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 March 31, 2014

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 0-14207

 

RANCON REALTY FUND IV,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

California	33-0016355
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification  No.)
400 South El Camino Real, Suite 1100
San Mateo, California	94402-1708
(Address of principal	(Zip Code)
executive offices)

 

(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 x 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  

 

 

INDEX

RANCON REALTY FUND IV,

A CALIFORNIA LIMITED PARTNERSHIP 

 

				Page No.
PART I		FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements of Rancon Realty Fund IV (Unaudited):
		Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013		3
		Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013		4
		Consolidated Statement of Partners’ Equity for the three months ended March 31, 2014		5
		Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013		6
		Notes to Consolidated Financial Statements		7-13
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-18
Item 3.		Qualitative and Quantitative Disclosures About Market Risk		18
Item 4.		Controls and Procedures		18
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings		19
Item 1A.		Risk Factors		19
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3.		Defaults Upon Senior Securities		19
Item 4.		Mine Safety Disclosures		19
Item 5.		Other Information		19
Item 6.		Exhibits		19
SIGNATURES				20

 

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

 

RANCON REALTY FUND IV,

A CALIFORNIA LIMITED PARTNERSHIP

 

Consolidated Balance Sheets

(in thousands, except units outstanding)

(Unaudited)

 

		March 31,				December 31,
		2014				2013
Assets
Investments in real estate:
Rental properties		$	62,053			$	62,146
Accumulated depreciation			(26,158	)			(25,511	)
Rental properties, net			35,895				36,635
Cash and cash equivalents			3,018				2,888
Accounts receivable, net			276				230
Deferred costs, net of accumulated amortization of $2,206 and $2,046 as of  March 31, 2014 and December 31, 2013, respectively			2,012				2,093
Prepaid expenses and other assets			2,646				2,569
Total assets		$	43,847			$	44,415
Liabilities and Partners’ Equity (Deficit)
Liabilities:
Note payable and line of credit		$	28,534			$	28,658
Accounts payable and other liabilities			390				398
Prepaid rent			374				295
Total liabilities			29,298				29,351
Commitments and contingent liabilities (Note 6)
Partners’ Equity (Deficit):
General Partner			(901	)			(896	)
Limited partners, 65,819 limited partnership units outstanding as of March 31, 2014 and December 31, 2013			15,450				15,960
Total partners’ equity			14,549				15,064
Total liabilities and partners’ equity		$	43,847			$	44,415

 

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

 

 

RANCON REALTY FUND IV,

A CALIFORNIA LIMITED PARTNERSHIP

 

Consolidated Statements of Operations

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

(Unaudited)

 

		Three Months Ended
		March 31,
		2014				2013
Operating revenue
Rental revenue and other		$	1,953			$	2,036
Tenant reimbursements			171				212
Total operating revenue			2,124				2,248
Operating expenses
Property operating expenses			932				970
Depreciation and amortization			909				867
General and administrative			385				215
Total operating expenses			2,226				2,052
Operating (loss) income			(102	)			196
Interest expense			(413	)			(399	)
Net loss		$	(515	)		$	(203	)
Basic and diluted net loss per limited partnership unit		$	(7.75	)		$	(3.05	)
Weighted average number of limited partnership units outstanding			65,819				65,819

 

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

 

 

RANCON REALTY FUND IV,

A CALIFORNIA LIMITED PARTNERSHIP

 

Consolidated Statement of Partners’ Equity

For the three months ended March 31, 2014

(in thousands)

(Unaudited)

 

		General				Limited
		Partner				Partners				Total
Balance (deficit) at December 31, 2013		$	(896	)		$	15,960			$	15,064
Net loss			(5	)			(510	)			(515	)
Balance (deficit) at March 31, 2014		$	(901	)		$	15,450			$	14,549

 

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

 

 

RANCON REALTY FUND IV,

A CALIFORNIA LIMITED PARTNERSHIP

 

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited) 

 

		Three Months Ended
		March 31,
		2014				2013
Cash flows from operating activities:
Net loss		$	(515	)		$	(203	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			909				867
Amortization of loan fees, included in interest expense			62				41
Changes in certain assets and liabilities:
Accounts receivable			(46	)			148
Deferred costs			(117	)			(11	)
Prepaid expenses and other assets			(77	)			(280	)
Accounts payable and other liabilities			(8	)			(26	)
Prepaid rent			79				37
Net cash provided by operating activities			287				573
Cash flows from investing activities:
Additions to real estate investments			(33	)			(49	)
Net cash used in investing activities			(33	)			(49	)
Cash flows from financing activities:
Note payable principal payments			(124	)			(117	)
Net cash used in financing activities			(124	)			(117	)
Net increase in cash and cash equivalents			130				407
Cash and cash equivalents at beginning of period			2,888				2,856
Cash and cash equivalents at end of period		$	3,018			$	3,263
Supplemental disclosure of cash flow information:
Cash paid for interest		$	352			$	358
Supplemental disclosure of non-cash operating activities:
Write-off of fully depreciated rental property assets		$	126			$	90
Write-off of fully amortized deferred costs		$	38			$	11

 

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

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.

ORGANIZATION

 

Rancon Realty Fund IV, a California Limited Partnership, (“the Partnership”), was organized in accordance with the provisions of the California Uniform Limited Partnership Act for the purpose of acquiring, developing, operating and disposing of real property. The Partnership was organized in 1984 and reached final funding in July 1987. The general partners of the Partnership are Daniel L. Stephenson 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 March 31, 2014, there were 65,819 Units (“Units”) outstanding.

 

The Partnership commenced on April 3, 1984 and had a term which was set to expire on December 31, 2015, in accordance with the provisions of the Partnership Agreement. On April 21, 2014, the Partnership sent a Consent Solicitation Statement to its Limited Partners seeking their consent to the dissolution of the Partnership prior to December 31, 2015 in accordance with the terms of a Plan of Liquidation adopted by the General Partner on April 10, 2014. The dissolution required the approval of Limited Partners holding a majority of the outstanding units. On May 8, 2014, the dissolution was approved by Limited Partners holding a majority of the outstanding units, and the Plan of Liquidation became effective. Consequently, the General Partner has begun an orderly liquidation of the Partnership’s assets. Management anticipates that the Partnership will complete the sale of its properties within 12-18 months. However, because of numerous uncertainties, the liquidation process may take longer or shorter than expected. Dissolution can be a complex process that may depend on a number of factors, most of which are beyond the Partnership’s control. There can be no assurance that the liquidation will be completed within a specified time frame.

 

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 from operations is allocated 90% to the limited partners and 10% to the General Partner. Net losses from operations are allocated 99% to the limited partners and 1% to the General Partner; however, if the limited partners or the General Partner would have, as a result of an allocation of cumulative net losses, a deficit balance in their capital accounts, then net losses shall not be allocated to the limited partners or General Partner, as the case may be, so as to create a capital account deficit, but such losses shall be allocated to the limited partners or General Partner with positive capital account balances until the positive capital account balances of such other partners are reduced to zero. However, if deficits are the result of cumulative distributions in excess of earnings, losses will continue to be allocated to the General Partner. Capital accounts shall be determined after taking into account all 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 Unitholder’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 6% 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 losses other than net losses from operations are 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 their 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.

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Notes to Consolidated Financial Statements

(Unaudited)

 

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 of such limited partner; (for limited partners admitted to the Partnership before March 31, 1985, there are additional cumulative non-compounded returns of 9%, 6%, or 3% depending on purchase date, through October 31, 1985); (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 March 31, 2014 and December 31, 2013, and the consolidated results of operations of the Partnership and its subsidiaries for the three months ended March 31, 2014 and 2013, the consolidated statement of partners’ equity for the three months ended March 31, 2014, and cash flows of the Partnership for the three months ended March 31, 2014 and 2013. All significant intercompany transactions, receivables and payables have been eliminated in consolidation.

 

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

 

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 March 31, 2014 and December 31, 2013, and the related consolidated statements of operations and cash flows for the three months ended March 31, 2014 and 2013, and the consolidated statement of partners’ equity for the three months ended March 31, 2014.

 

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 to the extent the carrying value is greater than the undiscounted future cash flows excluding interest. 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

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Fair Value of Investments

 

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.

 

Cash and Cash Equivalents

 

The Partnership considers short-term investments with an original maturity of three months or less at the time of investment to be cash and 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. Deferred 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 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.

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Net Loss Per Limited Partnership Unit

 

Net loss 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.

 

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

 

		For the three months ended
		March 31, 2014								March 31, 2013
Loss allocation:		General Partner				Limited Partners				General Partner				Limited Partners
Net loss		$	(5	)		$	(510	)		$	(2	)		$	(201	)
Weighted average number of limited partnership units outstanding during each period							65,819								65,819
Basic and diluted loss per limited partnership unit						$	(7.75	)						$	(3.05	)

 

The calculation of net loss per Unit assumes that the 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.

 

Income Taxes

 

Income taxes on Partnership income are the responsibility of the individual partners. Accordingly, no provision for income taxes is included in the accompanying consolidated financial statements. The Partnership determines whether a tax position of the Partnership is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement which could result in the Partnership recording a tax liability that would reduce partners’ capital. Based on its analysis, the Partnership has determined it has not incurred any liability for unrecognized tax benefits as of March 31, 2014. However, the Partnership’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of changes to tax laws, regulations and interpretations thereof. As of March 31, 2014, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are 2010, 2011, 2012, and 2013.

 

The Partnership files US Federal tax returns and state tax returns in California, Georgia, Indiana, Missouri, New Jersey, New York, Pennsylvania, and West Virginia.

 

Concentration Risk

 

One tenant, an educational institution, represented 26% of rental revenue for the three months ended March 31, 2014. The same tenant represented 23% of rental revenue for the three months ended March 31, 2013.

 

Reference to 2013 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, 2013 audited consolidated financial statements on Form 10-K.

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 3.

INVESTMENTS IN REAL ESTATE

 

Rental properties consist of the following (in thousands):

 

		March 31,				December 31,
		2014				2013
Land		$	4,617			$	4,617
Buildings			47,837				47,837
Building and tenant improvements			9,599				9,692
			62,053				62,146
Less: accumulated depreciation			(26,158	)			(25,511	)
Total rental properties, net		$	35,895			$	36,635

  

As of March 31, 2014, the Partnership’s rental properties included five office properties and seven retail properties (see detailed listing of properties in Item 2. Properties).

 

NOTE 4.

NOTE PAYABLE AND LINE OF CREDIT

 

Note payable and line of credit consists of the following (in thousands):

 

		March 31,				December 31,
		2014				2013
Note payable collateralized by first deeds of trust on eight properties (discussed below). The note has a fixed interest rate of 5.46%, a maturity date of January 1, 2016, with a 30-year amortization requiring monthly payments of principal and interest totaling $136.		$	20,785			$	20,909
Line of credit			7,749				7,749
Total note payable and line of credit		$	28,534			$	28,658

 

The note payable is collateralized by Promotional Retail II, Mimi’s Cafe, Palm Court Retail I and II, Promotional Retail Center, Service Retail Center, TGI Friday’s and One Vanderbilt. This note provides for a one-time loan assumption and release provisions for individual assets. The loan documents provide that if a debt service coverage ratio of 1.2 to 1 (as calculated by the lender) is not maintained, the lender has the right to notify the Partnership that a triggering event has occurred.  If a triggering event has occurred, the lender would have certain rights to retain revenues generated by the property in excess of property operating expenses, taxes, insurance, capital improvement costs and debt service as additional cash collateral, rather than returning such amounts to the Partnership.  As of March 31, 2014, the Partnership has not been notified by the lender that a triggering event has occurred. 

 

The line of credit is collateralized by Carnegie Business Center, Vanderbilt Plaza, North River Place and Northcourt Plaza and has a total availability of $15,000,000, an interest rate of 30-day LIBOR plus 3.00% and a maturity date of December 19, 2014. The line of credit contains a minimum net worth covenant and a debt to total assets covenant. In order to extend the maturity date of the line of credit in the future, the Partnership must meet several conditions precedent, including a specified loan to value ratio. The Partnership is in compliance with the debt covenants.

 

The required principal payments on the Partnership’s note payable for the next five years and thereafter, as of March 31, 2014, are as follows (in thousands).

 

2014		$	338
2015			532
2016			19,915
Total		$	20,785

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 5.

RELATED PARTY TRANSACTIONS

 

Glenborough LLC earns fees from the Partnership as prescribed by the Property Management and Services Agreement (the “Agreement”). The Agreement is in effect until the earlier of December 31, 2015 or the completion of the sale of all real property assets of the Partnership. The terms and conditions of the Agreement are to perform services for the following fees:

 

		Three Months Ended
		March 31,				March 31,
		2014				2013
(i)  property management fees of 2.5% of gross rental revenue which were included in property operating expenses in the accompanying consolidated statements of operations		$	55,000			$	55,000
(ii)  construction services fees which were capitalized and included in rental properties on the accompanying consolidated balance sheets			21,000				27,000
(iii)  an asset and Partnership management fee which was included in general and administrative expenses in the accompanying consolidated statements of operations			63,000				63,000
(iv)  leasing services fees which were included in deferred costs on the accompanying consolidated balance sheets			91,000				11,000
(v)  a sales fee of 1% for all properties			-				-
(vi) data processing fees which were included in property operating expenses in the accompanying consolidated statements of operations			27,000				24,000
(vii)  engineering fees which were included in property operating expenses in the accompanying consolidated statements of operations			7,000				7,000

 

On October 1, 2010, Glenborough Holdings, LLC (Glenborough Holdings) transferred all of its interest in the Partnership to Glenborough Investors, LLC, which currently holds those units in its subsidiary, Glenborough Property Partners, LLC (“Glenborough Property Partners”). As part of the same transaction, Glenborough Holdings transferred its ownership of Glenborough LLC to Glenborough Investors, LLC, which currently holds the ownership interests in that entity in its subsidiary, Glenborough Service, LP, the parent of Glenborough Property Partners. As of March 31, 2014, Glenborough Property Partners, LLC, an affiliate of Glenborough LLC, held 7,386 or 11.22% of the Units.

 

NOTE 6.

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.

 

Approximately 14.7 acres of the Tri-City land owned by the Partnership was part of a 27-acre landfill operated by the City of San Bernardino (“the City”) from approximately 1950 to 1960. This landfill incorporates two land parcels and part of a third parcel. In 1996, the Santa Ana Regional Water Quality Control Board ("SARWQCB"), with regulatory jurisdiction over the closure and monitoring of landfills, determined that the City was primarily responsible for the landfill. Therefore, the City and the Partnership entered into a Limited Access Easement Agreement, giving the City access to the site for development, implementation and financial responsibility for a plan for the remediation of the landfill. It was determined that the City was to improve the landfill cover system (The Waterman Landfill Cover Improvement Plans, April 2002), perform groundwater monitoring and install a permanent gas extraction system (Landfill Gas Collection System). Under the Limited Access Easement Agreement with the Partnership, methane monitoring is handled directly by the City. The City's installation of the cover improvement system was completed in the first quarter of 2007 along with the gas extraction system. The system is now operational and working properly to eliminate methane from the landfill.  All controlled wells are in compliance with County standards. Presently, the Partnership does not have any plans to develop or sell this site. No assurance can be made that circumstances will not arise which could impact the Partnership’s responsibility related to the land.

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Notes to Consolidated Financial Statements

(Unaudited)

 

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, as amended and reauthorized to date; 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 aggregate amount of $643,000 at March 31, 2014, for sales that were completed 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 considered remote, the liability has not been recognized in the accompanying consolidated financial statements; however, the amount will be recorded when and if it becomes probable.

  

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

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, 2013 audited consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K.

 

Background

During 1984 and 1985, our initial acquisition of property consisted of approximately 76.56 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 V (“Fund V”), a partnership sponsored by the General Partner.

 

The Partnership commenced on April 3, 1984 and had a term which was set to expire on December 31, 2015, in accordance with the provisions of the Partnership Agreement. On April 21, 2014, the Partnership sent a Consent Solicitation Statement to its Limited Partners seeking their consent to the dissolution of the Partnership prior to December 31, 2015 in accordance with the terms of a Plan of Liquidation adopted by the General Partner on April 10, 2014. The dissolution required the approval of Limited Partners holding a majority of the outstanding units. On May 8, 2014, the dissolution was approved by Limited Partners holding a majority of the outstanding units, and the Plan of Liquidation became effective. Consequently, the General Partner has begun an orderly liquidation of the Partnership’s assets. Management anticipates that the Partnership will complete the sale of its properties within 12-18 months. However, because of numerous uncertainties, the liquidation process may take longer or shorter than expected. Dissolution can be a complex process that may depend on a number of factors, most of which are beyond the Partnership’s control. There can be no assurance that the liquidation will be completed within a specified time frame.

 

Overview

 

Tri-City Properties

As of March 31, 2014, our rental properties consist of five office and seven retail properties, aggregating approximately 555,000 rentable square feet, of which 400,000 square feet are office space, and 155,000 square feet are retail space.

 

Property		Type		Square Footage
One Vanderbilt		Four-story office building			73,730
Carnegie Business Center I		Two office buildings			62,538
Service Retail Center		Two retail buildings			20,780
Promotional Retail Center		Four retail buildings			66,244
Northcourt Plaza		Two-story office building			77,589
TGI Friday’s		Restaurant			9,956
Promotional Retail Center II		Retail building			39,123
Mimi’s Café		Restaurant			6,455
Palm Court Retail I		Retail building			5,053
Palm Court Retail II		Retail building			7,433
Vanderbilt Plaza		Four-story office building			114,707
North River Place		Three-story office building			71,157
					554,765

 

As of March 31, 2014, the weighted average occupancy of the twelve properties was 67%.

 

Promotional Retail Center II is currently unoccupied. Management is actively marketing the vacant space in all of the buildings for lease.

 

Land

 

As of March 31, 2014, we owned approximately 14.7 acres of unimproved land.

 

Approximately 14.7 acres of the Tri-City land owned by the Partnership was part of a 27-acre landfill operated by the City of San Bernardino (“the City”) from approximately 1950 to 1960. This landfill incorporates two land parcels and part of a third parcel. In 1996, the Santa Ana Regional Water Quality Control Board ("SARWQCB"), with regulatory jurisdiction over the closure and monitoring of landfills, determined that the City was primarily responsible for the landfill. Therefore, the City and the Partnership entered into a Limited Access Easement Agreement, giving the City access to the site for development, implementation and financial responsibility for a plan for the remediation of the landfill. It was determined that the City was to improve the landfill cover system (The Waterman Landfill Cover Improvement Plans, April 2002), perform groundwater monitoring and install a permanent gas extraction system (Landfill Gas Collection System). Under the Limited Access Easement Agreement with the Partnership, methane monitoring is handled directly by the City. The City's installation of the cover improvement system was completed in the first quarter of 2007 along with the gas extraction system. The system is now operational and working properly to eliminate methane from the landfill.  All controlled wells are in compliance with County standards. Presently, the Partnership does not have any plans to develop or sell this site. No assurance can be made that circumstances will not arise which could impact the Partnership’s responsibility related to the land.

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Results of Operations

 

Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2013.

 

Revenue

 

Rental revenue and other decreased by $83,000, or 4%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due primarily to the early termination of a lease at One Vanderbilt .

 

Tenant reimbursements decreased by $41,000 or 19%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due primarily to lower requests for overtime HVAC.

 

Expenses

 

Property operating expenses were decreased by $38,000, or 4%, for the three months ended March 31, 2014, compared to the three months ended March 31, 2013 due primarily to lower repairs and maintenance costs due to lower occupancy.

 

Depreciation and amortization increased $42,000, or 5%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. This decrease was primarily due to the amortization of new lease commissions and improvements.

 

General and administrative expenses increased $170,000, or 79%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. This decrease was primarily due to increases in investor relations expense related to the dissolution proxy.

 

Interest expense increased $14,000, or 4%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to additional loan fees related to the extension of the line of credit.

 

Liquidity and Capital Resources

 

As of March 31, 2014, we have cash and cash equivalents of $3,018,000.

 

As of March 31, 2014, our primary liability is a note payable of approximately $20,785,000, collateralized by properties with an aggregate net carrying value of approximately $11,908,000. The note has a 10-year term requiring monthly principal and interest payments based on a 30-year amortization of approximately $136,000, bears a fixed interest rate of 5.46%, and has a maturity date of January 1, 2016. The note is collateralized by Promotional Retail Center II, Mimi’s Cafe, Palm Court Retail I and II, Promotional Retail Center, Service Retail Center, TGI Friday’s and One Vanderbilt. This note also provides for a one-time loan assumption and release provisions for individual assets and provides that if a debt service coverage ratio of 1.2 to 1 (as calculated by the lender) is not maintained, the lender has the right to notify us that a triggering event has occurred.  If a triggering event has occurred, the lender would have certain rights to retain revenues generated by the property in excess of property operating expenses, taxes, insurance, capital improvement costs and debt service as additional cash collateral, rather than returning such amounts to the Partnership.  As of March 31, 2014, we have not been notified by the lender that a triggering event has occurred.

 

We have a line of credit, which as of March 31, 2014 is collateralized by Carnegie Business Center, Vanderbilt Plaza, North River Place and Northcourt Plaza and had a total availability of $15,000,000. The line of credit requires a monthly interest-only payments, bears variable interest at the 30-day LIBOR plus 3.00% (3.19% at March 31, 2014), and has a maturity date of December 19, 2014. As of March 31, 2014, $7,749,000 was outstanding under the line of credit. The line of credit contains a minimum net worth covenant and a debt to total assets covenant. In order to extend the maturity date of the line of credit in the future, we must meet several conditions precedent, including a specified loan to value ratio. Management is in compliance as of March 31, 2014 to support a one year extension and anticipates that such an extension will be sought in late 2014.

 

We are contingently liable for subordinated real estate commissions payable to the General Partner in the aggregate amount of $643,000 at March 31, 2014, 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 considered remote, the liability has not been recognized in the accompanying consolidated financial statements; however, the amount will be recorded when and if it becomes probable.

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

Cash Flows

 

For the three months ended March 31, 2014, cash provided by operating activities was $287,000, as compared to $573,000 for the same period in 2013. The reduction was primarily due to a higher loss from operations. For the three months ended March 31, 2014, cash used in investing activities was $33,000, as compared to $49,000 for the same period in 2013. The change was due to slightly lower capital expenditures in the first quarter of 2014 as compared to the first quarter of 2013. For the three months ended March 31, 2014, cash used in financing activities was $124,000 as compared to $117,000 for the same period in 2013, representing principal payments on the note payable.

 

Our expectation is that cash and cash equivalents as of March 31, 2014, together with cash from operations, sales and financing, and the line of credit, will be adequate to meet our operating requirements 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, draws on the line of credit and property sales. Cash generated from property sales is generally added to our cash reserves, pending use for leasing costs at the properties or distribution to the partners.

 

Contractual Obligations

 

As of March 31, 2014, our contractual obligations consist of the following (in thousands):

 

		Less than 1 year				1 to 3 years				Total
Collateralized mortgage loans		$	513			$	20,272			$	20,785
Interest on indebtedness			1,122				823				1,945
Line of credit			7,749				-				7,749
Total		$	9,384			$	21,095			$	30,479

 

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, 2013.

 

Inflation

 

Leases at the office properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. Substantially all of the leases at the office and retail properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. 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.

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

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 or issues relating to the landfill property; 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;

 

§

increased operating costs;

 

§

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

 

§

our 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);

 

§

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

 

§

the inability to develop all or any portion of the former landfill site, due to environmental, legal or economic impediments.

 

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, 2013. We assume no obligation to update or supplement any forward looking-statement.

  

RANCON REALTY FUND IV,

A California Limited Partnership

 

 

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 principal cash flows by expected maturity dates of a note payable with a fixed interest rate of 5.46% and the line of credit with a maturity date of December 19, 2014 and variable interest rate of 3.19% as of March 31, 2014. The line of credit contains a minimum net worth covenant and a debt to total assets covenant. In order to extend the maturity date of the line of credit, the Partnership must meet several conditions precedent, including a specified loan to value ratio.

 

		Expected Maturity Date
		2014				2015				2016				Total
		(in thousands)
Collateralized fixed rate debt		$	338			$	532			$	19,915			$	20,785
Line of credit		$	7,749			$	-			$	-			$	7,749

 

As of March 31, 2014, we had cash and cash equivalents of $3,018,000.

 

Item 4.

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 March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

 

 

RANCON REALTY FUND IV,

A California Limited Partnership

 

PART II. OTHER INFORMATION 

 

Item 1.	Legal Proceedings
	Certain claims and lawsuits have arisen against the Partnership in its normal course of business. believes that such claims and lawsuits will not have a material adverse effect on the Partnership’s financial cash flow or results of operations. The Partnership position,
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, 2013.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	None.
Item 3.	Defaults Upon Senior Securities
	None.
Item 4.	Mine Safety Disclosures
	Not applicable.
Item 5.	Other Information
	None.
Item 6.	Exhibits

 

2

Plan of Liquidation of the Partnership, dated April 10, 2014 (included as Appendix A to Schedule 14A dated April 21, 2014, file number 0-14207), is incorporated herein by reference.

 

3

First Amendment to the Second Amended and Restated Agreement of Limited Partnership of the Partnership, dated March 27, 2014 (included as Exhibit 3.1 to Form 8-K dated March 27, 2014, file number 0-14207), is incorporated herein by reference.

 

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.

 

101.INS

XBRL Instance Document.

 

101.SCH

XBRL Taxonomy Extension Schema Document.

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

SIGNATURES

 

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

 

	RANCON REALTY FUND IV,
	a California limited partnership
	By:	Rancon Financial Corporation
		a California corporation,
		its General Partner

 

Date:	May 12, 2014	By:	/s/  Daniel L. Stephenson
			Daniel L. Stephenson, President
Date:	May 12, 2014	By:	/s/  Daniel L. Stephenson
			Daniel L. Stephenson, General Partner

 

 

EXHIBIT INDEX

RANCON REALTY FUND IV,

A CALIFORNIA LIMITED PARTNERSHIP

 

Exhibit 2		Plan of Liquidation of the Partnership, dated April 10, 2014 (included as Appendix A to Schedule 14A dated April 21, 2014, file number 0-14207), is incorporated herein by reference.
Exhibit 3		First Amendment to the Second Amended and Restated Agreement of Limited Partnership of the Partnership, dated March 27, 2014 (included as Exhibit 3.1 to Form 8-K dated March 27, 2014, file number 0-14207), is incorporated herein by reference.
Exhibit 31		Certification of 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 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.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.