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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2014

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from                      to                     

Commission file no. 0-16851

 

 

DEL TACO RESTAURANT PROPERTIES III

(A California limited partnership)

(Exact name of registrant as specified in its charter)

 

 

 

California		33-0139247
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

25521 Commercentre Drive Lake Forest, California		92630
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (949) 462-9300

Securities registered pursuant to section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: Units of Limited Partnership Interests

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Form S-11 Registration Statement filed December 17, 1982 are incorporated by reference into Part IV of this report.

 

 

 

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DEL TACO RESTAURANT PROPERTIES III

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

 

		PART I		PAGE NUMBER
Item 1.		Business			3
Item 1A.		Risk Factors			3
Item 2.		Properties			4
Item 3.		Legal Proceedings			4
Item 4.		Mine Safety Disclosures			4
		PART II
Item 5.		Market for Partnership’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities			5
Item 6.		Selected Financial Data			5
Item 7.		Management Discussion and Analysis of Financial Condition and Results of Operations			5
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			7
Item 8.		Financial Statements and Supplementary Data			8
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			19
Item 9A.		Controls and Procedures			19
Item 9B.		Other Information			19
		PART III
Item 10.		Directors, Executive Officers, and Corporate Governance			20
Item 11.		Executive Compensation			21
Item 12.		Security Ownership of Certain Beneficial Owners and Management			21
Item 13.		Certain Relationships, Related Transactions, and Director Independence			21
Item 14.		Principal Accountant Fees and Services			21
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			22
		Signatures			24

 

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PART I

 

Item 1.

Business

Del Taco Restaurant Properties III (the Partnership, us, we or our) is a publicly-held limited Partnership organized under the California Uniform Limited Partnership Act. The Partnership’s General Partner is Del Taco LLC, a California limited liability company (Del Taco or the General Partner). The Partnership sold 48,000 units totaling $12,000,000 through an offering of limited partnership units from February 1986 through June 1987. The term of the partnership agreement is until December 31, 2025, unless terminated earlier by means provided in the partnership agreement.

The business of the Partnership is ownership and leasing of restaurants in California to Del Taco. The Partnership acquired land and constructed ten Mexican-American restaurants for long-term lease to Del Taco. As of December 31, 2014, the Partnership owned a total of eight properties leased to Del Taco. Each property is leased for 35 years on a triple net basis. Rent is equal to twelve percent of gross sales of the restaurants.

The Partnership has no full-time employees. The Partnership agreement assigns full authority for general management and supervision of the business affairs of the Partnership to the General Partner. The General Partner has a one percent interest in the profits or losses and distributions of the Partnership. Limited partners have no right to participate in the day to day management or conduct of the Partnership’s business affairs.

 

Item 1A.

Risk Factors

None.

 

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Item 2.

Properties

The Partnership acquired ten properties with proceeds obtained from the sale of limited partnership units:

 

Address		City, State		Date of Acquisition		Restaurant Constructed		Date of Commencement of Operation (1)
Rancho California Plaza		Rancho California, CA		December 23, 1986		60 seat with drive through service window		July 14, 1987
East Vista Way		Vista, CA		February 24, 1987		60 seat with drive through service window		September 10, 1987
4th Street		Perris, CA		June 24, 1987		60 seat with drive through service window		December 16, 1987
Foothill Boulevard		Upland, CA		August 3, 1987		60 seat with drive through service window		January 12, 1988
East Valley Boulevard		Walnut, CA		April 29, 1988		60 seat with drive through service window		August 31, 1988
West Sepulveda Boulevard		Los Angeles, CA		July 8, 1988		60 seat with drive through service window		January 12, 1989 (2)
Lassen Street		Chatsworth, CA		January 27, 1989		60 seat with drive through service window		August 21, 1989
Hesperia Road		Victorville, CA		December 29, 1989		100 seat with drive through service window		July 5, 1990

See also Schedule III – Real Estate and Accumulated Depreciation included in Item 8.

 

(1)	Commencement of operation is the first date Del Taco, as lessee, operated the facility on the site as a Del Taco restaurant.

(2)	The restaurant was subleased to a franchisee of Del Taco and the restaurant operated as a Del Taco restaurant. On December 29, 1999 the franchise agreement for this restaurant expired. Del Taco began operation of this restaurant as a company-managed facility on December 29, 1999.

 

Item 3.

Legal Proceedings

The Partnership is not a party to any material pending legal proceedings.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

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PART II

 

Item 5.

Market for the Partnership’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities

The Partnership sold 48,000 ($12,000,000) limited partnership units during the public offering period ended June 1, 1987 and currently has 962 limited partners of record. There is no public market for the trading of the units. Distributions made by the Partnership to the limited partners during the past three fiscal years are described in Notes 6 and 8 to the Notes to the Financial Statements contained under Item 8.

 

Item 6.

Selected Financial Data

The selected financial data presented as of and for the years ended December 31, 2014, 2013, 2012, 2011, and 2010, has been derived from the audited financial statements and should be read in conjunction with the financial statements and related notes and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

		Years Ended December 31,
		2014				2013				2012				2011				2010
Rental revenues		$	1,086,294			$	1,023,572			$	985,670			$	1,005,655			$	1,036,594
General and administrative expense			117,951				91,074				94,173				145,625				76,117
Depreciation expense			72,412				72,412				72,412				76,406				112,737
Interest and other income			9,455				2,737				4,106				4,411				4,289
Gain on disposal of property			—				—				—				545,973				—
Net income			905,386				862,823				823,191				1,334,008				852,029
Net income per limited partnership unit			18.97				18.07				17.24				27.94				17.85
Cash distributions per limited partnership unit			20.47				19.27				17.61				45.55				20.25
Total assets			4,394,769				4,450,751				4,506,312				4,531,154				5,331,937
Long-term obligations			577,510				577,510				577,510				577,510				577,510

 

Item 7.

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

Management’s discussion and analysis of financial condition, results of operations, liquidity and capital resources, and off balance sheet arrangements and contractual obligations contained within this report on Form 10-K is more clearly understood when read in conjunction with the notes to the financial statements. The notes to the financial statements elaborate on certain terms that are used throughout this discussion and provide information about the Partnership and the basis of presentation used in this report on Form 10-K.

The eight restaurants currently leased to Del Taco make up all of the income producing assets of the Partnership. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco as the operator of the restaurants located at our properties. The success of the restaurants is dependent on a large variety of factors, including, but not limited to, consumer demand and preference for fast food, in general, and for Mexican-American food in particular.

 

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Liquidity and Capital Resources

The Partnership offered limited partnership units for sale between February 1986 and June 1987. In total, $12 million was raised through the sale of limited partnership units and used to acquire sites, build ten restaurants (eight of which are currently owned), pay commissions to brokers and to reimburse Del Taco LLC (the General Partner or Del Taco) for offering costs incurred. In February of 1992, approximately $281,000 raised during the offering but not required to acquire sites and build restaurants was distributed to the limited partners.

As described in note 6 to the Notes to the Financial Statements contained under Item 8, the Partnership has a death and disability redemption fund totaling $86,017 at December 31, 2014. Investors should contact the General Partner with all questions regarding the eligibility of a limited partner or the estate of a deceased limited partner to participate in the redemption fund. A limited partner has the right, under certain circumstances involving such limited partner’s death or disability, to tender to the Partnership for redemption all of the units owned of record by such limited partner. The redemption price will be equal to the partners’ capital account balance as of the redemption date. The death and disability fund was established in 1987. The fund was limited to two percent of the gross proceeds from sale of the limited partnership units. Requests for redemption made after the funds in the death and disability fund are depleted will not be accepted.

The Partnership’s only source of cash flow is rental income from the properties from the triple net leases. Such operating income has historically been and is expected to continue to be sufficient to fund the Partnership’s operating expenses. Net cash provided by operating activities in excess of the Partnership’s ongoing needs is distributed to the partners.

Off Balance Sheet Arrangements and Contractual Obligations

None.

Results of Operations

The Partnership owns eight properties, as of December 31, 2014, that are under long-term lease to Del Taco for restaurant operations.

The following table sets forth rental revenues earned by restaurant by year, under its respective lease:

 

		Years Ended December 31,
		2014				2013				2012
Rancho California Plaza, Rancho California, CA		$	172,417			$	173,958			$	170,415
East Vista Way, Vista, CA			110,430				109,317				109,272
4th Street, Perris, CA			138,172				127,697				121,079
Foothill Blvd., Upland, CA			152,555				141,859				125,606
East Valley Blvd., Walnut, CA			88,136				81,360				78,833
Lassen Street, Chatsworth, CA			160,830				149,662				145,132
Hesperia Road, Victorville, CA			169,319				153,240				147,290
W. Sepulveda Blvd., Los Angeles, CA			94,435				86,479				88,043
Total		$	1,086,294			$	1,023,572			$	985,670

The Partnership earns rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenues of $1,086,294 during the year ended December 31, 2014, which represents an increase of $62,722 from 2013. The changes in rental revenues between 2013 and 2014 are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

 

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Results of Operations (Continued)

The Partnership earned rental revenues of $1,023,572 during the year ended December 31, 2013, which represents an increase of $37,902 from 2012. The changes in rental revenues between 2012 and 2013 are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

The following table breaks down general and administrative expense by type of expense:

 

		Percentage of Total General and Administrative Expense
		Years Ended December 31,
		2014				2013				2012
Accounting fees			41.20	%			50.65	%			47.41	%
Distribution of information to limited partners			37.35				45.57				47.30
Potential sale-related expenses			18.51				—				—
Other			2.94				3.78				5.29
			100.00	%			100.00	%			100.00	%

General and administrative costs increased by $26,877 from 2013 to 2014. The increase was caused primarily by costs related to the “straw poll” and Form 8-K filings discussed in Notes 11 and 12.

General and administrative costs decreased by $3,099 from 2012 to 2013. The decrease was caused primarily by decreased legal fees.

Net income increased by $42,563 from 2013 to 2014 due to the increase in revenues of $62,722 and the increase in interest and other income of $6,718, partially offset by the increase in general and administrative expenses of $26,877.

Net income increased by $39,632 from 2012 to 2013 due to the increase in revenues of $37,902 and the decrease in general and administrative expenses of $3,099, partially offset by the decrease in interest and other income of $1,369.

Recent Accounting Pronouncements

None that applies to the Partnership.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations, as well as disclosures included elsewhere in this report on Form 10-K are based upon the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Partnership believes the critical accounting policies that most impact the financial statements are described below. A summary of the significant accounting policies of the Partnership can be found in Note 1 to the Financial Statements which is included in Item 8 of this Form 10-K.

Revenue Recognition: Rental revenue is recognized based on 12 percent of gross sales of the restaurants for the corresponding period, and is earned at the point of sale.

Property and Equipment: Property and equipment is stated at cost. Depreciation is computed using the straight-line method over estimated useful lives which are 20 years for land improvements, 35 years for buildings and improvements, and 10 years for machinery and equipment.

The Partnership accounts for property and equipment in accordance with authoritative guidance issued by the Financial Accounting Standards Board that requires long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating long-lived assets held for use, an impairment loss is recognized if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset. Once a determination has been made that an impairment loss should be recognized for long-lived assets, various assumptions and estimates are used to determine fair value including, among others, estimated costs of construction and development, recent sales of comparable properties and the opinions of fair value prepared by independent real estate appraisers. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

None.

 

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Item 8.

Financial Statements and Supplementary Data

 

INDEX		PAGE NUMBER
Report of Independent Registered Public Accounting Firm – Squar, Milner, Peterson, Miranda  & Williamson, LLP		9
Balance Sheets at December 31, 2014 and 2013		10
Statements of Income for the years ended December 31, 2014, 2013 and 2012		11
Statements of Partners’ Equity for the years ended December 31, 2014, 2013 and 2012		12
Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012		13
Notes to Financial Statements		14-18
Schedule III – Real Estate and Accumulated Depreciation		23

 

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Report of Independent Registered Public Accounting Firm

To the Partners

Del Taco Restaurant Properties III:

We have audited the accompanying balance sheets of Del Taco Restaurant Properties III (a California Limited Partnership) as of December 31, 2014 and 2013 and the related statements of income, partners’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule of the Partnership in Item 15 (a) Schedule III – Real Estate and Accumulated Depreciation. These financial statements and financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Del Taco Restaurant Properties III as of December 31, 2014 and 2013 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP

Newport Beach, California

March 2, 2015

 

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DEL TACO RESTAURANT PROPERTIES III

BALANCE SHEETS

 

		December 31,
		2014				2013
ASSETS
CURRENT ASSETS
Cash		$	346,478			$	335,901
Receivable from Del Taco LLC			93,384				87,772
Deposits			2,065				1,824
Total current assets			441,927				425,497
RESTRICTED CASH			86,017				86,017
PROPERTY AND EQUIPMENT
Land			3,284,629				3,284,629
Land improvements			494,254				494,254
Buildings and improvements			2,534,393				2,534,393
Machinery and equipment			1,306,171				1,306,171
			7,619,447				7,619,447
Less: accumulated depreciation			3,752,622				3,680,210
			3,866,825				3,939,237
		$	4,394,769			$	4,450,751
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES
Payable to limited partners		$	93,425			$	88,950
Accounts payable			28,251				15,294
Total current liabilities			121,676				104,244
OBLIGATION TO GENERAL PARTNER			577,510				577,510
PARTNERS’ EQUITY
Limited partners; 47,261 units outstanding at December 31, 2014 and 2013			3,741,723				3,814,403
General partner-Del Taco LLC			(46,140	)			(45,406	)
			3,695,583				3,768,997
		$	4,394,769			$	4,450,751

See accompanying notes to financial statements.

 

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DEL TACO RESTAURANT PROPERTIES III

STATEMENTS OF INCOME

 

		Years Ended December 31,
		2014				2013				2012
RENTAL REVENUES		$	1,086,294			$	1,023,572			$	985,670
EXPENSES
General and administrative			117,951				91,074				94,173
Depreciation			72,412				72,412				72,412
			190,363				163,486				166,585
Operating income			895,931				860,086				819,085
OTHER INCOME
Interest			580				537				491
Other			8,875				2,200				3,615
Net income		$	905,386			$	862,823			$	823,191
Net income per limited partnership unit (Note 2)		$	18.97			$	18.07			$	17.24
Number of limited partnership units used in computing per unit amounts			47,261				47,261				47,261

See accompanying notes to financial statements.

 

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DEL TACO RESTAURANT PROPERTIES III

STATEMENTS OF PARTNERS’ EQUITY

Years Ended December 31, 2014, 2013, and 2012

 

		Limited Partners								General
		Units				Amount				Partner				Total
Balance, December 31, 2011			47,261			$	3,890,871			$	(44,634	)		$	3,846,237
Net Income			—				814,959				8,232				823,191
Cash Distributions			—				(833,410	)			(8,418	)			(841,828	)
Balance, December 31, 2012			47,261				3,872,420				(44,820	)			3,827,600
Net Income			—				854,195				8,628				862,823
Cash Distributions			—				(912,212	)			(9,214	)			(921,426	)
Balance, December 31, 2013			47,261				3,814,403				(45,406	)			3,768,997
Net Income			—				896,332				9,054				905,386
Cash Distributions			—				(969,012	)			(9,788	)			(978,800	)
Balance, December 31, 2014			47,261			$	3,741,723			$	(46,140	)		$	3,695,583

See accompanying notes to financial statements.

 

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DEL TACO RESTAURANT PROPERTIES III

STATEMENTS OF CASH FLOWS

 

		Years Ended December 31,
		2014				2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	905,386			$	862,823			$	823,191
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			72,412				72,412				72,412
Changes in operating assets and liabilities:
Receivable from Del Taco LLC			(5,612	)			(7,108	)			1,122
Deposits			(241	)			(170	)			—
Payable to limited partners			4,475				13,006				6,415
Accounts payable			12,957				(9,964	)			(12,620	)
Net cash provided by operating activities			989,377				930,999				890,520
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to partners			(978,800	)			(921,426	)			(841,828	)
Net cash used in financing activities			(978,800	)			(921,426	)			(841,828	)
Net change in cash			10,577				9,573				48,692
Beginning cash balance			335,901				326,328				277,636
Ending cash balance		$	346,478			$	335,901			$	326,328

See accompanying notes to financial statements.

 

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO FINANCIAL STATEMENTS

December 31, 2014

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Partnership: Del Taco Restaurant Properties III, a California limited partnership, (the Partnership) was formed on December 19, 1985, for the purpose of acquiring real property in California for construction of ten Mexican-American restaurants to be leased under long-term agreements to Del Taco LLC (General Partner or Del Taco) for operation under the Del Taco trade name. As of July 5, 1990, all ten restaurants had commenced operation on acquired properties. In November 1997, the Twentynine Palms property was sold yielding net proceeds of $278,612. In May 2011, the Industry, California property was destroyed by fire and then sold in December 2011 yielding net proceeds of $1,231,720. As of December 31, 2014, Del Taco Restaurant Properties III had eight properties in operation. The term of the partnership agreement is until December 31, 2025 unless terminated earlier by means provided in the partnership agreement.

The Partnership has no full-time employees (see Note 5). The Partnership agreement assigns full authority for general management and supervision of the business affairs of the Partnership to the General Partner. The General Partner has a one percent interest in the profits or losses and distributions of the Partnership. Limited partners have no right to participate in the day to day management or conduct of the Partnership’s business affairs.

Distributions are made to the general and limited partners in accordance with the provisions of the partnership agreement (see Note 2).

Basis of Accounting: The Partnership utilizes the accrual method of accounting for transactions relating to the business of the Partnership. The summary of significant accounting policies presented below is designed to assist in understanding the Partnership’s financial statements. Such financial statements and accompanying notes are the representations of the Partnership’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying financial statements.

Property and Equipment: Property and equipment is stated at cost. Depreciation is computed using the straight-line method over estimated useful lives which are 20 years for land improvements, 35 years for buildings and improvements, and 10 years for machinery and equipment.

The Partnership accounts for property and equipment in accordance with authoritative guidance issued by the Financial Accounting Standards Board that requires long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating long-lived assets held for use, an impairment loss is recognized if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset. Once a determination has been made that an impairment loss should be recognized for long-lived assets, various assumptions and estimates are used to determine fair value including, among others, estimated costs of construction and development, recent sales of comparable properties and the opinions of fair value prepared by independent real estate appraisers. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Income Taxes: No provision has been made for federal or state income taxes on partnership net income, since the Partnership is not subject to income tax. Partnership income is includable in the taxable income of the individual partners as required under applicable income tax laws. Certain items, primarily related to depreciation methods, are accounted for differently for income tax reporting purposes (see Note 7).

Net Income Per Limited Partnership Unit: The net income per limited partnership unit is based on net income attributable to the limited partners (after 1% allocation to the general partner) using the weighted average units outstanding during the periods presented which amounted to 47,261 in 2014, 2013 and 2012, respectively.

Use of Estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition: Rental revenue is recognized based on 12 percent of gross sales of the restaurants for the corresponding period, and is earned at the point of sale.

 

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Concentration of Risk: The eight restaurants leased to Del Taco make up all of the income producing assets of the Partnership and contributed all of the Partnership’s rental revenues for the three years ended December 31, 2014. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name restaurants that lease the properties.

The Partnership maintains substantially all of its cash and cash equivalents at one major commercial bank. Although the Partnership at times maintains balances that exceed the federally insured limit, it has not experienced any losses related to these balances and management believes the credit risk to be minimal.

Fair Value of Financial Instruments: The fair values of cash, accounts receivables, deposits, accounts payable and payables to limited partners approximate the carrying amounts due to their short maturities.

Subsequent Events: Management has evaluated events subsequent to December 31, 2014 through the date the accompanying financial statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements (see Note 12).

NOTE 2 – PARTNERS’ EQUITY

Pursuant to the partnership agreement, annual partnership net income or loss is allocated one percent to the General Partner and 99 percent to the limited partners. Partnership gains from any sale or refinancing are to be allocated one percent to the General Partner and 99 percent to the limited partners until allocated gains and profits equal losses, distributions and syndication costs, and until each class of limited partners receive their priority return (10 percent) as defined in the partnership agreement. Additional gains are to be allocated 15 percent to the General Partner and 85 percent to the limited partners.

NOTE 3 – OBLIGATION TO GENERAL PARTNER

Under terms of the partnership agreement, the General Partner is entitled to receive a fee in an amount equal to five percent of aggregate capital contributions. The fee shall be for services rendered in connection with site selection and the design and supervision of construction and improvements to acquired properties. This fee shall be earned at the time the services are rendered, but shall not be paid and shall be subordinated to the limited partners’ interests until all restaurants have opened and the limited partners have received certain minimum returns on their investment, as required by the partnership agreement. It is the policy of the Partnership to accrue the site acquisition and development fee as an obligation to the General Partner. No fees were earned for such services during 2014, 2013, and 2012.

NOTE 4 – LEASING ACTIVITIES

The Partnership leases its properties for operation of restaurants to Del Taco on a triple net basis. The leases are for terms of 35 years commencing with the completion of the restaurant facility located on each property and require monthly rentals equal to 12 percent of the gross sales of the restaurants. The leases terminate in the years 2022 to 2024. Pursuant to the lease agreements, minimum rentals of $3,500 per month are due to the Partnership during the first six months of any non-operating period caused by an insured casualty loss. The Partnership had a total of eight properties leased to Del Taco as of December 31, 2014.

The restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $9,052,444, $8,529,770, and $8,213,914 and unaudited net income of $25,095 and unaudited net losses of $66,093 and $94,586 during the years ended December 31, 2014, 2013 and 2012, respectively. Net income and loss by restaurant includes charges for general and administrative expenses incurred in connection with supervision of restaurant operations and interest expense.

 

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 5 – RELATED PARTIES

The receivable from Del Taco consists of rent accrued for the months of December 2014 and 2013. The rent receivable was collected in January 2015 and 2014, respectively.

The General Partner received $9,788, $9,214 and $8,418 in distributions relating to its one percent interest in the Partnership for the years ended December 31, 2014, 2013 and 2012, respectively.

Del Taco serves in the capacity of General Partner in other partnerships which are engaged in the business of operating restaurants, and three other partnerships which were formed for the purpose of acquiring real property in California for construction of Mexican-American restaurants for lease under long-term agreements to Del Taco.

The General Partner provides certain minimal managerial and accounting services to the Partnership at no cost.

NOTE 6 – RESTRICTED CASH

At December 31, 2014 and 2013 the Partnership had a restricted cash balance of $86,017. The restricted cash is a death and disability redemption fund. Such fund is maintained in an interest bearing account at a major commercial bank. A limited partner has the right, under certain circumstances involving such limited partner’s death or disability, to tender to the Partnership for redemption all of the units owned of record by such limited partner. The redemption price will be equal to the partners’ capital account balance as of the redemption date. The death and disability fund was established in 1987. The fund was limited to two percent of the gross proceeds from sale of the limited partnership units. Requests for redemption made after the funds in the death and disability fund are depleted will not be accepted.

NOTE 7 – INCOME TAXES (UNAUDITED)

The Partnership is not subject to income taxes because its income is taxed directly to the General Partner and limited partners. The reconciling items presented in the table below are the only items that create a difference between the tax basis and reported amounts of the Partnerships assets and liabilities.

A reconciliation of financial statement net income to taxable income for each of the periods is as follows:

 

		2014				2013				2012
Net income per financial statements		$	905,386			$	862,823			$	823,191
Excess tax depreciation			(95	)			(95	)			(95	)
Taxable income		$	905,291			$	862,728			$	823,096

A reconciliation of partnership equity per the financial statements to partners’ equity for tax purposes as of December 31, 2014, is as follows (unaudited):

 

Partners’ equity per financial statements		$	3,695,583
Issue costs of limited partnership units capitalized for tax purposes			1,741,677
Difference in book vs. tax depreciation			505,928
Other			84
Partners’ equity for tax purposes		$	5,943,272

 

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 8 – CASH DISTRIBUTIONS TO LIMITED PARTNERS

Cash distributions paid to limited partners for the three years ended December 31, 2014 were as follows:

 

Quarter Ended		Cash Distribution per Limited Partnership Unit				Weighted Average Number of Units Outstanding				Number of Units Outstanding at the End of Quarter
December 31, 2011		$	3.63				47,261				47,261
March 31, 2012			4.44				47,261				47,261
June 30, 2012			4.68				47,261				47,261
September 30, 2012			4.86				47,261				47,261
Total paid in 2012		$	17.61
December 31, 2012		$	4.97				47,261				47,261
March 31, 2013			4.34				47,261				47,261
June 30, 2013			4.87				47,261				47,261
September 30, 2013			5.09				47,261				47,261
Total paid in 2013		$	19.27
December 31, 2013		$	4.90				47,261				47,261
March 31, 2014			4.96				47,261				47,261
June 30, 2014			5.40				47,261				47,261
September 30, 2014			5.22				47,261				47,261
Total paid in 2014		$	20.48

Cash distributions per limited partnership unit were calculated based upon the weighted average and cash flow statement units outstanding for each quarter and were paid from operations. Distributions declared in January 2015 for the quarter ended December 31, 2014 amounted to $4.94 per limited partnership unit and were paid in February 2015.

NOTE 9 – RESULTS BY QUARTER (UNAUDITED)

 

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Year ended December 31, 2014
Rental revenues		$	257,082			$	271,721			$	278,710			$	278,781
Net income			196,763				236,953				238,478				233,192
Net income per limited partnership unit			4.12				4.96				5.00				4.89
Year ended December 31, 2013
Rental revenues		$	240,964			$	258,486			$	261,201			$	262,921
Net income			180,157				223,064				229,774				229,828
Net income per limited partnership unit			3.77				4.67				4.81				4.82

NOTE 10 – PAYABLE TO LIMITED PARTNERS

Payable to limited partners represents a reclassification from cash for distribution checks made to limited partners that have remained outstanding for six months or longer.

 

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 11 - COMMUNICATION FROM CERTAIN LIMITED PARTNERS AND STRAW POLL RESULTS

During the third quarter of 2014, several limited partners communicated to the General Partner their desire to potentially sell all of the properties and then dissolve the Partnership. Pursuant to the Partnership agreement, any decision to sell all of the properties and to dissolve the Partnership would require approval from a majority in interest of limited partners. On October 1, 2014 the General Partner initiated a “straw poll” of all limited partners to determine if there is sufficient interest to support a potential sale of the properties and dissolution of the Partnership, as disclosed in Form 8-K filed on October 1, 2014. Limited partner responses to the straw poll were received during the fourth quarter of 2014 and on December 17, 2014, Del Taco filed a Form 8-K to disclose the results of the poll. The poll was intended to gauge interest level only and the results indicate a strong majority of the units responded either “open to” or “strongly in favor of” Del Taco testing the market and presenting a sale proposal to the limited partners for a vote. Accordingly, Del Taco filed a Form 8-K on January 12, 2015 indicating its intention to initiate a sale process to market the properties owned by the Partnership that may result in the presentation of a sale transaction to the limited partners for approval (see Note 12).

NOTE 12 - SUBSEQUENT EVENTS

The Partnership filed a Form 8-K on January 12, 2015 indicating its intention to initiate a sale process to market the properties owned by the Partnership that may result in the presentation of a sale transaction to the limited partners for approval. Del Taco intended to appoint a special committee comprised of a small group of qualified limited partners to facilitate the sale process and to manage any potential conflicts of interest with respect to Del Taco that may arise during the sale process, however, only two timely applications were received with only one including relevant experience. Del Taco does not believe that one committee member could adequately perform the role required by the committee, and therefore, the sale process has commenced without a special committee and Del Taco will resolve any potential conflicts of interest pursuant to the Partnership’s partnership agreement and applicable law. The sale process may result in the presentation of a sale transaction to the limited partners for approval; however, there are no assurances that Del Taco will receive any offers or will be successful in entering into a binding agreement to sell the properties. On February 17, 2015, affiliates of MacKenzie Realty Capital, Inc. (“MacKenzie”), a limited partner, filed a Schedule TO initiating a tender offer to purchase all units of the Partnership. The MacKenzie tender offer is unrelated to the sale process that Del Taco has initiated. On February 27, 2015, the Partnership filed a Schedule 14D-9 solicitation/recommendation statement in response to the Schedule TO.

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None

 

Item 9A.

Controls and Procedures

Disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost–benefit relationship of possible controls and procedures.

In connection with the preparation of this Annual Report on Form 10-K, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Internal control over financial reporting

 

(a)

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making its assessment of internal control over financial reporting, management used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management has concluded that, as of December 31, 2014, our internal control over financial reporting was effective based on these criteria.

 

(b)

Changes in internal controls:

There were no significant changes in the Partnership’s internal controls over financial reporting that occurred during our most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.

Other Information

None.

 

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PART III

 

Item 10.

Directors, Executive Officers, and Corporate Governance

(a) & (b) Del Taco serves as the Partnership’s sole General Partner. Individuals who perform the functions of directors and officers of the Partnership consist of the following officers of Del Taco:

 

Name		Title		Age
Paul J. B. Murphy, III		Chief Executive Officer		60
Steven L. Brake		Chief Financial Officer		42
John Cappasola		Chief Brand Officer		41
David Pear		Senior Vice President, Operations		51

Del Taco’s term as General Partner will continue indefinitely, subject to the right of a majority in interest of the limited partners to remove and replace it. The above referenced officers of the General Partner will hold office until their resignation or the election or appointment of their successor.

 

(c)

None

 

(d)	No family relationship exists between any such officer of the General Partner.

 

(e)	The following is an account of the business experience during the past five years of each such officer:

Paul J. B. Murphy, III, Chief Executive Officer of Del Taco LLC. Mr. Murphy has served as Chief Executive Officer since February 2009. He previously served as President and Chief Executive Officer of Einstein Noah Restaurant Group, Inc. (formerly, New World Restaurant Group, Inc.) from October 2003 to December 2008.

Steven L. Brake, Executive Vice President, Chief Financial Officer of Del Taco LLC. Mr. Brake has served as Chief Financial Officer since April 2010 and previously served as Treasurer from March 2006 to April 2010 and as the Corporate Controller of Del Taco LLC from September 2003 to March of 2006. From December 1995 until September 2003 Mr. Brake spent seven years with Arthur Andersen and one year with KPMG LLP in their respective audit departments. Mr. Brake is a licensed certified public accountant and holds a Bachelor of Arts degree in Economics from the University of California, Irvine and an MBA from the Paul Merage School of Business at the University of California, Irvine.

John Cappasola, Executive Vice President, Chief Brand Officer of Del Taco LLC. Mr. Cappasola has served as our Chief Brand Officer since February 2011. He previously served as our Vice President of Marketing from March 2009 to February 2011. From September 2008 to March 2009, he served as our Vice President of Marketing Development. From August 2002 to September 2008, he held various positions in marketing, strategic development and operations at Blockbuster, Inc. of Dallas, Texas.

David Pear, Senior Vice President, Operations of Del Taco LLC. Mr. Pear has served as Senior Vice President of Operations since January 2013. From January 2009 to January 2013 Mr. Pear served as a Director of DMA Operations for Taco Bell (Yum Brands). From 1985 to January 2009, Mr. Pear served in a wide variety of operation positions with increasing level of responsibility for Domino’s Pizza, Inc.

Code of Ethics

The Partnership has no executive officers or any full-time employees and, accordingly, has not adopted a code of ethics.

 

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Item 11.

Executive Compensation

The Partnership has no executive officers or directors and pays no direct remuneration to any executive officer or director of its General Partner. The Partnership has not issued any options or stock appreciation rights to any executive officer or director of its General Partner, nor does the Partnership propose to pay any annuity, pension or retirement benefits to any executive officer or director of its General Partner. The Partnership has no plan, nor does the Partnership presently propose a plan, which will result in any remuneration being paid to any executive officer or director of the General Partner upon termination of employment.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management

 

(a)	No person of record currently owns more than five percent of limited partnership units of the Partnership, nor was any person known of by the Partnership to own of record and beneficially, or beneficially only, more than five percent of such securities.

 

(b)	Neither Del Taco LLC, nor any executive officer or director of Del Taco LLC, owns any limited partnership units of the Partnership.

 

(c)

The Partnership knows of no contractual arrangements, the operation or the terms of which may at a subsequent date result in a change in control of the Partnership, except for provisions in the partnership agreement providing for removal of the General Partner by holders of a majority of the limited partnership units and if a material event of default occurs under the financing agreements of the General Partner.

 

Item 13.

Certain Relationships, Related Transactions, and Director Independence

 

(a)	Other than listed below, no transactions have occurred between the Partnership and any executive officer or director of its General Partner.

During 2014, the following transactions occurred between the Partnership and the General Partner pursuant to the terms of the partnership agreement.

 

(1)

The General Partner earned $9,054 as its one percent share of the net income of the Partnership.

 

(2)

The General Partner received $9,788 in distributions relating to its one percent interest in the Partnership.

 

(b)	During 2014, the Partnership had no business relationships with any entity of a type required to be reported under this item.

 

(c)	Neither the General Partner, any director or officer of the General Partner, or any associate of any such person, was indebted to the Partnership at any time during 2014 for any amount.

 

(d)	Not applicable.

 

Item 14.

Principal Accountant Fees and Services

The following table presents fees for professional services rendered by Squar, Milner, Peterson, Miranda & Williamson, LLP (Squar Milner).

 

		2014				2013
Audit Fees		$	16,953			$	17,010
Audit-Related Fees			—				—
Tax Fees			—				—
All Other Fees			—				—
Total		$	16,953			$	17,010

The General Partner approves all the audit and non-audit services and related fees provided to the Partnership by the independent auditors prior to the services being rendered.

 

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PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

 

(a)(1)		Financial Statements
		Included in Part II of this report:
		Report of Independent Registered Public Accounting Firm – Squar, Milner, Peterson, Miranda & Williamson, LLP
		Balance Sheets
		Statements of Income
		Statements of Partners’ Equity
		Statements of Cash Flows
		Notes to Financial Statements
(a)(2)		Financial Statement Schedule
		Schedule III – Real Estate and Accumulated Depreciation
		Financial statement schedules other than those referred to above have been omitted because they are not applicable or not required.
(b)		Reports on Form 8-K
		None
(c)		Exhibits required by Item 601 of Regulation S-K:
		1.		Incorporated herein by reference, Restated Agreement of Limited Partnership of Del Taco Restaurant Properties III filed as Exhibit 3.01 to Partnership’s Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on December 30, 1985.
		2.		Incorporated herein by reference, Amendment to Restated Agreement of Limited Partnership of Del Taco Restaurant Properties III.
		3.		Incorporated herein by reference, Form of Standard Lease to be entered into by partnership and Del Taco LLC, as lessee, filed as Exhibit 10.02 to Partnership’s Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on December 30, 1985.
		31.1		Paul J. B. Murphy, III’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		31.2		Steven L. Brake’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
		32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
				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 Label Linkbase Document
				101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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DEL TACO RESTAURANT PROPERTIES III

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2014

 

						Initial cost to company								Cost capitalized subsequent to acquisition				Gross amount at which carried at close of period
Description (All Restaurants)		Encumbrances				Land & land improvements				Building & Improvements				Carrying costs				Land, buildings & improvements Total				Accumulated depreciation				Date of construction		Date acquired		Life on which depreciation in latest income statement is computed
Rancho California, CA		$	—			$	384,400			$	257,807			$	—			$	642,207			$	248,866			1986		1986		20(LI), 35(BI)
Vista, CA			—				512,130				343,471				—				855,601				331,549			1987		1987		20(LI), 35(BI)
Perris, CA			—				437,522				293,434				—				730,956				283,252			1987		1987		20(LI), 35(BI)
Upland, CA			—				281,827				189,014				—				470,841				182,448			1987		1987		20(LI), 35(BI)
Walnut, CA			—				340,848				228,597				—				569,445				220,659			1988		1988		20(LI), 35(BI)
Los Angeles, CA			—				674,283				452,223				—				1,126,506				436,530			1988		1988		20(LI), 35(BI)
Chatsworth, CA			—				642,475				430,890				—				1,073,365				415,946			1989		1989		20(LI), 35(BI)
Victorville, CA			—				505,398				338,957				—				844,355				327,201			1989		1989		20(LI), 35(BI)
		$	—			$	3,778,883			$	2,534,393			$	—			$	6,313,276			$	2,446,451

 

		Restaurants				Accumulated Depreciation
Balances at December 31, 2011		$	6,313,276			$	2,229,215
Additions			—				72,412
Retirements			—				—
Balances at December 31, 2012			6,313,276				2,301,627
Additions			—				72,412
Retirements			—				—
Balances at December 31, 2013			6,313,276				2,374,039
Additions			—				72,412
Retirements			—				—
Balances at December 31, 2014		$	6,313,276			$	2,446,451

The aggregate cost basis of Del Taco Restaurant Properties III real estate assets for Federal income tax purposes was $6,313,276 (unaudited) at December 31, 2014.

See accompanying report of independent registered public accounting firm.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 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.

 

				DEL TACO RESTAURANT PROPERTIES III
				a California limited partnership
				Del Taco LLC
				General Partner
Date March 2, 2015				/s/ Paul J. B. Murphy, III
				Paul J. B. Murphy, III
				Chief Executive Officer
Date March 2, 2015				/s/ Steven L. Brake
				Steven L. Brake
				Chief Financial Officer
Date March 2, 2015				/s/ John Cappasola
				John Cappasola
				Chief Brand Officer

 

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