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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, 1996
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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
Securities registered pursuant to Section 12(g) of the Act: 13,981.5 Units
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 X No
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, 1996, 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, CCGP
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 accounted for the foreclosure of the property as of
December 31, 1995.
b. Financial Information about Industry Segments
The Registrant operates in one industry segment.
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, 1996, 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, 1996, 122 of the apartment units were under
lease at monthly rental rates ranging from $435 to $1,540. In
addition, 60,690 sf of the commercial space was under lease at annual
rates ranging from $6.00 per sf to $14.16 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.
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, 1996 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 $1,275,998 at December
31, 1996 including $10,038 of accrued interest) and a note payable of
$10,000 (total balance due of $10,000 at December 31, 1996). The
first mortgage loan bears interest at prime plus 1.25% with a minimum
of 9.5% and a maximum of 14.5%. The rate was 9.5% and 9.75% at
December 31, 1996 and 1995, respectively. The other mortgage loan
bears interest at prime plus 1%. The rate was 9.25% and 9.5% at
December 31, 1996 and 1995, respectively. 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; the principal was due in 1994. In 1988, a $95,000 second
mortgage loan (total balance due of $120,020 at December 31, 1996
including $19,742 of accrued interest) was obtained which bears
interest at prime plus 1.25%. The rate was 9.5% and 9.75% at December
31, 1996 and 1995, respectively and was due in 1994. In 1991, an
$100,000 third mortgage loan (total balance due of $131,668 at
December 31, 1996 including $24,548 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. In June 1996, the Registrant refinanced $1,268,000 of the
first mortgage (principal balance of $1,265,960 at December 31, 1996).
The new loan bears interest at 9.125%, is payable in monthly
installments of principal and interest of $10,317 and is due in
September 2003. The property is managed by BCMI. As of December 31,
1996, 51 residential units were under lease (88%) at monthly rents
ranging from $435 to $1,400.
All leases are renewable, one-year leases. The
occupancy for the previous four years was 81% for 1995, 58% for 1994,
63% for 1993 and 79% for 1992. The monthly rental range has been
approximately the same since 1992. For tax purposes, this property
has a federal tax basis of $3,727,534 and is depreciated using the
straight-line method with a useful life of 27.5 years. The 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 $1,512,676 at December 31, 1996 including
$202,524 of accrued interest) 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 was extended to 1999
with monthly payments of interest 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, 1996, 16 apartments were under
lease (89%) at monthly rents ranging from $490 to $705.
All leases are renewable, one-year leases. The
occupancy for the previous four years was 92% for 1995, 99% for 1994,
98% for 1993 and 91% for 1992. The monthly rental range has been
approximately the same since 1992. 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
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 $4,325,754 at December
31, 1996 including $540,854 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 of
additional financing in 1987 to fund cost overruns resulting from
delays and changes in rehabilitation and construction plans, (total
balance due of $281,160 at December 31, 1996 including $81,160 of
accrued interest) and interest at prime with a minimum of 6% and a
maximum of 8% adjusting annually on January 2, (the rate was 8% at
December 31, 1996 and 1995) and the Registrant advanced an additional
$1,098,000. The property is managed by BCMI. As of December 31,
1996, 60,690 sf were rented (96%) at annual rates ranging from $6.00
to $14.16 per sf.
The occupancy for the previous four years has been 95%
for 1995, 93% for 1994, 93% for 1993 and 79% for 1992. The range for
annual rents has been $6.00 to $12.93 per sf for 1995, $6.95 to $14.08
per sf for 1994, $6.95 to $13.41 per sf for 1993 and $7.08 to $13.08
per sf for 1992. 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
1997 2 23,241 $ 212,246 31%
1998 4 26,149 334,152 48%
1999 2 8,100 99,695 14%
2000 1 3,200 45,312 7%
There are two commercial leases which expire in 1997.
The first lease is for 15,546 sf and, although no negotiations have
taken place, the Registrant expects the tenant to renew at current
market rates. The second lease is for 7,695 sf and the Registrant
expects the tenant to exercise the renewal option in its lease. For
tax purposes of depreciation, this property has federal tax basis of
$6,118,865 and is depreciated using the straight-line method with a
useful life of 27.5 years. The annual real estate taxes are $21,825
which is based on an assessed value of $1,657,900 taxed at a rate of
$1.3164 per $100. It 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 $2,881,365 at December 31, 1996) 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, 1996, 55 residential units were
under lease (96%) at monthly rents ranging from $610 to $1,240.
All leases are renewable, one-year leases. The
occupancy for the previous four years was 91% for 1995, 89% for 1994,
97% for 1993 and 90% for 1992. The monthly rental range has been
approximately the same since 1992. 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.
Item 3. Legal Proceedings
a. To the best of its knowledge, Registrant is not
party to, nor is any of its property the subject of any pending
material legal proceedings.
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 23 Units of record
were sold or exchanged in 1996.
b. As of December 31, 1996, there were 1,577 record
holders of Units.
c. Registrant did not declare any cash dividends in
1996 or 1995.
Item 6. Selected Financial Data
The following selected financial data are for the five
years ended December 31, 1996. 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.
1996 1995 1994 1993 1992
Rental income $1,254,573 $1,658,031 $ 2,016,023 $ 1,971,274 $ 1,991,600
Interest income 1,229 840 1,005 3,365 6,131
Net loss (1,017,308) (533,933) (1,756,104) (1,719,611) (1,221,214)
Net loss per Unit (72.03) (37.80) (124.35) (121.76) (86.54)
Total assets (net of 8,711,971 8,887,472 18,771,092 19,662,834 20,848,362
depreciation and
amortization)
Debt obligations 8,414,901 7,776,693 15,216,724 14,642,621 14,337,159
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.
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
(1) Liquidity
At December 31, 1996, Registrant had cash of
approximately $20,862. 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, 1996, Registrant had restricted
cash of $203,796 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 Item 2. Properties), 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 mortgage. The mortgagee funded $87,609 and
$169,445 during 1996 and 1995, respectively, at Lincoln Court.
The Registrant will seek to refinance the
outstanding mortgage on the Loewy Building which is scheduled to
mature in November 1997. There can be no assurances that such
financing will be available and, if not, the property will be marketed
for sale.
Results of Operations
During 1996, Registrant incurred a net loss of
$1,017,308 ($72.03 per limited partnership unit), compared to a net
loss of $533,993 ($37.80 per limited partnership unit) in 1995 and a
net loss of $1,756,104 ($124.35 per limited partnership unit), in
1994. Included in the 1995 loss was an extraordinary gain of
$1,316,188 due to the foreclosure of Cathedral Court.
Rental income decreased from $2,016,023 in 1994 to
$1,658,031 in 1995 and to $1,254,573 in 1996. The decrease from 1995
to 1996 is due mainly to the foreclosure of Cathedral Court partially
offset by an increase in rental income at Lincoln Court due to an
increase in the average occupancy (81% to 96%) and an increase at the
Loewy Building due to an increase in the average rental rates. 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.
Other income decreased from $81,870 in 1994 to $0
in 1995 and 1996. The decrease from 1994 to 1995 and 1996 was the
result of the receipt in 1994 of insurance proceeds resulting from a
claim for water damage to several units in 1994 at Cathedral Court.
Rental operations expenses decreased from
$1,335,727 in 1994 to $1,088,752 in 1995 and to $661,589 in 1996. The
decrease from 1995 to 1996 is mainly the result of the foreclosure of
Cathedral Court partially offset by an increase in maintenance expense
due to improvements made at Lincoln Court and an increase in
management fees and commissions expense at the Loewy Building due to a
higher average occupancy. The decrease from 1994 to 1995 is due to
change in accounting method as a result of the change in ownership at
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.
Interest expense decreased from $1,478,380 in 1994
to $1,447,420 in 1995 to $983,145 in 1996. The decrease from 1995 to
1996 is mainly the result of the foreclosure of Cathedral Court
partially offset by an increase at Lincoln Court due to a higher
average principal balance of the mortgage due to advances for
improvements made by the mortgage holder. The decrease from 1994 to
1995 is the result an increase at Lincoln Court and Cathedral Court
partially offset by a decrease at 18th and Green, and a change in
accounting method as a result of the change in ownership at 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 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.
Depreciation and amortization decreased from
$927,774 in 1994 to $829,265 in 1995 to $478,758 in 1996. The
decrease from 1995 to 1996 is the result of the foreclosure of
Cathedral Court partially offset by an increase in amortization
expense at Lincoln Court due to the amortization of loan costs
incurred in the refinancing of the first mortgage. The decrease from
1994 to 1995 is due to the change in the accounting method as a result
of the change in ownership at Magazine Place.
In 1996, a loss of $812,000 was incurred at the
Registrant's five properties compared to a loss of $149,000 in 1995
and a loss of $1,590,000 in 1994. A discussion of property
operations/activities follows:
In 1996, Registrant sustained a loss of $366,000 at
Lincoln Court including $144,000 of depreciation and amortization
expense compared to a loss of $300,000 including $137,000 of
depreciation expense in 1995 and a loss of $285,000 including $137,000
of depreciation expense in 1994. The increase in the loss from 1995
to 1996 is the result of an increase in maintenance, interest, and
amortization expense partially offset by an increase in rental income.
Maintenance expense increased due to improvements made at the property
in order to attract more tenants and interest expense increased due to
a higher average principal balance of the mortgage due to advances for
improvements made by the mortgage holder. Amortization expense
increased due to the amortization of loan costs incurred in the
refinancing of the first mortgage. Rental income increased due to an
increase in the average occupancy (81% to 96%). 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.
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 was $45,703 during both 1995 and
1996. 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 (including accrued but unpaid
interest) at December 31, 1996 was $578,903.
In 1996, the Green Street Apartments sustained a loss
of $146,000 including $59,000 of depreciation expense compared to a
loss of $153,000 in 1995 including $59,000 of depreciation expense and
a loss of $281,000 in 1994 including $59,000 of depreciation expense.
The decrease in the loss from 1995 to 1996 is the result of an overall
decrease in operating expenses due to operational efficiencies
achieved at the property. The decrease from 1994 to 1995 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 was $5,055
during 1995 and 1996. Payments on the judgment are to be made from
available cash flow from 18th and Green. The balance of the note at
December 31, 1996 was $45,070.
In 1996, the Loewy Building sustained a loss of
$300,000 including $261,000 of depreciation and amortization expense
compared to a loss of $332,000 including $260,000 of depreciation
expense in 1995 and a loss of $379,000 including $260,000 of
depreciation expense in 1994. The decreased loss from 1995 to 1996 is
mainly due to an increase in rental income due to higher average
rental rates partially offset by an increase in commissions and
management fee expense. Management fees expense increased due to the
higher rental income and commissions expense increased due to a lease
extension with the tenant who leases 34% of the building. 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.
In 1996, Cathedral Court recognized income of $0
compared to income of $636,000 including $337,000 of depreciation
expense in 1995 and a loss of $576,000 including $334,000 of
depreciation expense in 1994. 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 resulting from a claim for water damage in several units.
Included in operations from 1995 is an extraordinary gain of
$1,316,188 representing the excess of the liabilities satisfied over
the fair market value of the Cathedral Court property.
Summary of Minority Interests
In 1996, the Registrant incurred a net loss of $11,000
at Magazine Place compared to a loss of $19,000 in 1995 compared to
$69,000 including $102,000 of depreciation expense in 1994. Prior to
1995, Magazine Place was treated as a consolidated subsidiary.
Pursuant to the Partnership Agreement as discussed in Item 2.
Properties, the Registrant's ownership interest was reduced to 40% as
of December 31, 1994. From January 1, 1995 forward, the investment is
accounted for by the equity method.
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.
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, 1996 and 1995 and
the related consolidated statements of operations, changes in
partners' equity and cash flows for the years ended December 31, 1996,
1995 and 1994. 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, 1996 and 1995, and the results of
their operations and their cash flows for the years ended December 31,
1996, 1995 and 1994, 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 29 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, L.L.C.
Philadelphia, Pennsylvania
February 11, 1997
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, 1996 and 1995 15
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 16
Consolidated Statements of Changes in Partners' Equity
for the Years Ended December 31, 1996, 1995, and 1994 17
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 18
Notes to consolidated financial statements 19-27
Financial statement schedules:
Schedule XI - Real Estate and Accumulated Depreciation 29
Notes to Schedule XI 30
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
Assets
1996 1995
Rental properties at cost:
Land $ 465,454 $ 465,454
Buildings and improvements 11,969,523 11,857,302
Furniture and fixtures 86,351 86,351
---------- ----------
12,521,328 12,409,107
Less - accumulated depreciation (4,461,992) (3,991,148)
---------- ----------
8,059,336 8,417,959
Cash and cash equivalents 20,862 10,685
Restricted cash 203,796 108,288
Accounts receivable 8,058 7,385
Investment in affiliate 264,762 276,180
Other assets (net of accumulated
amortization of $77,689 and $69,775) 155,157 66,975
---------- ----------
Total $ 8,711,971 $ 8,887,472
========== ==========
Liabilities and Partners' Equity
Liabilities:
Debt obligations $ 8,414,901 $ 7,776,693
Accounts payable:
Trade 752,257 579,664
Related parties 578,903 533,200
Taxes 0 155,907
Interest payable 888,864 755,866
Tenant security deposits 52,506 54,919
Other liabilities 26,024 15,399
---------- ---------
Total liabilities 10,713,455 9,871,648
---------- ---------
Partners' equity (2,001,484) (984,176)
---------- ---------
Total $ 8,711,971 $ 8,887,472
=========== =========
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Revenues:
Rental income $ 1,254,573 $ 1,658,031 $ 2,016,023
Other income 0 0 81,870
Interest income 1,229 840 1,005
--------- --------- ---------
Total revenues 1,255,802 1,658,871 2,098,898
--------- --------- ---------
Costs and expenses:
Rental operations 661,589 1,088,752 1,335,727
General and administrative 138,200 140,800 141,181
Interest 983,145 1,447,420 1,478,380
Depreciation and amortization 478,758 829,265 927,774
--------- --------- ---------
Total costs and expenses 2,261,692 3,506,237 3,883,062
--------- --------- ---------
Loss before minority interests and (1,005,890) (1,847,366) (1,784,164)
equity in affiliate
Minority interests' portion of loss 0 16,365 28,060
Equity in net loss of affiliate (11,418) (19,120) 0
--------- --------- ---------
Loss before extraordinary item (1,017,308) (1,850,121) 1,756,104
Extraordinary gain 0 1,316,188 0
--------- --------- ---------
Net loss ($1,017,308) ($ 533,993) ($ 1,756,104)
========= ========= =========
Net loss per limited partnership unit:
Loss before minority interests and (71.22) (130.80) (126.33)
equity in affiliate
Minority interests' portion of loss 0 1.15 1.99
Equity in net loss of affiliate (.81) (1.35) 0
------ ------- -------
Loss before extraordinary item (72.03) (131.00) (124.35)
Extraordinary gain 0 93.20 0
------ ------- -------
($ 72.03) ($ 37.80) ($ 124.35)
====== ====== =======
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
Dover
Historic Limited
Advisors II(1) Partners (2) Total
Percentage participation in
profit or loss 1% 99% 100%
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 (5,339) (528,594) (533,933)
------- --------- ---------
Balance at December 31, 1995 (122,881) (861,295) (984,176)
Net loss (10,173) (1,007,135) (1,017,308)
------- --------- ---------
Balance at December 31, 1996 ($133,054) ($1,868,430) ($2,001,484)
======= ========= =========
(1) General Partner.
(2) 13,981.5 limited partnership units outstanding at December 31,
1996, 1995, and 1994.
The accompanying notes are an integral part of these financial statements.
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating activities:
Net loss ($1,017,308) ($ 533,993) ($1,756,104)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 478,748 829,265 927,774
Extraordinary gain 0 (1,316,188) 0
Minority interests 0 (16,365) (28,060)
Equity in loss of affiliate 11,418 19,120 0
Changes in assets and liabilities:
Increase in restricted cash (95,508) (45,897) (7,552)
(Increase) decrease in accounts receivable (673) 7,450 (1,754)
(Increase) decrease in other assets (96,087) 1,604 380
Increase in accounts payable - trade 172,594 204,853 331,553
Increase (decrease) in accounts payable-
related parties 45,703 33,479 (206,364)
(Decrease) increase in accounts payable-
taxes (155,907) 59,277 41,342
Increase in interest payable 132,998 903,426 125,380
(Decrease) increase in tenant security
deposits (2,413) (31,928) 18,070
Increase in other liabilities 10,625 1,942 8,338
Net cash (used in) provided by ------- ------- -------
operating activities: (515,810) 116,105 (546,997)
------- ------- -------
Cash flows from investing activities:
Capital expenditures (112,221) (302,989) (18,609)
------- ------- -------
Net cash used in investing activities: (112,221) (302,989) (18,609)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt obligations 638,208 196,445 635,956
Payments of principal under debt
obligations 0 (30,313) (61,853)
Net cash provided by financing ------- ------- -------
activities: 638,208 166,132 574,103
------- ------- -------
Increase (decrease) in cash and cash
equivalents 10,177 (20,752) 8,497
Cash and cash equivalents at beginning of year 10,685 31,437 22,940
------- ------- -------
Cash and cash equivalents at end of year $ 20,862 $ 10,685 $ 31,437
======= ======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 558,411 $ 491,008 $ 299,696
The accompanying notes are an integral part of these financial statements.
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.
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 1996, 1995, and 1994).
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,
real estate tax reserves and other cash restricted as to use.
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 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 the Partnership does not receive any of the
distributable cash (see Note G), 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.
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.
NOTE F- DEBT OBLIGATIONS
Debt obligations are as follows:
December 31,
1996 1995
Mortgage loan, interest at 11 1/2%, principal and interest $ 3,784,900 $ 3,784,900
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 of the related
rental property; due November 1997; collateralized by the
related rental property; accrued interest of $540,955
relating to this loan is included in interest payable on the
balance sheet
Note, interest payable monthly at prime, with a minimum of 6% 200,000 200,000
and a maximum of 8%, adjusting annually on January 2 (8% at
December 31, 1996 and 1995); due in 1997; collateralized by
the related rental property; accrued interest of $81,160
relating to this loan is included in interest payable on the
balance sheet
Allowed unsecured claims in the amount of $268,042; non- 167,812 199,058
interest bearing
Priority tax claims in the amount of $80,705 payable 0 36,638
commencing February 1993 in equal quarterly installments of
$5,056. The note bears interest at 9% and matured in
November 1996
Note payable, interest only at 10%, payable quarterly; 10,000 10,000
principal due in 1994 (A)
Mortgage loan, interest only at prime plus 1% (9.5% at 0 80,000
December 31, 1995, respectively); payable annually; principal
and accrued interest due in 1994; collateralized by the
related rental property (B)
Mortgage loan, interest at 9.125%, payable in monthly 1,265,960 0
principal and interest installments of $10,317; principal due
in September 2003; collateralized by the related rental
property
Mortgage loan, interest at prime plus 1 1/4% with a minimum 1,468,679 1,948,897
of 9.5% and a maximum of 14.5%; 9.5% and 9.75% at December
31, 1996 and 1995, respectively, principal due in 1999;
collateralized by the related rental property; accrued
interest of $10,038 relating to this loan is included in
interest payable on the balance sheet (C)
Mortgage loan, interest at 11% per annum; principal due in 107,120 107,120
1999; collateralized by the related rental property; accrued
interest of $24,548 relating to this loan is included in
interest payable on the balance sheet (C)
Note, interest at prime plus 1 1/4% (9.5% and 9.75% at 100,278 100,278
December 31, 1996 and 1995, respectively); principal due in
1999; collateralized by the related rental property; accrued
interest of $19,742 relating to this loan is included in
interest payable on the balance sheet (C)
Mortgage loan, interest at 12%; payable interest only to the
extent of net operating income with a minimum monthly payment
of $5,750; principal due in 1999; collateralized by the
related rental property; accrued interest of $202,524
relating to this loan is included in interest payable on the
balance sheet (D) 1,310,152 1,309,802
---------- ----------
$ 8,414,901 $ 7,776,693
========== ==========
(A) Although this obligation has matured, the lenders have not made
any demand for payment.
(B) This loan was purchased in June 1996 by the first mortgage
holder and is included in the first mortgage balance.
(C) In June 1996, the Partnership refinanced $1,268,000 of the
first mortgage. Monthly payments of interest are to be made,
on all three loans combined, in an amount equal to net
operating income.
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) 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, 1996, for each of the succeeding five years are as follows:
1997 $ 4,162,712
1998 0
1999 2,986,229
2000 0
2001 0
Thereafter 1,265,960
----------
$ 8,414,901
==========
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.
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 these 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
Cathedral Court General Partnership ("CCGP") 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. 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 accounted for the foreclosure of 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 1996, 1995 and 1994 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.
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 was $45,703 during both 1995 and 1996. 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, 1996 was $578,903.
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 was $5,055 during both 1995
and 1996. Payments on the judgment are to be made from available cash
flow from 18th and Green. The balance of the note at December 31,
1996 was $45,070.
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,
1996 1995 1994
Net loss - book ($1,019,509) ($ 550,993) ($1,739,044)
Excess of tax over book depreciation 89,414 166,823 115,217
Interest 0 793,672 461,176
Gain on foreclosure 0 216,411 0
Other timing differences 23,940 (2,746) (8,695)
Minority interest (21,859) (19,675) 22,087
--------- -------- ----------
Net loss - tax ($ 928,014) $ 603,492 ($ 1,149,259)
========= ======== ==========
Partners' equity - book ($2,001,484) ($ 995,617) ($ 441,878)
1987 distribution of interest on escrow (39,576) (39,576) (39,576)
deposits to limited partners
Costs of issuance 1,697,342 1,697,342 1,697,342
Cumulative tax over (under) book loss 248,230 170,377 (986,854)
--------- --------- ---------
Partners' equity - tax ($ 95,488) $ 832,526 $ 229,034
========= ========= =========
SUPPLEMENTAL INFORMATION
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
Cost
Capitalized
Initial Cost to Partnership (b) Subsequent to
Acquisition
Buildings
and Date of Date
Description (a) Encumbrances Land Imprvmnts Imprvmnts Constr. Acq.
(f) (a)
64,000 square feet
of commercial space
in WInston-Salem,NC $4,152,712 $308,624 $6,290,125 $476,976 1986-1988 1986
58 apartment units
in Philadelphia, PA 2,952,037 86,187 3,490,437 - 1986-1987 1986
18 apartment units
in Philadelphia,
PA 1,310,152 70,643 1,559,017 0 1987
--------- ------- ---------- -------
TOTAL $8,414,901 $465,454 $11,339,579 $476,976
========= ======= ========== =======
Gross Amount at which Carried at
December 31, 1996
Buildings
and Accumulated
Description Land Improvements Total (c) (d) Depreciation
(d) (e)
64,000 square feet
of commercial space
in Winston-Salem, NC $308,624 $6,769,911 $7,078,535 $2,451,299
58 apartment units
in Philadelphia, PA 86,187 3,726,946 3,813,133 1,416,577
18 apartment units
in Philadelphia, PA 70,643 1,559,017 1,629,660 593,116
------- ---------- ---------- ---------
TOTAL $465,454 $12,055,874 $12,521,328 $4,461,992
======= ========== ========== =========
DIVERSIFIED HISTORIC INVESTORS III
(a limited partnership)
NOTES TO SCHEDULE XI
December 31, 1996
(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, 1996,
for Federal income tax purposes is approximately $11,327,296.
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:
1996 1995 1994
Balance at beginning of year: $12,409,107 $25,570,608 $25,551,999
Additions during the year:
Improvements 112,221 297,731 18,609
---------- ---------- ----------
Deductions during the year:
Retirements 0 (9,253,739) 0
Deconsolidated subsidiary 0 (4,205,493) 0
---------- ---------- ----------
Balance at end of year $12,521,328 $12,409,107 $25,570,608
========== ========== ==========
Reconciliation of accumulated depreciation:
1996 1995 1994
Balance at beginning of year $ 3,991,148 $ 7,035,889 $ 6,108,115
Depreciation expense for the year 470,844 829,265 927,774
Retirements 0 (2,830,686) 0
Deconsolidated subsidiary 0 (1,040,320) 0
---------- ---------- ----------
Balance at end of year $ 4,461,992 $ 3,991,148 $ 7,035,889
========== ========== ==========
(E) See Note B to the financial statements for depreciation method
and lives.
(F) See Note E to the financial statements for further information.
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 49 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 49) 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 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 50) was appointed Chairman and
Director of both D, LTD and DHP, Inc. on January 27, 1993. Mr. Tuszka
resigned as Chairman and Director of both D, LTD and DHP, Inc. on June
30, 1996.
Donna M. Zanghi (age 40) 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 32) 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 1996, 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
1996, 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 1996 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 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 1994 through 1996.
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.
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, 1996 and 1995.
b. Consolidated
Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994.
c. Consolidated
Statements of Changes in Partners' Equity
for the Years Ended December 31, 1996, 1995
and 1994.
d. Consolidated
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994.
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 Document
Number
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, 1996.
(c) Exhibits:
See Item 14(A)(3) above.
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: April 4, 1997 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 April 4, 1997
DONNA M. ZANGHI,
Secretary and Treasurer
By: /s/ Michele F. Rudoi April 4, 1997
MICHELE F. RUDOI,
Assistant Secretary