10-K 1 ccip.txt CCIP SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 [ ] 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 0-10831 CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES (Name of registrant as specified in its charter) California 94-2744492 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, PO Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) Registrant's telephone number (864) 239-1000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interests (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. Yes _X__ No _ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ___ No _X__ State the aggregate market value of the voting partnership interests held by non-affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests as of December 31, 2002. No market exists for the limited partnership interests of the Registrant, and, therefore, no aggregate market value can be determined. DOCUMENTS INCORPORATED BY REFERENCE None The matters discussed in this report contain certain forward-looking statements, including, without limitation, statements regarding future financial performance and the effect of government regulations. The discussions of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, do not take into account the effects of any changes to the Registrant's business and results of operations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the terms of governmental regulations that affect the Registrant and interpretations of those regulations; the competitive environment in which the Registrant operates; financing risks, including the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; and possible environmental liabilities. Readers should carefully review the Registrant's financial statements and the notes thereto, as well as the risk factors described in the documents the Registrant files from time to time with the Securities and Exchange Commission. PART I Item 1. Description of Business General Consolidated Capital Institutional Properties (the "Partnership" or "Registrant") was organized on April 28, 1981, as a Limited Partnership under the California Uniform Limited Partnership Act. On July 23, 1981, the Partnership registered with the Securities and Exchange Commission under the Securities Act of 1933 (File No. 2-72384) and commenced a public offering for the sale of $200,000,000 of limited partnership units (the "Units"). The sale of Units terminated on July 21, 1983, with 200,342 Units sold for $1,000 each, or gross proceeds of $200,342,000 to the Partnership. In accordance with its Partnership Agreement (the original partnership agreement of the Partnership together with all amendments thereto shall be referred to as the "Agreement"), the Partnership has repurchased and retired a total of 1,296.8 Units for a total purchase price of $1,000,000. The Partnership may repurchase any Units, at its absolute discretion, but is under no obligation to do so. Since its initial offering, the Registrant has not received, nor are limited partners required to make, additional capital contributions. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2011 unless terminated prior to such date. Upon the Partnership's formation in 1981, Consolidated Capital Equities Corporation ("CCEC") was the Corporate General Partner. In 1988, through a series of transactions, Southmark Corporation ("Southmark") acquired controlling interest in CCEC. In December 1988, CCEC filed for reorganization under Chapter 11 of the United States Bankruptcy Code. In 1990, as part of CCEC's reorganization plan, ConCap Equities, Inc. ("CEI") acquired CCEC's general partner interests in the Partnership and in 15 other affiliated public limited partnerships (the "Affiliated Partnerships"), and CEI replaced CCEC as managing general partner in all 16 partnerships. The selection of CEI as the sole managing general partner was approved by a majority of the limited partners in the Partnership and in each of the Affiliated Partnerships pursuant to a solicitation of the Limited Partners dated August 10, 1990. As part of this solicitation, the Limited Partners also approved an amendment to the Agreement to limit changes of control of the Partnership. All of CEI's outstanding stock was owned by Insignia Properties Trust ("IPT"). Effective February 26, 1999, IPT was merged into Apartment Investment and Management Company ("AIMCO"). Hence, CEI is now a wholly-owned subsidiary of AIMCO, a publicly held real estate investment trust. The Partnership's primary business and only industry segment is real estate related operations. The Partnership was originally formed for the benefit of its Limited Partners (herein so called and together with the General Partner shall be called the "Partners"), to lend funds to Consolidated Capital Equity Partners ("EP"), a California general partnership in which certain of the partners were former shareholders and former management of CCEC, the former Corporate General Partner of the Partnership. See "Status of the Master Loan" for a description of the loan and settlement of EP's bankruptcy. Through December 31, 2002, the Partnership had advanced a total of approximately $180,500,000 to EP and its successor under the Master Loan (as defined in "Status of the Master Loan"). As of December 31, 2002, the balance of the Master Loan, net of the allowance for possible losses, was approximately $14,144,000. EP used the proceeds from these loans to acquire 18 apartment complexes and four office complexes, which served as collateral for the Master Loan. EP's successor in bankruptcy (as more fully described in "Status of the Master Loan") currently owns 4 apartment complexes. The Partnership acquired The Loft Apartments through foreclosure in 1990. Prior to that time, The Loft Apartments had been collateral on the Master Loan. The Partnership acquired a multiple-use building, The Sterling Apartment Homes and Commerce Center ("The Sterling"), through a deed-in-lieu of foreclosure transaction in 1995. The Sterling was also collateral on the Master Loan. In 2002, the General Partner decided to foreclose on the remaining properties that collateralize the Master Loan. The General Partner began the process of foreclosure or executing deeds in lieu of foreclosure during the third quarter of 2002 on all the properties in CCEP. During the year ended December 31, 2002 the Partnership acquired four of the properties held by CCEP through deeds in lieu of foreclosure. In addition, one property held by CCEP was sold in December 2002. All these properties had been collateral on the Master Loan. The foreclosure process on the remaining four properties held by CCEP is ongoing. For a brief description of the properties owned by the Partnership, refer to "Item 2 - Description of Properties". The Registrant has no employees. Management and administrative services are provided by the General Partner and by agents retained by the General Partner. Property management services are performed at the Partnership's properties by an affiliate of the General Partner. Risk Factors The real estate business in which the Partnership is engaged is highly competitive. There are other residential and commercial properties within the market area of the Registrant's properties. The number and quality of competitive properties, including those residential properties which may be managed by an affiliate of the General Partner in such market area, could have a material effect on the rental market for the apartments and the commercial space at the Registrant's properties and the rents that may be charged for such apartments and space. While the General Partner and its affiliates own and/or control a significant number of apartment units in the United States, such units represent an insignificant percentage of total apartment units in the United States and competition for the apartments is local. Laws benefiting disabled persons may result in the Partnership's incurrence of unanticipated expenses. Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. These and other Federal, state and local laws may require modifications to the Partnership's properties, or restrict renovations of the properties. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although the General Partner believes that the Partnership's properties are substantially in compliance with present requirements, the Partnership may incur unanticipated expenses to comply with the ADA and the FHAA. Both the income and expenses of operating the properties owned by the Partnership are subject to factors outside of the Partnership's control, such as an oversupply of similar properties resulting from overbuilding, increases in unemployment or population shifts, reduced availability of permanent mortgage financing, changes in zoning laws or changes in patterns or needs of users. In addition, there are risks inherent in owning and operating residential and commercial properties because such properties are susceptible to the impact of economic and other conditions outside of the control of the Partnership. There have been, and it is possible there may be other, Federal, state and local legislation and regulations enacted relating to the protection of the environment. The Partnership is unable to predict the extent, if any, to which such new legislation or regulations might occur and the degree to which such existing or new legislation or regulations might adversely affect the properties owned by the Partnership. The Partnership monitors its properties for evidence of pollutants, toxins and other dangerous substances, including the presence of asbestos. In certain cases environmental testing has been performed which resulted in no material adverse conditions or liabilities. In no case has the Partnership received notice that it is a potentially responsible party with respect to an environmental clean up site. Insurance coverage is becoming more expensive and difficult to obtain. The current insurance market is characterized by rising premium rates, increasing deductibles, and more restrictive coverage language. Recent developments have resulted in significant increases in insurance premiums and have made it more difficult to obtain certain types of insurance. As an example, many insurance carriers are excluding mold-related risks from their policy coverages, or are adding significant restrictions to such coverage. Continued deterioration in insurance market place conditions may have a negative effect on the Partnership's operating results. A further description of the Partnership's business is included in Management's Discussion and Analysis of Financial Condition and Results of Operations included in "Item 7" of this Form 10-K. Segments Segment data for the years ended December 31, 2002, 2001 and 2000 is included in "Item 8. Financial Statements - Note K" and is an integral part of the Form 10-K. Status of the Master Loan Prior to 1989, the Partnership had loaned funds totaling $170,400,000 to EP subject to a nonrecourse note with a participation interest (the "Master Loan"), pursuant to the Master Loan Agreement dated July 22, 1981, between the Partnership and EP. The Partnership secured the Master Loan with deeds of trust or mortgages on real property purchased with the funds advanced, as well as by the assignment and pledge of promissory notes from the partners of EP. During 1989, EP defaulted on certain interest payments that were due under the Master Loan. Before the Partnership could exercise its remedies for such defaults, EP filed for bankruptcy protection in a Chapter 11 reorganization proceeding. On October 18, 1990, the bankruptcy court approved EP's consensual plan of reorganization (the "Plan"). In November 1990, EP and the Partnership consummated a closing under the Plan pursuant to which, among other things, the Partnership and EP executed an amended and restated loan agreement (the "New Master Loan Agreement"), EP was converted from a California General Partnership to a California Limited Partnership, Consolidated Capital Equity Partners, L.P., ("CCEP"), and CCEP renewed the deeds of trust on all the collateral to secure the New Master Loan Agreement. ConCap Holdings, Inc. ("CHI"), a Texas corporation and wholly-owned subsidiary of CEI, is the sole General Partner of CCEP and an affiliate of the Partnership. The General Partners of EP became Limited Partners in CCEP. CHI has full discretion with respect to conducting CCEP's business, including managing CCEP's properties and initiating and approving capital expenditures and asset dispositions and refinancings. Under the terms of the New Master Loan Agreement (as adopted in November 1990), interest accrues at a fluctuating rate per annum adjusted annually on July 15 by the percentage change in the U.S. Department of Commerce Implicit Price Deflator for the Gross National Product subject to an interest rate ceiling of 12.5%. Interest payments are currently payable quarterly in an amount equal to "Excess Cash Flow". If such Excess Cash Flow payments are less than the current accrued interest during the quarterly period, the unpaid interest is added to principal, compounded annually, and is payable at the loan's maturity. If such Excess Cash Flow payments are greater than the current accrued interest, the excess amount is applied to the principal balance of the loan. Any net proceeds from the sale or refinancing of any of CCEP's properties are paid to the Partnership under the terms of the New Master Loan Agreement. The New Master Loan Agreement matured in November 2000. The General Partner had been negotiating with CCEP with respect to its options which included foreclosing on the properties which collateralize the Master Loan or extending the terms of the loan. The General Partner decided to foreclose on the properties that collateralize the Master Loan. The General Partner began the process of foreclosure or executing deeds in lieu of foreclosure during the third quarter of 2002 on all the properties in CCEP. During the year ended December 31, 2002, the General Partner executed deeds in lieu of foreclosure on four of the active properties of CCEP. In addition, one property held by CCEP was sold in December 2002. The foreclosure process on the remaining four properties held by CCEP is ongoing. As the deeds are executed, title in the properties previously owned by CCEP will be transferred to the Partnership, subject to the existing liens on such properties, including the first mortgage loans. As a result, the Partnership will assume responsibility for the operations of such properties. For 1992, Excess Cash Flow was generally defined in the New Master Loan Agreement as net cash flow from operations after third-party debt service. Effective January 1, 1993, the Partnership and CCEP amended the New Master Loan Agreement to stipulate that Excess Cash Flow would be computed net of capital improvements. Such expenditures were formerly funded from advances on the Master Loan from the Partnership to CCEP. This amendment and change in the definition of Excess Cash Flow has had the effect of reducing income on the investment in the Master Loan by the amount of CCEP's capital expenditures since such amounts were previously excluded from Excess Cash Flow. Item 2. Description of Properties The following table sets forth the Partnership's investment in real estate as of December 31, 2002:
Date of Property Acquisition Type of Ownership Use The Loft Apartments 11/19/90 Fee ownership, subject to Apartment Raleigh, NC a first mortgage 184 units The Sterling Apartment Homes 12/01/95 Fee ownership subject to Apartment and Commerce Center a first mortgage (1) 536 units Philadelphia, PA Commercial 110,368 sq ft Silverado Apartments 8/09/02 Fee ownership, subject to Apartment El Paso, TX a first mortgage 248 units The Knolls Apartments 8/09/02 Fee ownership, subject to Apartment Colorado Springs, CO a first mortgage 262 units Indian Creek Village Apartments 8/09/02 Fee ownership, subject to Apartment Overland Park, KS a first mortgage 274 units Tates Creek Village Apartments 8/13/02 Fee ownership, subject to Apartment Lexington, KY a first mortgage 204 units
(1) Property is held by a Limited Partnership in which the Registrant ultimately owns a 100% interest. Schedule of Properties: Set forth below for each of the Partnership's properties is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation and Federal tax basis at December 31, 2002.
Gross Carrying Accumulated Federal Property Value Depreciation Rate Method Tax Basis (in thousands) (in thousands) The Loft Apartments $ 7,579 $ 4,258 5-30 yrs S/L $ 4,665 The Sterling Apartment Homes and Commerce Center 35,966 14,578 5-30 yrs S/L 24,975 Silverado 4,792 39 5-30 yrs S/L 4,727 The Knolls 15,173 111 5-30 yrs S/L 14,996 Indian Creek Village 12,228 110 5-30 yrs S/L 12,034 Tates Creek Village 6,339 62 5-30 yrs S/L 6,225 $82,077 $19,158 $67,612
See "Note A" of the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for a description of the Partnership's capitalization and depreciation policies. Schedule of Property Indebtedness: The following table sets forth certain information relating to the mortgages encumbering the Partnership's properties at December 31, 2002.
Principal Principal Balance At December 31, Balance Interest Period Maturity Due At Property 2002 Rate Amortized Date Maturity (1) (in thousands) (in thousands) The Loft Apartments 1st mortgage $ 4,139 6.95% 360 months 12/01/05 $ 3,903 The Sterling Apartment Homes and Commerce Center 1st mortgage 21,972 6.77% 120 months 10/01/08 19,975 Silverado Apartments 1st mortgage 3,360 7.87% 240 months 11/01/10 2,434 The Knolls 1st mortgage 9,433 7.78% 240 months 03/01/10 7,105 Indian Creek Village 1st mortgage 8,340 7.83% 240 months 01/01/10 6,351 Tates Creek Village 1st mortgage 4,017 7.78% 240 months 04/01/10 3,017 $51,261 Unamortized mortgage premiums 1,388 $52,649 $ 42,785
(1) See "Item 8. Financial Statements and Supplementary Data - Note E" for information with respect to the Registrant's ability to prepay these mortgages and other specific details about the mortgages. Rental Rates and Occupancy: Average annual rental rates and occupancy for 2002 and 2001 for each property:
Average Annual Average Rental Rates Occupancy Property 2002 2001 2002 2001 The Loft Apartments $ 8,605/unit $ 8,985/unit 90% 92% The Sterling Apartment Homes (residential) 16,974/unit 16,476/unit 91% 95% The Sterling Commerce Center (commercial) 18.17/s.f. 16.73/s.f. 56% 86% Silverado Apartments (residential) 6,661/unit 5,988/unit 96% 91% The Knolls Apartments (residential) 10,106/unit 8,242/unit 88% 96% Indian Creek Village Apartments (residential) 9,824/unit 8,574/unit 92% 94% Tates Creek Village Apartments (residential) 8,615/unit 7,652/unit 90% 94%
The General Partner attributes the decrease in occupancy at The Sterling Commerce Center to the loss of a major tenant in late December 2001. The Partnership is actively seeking a tenant to lease the space formerly occupied by this major tenant. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for further details regarding the loss of this tenant. The General Partner attributes the decrease in occupancy at the Sterling Apartment Homes, Tates Creek Village, and The Knolls Apartments to the competitive market of the apartment industry in the properties' locations. The increase in occupancy at Silverado Apartments is due to increased marketing efforts. As noted under "Item 1. Description of Business", the real estate industry is highly competitive. All of the properties are subject to competition from other residential apartment complexes and commercial properties in the area. The General Partner believes that all of the properties are adequately insured. Each apartment complex leases properties for terms of one year or less. No residential tenant leases 10% or more of the available rental space. All of the properties are in good physical condition, subject to normal depreciation and deterioration as is typical for assets of this type and age. The following is a schedule of the lease expirations of the commercial space for The Sterling Commerce Center for the years beginning 2003 through the maturities of the current leases. Number of % of Gross Expirations Square Feet Annual Rent Annual Rent 2003 12 21,914 336,517 38.38% 2004 4 9,611 150,409 17.16% 2005 4 5,608 116,106 13.24% 2006 1 3,838 70,440 8.04% 2007 3 7,347 203,249 23.18% No commercial tenant leases 10% or more of the available rental space. Real Estate Taxes and Rates: Real estate taxes and rates in 2002 for each property were: Billing Rate (in thousands) The Loft Apartments $ 88 0.99% The Sterling Apartment Homes and Commerce Center 740 8.82% Silverado Apartments 186 3.00% The Knolls Apartments 64 5.69% Indian Creek Village Apartments 118 9.56% Tates Creek Village Apartments 58 0.96% Capital Improvements: The Loft During the year ended December 31, 2002, the Partnership completed approximately $153,000 of capital improvements, consisting primarily of floor covering replacements, a water submetering project, and swimming pool improvements. These improvements were funded from operations and replacement reserves. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and expects to budget approximately $55,000. Additional improvements may be considered in 2003 and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. The Sterling During the year ended December 31, 2002, the Partnership completed approximately $171,000 of capital improvements at The Sterling Apartment Homes and Commerce Center, consisting primarily of parking area resurfacing, floor covering replacements, electrical and heating upgrades and office computers. These improvements were funded from operating cash flow and replacement reserves. The Partnership is currently evaluating the capital improvements needs of the property for the upcoming year and expects to budget approximately $161,000 for the apartments and approximately $13,000 for the Commerce Center. Additional improvements may be considered in 2003 and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Silverado Apartments The Partnership completed approximately $18,000 of capital improvements at Silverado Apartments as of December 31, 2002, consisting primarily of floor covering and appliance replacements. These improvements were funded from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and expects to budget approximately $639,000. Additional improvements may be considered in 2003 and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. The Knolls Apartments The Partnership completed approximately $173,000 of capital improvements at The Knolls Apartments as of December 31, 2002, consisting primarily of structural improvements, and floor covering, appliance and air conditioning unit replacements. These improvements were funded from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and expects to budget approximately $79,000. Additional improvements may be considered in 2003 and will depend on the physical condition of the property as well as anticipated cash flow generated by the property. Indian Creek Village Apartments The Partnership completed approximately $28,000 of capital improvements at Indian Creek Village Apartments as of December 31, 2002, consisting primarily of floor covering replacements. These improvements were funded from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and expects to budget approximately $76,000. Additional improvements may be considered in 2003 and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Tates Creek Village Apartments The Partnership completed approximately $39,000 of capital improvements at Tates Creek Village Apartments as of December 31, 2002, consisting primarily of floor covering and air conditioning unit replacements. These improvements were funded from operating cash flow. The Partnership is currently evaluating the capital improvement needs of the property for the upcoming year and expects to budget approximately $169,000. Additional improvements may be considered in 2003 and will depend on the physical condition of the property as well as replacement reserve and anticipated cash flow generated by the property. The additional capital improvements at the Partnership's properties will be made only to the extent of cash available from operations and Partnership reserves. To the extent that such budgeted capital improvements are completed, the Partnership's distributable cash flow, if any, may be adversely affected at least in the short term. Item 3. Legal Proceedings In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its General Partner and several of their affiliated partnerships and corporate entities. The action purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging, among other things, the acquisition of interests in certain General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the General Partner and its affiliates filed a demurrer to the third amended complaint. On May 14, 2001, the Court heard the demurrer to the third amended complaint. On July 10, 2001, the Court issued an order sustaining defendants' demurrer on certain grounds. On July 20, 2001, Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer. On September 7, 2001, Plaintiffs filed a fourth amended class and derivative action complaint. On September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On October 5, 2001, the General Partner and affiliated defendants filed a demurrer to the fourth amended complaint, which was heard on December 11, 2001. On February 2, 2002, the Court served its order granting in part the demurrer. The Court has dismissed without leave to amend certain of the plaintiffs' claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a putative class comprised of all non-affiliated persons who own or have owned units in the partnerships. The General Partner and affiliated defendants oppose the motion. On April 29, 2002, the Court held a hearing on plaintiffs' motion for class certification and took the matter under submission after further briefing, as ordered by the court, was submitted by the parties. On July 10, 2002, the Court entered an order vacating the current trial date of January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and stayed the case in its entirety through November 7, 2002 so that the parties could have an opportunity to discuss settlement. On October 30, 2002, the court entered an order extending the stay in effect through January 10, 2003. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action described below. The Court has scheduled the hearing on preliminary approval for April 4, 2003 and the hearing on final approval for June 2, 2003. In general terms, the proposed settlement provides for certification for settlement purposes of a settlement class consisting of all limited partners in this Partnership and others (the "Partnerships") as of December 20, 2002, the dismissal with prejudice and release of claims in the Nuanes and Heller litigation, payment by AIMCO of $9.9 million (which shall be distributed to settlement class members after deduction of attorney fees and costs of class counsel and certain costs of settlement) and up to $ 1 million toward the cost of independent appraisals of the Partnerships' properties by a Court appointed appraiser. An affiliate of the General Partner has also agreed to make a tender offer to purchase all of the partnership interests in the Partnerships within one year of final approval, if it is granted, and to provide partners with the independent appraisals at the time of these tenders. The proposed settlement also provides for the limitation of the allowable costs which the General Partner or its affiliates will charge the Partnerships in connection with this litigation and imposes limits on the class counsel fees and costs in this litigation. If the Court grants preliminary approval of the proposed settlement in April, a notice will be distributed to partners providing detail on the terms of the proposed settlement. During the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The first amended complaint in the Heller action is brought as a purported derivative action, and asserts claims for among other things breach of fiduciary duty; unfair competition; conversion, unjust enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a motion to consolidate the Heller action with the Nuanes action and stated that the Heller action was filed in order to preserve the derivative claims that were dismissed without leave to amend in the Nuanes action by the Court order dated July 10, 2001. On October 5, 2001, the General Partner and affiliated defendants moved to strike the first amended complaint in its entirety for violating the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer in the Nuanes action, or alternatively, to strike certain portions of the complaint based on the statute of limitations. Other defendants in the action demurred to the fourth amended complaint, and, alternatively, moved to strike the complaint. On December 11, 2001, the court heard argument on the motions and took the matters under submission. On February 4, 2002, the Court served notice of its order granting defendants' motion to strike the Heller complaint as a violation of its July 10, 2001 order in the Nuanes action. On March 27, 2002, the plaintiffs filed a notice appealing the order striking the complaint. Before completing briefing on the appeal, the parties stayed further proceedings in the appeal pending the Court's review of the terms of the proposed settlement described above. The General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security Holders During the quarter ended December 31, 2002, no matter was submitted to a vote of unitholders through the solicitation of proxies or otherwise. PART II Item 5. Market for Partnership Equity and Related Partner Matters The Partnership, a publicly-held limited partnership, offered and sold 200,342 limited partnership units (the "Units") aggregating $200,342,000. The Partnership currently has 11,512 holders of record owning an aggregate of 199,043.2 Units. Affiliates of the General Partner owned 129,682.6 units or 65.15% at December 31, 2002. No public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future. The following table sets forth the distributions made by the Partnership for the years ended December 31, 2000, 2001 and 2002: Distributions Per Limited Aggregate Partnership Unit (in thousands) 01/01/00 - 12/31/00 $ 47,880 (1) $240.55 01/01/01 - 12/31/01 15,757 (2) 78.83 01/01/02 - 12/31/02 3,572 (3) 17.79 01/01/03 - 1/31/03 1,993 (4) 9.99 (1) Distributions were made from surplus funds, approximately $28,770,000 of which was from the receipt of net financing and refinancing proceeds from CCEP. (2) Consists of approximately $6,646,000 of cash from operations and approximately $9,111,000 of cash from surplus funds, of which approximately $1,425,000 was from the receipt of previously undistributed net financing and refinancing proceeds from CCEP and approximately $6,019,000 was from the receipt of net sales proceeds from CCEP. (3) Consists of approximately $3,098,000 of cash from operations and approximately $474,000 of cash from surplus funds. (4) Consists of approximately $362,000 of cash from operations and approximately $1,631,000 of cash from surplus funds which was from sales proceeds from CCEP. Future distributions will depend on the levels of cash generated from operations, the availability of cash reserves and the timing of debt maturities, refinancings and/or property sales. The Partnership's cash available for distribution is reviewed on a monthly basis. There can be no assurance that the Partnership will generate sufficient funds from operations, after planned capital expenditures, to permit further distributions to its partners in 2003 or subsequent periods. See "Item 2. Description of Properties - Capital Improvements" for information relating to planned capital expenditures at the properties. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 129,682.6 limited partnership units in the Partnership representing 65.15% of the outstanding Units at December 31, 2002. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO either through private purchases or tender offers. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters which would include voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. As a result of its ownership of 65.15% of the outstanding Units, AIMCO is in a position to control all voting decisions with respect to the Registrant. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to AIMCO, as its sole stockholder. Item 6. Selected Financial Data The following table sets forth a summary of selected 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".
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 1999 1998 STATEMENTS OF OPERATIONS (in thousands, except per unit data) Total revenues $ 14,646 $ 15,484 $ 14,193 $ 13,545 $ 14,394 Total expenses (13,159) (11,582) (10,823) (9,773) (9,087) Reduction in provision for impairment loss -- 3,176 14,241 -- 23,269 Net income from continuing operations 1,487 7,078 17,611 3,772 28,576 Gain on foreclosure of real estate 1,831 -- -- -- -- Net income $ 3,318 $ 7,078 $ 17,611 $ 3,772 $ 28,576 Net income per Limited Partnership Unit $ 16.50 $ 35.20 $ 87.59 $ 18.76 $ 142.12 Distributions per Limited Partnership Unit $ 17.79 $ 78.83 $ 240.55 $ 113.65 $ 143.58 Limited Partnership Units outstanding 199,043.2 199,045.2 199,045.2 199,045.2 199,045.2
AS OF DECEMBER 31, BALANCE SHEETS 2002 2001 2000 1999 1998 (in thousands) Total assets $ 83,331 $ 56,089 $ 65,383 $ 95,668 $115,182 Mortgage note payable $ 52,649 $ 26,457 $ 26,762 $ 27,074 $ 27,360
The comparability of the information above has been affected by the foreclosure on the four CCEP properties. See "Item 1. Description of Business" for further information. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This item should be read in conjunction with "Item 8. Financial Statements and Supplementary Data" and other items contained elsewhere in this report. Results of Operations 2002 Compared to 2001 The Partnership's net income for the year ended December 31, 2002 was approximately $3,318,000 compared to net income of approximately $7,078,000 for the corresponding period in 2001. The decrease in net income for the year ended December 31, 2002 as compared to the year ended December 31, 2001 is primarily due to the $3,176,000 reduction of the provision for impairment loss on the investment in the Master Loan recognized during the year ended December 31, 2001, a decrease of approximately $2,894,000 in interest payments received and therefore recognized on the Master Loan, and an increase in total expenses partially offset by the revenues of the four foreclosed properties and by a gain on foreclosure of real estate of approximately $1,831,000. The reduction of the provision for impairment loss on the Master Loan was recognized in 2001 due to an increase in the net realizable value of the collateral properties and the payment of principal on the Master Loan from the sales proceeds of Magnolia Trace Apartments during the year ended December 31, 2001. The General Partner evaluates the net realizable value on a semi-annual basis or when circumstances dictate that it should be analyzed. Interest income on investment in Master Loan is only recognized to the extent that actual cash is received. The receipt of cash is dependent on the corresponding cash flow of the properties which secure the Master Loan. The gain on foreclosure of real estate was due to the foreclosure of four properties (Silverado, The Knolls, Indian Creek Village, and Tates Creek Village Apartments) during 2002. The Master Loan matured in November 2000. The General Partner had been negotiating with CCEP with respect to its options which included foreclosing on the properties which collateralize the Master Loan or extending the terms of the loan. The General Partner decided to foreclose on the properties that collateralize the Master Loan. The General Partner began the process of foreclosure or executing deeds in lieu of foreclosure during the third quarter of 2002 on all the properties in CCEP. During August 2002, the General Partner executed deeds in lieu of foreclosure on four of the active properties of CCEP. In addition, one property held by CCEP was sold during December 2002 (see "CCEP Property Operations" for further discussion). The foreclosure process on the remaining four properties held by CCEP is ongoing. As the deeds are executed, title in the properties previously owned by CCEP are transferred to the Partnership, subject to the existing liens on such properties, including the first mortgage loans. As a result, the Partnership assumed responsibility for the operations of such properties. Excluding the items related to the Master Loan, and the gain on foreclosure of real estate, the Partnership's net income for the year ended December 31, 2002 and 2001 was approximately $1,101,000 and $622,000, respectively. This increase in net income for the year ended December 31, 2002 is due to an increase in total revenues partially offset by an increase in total expenses. The increase in total revenues for the year ended December 31, 2002 is due to increases in rental income and other income. The increase in rental income is due to the addition of the four foreclosed properties and increased rental rates at Sterling Apartment Homes and Sterling Commercial Center, partially offset by a decrease in occupancy at The Sterling Commerce Center and The Sterling Apartment Homes and a decrease in average rental rates at The Loft Apartments. The increase in other income for the year ended December 31, 2002 is due to the foreclosure of the four properties and an increase in utility reimbursements at The Sterling, partially offset by reduced interest income due to lower average cash balances in interest bearing accounts. Total expenses increased for the year ended December 31, 2002 due to the foreclosure of the four properties. Exclusive of the operations of the foreclosed properties, expenses decreased due to decreases in operating expenses and depreciation expense partially offset by an increase in general and administrative expenses. Operating expense decreased primarily due to a decrease in property, amortization and maintenance expenses and management fees. Property expenses decreased due to a decrease in salaries and related benefits and utility expenses at Sterling Apartment Homes and utility charges at The Sterling and The Loft Apartments. Amortization expense decreased due to the write-off in 2001 of unamortized lease commissions relating to a tenant which moved out in December 2001 (see further discussion in 2001 compared to 2000"). Maintenance expenses decreased due to an increase in the capitalization of certain direct and indirect project costs, primarily payroll related costs, at the properties (see "Item 8. Financial Statements and Supplementary Data, Note A - Organization and Significant Accounting Policies." Management fees decreased due to reduced rental revenue at The Sterling Apartment Homes and The Sterling Commercial Center. Depreciation expense decreased due to capital improvements and replacements becoming fully depreciated during the past year at The Sterling. General and administrative expense increased for the year ended December 31, 2002 due to an increase in the costs of services included in the management reimbursements to the General Partner allowed under the Partnership Agreement and legal expenses related to the foreclosures of the four properties offset by a decrease due to the timing of an increase in the business privilege tax paid to the city of Philadelphia. 2001 Compared to 2000 The Partnership's net income for the year ended December 31, 2001 was approximately $7,078,000 compared to net income of approximately $17,611,000 for the year ended December 31, 2000. The decrease in net income for the year ended December 31, 2001 as compared to the year ended December 31, 2000 was primarily due to the decrease in the reduction of the provision for impairment loss on the investment in the Master Loan recognized in 2001, partially offset by an increase in interest payments received and therefore recognized as income related to the Master Loan. Each of these factors was caused by improved operations at the collateral properties due to major capital projects and the concerted effort to complete deferred maintenance items that have been ongoing over the past few years. This work was funded by cash flow from the collateral properties themselves as no amounts have been borrowed on the Master Loan or from other sources in order to fund such improvements. Excluding the items related to the Master Loan, the Partnership's net income for the year ended December 31, 2001 was approximately $622,000 compared to approximately $1,370,000 for the year ended December 31, 2000. The decrease in net income for the year ended December 31, 2001 is due to an increase in total expenses offset by a slight increase in total revenues. The increase in total expenses for the year ended December 31, 2001 was due to an increase in operating and property tax expenses. Operating expenses increased due to an increase in utility expense, primarily natural gas, at The Sterling and to increases in salary and other related benefits at The Sterling and The Loft Apartments. Also, the Partnership experienced a significant increase in amortization expense due to the write-off of unamortized lease commissions relating to a tenant which moved out in December 2001 from The Sterling (See further discussion below). Property tax expense increased due to an increase in the assessed value of The Sterling. The increase in total revenues for the year ended December 31, 2001 is due to an increase in rental and other income offset by a decrease in interest income and property tax refunds. The increase in rental income was due to an increase in average rental rates at The Sterling and The Loft Apartments and an increase in occupancy at The Sterling Apartment Homes, offset by a decrease in occupancy at The Sterling Commerce Center and a slight decrease in occupancy at The Loft Apartments. Other income increased due to an increase in lease cancellation fees and cable television income at The Sterling and The Loft Apartments and to utility reimbursements and tenant deposit forfeitures at The Sterling Commerce Center and Apartment Homes. The decrease in property tax refunds is due to The Sterling receiving a refund of prior year tax bills which had been under appeal during the year ending December 31, 2000. Interest income decreased due to the release of the working capital reserve requirement (see "Item 8. Financial Statements and Supplementary Data - Note G") which resulted in lower average cash balances in interest bearing accounts. In December 2001, the Partnership's most significant commercial tenant at The Sterling Commerce Center vacated its space which represented 30.58% of the leaseable commercial space. The Partnership filed a lawsuit against such tenant seeking monetary damages for unpaid rent, including rent which had been abated in favor of the tenant completing significant improvements to its space. The Partnership accepted a settlement whereby the tenant will pay $180,000 in satisfaction of all unpaid rent amounts due and the Partnership will accept possession of the improvements completed by the tenant which have been valued at approximately $498,000. The settlement was paid in 2002. Beginning in 2002, these improvements will be depreciated over their remaining estimated useful lives. As a result of the tenant vacating the space, the Partnership expensed approximately $191,000 in unamortized lease commissions during 2001. Included in general and administrative expenses for the years ended December 31, 2002 and 2001 are costs of the services provided by the General Partner as allowed under the Partnership Agreement associated with its management of the Partnership. Also included are costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement. As part of the ongoing business plan of the Partnership, the General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expense. As part of this plan, the General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the General Partner will be able to sustain such a plan. Capital Resources and Liquidity At December 31, 2002, the Partnership had cash and cash equivalents of approximately $3,175,000 compared to approximately $922,000 at December 31, 2001. Cash and cash equivalents increased approximately $2,253,000 since December 31, 2001 due to approximately $5,427,000 and $956,000 of cash provided by operating and investing activities, respectively, partially offset by approximately $4,130,000 of cash used in financing activities. Cash provided by investing activities consisted of principal payments received on the Master Loan and distributions received from investments in affiliates partially offset by property improvements and replacements and net deposits to escrow accounts maintained by the mortgage lenders. Cash used in financing activities consisted of distributions to partners and principal payments made on the mortgages encumbering the Partnership's properties. The Partnership invests its working capital reserves in interest bearing accounts. During the years ended December 31, 2002, 2001 and 2000, the Partnership received approximately $1,719,000, $7,801,000 and $33,634,000, as principal payments on the Master Loan from CCEP. Approximately $88,000 was received on certain investments by CCEP, which were required to be transferred to the Partnership per the Master Loan Agreement. In addition, during 2002 approximately $1,631,000 was received representing net sale proceeds from the sale of Society Park Apartments. For 2001, approximately $357,000 was received on certain investments by CCEP, which were required to be transferred to the Partnership per the Master Loan Agreement. Approximately $6,019,000 was received representing net proceeds from the sale of Magnolia Trace and approximately $1,425,000 was received representing additional proceeds received for the refinancing of the mortgages encumbering nine of the investment properties in 2000. For 2000, approximately $238,000 was received on certain investments by CCEP, which were required to be transferred to the Partnership per the Master Loan Agreement. Approximately $4,526,000 was received representing net proceeds from the sale of Shirewood and approximately $28,870,000 was received representing net proceeds received for the refinancing of the mortgages encumbering nine of the investment properties. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the various properties to adequately maintain the physical assets and other operating needs of the Registrant and to comply with Federal, state, and local legal and regulatory requirements. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. See "CCEP Property Operations" for discussion on CCEP's ability to provide future cash flow as Master Loan debt service. The General Partner monitors developments in the area of legal and regulatory compliance and is studying new federal laws, including the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas. In light of these changes, the Partnership expects that it will incur higher expenses related to compliance, including increased legal and audit fees. The Partnership is currently evaluating the capital improvements needs of all the properties for the upcoming year and expects to budget approximately $1,179,000 for all the apartment complexes and approximately $13,000 for the Sterling Commerce Center. Additional improvements may be considered in 2003 and will depend on the physical condition of the properties as well as replacement reserves and anticipated cash flow generated by the properties. The Partnership's assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Partnership. The mortgage indebtedness of approximately $52,649,000 requires monthly payments of principal and interest, and balloon payments of approximately $3,903,000, $19,975,000 and $18,907,000 during 2005, 2008 and 2010, respectively. The General Partner will attempt to refinance such indebtedness and/or sell the properties prior to such maturity dates. If the properties cannot be refinanced or sold for a sufficient amount, the Partnership may risk losing such properties through foreclosure. The Partnership distributed the following amounts during the year ended December 31, 2002 and 2001 (in thousands, except per unit data): Distributions Per Limited Aggregate Partnership Unit 01/01/00 - 12/31/00 $ 47,880 (1) $240.55 01/01/01 - 12/31/01 15,757 (2) 78.83 01/01/02 - 12/31/02 3,572 (3) 17.79 01/01/03 - 1/31/03 1,993 (4) 9.99 (1) Distributions were made from surplus funds, approximately $28,770,000 of which was from the receipt of net financing and refinancing proceeds from CCEP. (2) Consists of approximately $6,646,000 of cash from operations and approximately $9,111,000 of cash from surplus funds, of which approximately $1,425,000 was from the receipt of previously undistributed net financing and refinancing proceeds from CCEP and approximately $6,019,000 was from the receipt of net sales proceeds from CCEP. (3) Consists of approximately $3,098,000 of cash from operations and approximately $474,000 of cash from surplus funds. (4) Consists of approximately $362,000 of cash from operations and approximately $1,631,000 of cash from surplus funds which was from sales proceeds from CCEP. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves, and the timing of debt maturities, refinancings, and/or property sales. The Partnership's cash available for distribution is reviewed on a monthly basis. There can be no assurance that the Partnership will generate sufficient funds from operations, after planned capital improvement expenditures, to permit further distributions to its partners during 2003 or subsequent periods. On September 16, 2000, the Partnership sought the vote of limited partners to amend the Partnership Agreement to eliminate the requirement for the Partnership to maintain reserves equal to at least 5% of the limited partners' capital contributions less distributions to limited partners and instead permit the General Partner to determine reasonable reserve requirements of the Partnership. The vote was sought pursuant to a Consent Solicitation that expired on October 16, 2000 at which time the amendment was approved by the requisite percent of limited partnership interests. Upon expiration of the consent period, a total number of 140,565.90 units had voted of which 136,767.20 units had voted in favor of the amendment, 2,805.70 voted against the amendment and 993.00 units abstained. Other In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 129,682.6 limited partnership units (the "Units") in the Partnership representing 65.15% of the outstanding Units at December 31, 2002. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO either through private purchases or tender offers. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters which would include voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. As a result of its ownership of 65.15% of the outstanding Units, AIMCO is in a position to control all voting decisions with respect to the Registrant. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to AIMCO, as its sole stockholder. CCEP Property Operations During the year ended December 31, 2002, CCIP foreclosed on four of the properties that collaterized the Master Loan (see "Item 8. Financial Statements and Supplementary Data - Note C" for further discussion). During the third quarter of 2002, CCIP began the process of foreclosure or executing deeds in lieu of foreclosure. During August 2002, the General Partner executed deeds in lieu of foreclosure on four of the active properties of CCEP. In addition, one property held by CCEP was sold in December 2002. The foreclosure process on the remaining four properties held by CCEP is ongoing. As the deeds are executed, title in the properties previously owned by CCEP are vested in CCIP, subject to the existing liens on the properties including the first mortgage loans. When CCEP no longer has title to any properties, it will be dissolved. As a result of the decision to liquidate, CCEP changed its basis of accounting for its financial statements at March 31, 2002, to the liquidation basis of accounting. Consequently, assets have been valued at estimated net realizable value and liabilities are presented at their estimated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the liquidation. The actual realization of assets and settlement of liabilities could be higher or lower than amounts indicated and is based upon estimates of the General Partner of CCEP as of the date of the consolidated financial statements. During the period from March 31, 2002 to December 31, 2002, the net change in liabilities remained constant, but was affected by a decrease in cash and cash equivalents, restricted escrows, investment in affiliated partnerships, investment properties, mortgage notes payable and Master Loan and interest payable due to the foreclosure of four of the investment properties held by CCEP as discussed in "Results of Operations" and the sale of Society Park Apartments as discussed below. On December 31, 2002, the Partnership sold Society Park, located in Tampa, Florida, to an unaffiliated third party for net sales proceeds of approximately $1,631,000, after payment of closing costs. The Partnership used all of the proceeds from the sale of the property to pay down the Master Loan principal as required by the Master Loan Agreement. The sale resulted in a gain on sale of investment property of approximately $727,000. In conjunction with the sale, a fee of approximately $218,000 was earned by the General Partner in accordance with the Partnership Agreement. The fee was paid subsequent to December 31, 2002. During the year ended December 31, 2002, 2001, and 2000 CCEP paid approximately $1,719,000, $7,801,000, and $33,634,000 in principal payments on the Master Loan. Approximately $88,000, $357,000, and $238,000 was paid during the years ended December 31, 2002, 2001, and 2000, respectively, representing cash received from distributions from three affiliated partnerships. These funds are required to be transferred to the Partnership under the terms of the Master Loan. In addition, during the year ended December 31, 2002 approximately $1,631,000 was paid representing proceeds received from the sale of Society Park Apartments. For 2001, approximately $6,019,000 was paid representing net proceeds from the sale of Magnolia Trace and approximately $1,425,000 was paid representing additional proceeds received for the refinancing of the mortgages encumbering nine of the investment properties in 2000. For 2000, approximately $4,526,000 was paid representing net proceeds from the sale of Shirewood and approximately $28,870,000 was paid representing net proceeds received for the refinancing of the mortgages encumbering nine of the investment properties. Critical Accounting Policies and Estimates A summary of the Partnership's significant accounting policies is included in "Note A - Organization and Significant Accounting Policies" which is included in the consolidated financial statements in "Item 8. Financial Statements and Supplementary Data". The General Partner believes that the consistent application of these policies enables the Partnership to provide readers of the financial statements with useful and reliable information about the Partnership's operating results and financial condition. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Partnership's accounting policies in many areas. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Impairment of Long-Lived Assets Investment properties are recorded at cost less accumulated depreciation, unless considered impaired, and the investment properties foreclosed upon in the third quarter of 2002 were recorded at fair market value at the time of the foreclosures. If events or circumstances indicate that the carrying amount of a property may be impaired, the Partnership will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Partnership would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Real property investments are subject to varying degrees of risk. Several factors may adversely affect the economic performance and value of the Partnership's investment properties. These factors include changes in the national, regional and local economic climate; local conditions, such as an oversupply of multifamily properties; competition from other available multifamily property owners and changes in market rental rates. Any adverse changes in these factors could cause an impairment in the Partnership's assets. Revenue Recognition The Partnership generally leases apartment units for twelve-month terms or less. Rental income attributable to leases is recognized monthly as it is earned and the Partnership fully reserves all balances outstanding over thirty days. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged to income as incurred. The Partnership leases certain commercial space to tenants under various lease terms. The leases are accounted for as operating leases in accordance with SFAS No. 13, "Accounting for Leases". Some of the leases contain stated rental increases during their term. For leases with fixed rental increases, rents are recognized on a straight-line basis over the terms of the leases. For all other leases, minimum rents are recognized over the terms of the leases. Investment in Master Loan to Affiliates and Interest Income Recognition The investment in the Master Loan is evaluated for impairment based upon the fair value of the collateral properties as the collateral is the sole basis of repayment of the loan. The fair value of the remaining collateral properties is based on the fair market value of those properties. If the fair value of a collateral property increases or decreases for other than temporary conditions, then the allowance on the Master Loan is adjusted appropriately. The investment in the Master Loan is considered to be impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". Due to this impairment, interest income is recognized on the cash basis of accounting. Item 7a. Market Risk Factors The Partnership is exposed to market risks associated with its Master Loan to Affiliate ("Loan"). Receipts (interest income) on the Loan are based upon the operations and cash flow of the underlying investment properties that collateralize the Loan. Both the income and expenses of operating the investment properties are subject to factors outside of the Partnership's control, such as an oversupply of similar properties resulting from overbuilding, increases in unemployment, population shifts, reduced availability of permanent mortgage financing, changes in zoning laws or changes in the patterns or needs of users. The investment properties are also susceptible to the impact of economic and other conditions outside of the control of the Partnership as well as being affected by current trends in the market area which they operate. In this regard, the General Partner of the Partnership closely monitors the performance of the properties collateralizing the loans. Based upon the fact that the loan is considered impaired under Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan", interest rate fluctuations do not impact the recognition of income, as income is only recognized to the extent of cash flow. Therefore, market risk factors do not impact the Partnership's results of operations as it relates to the Loan. See "Item 8 - Financial Statements and Supplementary Data - Note C" for further information. The Partnership is exposed to market risks from adverse changes in interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Partnership's cash and cash equivalents as well as interest paid on its indebtedness. As a policy, the Partnership does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for its borrowing activities used to maintain liquidity and fund business operations. To mitigate the impact of fluctuations in U.S. interest rates, the Partnership maintains its debt as fixed rate in nature by borrowing on a long-term basis. Based on interest rates at December 31, 2002, a 100 basis point increase or decrease in market interest rates would impact Partnership income approximately $513,000. The following table summarizes the Partnership's debt obligations at December 31, 2002. The interest rates represent the weighted-average rates. The fair value of the debt obligations approximates its carrying amount at December 31, 2001. Principal Amount by Expected Maturity Fixed Rate Debt Long-term Average Interest Debt Rate 7.10% (in thousands) 2003 $ 1,043 2004 1,119 2005 5,106 2006 1,211 2007 1,305 Thereafter 41,477 Total $51,261 Item 8. Financial Statements and Supplementary Data CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES LIST OF FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Operations for the Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Changes in Partners' (Deficit) Capital for the Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Consolidated Capital Institutional Properties We have audited the accompanying consolidated balance sheets of Consolidated Capital Institutional Properties as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in partners' (deficit) capital, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 the Partnership's 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 consolidated financial position of Consolidated Capital Institutional Properties at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Greenville, South Carolina March 31, 2003 CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES CONSOLIDATED BALANCE SHEETS (in thousands, except unit data)
December 31, 2002 2001 Assets Cash and cash equivalents $ 3,175 $ 922 Receivables and deposits 493 488 Restricted escrows 1,114 392 Other assets 592 604 Investment in affiliated partnerships (Note I) 894 -- Investment in Master Loan to affiliate (Note C) 14,144 26,430 Investment properties (Notes D and G): Land 14,272 3,564 Buildings and related personal property 67,805 39,658 82,077 43,222 Less accumulated depreciation (19,158) (15,969) 62,919 27,253 $ 83,331 $ 56,089 Liabilities and Partners' Capital Liabilities Accounts payable $ 176 $ 126 Tenant security deposit liabilities 689 566 Accrued property taxes 326 -- Other liabilities 1,408 603 Mortgage notes payable (Note D) 52,649 26,457 55,248 27,752 Partners' Capital General partner 125 123 Limited partners (199,043.2 units issued and outstanding) 27,958 28,214 28,083 28,337 $ 83,331 $ 56,089 See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit data)
Years Ended December 31, 2002 2001 2000 Revenues: Rental income $ 13,232 $ 11,305 $ 10,826 Interest income on investment in Master Loan to affiliate (Note C) 386 3,280 2,000 Reduction of provision for impairment loss (Note C) -- 3,176 14,241 Interest income 12 78 397 Other income 1,016 821 760 Property tax refund -- -- 210 Total revenues 14,646 18,660 28,434 Expenses: Operating 5,649 5,168 4,570 General and administrative 836 720 711 Depreciation 3,189 2,980 3,036 Interest 2,482 1,889 1,909 Property taxes 1,003 825 597 Total expenses 13,159 11,582 10,823 Income from continuing operations 1,487 7,078 17,611 Gain on foreclosure of real estate (Note C) 1,831 -- -- Net income (Note B) $ 3,318 $ 7,078 $ 17,611 Net income allocated to general partner (1%) $ 33 $ 71 $ 176 Net income allocated to limited partners (99%) 3,285 7,007 17,435 $ 3,318 $ 7,078 $ 17,611 Per limited partnership unit: Income from continuing operations $ 7.39 $ 35.20 $ 87.59 Gain on foreclosure of real estate 9.11 -- -- Net income per limited partnership unit $ 16.50 $ 35.20 $ 87.59 Distributions per limited partnership unit $ 17.79 $ 78.83 $ 240.55 See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL (in thousands, except unit data)
Limited Partnership General Limited Units Partner Partners Total Original capital contributions 200,342.0 $ 1 $200,342 $200,343 Partners' (deficit) capital at December 31, 1999 199,045.2 $ (58) $ 67,343 $ 67,285 Distributions to partners -- -- (47,880) (47,880) Net income for the year ended December 31, 2000 -- 176 17,435 17,611 Partners' capital at December 31, 2000 199,045.2 118 36,898 37,016 Distributions to partners -- (66) (15,691) (15,757) Net income for the year ended December 31, 2001 -- 71 7,007 7,078 Partners' capital at December 31, 2001 199,045.2 123 28,214 28,337 Abandonment of limited partnership units (Note J) (2.0) -- -- -- Distributions to partners -- (31) (3,541) (3,572) Net income for the year ended December 31, 2002 -- 33 3,285 3,318 Partners' capital at December 31, 2002 199,043.2 $ 125 $ 27,958 $ 28,083 See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 2002 2001 2000 Cash flows from operating activities: Net income $ 3,318 $ 7,078 $ 17,611 Adjustments to reconcile net income to net cash provided by operating activities: Gain on foreclosure of real estate (1,831) -- -- Depreciation 3,189 2,980 3,036 Amortization of loan costs, lease commissions and mortgage premiums 43 316 133 Reduction of provision for impairment loss -- (3,176) (14,241) Change in accounts: Receivables and deposits 6 518 192 Other assets (24) 78 (22) Accounts payable 50 (63) 81 Tenant security deposit liabilities (5) (109) 101 Accrued property taxes 88 -- -- Other liabilities 593 (138) 114 Net cash provided by operating activities 5,427 7,484 7,005 Cash flows from investing activities: Property improvements and replacements (582) (398) (1,647) Lease commissions paid -- -- (74) Net (deposits to) receipts from restricted escrows (205) 61 147 Principal receipts on Master Loan 1,719 7,801 33,634 Distributions from affiliated partnerships 24 -- -- Net cash provided by investing activities 956 7,464 32,060 Cash flows from financing activities: Loan costs paid -- -- (12) Distributions to partners (3,572) (15,757) (47,880) Payments on mortgage notes payable (558) (305) (312) Net cash used in financing activities (4,130) (16,062) (48,204) Net increase (decrease) in cash and cash equivalents 2,253 (1,114) (9,139) Cash and cash equivalents at beginning of year 922 2,036 11,175 Cash and cash equivalents at end of year $ 3,175 $ 922 $ 2,036 Supplemental disclosure of cash flow information: Cash paid for interest $ 2,467 $ 1,702 $ 1,992 Supplemental disclosure of non-cash transactions: Property improvements and replacements capitalized as part of a settlement with a tenant that vacated its space $ -- $ 498 $ -- See Accompanying Notes to Consolidated Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES STATEMENTS OF CASH FLOWS (continued) (in thousands) SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES Foreclosure During the year ended December 31, 2002, Silverado, The Knolls, Indian Creek Village, and Tates Creek Village Apartments were foreclosed upon by the Partnership. In connection with the foreclosure on these properties, the following accounts were adjusted by the non-cash amounts noted below: 2002 Receivables and deposits $ (66) Investment in Master Loan to affiliates 10,567 Restricted escrows (517) Other assets 11 Investment properties (38,273) Investments in affiliated partnerships (918) Tenant security deposit liabilities 128 Accrued property taxes 238 Other liabilities 212 Mortgage notes payable 26,787 Gain on foreclosure of real estate $ (1,831) See Accompanying Notes to Consolidated Financial Statements CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002 Note A - Organization and Significant Accounting Policies Organization: Consolidated Capital Institutional Properties (the "Partnership" or "Registrant"), a California Limited Partnership, was formed on April 28, 1981, to lend funds through nonrecourse notes with participation interests (the "Master Loan"). The loans were made to, and the real properties that secure the Master Loan were purchased and owned by, Consolidated Capital Equity Partners, ("EP"), a California general partnership in which certain of the partners were former shareholders and former management of Consolidated Capital Equities Corporation ("CCEC"), the former Corporate General Partner. Through December 31, 2002, the Partnership had advanced a total of approximately $180,500,000 to EP and its successor under the Master Loan. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2011 unless terminated prior to such date. Upon the Partnership's formation in 1981, CCEC, a Colorado corporation, was the Corporate General Partner. In December 1988, CCEC filed for reorganization under Chapter 11 of the United States Bankruptcy Code. In 1990, as part of CCEC's reorganization plan, ConCap Equities, Inc., a Delaware corporation (the "General Partner" or "CEI"), acquired CCEC's General Partner interests in the Partnership and in 15 other affiliated public Limited Partnerships (the "Affiliated Partnerships") and replaced CCEC as Managing General Partner in all 16 partnerships. During 1989, EP defaulted on certain interest payments that were due under the Master Loan. Before the Partnership could exercise its remedies for such defaults, EP filed for bankruptcy protection in a Chapter 11 reorganization proceeding. On October 18, 1990, the Bankruptcy Court approved EP's consensual plan of reorganization (the "Plan"). In November 1990, EP and the Partnership consummated a closing under the Plan pursuant to which, among other things, the Partnership and EP executed an amended and restated loan agreement (the "New Master Loan Agreement"). EP was converted from a California General Partnership to a California Limited Partnership, Consolidated Capital Equity Partners, L.P. ("CCEP"), and CCEP renewed the deeds of trust on all the collateral to secure the New Master Loan Agreement. ConCap Holdings, Inc. ("CHI"), a Texas corporation and wholly-owned subsidiary of CEI, is the sole general partner of CCEP and an affiliate of the Partnership. The General Partners of EP became Limited Partners in CCEP. CHI has full discretion with respect to conducting CCEP's business, including managing CCEP's properties and initiating and approving capital expenditures and asset dispositions and refinancings. All of CEI's outstanding stock was owned by Insignia Properties Trust ("IPT"). Effective February 26, 1999, IPT was merged into Apartment Investment and Management Company ("AIMCO"). Hence, CEI is now a wholly-owned subsidiary of AIMCO, a publicly held real estate investment trust. The General Partner began the process of foreclosure or executing deeds in lieu of foreclosure during the third quarter of 2002 on all the properties in CCEP. During August 2002, the General Partner executed deeds in lieu of foreclosure on four of the active properties of CCEP. In addition, one of the properties held by CCEP was sold in December 2002. The foreclosure process on the remaining four properties held by CCEP is ongoing. As the deeds were executed, title in the properties previously owned by CCEP were transferred to the Partnership, subject to the existing liens on such properties, including the first mortgage loans. As a result, the Partnership assumed responsibility for the operations of such properties. The Partnership now owns and operates five apartment properties one each in North Carolina, Texas, Colorado, Kansas and Kentucky and one multiple-use complex in Pennsylvania. Also, the Partnership is the holder of the Master Loan which is collateralized by the four remaining apartment properties of CCEP which are located in Florida. Principles of Consolidation: The Partnership's consolidated financial statements include the accounts of CCIP Sterling, L.P., a Pennsylvania Limited Partnership, Kennedy Boulevard Associates II, L.P., Kennedy Boulevard Associates III, L.P., Kennedy Boulevard Associates IV, L.P., and Kennedy Boulevard GP I ("KBGP-I"), a Pennsylvania Partnership. Each of the entities above except KBGP-I are Pennsylvania limited partnerships, and the general partners of each of these affiliated limited and general partnerships are limited liability corporations of which the Partnership is the sole member. Therefore, the Partnership controls these affiliated limited and general partnerships, and consolidation is required. CCIP Sterling, L.P. holds title to The Sterling Apartment Home and Commerce Center ("the Sterling"). All interpartnership transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Certain reclassifications have been made to the 2000 and 2001 information to conform to the 2002 presentation. Allocation of Profits, Gains, and Losses: The Agreement provides for net income and net losses for both financial and tax reporting purposes to be allocated 99% to the Limited Partners and 1% to the General Partner. Net Income Per Limited Partnership Unit: Net income per Limited Partnership Unit ("Unit") is computed by dividing net income allocated to the Limited Partners by the number of Units outstanding at the beginning of the year. Per Unit information has been computed based on 199,045.2 Units for 2002, 2001 and 2000 (see "Note J" for further information). Cash and Cash Equivalents: Cash and cash equivalents includes cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $3,220,000 and $840,000 at December 31, 2002 and 2001, respectively, that are maintained by an affiliated management company on behalf of affiliated entities in cash concentration accounts. Restricted Escrows: At the time of the 1995 refinancing of The Loft, approximately $60,000 of the proceeds were designated for a Replacement Reserve Fund for certain capital replacements at the property. Additionally, monthly deposits are required pursuant to the mortgage agreement. At December 31, 2002 and 2001, the balance in this reserve was approximately $211,000 and $121,000, respectively. In conjunction with the financing of the Sterling in September 1998, the Partnership is required to make monthly deposits of approximately $17,000 with the mortgage company to establish and maintain a Replacement Reserve Fund designated for repairs and replacements at the property. As of December 31, 2002 and 2001, the balance was approximately $384,000 and $271,000, respectively. At the time of refinancing of The Knolls in September 2000, approximately $505,000 of the proceeds were designated for a replacement reserve fund for certain capital replacements. At December 31, 2002, the balance in the replacement reserve fund was approximately $519,000. Depreciation: Depreciation is provided by the straight-line method over the estimated lives of the apartment and commercial properties and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used for real property over 18 years for additions after March 15, 1984 and before May 9, 1985, and 19 years for additions after May 8, 1985, and before January 1, 1987. As a result of the Tax Reform Act of 1986, for additions after December 31, 1986, the modified accelerated cost recovery method is used for depreciation of (1) real property additions over 27 1/2 years and (2) personal property additions over 5 years. Loan Costs: As of December 31, 2002 and 2001, loan costs of approximately $569,000 for both years less accumulated amortization of approximately $275,000 and $219,000 respectively, are included in other assets. These costs are amortized on a straight-line method over the life of the loans. Amortization expense was approximately $45,000 and $47,000 for the years ended December 31, 2002 and 2001, respectively, and is included in interest expense. Amortization expense is expected to be $57,000 for each of the years 2003 through 2005 and $45,000 for each of the years 2006 and 2007. Tenant Security Deposits: The Partnership requires security deposits from lessees for the duration of the lease and such deposits are included in receivables and deposits. Deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on rental payments. Investment Properties: Investment properties consist of five apartment complexes and one multiple-use building consisting of apartment units and commercial space and are stated at cost. Acquisition fees are capitalized as a cost of real estate. Expenditures in excess of $250 that maintain an existing asset which has a useful life of more than one year are capitalized as capital replacement expenditures and depreciated over the estimated useful life of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs are expensed as incurred. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Costs of properties that have been permanently impaired have been written down to appraised value. No adjustments for impairment of value were recorded in the years ended December 31, 2002, 2001 or 2000. During 2001, AIMCO, an affiliate of the General Partner, commissioned a project to study process improvement ideas to reduce operating costs. The result of the study led to a re-engineering of business processes and eventual redeployment of personnel and related capital spending. The implementation of these plans during 2002, accounted for as a change in accounting estimate, resulted in a refinement of the Partnership's process for capitalizing certain direct and indirect project costs (principally payroll related costs) and increased capitalization of such costs by approximately $109,000 in 2002 compared to 2001. Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes that the carrying amounts of its financial instruments (except for long term debt) approximate their fair values due to the short term maturity of these instruments. The Partnership believes that the carrying amount of its long-term debt approximates its fair market value due to the fact that the mortgages on the foreclosed properties were recorded at their fair market value at the date of foreclosure. The carrying amount of the Partnership's investment in the Master Loan approximates fair value due to the fact that it has been valued based on the fair value of the underlying collateral. Investment in Master Loan: In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", the allowance for credit losses related to loans that are identified for evaluation in accordance with SFAS No. 114 is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Leases: The Partnership leases certain commercial space to tenants under various lease terms. The leases are accounted for as operating leases in accordance with SFAS No. 13, "Accounting for Leases". Some of the leases contain stated rental increases during their term. For leases with fixed rental increases, rents are recognized on a straight-line basis over the terms of the leases. For all other leases, minimum rents are recognized over the terms of the leases and the Partnership fully reserves all balances outstanding over thirty days. The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases and fully reserves all balances outstanding over thirty days. In addition, the General Partner's policy is to offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged against rental income as incurred. Lease Commissions: Lease commissions are capitalized and included in other assets and are being amortized using the straight-line method over the life of the applicable lease. At both December 31, 2002 and 2001, capitalized lease commissions totaled approximately $231,000 with accumulated amortization of approximately $175,000 and $151,000, respectively. During the year ended December 31, 2001, lease commissions of approximately $313,000 and accumulated amortization of approximately $122,000 was written off as a result of the tenant to which these lease commissions related vacating its space. Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also established standards for related disclosures about products and services, geographic areas, and major customers. See "Note K" for detailed disclosure of the Partnership's segments. Advertising: The Partnership expenses the costs of advertising as incurred. Advertising costs of approximately $113,000, $67,000 and $71,000 for the years ended December 31, 2002, 2001 and 2000, respectively, were charged to operating expense. Recent Accounting Pronouncements: In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Partnership adopted SFAS No. 144 effective January 1, 2002. Its adoption did not have a material effect on the financial position or results of operations of the Partnership. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recission of FASB Statements No. 4, 44 and 64." SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt," required that all gains and losses from extinguishment of debt be aggregated and, if material, classified as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should only be classified as extraordinary if they are unusual in nature and occur infrequently. Neither of these criteria applies to this Partnership. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Partnership adopted SFAS 145 effective April 1, 2002. Its adoption did not have a material effect on the financial position or results of operations of the Partnership. Note B - Income Taxes The Partnership has received a ruling from the Internal Revenue Service that it will be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the consolidated financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners. The following is a reconciliation of reported net income and Federal taxable income (in thousands, except per unit data):
2002 2001 2000 Net income as reported $ 3,318 $ 7,078 $17,611 Add (deduct): Deferred revenue and other liabilities 1,150 (157) 195 Depreciation differences 460 398 499 Accrued expenses (9) 7 21 Interest income 3,207 (3,280) (2,000) Differences in valuation allowances -- (3,176) (14,241) Gain on foreclosure (3,243) -- -- Other 1,371 90 14 Federal taxable income $ 6,254 $ 960 $ 2,099 Federal taxable income per limited partnership unit $ 31.10 $ 4.78 $ 10.44
The following is reconciliation between the Partnership's reported amounts and Federal tax basis of net assets and liabilities (in thousands): December 31, 2002 2001 Net assets as reported $ 28,083 $28,337 Land and buildings 930 433 Accumulated depreciation 3,763 3,303 Interest receivable -- 44 Syndication fees 22,500 22,500 Other 2,255 233 Net assets - Federal tax basis $ 57,531 $54,850 Note C - Net Investment in Master Loan The Partnership was initially formed for the benefit of its limited partners to lend funds to Consolidated Capital Equity Partners ("CCEP"), a California general partnership. The general partner of CCEP is an affiliate of the General Partner. The Partnership loaned funds to CCEP subject to a nonrecourse note with a participation interest (the "Master Loan"). At December 31, 2002, the recorded investment in the Master Loan was considered to be impaired under SFAS 114 "Accounting by Creditors for Impairment of a Loan". The Partnership measures the impairment of the loan based upon the fair value of the collateral, as repayment of the loan is expected to be provided solely by the collateral. For the years ended December 31, 2002, 2001 and 2000, the Partnership recorded approximately $386,000, $3,280,000, and $2,000,000 respectively, of interest income based upon "Excess Cash Flow" (as defined in the terms of the New Master Loan Agreement) generated by CCEP and paid to the Partnership. The fair value of all of the collateral properties which on a combined basis secure the Master Loan, was determined using the net operating income of the collateral properties capitalized at a rate deemed reasonable for the type of property adjusted for market conditions, the physical condition of the property and other factors, or by obtaining an appraisal by an independent third party. This methodology has not changed from that used in prior calculations performed by the General Partner in determining the fair value of the collateral properties. The approximate reduction of $3,176,000 and $14,241,000 in the provision for impairment loss recognized during the years ended December 31, 2001 and 2000, respectively, is attributed to an increase in the net realizable value of the collateral properties and to the payment of principal on the Master Loan from the sales proceeds of Magnolia Trace in January 2001 and the refinancing and financing proceeds of the collateral properties during 2000. There was no change in the provision for impairment loss during the year ended December 31, 2002. The General Partner evaluates the net realizable value on a semi-annual basis or as circumstances dictate that it should be analyzed. The Master Loan matured in November 2000. The General Partner had been negotiating with CCEP with respect to its options which included foreclosing on the properties which collateralize the Master Loan or extending the terms of the loan. The General Partner has decided to foreclose on the properties that collateralize the Master Loan. The General Partner began the process of foreclosure or executing deeds in lieu of foreclosure during the third quarter of 2002 on all the properties in CCEP. During August 2002, the General Partner executed deeds in lieu of foreclosure on four of the active properties of CCEP. In addition, one of the properties held by CCEP was sold in December 2002. The foreclosure process on the remaining four properties held by CCEP is ongoing. As the deeds were executed, title in the properties previously owned by CCEP were transferred to the Partnership, subject to the existing liens on such properties, including the first mortgage loans. As a result, the Partnership assumed responsibility for the operations of such properties. The results of operations of the foreclosed properties are reflected in the Statement of Operations for the period September 1, 2002 through December 31, 2002. The following table sets forth the Partnership's non-cash activities during the year ended December 31, 2002 with respect to the foreclosure of Silverado, The Knolls, Indian Creek Village and Tates Creek Village Apartments: Investment properties (a) $ 38,273 Investments in affiliated partnerships (b) 918 Mortgage notes payable (c) (26,787) Master loan, net of allowance (d) (10,567) Other assets received, net of other liabilities assumed (6) Gain on foreclosure of real estate $ 1,831 (a) Amount represents the estimated fair value of the properties. The fair value was determined by appraisals obtained in September 2000 from an independent third party which have been updated by management using the net operating income of all of the applicable collateral properties capitalized at a rate deemed reasonable for the type of property and adjusted by management for current market conditions, physical condition of each respective property, and other factors. (b) See "Note J". (c) Amount represents the present value on the mortgages encumbering the investment properties acquired through foreclosure, discounted at a rate currently available to the Partnership. (d) Amount represents the amount of the Master Loan associated with the four properties acquired through foreclosure. Proforma results of operations assuming the foreclosure of Silverado, The Knolls, Indian Creek Village, and Tates Creek Village Apartments occurred at January 1, 2001 are as follows (in thousands, except per unit data): Years Ended December 31, 2002 2001 Revenues $19,074 $26,309 Net income 3,213 8,174 Net income per limited partnership unit $ 15.98 $ 40.66 The principal balance of the Master Loan due to the Partnership totaled approximately $14,144,000 and $26,430,000 at December 31, 2002 and 2001, respectively. This amount represents the fair market value of the remaining properties held by CCEP, less the net liabilities owed by the properties. Interest, calculated on the accrual basis, due to the Partnership pursuant to the terms of the Master Loan Agreement, but not recognized in the income statements due to the impairment of the loan, totaled approximately $462,000, $38,763,000 and $39,287,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Interest income is recognized on the cash basis as required by SFAS 114. At December 31, 2002 and 2001, such cumulative unrecognized interest totaling approximately $462,000 and $345,024,000 was not included in the balance of the investment in Master Loan. The cumulative unrecognized interest owed on the Master Loan of approximately $376,239,000 was forgiven by the Partnership during the third quarter of 2002. The remaining collateral properties are encumbered by first mortgages totaling approximately $23,290,000 as of December 31, 2002, which are senior to the Master Loan. This has been taken into consideration in determining the fair value of the Master Loan. During the years ended December 31, 2002, 2001 and 2000, the Partnership made no advances to CCEP on Master Loan. During the years ended December 31, 2002, 2001 and 2000, the Partnership received approximately $1,719,000, $7,801,000 and $33,634,000, as principal payments on the Master Loan from CCEP. Approximately $88,000, $357,000 and $238,000 was received during the years ended December 31, 2002, 2001, and 2000, respectively, representing cash received from distributions from three affiliated partnerships which are required to be transferred to the Partnership per the Master Loan Agreement. In addition, during the year ended December 31, 2002, approximately $1,631,000 was received representing net proceeds from the sale of Society Park in December 2002. During the year ended December 31, 2001, approximately $6,019,000 was received representing net proceeds from the sale of Magnolia Trace and approximately $1,425,000 was received representing additional proceeds received for the refinancing of the mortgages encumbering nine of the investment properties in 2000. For 2000, approximately $4,526,000 was received representing net proceeds from the sale of Shirewood and approximately $28,870,000 was received representing net proceeds received for the refinancing of the mortgages encumbering nine of the investment properties. The investment in the Master Loan consists of the following: As of December 31, 2002 2001 (in thousands) Master Loan funds advanced at beginning of year $ 26,430 $ 34,231 Foreclosure write off (10,567) -- Principal receipts on Master Loan (1,719) (7,801) Master Loan funds advanced at end of year $ 14,144 $ 26,430 The allowance for impairment loss on Master Loan consists of the following: As of December 31, 2002 2001 (in thousands) Allowance for impairment loss on Master Loan, beginning of year $ -- $ 3,176 Reduction of impairment loss -- (3,176) Allowance for impairment loss on Master Loan, end of year $ -- $ -- Note D - Mortgage Notes Payable The principal terms of mortgage notes payable are as follows:
Principal Monthly Principal Balance At December 31, Payment Balance (including Interest Maturity Due At Property 2002 2001 interest) Rate Date Maturity (in thousands) (in (in thousands) thousands) The Loft Apartments 1st mortgage $ 4,139 $ 4,210 $ 30 6.95% 12/01/05 $ 3,903 The Sterling Apartment Homes and Commerce Center 1st mortgage 21,972 22,247 149 6.77% 10/01/08 19,975 Silverado 1st mortgage 3,360 -- 29 7.87% 11/01/10 2,434 The Knolls 1st mortgage 9,433 -- 81 7.78% 03/01/10 7,105 Indian Creek Village 1st mortgage 8,340 -- 72 7.83% 01/01/10 6,351 Tates Creek Village 1st mortgage 4,017 -- 35 7.78% 04/01/10 3,017 $ 51,261 $ 26,457 $396 $ 42,785 Unamortized mortgage loan premium 1,388 $52,649
The mortgage notes payable are non-recourse and are secured by pledge of the respective properties and by pledge of revenues from the respective properties. The notes require prepayment penalties if repaid prior to maturity. Further, the properties may not be sold subject to existing indebtedness. The carrying amount of the Partnership's long term debt approximates its fair value due to the fact that the mortgages on the foreclosed properties were recorded at their fair value. The fair value of the mortgages as determined based upon the incremental borrowing rate available to the Partnership at the time of foreclosure. The mortgage premium of approximately $1,388,000 is net of accumulated amortization of approximately $37,000. The mortgage premiums are being amortized over the remaining lives of the loans. Amortization expense is included in interest expense on the consolidated statements of operations. Scheduled principal payments of the mortgage notes payable subsequent to December 31, 2002, are as follows (in thousands): Mortgage Note 2003 $ 1,043 2004 1,119 2005 5,106 2006 1,211 2007 1,305 Thereafter 41,477 Total $51,261 Note E - Related Party Transactions The Partnership has no employees and is dependent on the General Partner and its affiliates for the management and administration of all Partnership activities. The Partnership Agreement provides for (i) certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. Affiliates of the General Partner are entitled to receive 5% of gross receipts from all of the Partnership's properties for providing property management services. The Partnership paid to such affiliates approximately $695,000, $640,000 and $580,000 for the years ended December 31, 2002, 2001 and 2000, respectively, which is included in operating expense. An affiliate of the General Partner received reimbursement of accountable administrative expenses amounting to approximately $454,000, $332,000 and $510,000 for the years ended December 31, 2002, 2001 and 2000, respectively which is included in general and administrative expenses. Beginning in 2001, the Partnership began insuring its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the General Partner. During the years ended December 31, 2002 and 2001, the Partnership paid AIMCO and its affiliates approximately $256,000 and $60,000 for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 129,682.6 limited partnership units (the "Units") in the Partnership representing 65.15% of the outstanding Units at December 31, 2002. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO either through private purchases or tender offers. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters which would include voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. As a result of its ownership of 65.15% of the outstanding Units, AIMCO is in a position to control all voting decisions with respect to the Registrant. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to AIMCO, as its sole stockholder. Note F - Commitments Until October 17, 2000, the Partnership was required by the Partnership Agreement to maintain working capital reserves for contingencies of not less than 5% of Net Invested Capital, as defined in the Partnership Agreement. In the event expenditures were made from this reserve, operating revenues were to be allocated to such reserve to the extent necessary to maintain the foregoing level. On September 16, 2000, the Partnership sought the vote of limited partners to amend the Partnership Agreement to eliminate the requirement for the Partnership to maintain reserves equal to at least 5% of the limited partner's capital contributions less distributions to limited partners and instead permit the General Partner to determine reasonable reserve requirements of the Partnership. The vote was sought pursuant to a Consent Solicitation that expired on October 16, 2000 at which time the amendment was approved by the requisite percent of limited partnership interests. Upon expiration of the consent period, a total number of 140,565.90 units had voted of which 136,767.20 units had voted in favor of the amendment, 2,805.70 voted against the amendment and 993.00 units abstained. Note G - Investment Properties and Accumulated Depreciation Investment Properties Initial Cost To Partnership (in thousands)
Buildings Cost and Related Capitalized Personal Subsequent to Description Encumbrances Land Property Acquisition (in thousands) (in thousands) The Loft Apartments $ 4,139 $ 1,053 $ 4,147 $ 2,379 The Sterling Apt Homes and Commerce Center 21,972 2,567 12,341 21,058 Silverado 3,360 966 3,807 18 The Knolls 9,433 4,318 10,682 173 Indian Creek Village 8,340 3,975 8,225 28 Tates Creek Village 4,017 1,449 4,851 39 Total $51,261 $14,328 $44,053 $ 23,695
Gross Amount At Which Carried At December 31, 2002 (in thousands)
Buildings And Related Personal Accumulated Date Depreciable Description Land Property Total Depreciation Acquired Life-Years (in thousands) The Loft $ 997 $ 6,582 $ 7,579 $ 4,258 11/19/90 5-30 The Sterling 2,567 33,399 35,966 14,578 12/01/95 5-30 Silverado 966 3,826 4,792 39 08/09/02 5-30 The Knolls 4,318 10,855 15,173 111 08/09/02 5-30 Indian Creek Village 3,975 8,253 12,228 110 08/09/02 5-30 Tates Creek Village 1,449 4,890 6,339 62 08/13/02 5-30 Totals $14,272 $67,805 $82,077 $19,158
Reconciliation of "investment properties and accumulated depreciation": Years Ended December 31, 2002 2001 (in thousands) Real Estate Balance, real estate at beginning of year $43,222 $42,326 Acquisition of properties through Foreclosure 38,273 -- Property improvements and Replacements 582 896 Balance, real estate at end of year $82,077 $43,222 Accumulated Depreciation Balance at beginning of year $15,969 $12,989 Additions charged to expense 3,189 2,980 Balance at end of year $19,158 $15,969 The aggregate cost of the real estate for Federal income tax purposes at December 31, 2002 and 2001, is approximately $83,007,000 and $43,655,000, respectively. Accumulated depreciation for Federal income tax purposes at December 31, 2002 and 2001 is approximately $15,395,000, and $12,666,000, respectively. Note H - Commercial Leases In December 2001, the Partnership's most significant commercial tenant at The Sterling Commerce Center vacated its space which represented 30.58% of the leaseable commercial space. The Partnership filed a lawsuit against such tenant seeking monetary damages for unpaid rent, including rent which had been abated in favor of the tenant completing significant improvements to its space. The Partnership accepted a settlement whereby the tenant paid $180,000 in satisfaction of all unpaid rent amounts due and the Partnership accepted possession of the Note H - Commercial Leases (continued) improvements completed by the tenant which were valued at approximately $498,000. The settlement amount was paid in 2002. Beginning in 2002, these improvements are being depreciated over their remaining estimated useful lives. As a result of the tenant vacating the space, the Partnership expensed approximately $191,000 in unamortized lease commissions during the year ending December 31, 2001. Rental income on the commercial property leases is recognized on the straight-line basis over the life of the applicable leases. Minimum future rental income for the commercial properties subject to noncancellable operating leases is as follows (in thousands): Year Ending December 31, 2003 $ 646 2004 509 2005 334 2006 270 2007 138 $ 1,897 There is no assurance that this rental income will continue at the same level when the current leases expire. Note I - Investment in Affiliated Partnerships The Partnership assumed investments in the following affiliated partnerships during the year ended December 31, 2002.
Investment Ownership At Partnership Type of Ownership Percentage December 31, 2002 Consolidated Capital Non-controlling Growth Fund General Partner 0.40% $ 47 Consolidated Capital Non-controlling Properties III General Partner 1.85% 27 Consolidated Capital Non-controlling Properties IV General Partner 1.85% 820
$ 894 These investments were assumed during the foreclosure of investment properties from CCEP (see "Note C") and are accounted for on the equity method of accounting. Subsequent to the foreclosure, the Partnership received a distribution of approximately $24,000 from one of the affiliated partnerships. Note J - Abandonment of Limited Partnership Units During the year ended December 31, 2002, the number of Limited Partnership Units decreased by 2 units due to limited partners abandoning their units. In abandoning his or her Limited Partnership Unit(s), a limited partner relinquishes all right, title, and interest in the partnership as of the date of abandonment. However, the limited partner is allocated his or her share of net income or loss for that year. The income or loss per Limited Partnership Unit in the accompanying consolidated statements of operations is calculated based on the number of units outstanding at the beginning of the year. There were no such abandonments in 2001 or 2000. Note K - Subsequent Distribution Subsequent to December 31, 2002, the Partnership distributed approximately $1,993,000 (approximately $1,989,000 paid to the limited partners or $9.99 per limited partnership unit). Approximately $362,000 (approximately $359,000 paid to the limited partners or $1.80 per limited partnership unit) was from operations and approximately $1,631,000 was paid to the limited partners (approximately $8.19 per limited partnership unit) from the receipt of sale proceeds from CCEP upon the sale of Society Park Apartments. Note L - Segment Reporting Description of the types of products and services from which the reportable segment derives its revenues: The Partnership has two reportable segments: residential properties and commercial property. The Partnership's property segments consist of five apartment complexes one each in North Carolina, Texas, Colorado, Kansas, and Kentucky and one multiple use facility consisting of apartment units and commercial space in Pennsylvania. The Partnership rents apartment units to tenants for terms that are typically less than twelve months. The commercial property leases space to various medical offices, career service facilities, and retail shops at terms ranging from month to month to five years. Measurement of segment profit and loss: The Partnership evaluates performance based on segment profit (loss) before depreciation. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Factors management used to identify the enterprise's reportable segment: The Partnership's reportable segments are business units (investment properties) that offer different products and services. The reportable segments are each managed separately because they provide distinct services with different types of products and customers. Segment information for the years ending December 31, 2002, 2001 and 2000 is shown in the tables below (in thousands). The "Other" Column includes partnership administration related items and income and expense not allocated to reportable segments.
2002 Residential Commercial Other Totals Rental income $12,123 $ 1,109 $ -- $13,232 Interest income 7 1 4 12 Other income 899 117 -- 1,016 Interest expense 2,254 228 -- 2,482 Depreciation 3,012 177 -- 3,189 General and administrative expenses -- -- 836 836 Interest income on investment in Master Loan -- -- 386 386 Gain on foreclosure of real estate -- -- 1,831 1,831 Segment profit 2,257 (324) 1,385 3,318 Total assets 65,550 862 16,919 83,331 Capital expenditures for investment Properties 560 22 -- 582
2001 Residential Commercial Other Totals Rental income $ 9,782 $ 1,523 $ -- $11,305 Interest income 58 8 12 78 Other income 539 282 -- 821 Interest expense 1,659 230 -- 1,889 Depreciation 2,890 90 -- 2,980 General and administrative expenses -- -- 720 720 Interest income on investment in Master Loan -- -- 3,280 3,280 Reduction of provision for impairment loss -- -- 3,176 3,176 Segment profit 1,285 49 5,744 7,078 Total assets 27,896 1,213 26,980 56,089 Capital expenditures for investment properties 372 524 -- 896
2000 Residential Commercial Other Totals Rental income $ 9,298 $ 1,528 $ -- $10,826 Interest income 98 24 275 397 Other income 520 239 1 760 Interest expense 1,673 236 -- 1,909 Depreciation 2,952 84 -- 3,036 General and administrative expenses -- -- 711 711 Interest Income on Investment in Master Loan -- -- 2,000 2,000 Reduction of provision for impairment loss -- -- 14,241 14,241 Segment profit 1,424 381 15,806 17,611 Total assets 32,276 1,853 31,254 65,383 Capital expenditures for investment properties 1,596 51 -- 1,647
Note M - Legal Proceedings In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its General Partner and several of their affiliated partnerships and corporate entities. The action purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging, among other things, the acquisition of interests in certain General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs seek monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The General Partner filed demurrers to the amended complaint which were heard February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the General Partner and its affiliates filed a demurrer to the third amended complaint. On May 14, 2001, the Court heard the demurrer to the third amended complaint. On July 10, 2001, the Court issued an order sustaining defendants' demurrer on certain grounds. On July 20, 2001, Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer. On September 7, 2001, Plaintiffs filed a fourth amended class and derivative action complaint. On September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On October 5, 2001, the General Partner and affiliated defendants filed a demurrer to the fourth amended complaint, which was heard on December 11, 2001. On February 2, 2002, the Court served its order granting in part the demurrer. The Court has dismissed without leave to amend certain of the plaintiffs' claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a putative class comprised of all non-affiliated persons who own or have owned units in the partnerships. The General Partner and affiliated defendants oppose the motion. On April 29, 2002, the Court held a hearing on plaintiffs' motion for class certification and took the matter under submission after further briefing, as ordered by the court, was submitted by the parties. On July 10, 2002, the Court entered an order vacating the current trial date of January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and stayed the case in its entirety through November 7, 2002 so that the parties could have an opportunity to discuss settlement. On October 30, 2002, the court entered an order extending the stay in effect through January 10, 2003. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action described below. The Court has scheduled the hearing on preliminary approval for April 4, 2003 and the hearing on final approval for June 2, 2003. In general terms, the proposed settlement provides for certification for settlement purposes of a settlement class consisting of all limited partners in this Partnership and others (the "Partnerships") as of December 20, 2002, the dismissal with prejudice and release of claims in the Nuanes and Heller litigation, payment by AIMCO of $9.9 million (which shall be distributed to settlement class members after deduction of attorney fees and costs of class counsel and certain costs of settlement) and up to $ 1 million toward the cost of independent appraisals of the Partnerships' properties by a Court appointed appraiser. An affiliate of the General Partner has also agreed to make a tender offer to purchase all of the partnership interests in the Partnerships within one year of final approval, if it is granted, and to provide partners with the independent appraisals at the time of these tenders. The proposed settlement also provides for the limitation of the allowable costs which the General Partner or its affiliates will charge the Partnerships in connection with this litigation and imposes limits on the class counsel fees and costs in this litigation. If the Court grants preliminary approval of the proposed settlement in April, a notice will be distributed to partners providing detail on the terms of the proposed settlement. During the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The first amended complaint in the Heller action is brought as a purported derivative action, and asserts claims for among other things breach of fiduciary duty; unfair competition; conversion, unjust enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a motion to consolidate the Heller action with the Nuanes action and stated that the Heller action was filed in order to preserve the derivative claims that were dismissed without leave to amend in the Nuanes action by the Court order dated July 10, 2001. On October 5, 2001, the General Partner and affiliated defendants moved to strike the first amended complaint in its entirety for violating the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer in the Nuanes action, or alternatively, to strike certain portions of the complaint based on the statute of limitations. Other defendants in the action demurred to the fourth amended complaint, and, alternatively, moved to strike the complaint. On December 11, 2001, the court heard argument on the motions and took the matters under submission. On February 4, 2002, the Court served notice of its order granting defendants' motion to strike the Heller complaint as a violation of its July 10, 2001 order in the Nuanes action. On March 27, 2002, the plaintiffs filed a notice appealing the order striking the complaint. Before completing briefing on the appeal, the parties stayed further proceedings in the appeal pending the Court's review of the terms of the proposed settlement described above. The General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Note N - Selected Quarterly Financial Data (Unaudited) The following is a summary of the unaudited quarterly results of operations for the Partnership (in thousands, except per unit data):
1st 2nd 3rd 4th 2002 Quarter Quarter Quarter Quarter Total Total revenues $2,929 $3,249 $3,883 $4,585 $14,646 Total expenses 2,787 2,810 3,307 4,255 13,159 Income from continuing operations 142 439 576 330 1,487 Gain on foreclosure of real estate -- -- 1,831 -- 1,831 Net income $ 142 $ 439 $ 2,407 $ 330 $ 3,318 Net income allocated to General Partner (1%) $ 1 $ 4 $ 24 $ 4 $ 33 Net income allocated to Limited Partners (99%) 141 435 2,383 326 3,285 $ 142 $ 439 $ 2,407 $ 330 $ 3,318 Net income per limited partnership unit $ 0.71 $ 2.19 $ 11.97 $ 1.63 $ 16.50 Distributions per limited partnership unit $ 2.27 $ 4.64 $ 4.70 $ 6.18 $ 17.79
1st 2nd 3rd 4th 2001 Quarter Quarter Quarter Quarter Total Revenues: Rental, interest and other income $ 3,075 $ 3,030 $ 3,044 $ 3,055 $ 12,204 Interest income on investment in Master Loan 1,900 804 576 -- 3,280 Reduction of provision for impairment loss 3,176 -- -- -- 3,176 Total revenues 8,151 3,834 3,620 3,055 18,660 Total expenses 2,945 3,126 2,725 2,786 11,582 Net income $ 5,206 $ 708 $ 895 $ 269 $ 7,078 Net income allocated to General Partner (1%) $ 52 $ 7 $ 9 $ 3 $ 71 Net income allocated to Limited Partners (99%) 5,154 701 886 266 7,007 $ 5,206 $ 708 $ 895 $ 269 $ 7,078 Net income per limited partnership unit $ 25.89 $ 3.52 $ 4.45 $ 1.34 $ 35.20 Distributions per limited partnership unit $ 39.02 $ 16.53 $ 18.65 $ 4.63 $ 78.83
1st 2nd 3rd 4th 2000 Quarter Quarter Quarter Quarter Total Revenues: Rental, interest and other income $ 2,846 $ 2,963 $ 3,066 $ 3,108 $ 11,983 Interest income on investment in Master Loan -- 1,000 1,000 -- 2,000 Reduction of provision for impairment loss -- -- 14,241 -- 14,241 Property tax refund -- -- 210 -- 210 Total revenues 2,846 3,963 18,517 3,108 28,434 Total expenses 2,621 2,736 2,816 2,650 10,823 Net income $ 225 $ 1,227 $ 15,701 $ 458 $ 17,611 Net income allocated to General Partner (1%) $ 2 $ 12 $ 157 $ 5 $ 176 Net income allocated to Limited Partners (99%) 223 1,215 15,544 453 17,435 $ 225 $ 1,227 $ 15,701 $ 458 $ 17,611 Net income per limited partnership unit $ 1.12 $ 6.10 $ 78.09 $ 2.28 $ 87.59 Distributions per limited partnership unit $ 27.54 $ 5.97 $ 31.17 $ 175.87 $ 240.55
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors, Executive Officers of the General Partner of the Partnership The names and ages of, as well as the positions and offices held by, the present executive officers and director of ConCap Equities, Inc. ("CEI") the Partnership's General Partner as of December 31, 2002, their ages and the nature of all positions with CEI presently held by them are as follows: Name Age Position Patrick J. Foye 45 Executive Vice President and Director Paul J. McAuliffe 46 Executive Vice President and Chief Financial Officer Thomas C. Novosel 44 Senior Vice President and Chief Accounting Officer Patrick J. Foye has been Executive Vice President and Director of the General Partner since October 1, 1998. Mr. Foye has served as Executive Vice President of AIMCO since May 1998, where he is responsible for continuous improvement, acquisitions of partnership securities, consolidation of minority interests, and corporate and other acquisitions. Prior to joining AIMCO, Mr. Foye was a Merger and Acquisitions Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998. Paul J. McAuliffe has been Executive Vice President and Chief Financial Officer of the General Partner since April 1, 2002. Mr. McAuliffe has served as Executive Vice President of AIMCO since February 1999 and Chief Financial Officer of AIMCO since October 1999. From May 1996 until he joined AIMCO, Mr. McAuliffe was Senior Managing Director of Secured Capital Corp. Thomas C. Novosel has been Senior Vice President and Chief Accounting Officer of the General Partner since April 1, 2002. Mr. Novosel has served as Senior Vice President and Chief Accounting Officer of AIMCO since April 2000. From October 1993 until he joined AIMCO, Mr. Novosel was a partner at Ernst & Young LLP, where he served as the director of real estate advisory services for the southern Ohio Valley area offices but did not work on any assignments related to AIMCO or the Partnership. One or more of the above persons are also directors and/or officers of a general partner (or general partner of a general partner) of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act. Further, one or more of the above persons are also directors and/or officers of Apartment Investment and Management Company and the general partner of AIMCO Properties, L.P., entities that have a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, or are subject to the reporting requirements of Section 15 (d) of such Act. The executive officers and director of the General Partner fulfill the obligations of the Audit Committee and oversee the Partnership's financial reporting process on behalf of the General Partner. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the executive officers and director of the General Partner reviewed the audited financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements. The executive officers and director of the General Partner reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States, their judgments as to the quality, not just the acceptability, of the Partnership's accounting principles and such other matters as are required to be discussed with the audit committee or its equivalent under auditing standards generally accepted in the United States. In addition, the Partnership has discussed with the independent auditors the auditors' independence from management and the Partnership including the matters in the written disclosures required by the Independence Standards Board and considered the compatibility of non-audit services with the auditors' independence. The executive officers and director of the General Partner discussed with the Partnership's independent auditors the overall scope and plans for their audit. In reliance on the reviews and discussions referred to above, the executive officers and director of the General Partner have approved the inclusion of the audited financial statements in the Form 10-K for the year ended December 31, 2002 for filing with the Securities and Exchange Commission. The General Partner has reappointed Ernst & Young LLP as independent auditors to audit the financial statements of the Partnership for the 2003 fiscal year. Fees for 2002 were annual audit services of approximately $58,000 and non-audit services (principally tax-related) of approximately $20,000. Item 11. Executive Compensation No remuneration was paid to the General Partner nor its director or officers. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners Except as noted below, no persons or entity is known by the General Partner to own beneficially more than 5% of the outstanding Units of the Partnership: Name and Address Number of Units Percentage Insignia Properties, L.P. (an affiliate of AIMCO) 50,572.4 25.41% Reedy River Properties, L.L.C. (an affiliate of AIMCO) 28,832.5 14.48% Cooper River Properties, L.L.C. (an affiliate of AIMCO) 11,365.6 5.71% AIMCO Properties, L.P. (an affiliate of AIMCO) 38,912.1 19.55% Reedy River Properties, Cooper River Properties LLC and Insignia Properties LP are indirectly ultimately owned by AIMCO. Their business addresses are 55 Beattie Place, Greenville, SC 20602. AIMCO Properties, LP is ultimately controlled by AIMCO. Its business address is 4582 S. Ulster St. Parkway, Suite 1100, Denver, Colorado 80237. (b) Beneficial Owners of Management Except as described in Item 12(a) above, neither CEI nor any of the directors, officers or associates of CEI own any Units of the Partnership of record or beneficially. (c) Changes in Control Beneficial Owners of CEI As of December 31, 2002, the following entity was known to CEI to be the beneficial owner of more than 5% of its common stock: NUMBER OF PERCENT NAME AND ADDRESS UNITS OF TOTAL Insignia Properties Trust 55 Beattie Place P.O. Box 1089 Greenville, SC 29602 100,000 100% Effective February 26, 1999, Insignia Properties Trust merged into AIMCO with AIMCO being the surviving corporation. As a result, AIMCO ultimately acquired a 100% interest in Insignia Properties Trust. Item 13. Certain Relationships and Related Transactions The Partnership has no employees and is dependent on the General Partner and its affiliates for the management and administration of all Partnership activities. The Partnership Agreement provides for (i) certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. Affiliates of the General Partner are entitled to receive 5% of gross receipts from all of the Partnership's properties for providing property management services. The Partnership paid to such affiliates approximately $695,000, $640,000 and $580,000 for the years ended December 31, 2002, 2001 and 2000, respectively, which is included in operating expense. An affiliate of the General Partner received reimbursement of accountable administrative expenses amounting to approximately $454,000, $332,000 and $510,000 for the years ended December 31, 2002, 2001 and 2000, respectively which is included in general and administrative expenses. Beginning in 2001, the Partnership began insuring its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the General Partner. During the years ended December 31, 2002 and 2001, the Partnership paid AIMCO and its affiliates approximately $256,000 and $60,000 for insurance coverage and fees associated with policy claims administration. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 129,682.6 limited partnership units (the "Units") in the Partnership representing 65.15% of the outstanding Units at December 31, 2002. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO either through private purchases or tender offers. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters which would include voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. As a result of its ownership of 65.15% of the outstanding Units, AIMCO is in a position to control all voting decisions with respect to the Registrant. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to AIMCO, as its sole stockholder. PART IV Item 14. Controls and Procedures The principal executive officer and principal financial officer of the General Partner, who are the equivalent of the Partnership's principal executive officer and principal financial officer, respectively, have, within 90 days of the filing date of this annual report, evaluated the effectiveness of the Partnership's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in the Partnership's internal controls or in other factors that could significantly affect the Partnership's internal controls since the date of evaluation. The Partnership does not believe any significant deficiencies or material weaknesses exist in the Partnership's internal controls. Accordingly, no corrective actions have been taken. Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements Consolidated Capital Equity Partners, L.P. Statement of Net Liabilities in Liquidation at December 31, 2002 Statement of Changes in Net Liabilities in Liquidation for the period March 31, 2002 to December 31, 2002 Balance Sheet as of December 31, 2001 Statements of Operations for the period January 1, 2002 to March 31, 2002 and for the Years Ended December 31, 2001 and 2000 Statements of Changes in Partners' Deficit(Capital)/Net Liabilities in Liquidation for the period January 1, 2002 to March 31, 2002 and for the Years Ended December 31, 2001 and 2000 Statements of Cash Flows for the period January 1, 2002 to March 31, 2002 and for the Years Ended December 31, 2001 and 2000 Notes to Financial Statements 2. Schedules All schedules are omitted because they are not required, are not applicable or the financial information is included in the financial statements or notes thereto. 3. Exhibits (a) See Exhibit Index attached. (b) Reports on Form 8-K filed during the fourth quarter of 2002: None. SIGNATURES 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. CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES By: ConCap Equities, Inc. General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Thomas C. Novosel Thomas C. Novosel Senior Vice President and Chief Accounting Officer Date: March 31, 2003 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the date indicated. /s/Patrick J. Foye Executive Vice President Date: March 31, 2003 Patrick J. Foye and Director /s/Thomas C. Novosel Senior Vice President Date: March 31, 2003 Thomas C. Novosel and Chief Accounting Officer CERTIFICATION I, Patrick J. Foye, certify that: 1. I have reviewed this annual report on Form 10-K of Consolidated Capital Institutional Properties; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/Patrick J. Foye Patrick J. Foye Executive Vice President of ConCap Equities, Inc., equivalent of the chief executive officer of the Partnership CERTIFICATION I, Paul J. McAuliffe, certify that: 1. I have reviewed this annual report on Form 10-K of Consolidated Capital Institutional Properties; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/Paul J. McAuliffe Paul J. McAuliffe Executive Vice President and Chief Financial Officer of ConCap Equities, Inc., equivalent of the chief financial officer of the Partnership EXHIBIT INDEX S-K Reference Document Description 3 Certificates of Limited Partnership, as amended to date. (Incorporated by reference to the Annual Report on Form 19-K for the year ended December 31, 1991 ("1991 Annual Report")). 10.1 Amended Loan Agreement dated November 15, 1990 (the "Effective Date"), by and between the Partnership and EP (Incorporated by reference to the Annual Report of Form 10-K for the year ended December 31, 1990 ("1990 Annual Report")). 10.2 Assumption Agreement as of the Effective Date, by and between EP and CCEP (Incorporated by reference to the 1990 Annual Report). 10.3 Assignment of Claims as of the Effective Date, by and between the Partnership and EP (Incorporated by reference to the 1990 Annual Report). 10.5 Bill of Sale and Assignment dated October 23, 1990, by and between CCEP and ConCap Services Company (Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1990). 10.20Mortgage and Security Agreement between Kennedy Boulevard Associates I, L.P., and Lehman Brothers Holdings, Inc., dated August 25, 1998, securing The Sterling Apartment Home and Commerce Center filed in Form 10-Q for the quarter ended September 30, 1998. 10.21Repair Escrow Agreement between Kennedy Boulevard Associates I, L.P., and Lehman Brothers Holdings, Inc., dated August 25, 1998, securing The Sterling Apartment Home and Commerce Center filed in Form 10-Q for the quarter ended September 30, 1998. 10.22Replacement Reserve and Security Agreement between Kennedy Boulevard Associates I, L.P., and Lehman Brothers Holdings, Inc., dated August 25, 1998, securing The Sterling Apartment Home and Commerce Center filed in Form 10-Q for the quarter ended September 30, 1998. 10.23 Third Amendment to the Limited Partnership Agreement filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference. 10.24 Fourth Amendment to the Limited Partnership Agreement filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference. 11 Statement regarding computation of Net Income per Limited Partnership Unit (Incorporated by reference to "Note A" of Item 8. Financial Statements and Supplementary Data - in this Form 10-K) 28.1 Fee Owner's Limited Partnership Agreement dated November 14, 1990 (Incorporated by reference to the 1990 Annual Report). 99 Certification of the Chief Executive Officer and Chief Financial Officer. 99.1 Audited Financial Statements of Consolidated Capital Equity Partners, L.P. for the years ended December 31, 2002 and 2001. Exhibit 99 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report on Form 10-K of Consolidated Capital Institutional Properties (the "Partnership"), for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Patrick J. Foye, as the equivalent of the chief executive officer of the Partnership, and Paul J. McAuliffe, as the equivalent of the chief financial officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/Patrick J. Foye Name: Patrick J. Foye Date: March 31, 2003 /s/Paul J. McAuliffe Name: Paul J. McAuliffe Date: March 31, 2003 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EXHIBIT 99.1 CONSOLIDATED CAPITAL EQUITY PARTNERS, L.P. FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 EXHIBIT 99.1 (Continued) CONSOLIDATED CAPITAL EQUITY PARTNERS, L.P. TABLE OF CONTENTS December 31, 2002 LIST OF FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Statement of Net Liabilities in Liquidation - December 31, 2002 Statement of Changes in Net Liabilities in Liquidation - for the period April 1, 2002 to December 31, 2002. Balance Sheet as of December 31, 2001 Statements of Operations for the Three Months Ended March 31, 2002, and the Years Ended December 31, 2001 and 2000 Statements of Changes in Partners' Deficit/Net Liabilities in Liquidation - Three Months Ended March 31, 2002 and Years Ended December 31, 2001 and 2000 Statements of Cash Flows for the Three Months Ended March 31, 2002 and the Years Ended December 31, 2001 and 2000 Notes to Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Consolidated Capital Equity Partners, L.P. We have audited the accompanying statement of net liabilities in liquidation of Consolidated Capital Equity Partners, L.P. as of December 31, 2002 and the related statement of changes in net liabilities in liquidation for the period from April 1, 2002 to December 31, 2002. We have also audited the statements of operations, changes in partners' deficit, and cash flows for the period from January 1, 2002 to March 31, 2002. In addition, we have audited the balance sheet as of December 31, 2001 and the statements of operations, changes in partners' deficit, and cash flows for each of the two years in the period ended December 31, 2001. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 the Partnership's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As more fully described in Note A, effective March 31, 2002, the General Partner approved a plan to liquidate the Partnership. As a result, the Partnership has changed its basis of accounting as of March 31, 2002 from a going concern basis to a liquidation basis. In our opinion, the financial statements referred to above present fairly, in all material respects, the net liabilities in liquidation of Consolidated Capital Equity Partners, L.P. at December 31, 2002, the changes in net liabilities in liquidation for the period from April 1, 2002 to December 31, 2002, the financial position at December 31, 2001, and the results of its operations and its cash flows for the period from January 1, 2002 to March 31, 2002, and for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States applied on the basis described in the preceding paragraph. As discussed in Note A to the Financial Statements, in 2002 the Partnership adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64." As a result, the accompanying financial statements for the period from January 1, 2002 to March 31, 2002 and the years ended December 31, 2001 and 2000, referred to above, have been restated to conform to the presentation adopted in 2002 in accordance with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Greenville, South Carolina March 31, 2003 CONSOLIDATED CAPITAL EQUITY PARTNERS, L.P. STATEMENT OF NET LIABILITIES IN LIQUIDATION (Unaudited) (in thousands) December 31, 2002 Assets Cash and cash equivalents $ 963 Receivables and deposits 264 Other assets 90 Investment properties (Notes D and F) 38,500 39,817 Liabilities Accounts payable 338 Tenant security deposit liabilities 272 Due to affiliate 929 Other liabilities 876 Mortgage notes payable (Note D) 23,290 Master Loan and interest payable (Note C) 14,112 39,817 Net liabilities in liquidation $ -- See Accompanying Notes to Financial Statements Exhibit 99.1 (continued) statement of changes in net liabilities in liquidation (in thousands) Period from April 1, 2002 to December 31, 2002 Net liabilities in liquidation at March 31, 2002 $ -- Changes in net liabilities in liquidation attributed to: Decrease in cash and cash equivalents (242) Increase in receivables and deposits 40 Decrease in restricted escrows (625) Decrease in other assets (252) Decrease in investment in affiliated partnerships (1,371) Decrease in investment properties (56,160) Increase in accounts payable (24) Decrease in tenant security deposit liabilities 168 Increase in due to affiliates (929) Decrease in accrued taxes 370 Increase in other liabilities (149) Decrease in mortgage notes payable 31,221 Decrease in Master Loan and interest payable 27,953 Net liabilities in liquidation at December 31, 2002 $ -- EXHIBIT 99.1 (Continued) CAPITAL EQUITY PARTNERS, L.P. BALANCE SHEET (in thousands) December 31, 2001 Assets Cash and cash equivalents $ 1,321 Receivables and deposits 280 Restricted escrows 615 Other assets 1,514 Investment properties (Notes D and F): Land 6,904 Building and related personal property 80,399 87,303 Less accumulated depreciation (68,315) 18,988 $ 22,718 Liabilities and Partners' Deficit Liabilities Accounts payable $ 527 Tenant security deposit liabilities 440 Accrued property taxes 256 Other liabilities 564 Mortgage notes (Note D) 54,834 Master loan and interest payable (Note C) 371,455 428,076 Partners' Deficit General partner (4,054) Limited partners (401,304) (405,358) $ 22,718 See Accompanying Notes to Financial Statements EXHIBIT 99.1 (Continued) CONSOLIDATED CAPITAL EQUITY PARTNERS, L.P. STATEMENTS OF OPERATIONS (Unaudited) (in thousands)
Period From January 1, 2002 to For the Years Ended March 31, December 31, 2002 2001 2000 (restated) (restated) (restated) Revenues: Rental income $ 1,874 $ 7,732 $ 7,317 Other income 275 1,303 923 Total revenues 2,149 9,035 8,240 Expenses: Operating 898 3,936 3,704 General and administrative 228 883 746 Depreciation 263 1,669 2,233 Property taxes 167 697 660 Interest 12,252 44,010 42,361 Loss on early extinguishment of debt (Note D) -- -- 680 Total expenses 13,808 51,195 50,384 Loss from continuing operations (11,659) (42,160) (42,144) Income from discontinued operations (Note G) 217 893 1,530 Gain on sale of discontinued operations (Note G) -- 4,377 3,121 Net loss $(11,442) $(36,890) $(37,493) Net loss allocated to general partner (1%) $ (114) $ (369) $ (375) Net loss allocated to limited partners (99%) (11,328) (36,521) (37,118) $(11,442) $(36,890) $(37,493) See Accompanying Notes to Financial Statements
EXHIBIT 99.1 (Continued) CONSOLIDATED CAPITAL EQUITY PARTNERS, L.P. STATEMENTS OF CHANGES IN PARTNERS' DEFICIT/NET LIABILITIES IN LIQUIDATION (in thousands) General Limited Partners Partners Total Partners' deficit at December 31, 1999 $(3,310) $(327,665) $(330,975) Net loss for the year ended December 31, 2000 (375) (37,118) (37,493) Partners' deficit at December 31, 2000 (3,685) (364,783) (368,468) Net loss for the year ended December 31, 2001 (369) (36,521) (36,890) Partners deficit at December 31, 2001 (4,054) (401,304) (405,358) Net loss for the period from January 1, 2002 to ended March 31, 2002 (114) (11,328) (11,442) Partners' deficit at March 31, 2002 $ (4,168) $(412,632) $(416,800) Adjustment to liquidation basis (Note A) 416,800 Net liabilities in liquidation of March 31, 2002 $ -- See Accompanying Notes to Financial Statements EXHIBIT 99.1 (Continued) CONSOLIDATED CAPITAL EQUITY PARTNERS, L.P. STATEMENTS OF CASH FLOWS (in thousands)
Period From January 1, 2002 to Years Ended March 31, December 31, 2002 2001 2000 Cash flows from operating activities: Net loss $(11,442) $(36,890) $(37,493) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 604 3,306 4,920 Loss on early extinguishment of debt -- -- 1,410 Gain on sale of discontinued operation -- (4,377) (3,121) Change in accounts: Receivables and deposits 56 648 431 Other assets (430) 45 27 Accounts payable 36 (132) (83) Tenant security deposit liabilities -- (45) 19 Accrued property taxes 114 38 (217) Other liabilities 163 (22) 121 Accrued interest on Master Loan 11,769 38,763 39,287 Net cash provided by operating activities 870 1,334 5,301 Cash flows from investing activities: Property improvements and replacements (617) (2,952) (4,210) Proceeds from sale of discontinued operation -- 6,019 4,526 Net (deposits to) withdrawals from restricted escrows (10) 152 (49) Net cash (used in) provided by investing activities (627) 3,219 267 Cash flows from financing activities: Principal payments on Master Loan -- (7,801) (33,634) Principal payments on mortgage notes payable (323) (1,226) (385) Proceeds from financing/refinancing -- -- 56,200 Repayment of mortgage notes payable -- -- (22,311) Debt extinguishment costs -- -- (1,007) Loan costs paid (36) (99) (1,402) Net cash used in financing activities (359) (9,126) (2,539) Net (decrease) increase in cash and cash equivalents (116) (4,573) 3,029 Cash and cash equivalents at beginning of period 1,321 5,894 2,865 Cash and cash equivalents at end of period $ 1,205 $ 1,321 $ 5,894 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,068 $ 7,617 $ 4,032 Supplemental disclosure of non-cash activity: Property improvements and replacements included in accounts payable $ -- $ 249 $ --
EXHIBIT 99.1 (Continued) CONSOLIDATED CAPITAL EQUITY PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS December 31, 2002 Note A - Basis of Presentation On March 31, 2002, Consolidated Capital Equity Partners, L.P. ("the Partnership" or "CCEP") adopted the liquidation basis of accounting as a result of the Partnership receiving notification from Consolidated Capital Investment Partners, L.P. ("CCIP"), the holder of the nonrecourse note ("Master Loan") and a related party, of its intention to exercise its remedy under the Master Loan agreement to foreclose or to execute deeds in lieu of foreclosure on the investment properties held by the Partnership. The Master Loan matured in November 2000. The Partnership does not have the means to satisfy its obligation under the Master Loan. No other sources of additional financing have been identified by the Partnership, nor does ConCap Holdings, Inc. (the "General Partner") have any other plans to remedy the liquidity problems the Partnership is experiencing. CCIP executed deeds in lieu of foreclosure during the third quarter of 2002 on four of the active properties of the Partnership. Upon completion of the foreclosure process on the remaining four properties held by the Partnership, the Partnership will cease to exist as a going concern, and it will be dissolved. As a result of the decision to liquidate the Partnership, the Partnership changed its basis of accounting for its financial statements at March 31, 2002, to the liquidation basis of accounting. Consequently, assets have been valued at estimated net realizable value and liabilities are presented at their estimated settlement amounts, including estimated costs associated with completing the liquidation and estimated operations of the investment properties. The valuation of assets and liabilities requires many estimates and assumptions. There are substantial uncertainties in completing the liquidation. The actual realization of assets and settlement of liabilities could be higher or lower than amounts indicated and is based upon estimates of the General Partner as of the date of the consolidated financial statements. Adjustment to Liquidation Basis of Accounting At March 31, 2002, in accordance with the liquidation basis of accounting, assets were adjusted to their estimated net realizable value and liabilities were adjusted to their estimated settlement amount. The net adjustment required to convert to the liquidation basis of accounting was a decrease in net liabilities of approximately $416,800,000 which is included in the Statement of Changes in Partners' Deficit/Net Liabilities In Liquidation. The adjustments are summarized as follows: Increase in Net Assets (in thousands) Adjustment of book value of property and improvements to estimated net realizable value $ 75,868 Adjustment for estimated net realizable value of investment in affiliated partnerships 1,371 Adjustment of master loan and accrued interest to estimated settlement amount 341,159 Adjustment of other assets and liabilities, net (1,598) Decrease in net liabilities $416,800 Note B - Organization and Summary of Significant Accounting Policies Organization: Consolidated Capital Equity Partners ("EP"), a California general partnership, was formed on June 24, 1981, to engage in the business of acquiring, operating and holding equity investments in income-producing real estate properties. The operations of EP were financed substantially through nonrecourse notes (the "Master Loan") from Consolidated Capital Institutional Properties ("CCIP"), a California limited partnership. These notes are secured by the real estate properties owned by EP. The General Partner of CCIP is ConCap Equities, Inc. ("CEI"), a Delaware corporation. In November 1990, EP's general partners executed a new partnership agreement (the "New Partnership Agreement") in conjunction with the bankruptcy settlement discussed below whereby EP converted from a general partnership to a California limited partnership, Consolidated Capital Equity Partners, L.P. ("CCEP" or the "Partnership"). Pursuant to the New Partnership Agreement, ConCap Holding, Inc. ("CHI"), a Texas corporation, a wholly-owned subsidiary of CEI, became the General Partner of CCEP, and the former General Partners of EP became Limited Partners of CCEP. CHI has full discretion with respect to conducting CCEP's business, including managing CCEP's properties and initiating and approving capital expenditures and asset dispositions and refinancings. All of CEI's outstanding stock was owned by Insignia Properties Trust ("IPT"). Effective February 26, 1999, IPT was merged into Apartment Investment and Management Company ("AIMCO"). Hence, CEI is now a wholly-owned subsidiary of AIMCO, a publicly held real estate investment trust. The Partnership Agreement provides that the Partnership is to terminate on December 31, 2011, unless terminated prior to such date. Allocation of Profits, Gains, and Losses: Pursuant to the New Partnership Agreement, net income and net losses for both financial and tax reporting purposes are allocated 99% to the Limited Partners and 1% to the General Partner. Cash and Cash Equivalents: Cash and cash equivalents includes cash on hand and in banks. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances included approximately $874,000 and $1,180,000 at December 31, 2002 and 2001, respectively, that are maintained by an affiliated management company on behalf of affiliated entities in cash concentration accounts. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Tenant Security Deposits: The Partnership requires security deposits from lessees for the duration of the lease and such deposits are included in receivables and deposits. Deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on rental payments. Depreciation: Depreciation was provided by the straight-line method over the estimated lives of the apartment properties and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used 18 years for additions after March 15, 1984 and before May 9, 1985, and 19 years for additions after May 8, 1985, and before January 1, 1987. As a result of the Tax Reform Act of 1986, for additions after December 31, 1986, the modified accelerated cost recovery method is used for depreciation of (1) real property additions over 27 1/2 years and (2) personal property additions over 5 years. No depreciation was recorded subsequent to March 31, 2002 due to the conversion to the liquidation basis of accounting. Loan Costs: Loan costs were being amortized using the straight-line method over the lives of the respective loans. At March 31, 2002, these loan costs were written off in the adjustment to liquidation basis because the Partnership determined that these intangible assets no longer have value. Advertising: The Partnership expenses the costs of advertising as incurred. Advertising costs were approximately $289,000, $333,000 and $385,000 for the years ended December 31, 2002, 2001 and 2000, respectively, and are included in operating expense. Investment Properties: Investment properties consist of four apartment complexes and were stated at cost. Acquisition fees were capitalized as a cost of real estate. Expenditures in excess of $250 that maintained an existing asset which had a useful life of more than one year were capitalized as capital replacement expenditures and depreciated over the estimated useful life of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs were expensed as incurred. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Partnership recorded impairment losses on long-lived assets used in operations when events and circumstances indicated that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets were less than the carrying amounts of those assets. Costs of properties that have been permanently impaired have been written down to appraised value. No adjustments for impairment of value were recorded during the three months ended March 31, 2002 or the years ended December 31, 2001 or 2000. As a result of the Partnership adopting the liquidation basis of accounting, the investment properties were adjusted to their estimated net realizable value at March 31, 2002. The effect of adoption was to increase the carrying value of the investment properties by approximately $75,868,000. Leases: The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases and fully reserves all balances outstanding over thirty days. In addition, the General Partner's policy is to offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged against rental income as incurred. Income Taxes: No provision has been made in the financial statements for Federal income taxes because, under current law, no Federal income taxes are paid directly by CCEP. The Partners are responsible for their respective shares of CCEP's net income or loss. CCEP reports certain transactions differently for tax than for financial statement purposes. The tax basis of CCEP's assets and liabilities is approximately $20,979,000 less than and $354,253,000 greater than the assets and liabilities as reported in the financial statements at December 31, 2002 and 2001, respectively. Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes that the carrying amounts of its financial instruments (except for long term debt) approximate their fair values due to the short term maturity of these instruments. The fair value of the Partnership's long term debt, after discounting the scheduled loan payments to maturity, approximates its carrying balance. Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also established standards for related disclosures about products and services, geographic areas, and major customers. As defined in SFAS 131, the Partnership has only one reportable segment. Recent Accounting Pronouncements: In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Partnership adopted SFAS No. 144 effective January 1, 2002. As a result, the accompanying statements of operations have been restated for the three months ended March 31, 2002, and the years ended December 31, 2001 and 2000 to reflect the operations of Society Park Apartments and Magnolia Trace Apartments and Shirewood Townhomes as income from discontinued operations. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recission of FASB Statements No. 4, 44 and 64". SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt," required that all gains and losses from extinguishment of debt be aggregated and, if material, classified as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should only be classified as extraordinary if they are unusual in nature and occur infrequently. Neither of these criteria applies to the Partnership. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Partnership adopted SFAS 145 effective April 1, 2002. As a result, the accompanying statement of operations for 2000 has been restated to reflect the loss on extinguishment of debt from the refinancing of the Partnership's properties in operations rather than as an extraordinary item. Note C - Master Loan and Accrued Interest Payable The General Partner had been in negotiations with CCIP with respect to its options which included CCIP foreclosing on the properties in CCEP which collateralize the Master Loan or extending the terms of the Master Loan. CCIP decided to foreclose on the properties that collaterize the Master Loan. CCIP began the process of executing deeds in lieu of foreclosure during the third quarter of 2002 on all the investment properties of the Partnership. During August 2002 the General Partner executed deeds in lieu of foreclosure on four of the active properties of CCEP. In addition, one of the properties held by the Partnership was sold in December 2002. The foreclosure process on the remaining four properties held by CCEP is ongoing. As the deeds are executed, title in the properties previously owned by the Partnership are vested in CCIP, subject to the existing liens on the properties including the first mortgage loans. As a result, during the year ended December 31, 2002, CCIP assumed responsibility for the operations of the foreclosed properties. When the Partnership no longer has title to any properties, it will be dissolved. Until the process of foreclosure or executing deeds in lieu of foreclosure on all the properties currently held by CCEP is completed, interest will accrue on the Master Loan at a fluctuating rate per annum, adjusted annually on July 15 by the percentage change in the U.S. Department of Commerce Implicit Price Deflator for the Gross National Product, subject to an interest rate ceiling of 12.5%. Payments are currently payable quarterly in an amount equal to "Excess Cash Flow", generally defined in the Master Loan as net cash flow from operations after third-party debt service and capital expenditures. Any unpaid interest is added to principal, and compounded annually. Any net proceeds from the sale or refinancing of any of CCEP's properties are paid to CCIP under the terms of the Master Loan Agreement. During the years ended December 31, 2002, 2001, and 2000, CCEP paid approximately $1,719,000, $7,801,000, and $33,634,000 in principal payments on the Master Loan. Approximately $88,000, $357,000, and $238,000 was paid during the years ended December 31, 2002, 2001, and 2000 respectively, representing cash received on certain investments. These funds are required to be transferred to CCIP under the terms of the Master Loan. In addition, during the year ended December 31, 2002, approximately $1,631,000 was paid representing proceeds received from the sale of Society Park Apartments. For 2001, approximately $6,019,000 was paid representing net proceeds from the sale of Magnolia Trace Apartments and approximately $1,425,000 was paid representing additional proceeds received for the refinancing of the mortgages encumbering nine of the investment properties in 2000. For 2000, approximately $4,526,000 was paid representing net proceeds from the sale of Shirewood Townhomes and approximately $28,870,000 was received representing net proceeds received for the refinancing of the mortgages encumbering nine of the investment properties. There were no advances on the Master Loan during the years ended December 31, 2002, 2001 or 2000. See Notes D and G for details concerning the refinancings and the sales of Society Park Apartments, Magnolia Trace Apartments, and Shirewood Townhomes Apartments, respectively. Note D - Mortgage Notes Payable The principal terms of mortgage notes payable are as follows: Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At Property 2002 Interest Rate Date Maturity (in thousands) Palm Lake 1st Mortgage $ 2,853 $ 25 7.86% 02/01/10 $ 2,158 Plantation Gardens 1st Mortgage 9,245 80 7.83% 03/01/10 6,972 Regency Oaks 1st Mortgage 7,274 63 7.80% 02/01/10 5,494 The Dunes 1st Mortgage 3,918 34 7.81% 02/01/10 2,960 Total $ 23,290 $ 202 $17,584 The mortgage notes payable are non-recourse and are secured by pledge of the respective apartment properties and by pledge of revenues from the respective apartment properties. The mortgage notes are senior to the Master Loan. Prepayment penalties are required if repaid prior to maturity. Further, the properties may not be sold subject to existing indebtedness. On September 29, 2000, the Partnership refinanced the mortgage encumbering The Dunes Apartments. The refinancing replaced indebtedness of approximately $1,945,000 with a new mortgage in the amount of $4,120,000. The new mortgage carries a stated interest rate of 7.81%. Interest on the old mortgage was 6.95%. Principal and interest payments are due monthly until the loan matures on February 1, 2010 at which time a balloon payment of approximately $2,960,000 is due. Total capitalized loan costs were approximately $111,000 during the year ended December 31, 2000. Approximately $10,000 of additional loan costs were capitalized during the year ended December 31, 2001. The Partnership recognized a loss on the early extinguishment of debt of approximately $134,000 due to the write-off of unamortized loan costs and a prepayment penalty. On September 29, 2000, the Partnership refinanced the mortgage encumbering Palm Lake Apartments. The refinancing replaced indebtedness of approximately $1,653,000 with a new mortgage in the amount of $3,000,000. The new mortgage carries a stated interest rate of 7.86%. Interest on the old mortgage was 6.95%. Principal and interest payments are due monthly until the loan matures on February 1, 2010 at which time a balloon payment of approximately $2,158,000 is due. Total capitalized loan costs were approximately $93,000 during the year ended December 31, 2000. Approximately $7,000 of additional loan costs were capitalized during the year ended December 31, 2001. The Partnership recognized a loss on the early extinguishment of debt of approximately $118,000 due to the write-off of unamortized loan costs and a prepayment penalty. On September 29, 2000, the Partnership refinanced the mortgage encumbering Tates Creek Village Apartments. The refinancing replaced indebtedness of approximately $2,455,000 with a new mortgage in the amount of $4,225,000. The new mortgage carried a stated interest rate of 7.78%. Interest on the old mortgage was 6.95%. Principal and interest payments were due monthly until the loan matured on April 1, 2010 at which time a balloon payment of approximately $3,017,000 was due. Total capitalized loan costs were approximately $101,000 during the year ended December 31, 2000. Approximately $13,000 of additional loan costs were capitalized during the year ended December 31, 2001. The Partnership recognized a loss on the early extinguishment of debt of approximately $155,000 due to the write-off of unamortized loan costs and a prepayment penalty. This property was foreclosed by CCIP during the year ended December 31, 2002. See "Note C" for further discussion. On September 29, 2000, the Partnership financed a mortgage encumbering Society Park Apartments. The mortgage debt totaled $5,330,000. The mortgage carries a stated interest rate of 7.80%. Principal and interest payments were due monthly until the loan matures on February 1, 2010 at which time a balloon payment of approximately $3,828,000 was due. Total capitalized loan costs were approximately $154,000 during the year ended December 31, 2000. Approximately $8,000 of additional loan costs were capitalized during the year ended December 31, 2001. This property was sold in December 2002. See "Note G" for further discussion. On September 29, 2000, the Partnership financed a mortgage encumbering Regency Oaks Apartments. The mortgage debt totaled $7,650,000. The mortgage carries a stated interest rate of 7.80%. Principal and interest payments are due monthly until the loan matures on February 1, 2010 at which time a balloon payment of approximately $5,494,000 is due. Total capitalized loan costs were approximately $209,000 during the year ended December 31, 2000. Approximately $13,000 of additional loan costs were capitalized during the year ended December 31, 2001. On October 3, 2000, the Partnership refinanced the mortgage encumbering Plantation Gardens Apartments. The refinancing replaced indebtedness of approximately $6,704,000 with a new mortgage in the amount of $9,700,000. The new mortgage carries a stated interest rate of 7.83%. Interest on the old mortgage was 6.95%. Principal and interest payments are due monthly until the loan matures on March 1, 2010 at which time a balloon payment of approximately $6,972,000 is due. Total capitalized loan costs were approximately $219,000 during the year ended December 31, 2000. Approximately $13,000 of additional loan costs were capitalized during the year ended December 31, 2001. The Partnership recognized a loss on the early extinguishment of debt of approximately $428,000 due to the write-off of unamortized loan costs and a prepayment penalty. On October 3, 2000, the Partnership refinanced the mortgage encumbering Indian Creek Apartments. The refinancing replaced indebtedness of approximately $4,438,000 with a new mortgage in the amount of $8,750,000. The new mortgage carries a stated interest rate of 7.83%. Interest on the old mortgage was 6.95%. Principal and interest payments were due monthly until the loan matures on January 1, 2010 at which time a balloon payment of $6,351,000 was due. Total capitalized loan costs were approximately $190,000 during the year ended December 31, 2000. Approximately $13,000 of additional loan costs were capitalized during the year ended December 31, 2001. The Partnership recognized a loss on the early extinguishment of debt of approximately $260,000 due to the write-off of unamortized loan costs and a prepayment penalty. This property was foreclosed by CCIP during the year ended December 31, 2002. See "Note C" for further discussion. On October 3, 2000, the Partnership financed a mortgage encumbering Silverado Apartments. The new mortgage is in the amount of $3,525,000. The new mortgage carries a stated interest rate of 7.87%. Principal and interest payments were due monthly until the loan matures on November 1, 2010 at which time a balloon payment of approximately $2,434,000 was due. Total capitalized loan costs were approximately $107,000 during the year ended December 31, 2000. Approximately $9,000 of additional loan costs were capitalized during the year ended December 31, 2001. This property was foreclosed by CCIP during the year ended December 31, 2002. See "Note C" for further discussion. On October 11, 2000, the Partnership refinanced the mortgage encumbering The Knolls Apartments. The refinancing replaced indebtedness of approximately $5,116,000 with a new mortgage in the amount of $9,900,000. The new mortgage carries a stated interest rate of 7.78%. Interest on the old mortgage was 6.95%. Principal and interest payments were due monthly until the loan matures on March 1, 2010 at which time a balloon payment of approximately $7,105,000 was due. Total capitalized loan costs were approximately $218,000 during the year ended December 31, 2000. Approximately $13,000 of additional loan costs were capitalized during the year ended December 31, 2001. The Partnership recognized a loss on the early extinguishment of debt of approximately $315,000 due to the write-off of unamortized loan costs and a prepayment penalty. This property was foreclosed by CCIP during the year ended December 31, 2002. See "Note C" for further discussion. Included in the loan costs capitalized associated with the above transactions was a 1% fee of approximately $560,000 paid in 2000 to the General Partner in accordance with the terms of the Partnership Agreement. Principal payments on mortgage notes payable are due as follows (in thousands): Years Ending December 31, 2003 $ 624 2004 675 2005 729 2006 788 2007 852 Thereafter 19,622 $23,290 Note E - Related Party Transactions The Partnership has no employees and is dependent on the General Partner and its affiliates for the management and administration of all Partnership activities. The New Partnership Agreement provides for (i) certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates for services. Affiliates of the General Partner are entitled to receive 5% of gross receipts from all of the Partnership's residential properties for providing property management services. The Partnership paid to such affiliates approximately $729,000, $964,000 and $985,000 for the years ended December 31, 2002, 2001 and 2000, respectively which is included in operating expense. The Partnership is also required to pay an investment advisory fee to an affiliate of the General Partner. This agreement provides for an annual fee, payable in monthly installments, to an affiliate of the General Partner for advising and consulting services for CCEP's properties. The Partnership paid to such affiliates approximately $107,000, $214,000 and $179,000 for the years ended December 31, 2002, 2001 and 2000, respectively which is included in general and administrative expense. Affiliates of the General Partner received reimbursement of accountable administrative expenses amounting to approximately $321,000, $1,486,000 and $548,000 for the years ended December 31, 2002, 2001 and 2000, respectively which is included in general and administrative expenses and investment properties. Included in these amounts are fees related to construction management services provided by an affiliate of the General Partner of approximately $86,000, $990,000 and $112,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The construction management service fees are calculated based on a percentage of current year additions to investment properties. In connection with the sale of Society Park in December 2002, the General Partner earned a fee of $218,000 in compensation for its role in the sale. The fee was paid subsequent to December 31, 2002. In connection with the sale of Magnolia Trace in 2001 and Shirewood Townhomes in 2000 the General Partner was paid a fee of $206,000 and $133,000, respectively, in compensation for its role in the sales. In connection with the refinancing of each of its mortgages and the financing of its unencumbered investment properties during 2000, the Partnership paid to the General Partner fees totaling $560,000 for its role in the transactions. These fees were capitalized as loan costs. These loan costs were written off in the adjustment to liquidation basis. See "Note A" for further discussion. In addition to the compensation and reimbursements described above, interest payments are made to and loan advances are received from CCIP. Such interest payments totaled approximately $386,000, $3,280,000 and $2,000,000 for the years ended December 31, 2002, 2001 and 2000, respectively. There were no advances during 2002, 2001 or 2000. Principal payments totaling $1,719,000, $7,801,000 and $33,634,000 were made during the years ended December 31, 2002, 2001 and 2000, respectively. In accordance with the Partnership Agreement, an affiliate of the General Partner loaned the Partnership approximately $19,000 during 2002 to cover operating expenses at The Dunes and Plantation Gardens Apartments. The entire balance was repaid during the year ended December 31, 2002. Interest was charged at the prime rate plus 2% and amounted to less than $1,000 for the year ended December 31, 2002. There were no loans from the General Partner or associated interest expense during the years ended December 31, 2001 and 2000. Beginning in 2001, the Partnership began insuring its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the General Partner. During the years ended December 31, 2002 and 2001, the Partnership paid AIMCO and its affiliates approximately $155,000 and $259,000 for insurance coverage and fees associated with policy claims administration. Note F - Investment Properties and Accumulated Depreciation The investment properties owned by the Partnership consist of the following (dollar amounts in thousands):
Building December 31, 2002 & Related Personal Accumulated Depreciable Description Land Property Total Depreciation Life-Years Palm Lake $ 308 $ 3,992 $ 4,300 $ -- (1) (1) Plantation Gardens 7,982 11,318 19,300 -- (1) (1) Regency Oaks 521 8,779 9,300 -- (1) (1) The Dunes 489 5,111 5,600 -- (1) (1) Total $ 9,300 $29,200 $38,500 $ --
(1) As a result of adopting the liquidation of accounting, the gross carrying value of the properties were adjusted to their net realizable value and will not be depreciated further.
Building December 31, 2001 & Related Personal Accumulated Depreciable Description Land Property Total Depreciation Life-Years Indian Creek Village $ 1,041 $ 9,454 $10,495 $ 8,202 5-18 The Knolls 647 8,700 9,347 6,832 5-18 Palm Lake 272 5,394 5,666 4,512 5-18 Plantation Gardens 1,958 14,949 16,907 13,315 5-18 Regency Oaks 521 12,254 12,775 10,333 5-18 Silverado 628 5,590 6,218 4,700 5-18 Society Park 966 9,691 10,657 8,561 5-18 The Dunes 489 6,090 6,579 4,992 5-18 Tates Creek Village 382 8,277 8,659 6,868 5-18 Total $ 6,904 $80,399 $87,303 $68,315
Note G - Sale of Investment Properties On December 31, 2002, the Partnership sold Society Park, located in Tampa, Florida, to an unaffiliated third party for net sales proceeds of approximately $1,631,000, after payment of closing costs. The Partnership used all of the proceeds from the sale of the property to pay down the Master Loan principal as required by the Master Loan Agreement. The sale resulted in a gain on sale of investment property of approximately $727,000. In conjunction with the sale, a fee of approximately $218,000 was earned by the General Partner in accordance with the Partnership Agreement. The fee was paid subsequent to December 31, 2002. On January 19, 2001, the Partnership sold Magnolia Trace, located in Baton Rouge, Louisiana, to an unaffiliated third party for net sales proceeds of approximately $6,019,000, after payment of closing costs. The Partnership used all of the proceeds from the sale of the property to pay down the Master Loan principal as required by the Master Loan Agreement. The sale resulted in a gain on sale of investment property of approximately $4,377,000. In conjunction with the sale, a fee of approximately $206,000 was paid to the General Partner in accordance with the Partnership Agreement. On July 21, 2000 the Partnership sold Shirewood Townhomes, located in Shreveport, Louisiana, to an unaffiliated third party for net sales proceeds of approximately $4,526,000, after payment of closing costs. The Partnership used all of the proceeds from the sale of the property to pay down the Master Loan principal as required by the Master Loan Agreement. The sale resulted in a gain on sale of investment property of approximately $3,121,000. In conjunction with the sale, a fee of approximately $133,000 was paid to the General Partner in accordance with the Partnership Agreement. Note H - Investment in Affiliated Partnerships The Partnership had investments in the following affiliated partnerships:
Estimated Ownership Net Realizable Partnership Type of Ownership Percentage Value Consolidated Capital Non-controlling Growth Fund General Partner 0.40% $ 47 Consolidated Capital Non-controlling Properties III General Partner 1.85% 27 Consolidated Capital Non-controlling Properties IV General Partner 1.85% 844
$ 918 Prior to the adoption of the liquidation basis of accounting, the Partnership did not recognize an investment in these affiliated partnerships in its consolidated financial statements as these investment balances had been reduced to zero as a result of the receipt of distributions from the affiliated partnerships in prior periods exceeding the investment balance of the Partnership. However, due to the adoption of the liquidation basis of accounting, the investments in these affiliated partnerships were valued at their estimated fair value and included in the Consolidated Statement of Net Liabilities in Liquidation. During the year ended December 31, 2002 these investments were assigned to CCIP as part of the foreclosure process of the assets of CCEP (see "Note A"). Note I - Selected Annual Financial Data (unaudited)
Year Ended December 31, 2001 (restated) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total Revenues $ 2,178 $ 2,285 $ 2,717 $ 1,855 $ 9,035 Expenses 12,941 12,901 12,995 12,358 51,195 Gain sale of discontinued operations 4,377 -- -- -- 4,377 Income from discontinued operations 158 184 255 296 893 Net loss $ (6,228) $(10,432) $(10,023) $(10,207) $(36,890)