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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file 0 - 15843
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DIVERSIFIED HISTORIC INVESTORS III
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2391927
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 500, 1521 LOCUST STREET, PHILADELPHIA, PA 19102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 735-5001
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: 13,981.5 Units
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UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes___ No_X_
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. [ ]
Aggregate market value of Units held by non-affiliates of the Registrant: Not
Applicable*
* Securities not quoted in any trading market to Registrant's knowledge.
PART I
Item 1. Business
a. General Development of Business
Diversified Historic Investors III ("Registrant") is a limited
partnership formed in 1986 under the Pennsylvania Uniform Limited Partnership
Act. As of December 31, 1995, Registrant had outstanding 13,981.5 units of
limited partnership interest (the "Units").
Registrant is presently in its operating stage. It originally owned
five properties or interests therein. One property has been lost through
foreclosure. See Item 2. Properties, for a description thereof. It currently
owns four properties or interests therein. For a discussion of the operations of
the Registrant, See Part II, Item 7. Management's Discussion and Analysis of
Financial Conditions and Results of Operations.
The following is a summary of significant transactions
involving the Registrant's interests:
Due to insufficient cash flow at Cathedral Court General
Partnership ("CCGP") from the property owned by it, the property ceased making
debt service payments in 1989. In January 1990, CCGP filed a reorganization
petition pursuant to Chapter 11 of the U.S. Bankruptcy Code. Although a plan of
reorganization was filed, it was not approved. Pursuant to a settlement
agreement reached with the first mortgage holder on July 31, 1993 the bankruptcy
was dismissed. The terms of the settlement agreement called for payment to the
first mortgage holder by CCGP of certain monies held, and for CCGP to continue
to control the property. CCGP anticipated that, subsequent to the bankruptcy's
dismissal, the first mortgage holder would attempt to sell the loan, but that
the Registrant would be given a right of first refusal. In September 1994, due
to the inability of the first mortgage holder and CCGP to reach an agreement
regarding CCGP's purchase of the loan, the first mortgage holder petitioned the
Circuit Court for the City of Baltimore in the matter of Harrington v. Cathedral
Court General Partnership, Case No. 89340045/CE 106281, to have a receiver
appointed, and such petition was granted. Pursuant to the appointment of the
receiver, CCGP was directed to deliver immediate possession of any and all
property connected with and used in the current operation of the property to the
receiver and on January 22, 1996 the lender foreclosed on the property. The
Registrant wrote off the property as of December 31, 1995.
b. Financial Information about Industry Segments
The Registrant operates in one industry segment.
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c. Narrative Description of Business
Registrant is in the business of operating, holding, selling,
exchanging and otherwise dealing in and with real properties containing
improvements which are "Certified Historic Structures," as such term is defined
in the Internal Revenue Code (the "Code"), for use as apartments, offices,
hotels and commercial spaces, or any combination thereof, or low income housing
eligible for the tax credit provided by Section 42 of the Code, and such other
uses as the Registrant's general partner may deem appropriate.
Since the Registrant's inception, all the properties acquired
either by the Registrant, or the subsidiary partnerships in which it has an
interest, have been rehabilitated and certified as Historic Structures and have
received the related Investment Tax Credit. All four properties are held for
rental operations. At this time it is anticipated that all the properties will
continue to be held for this purpose. At such time as real property values begin
to increase, the Registrant will re-evaluate its investment strategy regarding
the properties.
As of December 31, 1995, Registrant owned four properties (or
interests therein), located in Pennsylvania (two), Louisiana (one), and North
Carolina (one). Three properties are operating as apartment buildings and one
property is operating as a commercial/office building. In total, the four
properties contain 133 apartment units and 63,300 square feet ("sf") of
commercial/retail space. As of December 31, 1995, 121 of the apartment units
were under lease (91%) at monthly rental rates ranging from $425 to $1,768. In
addition, 59,845 sf of the commercial space was under lease (95%) at annual
rates ranging from $6.00 per sf to $12.93 per sf. Rental of the apartments and
commercial space is not expected to be seasonal. For further discussion of the
properties, see Item 2. Properties.
The Registrant is affected by and subject to the general
competitive conditions of the residential and commercial real estate industries.
As a result of the overbuilding that occurred in the 1980's, the competition for
both residential and commercial tenants in the local markets where the
Registrant's properties are located is generally strong. As a result, the
Registrant is forced to keep its rent levels competitively low in order to
maintain moderate to high occupancy levels. Two of the residential properties
are located in Philadelphia, PA and the other is located in the Warehouse
District of New Orleans, LA. The commercial/office building is located in
Winston-Salem, NC. One of the Philadelphia properties is located very close to
the "city line", ie. the boundary between Philadelphia and a neighboring suburb.
Many potential residents would prefer to live on the non-city side, to avoid
paying the city wage tax. The Registrant attempts to keep its rents at a level
that is low enough to offset the difference. In all the locations, the
competition for tenants remains stiff and several similar buildings exist. The
apartment and commercial market remains stable and new construction remains
virtually nonexistent although the availability of favorable home financing has
placed pressure on the rental tenant base.
Registrant has no employees. Registrant's activities are
overseen by Brandywine Construction & Management, Inc., ("BCMI"), a real estate
management firm.
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d. Financial Information About Foreign and Domestic Operations and
Export Sales.
See Item 8. Financial Statements and Supplementary Data.
Item 2. Properties
As of the date hereof, Registrant owned four properties, or interests
therein. A summary description of each property held at December 31, 1995 is
given below.
a. Lincoln Court - consists of 58 apartment units in three buildings
located at 5351 Overbrook Avenue in Philadelphia, Pennsylvania. In March 1987,
the Registrant acquired the buildings and is the 100% equity owner of this
property. Registrant acquired and rehabilitated the Property for $3,417,640 ($64
per sf) (such amount is exclusive of $158,985 of capitalized fees incurred,
which were funded by Registrant's equity contributions), including mortgage
financing of $1,730,000, (total balance due of $2,172,415 at December 31, 1995
including $143,518 of accrued interest) and a note payable of $10,000 (total
balance due of $10,000 at December 31, 1995). The first mortgage loan bears
interest at prime plus 1.25% with a minimum of 9.5% and a maximum of 14.5%,
therefore 9.75% at December 31, 1995 and 1994. The other mortgage loan bears
interest at prime plus 1%, therefore 9.5% at December 31, 1995 and 1994. Such
mortgage is payable interest only in monthly installments, and was due in 1994.
The note payable bears interest at 10% payable interest only on a quarterly
basis, principal was due in 1994. In 1988, a $95,000 second mortgage loan (total
balance due of $110,538 at December 31, 1995 including $10,260 of accrued
interest) was obtained which bears interest at prime plus 1.25%, therefore 9.75%
at December 31, 1995 and 1994, and was due in 1994. In 1991, an $100,000 third
mortgage loan (total balance due of $119,885 at December 31, 1995 including
$12,765 of accrued interest) was made which bears interest at 11%, principal and
interest payable monthly, and was due in 1994. Due to decreased cash flow, the
Registrant stopped making scheduled debt service payments to the holder of the
first, second and third mortgages. Notice of default was received from the
lender on November 29, 1993. The Registrant pursued settlement discussions with
the lender; however, in December 1994 the mortgage notes were sold. The
Registrant entered into an agreement with the new holder of the mortgages
whereby the maturities of the notes were extended to 1999 and monthly payments
of interest are to be made to the new note holder in an amount equal to net
operating income, with a minimum of $7,000 per month, increasing to $9,000 per
month in January 1996 and to $11,000 per month in January 1997. The property is
managed by BCMI. As of December 31, 1995, 53 of 58 residential units were under
lease (91%) at monthly rents ranging from $425 to $1,768.
All leases are renewable, one-year leases. The occupancy for the
previous four years was 58% for 1994, 63% for 1993, 79% for 1992 and 84% for
1991. The monthly rental range has been approximately the same since 1991. For
tax purposes, this property has a federal tax basis of $3,618,113 and is
depreciated using the straight-line method with a useful life of 27.5 years. The
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annual real estate taxes are $30,226 which is based on assessed value of
$365,760 taxed at a rate of $8.264 per $100. No one tenant occupies ten percent
or more of the building. It is the opinion of the management of the Registrant
that the property is adequately covered by insurance.
b. The Green Street Apartments - consists of 18 apartment units in
three adjoining buildings located at 1826-1828-1830 Green Street in
Philadelphia, Pennsylvania. In July 1987, Registrant acquired its interest in
this property by purchasing a 99% general partnership interest in 18th & Green
Associates General Partnership ("18th & Green"), a Pennsylvania general
partnership, for $800,000. 18th & Green contracted to acquire and rehabilitate
the Property for $1,600,000 ($100 per sf). Additionally, $100,000 of
cash/marketing reserves were provided. The total cost of the project was funded
by Registrant's equity contribution and mortgage financing of $900,000 (total
balance due of $1,427,998 at December 31, 1995 including $118,196 of accrued
interest) which has been added to principal) which bears interest at 12%. During
1990, Registrant defaulted on its mortgage loan and the lender obtained a
confession of judgment pursuant to the loan documents. Registrant petitioned the
court to open the judgment and negotiated a settlement with the lender. The
settlement required the Registrant to make payments toward delinquent interest
in December 1990 and April 1991. Registrant did not make the April 1991 payment,
however, no notice of default was received from the lender. In 1992, the
Resolution Trust Corporation ("RTC") took over control of the lender. The
Registrant received notice in 1993 that the RTC had sold the loan. The purchaser
of the note contacted the Registrant who attempted to negotiate a loan
modification. In September 1994, the mortgage note was sold again. The
Registrant entered into an agreement with the new holder of the mortgage whereby
the note maturity is extended to 1999 and monthly payments of interest are to be
made in an amount equal to net operating income, with a minimum of $5,750 per
month. The property is managed by BCMI. As of December 31, 1994, 16 apartments
were under lease (89%) at monthly rents ranging from $495 to $795.
All leases are renewable, one-year leases. The occupancy for the
previous four years was 99% for 1994, 98% for 1993, 91% for 1992 and 94% for
1991. The monthly rental range has been approximately the same since 1991. For
tax purposes, this property has a federal tax basis of $1,480,897 and is
depreciated using the straight-line method with a useful life of 27.5 years. The
annual real estate taxes are $15,470 which is based on assessed value of
$187,200 taxed at a rate of $8.264 per $100. No one tenant occupies ten percent
or more of the building. It is the opinion of the management of the Registrant
that the property is adequately covered by insurance.
c. The Loewy Building - consists of two adjoining buildings located
at 505 West Fourth Street in Winston-Salem, North Carolina. The buildings
consist of 63,300 sf of commercial space. In November 1986, the Registrant
acquired its interest in this Property by purchasing a 99% interest in Triad
Properties General Partnership ("Triad"), a Pennsylvania general partnership,
for a cash contribution of $2,250,000. Triad contracted to acquire and
rehabilitate the Property for $5,690,000 ($88 per sf). Additionally, $560,000 of
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working capital/marketing reserves were provided. The total cost of the project
was funded by Registrant's equity contribution, mortgage financing of $3,560,000
(total balance due of $4,190,591 at December 31, 1995 including $405,691 of
accrued interest) and a $500,000 note payable to the Developer (Cwood
Properties, Inc., Thomas L. Kummer and Gail R. Citron; all of whom are general
partners of Triad). The first mortgage bears interest at 11.5%. Triad obtained
$200,000 (total balance due of $265,160 at December 31, 1995 including $65,160
of accrued interest) and interest at prime with a minimum of 6% and a maximum of
8% adjusting annually on January 2, therefore 8% and 6% at December 31, 1995 and
1994, respectively) of additional financing in 1987 to fund cost overruns
resulting from delays and changes in rehabilitation and construction plans, and
the Registrant advanced an additional $1,098,000. The property is managed by
BCMI. As of December 31, 1995, 59,845 sf were rented (95%) at annual rates
ranging from $6.00 sf to $12.93 sf.
The occupancy for the previous four years has been 93% for 1994, 93%
for 1993, 79% for 1992 and 80% for 1991. The range for annual rents has been
$6.95 to $14.08 per sf for 1994, $6.95 to $13.41 per sf for 1993, $7.08 to
$13.08 per sf for 1992 and $7.08 to $13.44 per sf for 1991. There are three
tenants who each occupy ten percent or more of the rentable square footage. They
operate principally as a bank, a law firm and a retail store.
The following is a table showing commercial lease expirations at
Loewy Building for the next five years.
Total annual % of gross
Number of Total sf of rental covered annual rental
Years leases expiring expiring leases by expiring leases from property
1996 2 21,047 $270,752 37%
1997 2 10,495 127,757 17%
1998 1 1,457 13,113 2%
1999 2 8,100 98,999 13%
2000 1 3,200 45,312 6%
One commercial tenant at the building which occupies 15,546 sf has a
lease which expired in October 1995. This lease has not been renewed but the
tenant is still occupying the space under the terms of the expired lease. The
total annual rental covered by this lease is $110,426 which represents 7% of the
total gross annual rental. The Registrant is in the process of negotiating a new
lease with the tenant which would increase the annual rental rate by 30% and
extend the lease for at least three years. There are two commercial leases which
expire in 1996. The first lease is for 200 sf and although no negotiations have
taken place, the Registrant expects the tenant to renew. The other lease, which
expires in December 1996, is for 20,847 sf and no negotiations regarding renewal
have taken place. For tax purposes of depreciation, this property has federal
tax basis of $6,116,065 and is depreciated using the straight-line method with a
useful life of 27.5 years. The annual real estate taxes are $21,967 which is
based on an assessed value of $1,657,900 taxed at a rate of $1.325 per $100. It
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is of the opinion of the management of the Registrant that the property is
adequately covered by insurance.
d. Magazine Place - is a four story building consisting of 57
apartment units located at 730 Magazine Street in New Orleans, Louisiana. In
October 1986, the Registrant was admitted with a 60% general partnership
interest in Magazine Place Limited Partnership ("MPP"), a Louisiana partnership,
for a cash contribution of $600,000. Registrant believes that its acquisition of
a majority general partnership interest in MPP, though technically non-compliant
with the provisions of Registrant's partnership agreement disapproving of
investments in limited partnerships, will have no adverse impact on Registrant's
limited partners. Registrant subsequently made an additional equity contribution
of $142,393 to fund certain fees incurred by MPP. MPP acquired and rehabilitated
the property for $4,091,393 ($51 per sf), including mortgage financing of
$3,050,000 (principal balance of $2,912,697 at December 31, 1995) and cash
contributions by limited partners of $344,000. The mortgage note bears interest
at 10%, is payable in monthly installments of principal and interest of $26,766,
and is due in 1999. The excess proceeds from equity investments and mortgage
financing over the acquisition and rehabilitation costs were utilized to provide
working capital reserves. In 1987, Registrant made an equity contribution of
$7,000 (MPP's other partners contributed cash in the amount of $28,000 in 1987)
to fund operating deficits incurred during the lease-up period. According to the
Amended and Restated Partnership Agreement, the Registrant's interest in MPP
will be reduced from 60% to 40% as of the First Conversion Date. The First
Conversion Date is the date on which the Registrant will have received a return
of its initial capital contribution. For purposes of determining the First
Conversion Date, the Registrant will be deemed to have received a return of its
initial capital contribution when the sum of the following amounts equals
$600,000: (i) cash distributions from MPP; (ii) investment tax credit allocable
to the Registrant; and (iii) 50% of the aggregate of MPP's net losses and
deductions allocable to the Registrant. As of December 31, 1994, the Registrant
had received a return of its initial capital and the Registrant's interest in
the MPP was reduced to 40%. Since that date, the Registrant has accounted for
its investment in MPP on the equity basis. The property is managed by an
independent property management firm. As of December 31, 1995, 52 residential
units were under lease (91%) at monthly rents ranging from $610 to $1,240.
All leases are renewable, one-year leases. The occupancy for the
previous four years was 89% for 1994, 97% for 1993, 90% for 1992 and 95% for
1991. The monthly rental range has been approximately the same since 1991. For
tax purposes, this property has a federal tax basis of $2,586,532 and is
depreciated using the straight-line method with a useful life of 27.5 years. The
annual real estate taxes are $14,077 which is based on assessed value of $79,000
taxed at a rate of $17.819 per $100. No one tenant occupies ten percent or more
of the building. It is the opinion of the management of the Registrant that the
property is adequately covered by insurance.
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Item 3. Legal Proceedings
a. For a description of legal proceedings involving Registrant's
properties, see Part II, Item 7. Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Cathedral Court.
b. No such proceeding was terminated during the fourth quarter of
the fiscal year covered by this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal years covered by this
report to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
a. There is no established public trading market for the Units.
Registrant does not anticipate any such market will develop. Trading in the
Units occurs solely through private transactions. The Registrant is not aware of
the prices at which trades occur. Registrant's records indicate that 92 Units of
record were sold or exchanged in 1995.
b. As of December 31, 1995, there were 1,577 record holders of
Units.
c. Registrant has not declared any cash dividends in 1995 or 1994.
Item 6. Selected Financial Data
The following selected financial data are for the five years ended
December 31, 1995. The data should be read in conjunction with the consolidated
financial statements included elsewhere herein. This data is not covered by the
independent auditors' report.
1995 1994 1993 1992 1991
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Rental income $1,658,031 $2,016,023 $1,971,274 $1,991,600 $1,895,520
Interest income 840 1,005 3,365 6,131 1,419
Net loss (533,933) (1,756,104) (1,719,611) (1,221,214) (1,680,415)
Net loss per Unit (37.80) (124.35) (121.76) (86.54) (118.99)
Total assets(net 8,887,472 18,771,092 19,662,834 20,848,362 21,919,371
of depreciation
and amortization)
Debt obligations 7,776,693 15,216,724 14,642,621 14,337,159 14,501,479
Note: See Part II. Item 7.2 Results of Operations for a discussion of factors
which materially affect the comparability of the information reflected in the
above table.
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Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
(1) Liquidity
At December 31, 1995, Registrant had cash of approximately
$10,685. Such funds are expected to be used to pay liabilities and general and
administrative expenses of Registrant and to fund cash deficits of the
properties. Cash generated from operations is used primarily to fund operating
expenses and debt service. If cash flow proves to be insufficient, the
Registrant will attempt to negotiate with the various lenders in order to remain
current on all obligations. The Registrant is not aware of any additional
sources of liquidity.
As of December 31, 1995, Registrant had restricted cash of
$108,288 consisting primarily of funds held as security deposits, replacement
reserves and escrows for taxes. As a consequence of these restrictions as to
use, Registrant does not deem these funds to be a source of liquidity.
In recent years the Registrant has realized significant losses,
including the foreclosure of one property, due to the properties' inability to
generate sufficient cash flow to pay their operating expenses and debt service.
At the present time, with the exception of the Magazine Place, where the
Registrant does not receive any of the distributable cash (see page 7), the
Registrant has feasible loan modifications in place. However, in all three
cases, the mortgages are basically "cash-flow" mortgages, requiring all
available cash after payment of operating expenses to be paid to the first
mortgage holder. Therefore, it is unlikely that any cash will be available to
the Registrant to pay its general and administrative expenses.
It is the Registrant's intention to continue to hold the
properties until they can no longer meet the debt service requirements and the
properties are foreclosed, or the market value of the properties increases to a
point where they can be sold at a price which is sufficient to repay the
underlying indebtedness (principal plus accrued interest).
Since the lenders have agreed to forebear from taking any
foreclosure action as long as cash flow payments are made, the Registrant
believes it is appropriate to continue presenting the financial statements on a
going concern basis.
(2) Capital Resources
Due to the relatively recent rehabilitations of the properties,
any capital expenditures needed are generally replacement items and are funded
out of cash from operations or replacement reserves, if any. The Registrant is
not aware of any factors which would cause historical capital expenditures
levels not to be indicative of capital requirements in the future and
accordingly does not believe that it will have to commit material resources to
capital investment in the foreseeable future. If the need for capital
expenditures does arise, the first mortgage holder for Lincoln Court and 18th
and Green has agreed to fund capital expenditures at terms similar to the first
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mortgage. The mortgagee funded $169,445 during 1995 at Lincoln Court.
Results of Operations
During 1995, Registrant incurred a net loss of $533,993 ($37.80
per limited partnership unit), compared to a net loss of $1,756,104 ($124.35 per
limited partnership unit) in 1994 and a net loss of $1,719,611 ($121.76 per
limited partnership unit), in 1993. Included in the 1995 loss was an
extraordinary gain of $1,316,188 due to the foreclosure of Cathedral Court.
Rental income increased from $1,971,274 in 1993 to $2,016,023
in 1994 and decreased to $1,658,031 in 1995. The decrease from 1994 to 1995 is
due to a decrease in rental income recognized by the Registrant at Magazine
Place, due to the reduction in the Registrant's ownership interest in MPP (See
Item 2.d. Magazine Place) partially offset by increases in rental income at
Lincoln Court and Loewy Building due to higher average occupancy rates. The
increase from 1993 to 1994 is due mainly to an increase in rental income at
Loewy Building which resulted from the billing of prior years' common area
charges.
Other income increased from $0 in 1993 to $81,870 and decreased
to $0 in 1995. The increase from 1993 to 1994 and the decrease from 1994 to 1995
was the result of insurance proceeds resulting from a claim for water damage to
several units in 1994 at Cathedral Court.
As a result of a decrease in the average amount of cash held by
the Registrant, interest income declined from $3,365 in 1993 to $1,005 in 1994
to $840 in 1995.
Rental operations expenses increased from $1,173,645 in 1993 to
$1,335,727 in 1994 and decreased to $1,088,752 in 1995. The decrease from 1994
to 1995 is due to change in accounting method as a result of the change in
ownership at one of the properties (Magazine Place) partially offset by the
overall increase in operating expenses such as utilities, maintenance,
management fees, commissions and advertising, at Lincoln Court and Loewy
Building, due to the higher occupancy. The overall increase from 1993 to 1994
results from the increase of several operating expenses items at the various
properties such as utilities, commissions, legal, maintenance, insurance, and
wages and salaries, partially offset by a decrease in real estate taxes at one
of the properties.
Interest expense increased from $1,376,400 in 1993 to
$1,478,380 in 1994 to $1,447,420 in 1995. The decrease from 1994 to 1995 is the
result an increase in interest expense at Lincoln Court and Cathedral Court
partially offset by a decrease at 18th and Green and the change in accounting
method as a result of the change in ownership at one of the properties (Magazine
Place). Interest expense increased at Lincoln Court due to an increase in the
principal balance upon which interest is accrued along with an increase in the
interest rate. Cathedral Court interest expense increased due to an increase in
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the interest rate from 6% to 12% due to the expiration of a loan modification.
Interest expense decreased at 18th and Green due to the accrual of interest in
1994 on amounts owed to an affiliate of the Registrant upon which interest had
not been accrued in prior years. The increase in interest expense from 1993 to
1994 is due to the additional accrual of interest on the notes which were
restructured pursuant to the agreements reached with the new note holders (See
Part I. Item 2. Properties - Lincoln Court and Green Street Apartments) combined
with the accrual of additional interest in 1994 of interest that should have
been accrued in prior years.
Depreciation and amortization decreased $1,007,481 in 1993 to
$927,774 in 1994 to $829,265 in 1995. The decrease from 1994 to 1995 is due to
the change in the accounting method as a result of the change in ownership at
one of the properties (Magazine Place). The overall decrease from 1993 to 1994
is the result of an adjustment made in 1993 to correct a previous year's error
which increased depreciation to a higher-than-usual level in 1993 at Loewy
Building. Depreciation expense for 1994 is at the usual level.
In 1995, income of $150,230 was recognized at the Registrant's
five properties compared to losses of $1,590,000 in 1994 and $1,533,000 in 1993.
A discussion of property operations/activities follows:
In 1995, Registrant sustained a loss of $300,000 at Lincoln Court
including $174,000 of depreciation expense compared to a loss of $285,000
including $174,000 of depreciation expense in 1994 and a loss of $236,000
including $174,000 of depreciation expense in 1993. The increase in the loss
from 1994 to 1995 is the result of an increase in operating expenses such as
management fees, commissions and advertising and an increase in interest expense
partially offset by an increase in rental income. Operating expenses and rental
income increased due to an increase in average occupancy (58% to 91%) and a
corresponding increase in operating expenses. Interest expense increased due to
an increase in the principal balance upon which interest is accrued along with
an increase in the interest rate. The increase in the loss from 1993 to 1994 is
due to an increase in certain operating expenses such as utilities, maintenance,
advertising, and commissions and an increase in legal fees (incurred in
connection with the loan default and subsequent loan modification which occurred
in 1994. See Part I. Item 2.b). Utilities and maintenance charged to the
property increased as occupancy decreased from 63% to 58% and maintenance work
was done in order to attract new tenants. Advertising and commissions increased
as the marketing campaign was enhanced to attract new tenants.
On June 30, 1992 DHP, Inc. assigned to D, LTD a note receivable from
the Registrant in the amount of $432,103 which bears interest at 10% with the
entire principal and accrued interest due on June 30, 1997. Interest accrued
during 1995 was $45,703. Payments on the note are to be made from available cash
flow and before any distribution can be made to the Registrant's limited
partners. The balance of the note at December 31, 1995 was $533,200.
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In 1995, the Green Street Apartments sustained a loss of $153,000
including $59,000 of depreciation expense compared to a loss of $281,000 in 1994
including $59,000 of depreciation expense and a loss of $89,000 in 1993
including $66,000 of depreciation expense. The decrease from 1994 to 1995 and
the increase from 1993 to 1994 is due primarily to the additional accrual of
interest on the modified loan (See Part I. Item 2.c.) combined with the accrual
of additional interest in 1994 of interest that should have been accrued in
prior years.
On June 30, 1992 DHP, Inc. assigned to D, LTD a note receivable,
from 18th and Green to the Registrant, that had been assigned to it, in the
amount of $63,493 which bears interest at 10% with the entire principal and
accrued interest due on June 30, 1997. On December 6, 1993 D, LTD obtained a
judgment in the amount of $78,171 on this note in Common Pleas Court for
Philadelphia County. The judgment accrues interest at 15%. Interest accrued
during 1995 was $8,001. Payments on the judgment are to be made from available
cash flow from 18th and Green. The balance of the note at December 31, 1995 was
$40,015.
In 1995, Cathedral Court recognized income of $636,000 including
$337,000 of depreciation expense compared to a loss of $576,000 including
$334,000 of depreciation expense in 1994 and a loss of $691,000 including
$338,000 of depreciation expense in 1993. The 1995 loss without the effect of
the foreclosure would have been $850,000. The increase in the loss from 1994 to
1995 is the result of an increase in interest expense due to an increase in the
interest rate from 6% to 12% due to the expiration of a loan modification
partially offset by a decrease in other income. Other income decreased due to
the receipt of insurance proceeds in 1994 due to a claim for water damage in
several units. . Included in operations from 1995 is an extraordinary gain of
$1,316,188 representing the difference between the fair market value of the
assets relinquished and the liabilities satisfied. The decreased loss from 1993
to 1994 was primarily due to the receipt of insurance proceeds of $81,000 in
1994, which resulted from a claim for water damage to several units, combined
with a decrease of $23,000 in legal fees, due to legal fees paid in 1993
associated with the settlement agreement and dismissal of the bankruptcy. The
remainder of the decrease is due to a decrease in other operating expenses such
as insurance and real estate taxes.
In 1995, the Loewy Building sustained a loss of $332,000 including
$260,000 of depreciation expense compared to a loss of $379,000 including
$260,000 of depreciation expense, in 1994 and a loss of $490,000 including
$301,000 of depreciation expense in 1993. The decrease in the loss from 1994 to
1995 is the result of an increase in rental income partially offset by an
increase in operating expenses. Rental income increased due to an increase in
average occupancy from 93% to 95% along with higher rental rates. Operating
expenses such as utilities, maintenance and management fees increased due to the
increase in occupancy and (with respect to management fees) the higher average
rental rates. The decreased loss from 1993 to 1994 is the combination of an
increase in rental income and a decrease in depreciation partially offset by an
increase in other operating expenses such as utilities, management fees and real
estate taxes. The increase in rental income is primarily the result of the
-12-
billing to tenants of prior years' common area charges. Depreciation decreased
in 1994 due to an adjustment made in 1993 which increased depreciation to a
higher-than-usual level in 1993. Depreciation expense for 1994 is at the usual
level.
Summary of Minority Interests
In 1995, the Registrant incurred a net loss of $19,121 at Magazine
Place compared to a loss of $69,000 including $102,000 of depreciation expense
in 1994 and a loss of $27,000 including $127,000 of depreciation expense in
1993. Prior to 1995, Magazine Place was treated as a consolidated subsidiary.
Pursuant to the First Conversion Date as discussed in Item 2. Properties, the
Registrant's ownership interest was reduced to 40%. From January 1, 1995
forward, the investment is accounted for by the equity method. The increase in
the loss from 1993 to 1994 is due to an increase in certain operating expenses
such as maintenance, repairs, insurance, and wages and salaries partially offset
by an increase in rental income.
Effective January 1, 1995, the Registrant adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." There was no cumulative effect of the adoption of SFAS No. 121.
Item 8. Financial Statements and Supplementary Data
Registrant is not required to furnish the supplementary financial
information referred to in Item 302 of Regulations S-K.
-13-
Independent Auditor's Report
To the Partners of
Diversified Historic Investors III
We have audited the accompanying consolidated balance sheets of Diversified
Historic Investors III (a Pennsylvania Limited Partnership) and its subsidiaries
as of December 31, 1995 and 1994 and the related consolidated statements of
operations, changes in partners' equity and cash flows for the years ended
December 31, 1995, 1994 and 1993. These consolidated statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 in the first
paragraph presents fairly, in all material respects, the financial position of
Diversified Historic Investors III and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for the years
ended December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule of Real Estate and
Accumulated Depreciation on page 30 is presented for the purposes of additional
analysis and is not a required part of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. In recent years, the Partnership
has incurred significant losses from operations, which raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Gross, Kreger & Passio
Philadelphia, Pennsylvania
February 9, 1996
-14-
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AND FINANCIAL STATEMENT SCHEDULES
---------------------------------
Consolidated financial statements: Page
----
Consolidated Balance Sheets at December 31, 1995 and 1994 16
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994, and 1993 17
Consolidated Statements of Changes in Partners' Equity for the
Years Ended December 31, 1995, 1994, and 1993 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993 19
Notes to consolidated financial statements 20-28
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 30
Notes to Schedule XI 31
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
-15-
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 1995 and 1994
Assets
------
1995 1994
---------- --------
Rental properties at cost:
Land $ 465,454 $ 2,029,818
Buildings and improvements 11,857,302 23,324,996
Furniture and fixtures 86,351 215,794
------------ ------------
12,409,107 25,570,608
Less - accumulated depreciation (3,991,148) (7,035,889)
------------ ------------
8,417,959 18,534,719
Cash and cash equivalents 10,685 31,437
Restricted cash 108,288 108,674
Accounts receivable 7,385 17,063
Investment in affiliate 276,180 0
Other assets (net of accumulated
amortization of $69,775 and $109,081) 66,975 79,199
------------ ------------
Total $ 8,887,472 $ 18,771,092
============ ============
Liabilities and Partners' Equity
--------------------------------
Liabilities:
Debt obligations $ 7,776,693 $ 15,216,724
Accounts payable:
Trade 579,664 454,438
Related parties 533,200 599,721
Taxes 155,907 465,705
Interest payable 755,866 2,319,544
Tenant security deposits 54,919 143,216
Other liabilities 15,399 13,457
------------ ------------
Total liabilities 9,871,648 19,212,805
------------ ------------
Minority Interests 0 8,530
------------ ------------
Partners' equity (984,176) (450,243)
------------ ------------
Total $ 8,887,472 $ 18,771,092
============ ============
The accompanying notes are an integral part of these financial statements.
-16-
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------- ---------- ----------
Revenues:
Rental income $ 1,658,031 $ 2,016,023 $ 1,971,274
Other income 0 81,870 0
Interest income 840 1,005 3,365
----------- ----------- -----------
Total revenues 1,658,871 2,098,898 1,974,639
----------- ----------- -----------
Costs and expenses:
Rental operations 1,088,752 1,335,727 1,173,645
General and administrative 140,800 141,181 142,090
Interest 1,447,420 1,478,380 1,376,400
Depreciation and amortization 829,265 927,774 1,007,481
----------- ----------- -----------
Total costs and expenses 3,506,237 3,883,062 3,699,616
----------- ----------- -----------
Loss before minority interests and (1,847,366) (1,784,164) (1,724,977)
equity in affiliate
Minority interests' portion of loss 16,365 28,060 5,366
Equity in net loss of affiliate (19,120) 0 0
----------- ----------- -----------
Loss before extraordinary item (1,850,121) 1,756,104 1,719,611
Extraordinary gain 1,316,188 0 0
----------- ----------- -----------
Net loss ($ 533,993) ($1,756,104) ($1,719,611)
=========== =========== ===========
Net loss per limited partnership unit:
Loss before minority interests and
equity in affiliate (130.80) (126.33) (122.14)
Minority interests' portion of loss 1.15 1.99 .38
Equity in net loss of affiliate (1.35) 0 0
----------- ----------- -----------
Loss before extraordinary item (131.00) (124.35) (121.76)
Extraordinary gain 93.20 0 0
----------- ----------- -----------
($ 37.80) ($ 124.35) ($ 121.76)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-17-
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
------------------------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
Dover
Historic Limited
Advisors II(1) Partners(2) Total
-------------- ----------- -----
Percentage participation in profit or loss 1% 99% 100%
== === ====
Balance at December 31, 1992 (82,785) 3,108,257 3,025,472
Net loss (17,196) (1,702,415) (1,719,611)
----------- ----------- -----------
Balance at December 31, 1993 (99,981) 1,405,842 1,305,861
Net loss (17,561) (1,738,543) (1,756,104)
----------- ----------- -----------
Balance at December 31, 1994 (117,542) (332,701) (450,243)
Net loss (5,510) (545,483) (550,993)
----------- ----------- -----------
Balance at December 31, 1995 ($ 123,052) ($ 878,184) ($1,001,236)
=========== =========== ===========
(1) General Partner.
(2) 13,981.5 limited partnership units outstanding at December 31, 1995,
1994, and 1993.
The accompanying notes are an integral part of these financial statements.
-18-
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
---------- ---------- ---------
Cash flows from operating activities:
Net loss ($ 533,993) ($1,756,104) ($1,719,611)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 829,265 927,774 1,007,481
Extraordinary gain (1,316,188) 0 0
Minority interests (16,365) (28,060) (5,366)
Equity in loss of affiliate 19,120 0 0
Changes in assets and liabilities:
Increase in restricted cash (45,897) (7,552) (4,949)
Decrease (increase) in accounts 7,450 (1,754) 12,186
receivable
Decrease in other assets 1,604 380 0
Increase (decrease) in accounts 204,853 331,553 (281,094)
payable - trade
Increase (decrease) in accounts 33,479 (206,364) 177,688
payable - related parties
Increase in accounts payable-taxes 59,277 41,342 295,315
Increase in interest payable 903,426 125,380 485,979
(Decrease) increase in tenant security (31,928) 18,070 (25,014)
deposits
Increase in other liabilities 1,942 8,338 5,119
----------- ----------- -----------
Net cash provided by (used in)
operating activities: 116,105 (546,997) (52,266)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (302,989) (18,609) (17,690)
----------- ----------- -----------
Net cash used in
investing activities: (302,989) (18,609) (17,690)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from debt obligations 196,445 635,956 5,000
Payments of principal under debt (30,313) (61,853) (123,544)
obligations ----------- ----------- -----------
Net cash provided by (used in)
financing activities: 166,132 574,103 (118,544)
----------- ----------- -----------
(Decrease) increase in cash and cash (20,752) 8,497 (188,500)
equivalents
Cash and cash equivalents at beginning of 31,437 22,940 211,440
year ----------- ----------- -----------
Cash and cash equivalents at end of year $ 10,685 $ 31,437 $ 22,940
=========== =========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for interest $ 491,008 $ 299,696 $ 846,232
The accompanying notes are an integral part of these financial statements.
-19-
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE A - ORGANIZATION
Diversified Historic Investors III (the "Partnership") was formed in February
1986 under the laws of the Commonwealth of Pennsylvania. The Partnership was
formed to acquire, rehabilitate, and manage real properties which were certified
historic structures as defined in the Internal Revenue Code of 1986 (the
"Code"), or which were eligible for designation as such, utilizing mortgage
financing and the net proceeds from the sale of limited partnership units. Any
rehabilitations undertaken by the Partnership are done with a view to obtaining
certification of expenditures therefore as "qualified rehabilitations
expenditures" as defined in the Code.
The General Partner of the Partnership is Dover Historic Advisors II (a general
partnership), whose partners are Mr. Gerald Katzoff and DHP, Inc.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
The accompanying financial statements of the Partnership include the accounts of
three subsidiary partnerships (the "Ventures"), in which the Partnership has a
controlling interest with appropriate elimination of inter-partnership
transactions and balances. In addition, the Partnership owns a minority interest
of 40% in one partnership which it accounts for on the equity method. These
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of the Partnership's General
Partner, are necessary for a fair statement of the results for those years.
2. Depreciation
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Buildings and improvements are depreciated over 25
years and furniture and fixtures over five years.
3. Costs of Issuance
Costs incurred in connection with the offering and sale of limited partnership
units were charged against partners' equity as incurred.
-20-
4. Cash and Cash Equivalents
The Partnership considers all highly liquid instruments purchased with a
maturity of less than three months to be cash equivalents.
5. Interest Payable
Interest payable includes all accrued and unpaid interest on the debt
obligations, as well as interest in arrears.
6. Net Loss Per Limited Partnership Unit
The net loss per limited partnership unit is based on the weighted average
number of limited partnership units outstanding during the period (13,891.5 in
1995, 1994, and 1993).
7. Income Taxes
Federal and state income taxes are payable by the individual partners;
accordingly, no provision or liability for income taxes is reflected in the
annual financial statements.
8. Restricted Cash
Restricted cash includes amounts held for tenant security deposits and real
estate tax reserves.
9. Revenue Recognition
Revenues are recognized when rental payments are due on a straight-line basis.
Rental payments received in advance are deferred until earned.
10. Other income
Other income consists of insurance proceeds received at one of the properties
resulting from a claim for water damage to several of the units.
11. Rental Properties
Rental properties are stated at cost. A provision for impairment of value is
recorded when a decline in value of property is determined to be other than
temporary as a result of one or more of the following: (1) a property is offered
for sale at a price below its current carrying value, (2) a property has
significant balloon payments due within the foreseeable future for which the
Partnership does not have the resources to meet, and anticipates it will be
unable to obtain replacement financing or debt modification sufficient to allow
a continued hold of the property over a reasonable period of time, (3) a
property has been, and is expected to continue, generating significant operating
deficits and the Partnership is unable or unwilling to sustain such deficit
results of operations, and has been unable to, or anticipates it will be unable
-21-
to, obtain debt modification, financing or refinancing sufficient to allow a
continued hold of the property for a reasonable period of time or, (4) a
property's value has declined based on management's expectations with respect to
projected future operational cash flows and prevailing economic conditions. An
impairment loss is indicated when the undiscounted sum of estimated future cash
flows from an asset, including estimated sales proceeds, and assuming a
reasonable period of ownership up to 5 years, is less than the carrying amount
of the asset. The impairment loss is measured as the difference between the
estimated fair value and the carrying amount of the asset. In the absence of the
above circumstances, properties and improvements are stated at cost. An analysis
is done on an annual basis at December 31 of each year.
12. New Accounting Pronouncement
Effective January 1, 1995, the Partnership adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
There was no cumulative effect of the adoption of SFAS No. 121.
NOTE C - GOING CONCERN
In recent years the Partnership has realized significant losses, including the
foreclosure of one property, due to the properties' inability to generate
sufficient cash flow to pay their operating expenses and debt service. At the
present time, with the exception of the Magazine Place, where at the present
time the Partnership does not receive any of the distributable cash (see page
7), the Partnership has feasible loan modifications in place. However, in all
three cases, the mortgages are basically "cash-flow" mortgages, requiring all
available cash after payment of operating expenses to be paid to the first
mortgage holder. Therefore, it is unlikely that any cash will be available to
the Partnership to pay its general and administrative expenses.
It is the Partnership's intention to continue to hold the properties until they
can no longer meet the debt service requirements and the properties are
foreclosed, or the market value of the properties increases to a point where
they can be sold at a price which is sufficient to repay the underlying
indebtedness (principal plus accrued interest).
Since the lenders have agreed to forebear from taking any foreclosure action as
long as cash flow payments are made, the Partnership believes it is appropriate
to continue presenting the financial statements on a going concern basis.
NOTE D - PARTNERSHIP AGREEMENT
The significant terms of the Agreement of Limited Partnership (the "Agreement"),
as they relate to the financial statements, follow:
All distributable cash from operations (as defined in the Agreement of Limited
Partnership) will be distributed 90% to the limited partners and 10% to the
General Partner.
-22-
All distributable cash from sales or dispositions (as defined) will be
distributed to the limited partners up to their adjusted invested capital (as
defined) plus an amount equal to the sum of the greater of a 6% cumulative,
noncompounded annual return on the average after-credit invested capital, less
amounts previously distributed (as defined); thereafter, after receipt by the
General Partner or its affiliates of any accrued but unpaid real estate
brokerage commissions, the balance will be distributed 15% to the General
Partner and 85% to the limited partners.
Net income or loss from operations of the Partnership is allocated 1% to the
General Partner and 99% to the limited partners.
NOTE E - ACQUISITIONS
The Partnership acquired five controlling or limited partnership interests in
Ventures during the period October 1986 to July 1987, as discussed below.
In October 1986, the Partnership was admitted, with a 60% general partnership
interest, to a Louisiana limited partnership which owns a building located in
Louisiana consisting of 57 residential units, for a cash capital contribution of
$600,000. Pursuant to the Amended and Restated Partnership Agreement, the
Partnership's interest was reduced to 40% effective January 1, 1995.
In November 1986, the Partnership was admitted, with a 99% general partnership
interest, to a Pennsylvania general partnership which owns a building located in
North Carolina consisting of 64,000 square feet of commercial space, for a cash
contribution of $2,450,000.
In December 1986, the Partnership was admitted, with a 99% general partnership
interest, to a Maryland general partnership which owns a property located in
Maryland consisting of 55 residential units and 14,800 square feet of commercial
space, for a cash contribution of $3,508,700. The lender on the property
foreclosed in January 1996.
In March 1987, the Partnership purchased a property consisting of three
buildings (58 residential units) located in Pennsylvania for a cash capital
contribution of $500,000.
In July 1987, the Partnership was admitted, with a 99% general partnership
interest, to a Pennsylvania general partnership which owns a building located in
Pennsylvania consisting of 18 residential units, for a cash capital contribution
of $800,000.
-23-
NOTE F- DEBT OBLIGATIONS
Debt obligations are as follows:
December 31,
------------
1995 1994
---- ----
Mortgage loan, interest at 11 1/2%, principal and $ 3,784,900 $ 3,784,900
interest payable monthly in installments with a
minimum of $25,000, plus 70% of the gross revenues
from the rental of 10,330 square feet on the first
and second floors; due November 1997;
collateralized by the related rental property;
accrued interest of $405,691 relating to this loan
is included in interest payable on the balance
sheet
Note payable, interest payable monthly at prime, 200,000 200,000
with a minimum of 6% and a maximum of 8%,
adjusting annually on January 2 (8% and 6% at
December 31, 1995 and 1994, respectively); due in
1997; collateralized by the related rental
property; accrued interest of $65,160 relating to
this loan is included in interest payable on the
balance sheet
Allowed unsecured claims in the amount of $268,042 199,058 213,357
are to be repaid, without interest, in the
following manner: 15% at substantial consummation
of the Plan of Reorganization and 17% in each of
the five successive years
Priority tax claims in the amount of $80,705 36,638 52,652
payable commencing February 1993 in equal
quarterly installments of $5,055.52. The note
bears interest at 9% and is due in November 1997
Mortgage loan, interest only payable monthly at 0 4,524,000
the greater of prime plus 2% or 12% fixed,
therefore 12% at December 31, 1995 and 1994;
collateralized by the related rental property (A)
Priority tax claims in the amount of $157,114 are 0 141,104
payable commencing January 1992 in equal quarterly
installments of $3,365.81. The note bears
interest at 20% and is due in May 1999 (A)
Note payable, interest only at 10% payable 10,000 10,000
quarterly; principal due in 1994; (B)
-24-
Mortgage loan, interest only at prime plus 1% 80,000 80,000
(9.5% at December 31, 1995 and 1994); payable
annually; principal and accrued interest due in
1994;collateralized by the related rental property;
accrued interest of $66,862 relating to this loan
is included in interest payable on the balance
sheet(B)
Mortgage loan, interest at prime plus 1 1/4% with 1,948,897 1,754,452
a minimum of 9.5% and a maximum of 14.5%;
therefore, 9.75% at December 31, 1995 and 1994;
principal due in 1999; collateralized by the
related rental property; accrued interest of
$76,656 relating to this loan is included in
interest payable on the balance sheet (C)
Mortgage loan, interest at 11% per annum; 107,120 107,120
principal due in 1999; collateralized by the
related rental property; accrued interest of
$12,765 relating to this loan is included in
interest payable on the balance sheet (C)
Note payable, interest at prime plus 1 1/4% (9.75% 100,278 100,278
at December 31, 1995 and 1994); principal due in
1999; collateralized by the related rental
property; accrued interest of $10,260 relating to
this loan is included in interest payable on the
balance sheet (C)
Mortgage loan, principal and interest of 0 2,941,059
$26,765.93 payable monthly; interest at 10%; due
in 1999; collateralized by the related rental
property (D)
Mortgage loan, interest at 12%; interest only
payable to the extent of net operating income with
a minimum of $5,750; principal due in 1999;
collateralized by the related rental property;
accrued interest of $118,196 relating to this
loan is included in interest payable on the balance
sheet (E) 1,309,802 1,307,802
---------- -----------
$ 7,776,693 $15,216,724
========== ==========
(A) The Partnership which owns the property that collaterizes this loan had
been in bankruptcy since January 1990. Although a Plan of Reorganization
was filed, it was not approved. However, pursuant to a settlement
agreement reached with the first mortgage holder on July 31, 1993, the
bankruptcy was dismissed. It was expected that, subsequent to the
bankruptcy's dismissal, the first mortgage holder would sell the loan,
however the Partnership would be given the right of first refusal. In
September 1994, a receiver was appointed to take possession of the
-25-
property. The lender on the property foreclosed in January 1996.
(B) Although these obligations have matured, the lenders have not made any
demand for payment.
(C) Monthly payments of interest are to be made, on all three loans combined,
in an amount equal to net operating income, with a minimum of $7,000 per
month, increasing to $9,000 per month in January 1996 and to $11,000 per
month in January 1997.
On December 2, 1994, the terms of this loan were modified to those
described above. In accordance with Statement of Financial Accounting
Standards No. 15, "Accounting for Debtors and Creditors for Troubled Debt
Restructurings" the effects of the modification have been and will
continue to be accounted for prospectively from the date of the
restructuring with no gain recognized at that time.
(D) According to the Amended and Restated Partnership Agreement, the
Partnership's interest in the property was reduced from 60% to 40% as of
December 31, 1994. Since that date, the Registrant has accounted for its
investment in MPP on the equity basis. See Note G - COMMITMENTS AND
CONTINGENCIES.
(E) On September 2, 1994, the terms of this loan were modified to those
described above. In accordance with Statement of Financial Accounting
Standards No. 15, "Accounting for Debtors and Creditors for Troubled Debt
Restructurings" the effects of the modification have been and will
continue to be accounted for prospectively from the date of the
restructuring with no gain recognized at that time.
Approximate maturities of the mortgage loan obligations at December 31, 1995,
for each of the succeeding five years are as follows:
1996 $ 152,221
1997 4,048,751
1998 44,717
1999 3,531,004
-----------
$ 7,776,693
===========
NOTE G - COMMITMENTS AND CONTINGENCIES
Pursuant to certain agreements, the developers of the properties and limited
partners in the Ventures are entitled to share in the following:
a. 15% to 50% of net cash flow from operations above certain specified
amounts (three properties)
b. 30% of the net proceeds, as defined, from the sale or refinancing of one
property. The Partnership is entitled to a priority distribution of such
proceeds prior to any payment to the developer.
-26-
The sellers of two of the properties (who have maintained minority interests in
the ventures) have agreed to reimburse the Partnership for cash flow deficits,
as defined, of the properties for a five-year period (one property) and an
eight-year period (one property). No reimbursements were made by the sellers
pursuant to these agreements.
According to the Amended and Restated Partnership Agreement, the Partnership's
interest in Magazine Place Limited Partnership ("MPP") was reduced from 60% to
40% as of the First Conversion Date. The First Conversion Date is the date on
which the Registrant will have received a return of its initial capital
contribution. For purposes of determining the First Conversion Date, the
Registrant will be deemed to have received a return of its initial capital
contribution when the sum of the following amounts equals $600,000: (i) cash
distributions from MPP; (ii) investment tax credit allocable to the Registrant;
and (iii) 50% of the aggregate of MPP's net losses and deductions allocable to
the Registrant. As of December 31, 1994, the Registrant had received a return of
its initial capital and the Registrant's interest in the MPP was reduced to 40%.
Since that date, the Registrant has accounted for its investment in MPP on the
equity basis.
NOTE H - EXTRAORDINARY GAINS
Due to insufficient cash flow at Cathedral Court General Partnership ("CCGP")
from the property owned by it, the property ceased making debt service payments
in 1989. In January 1990, CCGP filed a reorganization petition pursuant to
Chapter 11 of the U.S. Bankruptcy Code. Although a plan of reorganization was
filed, it was not approved. Pursuant to a settlement agreement reached with the
first mortgage holder on July 31, 1993 the bankruptcy was dismissed. The terms
of the settlement agreement called for payment to the first mortgage holder by
CCGP of certain monies held, and for CCGP to continue to control the property.
CCGP anticipated that, subsequent to the bankruptcy's dismissal, the first
mortgage holder would attempt to sell the loan, but that the Partnership would
be given a right of first refusal. In September 1994, due to the inability of
the first mortgage holder and CCGP to reach an agreement regarding CCGP's
purchase of the loan, the first mortgage holder petitioned the Circuit Court for
the City of Baltimore in the matter of Harrington v. Cathedral Court General
Partnership, Case No. 89340045/CE 106281, to have a receiver appointed, and such
petition was granted. Pursuant to the appointment of the receiver, CCGP was
directed to deliver immediate possession of any and all property connected with
and used in the current operation of the property to the receiver and on January
22, 1996 the lender foreclosed on the property. The Partnership wrote off the
property as of December 31, 1995. The Partnership has recognized an
extraordinary gain of $1,316,188 for the difference between the book value of
the property (which approximates fair value) and the extinguished debt.
NOTE I - TRANSACTIONS WITH RELATED PARTIES
Included in debt obligations for 1995, 1994 and 1993 is $140,000 owed to an
affiliate of the General Partner, by one of the Partnership's Ventures, for
additional amounts advanced for working capital needs.
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On June 30, 1992 DHP, Inc. assigned to D, LTD a note receivable from the
Registrant in the amount of $432,103 which bears interest at 10% with the entire
principal and accrued interest due on June 30, 1997. Interest accrued during
1995 was $45,703. Payments on the note are to be made from available cash flow
and before any distribution can be made to the Registrant's limited partners.
The balance of the note at December 31, 1995 was $533,200.
On June 30, 1992 DHP, Inc. assigned to D, LTD a note receivable, from 18th and
Green to the Registrant, that had been assigned to it, in the amount of $63,493
which bears interest at 10% with the entire principal and accrued interest due
on June 30, 1997. On December 6, 1993 D, LTD confessed judgment in the amount of
$78,171 against 18th and Green in Common Pleas Court for Philadelphia County.
The judgment accrues interest at 15%. Interest accrued during 1995 was $8,001.
Payments on the judgment are to be made from available cash flow from 18th and
Green. The balance of the note at December 31, 1995 was $40,015.
NOTE J - INCOME TAX BASIS RECONCILIATION
Certain items enter into the determination of the results of operations in
different time periods for financial reporting ("book") purposes and for income
tax ("tax") purposes. Reconciliations of net loss and partners' equity follow:
For the Years Ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
Net loss - book ($ 550,993) ($1,739,044) ($1,719,611)
Excess of tax over book depreciation 166,823 115,217 98,885
Interest 793,672 461,176 289,292
Gain on foreclosure 216,411 0 0
Other timing differences (2,746) (8,695) 0
Minority interest (19,675) 22,087 18,305
----------- ----------- -----------
Net loss - tax $ 603,492 ($1,149,259) ($1,313,129)
=========== =========== ===========
Partners' equity - book ($ 995,617) ($ 441,878) $ 1,305,861
1987 distribution of interest on (39,576) (39,576) (39,576)
escrow deposits to limited partners
Costs of issuance 1,697,342 1,697,342 1,697,342
Cumulative tax over (under) book loss 170,377 (986,854) (1,585,334)
----------- ----------- -----------
Partners' equity - tax $ 832,526 $ 229,034 $ 1,378,293
=========== =========== ===========
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SUPPLEMENTAL INFORMATION
-29-
DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
Costs
Capitalized
Subsequent
to
Initial Cost to Partnership(b) Acquisition
------------------------------ -----------
Buildings
and
Description (a) Encumbrances(f) Land Improvements Improvements
- - --------------- --------------- ---- ------------ ------------
64,000 square
feet of
commercial space
in Winston-Salem, 4,220,596 308,624 6,290,125 476,976
NC
58 apartment
units in
Philadelphia, PA 2,246,295 86,187 3,490,437 --
18 apartment
units in
Philadelphia, PA 1,309,802 70,643 1,559,017 --
----------- ----------- ----------- -----------
$ 7,776,693 $ 465,454 $11,339,579 $ 476,976
=========== =========== =========== ===========
Gross Amount at which Carried at
December 31, 1995
-----------------
Buildings
and Accumulated Date of Date
Land Improvements Total(c)(d) Depr.(d)(e) Constr.(a) Acquired
---- ------------ ----------- ----------- ---------- --------
308,624 6,767,111 7,075,735 2,180,266 1986-1988 11/14/86
86,187 3,617,525 3,703,712 1,279,237 1986-1987 9/9/86
70,643 1,559,017 1,629,660 531,645 1987
- - ------------- -------------- ------------- --------------
$465,454 $11,943,653 $12,409,107 $3,991,148
============= ============== ============= ==============
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DIVERSIFIED HISTORIC INVESTORS III
----------------------------------
(a limited partnership)
NOTES TO SCHEDULE XI
--------------------
December 31, 1995
(A) All properties are certified historic structures as defined in the
Internal Revenue Code. The "date of construction" refers to the period in
which such properties are rehabilitated.
(B) Includes development/rehabilitation costs incurred pursuant to turnkey
development agreements entered into when the properties are acquired.
(C) The aggregate cost of real estate owned at December 31, 1995, for Federal
income tax purposes is approximately $11,215,075. However, the depreciable
basis of buildings and improvements is reduced for Federal income tax
purposes by the investment tax credit and the historic rehabilitation
credit obtained.
(D) Reconciliation of real estate:
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year: $ 25,570,608 $ 25,551,999 $ 25,534,309
Additions during the year:
Improvements 297,731 18,609 17,690
------------ ------------ ------------
Deductions during the year:
Retirements (9,253,739) 0 0
Deconsolidated subsidiary (4,205,493) 0 0
------------ ------------ ------------
Balance at end of year $ 12,409,107 $ 25,570,608 $ 25,551,999
============ ============ ============
Reconciliation of accumulated depreciation:
1995 1994 1993
------------ ------------ ------------
Balance at beginning of year $ 7,035,889 $ 6,108,115 $ 5,102,596
Depreciation expense for the year 829,265 927,774 1,005,519
Retirements (2,830,686) 0 0
Deconsolidated subsidiary (1,040,320) 0 0
------------ ------------ ------------
Balance at end of year $ 3,991,148 $ 7,035,889 $ 6,108,115
============ ============ ============
(E) See Note B to the financial statements for depreciation method and lives.
(F) See Note E to the financial statements for further information.
,
-31-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of Registrant
a. Identification of Directors - Registrant has no directors.
b. Identification of Executive Officers
The General Partner of the Registrant is Dover Historic
Advisors II (DoHA-II), a Pennsylvania general partnership. The partners of
DoHA-II are as follows:
Name Age Position Term of Office Period Served
- - ---- --- -------- -------------- -------------
Gerald Katzoff 48 Partner in No fixed term Since February
DoHA-II 1986
DHP, Inc. -- Partner in No fixed term Since February
("Formerly Dover DoHA-II 1986
Historic Properties,
Inc.")
For further description of DHP, Inc., see paragraph e. of this Item.
There is no arrangement or understanding between either person named above and
any other person pursuant to which any person was or is to be selected as an
officer.
c. Identification of Certain Significant Employees. Registrant has
no employees. Its administrative and operational functions are carried out by a
property management and partnership administration firm engaged by the
Registrant.
d. Family Relationships. There is no family relationship between or
among the executive officers and/or any person nominated or chosen by Registrant
to become an executive officer.
e. Business Experience. DoHA-II is a general partnership formed in
February 1986. The partners of DoHA-II are DHP, Inc. and Gerald Katzoff. The
General Partner is responsible for the management and control of the
Registrant's affairs and has general responsibility and authority in conducting
its operations.
Gerald Katzoff (age 48) has been involved in various aspects of the
real estate industry since 1974. Mr. Katzoff is the owner of Katzoff Resorts,
which controls various hotel and spa resorts in the United States. Mr. Katzoff
is a principal in an entity which is the owner of a property in Avalon, New
Jersey which has filed a petition pursuant to Chapter 11 of the U.S. Bankruptcy
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Code. Mr. Katzoff is a former President and director of D, LTD., (formerly The
Dover Group, Ltd., the corporate parent of DHP, Inc.).
Dover Historic Properties, Inc. was incorporated in Pennsylvania in
December 1984 for the purpose of sponsoring investments in, rehabilitating,
developing and managing historic (and other) properties. In February 1992, Dover
Historic Properties, Inc.'s name was changed to DHP, Inc. DHP, Inc. is a
subsidiary of The Dover Group, Ltd., an entity formed in 1985 to act as the
holding company for DHP, Inc. and certain other companies involved in the
development and operation of both historic properties and conventional real
estate as well as in financial (non-banking) services. In February 1992, Dover
Group's name was changed to D, LTD.
The executive officers, directors, and key employees of DHP, Inc.
are described below.
Michael J. Tuszka (age 49) was appointed Chairman and Director of
both D, LTD and DHP, Inc. on January 27, 1993. Mr. Tuszka has been associated
with D, LTD and its affiliates since 1984.
Donna M. Zanghi (age 39) was appointed Secretary/Treasurer of DHP,
Inc. on June 15,1993. She is also a Director and Secretary/Treasurer of D, LTD.
She has been associated with D, LTD, and its affiliates since 1984, except for
the period from December 1986 to June 1989 and the period from November 1, 1992
to June 14, 1993.
Michele F. Rudoi (age 31) was appointed on January 27, 1993 as
Assistant Secretary and Director of both D. LTD and DHP, Inc.
Item 11. Executive Compensation
a. Cash Compensation - During 1995, Registrant has paid no cash
compensation to DoHA-II, any partner therein or any person named in paragraph c.
of Item 10. Certain fees have been paid to DHP, Inc. by Registrant.
b. Compensation Pursuant to Plans - Registrant has no plan pursuant
to which compensation was paid or distributed during 1995, or is proposed to be
paid or distributed in the future, to DoHA-II, any partner therein, or any
person named in paragraph c. of Item 10 of this report.
c. Other Compensation - No compensation not referred to in paragraph
a. or paragraph b. of this Item was paid or distributed during 1995 to DoHA-II,
any partner therein, or any person named in paragraph c. of Item 10.
d. Compensation of Directors - Registrant has no directors.
e. Termination of Employment and Change of Control Arrangement -
Registrant has no compensatory plan or arrangement, with respect to any
individual, which results or will result from the resignation or retirement of
-33-
any individual, or any termination of such individual's employment with
Registrant or from a change in control of Registrant or a change in such
individual's responsibilities following such a change in control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a. Security Ownership of Certain Beneficial Owners - No person is
known to Registrant to be the beneficial owner of more than five percent of the
issued and outstanding Units.
b. Security Ownership of Management - No equity security of
Registrant are beneficially owned by any person named in paragraph c. of Item
10.
c. Changes in Control - Registrant does not know of any arrangement,
the operation of which may at a subsequent date result in a change in control of
Registrant.
Item 13. Certain Relationships and Related Transactions
Pursuant to Registrant's Amended and Restated Agreement of Limited
Partnership, DoHA-II is entitled to 10% of Registrant's distributable cash from
operations in each year. There was no such share allocable to DoHA-II for fiscal
years 1993 through 1995.
a. Certain Business Relationships - Registrant has no directors.
b. Indebtedness of Management - No executive officer or significant
employee of Registrant, Registrant's general partner (or any employee thereof),
or any affiliate of any such person, is or has at any time been indebted to
Registrant.
-34-
PART IV
Item 14. (A) Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
1. Financial Statements:
a. Consolidated Balance Sheets at December 31, 1995 and 1994.
b. Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993.
c. Consolidated Statements of Changes in Partners' Equity for
the Years Ended December 31, 1995, 1994 and 1993.
d. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993.
e. Notes to consolidated financial statements.
2. Financial statement schedules:
a. Schedule XI- Real Estate and Accumulated Depreciation.
b. Notes to Schedule XI.
3. Exhibits:
(a) Exhibit Number Document
3 Registrant's Amended and
Restated Certificate of Limited
Partnership and Agreement of
Limited Partnership, previously
filed as part of Amendment No. 2
of Registrant's Registration
Statement on Form S-11, are
incorporated herein by reference.
21 Subsidiaries of the Registrant
are listed in Item 2. Properties
of this Form 10-K.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended
December 31, 1995.
(c) Exhibits:
See Item 14(A)(3) above.
-35-
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVERSIFIED HISTORIC INVESTORS III
Date: May 24, 1996 By: Dover Historic Advisors II, General Partner
------------
By: DHP, Inc., Partner
By: /s/ Donna M. Zanghi
---------------------------
DONNA M. ZANGHI,
Secretary and Treasurer
By: /s/ Michele F. Rudoi
---------------------------
MICHELE F. RUDOI,
Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
DOVER HISTORIC ADVISORS II General Partner
By: DHP, Inc., Partner
By: /s/ Donna M. Zanghi May 24, 1996
---------------------------- ------------
DONNA M. ZANGHI,
Secretary and Treasurer
By: /s/ Michele F. Rudoi May 24, 1996
---------------------------- ------------
MICHELE F. RUDOI,
Assistant Secretary
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