-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G1u7Sn0ubpsSklIP/psYPJrq6OnkEMztENZ6P63Tdg2nBwrqT2J8AA188XbbYVZi nJi6FhReEGq3MxrloZZ//w== 0000318140-99-000002.txt : 19990402 0000318140-99-000002.hdr.sgml : 19990402 ACCESSION NUMBER: 0000318140-99-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCNEIL REAL ESTATE FUND XI LTD CENTRAL INDEX KEY: 0000318140 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 942669577 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-09783 FILM NUMBER: 99580590 BUSINESS ADDRESS: STREET 1: 13760 NOEL ROAD STREET 2: SUITE 700 LB70 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144485800 MAIL ADDRESS: STREET 1: 13760 NOEL ROAD SUITE 700 LB70 CITY: DALLAS STATE: TX ZIP: 75240 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to_____________ Commission file number 0-9783 --------- McNEIL REAL ESTATE FUND XI, LTD. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-2669577 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (972) 448-5800 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited partnership units - ---------------------------------------------------------- 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 159,500 of the registrant's 159,813 limited partnership units are held by non-affiliates of this registrant. The aggregate market value of units held by non-affiliates is not determinable since there is no public trading market for limited partnership units and transfers of units are subject to certain restrictions. Documents Incorporated by Reference: See Item 14, Page 40 TOTAL OF 43 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XI, Ltd. (the "Partnership") was organized June 2, 1980 as a limited partnership under the provisions of the California Uniform Limited Partnership Act. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The Partnership is governed by an amended and restated partnership agreement of limited partnership dated August 6, 1991, as amended (the "Amended Partnership Agreement"). Prior to August 6, 1991, Pacific Investors Corporation (the prior "Corporate General Partner"), a wholly-owned subsidiary of Southmark Corporation ("Southmark"), and McNeil were the general partners of the Partnership, which was governed by an agreement of limited partnership dated June 2, 1980 (the "Original Partnership Agreement") as amended August 29, 1980. The principal place of business for the Partnership and for the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. On September 18, 1980, a Registration Statement on Form S-11 was declared effective by the Securities and Exchange Commission whereby the Partnership offered for sale $80,000,000 of limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the holders thereof to participate in certain allocations and distributions of the Partnership. The sale of Units closed on June 1, 1981, with 160,000 Units sold at $500 each, or gross proceeds of $80,000,000 to the Partnership. In addition, the original general partners purchased a total of 140 Units for $70,000. During the years 1993 through 1998, 327 Units were rescinded leaving 159,813 Units outstanding as of December 31, 1998. SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - -------------------------------------------------- On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, McNeil nor the Corporate General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Corporate General Partner, were sold or liquidated for the benefit of creditors. In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio. On February 14, 1991, pursuant to the asset purchase agreement as amended on that date: (a) an affiliate of McNeil purchased the Corporate General Partner's economic interest in the Partnership; (b) McNeil became the managing general partner of the Partnership pursuant to an agreement with the Corporate General Partner that delegated management authority to McNeil; (c) McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates and commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates; and (d) the General Partner purchased the short-term, unsecured loan owing from the Partnership to a Southmark affiliate in the amount of $2,645,950. The unsecured loan has now been settled. On August 6, 1991, the limited partners approved a restructuring proposal providing for (i) the replacement of the Corporate General Partner and McNeil with the General Partner; (ii) the adoption of the Amended Partnership Agreement, which substantially alters the provisions of the Original Partnership Agreement relating to, among other things, compensation, reimbursement of expenses, and voting rights; and (iii) the approval of a new property management agreement with McREMI, the Partnership's property manager. The Amended Partnership Agreement provides for a Management Incentive Distribution ("MID") to replace all other forms of general partner compensation, other than property management fees and reimbursements of certain costs. Additional Units may be issued in connection with the payment of the MID pursuant to the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions with Affiliates." For a discussion of the methodology for calculating and distributing the MID, see Item 13 - Certain Relationships and Related Transactions. Settlement of Claims: During 1990, the Partnership filed claims in the Southmark bankruptcy in the amount of $1,180,040. McNeil also filed claims on behalf of the Partnership in an indeterminate amount, some of which overlapped in whole or in part with claims filed by the Partnership. No claims were filed by McNeil or the Partnership on behalf of individual limited partners. In July 1991, the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, approved an agreement whereby the Partnership settled its claims against Southmark. Under the settlement agreement, an affiliate of McNeil agreed to waive on a dollar-for-dollar basis an amount equal to the settled claims against affiliate advances owed by the Partnership, which at June 30, 1991, were in excess of the amount of the claim. The reduction of affiliate advances resulted in an extraordinary gain on extinguishment of debt of $1,180,040 in 1991. CURRENT OPERATIONS - ------------------ General: The Partnership is engaged in real estate activities, including the ownership, operation and management of residential real estate and other real estate related assets. At December 31, 1998, the Partnership owned seven income-producing properties as described in Item 2 - Properties. The Partnership does not directly employ any personnel. The Partnership is managed by the General Partner, and, in accordance with the Amended Partnership Agreement, the Partnership reimburses affiliates of the General Partner for certain cost incurred by affiliates of the General Partner in connection with the management of the Partnership's business. See Item 8 - Note 2 - "Transactions with Affiliates." The business of the Partnership to date has involved only one industry segment. See Item 8 - Financial Statements and Supplementary Data. The Partnership has no foreign operations. The business of the Partnership is not seasonal. Business Plan: As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership has placed Rock Creek Apartments on the market for sale effective October 1, 1996. Competitive Conditions: Since the principal business of the Partnership is to own and operate real estate, the Partnership is subject to all of the risks incident to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic or rent controls. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changed circumstances. The Partnership competes with numerous established companies, private investors (including foreign investors), real estate investment trusts, limited partnerships and other entities (many of which have greater resources than the Partnership) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosures of the Partnership's properties, is described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 2 - Properties for discussion of competitive conditions at the Partnership's properties. Forward-Looking Information: Within this document, certain statements are made as to the expected occupancy trends, financial condition, results of operations, and cash flows of the Partnership for periods after December 31, 1998. All of these statements are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical and involve risks and uncertainties. The Partnership's actual occupancy trends, financial condition, results of operations, and cash flows for future periods may differ materially due to several factors. These factors include, but are not limited to, the Partnership's ability to control costs, make necessary capital improvements, negotiate sales or refinancings of its properties and respond to changing economic and competitive factors. Environmental Matters: Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described above, Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. Other Information: In August 1995, High River Limited Partnership, a Delaware limited partnership controlled by Carl C. Icahn ("High River") made an unsolicited tender offer to purchase from holders of Units up to approximately 45% of the outstanding Units of the Partnership for a purchase price of $63 per Unit. In September 1996, High River made another unsolicited tender offer to purchase any and all of the outstanding Units of the Partnership for a purchase price of $104.50 per Unit. In addition High River made unsolicited tender offers for certain other partnerships controlled by the General Partner. The Partnership recommended that the limited partners reject the tender offers made with respect to the Partnership and not tender their Units. The General Partner believes that as of February 1, 1999, High River has purchased 11.65% of the outstanding Units pursuant to the tender offers. In addition, all litigation filed by High River, Mr. Icahn and his affiliates in connection with the tender offers have been dismissed without prejudice. ITEM 2. PROPERTIES - ------- ---------- The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1998. The buildings and the land on which they are located are owned by the Partnership in fee, subject in each case to a first lien deed of trust as set forth more fully in Item 8 - Note 5 - "Mortgage Notes Payable" and Item 8 - Note 6 - "Mortgage Note Payable - Affiliate." See also Item 8 - Note 4 - "Real Estate Investments" and Schedule III - "Real Estate Investments and Accumulated Depreciation." In the opinion of management, the properties are adequately covered by insurance.
Net Basis 1998 Date Property Description of Property Debt Property Tax Acquired - -------- ----------- ----------- ---- ------------ -------- Real Estate Investments: Acacia Lakes (1) Apartments Mesa, AZ 576 units $ 5,614,216 $ 8,680,219 $ 142,014 5/81 Gentle Gale (2) Apartments Galveston, TX 133 units 1,586,638 2,489,136 75,379 5/81 Knollwood (3) Apartments Kansas City, MO 315 units 2,814,547 4,326,728 76,410 5/81 Sun Valley (4) Apartments Charlotte, NC 311 units 4,120,235 6,376,663 118,309 8/81 Villa Del Rio (5) Apartments Jacksonville, FL 444 units 4,047,045 5,331,844 182,673 5/81 The Village (6) Apartments Gresham, OR 152 units 1,488,086 2,635,000 81,221 5/81 ------------- ------------- ----------- $ 19,670,767 $ 29,839,590 $ 676,006 ============= ============= =========== Asset held for sale: Rock Creek (7) Apartments Portland, OR 388 units $ 4,765,942 $ 6,225,000 $ 143,295 2/81 ============= ============= ===========
- ----------------------------------------- Total: Apartments - 2,319 units (1) Acacia Lakes Apartments is owned by Acacia Lakes Fund XI Limited Partnership which is wholly-owned by the Partnership and the General Partner. (2) Gentle Gale Apartments is owned by Gentle Gale Fund XI Limited Partnership which is wholly-owned by the Partnership. (3) Knollwood Apartments is owned by Knollwood Fund XI Associates, a general partnership, which is wholly-owned by the Partnership and the General Partner. (4) Sun Valley Apartments is owned by Sun Valley Fund XI Associates, a general partnership, which is wholly-owned by the Partnership and the General Partner. (5) Villa Del Rio Apartments is owned by Villa Del Rio Fund XI Limited Partnership which is wholly-owned by the Partnership. (6) The Village Apartments is owned by Village Fund XI Associates Limited Partnership which is wholly-owned by the Partnership and the General Partner. (7) Rock Creek Apartments is owned by Rock Creek Fund XI, Ltd., which is wholly -owned by the Partnership. The following table sets forth the properties' occupancy rate and rent per square foot for each of the last five years:
1998 1997 1996 1995 1994 ------------- ------------- -------------- ------------- ---------- Acacia Lakes Occupancy Rate............ 96% 95% 94% 96% 97% Rent Per Square Foot...... $8.07 $7.92 $7.73 $7.44 $6.64 Gentle Gale Occupancy Rate............ 90% 93% 90% 88% 93% Rent Per Square Foot...... $8.10 $7.90 $7.78 $7.86 $7.83 Knollwood Occupancy Rate............ 97% 97% 96% 96% 93% Rent Per Square Foot...... $6.20 $6.06 $5.72 $5.53 $5.17 Sun Valley Occupancy Rate............ 96% 96% 96% 97% 97% Rent Per Square Foot...... $8.01 $7.81 $7.40 $7.12 $6.51 Villa Del Rio Occupancy Rate............ 96% 92% 96% 100% 98% Rent Per Square Foot...... $5.83 $5.76 $5.67 $5.46 $4.98 The Village Occupancy Rate............ 96% 98% 96% 100% 100% Rent Per Square Foot...... $8.69 $8.31 $8.27 $7.96 $7.76 Asset held for sale: Rock Creek Occupancy Rate............ 95% 94% 95% 99% 94% Rent Per Square Foot...... $8.58 $8.35 $8.27 $7.91 $7.54
Occupancy rate represents all units leased divided by the total number of units of the property as of December 31 of the given year. Rent per square foot represents all revenue, except interest, derived from the property's operations divided by the leasable square footage of the property. Competitive Conditions at Properties - ------------------------------------ Acacia Lakes - ------------ Due to a substantial investment of capital since 1994, Acacia Lakes has increased its rent per square foot by 22% over the last five years. Currently, the property is slightly above the average market occupancy rate of 95%. Over the last year, approximately 8,250 multi-family units were added to the Mesa submarket. Strong employment growth is expected to add renters to the market and provide positive absorption. Rental rates at Acacia Lakes are lower than the market rate. Gentle Gale - ----------- Gentle Gale is located in Galveston, Texas, where the local economy is dependent upon the University of Texas Medical Branch and tourism. The University of Texas announced a reduction of over 600 jobs effective January 1999 and additional cut backs are anticipated. Over the last few years the economy has been sluggish. Gentle Gale experienced a decrease in its occupancy rate and is currently at 90%. Gentle Gale competes with properties that are newer and offer better amenity packages. Rental rates at Gentle Gale are just below many of their competitors in the market. In 1998, an additional 177 units were added to the already soft market. The property has been upgrading the units and offering rental discounts to remain competitive in the market. Knollwood - --------- Knollwood finished 1998 above the average market occupancy rate of 94%. The current rental rates for Knollwood's townhouses and one and two bedroom apartments are comparable to the market rate. Continued capital improvements are planned to improve the curb appeal and upgrade the apartments to take advantage of the strong market conditions. Sun Valley - ---------- Strong market conditions have stimulated new developments in the area surrounding Sun Valley. Currently, 3,458 units are under construction in the Charlotte market, and an additional 3,419 units are proposed. The market began to soften in 1997 and the continued heavy development continued to increase the market competitiveness in 1999. With the capital improvements made at the property over the last few years, the property has been able to stay competitive with the newer properties. Sun Valley finished 1998 at the market average occupancy rate of 95%. Villa Del Rio - ------------- Villa Del Rio's occupancy rate finished 1998 above the market average of 91%. During 1998, 7,500 units were added to the market with other projects in the planning stages. Villa Del Rio's advantage over its competitors is design and layout of the property. All units are single story apartments and the property is spread over 25 acres. The Village - ----------- The Village finished the year equal to the Gresham market occupancy rate of 96%. The expanding economy in Portland is slowing down after several years growth. The new construction over the last couple of years has softened the market with higher vacancies and rental concessions. The market rental rate is slightly lower than the rental rate at The Village. The Village should continue to remain competitive in the marketplace. Asset held for sale: Rock Creek - ---------- Rock Creek finished the year at the market average of 95%. The Portland market has become saturated with new multi-family units with the addition of 1,500 units in 1998. Over the past few years the property has been upgrading the interiors of the units as well as improving the outside appearances with landscaping and a renovation of the clubhouse and office. These enhancements have allowed the property to remain competitive in the market and compete with the new apartments being built in the area. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. For a discussion of the Southmark bankruptcy, see Item 1 - Business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND RELATED - ------- -------------------------------------------------------------------- SECURITY HOLDER MATTERS ----------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. (B) Title of Class Number of Record Unit Holders Limited partnership units 6,802 as of February 1, 1999 (C) Cash distributions of $4,221,415 were made to the limited partners during 1998. No distributions were made to the partners in 1997. During the last week of March 1999, the Partnership distributed approximately $500,000 to the limited partners of record at March 1, 1999. The Partnership accrued distributions of $853,756 and $905,153 for the benefit of the General Partner for the years ended December 31, 1998 and 1997, respectively. Total distributions of $2,597,224 remain unpaid at December 31, 1998. These distributions are the MID pursuant to the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions with Affiliates." See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of distributions and the likelihood that they will continue distributions to the limited partners. ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data.
Statements of Years Ended December 31, Operations 1998 1997 1996 1995 1994 - ------------------ ------------- ------------- -------------- ------------- ------------- Rental revenue................. $ 15,012,339 $ 15,187,999 $ 14,855,652 $ 14,304,055 $ 13,313,091 Total revenue.................. 18,569,006 15,536,941 15,582,063 14,451,813 13,425,413 Net income (loss).............. 4,453,260 1,744,719 1,592,611 307,243 (193,822) Net income (loss) per limited partnership unit.............. $ 26.44 $ 3.61 $ 5.03 $ 1.83 $ (3.98) Distributions per limited partnership unit.............. $ 26.41 $ - $ - $ - $ - As of December 31, Balance Sheets 1998 1997 1996 1995 1994 - -------------- ------------- ------------- -------------- ------------- ------------- Real estate investments, net... $ 19,670,767 $ 20,677,187 $ 22,992,254 $ 27,251,831 $ 27,916,213 Assets held for sale........... 4,765,942 5,910,865 4,203,597 - - Total assets................... 29,746,379 32,369,919 32,592,153 32,508,764 33,355,998 Mortgage notes payable, net.... 36,064,590 38,796,649 39,255,045 39,684,440 40,090,432 Partners' deficit.............. (10,415,809) (9,793,898) (10,633,464) (11,323,378) (10,759,568)
See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- FINANCIAL CONDITION - ------------------- The Partnership was formed to acquire, operate and ultimately dispose of a portfolio of income-producing real properties. As of December 31, 1998, the Partnership owned seven apartment properties. All of the Partnership's properties are subject to mortgage notes. RESULTS OF OPERATIONS - --------------------- 1998 compared to 1997 Revenue: Total Partnership revenues for 1998 increased by $3,032,065 as compared to 1997. Rental revenue decreases were offset by increased interest revenue. The Partnership also recognized a gain of $3,319,137 on the sale of The Park Apartments. No such gain was recognized in 1997. Rental revenue for 1998 decreased $175,660 primarily due to the sale of The Park Apartments in April of 1998. Excluding the revenue from The Park, rental revenue increased $367,910 or 3%. Interest income for 1998 increased by $108,216 as compared to the prior year due to higher average cash balances being invested in interest bearing accounts. Expenses: Partnership expenses increased by $323,524 or 2% for the year ended 1998 as compared to 1997. The effects from the sale of The Park in April 1998 were declines of $96,205 for interest, $5,817 for property taxes, $69,876 for personnel expenses, $32,376 for repairs and maintenance, $13,699 for property management fees, $17,064 for utilities and $28,339 for other property operating expenses. In addition to the sale of The Park, other factors affected the level of expenses reported by the remaining properties. Interest expense - affiliates decreased by $138,241 in 1998 as compared to 1997. This decrease is due to the repayment of the affiliate mortgage note in April 1998. Personnel expenses increased by $126,098 or 7% in 1998 due to an increase of compensation and benefits at all the properties. General and administrative expenses increased $394,531 for the year ended December 31, 1998 and compared to the same period last year. The increase was mainly due to the costs incurred to explore alternatives to maximize the value of the Partnership. The increase was partially offset by decreases attributable to investor services. During 1997, charges for investor services were provided by a third party vendor. Beginning with 1998, these services are provided by affiliates of the General Partner. As a result of this, general and administrative affiliates increased by $65,155 in 1998. 1997 compared to 1996 Revenue: Total Partnership revenues for 1997 decreased by $45,122 as compared to 1996. Rental revenue increased $332,347 or 2%. In 1997, the Partnership recognized a gain on involuntary conversion of $219,628 for fires at The Park, The Village and Knollwood as compared to $598,859 in 1996. Rental revenue for 1997 was $15,187,999 as compared to $14,855,652 for 1996. This increase of $332,347 is due to an increase in the rental rates at seven of the eight Partnership's properties, offset by decreases in the occupancy rates at three of the eight Partnership's properties. Expenses: Total Partnership expenses decreased by $197,230 for the year ended December 31, 1997 as compared to 1996. Decreases in depreciation, general and administrative, and general and administrative - affiliates were offset by increases in repairs and maintenance and interest - affiliate. Interest expense decreased by $249,546 or 7% as compared to the same period last year. This decrease is due to the November 1996 refinancing of the mortgage note on The Village with an affiliate mortgage note. As a result of this refinancing, interest expense - affiliates increased by $221,118 for the year ended December 31, 1997. Depreciation declined by $289,254 or 12% for the period ended December 31, 1997 as compared to the same period in 1996. This decrease is mainly due to Rock Creek, which is currently classified as an asset held for sale, for which no depreciation has been recognized since October 1, 1996. The Park was also classified as an asset held for sale as of August 1, 1997, and no depreciation has been recognized since that date. Repairs and maintenance expense increased by $211,296 or 11% for the period ended December 31, 1997 compared to the same period in 1996. The increase can be attributed to increases in service expenses and the replacement of carpeting. Carpet replacements of $162,461 for three of the Partnership properties, which met the Partnership's criteria for capitalization in 1996, were expensed in 1997. General and administrative expenses decreased $234,637 or 54% for the year ended December 31, 1997 as compared to the same period last year. In 1996, the Partnership incurred costs to evaluate and disseminate information regarding an unsolicited tender offer. The decrease was slightly offset by charges for investor services, which beginning in 1997, was provided by a third party vendor. In 1996, these costs were paid to an affiliate of the General Partner and were included in general and administrative - affiliates. General and administrative - affiliates expense decreased by $74,448 or 22% for 1997 as compared to the same period last year due to the reduction of overhead expenses allocable to the Partnership. Allocated expenses decreased in part due to investor services being performed by an unrelated third party in 1997, as discussed above. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At December 31, 1998, the Partnership held cash and cash equivalents of $2,397,968, down $647,817 as compared to 1997. The Partnership has experienced positive cash flow from operations of $10,761,719 for the three years ended December 31, 1998. During 1996, the Partnership received a mortgage loan from affiliates of $2,588,971. The Partnership has also received $1,009,178 in insurance proceeds for the three years ended December 31, 1998. Over the last three years the Partnership has used cash to fund $5,325,786 in additions to real estate investments, $1,446,347 in principal payments, $152,564 for additions to deferred borrowing costs and $2,513,937 for the payment of the MID. The Partnership received $4,787,389 as proceeds from the sale of The Park, of which $2,565,604 was used to retire the related mortgage note payable. On April 27, 1998, the Partnership refinanced the mortgage note payable on The Village. The new mortgage note, in the amount of $2,635,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum. The new mortgage note requires monthly interest only payments and quarterly principal payments in the amount necessary to reduce the principal balance of the note by 5% annually. The maturity date of the new mortgage note is May 1, 2001. The Partnership realized $46,029 of cash proceeds from the transaction; however, the cash proceeds together with additional cash reserves were used to fund various deferred borrowing costs of $57,134 related to the transaction. On September 28, 1998, the Partnership refinanced the mortgage note payable on Rock Creek. The new mortgage note, in the amount of $6,225,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum. The new mortgage note requires monthly interest only payments and quarterly principal payments in the amount necessary to reduce the principal balance of the note by 5% annually. The maturity date of the new mortgage note is October 1, 2001. The Partnership realized $250,217 of cash proceeds from the transaction; however, $82,273 of the cash proceeds was used to fund various deferred borrowing costs related to the transaction. The Partnership generated $3,645,973 through operating activities in 1998 as compared to $3,703,741 in 1997. The decrease of $57,768 can be attributed to the decrease in cash received from tenants and increases in cash paid to suppliers and property taxes paid. The decrease was partially offset with decreases in interest paid and interest - affiliate paid. The Partnership generated $3,703,741 through operating activities in 1997 as compared to $3,412,005 in 1996. The increase of $291,736 can be attributed to the increase in tenant receipts as a result of the increased rental rates at all the Partnership's properties and a decrease in the cash paid to affiliates. Short-term liquidity: The Partnership expended considerable resources during the past three years to restore its properties to good operating condition. These expenditures have been necessary to maintain the competitive position of the Partnership's aging properties in each of their markets. The capital improvements made during the past three years have enabled the Partnership to increase its rental revenues and reduce certain of its repairs and maintenance expenses. The Partnership has budgeted an additional $1.03 million of capital improvements for 1999, to be funded from property operations and cash reserves. At December 31, 1998, the Partnership held cash and cash equivalents of $2,397,968. The General Partner considers this level of cash reserves to be adequate to meet the Partnership's operating needs. The General Partner anticipates continuing MID payments if the Partnership's properties continue to perform as projected. The General Partner believes that anticipated operating results for 1999 will be sufficient to fund the Partnership's budgeted capital improvements for 1999 and to repay the current portion of the Partnership's mortgage notes. Long-term liquidity: For the long-term, property operations will remain the primary source of funds. In this regard, the General Partner expects that the $5.3 million of capital improvements made by the Partnership during the past three years will yield improved cash flow from property operations in the future. If the Partnership's cash position deteriorates, the General Partner may elect to defer certain of the capital improvements, except where such improvements are expected to increase the competitiveness or marketability of the Partnership's properties. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership has placed Rock Creek Apartments on the market for sale effective October 1, 1996 Income allocation and distributions: Terms of the Amended Partnership Agreement specify that income before depreciation is allocated to the General Partner to the extent of MID paid in cash. Depreciation is allocated in the ratio of 95:5 to the limited partners and the General Partner, respectively. Therefore, for each of the three years in the period ended December 31, 1998, $228,243, $1,167,537 and $788,575, respectively, of net income was allocated to the General Partner. The limited partners received allocations of net income of $4,225,017, $577,182 and $804,036, respectively, for the three year period ended December 31, 1998. During 1998, the limited partners received a cash distribution of $4,221,415. The distributions consisted of funds from operations and cash reserves. A distribution of $853,756 for the MID has been accrued by the Partnership for the year ended December 31, 1998 for the General Partner. During the last week of March 1999, the General Partner distributed approximately $500,000 to the limited partners of record as of March 1, 1999. The General Partner will continue to monitor the cash reserves and working capital needs of the Partnership to determine when cash flows will support additional distributions to the limited partners. YEAR 2000 DISCLOSURE - -------------------- State of readiness - ------------------ The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major systems failure or miscalculations. Management has assessed its information technology ("IT") infrastructure to identify any systems that could be affected by the year 2000 problem. The IT used by the Partnership for financial reporting and significant accounting functions was made year 2000 compliant during recent systems conversions. The software utilized for these functions are licensed by third party vendors who have warranted that their systems are year 2000 compliant. Management is in the process of evaluating the mechanical and embedded technological systems at the various properties. Management has inventoried all such systems and queried suppliers, vendors and manufacturers to determine year 2000 compliance. Management will complete assessment of findings by May 1, 1999. In circumstances of non-compliance management will work with the vendor to remedy the problem or seek alternative suppliers who will be in compliance. Management believes that the remediation of any outstanding year 2000 conversion issues will not have a material or adverse effect on the Partnership's operations. However, no estimates can be made as to the potential adverse impact resulting from the failure of third party service providers and vendors to be year 2000 compliant. Cost - ---- The cost of IT and embedded technology systems testing and upgrades is not expected to be material to the Partnership. Because all the IT systems have been upgraded over the last three years, all such systems were compliant, or made compliant at no additional cost by third party vendors. Management anticipates the costs of assessing, testing, and if necessary replacing embedded technology components will be less than $50,000. Such costs will be funded from operations of the Partnership. Risks - ----- Ultimately, the potential impact of the year 2000 issue will depend not only on the corrective measures the Partnership undertakes, but also on the way in which the year 2000 issue is addressed by government agencies and entities that provide services or supplies to the Partnership. Management has not determined the most likely worst case scenario to the Partnership. As management studies the findings of its property systems assessment and testing, management will develop a better understanding of what would be the worst case scenario. Management believes that progress on all areas is proceeding and that the Partnership will experience no adverse effect as a result of the year 2000 issue. However, there is no assurance that this will be the case. Contingency plans - ----------------- Management is developing contingency plans to address potential year 2000 non-compliance of IT and embedded technology systems. Management believes that failure of any IT system could have an adverse impact on operations. However, management believes that alternative systems are available that could be utilized to minimize such impact. Management believes that any failure in the embedded technology systems could have an adverse impact on that property's performance. Management will assess these risks and develop plans to mitigate possible failures by June, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ---------------------------------------------------------- Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- --------------------------------------------
Page Number ------ INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 16 Balance Sheets at December 31, 1998 and 1997................................... 17 Statements of Operations for each of the three years in the period ended December 31, 1998..................................................... 18 Statements of Partners' Deficit for each of the three years in the period ended December 31, 1998....................................... 19 Statements of Cash Flows for each of the three years in the period ended December 31, 1998..................................................... 20 Notes to Financial Statements.................................................. 22 Financial Statement Schedule - Schedule III - Real Estate Investments and Accumulated Depreciation............................................................. 32
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of McNeil Real Estate Fund XI, Ltd.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XI, Ltd. (a California limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XI, Ltd. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Dallas, Texas March 19, 1999 McNEIL REAL ESTATE FUND XI, LTD. BALANCE SHEETS
December 31, ---------------------------------- 1998 1997 ------------ ------------- ASSETS - ------ Real estate investments: Land ................................................. $ 4,407,325 $ 4,407,325 Buildings and improvements ........................... 48,327,237 47,211,527 ------------ ------------ 52,734,562 51,618,852 Less: Accumulated depreciation ...................... (33,063,795) (30,941,665) ------------ ------------ 19,670,767 20,677,187 Assets held for sale .................................... 4,765,942 5,910,865 Cash and cash equivalents ............................... 2,397,968 3,045,785 Cash segregated for security deposits ................... 459,382 413,487 Cash restricted for mortgage payments ................... 286,160 -- Accounts receivable ..................................... 149,681 40,018 Prepaid expenses and other assets ....................... 233,791 242,961 Escrow deposits ......................................... 617,502 683,785 Deferred borrowing costs, net of accumulated amortization of $682,223 and $677,649 at December 31, 1998 and 1997, respectively ............. 1,165,186 1,355,831 ------------ ------------ $ 29,746,379 $ 32,369,919 ============ ============ LIABILITIES AND PARTNERS' DEFICIT - --------------------------------- Mortgage notes payable, net ............................. $ 36,064,590 $ 36,207,678 Mortgage note payable - affiliate ....................... -- 2,588,971 Accrued interest ........................................ 240,794 292,766 Accrued expenses and deferred rental income ............. 414,875 382,446 Payable to affiliates - General Partner ................. 2,950,388 2,231,389 Deferred gain - fire .................................... 25,037 -- Security deposits ....................................... 466,504 460,567 ------------ ------------ 40,162,188 42,163,817 ------------ ------------ Partners' deficit: Limited partners - 159,813 limited partnership units issued and outstanding at December 31, 1998 and 1997 .................................... (3,598,672) (3,602,274) General Partner .................................... (6,817,137) (6,191,624) ------------ ------------ (10,415,809) (9,793,898) ------------ ------------ $ 29,746,379 $ 32,369,919 ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF OPERATIONS
For the Years Ended December 31, ------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenue: Rental revenue ........................... $15,012,339 $15,187,999 $14,855,652 Interest ................................. 237,530 129,314 127,552 Gain on involuntary conversion ........... -- 219,628 598,859 Gain on disposition of real estate ....... 3,319,137 -- -- ----------- ----------- ----------- Total revenue .......................... 18,569,006 15,536,941 15,582,063 ----------- ----------- ----------- Expenses: Interest ................................. 3,443,644 3,535,009 3,784,555 Interest - affiliates .................... 106,497 244,738 23,620 Depreciation ............................. 2,135,144 2,083,616 2,372,870 Property taxes ........................... 825,119 793,994 787,865 Personnel expenses ....................... 1,934,708 1,808,610 1,716,875 Repairs and maintenance .................. 2,028,214 2,133,196 1,921,900 Property management fees - affiliates ............................. 811,452 752,909 734,247 Utilities ................................ 1,159,166 1,161,104 1,093,688 Other property operating expenses ........ 742,860 809,790 775,491 General and administrative ............... 592,301 197,770 432,407 General and administrative - affiliates ............................. 336,641 271,486 345,934 ----------- ----------- ----------- Total expenses ......................... 14,115,746 13,792,222 13,989,452 ----------- ----------- ----------- Net income .................................. $ 4,453,260 $ 1,744,719 $ 1,592,611 =========== =========== =========== Net income allocable to limited partners ................................. $ 4,225,017 $ 577,182 $ 804,036 Net income allocable to General Partner .................................. 228,243 1,167,537 788,575 ----------- ----------- ----------- Net income .................................. $ 4,453,260 $ 1,744,719 $ 1,592,611 =========== =========== =========== Net income per limited partnership unitxxxxxx $ 26.44 $ 3.61 $ 5.03 =========== =========== =========== Distributions per limited partnership unit ..................................... $ 26.41 $ -- $ -- =========== =========== ===========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF PARTNERS' DEFICIT For the Years Ended December 31, 1998, 1997 and 1996
Total General Limited Partners' Partner Partners Deficit ------------- ------------- ------------- Balance at December 31, 1995 ........... $ (6,339,886) $ (4,983,492) $(11,323,378) Net income ............................. 788,575 804,036 1,592,611 Management Incentive Distribution....... (902,697) -- (902,697) ------------ ------------ ------------ Balance at December 31, 1996 ........... (6,454,008) (4,179,456) (10,633,464) Net income ............................. 1,167,537 577,182 1,744,719 Management Incentive Distribution ...... (905,153) -- (905,153) ------------ ------------ ------------ Balance at December 31, 1997 ........... (6,191,624) (3,602,274) (9,793,898) Net income ............................. 228,243 4,225,017 4,453,260 Distributions to limited partners ...... -- (4,221,415) (4,221,415) Management Incentive Distribution ...... (853,756) -- (853,756) ------------ ------------ ------------ Balance at December 31, 1998 ........... $ (6,817,137) $ (3,598,672) $(10,415,809) ============ ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, ------------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Cash received from tenants ............... $ 14,884,390 $ 15,197,251 $ 14,877,289 Cash paid to suppliers ................... (6,352,045) (6,259,909) (5,836,491) Cash paid to affiliates .................. (879,258) (984,779) (1,369,172) Interest received ........................ 237,530 129,314 127,552 Interest paid ............................ (3,271,612) (3,352,192) (3,645,580) Interest paid to affiliates .............. (106,497) (244,738) (23,620) Property taxes paid ...................... (866,535) (781,206) (717,973) ------------ ------------ ------------ Net cash provided by operating activities ............................... 3,645,973 3,703,741 3,412,005 ------------ ------------ ------------ Cash flows from investing activities: Additions to real estate investments and assets held for sale ............... (1,342,388) (1,516,353) (2,467,045) Insurance proceeds from fire damage ...... -- 260,164 681,998 Insurance proceeds from hail damage Proceeds from disposition of real estate ............................ 4,787,389 -- -- ------------ ------------ ------------ Net cash provided by (used in) investing activities ..................... 3,445,001 (1,256,189) (1,718,031) ------------ ------------ ------------ Cash flows from financing activities: Principal payments on mortgage notes payable .......................... (487,451) (481,928) (476,968) Cash restricted for mortgage note payment ................................ (286,160) -- -- Deferred borrowing costs paid ............ (139,407) -- (13,157) Proceeds from mortgage notes payable ................................ 8,860,000 -- -- Repayment of mortgage note - affiliate .............................. (2,588,971) -- -- Retirement of mortgage note payable ...... (5,974,783) -- (2,564,266) Retirement of mortgage note payable due to disposition ............. (2,565,604) -- -- Distributions to limited partners ........ (4,221,415) -- -- Mortgage loan from affiliate ............. -- -- 2,588,971 Management Incentive Distribution ........ (335,000) (1,271,718) (907,219) ------------ ------------ ------------ Net cash used in financing activities ....... (7,738,791) (1,753,646) (1,372,639) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ....................... (647,817) 693,906 321,335 Cash and cash equivalents at beginning of year ...................... 3,045,785 2,351,879 2,030,544 ------------ ------------ ------------ Cash and cash equivalents at end of year ................................ $ 2,397,968 $ 3,045,785 $ 2,351,879 ============ ============ ============
See discussion of noncash investing and financing activities in Note 2, 7 and 9. See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. STATEMENTS OF CASH FLOWS Reconciliation of Net Income to Net Cash Provided by Operating Activities
For the Years Ended December 31, --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net income ................................... $ 4,453,260 $ 1,744,719 $ 1,592,611 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Gain on involuntary conversion ............ -- (219,628) (598,859) Gain on disposition of real estate ........ (3,319,137) -- -- Depreciation .............................. 2,135,144 2,083,616 2,372,870 Amortization of discounts on mortgage notes payable .................. 24,750 23,532 22,868 Amortization of deferred borrowing costs ................................... 199,254 161,947 123,008 Changes in assets and liabilities: Cash segregated for security deposits .............................. (45,895) (9,538) (17,824) Accounts receivable ..................... (75,368) (10,132) 1,441 Prepaid expenses and other assets ................................ 9,170 13,190 20,634 Escrow deposits ......................... 66,283 (21,782) 175,504 Accounts payable ........................ -- (52,886) (9,170) Accrued interest ........................ (51,972) (2,662) (6,901) Accrued expenses and deferred rental income ......................... 44,304 (73,411) (1,127) Payable to affiliates - General Partner ............................... 200,243 39,616 (288,991) Security deposits ....................... 5,937 27,160 25,941 ----------- ----------- ----------- Total adjustments ................... 807,287 1,959,022 1,819,394 ----------- ----------- ----------- Net cash provided by operating activities ................................ $ 3,645,973 $ 3,703,741 $ 3,412,005 =========== =========== ===========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XI, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------- McNeil Real Estate Fund XI, Ltd. (the "Partnership") was organized June 2, 1980 as a limited partnership under the provisions of the California Uniform Limited Partnership Act. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil. The Partnership is governed by an amended and restated partnership agreement of limited partnership dated August 6, 1991, as amended (the "Amended Partnership Agreement"). The principal place of business for the Partnership and for the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. The Partnership is engaged in real estate activities, including the ownership, operation and management of residential real estate and other real estate related assets. At December 31, 1998, the Partnership owned seven income-producing properties as described in Note 4 - Real Estate Investments. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. The Partnership has placed Rock Creek Apartments on the market for sale effective October 1, 1996 Basis of Presentation - --------------------- The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with 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 amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership's financial statements include the accounts of the following listed tier partnerships for the years ended December 31, 1998, 1997 and 1996. These single asset tier partnerships were formed to accommodate the refinancing of the respective property. The Partnership's and the General Partner's ownership interest in each tier partnership is detailed below. The Partnership retains effective control of each tier partnership. The General Partner's minority interest is not presented as it is both negative or immaterial.
% of Ownership Interest Tier Partnership Partnership General Partner ---------------- ----------- --------------- Limited Partnerships: Acacia Lakes Fund XI Limited Partnership 99% 1% Gentle Gale Fund XI Limited Partnership* 100 - Rock Creek Fund XI Limited* 100 - Villa Del Rio XI Limited Partnership* 100 - Village Fund XI Associates 99 1 General Partnerships: Knollwood XI Associates 99 1 The Park Fund XI Associates** 99 1 Sun Valley Fund XI Associates 99 1
* The general partner of these partnerships is a corporation whose stock is 100% owned by the Partnership. ** The Partnership sold The Park Apartments on April 30, 1998. See Note 7. Adoption of Recent Accounting Pronouncements - -------------------------------------------- The Partnership has adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires an enterprise to report financial information about its reportable operating segments, which are defined as components of a business for which separate financial information is evaluated regularly by the chief decision maker in allocating resources and assessing performance. The Partnership does not prepare such information for internal use, since it analyzes the performance of and allocates resources for each property individually. The Partnership's management has determined that it operates one line of business and it would be impracticable to report segment information. Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial statements. Real Estate Investments - ----------------------- Real estate investments are generally stated at the lower of depreciated cost or fair value. Real estate investments are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value. Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred. Assets Held for Sale - -------------------- The assets held for sale are stated at the lower of depreciated cost or fair value less costs to sell. Depreciation on these assets ceased at the time they were placed on the market for sale. Depreciation - ------------ Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 40 years. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash on hand and cash on deposit with financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value. Escrow Deposits - --------------- The Partnership is required to maintain escrow accounts in accordance with the terms of various mortgage indebtedness agreements. These escrow accounts are controlled by the mortgagee and are used for payment of property taxes, hazard insurance, capital improvements and/or property replacements. Carrying amounts for escrow deposits approximate fair value. Deferred Borrowing Costs - ------------------------ Loan fees and other related costs incurred to obtain long-term financing on real property are capitalized and amortized using a method that approximates the effective interest method over the terms of the related mortgage notes payable. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations. Discounts on Mortgage Notes Payable - ----------------------------------- Discounts on mortgage notes payable are being amortized over the remaining terms of the related mortgage notes using the effective interest method. Amortization of discounts on the mortgage notes payable is included in interest expense on the Statements of Operations. Rental Revenue - -------------- The Partnership leases its residential properties under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned. Income Taxes - ------------ No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax, and the tax effect of its activities accrues to the partners. Allocation of Net Income and Net Loss - -------------------------------------- The Amended Partnership Agreement provides for net income of the Partnership for both financial statement and income tax reporting purposes to be allocated as indicated below. For allocation purposes, net income and net loss of the Partnership are determined prior to deductions for depreciation: a) first, deductions for depreciation shall be allocated 5% to the General Partner and 95% to the limited partners; b) then, net income in an amount equal to the cumulative amount paid to the General Partner for the Management Incentive Distribution ("MID"), for which no previous income allocations have been made, shall be allocated to the General Partner; provided, however, that if all or a portion of such payment consists of limited partnership units ("Units"), the amount of net income allocated shall be equal to the amount of cash the General Partner would have otherwise received; and c) then, any remaining net income shall be allocated to achieve the allocation of 5% to the General Partner and 95% to the limited partners. The Amended Partnership Agreement provides that net losses, other than that arising from a sale or refinancing, shall be allocated 5% to the General Partner and 95% to the limited partners. Net losses arising from a sale or refinancing shall be allocated 1% to the General Partner and 99% to the limited partners. Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocations of Partnership deductions attributable to debt. The Partnership's tax allocations for 1998, 1997 and 1996 have been made in accordance with these provisions. Distributions - ------------- Pursuant to the Amended Partnership Agreement and at the discretion of the General Partner, distributions during each taxable year shall be made as follows: (a) first, to the General Partner, in an amount equal to the MID; and (b) any remaining distributable cash, as defined, shall be distributed 100% to the limited partners. Cash distributions of $4,221,415 were made to the limited partners in 1998. No distributions were made to the limited partners in 1997 or 1996. The Partnership paid or accrued distributions of $853,756, $905,153 and $902,697 for the benefit of the General Partner for the years ended December 31, 1998, 1997 and 1996, respectively. These distributions are the MID pursuant to the Amended Partnership Agreement. The General Partner has waived the collection terms of reimbursable expenses and MID, and has elected for the Partnership to pay limited partner distributions before the payment of such amounts. During the last week of March 1999, the Partnership distributed approximately $500,000 to the limited partners of record at March 1, 1999. Net Income Per Limited Partnership Unit - --------------------------------------- Net income per Unit is computed by dividing net income allocated to the limited partners by the number of Units outstanding. Per Unit information has been computed based on 159,813 Units outstanding in 1998, 1997 and 1996. NOTE 2 - TRANSACTIONS WITH AFFILIATES - ------------------------------------- The Partnership pays property management fees equal to 5% of the gross rental receipts of the Partnership's properties to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management and leasing services. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. Under terms of the Amended Partnership Agreement, the Partnership is paying the MID to the General Partner. The maximum MID is calculated as 1% of the tangible asset value of the Partnership. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The maximum MID percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. The MID will be paid to the extent of the lesser of the Partnership's excess cash flow as defined, or net operating income, as defined (the "Entitlement Amount"), and may be paid (i) in cash, unless there is insufficient cash to pay the distribution in which event any unpaid portion not taken in Units will be deferred and is payable, without interest, from the first available cash and/or (ii) in Units. A maximum of 50% of the MID may be paid in Units. The number of Units issued in payment of the MID is based on the greater of $50 per Unit or the net tangible asset value per Unit, as defined. No Units were issued in payment of the MID in 1998, 1997 or 1996. During 1991, the Partnership amended its capitalization policy and began capitalizing certain costs of improvements and betterments which under policies of prior management had been expensed when incurred. The purpose of the amendment was to more properly recognize items which were capital in nature. The effect of the amendment standing alone was evaluated at the time the change was made and determined not to be material to the financial statements of the Partnership in 1991, nor was it expected to be material in any future year. However, the amendment can have a material effect on the calculation of the Entitlement Amount which determines the amount of MID earned. Capital improvements are excluded from cash flow, as defined. The majority of base period cash flow was measured under the previous capitalization policy, while incentive period cash flow is determined using the amended policy. Under the amended policy, more items are capitalized, and cash flow increases. The amendment of the capitalization policy did not materially affect the MID for 1998, 1997 or 1996 because the Entitlement Amount was sufficient to pay MID notwithstanding the amendment to the capitalization policy. Any amount of the MID that is paid to the General Partner in Units will be treated as if cash is distributed to the General Partner and is then contributed to the Partnership by the General Partner. The MID represents a return of equity to the General Partner for increasing cash flow, as defined, and accordingly is treated as a distribution. Compensation and reimbursements paid or accrued for the benefit of the General Partner or its affiliates are as follows:
For the Years Ended December 31, 1998 1997 1996 ---------- ---------- ---------- Property management fees - affiliates ....... $ 811,452 $ 752,909 $ 734,247 Interest - affiliates ....................... 106,497 244,738 23,620 Charged to general and administrative - affiliates: Partnership administration ............... 336,641 271,486 345,934 ---------- ---------- ---------- $1,254,590 $1,269,133 $1,103,801 ========== ========== ========== Charged to General Partner's deficit: MID ...................................... $ 853,756 $ 905,153 $ 902,697 ========== ========== ==========
Payable to affiliates - General Partner at December 31, 1998 and 1997 consisted primarily of accrued property management fees, MID and cost reimbursements and are due and payable from operations. In 1998 and 1997, the Partnership paid $335,000 and $1,271,718, respectively, from cash reserves for the MID. The General Partner has waived the collection terms of reimbursable expenses and MID, and has elected for the Partnership to pay limited partner distributions before the payment of such amounts. NOTE 3 - TAXABLE INCOME - ----------------------- McNeil Real Estate Fund XI, Ltd. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly. The Partnership's net assets and liabilities for tax purposes were less than the net assets and liabilities for financial reporting purposes by $2,449,717 in 1998, $261,840 in 1997and $831,834 in 1996. NOTE 4 - REAL ESTATE INVESTMENTS - -------------------------------- The basis and accumulated depreciation of the Partnership's real estate investments at December 31, 1998 and 1997 are set forth in the following tables:
Buildings and Accumulated Net Book 1998 Land Improvements Depreciation Value ---- -------------- ------------ ------------ --------------- Acacia Lakes Mesa, AZ $ 1,953,090 $ 13,505,267 $ (9,844,141) $ 5,614,216 Gentle Gale Galveston, TX 450,155 3,837,200 (2,700,717) 1,586,638 Knollwood Kansas City, MO 330,547 7,481,953 (4,997,953) 2,814,547 Sun Valley Charlotte, NC 562,797 8,887,177 (5,329,739) 4,120,235 Villa Del Rio Jacksonville, FL 636,634 10,072,157 (6,661,746) 4,047,045 The Village Gresham, OR 474,102 4,543,483 (3,529,499) 1,488,086 ------------- ------------- ------------- ------------- $ 4,407,325 $ 48,327,237 $ (33,063,795) $ 19,670,767 ============= ============= ============= ============= Buildings and Accumulated Net Book 1997 Land Improvements Depreciation Value ---- -------------- ------------ ------------ --------------- Acacia Lakes $ 1,953,090 $ 13,280,033 $ (9,302,116) $ 5,931,007 Gentle Gale 450,155 3,768,457 (2,533,853) 1,684,759 Knollwood 330,547 7,257,557 (4,638,122) 2,949,982 Sun Valley 562,797 8,654,858 (4,963,089) 4,254,566 Villa Del Rio 636,634 9,760,851 (6,264,146) 4,133,339 The Village 474,102 4,489,771 (3,240,339) 1,723,534 ------------- ------------- ------------- ------------- $ 4,407,325 $ 47,211,527 $ (30,941,665) $ 20,677,187 ============= ============= ============= =============
On August 1, 1997, the General Partner placed The Park Apartments, located in Joplin, Missouri, on the market for sale. The property was classified as an asset held for sale at December 31, 1997. The net book value of the property was $1,341,317 at December 31, 1997. On April 30, 1998, the Partnership sold The Park Apartments. See Note 7. On October 1, 1996, the General Partner placed Rock Creek Apartments, located in Portland, Oregon, on the market for sale. The property was classified as an asset held for sale at December 31, 1998 and 1997. The net book value of the property was $4,765,942 and $4,569,548 at December 31, 1998 and 1997, respectively. The results of operations for the assets held for sale at December 31, 1998 were $600,215, $671,919 and $263,104 for 1998, 1997 and 1996, respectively. Results of operations are operating revenues less operating expenses including interest expense and depreciation expense. The Partnership's real estate properties are encumbered by mortgage indebtedness as discussed in Notes 5 and 6. NOTE 5 - MORTGAGE NOTES PAYABLE - ------------------------------- The following table sets forth the mortgage notes payable of the Partnership at December 31, 1998 and 1997. All mortgage notes are secured by real estate investments or the assets held for sale.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity Date (g) 1998 1997 - -------- --------------- ------- ----------------- --------------- -------------- Acacia Lakes First 8.700 $ 71,069 01/01 $ 8,680,219 $ 8,773,421 ------------- -------------- Gentle Gale (f) First 8.150 22,327 07/03 2,530,638 2,589,676 Discount (b) (41,502) (50,020) ------------- -------------- 2,489,136 2,539,656 ------------- -------------- Knollwood First 7.750 32,506 05/24 4,326,728 4,379,253 ------------- -------------- Rock Creek First (c) Variable Variable 10/01 6,225,000 - First 11.875 67,860 02/01 - 6,049,641 ------------- -------------- 6,225,000 6,049,641 ------------- -------------- Sun Valley First 7.875 48,384 06/24 6,376,663 6,451,832 ------------- --------------
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity Date (g) 1998 1997 - -------- --------------- ------- ----------------- --------------- -------------- The Park First (d) 10.500 24,021 05/24 - 2,571,755 ------------- -------------- The Village First (e) Variable Variable 05/01 2,635,000 - ------------- -------------- Villa Del Rio (f) First 8.150 47,843 07/03 5,422,798 5,549,306 Discount (b) (90,954) (107,186) ------------- --------------- 5,331,844 5,442,120 ------------- -------------- $ 36,064,590 $ 36,207,678 ============= ==============
(a) The debt is non-recourse to the Partnership. (b) Discounts are based on an effective interest rate of 8.62%. (c) On September 28, 1998, the Partnership refinanced the mortgage note payable on Rock Creek. The new mortgage note bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate ("LIBOR"). The interest rate is adjusted every three months. Terms of the note require monthly interest-only debt service payments, plus annual principal payments equal to 5% of the outstanding principal balance. At December 31, 1998, the interest rate of the mortgage note was 7.06%. See Note 8. (d) On April 30, 1998, The Park was sold. See Note 7. (e) On April 27, 1998, the Partnership refinanced the mortgage note payable on The Village. The new mortgage note bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate ("LIBOR"). The interest rate is adjusted every three months. Terms of the note require monthly interest-only debt service payments, plus annual principal payments equal to 5% of the outstanding principal balance. At December 31, 1998, the interest rate of the mortgage note was 7.37%. See Note 6 and 8. (f) Financing was obtained under the terms of a Real Estate Mortgage Investment Conduit financing. The mortgage notes payable are cross-collateralized. Principal prepayments made before July 2000 are subject to a Yield Maintenance premium, as defined. Additionally, the Partnership must pay a release payment equal to 25% of the prepaid balance which will be applied to the remaining mortgage notes in the collateral pool. (g) Balloon payments on the mortgage notes are due as follows: Property Balloon Payment Date -------- --------------- ---- Acacia Lakes $ 8,468,000 01/01 Rock Creek 5,766,000 10/01 The Village 2,380,000 05/01 Gentle Gale 2,197,000 07/03 Villa Del Rio 4,707,000 07/03 Scheduled principal maturities of the mortgage notes, before consideration of discounts of $132,456, are as follows: Real Estate Asset Held Investments For Sale ------------ ------------ 1999.................................... $ 570,214 $ 155,000 2000.................................... 603,912 303,500 2001.................................... 11,246,139 5,766,500 2002.................................... 431,266 - 2003.................................... 5,032,325 - Thereafter.............................. 12,088,190 - ----------- ----------- Total................................. $ 29,972,046 $ 6,225,000 =========== =========== Based on borrowing rates currently available to the Partnership for mortgage loans with similar terms and average maturities, the fair value of notes payable was approximately $36,137,000 as of December 31, 1998 and $38,601,000 as of December 31, 1997. NOTE 6 - MORTGAGE NOTE PAYABLE - AFFILIATE - ------------------------------------------ The following sets forth the mortgage note payable - affiliate of the Partnership at December 31, 1998 and 1997. The mortgage note was secured by the real estate investment.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity Date 1998 1997 - -------- --------------- ------- ------------------- --------------- ----------- The Village (b) First (c) Variable 11/99 $ - $ 2,588,971 =============== ==========
(a) The debt is non-recourse to the Partnership. (b) In October 1996, the Partnership obtained a mortgage note commitment from an affiliate of the General Partner for an amount up to $2,588,971. On November 25, 1996, $2,588,971 was funded to the Partnership to pay off the mortgage note on The Village. The Partnership incurred deferred borrowing costs of $13,157 for the new mortgage note payable, and the deferred borrowing costs for the old mortgage note payable were written off. On April 27, 1998, the mortgage note was paid in full. (c) The note required monthly payments of interest only equal to the prime lending rate plus 1%. At December 31, 1997, the prime rate was 8.50%. Under the terms of the Amended Partnership Agreement, borrowings from affiliates approximate fair market value. NOTE 7 - DISPOSITION OF PROPERTY - --------------------------------- On April 30,1998, the Partnership sold to an unaffiliated buyer, The Park, a 192 unit apartment complex in Joplin, Missouri, for a cash purchase price of $4,900,000. Cash proceeds from this transaction, as well as the gain on disposition are detailed below.
Gain on Disposition Cash Proceeds ---------------- ------------- Cash sales price..................................... $ 4,900,000 $ 4,900,000 Selling costs........................................ (112,611) (112,611) Basis of real estate sold............................ (1,349,329) Deferred revenue written-off......................... 11,875 Deferred borrowing costs written off............... (130,798) --------------- ----------- Gain on sale of real estate.......................... $ 3,319,137 ============== Proceeds from sale of real estate.................... 4,787,389 Retirement of mortgage note payable.................. (2,565,604) ----------- Net cash proceeds.................................... $ 2,221,785 ===========
NOTE 8 - REFINANCING OF MORTGAGE NOTES PAYABLE - ---------------------------------------------- On September 28, 1998, the Partnership refinanced the Rock Creek mortgage note. The new mortgage note, in the amount of $6,225,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum (7.06% at December 31, 1998). The new mortgage note requires monthly interest-only payments and annual principal payments equal to 5% of the outstanding principal balance of the mortgage note. Terms of the new note require the Partnership to deposit funds into a restricted cash account on a quarterly basis. The restricted funds will be used to pay the annual principal payment and are included in cash restricted for mortgage payments on the Balance Sheet. The maturity date of the new mortgage note is October 1, 2001. Cash proceeds from the refinancing transaction are as follows: New mortgage note proceeds........................... $ 6,225,000 Amount required to payoff existing debt.............. 5,974,783 ---------- Cash proceeds from refinancing....................... $ 250,217 ========== The Partnership incurred $82,273 of deferred borrowing costs related to the refinancing of the Rock Creek mortgage note. On April 27, 1998, the Partnership refinanced The Village mortgage note. The new mortgage note, in the amount of $2,635,000 bears interest at a variable rate equal to 1.75% plus the London Interbank Offered Rate per annum (7.37% at December 31, 1998). The new mortgage note requires monthly interest-only payments and annual principal payments equal to 5% of the outstanding principal balance of the mortgage note. Terms of the new note require the Partnership to deposit funds into a restricted cash account on a quarterly basis. The restricted funds will be used to pay the annual principal payment and are included in cash restricted for mortgage payments on the Balance Sheet. The maturity date of the new mortgage note is May 1, 2001. Cash proceeds from the refinancing transaction are as follows: New mortgage note proceeds........................... $ 2,635,000 Amount required to payoff existing debt.............. 2,588,971 ----------- Cash proceeds from refinancing....................... $ 46,029 =========== The Partnership incurred $57,134 of deferred borrowing costs related to the refinancing of The Village mortgage note. NOTE 9 - GAIN ON INVOLUNTARY CONVERSION - --------------------------------------- On November 5, 1998, a fire destroyed two units and damaged four units at Gentle Gale Apartments. The Partnership expects to receive $34,295 in insurance reimbursements to cover the cost of repairs which is included in accounts receivable as of December 31, 1998. A deferred gain of $25,037 was recorded by the Partnership as of December 31, 1998. The deferred gain represents the amount of insurance reimbursements to be received in excess of the basis of the property destroyed. The deferred gain will be recognized when the insurance proceeds are received. On January 25, 1997, a fire destroyed two units at The Park. The Partnership received $37,624 in insurance reimbursements to cover the cost of repairs. Insurance reimbursements received in excess of the basis of the property damage were recorded as a $22,630 gain on involuntary conversion. On January 20, 1997, a fire destroyed three units at The Village. The Partnership received $49,552 in insurance reimbursements to cover the cost of repairs. Insurance reimbursements received in excess of the basis of the property damage were recorded as a $24,010 gain on involuntary conversion. On January 8, 1996, 23,347 square feet of Knollwood Apartments were destroyed by fire causing approximately $857,000 in damages. The Partnership received $681,998 in insurance reimbursements as of December 31, 1996, to cover the cost to repair Knollwood. Insurance reimbursements received in excess of the basis of the property damaged were recorded as a $531,843 gain on involuntary conversion during 1996. In 1997, the Partnership received an additional $172,988 in insurance reimbursements, all of which was recorded as a gain on involuntary conversion. In 1994, the Partnership received $67,016 in insurance proceeds to cover the cost of repairs caused by a hail storm in August 1994 at Knollwood Apartments. The insurance proceeds were placed in escrow until completion of repairs. During 1996, the Partnership completed the repairs, received the proceeds that had been held in escrow, and recorded a $67,016 gain on the involuntary conversion. NOTE 10 - LEGAL PROCEEDINGS - --------------------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. NOTE 11 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described in Note 1 - "Organization and Summary of Significant Accounting Policies", Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. McNEIL REAL ESTATE FUND XI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1998
Costs Initial Cost (b) Cumulative Capitalized Related (b) Buildings and Write-down for Subsequent Description Encumbrances Land Improvements Impairment (d) To Acquisition - ----------- ------------- ----- -------------- -------------- -------------- APARTMENTS: Acacia Lakes Mesa, AZ $ 8,680,219 $ 1,953,090 $ 10,784,729 $ - $ 2,720,538 Gentle Gale Galveston, TX 2,489,136 450,155 2,925,081 (21,141) 933,260 Knollwood Kansas City, MO 4,326,728 330,547 5,122,225 - 2,359,728 Sun Valley Charlotte, NC 6,376,663 562,797 7,056,988 - 1,830,189 Villa Del Rio Jacksonville, FL 5,331,844 636,634 7,685,383 - 2,386,774 The Village Gresham, OR 2,635,000 474,102 3,372,567 - 1,170,916 -------------- -------------- -------------- ------------ ------------- $ 29,839,590 $ 4,407,325 $ 36,946,973 $ (21,141) $ 11,401,405 ============== ============== ============== ============ ============ Asset Held for Sale: Rock Creek (c) Portland, OR $ 6,225,000 ==============
(b) The initial cost and encumbrances reflect the present value of future loan payments discounted, if appropriate, at a rate estimated to be the prevailing interest rate at the date of acquisition or refinancing. (c) Asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Historical cost net of accumulated depreciation and write-downs becomes the new cost basis when the asset is classified as "Held for sale." Depreciation ceases at the time they are placed on the market for sale. (d) The carrying value of Gentle Gale Apartments was reduced by $21,141 in 1990. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1998
Gross Amount at Which Carried at Close of Period Buildings and Accumulated Description Land Improvements Total (a) Depreciation - ----------- ---- -------------- --------- ------------ APARTMENTS: Acacia Lakes Mesa, AZ $ 1,953,090 $ 13,505,267 $ 15,458,357 $ (9,844,141) Gentle Gale Galveston, TX 450,155 3,837,200 4,287,355 (2,700,717) Knollwood Kansas City, MO 330,547 7,481,953 7,812,500 (4,997,953) Sun Valley Charlotte, NC 562,797 8,887,177 9,449,974 (5,329,739) Villa Del Rio Jacksonville, FL 636,634 10,072,157 10,708,791 (6,661,746) The Village Gresham, OR 474,102 4,543,483 5,017,585 (3,529,499) -------------- ------------- -------------- ------------ $ 4,407,325 $ 48,327,327 $ 52,734,562 $ (33,063,795) ============== ============= ============== ============ Asset Held for Sale: Rock Creek (c) Portland, OR $ 4,765,942 ==============
(a) For Federal income tax purposes, the properties are depreciated over lives ranging from 5-27.5 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $71,002,898 and accumulated depreciation was $56,512,227 at December 31, 1998. (c) Asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Historical cost net of accumulated depreciation and write-downs becomes the new cost basis when the asset is classified as "Held for sale." Depreciation ceases at the time they are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1998
Date of Date Depreciable Description Construction Acquired lives (years) - ----------- ------------ -------- ------------- APARTMENTS: Acacia Lakes Mesa, AZ 1980 05/81 3-33 Gentle Gale Galveston, TX 1980 05/81 3-21 Knollwood Kansas City, MO 1970 05/81 3-29 Sun Valley Charlotte, NC 1980 08/81 3-40 Villa Del Rio Jacksonville, FL 1976 05/81 3-40 The Village Gresham, OR 1974 05/81 3-30 Asset Held for Sale: Rock Creek (c) Portland, OR 1975 02/81
(c) Asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Historical cost net of accumulated depreciation and write-downs becomes the new cost basis when the asset is classified as "Held for sale." Depreciation ceases at the time they are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XI, LTD. Notes to Schedule III Real Estate Investments and Accumulated Depreciation A summary of activity for the real estate investments and accumulated depreciation is as follows:
For the Years Ended December 31, ------------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------ Real estate investments: Balance at beginning of year .................. $ 51,618,852 $ 55,173,438 $ 64,347,015 Improvements .................................. 1,137,982 1,150,402 2,391,036 Reclassification to assets held for sale....... -- (4,561,586) (11,110,783) Replacement of assets ......................... (22,272) (143,402) (453,830) ------------ ------------ ------------ Balance at end of year ........................ $ 52,734,562 $ 51,618,852 $ 55,173,438 ============ ============ ============ Accumulated depreciation: Balance at beginning of year .................. $ 30,941,665 $ 32,181,184 $ 37,095,184 Depreciation .................................. 2,135,144 2,083,616 2,372,870 Reclassification to assets held for sale ...... -- (3,220,269) (6,983,195) Replacement of assets ......................... (13,014) (102,866) (303,675) ------------ ------------ ------------ Balance at end of year ........................ $ 33,063,795 $ 30,941,665 $ 32,181,184 ============ ============ ============ Assets Held for Sale: Balance at beginning of year .................. $ 5,910,865 $ 4,203,597 $ -- Reclassification to assets held for sale ...... -- 1,341,317 4,127,588 Sale of asset ................................. (1,349,329) -- -- Improvements .................................. 204,406 365,951 76,009 ------------ ------------ ------------ Balance at end of year ........................ $ 4,765,942 $ 5,910,865 $ 4,203,597 ============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------- ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows: Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Robert A. McNeil, 78 Mr. McNeil is also Chairman of the Chairman of the Board and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such an entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the International Board of Directors of the Salk Institute, which promotes research in improvements in health care. Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband Co-Chairman of the Robert A. McNeil, of McNeil Investors, Board Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute. Ron K. Taylor 41 Mr. Taylor is the President and Chief President and Chief Executive Officer of McNeil Real Estate Executive Officer Management which is an affiliate of the General Partner. Mr. Taylor has been in this capacity since the resignation of Donald K. Reed on March 4, 1997. Prior to assuming his current responsibilities, Mr. Taylor served as a Senior Vice President of McREMI. Mr. Taylor has been in this capacity since McREMI commenced operations in 1991. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management firm. In this capacity, Mr. Taylor had the responsibility for the management and leasing of a 21,000,000 square foot portfolio of commercial properties. Mr. Taylor has been actively involved in the real estate industry since 1983. Each director shall serve until his successor shall have been duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1998, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1998. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, known to the Partnership is the beneficial owner of more than 5 percent of the Partnership's Units, other than High River Limited Partnership, which owns 18,622 Units (11.65% of the outstanding Units) as of February 1, 1999. The business address for High River Limited Partnership is 100 South Bedford Road, Mount Kisco, New York 10549. (B) Security ownership of management. The General Partner and the officers and directors of its general partner, collectively, own 313 Units which represent less than 1% of the outstanding Units. (C) Change in control. None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- Under the terms of the Amended Partnership Agreement, the Partnership is paying the MID to the General Partner. The maximum MID is calculated as 1% of the tangible asset value of the Partnership. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The maximum MID percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. The MID will be paid to the extent of the lesser of the Partnership's excess cash flow as defined, or net operating income, as defined (the "Entitlement Amount"), and may be paid (i) in cash, unless there is insufficient cash to pay the distribution in which event any unpaid portion not taken in Units will be deferred and is payable, without interest, from the first available cash and/or (ii) in Units. A maximum of 50% of the MID may be paid in Units. The number of Units issued in payment of the MID is based on the greater of $50 per Unit or the net tangible asset value, as defined. For the year ended December 31, 1998, the Partnership paid or accrued for the General Partner MID in the amount of $853,756. Any amount of the MID which is paid to the General Partner in Units will be treated as if cash is distributed to the General Partner and is then contributed to the Partnership by the General Partner. The MID represents a return of equity to the General Partner for increasing cash flow, as defined, and accordingly is treated as a distribution. The Partnership pays property management fees equal to 5% of the gross rental receipts of the Partnership's properties to McREMI for providing property management and leasing services. Effective February 14, 1991, the Partnership began reimbursing McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1998, the Partnership paid or accrued for McREMI $1,148,093 in property management fees and reimbursements. See Item 1 - Business, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 2 - "Transactions with Affiliates." In November 1996, the Partnership obtained a loan from McNeil Real Estate Fund XXVII, L.P., an affiliate of the General Partner, totaling $2,588,971. The note is secured by The Village and requires monthly interest-only payments equal to the prime lending rate of Bank of America plus 1%. Total interest expense for this loan was $106,497 for the year ended December 31, 1998. The mortgage note was repaid on April 27, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------- See accompanying index to financial statements at Item 8 - Financial Statements and Supplementary Data. (A) Exhibits Exhibit Number Description ------- ----------- 3. Limited Partnership Agreement (Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended September 30, 1987). 3.1 Amended and Restated Limited Partnership Agreement, dated August 6, 1991 (Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1991). 3.2 Amendment No. 1 to the Amended and Restated Partnership Agreement of McNeil Real Estate Fund XI, Ltd., dated March 28, 1994. (2) 3.3 Amendment No. 2 to the Amended and Restated Partnership Agreement of McNeil Real Estate Fund XI, Ltd., dated March 28, 1994. (2) 10.1 Deed of Trust Note, dated April 5, 1989, between Knollwood Fund XI Associates and American Mortgages, Inc. (1) 10.2 Deed of Trust Note, dated May 5, 1989, between Sun Valley Fund XI Associates and American Mortgages, Inc. (1) 10.4 Termination Agreement, dated as of August 6, 1991 between Sun Valley Fund XI Associates and McNeil Real Estate Management, Inc. (1) 10.5 Termination Agreement, dated as of August 6, 1991, between Knollwood Fund XI Associates and McNeil Real Estate Management, Inc. (1) Exhibit Number Description -------- ----------- 10.6 Termination Agreement, dated as of August 6, 1991 among Southmark Management Corporation, Southmark Commercial Management Company, McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Management, Inc. (1) 10.7 Property Management Agreement, dated as of August 6, 1991, between McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Management, Inc. (1) 10.8 Property Management Agreement, dated as of August 6, 1991, between Knollwood Fund XI Associates and McNeil Real Estate Management, Inc. (1) 10.9 Property Management Agreement, dated as of August 6, 1991, between Sun Valley Fund XI Associates and McNeil Real Estate Management, Inc. (1) 10.12 Amendment of Property Management Agreement, dated March 5, 1993, between McNeil Real Estate Fund XI, Ltd. and McNeil Real Estate Management, Inc. (Incorporated by reference, to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783), on Form 10-K for the period ended December 31, 1992) 10.13 Loan Agreement dated June 24, 1993, between Lexington Mortgage Company and McNeil Real Estate Fund XI, Ltd. (2) 10.14 Master Property Management Agreement, dated as of June 24, 1993, between McNeil Real Estate Management, Inc. and McNeil Real Estate Fund XI, Ltd. (2) 10.15 Multifamily Note, dated November 1, 1993 between Value Line Mortgage Corporation and Acacia Lakes Fund XI Limited Partnership. (2) Exhibit Number Description -------- ----------- 10.16 Modification of Deed of Trust Note, dated December 15, 1993, between American Mortgages, Inc. and Knollwood Fund XI Associates. (2) 10.17 Modification of Deed of Trust Note, dated December 20, 1993, between American Mortgages, Inc. and Sun Valley Fund XI Associates. (2) 10.18 Promissory Note, dated April 27, 1998, between Village Fund XI Associates Limited and NationsBank of Texas, N.A. 10.19 Promissory Note, dated September 28, 1998, between Rock Creek Fund XI Limited and NationsBank, N.A. 11. Statement regarding computation of Net Income per limited partnership unit (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies). 22. List of subsidiaries of the Partnership.
Names Under Jurisdiction of Which It Is Name of Subsidiary Incorporation Doing Business ------------------ --------------- -------------- Acacia Lakes Fund XI Arizona None Limited Partnership Gentle Gale Fund XI Delaware None Limited Partnership Knollwood Fund XI Missouri None Associates Rock Creek Fund XI Ltd. Texas None Sun Valley Fund XI North Carolina None Associates Villa Del Rio Fund XI Delaware None Limited Partnership Village Fund XI Associates Oregon None Limited Partnership
(1) Incorporated by reference to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783), on Form 10-K for the period ended December 31, 1991, as filed with the Securities and Exchange Commission on March 29, 1992. (2) Incorporated by reference to the Annual Report of McNeil Real Estate Fund XI, Ltd. (File No. 0-9783), on Form 10-K for the period ended December 31, 1993, as filed with the Securities and Exchange Commission on March 30, 1995. 27. Financial Data Schedule for the year ended December 31, 1998. (B) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 1998. McNEIL REAL ESTATE FUND XI, LTD. A Limited Partnership SIGNATURE PAGE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. McNEIL REAL ESTATE FUND XI, LTD. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 31, 1999 By: /s/ Robert A. McNeil - -------------- --------------------------------------------- Date Robert A. McNeil Chairman of the Board and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 31, 1999 By: /s/ Ron K. Taylor - -------------- --------------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 31, 1999 By: /s/ Brandon K. Flaming - -------------- --------------------------------------------- Date Brandon K. Flaming Vice President of McNeil Investors, Inc. (Principal Accounting Officer) EX-27 2
5 12-MOS DEC-31-1998 DEC-31-1998 2,397,968 0 149,681 0 0 0 52,734,562 (33,063,795) 29,746,379 0 36,064,590 0 0 0 0 29,746,379 15,012,339 18,569,006 0 0 10,565,605 0 3,550,141 0 0 4,453,260 0 0 0 4,453,260 0 0
EX-10 3 PROMISSORY NOTE $6,225,000.00 Dallas, Texas Effective as of September 28, 1998 FOR VALUE RECEIVED, ROCK CREEK FUND XI, LTD., a Texas limited partnership ("Maker"), hereby promises to pay to the order of NATIONSBANK, N.A., a national banking association ("Lender"), at its banking house in the City of Dallas, Dallas County, Texas, the principal sum of SIX MILLION TWO HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($6,225,000.00) (the "Maximum Principal Amount") (or the unpaid balance of all principal advanced against this Note, if that amount is less), together with interest on the unpaid principal balance of this Note from day to day outstanding, as hereinafter provided. 1. Definitions. When used in this Note, the following terms shall have the following meanings: (a) "Adjusted LIBOR Rate" means a rate per annum equal to the quotient (rounded upwards, if necessary, to the next higher one/one-hundredth [1/100] of one percent [1%]) obtained by dividing (i) the applicable "Euro-Dollar Rate" (as such term is hereafter defined) by (ii) 1.00 minus the "Euro-Dollar Reserve Percentage" (as such term is hereafter defined) and increased by the amount of any impositions, assessments or other reserves (collectively, the "Assessments") to which Lender or any participant (a "Participant") in the Loan may be or become subject, including, but not limited to, the cost of Federal Deposit Insurance Corporation insurance or other insurance, and other fees, assessments and surcharges allocable to Lender's sale of the certificate(s) of deposit that establish the Euro-Dollar Rate with respect to a particular Matching Funds Election; provided that the Adjusted LIBOR Rate shall automatically be adjusted from time to time during the term of a Matching Funds Election to account for any fluctuations in the Euro-Dollar Reserve Percentage and the other costs to Lender of such Assessments. (b) "Election" means a Matching Funds Election. (c) "Euro-Dollar Business Days" means any domestic business day on which commercial banks are open for international business (including dealings in U.S. dollar deposits) in London. (d) "Euro-Dollar Reserve Percentage" means for any day during the term of this Note, that percentage (expressed as a decimal) that is in effect on such day, as the same is prescribed by the Board of Governors of the Federal Reserve System (or its successor) for determining the maximum reserve requirement for Lender or any Participant in respect of "Euro-currency liabilities" (or in respect of any other category of liabilities which includes deposits, by reference to which the interest rate on a borrowing is determined, or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). (e) "Formula Rate" means the per annum interest rate, calculated for the applicable day, equal to the "Prime Rate" (as such term is hereafter defined) for that day, computed for the actual number of calendar days elapsed during which the principal of this Note is outstanding but as if each year consisted of 360 days, subject to the controlling terms of Section 2(d) hereinbelow. (f) "Euro-Dollar Rate" means the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of any interest period for a term comparable to such interest period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of an interest period for a term comparable to such interest period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. (g) "Matching Funds Election" means an election by Maker to cause the principal balance of the Loan to be segregated into a separate account and to bear interest at the applicable "Matching Funds Rate" rather than the "Stated Rate" (as such terms are hereafter defined) for the term of the Election. (h) "Matching Funds Principal" means the then-outstanding principal balance of the Loan at the time of an effective Election. (i) "Matching Funds Rate" means a rate one hundred seventy-five (175) basis points (the "LIBOR Rate Adjustment") per annum in excess of the Adjusted LIBOR Rate as it exists from time to time. (j) "Maturity Date" means the first to occur of (i) October 1, 2001; (ii) the date on which the entity comprising the Maker ceases to exist; or (iii) the date on which Maker makes a Disposition [as defined in the Mortgage (hereinafter defined)] of all or any portion of the Property (hereinafter defined), other than a Permitted Disposition. (k) "Maximum Lawful Rate" shall have the meaning ascribed to such term in Section 13 hereof. (l) "Outstanding Principal Balance" means the portion of the Maximum Principal Amount then advanced and outstanding and payable from Maker to Lender in accordance with this Note. The Outstanding Principal Balance shall be reduced by any Principal Reduction Payment and interest earned on the Principal Reduction Account, as described hereinbelow. (m) "Past Due Rate" means, on any day, a rate per annum equal to the lesser of (a) the Maximum Lawful Rate, or (b) the Stated Rate plus four percent (4%) per annum computed for the actual number of calendar days elapsed during which such a past due amount is outstanding. (n) "Prime Rate" means that variable rate of interest per annum established and announced by Lender at its principal office in Dallas, Texas from time to time as its "prime rate." Such rate is set by Lender as a general reference rate of interest, taking into account such factors as Lender may deem appropriate, it being understood that it is not necessarily the lowest or best rate actually charged to any customer or a favored rate and that Lender may make various business or other loans at rates of interest having no relationship to that rate. (o) "Stated Rate" means, on any day, a rate per annum equal to and calculated on the basis of the Formula Rate. If on any day the Stated Rate shall exceed the maximum permitted by application of the Maximum Lawful Rate in effect on that day, the Stated Rate shall be fixed at the maximum permitted by application of the Maximum Lawful Rate on that day and on each day thereafter until the total amount of interest accrued at the fixed Stated Rate on the unpaid balance of this Note equals the total amount of interest which would have accrued if there were no limitation by the Maximum Lawful Rate and the Stated Rate had not been so fixed. 2 Interest. As hereinafter provided, the principal balance of this Note may be segregated into separate accounts and shall bear interest as follows: (a) At any time when the principal balance of this Note as is not subject to an effective Election, such balance shall constitute one account (the "Stated Rate Account") and shall bear interest prior to an Event of Default or maturity at a varying rate per annum equal to the lesser of (i) the Maximum Lawful Rate, or (ii) the Stated Rate. (b) The principal balance of this Note which may from time to time be subject to an effective Election shall constitute a separate account (the "Matching Funds Account") and shall bear interest prior to an Event of Default or maturity at a rate per annum equal to the lesser of (i) the Maximum Lawful Rate, or (ii) the Matching Funds Rate applicable to such Election. (c) Any principal of, and to the extent permitted by applicable law any interest on, this Note which is not paid when due shall bear interest at a varying rate per annum equal to the Past Due Rate from the date due and payable until paid. (d) Subject always to limitation by the Maximum Lawful Rate, interest on this Note shall be calculated on the basis of the 360-day method, which computes a daily amount of interest for a hypothetical year of 360 days, then multiplies such amount by the actual number of days elapsed in an interest calculation period. (e) Without notice to Maker or anyone else, the Prime Rate and the Maximum Lawful Rate shall each automatically fluctuate upward and downward as and in the amount by which the Lender's prime rate and such maximum nonusurious rate of interest permitted by applicable law, respectively, fluctuate, subject always to limitation of the Stated Rate and the Past Due Rate by the Maximum Lawful Rate. 3 Payment of Principal and Interest. (a) The entire principal balance of this Note then unpaid and all interest then outstanding shall be due and payable on the Maturity Date or upon any earlier termination of this Note. (b) Accrued but unpaid interest shall be due and payable (i) in monthly installments beginning on November 1, 1998, (ii) continuing on the first (1st) day of each consecutive calendar month thereafter before maturity, and (iii) at the final maturity of this Note. Maker agrees and acknowledges that Lender has no obligation to give notice to Maker of the amount of interest which is due and payable each month. Maker further agrees and acknowledges that Maker is solely responsible for, and shall not be relieved of, its obligation to pay such interest on the first day of each month until maturity of this Note, notwithstanding the fact that notice of such amount may not have been sent by Lender and/or received by Maker even if Lender regularly gives such notice. (c) Whenever any payment shall be due under this Note on a day which is not a "Business Day" (as such term is hereafter defined), the date on which such payment is due shall be extended to the next succeeding Business Day. "Business Day" means a day other than a Saturday, Sunday or other day on which national banks in Dallas, Texas are authorized or required to be closed. (d) All principal, interest and other sums payable under this Note shall be paid, not later than 2:00 o'clock p.m. (Dallas, Texas time) on the day when due, in immediately available funds and in lawful money of the United States of America. Funds received after 2:00 o'clock p.m. (Dallas, Texas time) shall be treated for all purposes as having been received by Lender on the Business Day next following the date of receipt of such funds. Any payment under this Note or under any other "Loan Document" (as such term is hereafter defined) other than in the required amount in good, unrestricted U.S. funds immediately available to the holder hereof shall not, regardless of any receipt or credit issued therefor, constitute payment until the required amount is actually received by the holder hereof in such funds and shall be made and accepted subject to the condition that any check or draft may be handled for collection in accordance with the practice of the collecting bank or banks. (e) Except to the extent specific provisions are set forth in this Note or another Loan Document with respect to application of payments, all payments received by the holder hereof shall be applied, to the extent thereof, to the "secured indebtedness" (as defined in the Mortgage) in the order and manner which the holder hereof shall deem appropriate, any instructions from Maker to the contrary notwithstanding. All payments made as scheduled on this Note shall be applied, to the extent thereof, first to accrued but unpaid interest and the balance to unpaid principal. All prepayments on this Note shall be applied, to the extent thereof, first to accrued but unpaid interest which is then past due under the terms of this Note and the balance to the remaining principal installments. Nothing herein shall limit or impair any rights of the holder hereof to apply as provided in the Loan Documents any past due payments, any proceeds from the disposition of any collateral by foreclosure or other collections after an Event of Default. Except to the extent specific provisions are set forth in this Note or another Loan Document with respect to application of payments, all payments received by the holder hereof shall be applied, to the extent thereof, to the indebtedness secured by the Mortgage in such order and manner as the holder hereof shall deem appropriate, any instructions from Maker or anyone else to the contrary notwithstanding. 4 Prepayment. Maker may at any time pay the full amount or any part of this Note without payment of any premium or fee; provided, however, that if Maker prepays any portion of the Matching Funds Account prior to the expiration of the term of the Matching Funds Election applicable to such portion, Maker shall pay Lender the prepayment charges hereinafter described in Section 7 hereof. All prepayments shall be applied first to accrued interest, the balance to principal. Such prepayment charges are not a penalty but, rather, are agreed to by Maker and Lender as representing reasonable charges for costs incurred by Lender. 5 Mortgage. This Note has been issued in connection with and is secured by, among other things, a certain Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing of even date herewith executed by Maker for the benefit of Lender, covering and affecting certain property (the "Property") located in Portland, Oregon, more fully described therein (which, as it may have been or may be amended, restated, modified or supplemented from time to time, herein called the "Mortgage"). Lender is entitled to the benefits of and security provided for in the Mortgage. This Note, the Mortgage, any guaranty executed in connection therewith and any other document now or hereafter evidencing, securing, guaranteeing or executed in connection with the loan currently evidenced by this Note are, as the same have been or may be amended, restated, modified or supplemented from time to time, herein sometimes called individually a "Loan Document" and together the "Loan Documents." Terms used herein with initial capital letters and not defined herein, if any, have the meanings given them in the Mortgage. Any notice required or which any party desires to give under this Note shall be given and effective as provided in the Mortgage. 6 Matching Funds Election. (a) From time to time during the term of the Loan, so long as no Event of Default has occurred and is continuing, Maker may elect to cause the then-outstanding principal amount of the Loan to bear interest at the Matching Funds Rate rather than the Stated Rate; provided, however, that (i) Maker may not exercise an Election at any time when the Matching Funds Rate would exceed the Maximum Lawful Rate, (ii) no more than one Election may be in force at any time, and (iii) such Election must include the entire outstanding principal of the Loan. Upon the effective date of the Election, the Loan shall bear interest prior to an Event of Default or maturity from the effective date of the Election to the end of the term of the Election at the Matching Funds Rate applicable on the effective date of the Election; provided that the Matching Funds Rate shall be adjusted from time to time during the term of the Election in accordance with any fluctuations in the Adjusted LIBOR Rate caused solely by fluctuations in the Euro-Dollar Reserve Percentage and the Assessments referenced in Section l(a)(ii) hereinabove. (b) Maker shall inform Lender when Maker wishes to exercise an Election, and Lender shall advise Maker as to the then applicable Matching Funds Rates and the available periods for which Maker may exercise the Election. To exercise the Election, Maker shall advise Lender by 1:00 p.m. (Dallas, Texas time) at least three (3) days prior to the desired effective date of the Election of (i) the desired effective date of the election and (ii) the desired term of the Election, which term shall be a 30, 60, 90 day period, provided that the term of an Election for the Adjusted LIBOR Rate must not end on a day other than a Euro-Dollar Business Day, and no Election may end on a day that is later than the stated maturity date of this Note. The Election shall become effective three (3) Euro-Dollar Business Days following the date of Maker's advising Lender of the particular terms of the Election. On or before the effective date of the Election, Maker shall execute and deliver to Lender a written confirmation of (i) the amount of the Matching Funds Principal, (ii) the term of the Election and (iii) the initial Matching Funds Rate applicable to the Election. (c) Maker may not extend an Election beyond the original term thereof at the Matching Funds Rate applicable during the original term. However, at the end of the term of an Election, Maker may make an additional Election to cause the Matching Funds Principal to bear interest at the Matching Funds Rate applicable on the day of the expiration of the prior Election for the term of the new Election by so advising Lender three (3) Euro-Dollar Business Days before the expiration of the prior Election, and giving to Lender a written confirmation by the effective date of the new Election in the manner specified above accompanied by the payment of an additional fee if any is required by this Note. Otherwise, upon the expiration of the prior Election, the Matching Funds Principal shall bear interest prior to an Event of Default or maturity at the Stated Rate. (d) Notwithstanding any other provision of this Note, if (i) any change in applicable law, rule or regulation or in the interpretation or administration thereof shall make it unlawful for Lender to issue certificates of deposit or impair or restrict Lender's ability to do so for terms and at rates which permit Lender to respond to an Election by obtaining funds at the Adjusted LIBOR Rate, or (ii) Lender reasonably determines that by reason of circumstances affecting the Interbank euro-dollar market generally, either adequate or reasonable means do not exist for ascertaining the Adjusted LIBOR Rate for any period, or (iii) Lender reasonably determines that it is impracticable for Lender to obtain funds against which to match Matching Funds Principal in connection with an Election (by purchasing U.S. Dollars in the Interbank euro-dollar market); then, in any of the foregoing instances, Maker's right to make any further Elections or to continue any Elections then in force shall be suspended for the duration of such illegality or impairment or restriction. 7 Prepayment of Matching Funds Principal. If Maker prepays the Matching Funds Principal prior to the expiration of the term of the Matching Funds Election applicable thereto, Maker shall pay Lender a prepayment fee in an amount calculated as follows: D x (A-B) x C ----- 360 A = the 360-day interest yield (as of the beginning of the term of the applicable Matching Funds Election and expressed as a decimal) on a U.S. Government Treasury bill, note or bond (a "Treasury Obligation") selected by Lender in Lender's reasonable discretion and having, as of the beginning of the term of the applicable Election, a remaining term until its maturity approximately equal to the term of the Election. B = the 360-day interest yield (as of the Business Day immediately preceding the prepayment date and expressed as a decimal) on a Treasury Obligation selected by Lender in Lender's reasonable discretion and having, as of the Business Day preceding the prepayment date, a term approximately equal to the unexpired term of the term of the applicable Matching Funds Election. C = the number of calendar days from the date of prepayment to the date on which the applicable Matching Funds Election would have expired but for the prepayment. D = the amount of the Matching Funds Principal that is being prepaid. The amount so determined shall then be discounted to its present value as of the date of prepayment; the interest rate used to compute such discount shall be the rate used in item B in the above formula. In no event shall the result of A-B be less than 0.00. The Treasury Obligation selected by Lender shall be from among those included in the over the counter quotations supplied to The Wall Street Journal by the Federal Reserve Bank of New York City based on transactions of $1,000,000 or more. It is expressly understood that all provisions of this Note, including but not limited to the provisions regarding the charging of interest at a Matching Funds Rate for the term of an Election, are subject to the provisions hereof limiting the amount of interest contracted for, charged, received or collected hereunder to the maximum amount permitted under applicable law. 8 Loan Limitation. Notwithstanding anything in this Agreement to the contrary, the amount of the Loan, at the time of the initial disbursement of the proceeds of the Loan, shall not exceed an amount equal to the lesser of the following: (i) the amount equal to sixty percent (60%) of the fair market value of the Mortgaged Property, as reflected in an appraisal acceptable to Lender; or (ii) the amount which would allow a Debt Coverage Ratio (hereinafter defined) of not less than 1.40 to 1.00, as calculated in accordance with the other terms and provisions therefor as herein required. In calculating the debt service coverage ratio specified above, the calculation shall be based on annual (or, if applicable, annualized) Net Operating Income (hereinafter defined) and applicable debt service for the corresponding annual (or annualized) period (being all principal and interest payments required or anticipated, if annualized, pursuant to the Note). As used herein, the following terms shall have the following meanings: (a) "Operating Expenses" for each such applicable annual period shall mean all reasonable expenses in an amount equal to the greater of (i) that amount equal to the product of the number of units contained on the Mortgaged Property multiplied by $3,500.00 per unit, or (ii) those amounts actually incurred and paid by Owner with respect to the ownership, operation, management, leasing and occupancy of the Mortgaged Property determined on a cash basis, except as otherwise specified herein, including, but not limited to, any and all of the following (but without duplication of any item): (i) ad valorem taxes calculated on an accrual basis (and not on the cash basis) of accounting for the calendar period; such accrual accounting for ad valorem taxes shall be based upon taxes actually assessed for the current calendar year, or if such assessment for the current year has not been made, then until such assessment has been made (and with any retroactive adjustments for prior calendar months as may ultimately be needed when the actual assessments has been made), ad valorem taxes for the calendar period shall be estimated to be an amount equal to one hundred percent (100%) of the assessment for the immediately preceding calendar period; (ii) foreign, U.S., state and local sales, use or other taxes (except for taxes measured by net income); (iii) special assessments or similar charges against the Mortgaged Property; (iv) costs of utilities, air conditioning and heating for the Mortgaged Property to the extent not paid by lessees or tenants; (v) maintenance and repair costs for the Mortgaged Property, including the replenishment of any reserve account(s) required by Lender pursuant to the Loan Documents and assuming, at a minimum, an annual capital expenditure of $300 per unit; (vi) the greater of actual management fees under any management agreement for the Property or an assumed annual management fee of four percent (4%) of the annual Gross Income of the Property; (vii) all salaries, wages and other benefits to "on-site" employees of Owner or its property manager (excluding all salaries, wages and other benefits of officers and supervisory personnel, and other general overhead expenses of Owner and its property manager) employed in connection with the leasing, maintenance and management of the Mortgaged Property; (viii) insurance premiums calculated on an accrual basis (and not on the cash basis) of accounting for the calendar period; such accrual accounting for insurance premiums shall be based upon the insurance premiums for the Mortgaged Property which was last billed to Owner, adjusted to an annualized premium if necessary, and multiplied by one hundred percent (100%); (ix) costs, including leasing commissions, advertising and promotion costs, to obtain new leases or to extend or renew existing leases, and the costs of work performed and materials provided to ready tenant space in the Property for new or renewal occupancy under leases; (x) outside accounting and audit fees and costs and administrative expenses in each case reasonably incurred by Owner in connection with the direct operation and management of the Mortgaged Property; (xi) any payments, and any related interest thereon, to lessees or tenants of the Mortgaged Property with respect to security deposits or other deposits required to be paid to tenants but only to the extent any such security deposits and related interest thereon have been previously included in Gross Income; and (xii) to the extent not included in any other Operating Expense category, the sums actually paid by Owner into any tax accounts or other reserve account(s) for the time period in question and approved by Lender. Notwithstanding anything to the contrary as being included in the definition of Operating Expenses, there shall be excluded from Operating Expenses the following: (i) depreciation and any other non-cash deduction allowed to Owner for income tax purposes; (ii) any compensation or fees paid to leasing agents, brokers or other third parties or affiliates of Owner which are in excess of reasonable and necessary compensation or fees which would be payable to unrelated third parties in arms' length transactions for similar services in the area in which the Mortgaged Property is located; (iii) all salaries, wages and other benefits to "off-site" employees and all other general "off-site" overhead expenses of Owner, its property manager or other professional manager of the Mortgaged Property; (iv) any and all payments of ad valorem taxes for either real or personal property (except for the accrual amount allowed pursuant to subpart (i) above); (v) any and all payments of insurance premiums (except for the accrual amount allowed pursuant to subpart (viii) above); (vi) the initial funding of the reserve account and any subsequent replenishment thereof up to or exceeding the amount required pursuant to the Loan Documents; (vii) any and all principal, interest or other costs paid under or with respect to the Loan, and the subordinate loans or with respect to any other financings with respect to the Mortgaged Property, whether unsecured or secured by all or any portion of the Mortgaged Property; and (viii) capital improvements (only to the extent not paid from any reserve account). (b) "Gross Income" for each such applicable annual period shall mean rentals, revenues and other recurring forms of consideration, received by, or paid to or for the account of or for the benefit of, Owner resulting from or attributable to the operation, leasing and occupancy of the Mortgaged Property determined on a cash basis (except as specified herein) and using for all calculations hereunder the greater of (i) actual vacancy of the Mortgaged Property at the time of such calculation or (ii) a vacancy factor of seven percent (7%), including, but not limited to, the following: (i) rents by any lessees or tenants of the Mortgaged Property; (ii) proceeds received by or for the benefit of Owner in connection with any rental loss or business interruption insurance with respect to the Mortgaged Property; (iii) any other fees or rents collected by, for or on behalf of Owner with respect to the leasing and operating the Mortgaged Property; and (iv) interest, if any, earned by Owner on security and other type deposits of and advance rentals paid by, any lessees or tenants of the Mortgaged Property. Notwithstanding anything included within the above definition of Gross Income, there shall be excluded from Gross Income the following: (i) any security or other deposits of lessees and tenants (even when applied to sums due under leases); (ii) rents and receipts received by or for the benefit of Owner with respect to services provided by Owner to lessees relating to the Mortgaged Property; (iii) the proceeds of any financing or refinancing with respect to all or any part of the Mortgaged Property which has been previously approved in writing by Lender; (iv) the proceeds of any sale or other capital transaction (excluding leases for occupancy purposes only) of all or any portion of the Mortgaged Property; (v) any insurance or condemnation proceeds paid with respect to the Mortgaged Property to the extent such proceeds are available and are used to restore or rebuild the Mortgaged Property as may be permitted in accordance with the terms of the Mortgage, except for rental loss or business interruption insurance; (vi) any insurance and condemnation proceeds applied in reduction of the principal of the Note in accordance with the terms of the Loan Documents; and (vii) any Collateral Account Payment (hereinafter defined) on deposit with Lender in the Collateral Account (hereinafter defined); provided, however, nothing set forth herein shall in any manner imply Lender's consent to a sale, refinancing or other capital transaction. (c) "Net Operating Income" for the applicable annual period shall mean all Gross Income for such annual period less all Operating Expenses for such corresponding annual period, as determined or approved by Lender. (d) "Debt Coverage Ratio" means the ratio of (i) Net Operating Income from the Property for any calendar month in question, as verified to Lender, to (ii) the greater of (A) the amount of principal and interest that would be due monthly on a promissory note with an outstanding principal balance equal to the Outstanding Principal Balance and an obligation of Maker to pay equal monthly installments of principal and interest calculated by amortizing the Outstanding Principal Balance over twenty-five (25) years at a rate of interest equal to the higher of (1) nine percent (9%) per annum or (2) the per annum rate equal to the Treasury Note Rate plus 250 basis points, or (B) the actual monthly interest payment due under the Note for the calendar month in question. In determining the Outstanding Principal Balance for the purposes of this Section 8 of the Note, no monies deposited in any Accounts (hereinafter defined) or any interest earned thereon shall be considered to reduce the Outstanding Principal Balance unless and until such deposits and interest have actually been applied to the Loan in accordance with Section 9 of this Note. As used herein, the term "Treasury Note Rate" means the latest Treasury Constant Maturity Series yields reported, as of the first day of the calendar month in question, in the Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to seven (7) years. Such implied yield shall be determined, if necessary, by (i) converting U.S Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (ii) interpolating linearly between reported yields. 9 Additional Financial Covenants. (a) Maker shall establish an interest bearing principal reduction account (the "Principal Reduction Account") with Lender. Concurrently herewith, Maker shall execute and deliver to Lender a "Security Agreement" (herein so called) granting to Lender a security interest in the Principal Reduction Account and the Collateral Account (hereinafter defined; the Principal Reduction Account and the Collateral Account are sometimes hereinafter collectively referred to as the "Accounts"), including all monies deposited in the Accounts at any time and all interest earned thereon. On December 31, 1998, Maker shall deposit into the Principal Reduction Account monies, which shall not include any proceeds of the loan evidenced by the Note, in an amount equal to two and one-half percent (2.50%) of the Outstanding Principal Balance (the "Principal Reduction Payment"). On each of March 31, June 30, September 30 and December 31 1999, and March 31, June 30, September 30, and December 31, 2000, and March 31, June 30, 2001 Maker shall deposit into the Principal Reduction Account a Principal Reduction Payment equal to one and 25/100 percent (1.25%) of the Outstanding Principal Balance. Interest earned on deposits in the Principal Reduction Account may be used as a part of the next-due Principal Reduction Payment. Provided there has been no Event of Default (as hereinafter defined), then (i) on each of January 15, 1999, January 15, 2000 and January 15, 2001, as applicable, Lender shall apply all sums then on deposit in the Principal Reduction Account (together with all interest earned thereon that has not already been used as part of a Principal Reduction Payment) to the Loan to reduce the amount of the Outstanding Principal Balance on the Note and (ii) all Principal Reduction Payments made in the year 2001 and interest earned thereon will be applied to reduce the Outstanding Principal Balance on the Note at the end of the Term; provided, however, if an Event of Default has occurred, then upon any such Event of Default, Lender may exercise all remedies available to Lender under the Security Agreement or any other Loan Document, including using the funds on deposit in the Principal Reduction Account and all interest thereon at Lender's discretion for any purpose permitted under the Loan Documents. (b) Maker shall provide to Lender, on a monthly basis, the financial and operating information required by the Mortgage. If, at the end of any quarter of a calendar year, such data indicates that the Debt Coverage Ratio for the Property is less than 1.40 to 1.00, then Lender shall so notify Maker and, within five (5) business days of such notice, Maker (i) shall establish with Lender a collateral account (the "Collateral Account") and (ii) shall deposit into the Collateral Account sufficient funds, which shall not include any proceeds of the loan evidenced by the Note, such that if such funds were to be applied to reduce the Outstanding Principal Balance, the Debt Coverage Ratio would return to a ratio equal to or greater than 1.40 to 1.00 (the "Collateral Account Payment"). A Collateral Account Payment shall not be applied to reduce the Outstanding Principal Balance, but, unless an Event of Default has occurred, shall be held by Lender pursuant to the terms of the Security Agreement and this Note. If the Debt Coverage Ratio for the Property at the end of the next calendar year quarter (or any subsequent quarter) is equal to or greater than 1.40 to 1.00, then within twenty (20) days after Lender's determination of such ratio, Lender shall refund to Maker any Collateral Account Payment then on deposit in the Collateral Account. If during any subsequent quarter of a calendar year the Debt Coverage Ratio is again less than 1.40 to 1.00, Maker shall make an additional Collateral Account Payment in an amount such that if such Collateral Account Payment were to be applied to reduce the Outstanding Principal Balance, the Debt Coverage Ratio would return to a ratio equal to or greater than 1.40 to 1.00; provided, however, that so long as no Event of Default has occurred, any funds then being held in the Collateral Account shall be applied to reduce the amount of such subsequent Collateral Account Payment. The Security Agreement shall also grant to Lender a security interest in all funds deposited in the Collateral Account and all interest earned thereon. If an Event of Default has occurred, Lender may exercise all remedies available to Lender under the Security Agreement, including using the funds in the Collateral Account and all interest thereon at Lender's discretion for any purpose permitted under the Loan Documents. If no Event of Default has occurred, upon the end of the Term or earlier payment in full to Lender of the Outstanding Principal Balance under this Note, any monies then on deposit in the Collateral Account and any interest earned thereon shall, at Maker's election, (i) be applied to reduce such Outstanding Principal Balance or (ii) be paid by Lender to Maker. 10 Events of Default. The occurrence of any one of the following shall be a default under this Note ("Event of Default"): (a) Any principal and interest payment and any other sum of money due under this Note, including any Earnings Deposit, any Principal Reduction Payment or any obligation involving the payment of money by Maker under the Loan Documents is not paid within five (5) days after written notice from Lender that such payment is due; provided that such five (5) day grace period shall not be applicable to sums due and payable at the Maturity Date or upon prepayment, by acceleration or otherwise; or (b) The Debt Coverage Ratio for the Property falls below 1.25 to 1.00; or (c) The occurrence of any other default, breach or Event of Default (however such term is defined therein or whether or not such term is defined) under any Loan Document and such default or Event of Default is not cured within any applicable notice and cure periods provided therein. Any Event of Default under this Note shall constitute a default (however such term is defined therein or whether or not such term is defined therein) under each of the Loan Documents, and any default, breach, or event of default (however such term is defined therein or whether or not such term is defined therein) under any of the Loan Documents shall constitute an Event of Default under this Note and under each of the Loan Documents. Upon the occurrence of an Event of Default, the holder hereof shall have the right to declare the unpaid principal balance and accrued but unpaid interest on this Note at once due and payable (and upon such declaration, the same shall be at once due and payable), to foreclose any liens and security interests securing payment hereof and to exercise any of its other rights, powers and remedies under this Note, under any other Loan Document, or at law or in equity. 11 No Waiver by Holder. Neither the failure by the holder hereof to exercise, nor delay by the holder hereof in exercising, the right to accelerate the maturity of this Note or any other right, power or remedy upon any Event of Default shall be construed as a waiver of such Event of Default or as a waiver of the right to exercise any such right, power or remedy at any time. No single or partial exercise by the holder hereof of any right, power or remedy shall exhaust the same or shall preclude any other or further exercise thereof, and every such right, power or remedy may be exercised at any time and from time to time. All remedies provided for in this Note and in any other Loan Document are cumulative of each other and of any and all other remedies existing at law or in equity, and the holder hereof shall, in addition to the remedies provided herein or in any other Loan Document, be entitled to avail itself of all such other remedies as may now or hereafter exist at law or in equity for the collection of the indebtedness owing hereunder, and the resort to any remedy provided for hereunder or under any such other Loan Document or provided for by law or in equity shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies. Without limiting the generality of the foregoing provisions, the acceptance by the holder hereof from time to time of any payment under this Note which is past due or which is less than the payment in full of all amounts due and payable at the time of such payment, shall not (i) constitute a waiver of or impair or extinguish the rights of the holder hereof to accelerate the maturity of this Note or to exercise any other right, power or remedy at the time or at any subsequent time, or nullify any prior exercise of any such right, power or remedy, or (ii) constitute a waiver of the requirement of punctual payment and performance, or a novation in any respect. 12 Collection of Costs. If any holder of this Note retains an attorney in connection with any Event of Default or at maturity or to collect, enforce, or defend this Note or any other Loan Document in any lawsuit or in any probate, reorganization, bankruptcy or other proceeding, or if Maker sues any holder in connection with this Note or any other Loan Document and does not prevail, then Maker agrees to pay to each such holder, in addition to principal and interest, all reasonable costs and expenses incurred by such holder in trying to collect this Note or in any such suit or proceeding, including reasonable attorneys' fees, which shall include the reasonable fees and costs incurred in connection with the appeal of any judgment. 13 Interest Provisions. (a) Savings Clause. It is expressly stipulated and agreed to be the intent of Maker and Lender at all times to comply strictly with the applicable Texas law governing the Maximum Lawful Rate or amount of interest payable on this Note or the Related Indebtedness (or applicable United States federal law to the extent that it permits Lender to contract for, charge, take, reserve or receive a greater amount of interest than under Texas law). If the applicable law is ever judicially interpreted so as to render usurious any amount (i) contracted for, charged, taken, reserved or received pursuant to this Note, any of the other Loan Documents or any other communication or writing by or between Maker and Lender related to the transaction or transactions that are the subject matter of the Loan Documents, (ii) contracted for, charged or received by reason of Lender's exercise of the option to accelerate the maturity of this Note and/or Related Indebtedness, or (iii) Maker will have paid or Lender will have received by reason of any voluntary prepayment by Borrower of this Note and/or Related Indebtedness, then it is Maker's and Lender's express intent that all amounts charged in excess of the Maximum Lawful Rate shall be automatically cancelled, ab initio, and all amounts in excess of the Maximum Lawful Rate theretofore collected by Lender shall be credited on the principal balance of this Note and/or the Related Indebtedness (or, if this Note and all Related Indebtedness have been or would thereby be paid in full, refunded to Maker), and the provisions of this Note and the other Loan Documents immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder; provided, however, if this Note has been paid in full before the end of the stated term of this Note, then Maker and Lender agree that Lender shall, with reasonable promptness after Lender discovers or is advised by Maker that interest was received in an amount in excess of the Maximum Lawful Rate, either refund such excess interest to Maker and/or credit such excess interest against this Note and/or any Related Indebtedness then owing by Maker to Lender. Maker hereby agrees that as a condition precedent to any claim seeking usury penalties against Lender, Maker will provide written notice to Lender, advising Lender in reasonable detail of the nature and amount of the violation, and Lender shall have sixty (60) days after receipt of such notice in which to correct such usury violation, if any, by either refunding such excess interest to Maker or crediting such excess interest against this Note and/or any Related Indebtedness then owing by Maker to Lender. All sums contracted for, charged or received by Lender for the use, forbearance or detention of any debt evidenced by this Note and/or any Related Indebtedness shall, to the extent permitted by applicable law, be amortized or spread, using the actuarial method, throughout the stated term of this Note and/or any Related Indebtedness (including any and all renewal and extension periods) until payment in full so that the rate or amount of interest on account of this Note and/or any Related Indebtedness does not exceed the Maximum Lawful Rate from time to time in effect and applicable to this Note and/or any Related Indebtedness for so long as debt is outstanding. In no event shall the provisions of Chapter 346 of the Texas Finance Code (which regulates certain revolving credit loan accounts and revolving triparty accounts) apply to this Note and/or any Related Indebtedness. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is not the intention of Lender to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration. (b) Definitions. As used herein, the term "Maximum Lawful Rate" shall mean the maximum lawful rate of interest which may be contracted for, charged, taken, received or reserved by Lender in accordance with the applicable laws of the State of Texas (or applicable United States federal law to the extent that it permits Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law), taking into account all Charges (as herein defined) made in connection with the transaction evidenced by this Note and the other Loan Documents. As used herein, the term "Charges" shall mean all fees, charges and/or any other things of value, if any, contracted for, charged, received, taken or reserved by Lender in connection with the transactions relating to this Note and the other Loan Documents, which are treated as interest under applicable law. As used herein, the term "Related Indebtedness" shall mean any and all debt paid or payable by Maker to Lender pursuant to the Loan Documents or any other communication or writing by or between Maker and Lender related to the transaction or transactions that are the subject matter of the Loan Documents, except such debt which has been paid or is payable by Maker to Lender under the Note. (c) Ceiling Election. To the extent that Lender is relying on Chapter 1D of the Texas Credit Title to determine the Maximum Lawful Rate payable on this Note and/or this Note and/or the Related Indebtedness, Lender will utilize the weekly ceiling from time to time in effect as provided in such Chapter 1D, as amended. To the extent United States federal law permits Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law, Lender will rely on United States federal law instead of such Chapter 1D for the purpose of determining the Maximum Lawful Rate. Additionally, to the extent permitted by applicable law now or hereafter in effect, Lender may, at its option and from time to time, utilize any other method of establishing the Maximum Lawful Rate under such Chapter 1D or under other applicable law by giving notice, if required, to Maker as provided by applicable law now or hereafter in effect. 14 Joint and Several Liability. If more than one person or entity executes this Note as Maker, all of said parties shall be jointly and severally liable for payment of the indebtedness evidenced hereby. Maker and all sureties, endorsers, guarantors and any other party now or hereafter liable for the payment of this Note in whole or in part, hereby severally (i) waive demand, presentment for payment, notice of dishonor and of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notice (except only for any notices which are specifically required by this Note or any other Loan Document), filing of suit and diligence in collecting this Note or enforcing any of the security therefor; (ii) agree to any substitution, subordination, exchange or release of any such security or the release of any party primarily or secondarily liable hereon; (iii) agree that the holder hereof shall not be required first to institute suit or exhaust its remedies hereon against Maker or others liable or to become liable hereon or to enforce its rights against them or any security therefor; (iv) consent to any extension or postponement of time of payment of this Note for any period or periods of time and to any partial payments, before or after maturity, and to any other indulgences with respect hereto, without notice thereof to, any of them; and (v) submit (and waive all rights to object) to non-exclusive personal jurisdiction in the State of Texas, and venue in Dallas County, Texas, for the enforcement of any and all obligations under the Loan Documents. 15 Amendments. This Note may not be changed, amended or modified except in a writing expressly intended for such purposes and executed by the party against whom enforcement of the change, amendment or modification is sought. 16 Purpose of Loan. The loan evidenced by this Note is made solely for business purposes and is not for personal, family, household or agricultural purposes. 17 Participation. The holder of this Note may, from time to time, sell or offer to sell the loan evidenced by this Note, or interests therein, to one or more assignees or participants and is hereby authorized to disseminate any information it now has or hereafter obtains pertaining to the loan evidenced by this Note including, without limitation, any security for this Note and credit information on Maker, any of its principals and any guarantor of this Note to any assignee or participant or prospective assignee or prospective participant, the holder's affiliates including NationsBanc Montgomery Securities, Inc. in the case of Lender, any regulatory body having jurisdiction over the holder, and to any other parties as necessary or appropriate in holder's reasonable judgment. Maker shall execute, acknowledge and deliver any and all instruments reasonably requested by Lender in connection therewith, and to the extent, if any, specified in any such assignment or participation, such companies, assignee(s), and participant(s) shall have the rights and benefits with respect to this Note and the other Loan Documents as such person(s) would have had if such person(s) had been Lender hereunder. 18 Successors and Assigns. The terms, provisions, covenants and conditions of this Note shall be binding upon Maker and the heirs, devisees, representatives, successors and assigns of Maker. 19 Governing Law. THIS NOTE, AND ITS VALIDITY, ENFORCEMENT AND INTERPRETATION, SHALL BE GOVERNED BY LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES) AND APPLICABLE UNITED STATES FEDERAL LAW. MAKER HEREBY ACKNOWLEDGES THAT ITS BUSINESS OFFICE IS IN DALLAS COUNTY, TEXAS, AND THAT THE NOTE IS PAYABLE IN DALLAS COUNTY, TEXAS; THEREFORE, MAKER HEREBY CONFIRMS AND AGREES THAT ALL LEGAL ACTIONS INVOLVING THE VALIDITY OR ENFORCEMENT OF THIS NOTE (INCLUDING, BUT NOT LIMITED TO, ANY BANKRUPTCY PROCEEDINGS INVOLVING MAKER) SHALL HAVE JURISDICTION AND VENUE IN DALLAS COUNTY, TEXAS. 20 Time of Essence. Time shall be of the essence in this Note with respect to all of Maker's obligations hereunder. 21 Captions. The paragraph headings used in this Note are for convenience of reference only and shall not affect the meaning or interpretation of this Note. 22 Limited Recourse. Subject to the exceptions and qualifications described below, Maker shall not be personally liable for the payment of the indebtedness evidenced by or created or arising under this Note and any judgment or decree in any action brought to enforce the obligation of Maker to pay such indebtedness shall be enforceable against Maker only to the extent of its interest in the Mortgaged Property (as defined in the Mortgage) and any such judgment or decree shall not be subject to execution upon or be a lien upon the assets of Maker other than its interest in such Mortgaged Property. The foregoing limitation of personal liability shall be subject to the following exceptions and qualifications: (a) Maker shall be fully and personally liable for the following: (i) failure to pay taxes, assessments and any other charges which could result in liens against any portion of the Mortgaged Property; (ii) fraud or material misrepresentation; (iii) retention by Maker of any payments, rental income or other funds arising with respect to any of the Mortgaged Property which, under the terms of the Loan Documents, should have been paid to Lender; (iv) all insurance proceeds, condemnation awards or other similar funds or payments attributable to the Mortgaged Property which, under the terms of the Loan Documents, should have been paid to Lender; (v) failure to protect and maintain the Mortgaged Property in accordance with the terms of the Loan Documents; and (vi) the failure of the Loan Documents to constitute a first and prior lien, assignment, pledge or security interest in or upon the Mortgaged Property, subject only to the matters permitted by the Loan Documents. (b) Nothing contained in this paragraph shall affect or limit the ability of the holder hereof to enforce any of its rights or remedies with respect to the Mortgaged Property. (c) Nothing contained in this paragraph shall affect or limit the rights of the holder hereof to proceed against any person or entity, including Maker, any partner in Maker or any other party, with respect to the enforcement of any guarantees of payment, guarantees of performance and completion, hazardous materials indemnification agreements or other similar rights. 23 Statute of Frauds Notice. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, Maker has duly executed this Note effective as of the date first above written. MAKER: ROCK CREEK FUND XI, LTD., a Texas limited partnership By: McNeil Rock Creek Fund XI Corp., a Texas corporation, its general partner By: /s/ Ron K. Taylor Name: Ron K. Taylor Title: President EX-10 4 PROMISSORY NOTE $2,635,000.00 Dallas, Texas May 13, 1998 FOR VALUE RECEIVED, VILLAGE FUND XI ASSOCIATES LIMITED PARTNERSHIP, an Oregon limited partnership ("Maker"), hereby promises to pay to the order of NATIONSBANK OF TEXAS, N.A., a national banking association ("Lender"), at its banking house in the City of Dallas, Dallas County, Texas, the principal sum of TWO MILLION SIX HUNDRED THIRTY-FIVE THOUSAND AND NO/100 DOLLARS ($2,635,000.00) (the "Maximum Principal Amount") (or the unpaid balance of all principal advanced against this Note, if that amount is less), together with interest on the unpaid principal balance of this Note from day to day outstanding, as hereinafter provided. 1. Definitions. When used in this Note, the following terms shall have the following meanings: (a) "Adjusted LIBOR Rate" means a rate per annum equal to the quotient (rounded upwards, if necessary, to the next higher one/one-hundredth [1/100] of one percent [1%]) obtained by dividing (i) the applicable "Euro-Dollar Rate" (as such term is hereafter defined) by (ii) 1.00 minus the "Euro-Dollar Reserve Percentage" (as such term is hereafter defined) and increased by the amount of any impositions, assessments or other reserves (collectively, the "Assessments") to which Lender or any participant (a "Participant") in the Loan may be or become subject, including, but not limited to, the cost of Federal Deposit Insurance Corporation insurance or other insurance, and other fees, assessments and surcharges allocable to Lender's sale of the certificate(s) of deposit that establish the Euro-Dollar Rate with respect to a particular Matching Funds Election; provided that the Adjusted LIBOR Rate shall automatically be adjusted from time to time during the term of a Matching Funds Election to account for any fluctuations in the Euro-Dollar Reserve Percentage and the other costs to Lender of such Assessments. (b) "Election" means a Matching Funds Election. (c) "Euro-Dollar Business Days" means any domestic business day on which commercial banks are open for international business (including dealings in U.S. dollar deposits) in London. (d) "Euro-Dollar Reserve Percentage" means for any day during the term of this Note, that percentage (expressed as a decimal) that is in effect on such day, as the same is prescribed by the Board of Governors of the Federal Reserve System (or its successor) for determining the maximum reserve requirement for Lender or any Participant in respect of "Euro-currency liabilities" (or in respect of any other category of liabilities which includes deposits, by reference to which the interest rate on a borrowing is determined, or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). (e) "Formula Rate" means the per annum interest rate, calculated for the applicable day, equal to the "Prime Rate" (as such term is hereafter defined) for that day, computed for the actual number of calendar days elapsed during which the principal of this Note is outstanding but as if each year consisted of 360 days, subject to the controlling terms of Section 2(d) hereinbelow. (f) "Euro-Dollar Rate" means the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of any interest period for a term comparable to such interest period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of an interest period for a term comparable to such interest period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. (g) "Matching Funds Election" means an election by Maker to cause the principal balance of the Loan to be segregated into a separate account and to bear interest at the applicable "Matching Funds Rate" rather than the "Stated Rate" (as such terms are hereafter defined) for the term of the Election. (h) "Matching Funds Principal" means the then-outstanding principal balance of the Loan at the time of an effective Election. (i) "Matching Funds Rate" means a rate one hundred seventy-five (175) basis points (the "LIBOR Rate Adjustment") per annum in excess of the Adjusted LIBOR Rate as it exists from time to time. (j) "Maturity Date" means the first to occur of (i) May 1, 2001; (ii) the date on which the entity comprising the Maker ceases to exist; or (iii) the date on which Maker makes a Disposition [as defined in the Mortgage (hereinafter defined)] of all or any portion of the Property (hereinafter defined), other than a Permitted Disposition. (k) "Maximum Rate" means the maximum nonusurious rate of interest per annum permitted by whichever of applicable United States federal law or Texas law permits the higher interest rate, including to the extent permitted by applicable law, any amendments thereof hereafter or any new law hereafter coming into effect to the extent a higher Maximum Rate is permitted thereby. To the extent, if any, that Chapter 1D of the Texas Credit Title (Articles 5069-1D.001 et seq.), as the same may be amended (the "Texas Credit Code") establishes the Maximum Rate, the Maximum Rate shall be the "weekly ceiling" (as defined in the Texas Credit Code). The Maximum Rate shall be applied by taking into account all amounts characterized by applicable law as interest on the debt evidenced by this Note, so that the aggregate of all interest does not exceed the maximum nonusurious amount permitted by applicable law. (l) "Outstanding Principal Balance" means the portion of the Maximum Principal Amount then advanced and outstanding and payable from Maker to Lender in accordance with this Note. The Outstanding Principal Balance shall be reduced by any Principal Reduction Payment and interest earned on the Principal Reduction Account, as described hereinbelow. (m) "Past Due Rate" means, on any day, a rate per annum equal to the lesser of (a) the Maximum Rate, or (b) the Stated Rate plus four percent (4%) per annum computed for the actual number of calendar days elapsed during which such a past due amount is outstanding. (n) "Prime Rate" means that variable rate of interest per annum established and announced by Lender at its principal office in Dallas, Texas from time to time as its "prime rate." Such rate is set by Lender as a general reference rate of interest, taking into account such factors as Lender may deem appropriate, it being understood that it is not necessarily the lowest or best rate actually charged to any customer or a favored rate and that Lender may make various business or other loans at rates of interest having no relationship to that rate. (o) "Stated Rate" means, on any day, a rate per annum equal to and calculated on the basis of the Formula Rate. If on any day the Stated Rate shall exceed the maximum permitted by application of the Maximum Rate in effect on that day, the Stated Rate shall be fixed at the maximum permitted by application of the Maximum Rate on that day and on each day thereafter until the total amount of interest accrued at the fixed Stated Rate on the unpaid balance of this Note equals the total amount of interest which would have accrued if there were no limitation by the Maximum Rate and the Stated Rate had not been so fixed. 2 Interest. As hereinafter provided, the principal balance of this Note may be segregated into separate accounts and shall bear interest as follows: (a) At any time when the principal balance of this Note as is not subject to an effective Election, such balance shall constitute one account (the "Stated Rate Account") and shall bear interest prior to an Event of Default or maturity at a varying rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the Stated Rate. (b) The principal balance of this Note which may from time to time be subject to an effective Election shall constitute a separate account (the "Matching Funds Account") and shall bear interest prior to an Event of Default or maturity at a rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the Matching Funds Rate applicable to such Election. (c) Any principal of, and to the extent permitted by applicable law any interest on, this Note which is not paid when due shall bear interest at a varying rate per annum equal to the Past Due Rate from the date due and payable until paid. (d) Subject always to limitation by the Maximum Rate, interest on this Note shall be calculated on the basis of the 360-day method, which computes a daily amount of interest for a hypothetical year of 360 days, then multiplies such amount by the actual number of days elapsed in an interest calculation period. (e) Without notice to Maker or anyone else, the Prime Rate and the Maximum Rate shall each automatically fluctuate upward and downward as and in the amount by which the Lender's prime rate and such maximum nonusurious rate of interest permitted by applicable law, respectively, fluctuate, subject always to limitation of the Stated Rate and the Past Due Rate by the Maximum Rate. 3 Payment of Principal and Interest. (a) The entire principal balance of this Note then unpaid and all interest then outstanding shall be due and payable on the Maturity Date or upon any earlier termination of this Note. (b) Accrued but unpaid interest shall be due and payable (i) in monthly installments beginning on June 1, 1998, (ii) continuing on the first (1st) day of each consecutive calendar month thereafter before maturity, and (iii) at the final maturity of this Note. Maker agrees and acknowledges that Lender has no obligation to give notice to Maker of the amount of interest which is due and payable each month. Maker further agrees and acknowledges that Maker is solely responsible for, and shall not be relieved of, its obligation to pay such interest on the first day of each month until maturity of this Note, notwithstanding the fact that notice of such amount may not have been sent by Lender and/or received by Maker even if Lender regularly gives such notice. (c) Whenever any payment shall be due under this Note on a day which is not a "Business Day" (as such term is hereafter defined), the date on which such payment is due shall be extended to the next succeeding Business Day. "Business Day" means a day other than a Saturday, Sunday or other day on which national banks in Dallas, Texas are authorized or required to be closed. (d) All principal, interest and other sums payable under this Note shall be paid, not later than 2:00 o'clock p.m. (Dallas, Texas time) on the day when due, in immediately available funds and in lawful money of the United States of America. Funds received after 2:00 o'clock p.m. (Dallas, Texas time) shall be treated for all purposes as having been received by Lender on the Business Day next following the date of receipt of such funds. Any payment under this Note or under any other "Loan Document" (as such term is hereafter defined) other than in the required amount in good, unrestricted U.S. funds immediately available to the holder hereof shall not, regardless of any receipt or credit issued therefor, constitute payment until the required amount is actually received by the holder hereof in such funds and shall be made and accepted subject to the condition that any check or draft may be handled for collection in accordance with the practice of the collecting bank or banks. (e) Except to the extent specific provisions are set forth in this Note or another Loan Document with respect to application of payments, all payments received by the holder hereof shall be applied, to the extent thereof, to the "secured indebtedness" (as defined in the Mortgage) in the order and manner which the holder hereof shall deem appropriate, any instructions from Maker to the contrary notwithstanding. All payments made as scheduled on this Note shall be applied, to the extent thereof, first to accrued but unpaid interest and the balance to unpaid principal. All prepayments on this Note shall be applied, to the extent thereof, first to accrued but unpaid interest which is then past due under the terms of this Note and the balance to the remaining principal installments. Nothing herein shall limit or impair any rights of the holder hereof to apply as provided in the Loan Documents any past due payments, any proceeds from the disposition of any collateral by foreclosure or other collections after an Event of Default. Except to the extent specific provisions are set forth in this Note or another Loan Document with respect to application of payments, all payments received by the holder hereof shall be applied, to the extent thereof, to the indebtedness secured by the Mortgage in such order and manner as the holder hereof shall deem appropriate, any instructions from Maker or anyone else to the contrary notwithstanding. 4 Prepayment. Maker may at any time pay the full amount or any part of this Note without payment of any premium or fee; provided, however, that if Maker prepays any portion of the Matching Funds Account prior to the expiration of the term of the Matching Funds Election applicable to such portion, Maker shall pay Lender the prepayment charges hereinafter described in Section 7 hereof. All prepayments shall be applied first to accrued interest, the balance to principal. Such prepayment charges are not a penalty but, rather, are agreed to by Maker and Lender as representing reasonable charges for costs incurred by Lender. 5 Mortgage. This Note has been issued in connection with and is secured by, among other things, a certain Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing of even date herewith executed by Maker for the benefit of Lender, covering and affecting certain property (the "Property") located in Gresham, Oregon, more fully described therein (which, as it may have been or may be amended, restated, modified or supplemented from time to time, herein called the "Mortgage"). Lender is entitled to the benefits of and security provided for in the Mortgage. This Note, the Mortgage, any guaranty executed in connection therewith and any other document now or hereafter evidencing, securing, guaranteeing or executed in connection with the loan currently evidenced by this Note are, as the same have been or may be amended, restated, modified or supplemented from time to time, herein sometimes called individually a "Loan Document" and together the "Loan Documents." Terms used herein with initial capital letters and not defined herein, if any, have the meanings given them in the Mortgage. Any notice required or which any party desires to give under this Note shall be given and effective as provided in the Mortgage. 6 Matching Funds Election. (a) From time to time during the term of the Loan, so long as no Event of Default has occurred and is continuing, Maker may elect to cause the then-outstanding principal amount of the Loan to bear interest at the Matching Funds Rate rather than the Stated Rate; provided, however, that (i) Maker may not exercise an Election at any time when the Matching Funds Rate would exceed the Maximum Rate, (ii) no more than one Election may be in force at any time, and (iii) such Election must include the entire outstanding principal of the Loan. Upon the effective date of the Election, the Loan shall bear interest prior to an Event of Default or maturity from the effective date of the Election to the end of the term of the Election at the Matching Funds Rate applicable on the effective date of the Election; provided that the Matching Funds Rate shall be adjusted from time to time during the term of the Election in accordance with any fluctuations in the Adjusted LIBOR Rate caused solely by fluctuations in the Euro-Dollar Reserve Percentage and the Assessments referenced in Section l(a)(ii) hereinabove. (b) Maker shall inform Lender when Maker wishes to exercise an Election, and Lender shall advise Maker as to the then applicable Matching Funds Rates and the available periods for which Maker may exercise the Election. To exercise the Election, Maker shall advise Lender by 1:00 p.m. (Dallas, Texas time) at least three (3) days prior to the desired effective date of the Election of (i) the desired effective date of the election and (ii) the desired term of the Election, which term shall be a 30, 60, 90 day period, provided that the term of an Election for the Adjusted LIBOR Rate must not end on a day other than a Euro-Dollar Business Day, and no Election may end on a day that is later than the stated maturity date of this Note. The Election shall become effective three (3) Euro-Dollar Business Days following the date of Maker's advising Lender of the particular terms of the Election. On or before the effective date of the Election, Maker shall execute and deliver to Lender a written confirmation of (i) the amount of the Matching Funds Principal, (ii) the term of the Election and (iii) the initial Matching Funds Rate applicable to the Election. (c) Maker may not extend an Election beyond the original term thereof at the Matching Funds Rate applicable during the original term. However, at the end of the term of an Election, Maker may make an additional Election to cause the Matching Funds Principal to bear interest at the Matching Funds Rate applicable on the day of the expiration of the prior Election for the term of the new Election by so advising Lender three (3) Euro-Dollar Business Days before the expiration of the prior Election, and giving to Lender a written confirmation by the effective date of the new Election in the manner specified above accompanied by the payment of an additional fee if any is required by this Note. Otherwise, upon the expiration of the prior Election, the Matching Funds Principal shall bear interest prior to an Event of Default or maturity at the Stated Rate. (d) Notwithstanding any other provision of this Note, if (i) any change in applicable law, rule or regulation or in the interpretation or administration thereof shall make it unlawful for Lender to issue certificates of deposit or impair or restrict Lender's ability to do so for terms and at rates which permit Lender to respond to an Election by obtaining funds at the Adjusted LIBOR Rate, or (ii) Lender reasonably determines that by reason of circumstances affecting the Interbank euro-dollar market generally, either adequate or reasonable means do not exist for ascertaining the Adjusted LIBOR Rate for any period, or (iii) Lender reasonably determines that it is impracticable for Lender to obtain funds against which to match Matching Funds Principal in connection with an Election (by purchasing U.S. Dollars in the Interbank euro-dollar market); then, in any of the foregoing instances, Maker's right to make any further Elections or to continue any Elections then in force shall be suspended for the duration of such illegality or impairment or restriction. 7 Prepayment of Matching Funds Principal. If Maker prepays the Matching Funds Principal prior to the expiration of the term of the Matching Funds Election applicable thereto, Maker shall pay Lender a prepayment fee in an amount calculated as follows: D x (A-B) x C --- 360 A = the 360-day interest yield (as of the beginning of the term of the applicable Matching Funds Election and expressed as a decimal) on a U.S. Government Treasury bill, note or bond (a "Treasury Obligation") selected by Lender in Lender's reasonable discretion and having, as of the beginning of the term of the applicable Election, a remaining term until its maturity approximately equal to the term of the Election. B = the 360-day interest yield (as of the Business Day immediately preceding the prepayment date and expressed as a decimal) on a Treasury Obligation selected by Lender in Lender's reasonable discretion and having, as of the Business Day preceding the prepayment date, a term approximately equal to the unexpired term of the term of the applicable Matching Funds Election. C = the number of calendar days from the date of prepayment to the date on which the applicable Matching Funds Election would have expired but for the prepayment. D = the amount of the Matching Funds Principal that is being prepaid. The amount so determined shall then be discounted to its present value as of the date of prepayment; the interest rate used to compute such discount shall be the rate used in item B in the above formula. In no event shall the result of A-B be less than 0.00. The Treasury Obligation selected by Lender shall be from among those included in the over the counter quotations supplied to The Wall Street Journal by the Federal Reserve Bank of New York City based on transactions of $1,000,000 or more. It is expressly understood that all provisions of this Note, including but not limited to the provisions regarding the charging of interest at a Matching Funds Rate for the term of an Election, are subject to the provisions hereof limiting the amount of interest contracted for, charged, received or collected hereunder to the maximum amount permitted under applicable law. 8 Loan Limitation. Notwithstanding anything in this Agreement to the contrary, the amount of the Loan, at the time of the initial disbursement of the proceeds of the Loan, shall not exceed an amount equal to the lesser of the following: (i) the amount equal to sixty percent (60%) of the fair market value of the Mortgaged Property, as reflected in an appraisal acceptable to Lender; or (ii) the amount which would allow a Debt Coverage Ratio (hereinafter defined) of not less than 1.40 to 1.00, as calculated in accordance with the other terms and provisions therefor as herein required. In calculating the debt service coverage ratio specified above, the calculation shall be based on annual (or, if applicable, annualized) Net Operating Income (hereinafter defined) and applicable debt service for the corresponding annual (or annualized) period (being all principal and interest payments required or anticipated, if annualized, pursuant to the Note). As used herein, the following terms shall have the following meanings: (a) "Operating Expenses" for each such applicable annual period shall mean all reasonable expenses in an amount equal to the greater of (i) those specific sums set forth in the annual operating budget for the Mortgaged Property for the applicable calendar period, or (ii) those amounts actually incurred and paid by Owner with respect to the ownership, operation, management, leasing and occupancy of the Mortgaged Property determined on a cash basis, except as otherwise specified herein, including, but not limited to, any and all of the following (but without duplication of any item): (i) ad valorem taxes calculated on an accrual basis (and not on the cash basis) of accounting for the calendar period; such accrual accounting for ad valorem taxes shall be based upon taxes actually assessed for the current calendar year, or if such assessment for the current year has not been made, then until such assessment has been made (and with any retroactive adjustments for prior calendar months as may ultimately be needed when the actual assessments has been made), ad valorem taxes for the calendar period shall be estimated to be an amount equal to one hundred percent (100%) of the assessment for the immediately preceding calendar period; (ii) foreign, U.S., state and local sales, use or other taxes (except for taxes measured by net income); (iii) special assessments or similar charges against the Mortgaged Property; (iv) costs of utilities, air conditioning and heating for the Mortgaged Property to the extent not paid by lessees or tenants; (v) maintenance and repair costs for the Mortgaged Property, including the replenishment of any reserve account(s) required by Lender pursuant to the Loan Documents and assuming, at a minimum, an annual capital expenditure of $300 per unit; (vi) the greater of actual management fees under any management agreement for the Property or an assumed annual management fee of four percent (4%) of the annual Gross Income of the Property; (vii) all salaries, wages and other benefits to "on-site" employees of Owner or its property manager (excluding all salaries, wages and other benefits of officers and supervisory personnel, and other general overhead expenses of Owner and its property manager) employed in connection with the leasing, maintenance and management of the Mortgaged Property; (viii) insurance premiums calculated on an accrual basis (and not on the cash basis) of accounting for the calendar period; such accrual accounting for insurance premiums shall be based upon the insurance premiums for the Mortgaged Property which was last billed to Owner, adjusted to an annualized premium if necessary, and multiplied by one hundred percent (100%); (ix) costs, including leasing commissions, advertising and promotion costs, to obtain new leases or to extend or renew existing leases, and the costs of work performed and materials provided to ready tenant space in the Property for new or renewal occupancy under leases; (x) outside accounting and audit fees and costs and administrative expenses in each case reasonably incurred by Owner in connection with the direct operation and management of the Mortgaged Property; (xi) any payments, and any related interest thereon, to lessees or tenants of the Mortgaged Property with respect to security deposits or other deposits required to be paid to tenants but only to the extent any such security deposits and related interest thereon have been previously included in Gross Income; and (xii) to the extent not included in any other Operating Expense category, the sums actually paid by Owner into any tax accounts or other reserve account(s) for the time period in question and approved by Lender. Notwithstanding anything to the contrary as being included in the definition of Operating Expenses, there shall be excluded from Operating Expenses the following: (i) depreciation and any other non-cash deduction allowed to Owner for income tax purposes; (ii) any compensation or fees paid to leasing agents, brokers or other third parties or affiliates of Owner which are in excess of reasonable and necessary compensation or fees which would be payable to unrelated third parties in arms' length transactions for similar services in the area in which the Mortgaged Property is located; (iii) all salaries, wages and other benefits to "off-site" employees and all other general "off-site" overhead expenses of Owner, its property manager or other professional manager of the Mortgaged Property; (iv) any and all payments of ad valorem taxes for either real or personal property (except for the accrual amount allowed pursuant to subpart (i) above); (v) any and all payments of insurance premiums (except for the accrual amount allowed pursuant to subpart (viii) above); (vi) the initial funding of the reserve account and any subsequent replenishment thereof up to or exceeding the amount required pursuant to the Loan Documents; (vii) any and all principal, interest or other costs paid under or with respect to the Loan, and the subordinate loans or with respect to any other financings with respect to the Mortgaged Property, whether unsecured or secured by all or any portion of the Mortgaged Property; and (viii) capital improvements (only to the extent not paid from any reserve account). (b) "Gross Income" for each such applicable annual period shall mean rentals, revenues and other recurring forms of consideration, received by, or paid to or for the account of or for the benefit of, Owner resulting from or attributable to the operation, leasing and occupancy of the Mortgaged Property determined on a cash basis (except as specified herein) and using for all calculations hereunder the greater of (i) actual vacancy of the Mortgaged Property at the time of such calculation or (ii) a vacancy factor of seven percent (7%), including, but not limited to, the following: (i) rents by any lessees or tenants of the Mortgaged Property; (ii) proceeds received by or for the benefit of Owner in connection with any rental loss or business interruption insurance with respect to the Mortgaged Property; (iii) any other fees or rents collected by, for or on behalf of Owner with respect to the leasing and operating the Mortgaged Property; and (iv) interest, if any, earned by Owner on security and other type deposits of and advance rentals paid by, any lessees or tenants of the Mortgaged Property. Notwithstanding anything included within the above definition of Gross Income, there shall be excluded from Gross Income the following: (i) any security or other deposits of lessees and tenants (even when applied to sums due under leases); (ii) rents and receipts received by or for the benefit of Owner with respect to services provided by Owner to lessees relating to the Mortgaged Property; (iii) the proceeds of any financing or refinancing with respect to all or any part of the Mortgaged Property which has been previously approved in writing by Lender; (iv) the proceeds of any sale or other capital transaction (excluding leases for occupancy purposes only) of all or any portion of the Mortgaged Property; (v) any insurance or condemnation proceeds paid with respect to the Mortgaged Property to the extent such proceeds are available and are used to restore or rebuild the Mortgaged Property as may be permitted in accordance with the terms of the Mortgage, except for rental loss or business interruption insurance; (vi) any insurance and condemnation proceeds applied in reduction of the principal of the Note in accordance with the terms of the Loan Documents; and (vii) any Collateral Account Payment (hereinafter defined) on deposit with Lender in the Collateral Account (hereinafter defined); provided, however, nothing set forth herein shall in any manner imply Lender's consent to a sale, refinancing or other capital transaction. (c) "Net Operating Income" for the applicable annual period shall mean all Gross Income for such annual period less all Operating Expenses for such corresponding annual period, as determined or approved by Lender. (d) "Debt Coverage Ratio" means the ratio of (i) Net Operating Income from the Property for any calendar month in question, as verified to Lender, to (ii) the greater of (A) the amount of principal and interest that would be due monthly on a promissory note with an outstanding principal balance equal to the Outstanding Principal Balance and an obligation of Maker to pay equal monthly installments of principal and interest calculated by amortizing the Outstanding Principal Balance over twenty (20) years at a rate of interest equal to the higher of (1) nine percent (9%) per annum or (2) the per annum rate equal to the Treasury Note Rate plus 250 basis points, or (B) the actual monthly interest payment due under the Note for the calendar month in question. In determining the Outstanding Principal Balance for the purposes of this Section 8 of the Note, no monies deposited in any Accounts (hereinafter defined) or any interest earned thereon shall be considered to reduce the Outstanding Principal Balance unless and until such deposits and interest have actually been applied to the Loan in accordance with Section 9 of this Note. As used herein, the term "Treasury Note Rate" means the latest Treasury Constant Maturity Series yields reported, as of the first day of the calendar month in question, in the Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to seven (7) years. Such implied yield shall be determined, if necessary, by (i) converting U.S Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (ii) interpolating linearly between reported yields. 9 Additional Financial Covenants. (a) Maker shall establish an interest bearing principal reduction account (the "Principal Reduction Account") with Lender. Concurrently herewith, Maker shall execute and deliver to Lender a "Security Agreement" (herein so called) granting to Lender a security interest in the Principal Reduction Account and the Collateral Account (hereinafter defined; the Principal Reduction Account and the Collateral Account are sometimes hereinafter collectively referred to as the "Accounts"), including all monies deposited in the Accounts at any time and all interest earned thereon. On June 30, 1998, Maker shall deposit into the Principal Reduction Account monies, which shall not include any proceeds of the loan evidenced by the Note, in an amount equal to two and one-half percent (2.50%) of the Outstanding Principal Balance (the "Principal Reduction Payment"). On each of September 30, 1998 and December 31, 1998, March 31, June 30, September 30 and December 31 1999, and March 31, June 30, September 30, and December 31, 2000, Maker shall deposit into the Principal Reduction Account a Principal Reduction Payment equal to one and 25/100 percent (1.25%) of the Outstanding Principal Balance. Interest earned on deposits in the Principal Reduction Account may be used as a part of the next-due Principal Reduction Payment. Provided there has been no Event of Default (as hereinafter defined), then (i) on each of January 15, 1999 and January 15, 2000, as applicable, Lender shall apply all sums then on deposit in the Principal Reduction Account (together with all interest earned thereon that has not already been used as part of a Principal Reduction Payment) to the Loan to reduce the amount of the Outstanding Principal Balance on the Note and (ii) all Principal Reduction Payments made in the year 2000 and interest earned thereon will be applied to reduce the Outstanding Principal Balance on the Note at the end of the Term; provided, however, if an Event of Default has occurred, then upon any such Event of Default, Lender may exercise all remedies available to Lender under the Security Agreement or any other Loan Document, including using the funds on deposit in the Principal Reduction Account and all interest thereon at Lender's discretion for any purpose permitted under the Loan Documents. (b) Maker shall provide to Lender, on a monthly basis, the financial and operating information required by the Mortgage. If, at the end of any quarter of a calendar year, such data indicates that the Debt Coverage Ratio for the Property is less than 1.40 to 1.00, then Lender shall so notify Maker and, within five (5) business days of such notice, Maker (i) shall establish with Lender a collateral account (the "Collateral Account") and (ii) shall deposit into the Collateral Account sufficient funds, which shall not include any proceeds of the loan evidenced by the Note, such that if such funds were to be applied to reduce the Outstanding Principal Balance, the Debt Coverage Ratio would return to a ratio equal to or greater than 1.40 to 1.00 (the "Collateral Account Payment"). A Collateral Account Payment shall not be applied to reduce the Outstanding Principal Balance, but, unless an Event of Default has occurred, shall be held by Lender pursuant to the terms of the Security Agreement and this Note. If the Debt Coverage Ratio for the Property at the end of the next calendar year quarter (or any subsequent quarter) is equal to or greater than 1.40 to 1.00, then within twenty (20) days after Lender's determination of such ratio, Lender shall refund to Maker any Collateral Account Payment then on deposit in the Collateral Account. If during any subsequent quarter of a calendar year the Debt Coverage Ratio is again less than 1.40 to 1.00, Maker shall make an additional Collateral Account Payment in an amount such that if such Collateral Account Payment were to be applied to reduce the Outstanding Principal Balance, the Debt Coverage Ratio would return to a ratio equal to or greater than 1.40 to 1.00; provided, however, that so long as no Event of Default has occurred, any funds then being held in the Collateral Account shall be applied to reduce the amount of such subsequent Collateral Account Payment. The Security Agreement shall also grant to Lender a security interest in all funds deposited in the Collateral Account and all interest earned thereon. If an Event of Default has occurred, Lender may exercise all remedies available to Lender under the Security Agreement, including using the funds in the Collateral Account and all interest thereon at Lender's discretion for any purpose permitted under the Loan Documents. If no Event of Default has occurred, upon the end of the Term or earlier payment in full to Lender of the Outstanding Principal Balance under this Note, any monies then on deposit in the Collateral Account and any interest earned thereon shall, at Maker's election, (i) be applied to reduce such Outstanding Principal Balance or (ii) be paid by Lender to Maker. 10 Events of Default. The occurrence of any one of the following shall be a default under this Note ("Event of Default"): (a) Any principal and interest payment and any other sum of money due under this Note, including any Earnings Deposit, any Principal Reduction Payment or any obligation involving the payment of money by Maker under the Loan Documents is not paid within five (5) days after written notice from Lender that such payment is due; provided that such five (5) day grace period shall not be applicable to sums due and payable at the Maturity Date or upon prepayment, by acceleration or otherwise; or (b) The Debt Coverage Ratio for the Property falls below 1.25 to 1.00; or (c) The occurrence of any other default, breach or Event of Default (however such term is defined therein or whether or not such term is defined) under any Loan Document and such default or Event of Default is not cured within any applicable notice and cure periods provided therein. Any Event of Default under this Note shall constitute a default (however such term is defined therein or whether or not such term is defined therein) under each of the Loan Documents, and any default, breach, or event of default (however such term is defined therein or whether or not such term is defined therein) under any of the Loan Documents shall constitute an Event of Default under this Note and under each of the Loan Documents. Upon the occurrence of an Event of Default, the holder hereof shall have the right to declare the unpaid principal balance and accrued but unpaid interest on this Note at once due and payable (and upon such declaration, the same shall be at once due and payable), to foreclose any liens and security interests securing payment hereof and to exercise any of its other rights, powers and remedies under this Note, under any other Loan Document, or at law or in equity. 11 No Waiver by Holder. Neither the failure by the holder hereof to exercise, nor delay by the holder hereof in exercising, the right to accelerate the maturity of this Note or any other right, power or remedy upon any Event of Default shall be construed as a waiver of such Event of Default or as a waiver of the right to exercise any such right, power or remedy at any time. No single or partial exercise by the holder hereof of any right, power or remedy shall exhaust the same or shall preclude any other or further exercise thereof, and every such right, power or remedy may be exercised at any time and from time to time. All remedies provided for in this Note and in any other Loan Document are cumulative of each other and of any and all other remedies existing at law or in equity, and the holder hereof shall, in addition to the remedies provided herein or in any other Loan Document, be entitled to avail itself of all such other remedies as may now or hereafter exist at law or in equity for the collection of the indebtedness owing hereunder, and the resort to any remedy provided for hereunder or under any such other Loan Document or provided for by law or in equity shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies. Without limiting the generality of the foregoing provisions, the acceptance by the holder hereof from time to time of any payment under this Note which is past due or which is less than the payment in full of all amounts due and payable at the time of such payment, shall not (i) constitute a waiver of or impair or extinguish the rights of the holder hereof to accelerate the maturity of this Note or to exercise any other right, power or remedy at the time or at any subsequent time, or nullify any prior exercise of any such right, power or remedy, or (ii) constitute a waiver of the requirement of punctual payment and performance, or a novation in any respect. 12 Collection of Costs. If any holder of this Note retains an attorney in connection with any Event of Default or at maturity or to collect, enforce, or defend this Note or any other Loan Document in any lawsuit or in any probate, reorganization, bankruptcy or other proceeding, or if Maker sues any holder in connection with this Note or any other Loan Document and does not prevail, then Maker agrees to pay to each such holder, in addition to principal and interest, all reasonable costs and expenses incurred by such holder in trying to collect this Note or in any such suit or proceeding, including reasonable attorneys' fees, which shall include the reasonable fees and costs incurred in connection with the appeal of any judgment. 13 Interest Provisions. (a) Savings Clause. It is expressly stipulated and agreed to be the intent of Maker and Lender at all times to comply strictly with the applicable Texas law governing the maximum rate or amount of interest payable on this Note (or applicable United States federal law to the extent that it permits Lender to contract for, charge, take, reserve or receive a greater amount of interest than under Texas law). If the applicable law is ever judicially interpreted so as to render usurious any amount (i) contracted for, charged, taken, reserved or received pursuant to this Note, any of the other Loan Documents or any other communication or writing by or between Maker and Lender related to the transaction or transactions that are the subject matter of the Loan Documents, (ii) contracted for, charged or received by reason of Lender's exercise of the option to accelerate the maturity of this Note, or (iii) Maker will have paid or Lender will have received by reason of any voluntary prepayment by Borrower of this Note, then it is Maker's and Lender's express intent that all amounts charged in excess of the Maximum Lawful Rate shall be automatically cancelled, ab initio, and all amounts in excess of the Maximum Lawful Rate theretofore collected by Lender shall be credited on the principal balance of this Note (or, if this Note has been or would thereby be paid in full, refunded to Maker), and the provisions of this Note and the other Loan Documents immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder; provided, however, if this Note has been paid in full before the end of the stated term of this Note, then Maker and Lender agree that Lender shall, with reasonable promptness after Lender discovers or is advised by Maker that interest was received in an amount in excess of the Maximum Lawful Rate, either refund such excess interest to Maker and/or credit such excess interest against this Note then owing by Maker to Lender. Maker hereby agrees that as a condition precedent to any claim seeking usury penalties against Lender, Maker will provide written notice to Lender, advising Lender in reasonable detail of the nature and amount of the violation, and Lender shall have sixty (60) days after receipt of such notice in which to correct such usury violation, if any, by either refunding such excess interest to Maker or crediting such excess interest against this Note then owing by Maker to Lender. All sums contracted for, charged or received by Lender for the use, forbearance or detention of any debt evidenced by this Note shall, to the extent permitted by applicable law, be amortized or spread, using the actuarial method, throughout the stated term of this Note (including any and all renewal and extension periods) until payment in full so that the rate or amount of interest on account of this Note does not exceed the Maximum Lawful Rate from time to time in effect and applicable to this Note for so long as debt is outstanding. In no event shall the provisions of Chapter 346 of the Texas Finance Code (which regulates certain revolving credit loan accounts and revolving triparty accounts) apply to this Note. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is not the intention of Lender to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration. (b) Definitions. As used herein, the term "Maximum Lawful Rate" shall mean the maximum lawful rate of interest which may be contracted for, charged, taken, received or reserved by Lender in accordance with the applicable laws of the State of Texas (or applicable United States federal law to the extent that it permits Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law), taking into account all Charges (as herein defined) made in connection with the transaction evidenced by this Note and the other Loan Documents. As used herein, the term "Charges" shall mean all fees, charges and/or any other things of value, if any, contracted for, charged, received, taken or reserved by Lender in connection with the transactions relating to this Note and the other Loan Documents, which are treated as interest under applicable law. (c) Ceiling Election. To the extent that Lender is relying on Chapter 1D of the Texas Credit Title to determine the Maximum Lawful Rate payable on this Note and/or this Note and/or the Related Indebtedness, Lender will utilize the weekly ceiling from time to time in effect as provided in such Chapter 1D, as amended. To the extent United States federal law permits Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas law, Lender will rely on United States federal law instead of such Chapter 1D for the purpose of determining the Maximum Lawful Rate. Additionally, to the extent permitted by applicable law now or hereafter in effect, Lender may, at its option and from time to time, utilize any other method of establishing the Maximum Lawful Rate under such Chapter 1D or under other applicable law by giving notice, if required, to Maker as provided by applicable law now or hereafter in effect. 14 Joint and Several Liability. If more than one person or entity executes this Note as Maker, all of said parties shall be jointly and severally liable for payment of the indebtedness evidenced hereby. Maker and all sureties, endorsers, guarantors and any other party now or hereafter liable for the payment of this Note in whole or in part, hereby severally (i) waive demand, presentment for payment, notice of dishonor and of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notice (except only for any notices which are specifically required by this Note or any other Loan Document), filing of suit and diligence in collecting this Note or enforcing any of the security therefor; (ii) agree to any substitution, subordination, exchange or release of any such security or the release of any party primarily or secondarily liable hereon; (iii) agree that the holder hereof shall not be required first to institute suit or exhaust its remedies hereon against Maker or others liable or to become liable hereon or to enforce its rights against them or any security therefor; (iv) consent to any extension or postponement of time of payment of this Note for any period or periods of time and to any partial payments, before or after maturity, and to any other indulgences with respect hereto, without notice thereof to, any of them; and (v) submit (and waive all rights to object) to non-exclusive personal jurisdiction in the State of Texas, and venue in Dallas County, Texas, for the enforcement of any and all obligations under the Loan Documents. 15 Amendments. This Note may not be changed, amended or modified except in a writing expressly intended for such purposes and executed by the party against whom enforcement of the change, amendment or modification is sought. 16 Purpose of Loan. The loan evidenced by this Note is made solely for business purposes and is not for personal, family, household or agricultural purposes. 17 Participation. The holder of this Note may, from time to time, sell or offer to sell the loan evidenced by this Note, or interests therein, to one or more assignees or participants and is hereby authorized to disseminate any information it now has or hereafter obtains pertaining to the loan evidenced by this Note including, without limitation, any security for this Note and credit information on Maker, any of its principals and any guarantor of this Note to any assignee or participant or prospective assignee or prospective participant, the holder's affiliates including NationsBanc Montgomery Securities, Inc. in the case of Lender, any regulatory body having jurisdiction over the holder, and to any other parties as necessary or appropriate in holder's reasonable judgment. Maker shall execute, acknowledge and deliver any and all instruments reasonably requested by Lender in connection therewith, and to the extent, if any, specified in any such assignment or participation, such companies, assignee(s), and participant(s) shall have the rights and benefits with respect to this Note and the other Loan Documents as such person(s) would have had if such person(s) had been Lender hereunder. 18 Successors and Assigns. The terms, provisions, covenants and conditions of this Note shall be binding upon Maker and the heirs, devisees, representatives, successors and assigns of Maker. 19 Governing Law. THIS NOTE, AND ITS VALIDITY, ENFORCEMENT AND INTERPRETATION, SHALL BE GOVERNED BY LAWS OF THE STATE OF TEXAS (WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES) AND APPLICABLE UNITED STATES FEDERAL LAW. MAKER HEREBY ACKNOWLEDGES THAT ITS BUSINESS OFFICE IS IN DALLAS COUNTY, TEXAS, AND THAT THE NOTE IS PAYABLE IN DALLAS COUNTY, TEXAS; THEREFORE, MAKER HEREBY CONFIRMS AND AGREES THAT ALL LEGAL ACTIONS INVOLVING THE VALIDITY OR ENFORCEMENT OF THIS NOTE (INCLUDING, BUT NOT LIMITED TO, ANY BANKRUPTCY PROCEEDINGS INVOLVING MAKER) SHALL HAVE JURISDICTION AND VENUE IN DALLAS COUNTY, TEXAS. 20 Time of Essence. Time shall be of the essence in this Note with respect to all of Maker's obligations hereunder. 21 Captions. The paragraph headings used in this Note are for convenience of reference only and shall not affect the meaning or interpretation of this Note. 22 Limited Recourse. Subject to the exceptions and qualifications described below, Maker shall not be personally liable for the payment of the indebtedness evidenced by or created or arising under this Note and any judgment or decree in any action brought to enforce the obligation of Maker to pay such indebtedness shall be enforceable against Maker only to the extent of its interest in the Mortgaged Property (as defined in the Mortgage) and any such judgment or decree shall not be subject to execution upon or be a lien upon the assets of Maker other than its interest in such Mortgaged Property. The foregoing limitation of personal liability shall be subject to the following exceptions and qualifications: (a) Maker shall be fully and personally liable for the following: (i) failure to pay taxes, assessments and any other charges which could result in liens against any portion of the Mortgaged Property; (ii) fraud or material misrepresentation; (iii) retention by Maker of any payments, rental income or other funds arising with respect to any of the Mortgaged Property which, under the terms of the Loan Documents, should have been paid to Lender; (iv) all insurance proceeds, condemnation awards or other similar funds or payments attributable to the Mortgaged Property which, under the terms of the Loan Documents, should have been paid to Lender; (v) failure to protect and maintain the Mortgaged Property in accordance with the terms of the Loan Documents; and (vi) the failure of the Loan Documents to constitute a first and prior lien, assignment, pledge or security interest in or upon the Mortgaged Property, subject only to the matters permitted by the Loan Documents. (b) Nothing contained in this paragraph shall affect or limit the ability of the holder hereof to enforce any of its rights or remedies with respect to the Mortgaged Property. (c) Nothing contained in this paragraph shall affect or limit the rights of the holder hereof to proceed against any person or entity, including Maker, any partner in Maker or any other party, with respect to the enforcement of any guarantees of payment, guarantees of performance and completion, hazardous materials indemnification agreements or other similar rights. 23 Statute of Frauds Notice. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, Maker has duly executed this Note as of the date first above written. MAKER: VILLAGE FUND XI ASSOCIATES LIMITED PARTNERSHIP, an Oregon limited partnership By: McNeil Village Apartments XI Corp., a Texas corporation, its general partner By: /s/ Ron Taylor ------------------------------- Name: Ron Taylor Title: President -----END PRIVACY-ENHANCED MESSAGE-----