UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-16467

 

 

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

 

 

California		33-0098488
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

400 South El Camino Real, Suite 1100 San Mateo, California		94402-1708
(Address of principal executive offices)		(Zip Code)

(650) 343-9300

(Registrant’s telephone number, including area code)

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer		¨		Accelerated Filer		¨
Non-accelerated filer		¨		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

 

 

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INDEX

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

 

				Page No.
PART I FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements of Rancon Realty Fund V (Unaudited):
		Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009		3
		Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009		4
		Consolidated Statement of Partners’ Equity for the six months ended June 30, 2010		5
		Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009		6
		Notes to Consolidated Financial Statements		7-13
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-17
Item 3.		Qualitative and Quantitative Disclosures About Market Risk		17
Item 4.		Controls and Procedures		17
Item 4T.		Controls and Procedures		17
PART II OTHER INFORMATION
Item 1.		Legal Proceedings		18
Item 1A.		Risk Factors		18
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3.		Defaults Upon Senior Securities		18
Item 4.		[Removed and Reserved]		18
Item 5.		Other Information		18
Item 6.		Exhibits		18
SIGNATURES				19

 

2

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Balance Sheets

(in thousands, except units outstanding)

(Unaudited)

 

		June 30, 2010				December 31, 2009
Assets
Investments in real estate:
Rental properties		$	84,152			$	83,672
Accumulated depreciation			(27,945	)			(25,941	)
Rental properties, net			56,207				57,731
Land held for development			1,494				1,494
Total investments in real estate			57,701				59,225
Cash and cash equivalents			5,763				5,507
Accounts receivable, net			49				70
Deferred costs, net of accumulated amortization of $2,460 and $2,234 as of June 30, 2010 and December 31, 2009, respectively			2,640				2,802
Prepaid expenses and other assets			3,041				3,162
Total assets		$	69,194			$	70,766
Liabilities and Partners’ Equity (Deficit)
Liabilities:
Notes payable		$	53,189			$	53,651
Accounts payable and other liabilities			759				889
Prepaid rent			277				611
Total liabilities			54,225				55,151
Commitments and contingent liabilities (Note 7)
Partners’ Equity (Deficit):
General Partner			(1,496	)			(1,431	)
Limited partners, 83,898 limited partnership units outstanding as of June 30, 2010 and December 31, 2009			16,465				17,046
Total partners’ equity			14,969				15,615
Total liabilities and partners’ equity		$	69,194			$	70,766

The accompanying notes are an integral part of these consolidated financial statements.

 

3

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Statements of Operations

(in thousands, except per unit amounts and units outstanding)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Operating revenue
Rental revenue and other		$	3,285			$	3,424			$	6,600			$	6,948
Tenant reimbursements			174				317				421				737
Total operating revenue			3,459				3,741				7,021				7,685
Operating expenses
Property operating expenses			1,638				1,607				3,190				3,181
Depreciation and amortization			1,258				1,292				2,508				2,548
General and administrative			198				247				458				513
Total operating expenses			3,094				3,146				6,156				6,242
Operating income			365				595				865				1,443
Interest and other income			1				3				3				7
Interest expense (including amortization of loan fees)			(752	)			(772	)			(1,514	)			(1,546	)
Net loss		$	(386	)		$	(174	)		$	(646	)		$	(96	)
Basic and diluted net loss per limited partnership unit		$	(4.14	)		$	(1.87	)		$	(6.93	)		$	(1.04	)
Weighted average number of limited partnership units outstanding			83,898				83,898				83,898				83,898

The accompanying notes are an integral part of these consolidated financial statements.

 

4

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Statement of Partners’ Equity

For the six months ended June 30, 2010

(in thousands)

(Unaudited)

 

		General Partner				Limited Partners				Total
Balance (deficit) at December 31, 2009		$	(1,431	)		$	17,046			$	15,615
Net loss			(65	)			(581	)			(646	)
Balance (deficit) at June 30, 2010		$	(1,496	)		$	16,465			$	14,969

The accompanying notes are an integral part of these consolidated financial statements.

 

5

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2010				2009
Cash flows from operating activities:
Net loss		$	(646	)		$	(96	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			2,508				2,548
Amortization of loan fees, included in interest expense			33				40
Changes in certain assets and liabilities:
Accounts receivable			2				7
Deferred costs			(220	)			(206	)
Prepaid expenses and other assets			121				17
Accounts payable and other liabilities			(84	)			(423	)
Prepaid rent			(334	)			245
Net cash provided by operating activities			1,380				2,132
Cash flows from investing activities:
Additions to real estate investments			(681	)			(731	)
Payments received from tenant improvement note receivable			19				17
Net cash used in investing activities			(662	)			(714	)
Cash flows from financing activities:
Notes payable principal payments			(462	)			(438	)
Return of excess distribution to General Partner			—				11
Net cash used in financing activities			(462	)			(427	)
Net increase in cash and cash equivalents			256				991
Cash and cash equivalents at beginning of period			5,507				4,545
Cash and cash equivalents at end of period		$	5,763			$	5,536
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,481			$	1,506
Supplemental disclosure of non-cash operating activities:
Write-off of fully depreciated rental property assets		$	155			$	1,171
Write-off of fully amortized deferred costs		$	156			$	399

The accompanying notes are an integral part of these consolidated financial statements.

 

6

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. ORGANIZATION

Rancon Realty Fund V, a California Limited Partnership (“the Partnership”), was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, developing, operating and disposing of real property. The Partnership was organized in 1985 and reached final funding in February 1989. The general partners of the Partnership are Daniel L. Stephenson and Rancon Financial Corporation (“RFC”), hereinafter collectively referred to as the General Partner. RFC is wholly owned by Daniel L. Stephenson. The Partnership has no employees.

As of June 30, 2010, there were 83,898 Units (“Units”) outstanding.

The Partnership commenced on May 8, 1985 and shall continue until December 31, 2015, unless previously terminated in accordance with the provisions of the Partnership Agreement.

Allocation of Net Income and Net Loss

Allocation of net income and net loss is made pursuant to the terms of the Partnership Agreement. Generally, net income and net losses from operations are allocated 90% to the limited partners and 10% to the General Partner; however, if the limited partners and the General Partner have, as a result of an allocation of net loss, a deficit balance in their capital accounts, net loss shall not be allocated to the limited partners and General Partner in excess of the positive balance until the balances of the limited partners’ and General Partner’s capital accounts are reduced to zero. Capital accounts shall be determined after taking into account the other allocations and distributions for the fiscal year.

Net income other than net income from operations shall be allocated as follows: (i) first, to the partners who have a deficit balance in their capital account, provided that, in no event shall the General Partner be allocated more than 5% of the net income other than net income from operations until the earlier of sale or disposition of substantially all of the assets or the distribution of cash (other than cash from operations) equal to the Unit holder’s original invested capital; (ii) second, to the limited partners in proportion to and to the extent of the amounts required to increase their capital accounts to an amount equal to the sum of the adjusted invested capital of their units plus an additional cumulative non-compounded 12% return per annum (plus additional amounts depending on the date Units were purchased); (iii) third, to the partners in the minimum amount required to first equalize their capital accounts in proportion to the number of units owned, and then, to bring the sum of the balances of the capital accounts of the limited partners and the General Partner into the ratio of 4 to 1; and (iv) the balance, if any, 80% to the limited partners and 20% to the General Partner. In no event shall the General Partner be allocated less than 1% of the net income other than net income from operations for any period.

Net loss other than net loss from operations is allocated 99% to the limited partners and 1% to the General Partner. Such net losses will be allocated among limited partners as necessary to equalize their capital accounts in proportion to their Units, and thereafter will be allocated in proportion to their Units.

The terms of the Partnership Agreement call for the General Partner to restore any deficits that may exist in its capital account after allocation of gains and losses from the sale of the final property owned by the Partnership, but prior to any liquidating distributions being made to the partners.

Distribution of Cash

The Partnership shall make annual or more frequent distributions of substantially all cash available to be distributed to partners as determined by the General Partner, subject to the following: (i) distributions may be restricted or suspended for limited periods when the General Partner determines in its absolute discretion that it is in the best interests of the Partnership; and (ii) all distributions are subject to the payment of Partnership expenses and maintenance of reasonable reserves for debt service, alterations and improvements, maintenance, replacement of furniture and fixtures, working capital and contingent liabilities.

All excess cash from operations shall be distributed 90% to the limited partners and 10% to the General Partner.

All cash from sales or refinancing and any other cash determined by the General Partner to be available for distribution other than cash from operations shall be distributed in the following order of priority: (i) first, 1% to the General Partner and 99% to the limited partners in proportion to the outstanding positive amounts of Adjusted Invested Capital (as defined in the Partnership Agreement) for each of their Units until Adjusted Invested Capital (as defined in the Partnership Agreement) for each Unit is reduced to zero; (ii) second, 1% to the General Partner and 99% to the limited partners until each of the limited partners has received an amount which, including cash from operations previously distributed to the limited partners, equals a 12% annual cumulative non-compounded return on the Adjusted Invested Capital (as defined in the Partnership Agreement) of their Units plus such limited partners’ Limited Incremental Preferential Return (as defined in the Partnership Agreement), if any, with respect to each such Unit, on the Adjusted Investment Capital (as defined in the Partnership Agreement) of such Units for the twelve month period following the date upon which such Unit was purchased from the Partnership and following the admission

 

7

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

of such limited partner; (iii) third, 99% to the General Partner and 1% to the limited partners, until the General Partner has received an amount equal to 20% of all distributions of cash from sales or refinancing; and (iv) the balance, 80% to the limited partners, pro rata in proportion to the number of Units held by each, and 20% to the General Partner.

Note 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements present the consolidated financial position of the Partnership and its subsidiaries as of June 30, 2010 and December 31, 2009, and the consolidated results of operations of the Partnership and its subsidiaries for the three and six months ended June 30, 2010 and 2009 and cash flows of the Partnership for the six months ended June 30, 2010 and 2009. All significant intercompany transactions, receivables and payables have been eliminated in consolidation.

In the opinion of the General Partner, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal accruals) necessary to present fairly the consolidated financial position of the Partnership as of June 30, 2010 and December 31, 2009, and the related consolidated statements of operations for the three and six months ended June 30, 2010 and 2009, the consolidated statement of partners’ equity for the six months ended June 30, 2010 and the consolidated statement of cash flows for the six months ended June 30, 2010 and 2009.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates.

Rental Properties

Rental properties, including the related land, are stated at depreciated cost unless events or circumstances indicate that such amounts cannot be recovered, in which case, the carrying value of the property is reduced to its estimated fair value. Estimated fair value is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates applied to annualized net operating income based upon the age, construction and use of the building. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership’s properties could be materially different than current expectations. Rental properties are reviewed for impairment whenever there is a triggering event and at least annually.

Depreciation is provided using the straight-line method over the useful lives of the respective assets. The useful lives are as follows:

 

Building and improvements		5 to 40 years
Tenant improvements		Lesser of the initial term of the related lease, or the estimated useful life of the improvements
Furniture and equipment		5 to 7 years

Construction in Progress and Land Held for Development

Construction in progress and land held for development are stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case, the carrying value is reduced to estimated fair value. Estimated fair value is computed using estimated sales price, based upon market values for comparable properties and considers the cost to complete and the estimated fair value of the completed project. Construction in progress and land held for development are reviewed for impairment whenever there is a triggering event and at least annually.

The pre-development costs for a new project are capitalized and include survey fees and consulting fees. Interest, property taxes and insurance related to the new project are capitalized during periods when activities that are necessary to get the project ready for its intended use are in progress. The capitalization ends when the construction is substantially completed and the project is ready for its intended use.

 

8

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

Fair Value of Investments

The Partnership adopted policies related to the accounting for fair value measurements effective January 1, 2008. The guidance related to accounting for fair value measurements defines fair value and establishes a framework for measuring fair value in order to meet disclosure requirements for fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This hierarchy describes three levels of inputs that may be used to measure fair value.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1. Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation using unobservable inputs. This category generally includes long-term derivative contracts, real estate and unconsolidated joint ventures.

The Partnership adopted policies with respect to the fair value of assets and liabilities on January 1, 2008. There was no material impact on the Partnership’s financial position, results of operations and cash flows as a result of adoption.

Cash and Cash Equivalents

The Partnership considers money market funds with original maturities of less than ninety days when purchased to be cash equivalents.

Deferred Costs

Deferred loan fees are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the life of the related loan. Lease commissions are capitalized and amortized on a straight-line basis over the initial fixed term of the related lease agreements.

Revenues

The Partnership recognizes rental revenue on a straight-line basis over the term of the leases. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Partnership has previously recognized as revenue. For tenants with percentage rent, the Partnership recognizes revenue when the tenants’ specified sales targets have been met. The reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue on an estimated basis during the current year. The Partnership develops a revised estimate of the amount recoverable from tenants based on updated expenses for the year and amounts to be recovered and records adjustments to income in the current year financial statement accounts. Any final changes in estimate based on lease-by-lease reconciliations and tenant negotiations and collection are recorded in the period those negotiations are settled.

Net (Loss) Income Per Limited Partnership Unit

Net (loss) income per Unit is calculated using the weighted average number of Units outstanding during the period and the limited partners’ allocable share of the net (loss) income.

Effective January 1, 2009, the Partnership adopted guidance which improves the comparability of earnings per unit calculations for master limited partnerships (MLPs) with incentive distribution rights (IDRs). As such, the distributions should impact the calculation of earnings per unit (“EPU”) using the two-class method.

 

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

Net loss per Unit is as follows (in thousands, except for weighted average units and per unit amounts):

 

(Loss) Income allocation:		For the three months ended																For the six months ended
		June 30, 2010								June 30, 2009								June 30, 2010								June 30, 2009
		General Partner				Limited Partners				General Partner				Limited Partners				General Partner				Limited Partners				General Partner				Limited Partners
Net loss		$	(39	)		$	(347	)		$	(17	)		$	(157	)		$	(65	)		$	(581	)		$	(9	)		$	(87	)
Weighted average number of limited partnership units outstanding during each period							83,898								83,898								83,898								83,898
Basic and diluted loss per limited partnership unit						$	(4.14	)						$	(1.87	)						$	(6.93	)						$	(1.04	)

The calculation of net (loss) income per Unit assumes that the income (loss) otherwise allocable to the limited partners is first used to fund distributions to the General Partner. As discussed in Note 1, because distributions of available cash have exceeded cumulative earnings and the General Partner has a deficit, the General Partner would restore that deficit in liquidation. The calculation of net (loss) income per unit does not assume a liquidation in the periods presented and therefore the net (loss) income per limited partner Unit may be less than what would be realized in a liquidation due to the requirement for the General Partner to restore deficits.

Income Taxes

No provision for income taxes is included in the accompanying consolidated financial statements as the Partnership’s results of operations are allocated to the partners for inclusion in their respective income tax returns. Net (loss) income and partners’ equity (deficit) for financial reporting purposes will differ from the Partnership’s income tax return because of different accounting methods used for certain items, including depreciation expense, provisions for impairment of investments in real estate, capitalization of development period interest and rental income and loss recognition. There was no material impact related to the Partnership’s adoption of accounting policies related to income tax uncertainties on January 1, 2007.

Concentration Risk

One tenant (Northrop Grumman Corporation) represented 16% and 15% of rental revenue for the six months ended June 30, 2010 and June 30, 2009, respectively.

Recently Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued the FASB Accounting Standards Codification (Codification) which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of an entity’s financial statements that are presented in conformity with GAAP. Effective September 30, 2009, the Partnership adopted the Codification, which did not have any impact on the Partnership’s financial statements.

In May 2009, the FASB issued guidance related to disclosures of subsequent events which involves accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This adoption did not have any impact on the Partnership’s financial statements.

Reference to 2009 audited consolidated financial statements

These unaudited consolidated financial statements should be read in conjunction with the notes to audited consolidated financial statements included in the Partnership’s December 31, 2009 audited consolidated financial statements on Form 10-K.

 

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

Note 3. INVESTMENTS IN REAL ESTATE

Rental properties consist of the following (in thousands):

 

		June 30, 2010				December 31, 2009
Land		$	6,944			$	6,944
Land and improvements			1,536				1,536
Buildings			58,638				58,644
Building and tenant improvements			17,034				16,548
			84,152				83,672
Less: accumulated depreciation			(27,945	)			(25,941	)
Total rental properties, net		$	56,207			$	57,731

As of June 30, 2010, the Partnership’s rental properties included nine office properties and four retail properties (see detailed listing of properties in Management’s Discussion & Analysis of Financial Condition and Results of Operations).

Note 4. LAND HELD FOR DEVELOPMENT

Land held for development consists of the following (in thousands):

 

		June 30, 2010			December 31, 2009
East Lake Restaurant Pad (includes approximately 0.3 acres of land with a cost basis of $166 as of June 30, 2010 and December 31, 2009)		$	451		$	451
Land held for development (approximately 4.1 acres of land as of June 30, 2010 and December 31, 2009)			1,043			1,043
Total land held for development		$	1,494		$	1,494

The book basis of the land held for development is shown net of an impairment provision of $820,000. The original cost of the land was $1,500,000 and subsequent improvements total $363,000.

Note 5. NOTES PAYABLE

Notes payable consists of the following (in thousands):

 

		June 30, 2010			December 31, 2009
Note payable #1 collateralized by first deeds of trust on seven properties. The note has a fixed interest rate of 5.46%, a maturity date of January 1, 2016 with a 30-year amortization requiring monthly principal and interest payments of $151.		$	24,996		$	25,218
Note payable #2 collateralized by first deeds of trust on four properties. The note has a fixed interest rate of 5.61%, a maturity date of May 1, 2016 with a 30-year amortization requiring monthly principal and interest payments of $173.			28,193			28,433
Total notes payable		$	53,189		$	53,651

Note payable #1 is collateralized by Bally’s Health Club, Carnegie Business Center II, Lakeside Tower, Outback Steakhouse, Pat & Oscars, Palm Court Retail #3 and One Carnegie Plaza. Note payable #2 is collateralized by Brier Corporate Center, One Parkside, Two Parkside and Two Carnegie Plaza.

 

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

The annual maturities on the Partnership’s notes payable as of June 30, 2010, are as follows (in thousands):

 

2010		$	476
2011			992
2012			1,048
2013			1,107
2014			1,171
Thereafter			48,395
Total		$	53,189

Note 6. RELATED PARTY TRANSACTIONS

In May 2006, the Partnership extended its then current Property Management and Services Agreement (the “Agreement”) with Glenborough Properties L.P. (“Glenborough”) through December 31, 2009. Effective March 1, 2009, the Partnership and Glenborough LLC again amended the Agreement, to reduce certain fees (as noted below) charged by Glenborough LLC, and extend the term of the agreement through December 31, 2015, or if earlier, until the completion of sale of all real property assets of the Partnership. The Partnership engaged Glenborough LLC to perform services for the following fees:

 

		Six Months Ended
		June 30, 2010			June 30, 2009
(i) property management fees of 2.5% effective March 1, 2009, and 3% prior to that, of gross rental revenue which was included in property operating expenses in the accompanying consolidated statements of operations		$	170,000		$	193,000
(ii) a construction services fee which was capitalized and included in rental properties on the accompanying consolidated balance sheets			9,000			98,000
(iii) an asset and Partnership management fee which was included in general and administrative expenses in the accompanying consolidated statements of operations			125,000			133,000
(iv) a leasing services fee which was included in the deferred costs on the accompanying consolidated balance sheets			70,000			65,000
(v) a sales fee of 1% for all properties, as amended and effective March 1, 2009			—			—
(vi) a financing services fee of 1% of the gross loan amount which was included in the deferred costs on the accompanying consolidated balance sheets			—			—
(vii) a development fee equal to 5% of the hard costs of the development project which was included in the construction in progress and /or rental properties on the accompanying consolidated balance sheets, excluding the cost of the land, the development fee and the general contractor’s fee shall not exceed 11.5%, in the aggregate, of the hard costs of the development fee project			—			—
(viii) data processing fees which were included in property operating expenses in the accompanying consolidated statements of operations			49,000			43,000
(ix) engineering fees which were included in property operating expenses in the accompanying consolidated statements of operations			17,000			12,000

As of June 30, 2010, Glenborough Fund XV LLC, an affiliate of Glenborough LLC, held 11,565 or 13.78% of the Units purchased from unaffiliated third parties.

 

12

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RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

Note 7. COMMITMENTS AND CONTINGENT LIABILITIES

Environmental Matters

The Partnership follows a policy of monitoring its properties for the presence of hazardous or toxic substances. The Partnership is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Partnership’s business, assets or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Partnership’s consolidated results of operations and cash flows.

General Uninsured Losses

The Partnership carries property and liability insurance with respect to the properties. This coverage has policy specification and insured limits customarily carried for similar properties. However, certain types of losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Should the properties sustain damage as a result of an earthquake or flood, the Partnership may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Additionally, the Partnership has elected to obtain insurance coverage for “certified acts of terrorism” as defined in the Terrorism Risk Insurance Act of 2002; however, our policies of insurance may not provide coverage for other acts of terrorism. Any losses from such other acts of terrorism might be uninsured. Should an uninsured loss occur, the Partnership could lose some or all of its capital investment, cash flow and anticipated profits related to the properties.

Other Matters

The Partnership is contingently liable for subordinated real estate commissions payable to the General Partner in the amount of $102,000 at June 30, 2010 for sales that occurred in previous years. The subordinated real estate commissions are payable only after the limited partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 12% per annum on their adjusted invested capital. Since the circumstances under which these commissions would be payable are not currently met, the liability has not been recognized in the accompanying consolidated financial statements; however, the amount will be recorded when and if it becomes payable.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our December 31, 2009 audited consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K.

Background

In June 1985, our initial acquisition of property consisted of approximately 76.21 acres of partially developed and unimproved land located in San Bernardino, California. The property is part of a master-planned development of 153 acres known as Tri-City Corporate Centre (“Tri-City”) and is zoned for mixed commercial, office, hotel, transportation-related, and light industrial uses and all of the parcels thereof are separately owned by us and Rancon Realty Fund IV (“Fund IV”), a partnership sponsored by the General Partner.

Overview

Tri-City Properties

As of June 30, 2010, our rental properties consist of nine office and four retail properties, aggregating approximately 752,000 rentable square feet, of which 710,000 square feet are office space, and 42,000 square feet are retail space.

 

Property		Type		Square Footage
One Carnegie Plaza		Two two-story office buildings		107,275
Two Carnegie Plaza		Two-story office building		68,957
Carnegie Business Center II		Two industrial buildings		50,867
Lakeside Tower		Six-story office building		112,716
One Parkside		Four-story office building		70,068
Bally’s Health Club (Bally’s)		Health club facility		25,000
Outback Steakhouse (Outback)		Restaurant		6,500
Palm Court Retail #3		Retail		6,004
Two Parkside		Three-story office building		81,805
Pat & Oscars		Restaurant		5,100
Three Carnegie		Two-story office building		83,698
Brier Corporate Center		Three-story office building		104,501
Three Parkside (Placed into service January 2009)		Two-story office building		30,000
				752,491

As of June 30, 2010, the weighted average occupancy of the thirteen properties was 83%.

Land

As of June 30, 2010, the Partnership owned approximately 4.4 acres of land. Although the current market environment is not conducive to office development, the market will continue to be monitored with the intent to position the land for future development.

Results of Operations

Comparison of the three and six months ended June 30, 2010 to the three and six months ended June 30, 2009

Revenue

Rental revenue and other decreased by $139,000, or 4%, and $348,000, or 5% for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively. The decrease was primarily due to decreases in occupancy at some of the Partnerships’ properties, combined with decreases in rental rates upon tenant renewals. The main decline in occupancy was at One Carnegie where occupancy fell from 96% to 72% from June 2009 to June 2010, and the impact on rental revenue was a $116,000 and $200,000 decline when comparing the three and six month periods. In addition, for the six month period, the first quarter of 2009 included $81,000 of income arising from a change in estimate related to an accounts receivable reserve for Bally’s.

Tenant reimbursements decreased $143,000, or 45%, and $316,000, or 43% for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively. The decrease was primarily due to a decrease in recoveries at Two Parkside and One Carnegie. The decrease at Two Parkside is due to establishing new base years for the two tenants who renewed during 2009 with the result that they will not be billed for tenant reimbursements until later in 2010 or the following year. The decrease at One Carnegie related to decreased occupancy together with a credit received by a tenant related to operating expenses.

The Partnership has been notified by a tenant that they may wish to terminate their lease in Three Carnegie Plaza early. The lease is for approximately 18,000 square feet and has eight years of remaining term. There can be no assurances of the outcome of negotiations with the tenant for a termination fee, nor how much rent could be recovered if we were to pursue legal remedies.

 

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Expenses

Property operating expenses increased $31,000, or 2%, and $9,000, or essentially unchanged, for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively. The change was primarily due to higher repairs and maintenance expenses, HVAC expenses and property taxes, partially offset by lower utilities. Increased repairs and maintenance costs are primarily due to the timing of maintenance projects. The higher HVAC expenses primarily related to numerous items across several properties. The decrease in utility costs was primarily due to lower occupancy at One Carnegie. A further contributing factor for the six month period was lower management fees, reflecting a reduction in the fees earned by Glenborough LLC as contained in the amended management agreement, which took effect March 1, 2009.

Depreciation and amortization decreased $34,000, or 3%, and $40,000, or 2% for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively. The change was primarily due to lower depreciation and amortization expense at One Parkside due to several assets and lease commissions being fully depreciated.

General and administrative expenses decreased $49,000, or 20%, and $55,000, or 11% for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009, respectively. The change for the three month period was primarily due to lower audit fees due to the SEC’s decision to permanently exempt smaller companies from Sarbanes Oxley external auditor testing requirements and lower investor relations expenses. The change for the six month period was primarily due to lower audit fees, as noted above, and lower tax and license fees due to estimated taxes paid in 2009.

Liquidity and Capital Resources

As of June 30, 2010, we had cash and cash equivalents of $5,763,000.

As of June 30, 2010, our liabilities include two notes payable with total borrowing of $53,189,000. These notes are collateralized by properties with an aggregate net carrying value of approximately $41,530,000. Note payable #1 matures in January 2016, requires monthly principal and interest payments of $151,000 and bears interest at a fixed rate of 5.46% and is collateralized by Bally’s Health Club, Carnegie Business Center II, Lakeside Tower, Outback Steakhouse, Pat & Oscars, Palm Court Retail #3 and One Carnegie Plaza. Note payable #2 matures in May 2016, requires monthly principal and interest payments of $173,000 and bears interest at a fixed rate of 5.61% and is collateralized by Brier Corporate Center, One Parkside, Two Parkside and Two Carnegie Plaza.

We are contingently liable for subordinated real estate commissions payable to the General Partner in the aggregate amount of $102,000 at June 30, 2010 for sales that transpired in previous years. The subordinated real estate commissions are payable only after the limited partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 12% per annum on their adjusted invested capital. Since the conditions under which these commissions would be payable are not currently met, the liability has not been recognized in the accompanying consolidated financial statements; however, the amount will be recorded when and if it becomes payable.

Cash flows

For the six months ended June 30, 2010, cash provided by operating activities was $1,380,000, as compared to cash provided by operating activities of $2,132,000 for the same period in 2009. This decrease was primarily due to an increase in net loss combined with changes in certain assets and liabilities, notably prepaid rents and accounts payable and other liabilities. Fewer rents were prepaid at the end of the second quarter 2010 compared to prior year resulting in a decrease in cash provided by operating activities. For the six months ended June 30, 2010, cash used in investing activities was $662,000, as compared to cash used in investing activities of $714,000 for the same period in 2009, due to slightly lower capital spending. The majority of the spending during the first half of 2010 was for tenant improvements at Three Parkside, while in 2009 the spending related to tenant and building improvements at One Carnegie and Lakeside Tower. For the six months ended June 30, 2010, cash used in financing activities was $462,000, as compared to cash used in financing activities of $427,000 for the same period in 2009, related to the principal payments on notes payable.

Our expectation is that cash and cash equivalents as of June 30, 2010, together with cash from operations, sales and financing, will be adequate to meet our operating requirements and development plans on a short-term basis and for the reasonably foreseeable future. There can be no assurance that our results of operations will not fluctuate in the future and at times affect our ability to meet operating requirements.

Operationally, our primary source of funds consists of cash provided by rental activities. Other sources of funds may include permanent financing, property sales and interest income on money market funds. Cash generated from property sales is generally added to our cash reserves, pending use in the development of properties or distribution to the partners.

 

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Contractual Obligations

As of June 30, 2010, our contractual obligations are as follows (in thousands):

 

		Less than 1 year			1 to 3 years			3 to 5 years			More than 5 years			Total
Collateralized mortgage loans		$	476		$	2,040		$	2,278		$	48,395		$	53,189
Interest on indebtedness			1,468			5,733			5,496			3,117			15,814
Total		$	1,944		$	7,773		$	7,774		$	51,512		$	69,003

We are unaware of any demands, commitments, events or uncertainties, which might affect capital resources in any material respect. In addition, we are not subject to any covenants pursuant to our collateralized debt that would constrain our ability to obtain additional capital.

Critical Accounting Policies

In the preparation of financial statements, we utilize certain critical accounting policies. There has been no change to our significant accounting policies included in the notes to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Inflation

Leases at the office properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. We anticipate that these provisions may permit us to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce our exposure to the adverse effects of inflation.

Forward Looking Statements; Factors That May Affect Operating Results

This Report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, beliefs and strategies regarding the future. These forward looking statements include statements relating to:

 

•

Our belief that cash and cash generated by operations, sales and financing will be sufficient to meet our operating requirements in both the short and the long-term;

 

•

Our expectation that changes in market interest rates will not have a material impact on the performance or the fair value of our portfolio;

 

•

Our belief that certain claims and lawsuits which have arisen against us in the normal course of business will not have a material adverse effect on our financial position, cash flow or results of operations;

 

•

Our belief that properties are competitive within our market;

 

•

Our expectation to achieve certain occupancy levels;

 

•

Our estimation of market strength;

 

•

Our knowledge of any material environmental matters; and

 

•

Our expectation that lease provisions may permit us to increase rental rates or other charges to tenants in response to rising prices, and therefore serve to reduce exposure to the adverse effects of inflation.

All forward-looking statements included in this document are based on information available to us on the date hereof. Because these forward looking statements involve risk and uncertainty, there are important factors that could cause our actual results to differ materially from those stated or implied in the forward-looking statements. Those important factors include:

 

•

market fluctuations in rental rates and occupancy;

 

•

reduced demand for rental space;

 

•

availability and creditworthiness of prospective tenants;

 

•

defaults or non-renewal of leases by customers;

 

•

differing interpretations of lease provisions regarding recovery of expenses;

 

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•

increased operating costs;

 

•

changes in interest rates and availability of financing that may render the sale or financing of a property difficult or unattractive;

 

•

failure to obtain necessary outside financing;

 

•

risks and uncertainties affecting property development and construction (including construction delays, cost overruns, our inability to obtain necessary permits and public opposition to these activities); and

 

•

the unpredictability of both the frequency and final outcome of litigation.

The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009. We assume no obligation to update or supplement any forward looking-statement.

Risks of Litigation

Certain claims and lawsuits have arisen against us in our normal course of business. We believe that such claims and lawsuits will not have a material adverse effect on our financial position, cash flow or results of operations.

 

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

Interest Rates

We are exposed to changes in interest rates obtainable on our borrowings. Our expectation is that changes in market interest rates will not have a material impact on the performance or fair value of our portfolio.

For debt obligations, the table below presents required principal payments and interest rates by expected maturity dates.

 

		Expected Maturity Date																		Total
		2010			2011			2012			2013			2014			Thereafter
		(in thousands)
Collateralized fixed rate debt at 5.46%		$	229		$	478		$	504		$	532		$	563		$	22,690		$	24,996
Collateralized fixed rate debt at 5.61%			247			514			544			575			608			25,705			28,193

As of June 30, 2010, we had cash and cash equivalents of $5,763,000.

 

Item 4.

Controls and Procedures

See item 4T.

 

Item 4T.

Controls and Procedures

The principal executive officer and principal financial officer of the General Partner have evaluated the disclosure controls and procedures of the Partnership as of the end of the period covered by this quarterly report. As used herein, the term “disclosure controls and procedures” has the meaning given to the term by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and includes the controls and other procedures of the Partnership that are designed to ensure that information required to be disclosed by the Partnership in the reports that it files with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon his evaluation, the principal executive officer and principal financial officer of the General Partner has concluded that the Partnership’s disclosure controls and procedures were effective such that the information required to be disclosed by the Partnership in this quarterly report is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms applicable to the preparation of this report and is accumulated and communicated to the General Partner’s management, including the General Partner’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

There have not been any changes in the Partnership’s internal control over financial reporting that occurred during the Partnership’s fiscal quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

Certain claims and lawsuits have arisen against the Partnership in its normal course of business. The Partnership believes that such claims and lawsuits will not have a material adverse effect on the Partnership’s financial position, cash flow or results of operations.

 

Item 1A.

Risk Factors

There are no material changes to any of the risk factors as previously disclosed in Item 1A. to Part I of the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

[Removed and Reserved]

None.

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

 

31

Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(a) of the Exchange Act.

 

32

Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This certification, required by Section 906 of the Sarbanes-Oxley Act of 2002, other than as required by Section 906, is not to be deemed “filed” with the Commission or subject to the rules and regulations promulgated by the Commission under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of said Act.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		RANCON REALTY FUND V,
		a California limited partnership
		By:		Rancon Financial Corporation
				a California corporation,
				its General Partner
Date: August 13, 2010		By:		/S/    DANIEL L. STEPHENSON
				Daniel L. Stephenson, President
Date: August 13, 2010		By:		/S/    DANIEL L. STEPHENSON
				Daniel L. Stephenson, General Partner

 

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EXHIBIT INDEX

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

 

Exhibit 31		Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(a) of the Exchange Act.
Exhibit 32		Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This certification, required by Section 906 of the Sarbanes-Oxley Act of 2002, other than as required by Section 906, is not to be deemed “filed” with the Commission or subject to the rules and regulations promulgated by the Commission under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of said Act.

 

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