eight percent increase in occupancy from December 31, 1996 to December
31, 1997 at Two Vanderbilt can be attributed to the successful leasing of two
tenants comprising 42,654 square feet of space.
The twenty-one percent decrease in occupancy from December 31, 1996 to December
31, 1997 at Carnegie Business Center I is due to the vacancies in 1997 of three
tenants occupying an aggregate 12,844 square feet. Management is currently
marketing this space for lease.
In 1997, tenants at Tri-City occupying substantial portions of leased rental
space included: (i) Inland Empire Health Plan with a lease through March 2002;
(ii) CompUSA with a lease through August 2003; (iii) ITT Educational Services
with a lease which expires in December 2004; (iv) PetsMart with a lease through
January 2009; (v) Inland Regional Center with a lease through July 2009; and
Circuit City with a lease through January 2018. These six tenants, in the
aggregate, occupied approximately 238,000 square feet of the 422,000 total
leasable square feet at Tri-City and account for approximately 51% of the rental
income generated at Tri-City and 37% of the total rental income for the
Partnership in 1997. At December 31, 1997, management was in various stages of
negotiation for two new leases totaling 19,114 square feet of space.
Interest and other income for the year ended December 31, 1997 decreased $42,000
or 65% from the year ended December 31, 1996 as a result of the elimination of
the interest income on the $405,000 note receivable that was retired as part of
the acquisition of TGI Friday's on February 28, 1997.
Expenses
Operating expenses increased $524,000 or 20% during the year ended December 31,
1997 compared to the year ended December 31, 1996 due to: (i) the addition of
Inland Regional Center as an operating property in June 1996; (ii) the addition
of TGI Friday's as an operating property in February 1997; (iii) the addition of
Circuit City as an operating property in May 1997; (iv) increased
Page 15 of 43
utility and operational expenses related to increased occupancy at selected
properties; and (v) property tax refunds received in 1996.
Depreciation and amortization increased $299,000 or 21% during the year ended
December 31, 1997 compared to the year ended December 31, 1996 primarily as a
result of the acquisition / commencement of operations of the Inland Regional
Center, TGI Friday's and Circuit City properties as well as additions to tenant
improvements associated with new leases over the past year.
Interest expense increased $1,095,000 or 138% during the year ended December 31,
1997 compared to the year ended December 31, 1996 due to the Partnership's
increased permanent debt to finance selected properties over the past two years.
In addition, in 1996 some of the land was under development and accordingly, the
Partnership capitalized $597,000 of interest costs.
In 1997, management determined that the carrying value of the Partnership's land
held for development and the land held for sale was in excess of the estimated
fair market value of such property and, accordingly, recorded provisions for
impairment of real estate investments in the aggregate amount of $947,000. The
fair market values were based on independent appraisals of the Partnership's
real estate. Due to the uncertainties inherent in these processes, these
valuations do not purport to be the price at which a sale transaction involving
these properties can or will take place.
The Partnership made the following provisions to reduce the carrying value of
investments in real estate for the year ended December 31, 1997:
Land held for development:
San Bernardino, CA $ 275,000
Land held for sale:
Temecula, CA 672,000
-----------
Total provision for impairment
of real estate investments $ 947,000
===========
No such provisions were recorded in 1996 or the two month period ended December
31, 1995.
During the year ended December 31, 1997, the Partnership recognized $253,000 in
losses on sales of the eight parcels in Rancon Towne Village.
Expenses associated with undeveloped land increased $107,000 or 19% and
decreased $197,000 or 26% during the year ended December 31, 1997 over the year
ended December 31, 1996 and the year ended December 31, 1996 compared to the
year ended October 31, 1995, respectively, due in large part to the
capitalization of expenses at the Circuit City and Rancon Towne Village projects
in 1996.
The $445,000 for proposed dissolution costs in 1997 was for work performed and
expenses incurred while exploring the possibilities of having the Partnership
sell all of its real estate assets and then liquidate. The proposed transactions
were detailed in a Consent Solicitation Statement, sent to the Unitholders on
October 17, 1997, (incorporated by reference to the Definitive Schedule 14A
Proxy Statement filed with the Securities and Exchange Commission on October 17,
1997).
Page 16 of 43
1996 versus 1995
In 1995, the Partnership's reporting year end changed from October 31 to
December 31. Since the Partnership's operations are not seasonal, the analysis
of results of operations compares the fiscal years ended December 31, 1996 and
October 31, 1995.
Revenue
Rental income for the year ended December 31, 1996 decreased $635,000 or 11%
from the year ended October 31, 1995, primarily as a result of the November,
1995 vacancy upon lease expiration of one tenant, Aetna Health Management
("Aetna"), who occupied an aggregate of 74,000 square feet of space at One
Vanderbilt, Two Vanderbilt and Carnegie Business Center I. Aetna's vacancy was
primarily a function of the tenant's desire to consolidate its operations into
one building. This decrease was partially offset by the $40,000 income
recognized by the Partnership as part of a settlement agreement with a former
tenant.
Interest and other income for the year ended December 31, 1996 decreased $88,000
or 58% from the year ended October 31, 1995 primarily due to the significant
decrease in cash during 1996 compared to fiscal year 1995, as cash was used to
fund the construction of the Inland Regional Center property.
Expenses
Operating expenses for the year ended December 31, 1996 remained comparable to
the operating expenses for the year ended October 31, 1995.
Depreciation and amortization decreased $98,000 or 6% during the year ended
December 31, 1996 compared to the year ended October 31, 1995 as a result of
fully amortizing lease commissions paid in connection with a tenant's early
vacancy in the One Vanderbilt building in 1995.
Interest expense increased $39,000 or 5% during the year ended December 31, 1996
compared to the year ended October 31, 1995 due to the increased debt to finance
the construction of properties.
In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS 121 requires
that an evaluation of an individual property for possible impairment must be
performed whenever events or changes in circumstances indicate that an
impairment may have occurred and that long-lived assets to be disposed of be
carried at the lower of carrying amount or fair value. Prior to 1995, the
Partnership's business strategy was to hold its properties for future
development and operations. Conclusions about the carrying value of the
Partnership's properties were based upon this strategy. In 1995, the Partnership
modified this strategy to focus on eventual disposition of its assets at the
optimal time and sales price and revalued certain of its assets by providing for
impairment in real estate.
Page 17 of 43
The Partnership made the following provisions to reduce the carrying value of
investments in real estate for the year ended October 31, 1995:
Land held for development:
San Bernardino, CA $ 6,158,000
Lake Elsinore, CA 4,042,000
Land held for sale:
Perris, CA 2,024,000
---------------
Total provision for impairment
of real estate investments $ 12,224,000
===============
The $197,000 or 26% decrease in expenses associated with undeveloped land during
the year ended December 31, 1996 compared to the year ended October 31, 1995 was
in large part due to the capitalization of expenses at the Circuit City and
Rancon Town Village projects in 1996.
Administrative expenses decreased $109,000 or 8% during the year ended December
31, 1996 from the year ended October 31, 1995, a result of a one-time severance
payment to RFC's terminated employees in 1995, but partially offset by a $72,000
increase in general overhead expenses related to the management of the
Partnership and a $28,000 increase in general partnership legal costs in 1996.
Year 2000 Compliance
The Partnership utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Partnership's software applications contain a source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such applications will be necessary. The
Partnership has completed its identification of applications that are not yet
"Year 2000" compliant and has commenced modification or replacement of such
applications, as necessary. Given information known at this time about the
Partnership's systems that are non-compliant, coupled with the Partnership's
ongoing, normal course-of-business efforts to upgrade or replace critical
systems, as necessary, management does not expect "Year 2000" compliance costs
to have any material adverse impact on the Partnership's liquidity or ongoing
results of operations. No assurance can be given, however, that all of the
Partnership's systems will be "Year 2000" compliant or that compliance costs or
the impact of the Partnership's failure to achieve substantial "Year 2000"
compliance will not have a material adverse effect on the Partnership's future
liquidity or results of operations.
Item 8. Financial Statements and Supplementary Data
For information with respect to this Item 8, see Financial Statements and
Schedules as listed in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 18 of 43
Part III
Item 10. Directors and Executive Officers of the Partnership
Daniel Lee Stephenson and RFC are the General Partners of the Partnership. The
executive officer and director of Rancon is:
Daniel L. Stephenson Director, President, Chief Executive Officer and Chief
Financial Officer
There is no fixed term of office for Mr. Stephenson.
Mr. Stephenson, age 54, founded RFC (formerly known as Rancon Corporation) in
1971 for the purpose of establishing itself as a commercial, industrial and
residential property syndication, development and brokerage concern. Mr.
Stephenson has, from inception, held the position of Director. In addition, Mr.
Stephenson was President and Chief Executive Officer of RFC from 1971 to 1986,
from August 1991 to September 1992 and from March 31, 1995 to present. Mr.
Stephenson is Chairman of the Board of PacWest Group, Inc., a real estate firm
which has acquired a portfolio of assets from the Resolution Trust Corporation.
Item 11. Executive Compensation
The Partnership has no executive officers. For information relating to fees,
compensation, reimbursement and distributions paid to related parties, reference
is made to Item 13 below.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
No person is known by the Partnership to be the beneficial owner of more than 5%
of the Units.
Security Ownership of Management
Title Amount and Nature of Percent
of Class Name of Beneficial Owner Beneficial Ownership of Class
-------- ------------------------ -------------------- --------
Units Daniel Lee Stephenson (I.R.A.) 4 Units (direct) *
Units Daniel Lee Stephenson Family Trust 100 Units (direct) *
* Less than 1 percent
Page 19 of 43
Changes in Control
The Limited Partners have no right, power or authority to act for or bind the
Partnership. However, the Limited Partners have the power to vote upon the
following matters affecting the basic structure of the Partnership, each of
which shall require the approval of Limited Partners holding a majority of the
outstanding Units: (i) amendment of the Partnership's Partnership Agreement;
(ii) termination and dissolution of the Partnership; (iii) sale, exchange or
pledge of all or substantially all of the assets of the Partnership; (iv)
removal of the General Partners or any successor General Partner; (v) election
of a new General Partner or General Partners upon the removal, retirement,
death, insanity, insolvency, bankruptcy or dissolution of the General Partners
or any successor General Partner; and (vi) extension of the term of the
Partnership.
Item 13. Certain Relationships and Related Transactions
During the year ended December 31, 1997, the Partnership did not incur any costs
reimbursable to RFC.
Page 20 of 43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of the report
(1) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996, the two months ended December 31,
1995, and the year ended October 31, 1995
Consolidated Statements of Partners' Equity (Deficit) for the
years ended December 31, 1997 and 1996, the two months ended
December 31, 1995, and the year ended October 31, 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996, the two months ended December 31,
1995, and the year ended October 31, 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1997 and Note thereto
(3) Exhibits:
(2.1) Consent Solicitation Statement (filed as a Definitive
Schedule 14A - Proxy Statement of the Registrant,
dated October 17, 1997, is incorporated herein by
reference).
(3.1) Second Amended and Restated Certificate and Agreement
of Limited Partnership of the Partnership (included
as Exhibit B to the Prospectus dated December 29,
1986, as amended on January 5, 1987, filed pursuant
to Rule 424(b), file number 2-90327, is incorporated
herein by reference).
(3.2) First Amendment to the Second Amended and Restated
Agreement and Certificate of Limited Partnership of
the Partnership, dated March 11, 1991 (included as
Exhibit 3.2 to 10-K dated October 31, 1992, File
number 0-14207, is incorporated herein by reference).
Page 21 of 43
(3.3) Limited Partnership Agreement of RRF IV Tri-City
Limited Partnership, A Delaware limited partnership
of which Rancon Realty Fund IV, A California Limited
Partnership is the limited partner (filed as Exhibit
3.3 to the Partnership's annual report on Form 10-K
for the year ended December 31, 1996 is incorporated
herein by reference)
(10.1) Management, administration and consulting agreement
and amendment thereto for services rendered by
Glenborough Inland Realty Corporation dated December
20, 1994 and March 30, 1995, respectively.
(10.2) Construction loan agreement and promissory note on
the Discovery Zone site in the Promotional Retail
Center at Tri-City Corporate Centre in the amount of
$1,000,000 dated February 15, 1995.
(10.3) Promissory note secured by a deed of trust on the One
Vanderbilt building at the Tri-City Corporate Centre
in the amount of $2,400,000 dated January 17, 1995.
(10.4) Construction loan agreement and promissory note on
the Inland Regional Center at Tri-City Corporate
Centre in the amount of $1,000,000 dated May 12,
1995.
(10.5) Note secured by deed of trust on Carnegie Business
Center I and Service Retail Center at Tri-City
Corporate Centre in the amount of $2,800,000 dated
June 1, 1995.
(10.6) Promissory note in the amount of $6,500,000, dated
April 19, 1996, secured by Deeds of Trust on three of
the Partnership Properties (filed as Exhibit 10.6 to
the Partnership's annual report on Form 10-K for the
year ended December 31, 1996 is incorporated herein
by reference).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
Page 22 of 43
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RANCON REALTY FUND IV,
a California Limited Partnership
(Partnership)
Date: March 27, 1998 By: /s/ DANIEL L. STEPHENSON
-------------------------
Daniel L. Stephenson, General Partner and
Director, President, Chief Executive Officer and
Chief Financial Officer of Rancon Financial
Corporation, General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by following persons on behalf of the Partnership and in the
capacities and on the dates indicated.
Date: March 27, 1998 By: /s/ DANIEL L. STEPHENSON
-------------------------
Daniel L. Stephenson, General Partner and
Director, President, Chief Executive Officer and
Chief Financial Officer of Rancon Financial
Corporation, General Partner
Page 23 of 43
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Financial Statements and Schedule Page
Financial Statements:
Report of Independent Public Accountants 25
Consolidated Balance Sheets as of December 31, 1997 and 1996 26
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 the two months ended
December 31, 1995, and the year ended October 31, 1995 27
Consolidated Statements of Partners' Equity (Deficit)for the
years ended December 31, 1997 and 1996, the two months ended
December 31, 1995, and the year ended October 31, 1995 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996, the two months ended December 31,
1995, and the year ended October 31, 1995 29 and 30
Notes to Consolidated Financial Statements 31
Schedule:
III - Real Estate and Accumulated Depreciation
as of December 31, 1997 and Note thereto 42
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Page 24 of 43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
RANCON REALTY FUND IV, A CALIFORNIA LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of RANCON REALTY
FUND IV, A CALIFORNIA LIMITED PARTNERSHIP as of December 31, 1997 and 1996 and
the related statements of operations, partners' equity (deficit) and cash flows
for the years ended December 31, 1997 and 1996, the two months ended December
31, 1995 and the year ended October 31, 1995. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RANCON
REALTY FUND IV, A CALIFORNIA LIMITED PARTNERSHIP, as of December 31, 1997 and
1996 and the results of its operations and its cash flows for the years ended
December 31, 1997 and 1996, the two months ended December 31, 1995, and the year
ended October 31, 1995, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedule
listed in the index to financial statements and schedule is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic consolidated financial statements. This
information has been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
San Francisco, California /s/ Arthur Andersen LLP
February 12, 1998
Page 25 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands, except units outstanding)
Assets 1997 1996
- ------ ---- ----
Investments in real estate:
Rental property, net of accumulated depreciation of $11,474
and $13,077 as of December 31, 1997 and 1996, respectively $ 32,659 $ 38,094
Construction in progress -- 2,184
Land held for development, net 4,666 4,911
Rental property held for sale, net 10,179 --
Land held for sale, net 2,310 4,869
---------- -----------
Total real estate investments 49,814 50,058
---------- -----------
Cash and cash equivalents 788 97
Restricted cash 369 102
Accounts and interest receivable 286 188
Notes receivable -- 405
Deferred financing costs and other fees, net of
accumulated amortization of $1,039 and $775 as of
December 31, 1997 and 1996, respectively 1,373 1,223
Prepaid expenses and other assets 771 622
---------- -----------
Total assets $ 53,401 $ 52,695
========== ===========
Liabilities and Partners' Equity (Deficit)
Notes payable $ 22,004 $ 17,256
Accounts payable and accrued expenses 565 713
Interest payable 66 67
---------- -----------
Total liabilities 22,635 18,036
---------- -----------
Commitments and contingent liabilities (see Note 9)
Partners' equity (deficit):
General partners (891) (891)
Limited partners, 77,054 and 79,846 limited partnership units
outstanding at December 31, 1997 and 1996, respectively 31,657 35,550
---------- -----------
Total partners' equity 30,766 34,659
---------- -----------
Total liabilities and partners' equity $ 53,401 $ 52,695
========== ===========
The accompanying notes are an integral part of these financial statements
Page 26 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Operations
For the years ended December 31, 1997 and 1996, the two months ended
December 31, 1995, and the year ended October 31, 1995
(in thousands, except per unit amounts and units outstanding)
For the two For the
For the years ended months ended year ended
December 31, December 31, October 31,
1997 1996 1995 1995
--------- ----------- ---------- ----------
Revenue:
Rental income $ 7,275 $ 5,149 $ 768 $ 5,784
Interest and other income 23 65 16 153
--------- ----------- ---------- ----------
Total revenue 7,298 5,214 784 5,937
--------- ----------- ---------- ----------
Expenses:
Operating, including $54 paid to Sponsor
during the year ended October 31, 1995 3,166 2,642 411 2,683
Depreciation and amortization 1,748 1,449 207 1,547
Interest expense 1,887 792 139 753
Loss on sales of land 253 ___ ___ ___
Provision for impairment of real
estate investments 947 -- -- 12,224
Expenses associated with undeveloped land 678 571 124 768
Administrative, including $302 paid to
Sponsor during the year ended
October 31, 1995 1,240 1,270 211 1,379
Proposed dissolution costs 445 ____ ____ ____
--------- ----------- ---------- ----------
Total expenses 10,364 6,724 1,092 19,354
--------- ----------- ---------- ---------
Net loss $ (3,066) $ (1,510) $ (308) $ (13,417)
========= =========== ========== =========
Net loss per limited partnership unit $ (38.40) $ (18.91) $ (3.86) $ (168.03)
======== =========== ========== =========
Weighted average number of limited partnership
units outstanding during each period used to
compute net loss per limited partnership unit 79,846 79,846 79,846 79,850
========= ============ ========== =========
The accompanying notes are an integral part of these financial statements
Page 27 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Equity (Deficit)
For the years ended December 31, 1997 and 1996, the two months ended
December 31, 1995, and the year ended October 31, 1995
(in thousands)
General Limited
Partners Partners Total
Balance at October 31, 1994 $ (891) $ 50,797 $ 49,906
Retirement of limited partnership units -- (12) (12)
Net loss -- (13,417) (13,417)
--------- ---------- --------
Balance at October 31, 1995 (891) 37,368 36,477
Net loss -- (308) (308)
--------- ---------- --------
Balance at December 31, 1995 (891) 37,060 36,169
Net loss -- (1,510) (1,510)
--------- ---------- --------
Balance at December 31, 1996 (891) 35,550 34,659
Retirement of limited partnership units -- (827) (827)
Net loss -- (3,066) (3,066)
--------- ---------- --------
Balance at December 31, 1997 $ (891) $ 31,657 $ 30,766
========= ========== ========
The accompanying notes are an integral part of these financial statements
Page 28 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
For the years ended December 31, 1997 and 1996, the two months ended
December 31, 1995, and the year ended October 31, 1995
(in thousands)
For the two For the
For the years ended months ended year ended
December 31, December 31, October 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
Cash flows from operating activities:
Net loss $ (3,066) $ (1,510) $ (308) $ (13,417)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,748 1,449 207 1,496
Amortization of loan fees,
included in interest expense 105 68 15 51
Provision for impairment of real estate investments 947 -- -- 12,224
Loss on sales of land 253 -- -- --
Changes in certain assets and liabilities:
Accounts and interest receivable (98) (180) 6 (6)
Deferred fees (292) (596) (6) (13)
Prepaid expenses and other assets (149) 155 268 32
Accounts payable and accrued expenses (148) 357 (678) 349
Interest payable (1) 67 (44) 22
Payable to Sponsor -- -- -- (8)
----------- ----------- -------- ----------
Net cash provided by (used for)
operating activities (701) (190) (540) 730
------------ ----------- --------- ----------
Cash flows from investing activities:
Collection of note receivable -- -- -- 720
Net proceeds from sales of land 1,890 248 -- --
Net additions to real estate and property
development costs (4,030) (7,166) (353) (2,538)
------------ ----------- --------- ----------
Net cash used for investing activities (2,140) (6,918) (353) (1,818)
------------ ----------- --------- ----------
Cash flows from financing activities:
Decrease (increase) in restricted cash, net (267) 824 287 (1,213)
Payment of loan fees (122) (406) (23) (224)
Net loan proceeds 6,500 5,687 -- 3,083
Notes payable principal payments (1,752) (196) (9) (178)
Retirement of limited partnership units (827) -- -- (12)
Other liabilities -- -- -- 11
----------- ----------- --------- ----------
Net cash provided by financing
activities $ 3,532 $ 5,909 $ 255 $ 1,467
----------- ----------- --------- ---------
(continued)
Page 29 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 1997 and 1996, the two months ended
December 31, 1995, and the year ended October 31, 1995
(in thousands)
For the two For the
For the years ended months ended year ended
December 31, December 31, October 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents $ 691 $ (1,199) $ (638) $ 379
Cash and cash equivalents at beginning of period 97 1,296 1,934 1,555
--------- --------- -------- ----------
Cash and cash equivalents at end of period $ 788 $ 97 $ 1,296 $ 1,934
========= ========= ======== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,783 $ 1,254 $ 176 $ 861
========= ========= ======== =========
Interest capitalized $ -- $ 597 $ 28 $ 130
========= ========= ======== =========
Supplemental disclosure of non-cash refinancing activity:
New financing $ 7,700 $ 11,273 $ -- $ --
Original financing paid-off in escrow (1,200) (5,586) -- --
---------- ---------- -------- ---------
Net loan proceeds $ 6,500 $ 5,687 $ -- $ --
========= ========= ======== =========
The accompanying notes are an integral part of these financial statements
Page 30 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Rancon Realty Fund IV, a California Limited Partnership, ("the Partnership"),
was organized in accordance with the provisions of the California Uniform
Limited Partnership Act for the purpose of acquiring, developing and operating
real property. The General Partners of the Partnership are Daniel L. Stephenson
and Rancon Financial Corporation, ("RFC") hereinafter referred to as the
Sponsor. RFC is wholly-owned by Daniel L. Stephenson. The Partnership reached
final funding in July, 1987.
Allocation of profits, losses and cash distributions from operations and cash
distributions from sale or financing are made pursuant to the terms of the
Partnership Agreement. Generally, net income and distributions from operations
are allocated 90% to the limited partners and 10% to the general partners. Net
losses from operations are allocated 99% to the limited partners and 1% to the
general partners until such time as a partner's account is reduced to zero.
Additional losses will be allocated entirely to those partners with positive
account balances until such balances are reduced to zero.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that the market
has flattened and with the exception of undeveloped land is no longer falling in
terms of sales prices. While prices have not increased significantly, the
Southern California real estate market appears to be improving. Management
continues to evaluate the real estate markets in which the Partnership's assets
are located in an effort to determine the optimal time to dispose of them and
realize their maximum value.
General Partners and Management Matters
Effective January 1, 1994, the Partnership contracted with RFC to perform or
contract on the Partnership's behalf for financial, accounting, data processing,
marketing, legal, investor relations, asset and development management and
consulting services for the Partnership. These services were provided by RFC
subject to the provisions of the Partnership Agreement.
Effective January 1, 1995, RFC entered into an agreement with Glenborough
Corporation (successor by merger with Glenborough Inland Realty Corporation)
("Glenborough") whereby RFC sold to Glenborough the contract to perform the
rights and responsibilities under RFC's agreement with the Partnership and other
related Partnerships (collectively, "the Rancon Partnerships") to perform or
contract on the Partnership's behalf for financial, accounting, data processing,
marketing, legal, investor relations, asset and development management and
consulting services for the Partnership for a period of ten years or to the
liquidation of the Partnership, whichever comes first. According to the
contract, the Partnership will pay Glenborough for its services as follows: (i)
a specified asset administration fee which is fixed for five years subject to
reduction in the year following the sale of assets ($989,000 in 1997 and
$993,000 per year prior to 1997); (ii) sales fees of 2% for improved properties
and 4% for land; (iii) a refinancing fee of 1% and (iv) a management fee of 5%
of gross
Page 31 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
rental receipts. As part of this agreement, Glenborough will perform certain
responsibilities for the General Partner of the Rancon Partnerships and RFC
agreed to cooperate with Glenborough, should Glenborough attempt to obtain a
majority vote of the limited partners to substitute itself as the Sponsor for
the Rancon Partnerships. Glenborough is not an affiliate of RFC or the
Partnership.
Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles under the presumption that the Partnership will continue
as a going concern.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
Risks and Uncertainties - The Partnership's ability to (i) achieve positive cash
flow from operations, (ii) meet its debt obligations, (iii) provide
distributions either from operations or the ultimate disposition of the
Partnership's properties or (iv) continue as a going concern, may be impacted by
changes in interest rates, property values, geographic economic conditions, or
the entry of other competitors into the market. The accompanying financial
statements do not provide for adjustments with regard to these uncertainties.
New Accounting Pronouncement - In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
is effective for fiscal years beginning after December 15, 1997. Management has
not yet determined the level of additional disclosure, if any, that may be
required by SFAS 131. Additional disclosures that may be required will be
provided beginning with the financial statements of the Partnership for the year
ending December 31, 1998.
Rental Property - Rental properties, including the related land, are stated at
cost unless events or circumstances indicate that cost cannot be recovered in
which case the carrying value is reduced to estimated fair value. Estimated fair
value: (i) is based upon the Partnership's plans for the continued operations of
each property; (ii) is computed using estimated sales price, as determined by
prevailing market values for comparable properties and/or the use of
capitalization rates multiplied by annualized rental income based upon the age,
construction and use of the building, and (iii) does not purport, for a specific
property, to represent the current sales price that the Partnership could obtain
from third parties for such property. The fulfillment of the Partnership's plans
related to each of its properties is dependent upon, among other things, the
presence of economic conditions which will enable the Partnership to continue to
hold and operate the properties prior to their eventual sale. Due to
uncertainties inherent in the valuation process and in the economy, it is
reasonably possible that the actual results of operating and disposing of the
Partnership's properties could be materially different than current
expectations.
Page 32 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
Land Held for Development and Construction in Progress - Land held for
development and construction in progress are stated at cost unless events or
circumstances indicate that cost cannot be recovered in which case the carrying
value is reduced to estimated fair value. Estimated fair value: (i) is based on
the Partnership's plans for the development of each property; (ii) is computed
using estimated sales price, based upon market values for comparable properties;
(iii) considers the cost to complete and the estimated fair value of the
completed project; and (iv) does not purport, for a specific property, to
represent the current sales price that the Partnership could obtain from third
parties for such property. The fulfillment of the Partnership's plans related to
each of its properties is dependent upon, among other things, the presence of
economic conditions which will enable the Partnership to either hold the
properties for eventual sale or obtain financing to further develop the
properties.
Real Estate Held for Sale - Real estate held for sale is stated at the lower of
cost or estimated fair value. Estimated fair value is based upon prevailing
market values for comparable properties and/or the use of capitalization rates
multiplied by annualized rental income based upon the age, construction and use
of the building, but does not purport to represent the current sales price that
the Partnership could obtain from third parties for such property. The
fulfillment of the Partnership's plans is dependent upon, among other things,
the presence of economic conditions which will enable the Partnership to either
hold the property for eventual sale or obtain financing to further develop the
property.
Land Held for Sale - Land held for sale is stated at the lower of cost or
estimated fair value less costs to sell. Estimated fair value is based upon
independent appraisals or prevailing market rates for comparable properties.
Appraisals are estimates of fair value based upon assumptions about the property
and the market in which it is located. Due to the uncertainties inherent in the
appraisal process, these valuations do not purport to be the price at which a
sale transaction involving these properties can or will take place.
Cash and Cash Equivalents - The Partnership considers certificates of deposit
and money market funds with original maturities of less than ninety days to be
cash equivalents.
Deferred Financing Costs and Other Fees - Deferred loan fees are amortized on a
straight-line basis over the life of the related loan and deferred lease
commissions are amortized over the initial fixed term of the related lease
agreement.
Rental Income - Rental income is recognized as earned over the life of the
respective leases.
Net Loss Per Limited Partnership Unit - Net loss per limited partnership unit is
calculated using the weighted average number of limited partnership units
outstanding during the period and the Limited Partners' allocable share of the
net loss.
Page 33 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
Income Taxes - No provision for income taxes is included in the accompanying
financial statements, as the Partnership's results of operations are allocated
to the partners for inclusion in their respective income tax returns. Net loss
and partners' equity (deficit) for financial reporting purposes will differ from
the Partnership income tax return because of different accounting methods used
for certain items, including depreciation expense, provisions for impairment of
investments in real estate, capitalization of development period interest and
income and loss recognition.
Consolidation - In order to satisfy certain lender requirements for the
Partnership's 1996 loan secured by Service Retail Center, Promotional Retail
Center and Carnegie Business Center (see Note 6), Rancon Realty Fund IV Tri-City
Limited Partnership, a Delaware limited partnership ("RRF IV Tri-City") was
formed in April, 1996. The three properties securing the loan were contributed
to RRF IV Tri-City by the Partnership. The limited partner of RRF IV Tri-City is
the Partnership and the general partner is Rancon Realty Fund IV, Inc., a
corporation wholly owned by the Partnership. Since the Partnership indirectly
owns 100% of RRF IV Tri-City, the financial statements of RRF IV Tri-City have
been consolidated with those of the Partnership. All inter-company transactions
and balances have been eliminated in consolidation.
Reclassifications - Certain prior year balances have been reclassified to
conform with the current year presentation.
Note 2. RELATED PARTY TRANSACTIONS
Employee costs paid to Sponsor - As a result of the agreement between RFC and
Glenborough (see Note 1), RFC terminated certain employees who were previously
responsible for performing the administrative, legal and development services
for the Partnership. Upon termination, certain employee costs including
severance benefits were allocated to the various Rancon partnerships. Such costs
allocated to the Partnership aggregated $200,000 and are included in
administrative costs for the year ended October 31, 1995.
Reimbursable Expenses and Management Fees to Sponsor - Through December 31,
1994, the Partnership had an agreement with the Sponsor for property management
services. The agreement provided for a management fee equal to 5% of gross
rentals collected while managing the properties. Fees incurred under this
agreement totaled $54,000 for the year ended October 31, 1995. Effective January
1, 1995 the Partnership contracted with Glenborough to provide these services to
the Partnership.
The Partnership paid $4,000 in program management fees to the Sponsor for the
year ended October 31, 1995. The Sponsor received this fee for its management
and administration of unimproved or non-income producing properties. As a result
of the agreement with Glenborough, effective January 1, 1995 this fee was no
longer payable.
Page 34 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
The Partnership Agreement also provides for the reimbursement of actual costs
incurred by the Sponsor in providing certain administrative, legal and
development services necessary for the prudent operation of the Partnership.
Reimbursable costs incurred by the Partnership totaled $341,000 for the year
ended October 31, 1995, of which the Partnership capitalized $43,000 in fiscal
year 1995. Effective January 1, 1995, such services are being provided by
Glenborough as described in Note 1.
Note 3. INVESTMENTS IN REAL ESTATE
Rental property components at December 31, 1997 and 1996 are as follows (in
thousands):
1997 1996
----------- --------
Land $ 3,845 $ 4,976
Buildings 29,671 37,378
Leasehold and other improvements 10,617 8,817
----------- -----------
44,133 51,171
Less: accumulated depreciation (11,474) (13,077)
------------ -----------
Total rental property, net $ 32,659 $ 38,094
=========== ===========
At December 31, 1997, the Partnership's rental property includes eight projects
at the Tri-City Corporate Centre in San Bernardino, California. In 1997, the
Shadowridge Woodbend Apartments in Vista, California was reclassified to real
estate held for sale.
Land held for development consists of the following at December 31, 1997 and
1996 (in thousands):
1997 1996
----------- --------
26.0 acres at Tri-City Corporate Centre,
San Bernardino, CA $ 2,730 $ 2,975
24.8 acres in Lake Elsinore, CA 1,936 1,936
---------- ----------
Total land held for development $ 4,666 $ 4,911
========== ==========
The above land held for development is unencumbered at December 31, 1997 and
1996.
Real estate held for sale at December 31, 1997:
The Shadowridge Woodbend Apartment complex, a 240-unit complex is currently
being marketed for sale by the Partnership. Accordingly, in 1997, the
Partnership reclassified $10,179,000 (net of $3,192,000 in accumulated
depreciation) from rental property to real estate held for sale and ceased
depreciation of the rental property.
Page 35 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
Land held for sale consists of the following at December 31, 1997 and 1996 (in
thousands):
1997 1996
-------- ------
17.14 acres in Perris, CA $ 1,386 $ 1,386
3.87 acres and 10.66 acres in Temecula, CA
in 1997 and 1996, respectively, net of a $121
provision for impairment of real estate investment in 1997 924 3,483
------- --------
Total land held for sale $ 2,310 $ 4,869
======= ========
Through December 31, 1997, 8.53 acres of the total 12.4 acres of land in
Temecula, California have been sold. The Partnership sold another 1.06 acres on
January 27, 1998. Negotiations are currently underway to sell the remaining two
lots totaling 2.18 acres.
The Partnership does not intend to develop the remaining sites held for sale.
The proceeds generated from future sales would be used to reduce the
Partnership's existing debt or to increase reserves.
The above land held for sale is unencumbered at December 31, 1997.
During the years ended December 31, 1997 and October 31, 1995, the Partnership
recorded the following provisions to reduce the carrying value of investments in
real estate (in thousands):
1997 1995
---- ----
Land held for development:
San Bernardino, CA $ 275 $ 6,158
Lake Elsinore, CA -- 4,042
Land held for sale:
Temecula, CA 672 --
Perris, CA -- 2,024
--------- ----------
Total provision for impairment
of real estate investments $ 947 $ 12,224
========= ==========
Prior to 1995, the Partnership's business strategy was to hold its properties
for future development and operations. Conclusions about the carrying value of
the Partnership's properties were based upon this strategy. In 1995, the
Partnership modified this strategy to focus on eventual disposition of its
assets at the optimal time and sales price and revalued certain of its assets by
providing for impairment in real estate. In 1997, management determined that the
carrying values of the Partnership's land held for development and the land held
for sale were in excess of the estimated fair market value of such property and
recorded provisions for impairment of real estate totaling $275,000. Due to
uncertainties in the valuation process, the carrying values do not purport to be
the price at which a sale transaction involving these properties can or will
take place.
Page 36 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
Approximately 23 acres of the Tri-City Corporate Centre land owned by the
Partnership was part of a landfill operated by the City of San Bernardino ("the
City") from approximately 1950 to 1960. There are no records of which the
Partnership is aware disclosing that hazardous wastes exist at the landfill. The
Partnership's landfill monitoring program currently meets or exceeds all
regulatory requirements. The Partnership is currently working with the Santa Ana
Region of the California Regional Water Quality Control Board and the City to
determine the need and responsibility for any further testing. There is no
current requirement to ultimately clean up the site, however, no assurance can
be made that circumstances will not arise which could impact the Partnership's
responsibility related to the property.
Construction in progress of $2,184,000 at December 31, 1996 primarily
represented development costs incurred on the Circuit City site in Tri-City. In
May 1997, construction was completed for a total cost of approximately
$3,840,000 and the construction in progress balance was reclassed to rental
property.
Note 4. RESTRICTED CASH
On March 12, 1997, pursuant to the Inland Regional Center ("IRC") lease, a
$269,000 certificate of deposit ("CD") was opened. The $269,000 CD represents a
security deposit, that the Partnership will retain in the event of default by
IRC. Provisions in the lease allow for the security deposit plus accrued
interest to be converted to prepaid rent after the 60th month (June 2001) of the
lease if the tenant is not in default of the provisions of the lease.
In addition, a $100,000 CD at December 31, 1997 is held as collateral for
subdivision improvement bonds related to the 3.87 acres of land held for
development in Temecula, California. The Partnership is in the process of
obtaining a release of this CD.
Note 5. NOTES RECEIVABLE
At December 31, 1996, the Partnership had a $405,000 note receivable secured by
a deed of trust on the TGI Friday's property (which the Partnership sold in
December, 1990). The note bore interest at 10% per annum and matured on December
31, 2000.
On February 28, 1997, the Partnership reacquired the property known as TGI
Friday's in San Bernardino, California for $1,750,000. The Partnership paid
$1,345,000 in cash and the $405,000 note receivable secured by a deed of trust
on the TGI Friday's property was retired as part of the transaction.
In 1996, the Partnership reached a $120,000 settlement with a former tenant. The
Partnership received cash of $40,000 and an $80,000 note receivable which has
been fully reserved. The note bears interest at ten percent per annum and
requires monthly principal and interest payments of $4,805 commencing January 1,
1998 until the note matures on June 1, 1999. As of the date of filing, payments
on the note receivable are current.
Page 37 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
Note 6. NOTES PAYABLE
Notes payable as of December 31, 1997 and 1996 was as follows (in thousands):
1997 1996
-------- -------
Note payable, secured by first deed of
trust on Service Retail Center,
Promotional Retail Center and Carnegie
Business Center I. The loan, which
matures May 1, 2006, is a 10-year,
8.744% fixed rate loan with a 25-year
amortization and requires $53 in
principal and interest payments due
monthly. $6,377 $ 6,457
Permanent loan secured by the IRC
building. Interest accrues at a fixed
rate of 8.75% per annum. Monthly
payments of $21 of principal and
interest are due until the loan matures
on April 23, 2001. 2,458 2,488
Note payable, secured by first deed of
trust on the Shadowridge Woodbend
Apartments. Interest accrues at a fixed
rate of 7.95% per annum. Monthly
installments of $48 of principal and
interest are due until the loan matures
on April 15, 1998. 5,849 5,960
Note payable secured by first deed of
trust on the One Vanderbilt building.
Interest accrues at a fixed rate of 9%.
Monthly installments of $20 are payable
which include principal and interest
amortized over 25 years. The unpaid
principal and interest are due on
January 1, 2005. 2,320 2,351
Note payable secured by first deeds of
trust on Circuit City and TGI Friday's.
Interest is payable monthly at one
percent (1%) per annum in excess of the
lender's "Prime Rate" until the loan
matures on April 30, 1999 at which time
the unpaid principal and interest are
due. 5,000 --
------- -------
Total notes payable $22,004 $17,256
======= =======
On January 31, 1997, the Partnership obtained an unsecured promissory note for a
$1,500,000 revolving line of credit from Glenborough at a rate of eleven percent
(11%) per annum to fund capital expenditures and other partnership costs. As of
April 1997, the Partnership had drawn the total $1,500,000 available on the line
of credit and the loan was paid-off in May 1997 from new permanent financing
proceeds (see below).
Page 38 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
On February 28, 1997, the Partnership obtained a $1,200,000 unsecured loan from
Wells Fargo Bank at an interest rate of one percent (1%) per annum in excess of
the bank "Prime Rate". The loan was used to finance the acquisition of the TGI
Friday's property. This loan was also paid-off in May 1997, from new permanent
financing proceeds (see below).
On May 8, 1997, the Partnership obtained new permanent financing of $5,000,000
from Wells Fargo Bank, secured by real estate referred to as Circuit City and
TGI Friday's. The Partnership used the proceeds to pay off the $1,500,000
Glenborough line of credit and $1,221,000 to pay off the unsecured Wells Fargo
Bank loan (including accrued interest). In addition, the Partnership incurred
approximately $193,000 in loan fees and closing costs and $1,956,000 for the
Circuit City tenant improvement allowance. The remaining net proceeds of
approximately $130,000 were added to the Partnership's cash reserves.
The annual maturities of the Partnership's notes payable subsequent to December
31, 1997 are as follows (in thousands):
1998 $ 6,006
1999 5,171
2000 187
2001 2,498
2002 172
Thereafter 7,970
------------
Total $ 22,004
============
Note 7. PROPOSED DISSOLUTION COSTS
In 1997, the Partnership entered into an agreement to sell all of its real
estate assets and then liquidate the Partnership, described in a Consent
Solicitation Statement sent to the Unitholders on October 17, 1997 (incorporated
by reference to the Definitive Schedule 14A - Proxy Statement filed with the
Securities and Exchange Commission on October 17, 1997).
In December 1997, the Partnership's General Partner determined it would be in
the best interests of the Partnership to rescind the agreement (see Item 4) and
all costs totaling $445,000 related to the sale and proposed dissolution were
expensed.
Page 39 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
Note 8. LEASES
The Partnership's rental properties are leased under non-cancelable operating
leases that expire at various dates through January, 2018. In addition to
monthly base rents, several of the leases provide for additional rents based
upon a percentage of sales levels attained by the tenants; however, no
contingent rentals were realized during the years ended December 31, 1997 and
1996 and October 31, 1995. Future minimum rents under non-cancelable operating
leases as of December 31, 1997 are as follows (in thousands):
1998 $ 5,393
1999 5,385
2000 5,141
2001 4,849
2002 4,022
Thereafter 21,699
------------
Total $ 46,489
============
Note 9. COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership is contingently liable for subordinated real estate commissions
payable to the Sponsor in the amount of $643,000 at December 31, 1997 for sales
that transpired in previous years. The subordinated real estate commissions are
payable only after the Limited Partners have received distributions equal to
their original invested capital plus a cumulative non-compounded return of six
percent per annum on their adjusted invested capital.
Note 10. TAXABLE INCOME (LOSS)
The Partnership's tax returns, the qualification of the Partnership as a
partnership for federal income tax purposes, and the amount of income or loss
are subject to examination by federal and state taxing authorities. If such
examinations result in changes to the Partnership's taxable income or loss, the
tax liability of the partners could change accordingly.
The Partnership's tax returns are filed on a calendar year basis. As such, the
following reconciliation has been prepared using tax amounts estimated on a
calendar year basis.
Page 40 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996, and October 31, 1995
The following is a reconciliation for the years ended December 31, 1997 and 1996
and October 31, 1995 of the net loss for financial reporting purposes to the
estimated taxable income (loss) determined in accordance with accounting
practices used in preparation of federal income tax returns (in thousands).
1997 1996 1995
---------- --------- ---------
Net loss per financial statements $ (3,066) $ (1,510) $ (13,417)
Financial reporting depreciation in excess
of tax reporting depreciation 200 191 599
Provision for impairment of investments
in real estate 672 -- 12,224
Operating expenses recognized in a
different period for financial reporting
than for income tax reporting, net 432 (692) (271)
Property taxes capitalized for tax 388 465 476
-------- --------- --------
Estimated net loss for federal
income tax purposes $ (1,374) $ (1,546) $ (389)
========= ========= ========
The following is a reconciliation of partner's equity for financial reporting
purposes to estimated partners' capital for federal income tax purposes as of
December 31, 1997 and 1996 (in thousands).
1997 1996
---------- ---------
Partners' equity per financial statements $ 30,766 $ 34,659
Cumulative provision for impairment of
investments in real estate 14,946 14,274
Financial reporting depreciation in excess
of tax reporting depreciation 4,586 4,386
Operating expenses recognized in a
different period for financial reporting
than for income tax reporting, net 305 (692)
Property taxes capitalized for tax 1,329 941
Other, net -- (287)
---------- ---------
Estimated partners' capital for federal
income tax purposes $ 51,932 $ 53,281
========== =========
Page 41 of 43
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(in thousands)
- --------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------------------------------------------------------------------------
Initial Cost to Cost Capitalized Subsequent
Partnership to Acquisition
-------------------- -------------------------
Buildings
and Carrying
Description Encumbrances Land Improvements Improvements Cost
- --------------------------------------------------------------------------------------------------------
Rental Properties:
Commercial Office Complexes, San Bernardino County, CA:
One Vanderbilt $ 2,320 $ 572 $ -- $ 8,693 $ 9
Two Vanderbilt -- 443 -- 6,872 --
Carnegie Business Center I (c) 380 -- 4,885 --
Inland Regional Center 2,458 608 -- 7,419 338
Provision for impairment of real est -- (196) -- -- --
------- -------- -------- -------- ------
4,778 1,807 -- 27,869 347
------- -------- -------- -------- ------
Commercial Retail Space, San Bernardino, County, CA:
Service Retail Center (c) 300 -- 1,717 --
Provision for impairment of real estate (b) -- -- -- (250) --
Promo Retail (c) 811 -- 5,677 282
Provision for impairment of real estate (b) -- -- -- (119) --
TGI Friday's (d) 181 1,624 -- --
Circuit City (d) 284 -- 3,426 170
------ -------- -------- ------- ------
11,377 1,576 1,624 10,451 452
------- -------- -------- -------- ------
Land Held for Development:
San Bernardino County, CA:
26 acres - Tri-City -- 4,186 -- 5,626 417
Provision for impairment of real estate (b) -- (244) -- (7,255) --
Riverside County, CA:
Lake Elsinore property 24.8 acres -- 4,495 -- 1,483 --
Provision for impairment of real estate (b) -- (2,560) -- (1,482) --
------- --------- ------- ------- ------
-- 5,877 -- (1,628) 417
------- -------- ------- ------- ------
Real Estate Held for Sale:
Residential Property, San Diego County, CA:
Shadowridge Woodbend Apartments 5,849 1,766 11,118 487 --
------- -------- ------- -------- ------
Land Held for Sale:
Riverside County, CA:
Perris property 17.14 acres -- 3,005 -- 327 78
Provision for impairment of real estate (b) -- (1,697) -- (327) --
Temecula property 3.87 acres -- 712 -- 333 --
Provision for impairment of real estate (b) -- -- -- (121) --
------- -------- ------- -------- ------
-- 2,020 -- 212 78
------- -------- ------- -------- ------
$22,004 $ 13,046 $12,742 $ 37,391 $1,294
======= ======== ======= ======== ======
- -------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
- -------------------------------------------------------------------------------------------------------------------
Gross Amount Carried
at December 31, 1997
-------------------------------
Buildings Date Life
and (a) Accumulated Construction Date Depreciated
Description Land Improvements Total Depreciation Began Acquired Over
- -------------------------------------------------------------------------------------------------------------------
Rental Properties:
Commercial Office Complexes, San Bernardino County, CA:
One Vanderbilt $ 573 $ 8,701 $ 9,274 $ 4,102 11/30/85 11/06/84 3-40 yrs.
Two Vanderbilt 443 6,872 7,315 3,234 1/30/86 11/06/84 3-40 yrs.
Carnegie Business Center I 380 4,885 5,265 2,611 7/31/86 11/06/84 3-40 yrs.
Inland Regional Center 946 7,419 8,365 301 1/96 6/26/87 10-40 yrs.
Provision for impairment of real estate (b) (196) -- (196) --
------- ------- -------- --------
2,146 27,877 30,023 10,248
------- ------- -------- --------
Commercial Retail Space, San Bernardino, County, CA:
Service Retail Center 301 1,723 2,024 540 7/31/86 11/06/84 3-40 yrs.
Provision for impairment of real estate (b) (41) (209) (250) --
Promo Retail 811 5,959 6,770 559 2/01/93 11/06/84 10-40 yrs.
Provision for impairment of real estate (b) (7) (112) (119) --
TGI Friday's 181 1,624 1,805 34 N/A 2/28/97 40yrs.
Circuit City 454 3,426 3,880 93 7/96 11/06/84 20-40yrs.
------- ------- -------- --------
1,699 12,411 14,110 1,226
------- ------- -------- --------
Land Held for Development:
San Bernardino County, CA:
26 acres - Tri-City 10,229 -- 10,229 -- N/A 11/06/84 N/A
Provision for impairment of real estate(b)(7,499) -- (7,499) --
Riverside County, CA:
Lake Elsinore property 24.8 acres 5,978 -- 5,978 -- N/A 7/06/88 N/A
Provision for impairment of real estate(b)(4,042) -- (4,042) --
------ ------- -------- ------
4,666 -- 4,666 --
------ ------- -------- ------
Real Estate Held for Sale:
Residential Property, San Diego County, CA:
Shadowridge Woodbend Apartments 1,766 11,605 13,371 3,192 N/A 6/26/87 5-40 yrs.
------ ------- ------- -------
Land Held for Sale:
Riverside County, CA:
Perris property 17.14 acres 3,410 -- 3,410 -- N/A 11/07/88 N/A
Provision for impairment of real estate(b)(2,024) -- (2,024) --
Temecula property 3.87 acres 1,045 -- 1,045 -- N/A 6/01/92 N/A
Provision for impairment of real estate(b) (121) -- (121) --
------ ------- ------- -------
2,310 -- 2,310 --
------ ------- ------- -------
$12,587 $51,893 $ 64,480 $ 14,666
====== ======= ======= =======
(a) The aggregate cost for federal income tax purposes is $ 80,614.
(b) See Note 3 to Financial Statements.
(c) Service Retail Centre, Carnegie Business Center I and Promotional Retail
Center are collateral for the debt in the aggregate amount of $6,377.
(d) TGI Friday's and Circuit City are collateral for the debt in the
aggregate amount of $5,000.
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Reconciliation of gross amount at which real estate was carried:
For the two For the
For the years ended months ended year ended
December 31, December 31, October 31,
1997 1996 1995 1995
-------- --------- ------------ --------
Investment in real estate
Balance at beginning of period $ 63,135 $ 56,216 $ 55,863 $ 65,560
Additions during period:
Purchases and improvements 4,030 7,166 353 2,351
Capitalized carrying costs -- -- -- 176
Provision for impairment of
investments in real estate (947) -- -- (12,224)
Sales (1,738) (247) -- --
--------- --------- ------- --------
Balance at end of period $ 64,480 $ 63,135 $56,216 $ 55,863
======== ======== ======= ========
Accumulated Depreciation
Balance at beginning of period $ 13,077 $ 11,799 $11,609 $ 10,332
Additions charged to expense 1,589 1,278 190 1,277
-------- -------- ------- --------
Balance at end of period $ 14,666(1) $ 13,077 $11,799 $ 11,609
========= ========= ======= ========
(1) Included in the accumulated depreciation balance at December 31, 1997 is
$3,192,000 of accumulated depreciation of the Shadowridge Woodbend Apartment
complex, which is classified in the December 31, 1997 balance sheet as real
estate held for sale.
Page 43 of 43