-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IHAu21pM8NMqd4XexWKDMUF5jKqfRxjOCpmImyIsCmTDUcRQE8cGslbxNs7EQYjx vKZHD7M0qv1SUUKuEHuGVw== 0000720460-97-000001.txt : 19970328 0000720460-97-000001.hdr.sgml : 19970328 ACCESSION NUMBER: 0000720460-97-000001 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANGELES INCOME PROPERTIES LTD III CENTRAL INDEX KEY: 0000720460 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 953903984 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13192 FILM NUMBER: 97564274 BUSINESS ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8032391000 MAIL ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLAZA STREET 2: P.O. BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (As last amended by 34-31905, eff. 4/26/93) (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-13192 ANGELES INCOME PROPERTIES, LTD. III California 95-3903984 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) One Insignia Financial Plaza, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (Zip Code) Issuer's telephone number (864) 239-1000 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Limited Partnership Units (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this form 10-KSB [X] State issuer's revenues for its most recent fiscal year. $1,779,000 State the aggregate market value of the voting stock held by nonaffiliates of the Registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. Market value information for Registrant's Partnership Interests is not available. Should a trading market develop for these Interests, it is the Managing General Partner's belief that such trading would not exceed $25 million. DOCUMENTS INCORPORATED BY REFERENCE NONE PART I ITEM 1. DESCRIPTION OF BUSINESS Angeles Income Properties, Ltd. III (the "Partnership" or "Registrant") is a publicly-held limited partnership organized under the California Uniform Limited Partnership Act pursuant to a Certificate and Agreement of Limited Partnership dated May 26, 1983, as amended (hereinafter referred to as "the Agreement"). The Partnership's Managing General Partner is Angeles Realty Corporation II ("ARC II"), a California corporation. The Elliott Accommodation Trust and the Elliott Family Partnership, Ltd., California limited partnerships, are the Non- Managing General Partners. The Managing General Partner and the Non-Managing General Partners are herein collectively referred to as the "General Partners". The Partnership, through its public offering of Limited Partnership Units, sold 86,920 units aggregating $43,460,000. The General Partners contributed capital in the amount of $1,000 for a 1% interest in the Partnership. The Partnership was formed for the purpose of acquiring fee and other forms of equity interests in various types of real property. The Managing General Partner of the Partner- ship intends to maximize the operating results and, ultimately, the net realizable value of each of the Partnership's properties in order to achieve the best possible return for the investors. Such results may best be achieved through property sales, refinancings, debt restructurings or relinquishment of the assets. The Partnership intends to evaluate each of its holdings periodically to determine the most appropriate strategy for each of the assets. The Partnership has no full time employees. The Managing General Partner is vested with full authority as to the general management and supervision of the business and affairs of the Partnership. Limited Partners and the Non-Managing General Partners have no right to participate in the management or conduct of such business and affairs. Insignia Residential Group, L.P. provides property management services to each of the Partnership's investment properties. The business in which the Partnership is engaged is highly competitive, and the Partnership is not a significant factor in its industry. Each of its apartment and commercial properties is located in or near a major urban area and, accordingly, competes for rentals not only with similar apartment and commercial properties in its immediate area but with hundreds of similar apartment and commercial properties throughout the urban area. Such competition is primarily on the basis of location, rents, services and amenities. In addition, the Partnership competes with significant numbers of individuals and organizations (including similar partnerships, real estate investment trusts and financial institutions) with respect to the sale of improved real properties, primarily on the basis of the prices and terms of such transactions. ITEM 2. DESCRIPTION OF PROPERTIES The following table sets forth the Registrant's investments in properties: Property Purchase Type of Ownership Use Poplar Square Shopping 05/15/85 Fee ownership - subject Commercial Center to a first mortgage 166,274 sq.ft. Medford, Oregon Lake Forest Apartments 06/27/84 Fee ownership Residential Rental Brandon, Mississippi 136 units The Partnership has a 33.3% investment in Northtown Mall Partners ("Northtown"). It also had a 57% investment in Burlington Outlet Mall Joint Venture ("Burlington") and a 50% investment in Moraine West Carrollton Joint Venture ("Moraine"). The Partnership no longer has an investment in these joint ventures due to the foreclosure of Burlington's investment property and the dissolution of Moraine during 1995. The property owned by Northtown, as of December 31, 1996, is summarized as follows: Date of Property Purchase Type of Ownership Use Northtown Mall 06/28/85 33.3% Commercial 806,730 sq.ft. Northtown is accounted for by the Partnership on the equity method of accounting in accordance with its respective ownership percentage and is included on the balance sheet in "Equity interest in net liabilities of joint venture." SCHEDULE OF PROPERTIES: (dollar amounts in thousands) Carrying Accumulated Federal Property Value Depreciation Rate Method Tax Basis Poplar Square Shopping Center $ 9,697 $ 6,233 5-20 yrs S/L $ 5,257 Lake Forest Apartments 4,465 2,351 5-40 yrs S/L 1,836 $ 14,162 $ 8,584 $ 7,093 See "Note A" of the financial statements included in "Item 7." for a description of the Partnership's depreciation policy. SCHEDULE OF MORTGAGES: (dollar amounts in thousands) Principal Principal Balance At Balance December 31, Interest Period Maturity Due At Property 1996 Rate Amortized Date Maturity Poplar Square Shopping Center First mortgage $ 3,797 9.2% 25 yrs. 11/01/06 $ 3,167 Average annual rental rate and occupancy for 1996 and 1995 for each property: Average Annual Average Annual Rental Rates Occupancy Property 1996 1995 1996 1995 Poplar Square Shopping Center $4.67/sq.ft. $4.82/sq.ft. 97% 97% Lake Forest Apartments (1) 6,223/unit 6,040/unit 92% 94% (1) Low occupancy at Lake Forest Apartments is due to competition from new apartment complexes in the area. This property has some physical deficiencies and the Managing General Partner anticipates that occupancy will improve once the physical deficiencies are addressed. As noted under "Item 1. Description of Business", the real estate industry is highly competitive. All of the properties of the Partnership are subject to competition from other residential apartment complexes and commercial buildings in the area. The Managing General Partner believes that all of the properties are adequately insured. The multi-family residential property's lease terms are for one year or less. No residential tenant leases 10% or more of the available rental space. Poplar Square's leases expire on various dates through 2009. The following is a schedule of the lease expirations for the years 1997-2006: Number of % of Gross Expirations Square Feet Annual Rent Annual Rent Poplar Square Shopping Center 1997 4 26,801 $ 143,616 17.00% 1998 1 675 6,684 .79% 1999 5 14,320 139,128 16.46% 2000 5 35,545 226,740 26.83% 2001 2 29,475 214,464 25.37% 2002 1 2,550 24,480 2.90% 2003-2006 1 47,800 90,000 10.65% The following schedule reflects information on tenants occupying 10% or more of the leasable square footage of Poplar Square Shopping Center: Square Footage Annual Rent Nature of Business Leased Per Square Foot Lease Expiration Clothes Retailer 22,395 $ 7.00 01/31/01 Fabric Retailer 19,980 5.40 01/31/00 Discount Retailer 47,800 1.88 10/14/09 Real estate taxes and rates in 1996 for each property were: 1996 1996 Billing Rate Poplar Square Shopping Center (1) $114 1.34% Lake Forest Apartments 41 10.61% (1)The fiscal property tax year for this property, which ends in June, is different than the Partnership's fiscal year. ITEM 3. LEGAL PROCEEDINGS Angeles Corporation ("Angeles"), either directly or through an affiliate, maintained a central disbursement account (the "account") for the properties and partnerships managed by Angeles and its affiliates, including the Registrant. Angeles caused the Partnership to make deposits to the account ostensibly to fund the payment of certain obligations of the Partnership. However, of these total deposits, at least $42,000 deposited by or on behalf of the Partnership was used for purposes other than satisfying the liabilities of the Partnership. Accordingly, the Partnership filed a Proof of Claim in the Angeles bankruptcy proceedings for such amount. However, subsequently the Managing General Partner of the Partnership has determined that the cost involved to pursue such claim would likely exceed any amount received, if in fact such claim were to be resolved in favor of the Partnership. Therefore, the Partnership withdrew this claim on August 9, 1995. The Registrant is unaware of any other pending or outstanding litigation that is not of a routine nature. The Managing General Partner of the Registrant believes that all such pending or outstanding litigation will be resolved without a material adverse effect upon the business, financial condition, or operations of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The security holders of the Registrant did not vote on any matter during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS The Partnership, a publicly-held limited partnership, sold 86,920 Limited Partnership Units during its offering period through March 7, 1984, and currently has 86,778 Limited Partnership Units outstanding and 3,738 Limited Partners of record. There is no intention to sell additional Limited Partnership Units nor is there an established market for these units. During 1996, the number of Limited Partnership Units decreased by 40 units due to limited partners abandoning their units. In abandoning his or her Limited Partnership Units, a limited partner relinquishes all right, title and interest in the Partnership as of the date of abandonment. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations This item should be read in conjunction with the consolidated financial statements and other items contained elsewhere in this report. The Partnership recognized a net loss of $1,075,000 for the year ended December 31, 1996, as compared to net income of $224,000 for the year ended December 31, 1995. The net loss in 1996 is primarily due to the Partnership's share of losses from the joint venture (see discussion below). Lake Forest Apartments conducted extensive improvements to its vacant units during 1996, which necessitated the hiring of two additional maintenance personnel. This resulted in increased operating expenses. General and administrative expenses decreased due to decreases in reimbursements for services of affiliates. The decrease in property tax expense arose from a refund for an overpayment of property taxes on Poplar Square Shopping Center in 1995. Bad debt expense increased as a result of an increase in the reserve required based on a review of the tenant's accounts receivable at the Poplar Square Shopping Center. The increase in equity in loss of the joint ventures is due to the gain recognized on the foreclosure of Burlington in 1995. The loss on disposal of property, in 1995, relates to a roof replacement at Lake Forest Apartments. The loss is the result of the write-off of the roof which was not fully depreciated. Included in maintenance expenses for the year ended December 31, 1996, is $57,000 of major repairs and maintenance mainly comprised of interior building improvements and parking lot resurfacing. As part of the ongoing business plan of the Partnership, the Managing 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 expenses. As part of this plan, the Managing 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 Managing General Partner will be able to sustain such a plan. Capital Resources and Liquidity The Partnership's primary source of cash is from the operations of its properties. Cash from these sources is utilized for property operations, capital improvements and/or repayment of debt. At December 31, 1996, the Partnership had unrestricted cash of $1,371,000 versus $1,888,000 at December 31, 1995. Net cash provided by operating activities decreased due to a decrease in other liabilities. The increase in net cash used in investing activities resulted from an increase in advances to the joint venture, as well as a deposit to restricted escrows, which was required as a result of the refinance of Poplar Square Shopping Center. A distribution from Moraine was also received in 1995, which did not occur in 1996. Net cash provided by financing activities resulted from the refinancing of Poplar Square Shopping Center in October 1996. On October 31, 1996, the Partnership, through it 99.99% owned subsidiary (Poplar Square AIP III, L.P.), refinanced the mortgage debt secured by Poplar Square Shopping Center. The previous indebtedness matured in June 1996. The new mortgage, in the principal amount of $3,800,000, carries a stated interest rate of 9.2% and matures November 2006. The Partnership paid off debt and related accrued interest of approximately $3,435,000 at closing. The remainder of the proceeds from the refinance were used to pay closing costs, fund tax and insurance escrows and fund repair and replacement reserves. 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 properties to adequately maintain the physical assets and other operating needs of the Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. Future cash distributions will depend on the levels of net cash generated from operations, property sales and the availability of cash reserves. Northtown is in default on its non-recourse mortgage note payable due to allowing a mechanics lien to remain on its mortgaged property which is in violation of its mortgage agreement. The Partnership incurred significant costs for tenant improvements and other expenditures for a new tenant during 1996. In November 1996, the lender and the Partnership disagreed on the funding for these costs, resulting in the Partnership refusing to authorize any further disbursements from its "Improvements and Leasing Commissions Reserve Escrow" to pay the remaining balance of approximately $1 million due to the contractors and other vendors. In January 1997, the contractors filed a mechanics lien against the property. The Partnership and the lender is presently in negotiations to settle their disagreement over the funding of the tenant improvements. Upon settlement, the Partnership will authorize the remaining payments to the contractors and vendors and ensure that the mechanics lien will be removed. There can be no assurance that these negotiations will be successful. On March 15, 1991, Northtown and the holder of the Northtown Mall mortgage note payable entered into an Option Agreement ("Option") whereby the lender has the right and an option to purchase the Northtown Mall property on the terms and conditions as set forth in the Option. The purchase price of the property, as set forth in the Option, is defined as the fair market value of the property. Such Option can be exercised by written notice by the lender at specified dates. The Option expires in 2006. In accordance with the Option, the lender gave notice to Northtown in November 1996, that it intended to exercise this Option. The lender and Northtown have begun the determination of the property's fair value as defined in the Option and in the loan agreement. If the determined fair value exceeds the annual appraisal by more than 5%, the lender may withdraw its exercise of the Option and the Option continues in full force. The fair value of the property, as defined in the Option and loan agreement, has not been determined; therefore, Northtown cannot presently determine if the property will be sold. ITEM 7. FINANCIAL STATEMENTS ANGELES INCOME PROPERTIES, LTD. III LIST OF FINANCIAL STATEMENTS Report of Independent Auditors Consolidated Balance Sheet - December 31, 1996 Consolidated Statements of Operations - Years ended December 31, 1996 and 1995 Consolidated Statement of Changes in Partners' Deficit - Years ended December 31, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended December 31, 1996 and 1995 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Angeles Income Properties, Ltd. III We have audited the accompanying consolidated balance sheet of Angeles Income Properties, Ltd. III as of December 31, 1996, and the related consolidated statements of operations, changes in partners' deficit and cash flows for each of the two years in the period ended December 31, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by 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 Angeles Income Properties, Ltd. III as of December 31, 1996, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Greenville, South Carolina February 14, 1997 ANGELES INCOME PROPERTIES, LTD. III CONSOLIDATED BALANCE SHEET (in thousands, expect unit data) December 31, 1996 Assets Cash and cash equivalents: Unrestricted $ 1,371 Restricted--tenant security deposits 48 Accounts receivable, less allowance of $26 11 Escrows for taxes 114 Other assets 303 Restricted escrows 207 Investment properties (Notes B and E): Land $ 1,527 Buildings and related personal property 12,635 14,162 Less accumulated depreciation (8,584) 5,578 $ 7,632 Liabilities and Partners' Deficit Liabilities Accounts payable $ 27 Tenant security deposits 48 Accrued taxes 41 Other liabilities 60 Mortgage note payable (Notes B and E) 3,797 Equity interest in net liabilities of joint venture, net of advances of $1,653 (Note F) 5,909 Partners' Deficit General partners $ (398) Limited partners (86,778 units issued and outstanding) (1,852) (2,250) $ 7,632 See Accompanying Notes to Consolidated Financial Statements ANGELES INCOME PROPERTIES, LTD. III CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) Years Ended December 31, 1996 1995 Revenues: Rental income $ 1,682 $ 1,701 Other income 97 101 Total revenues 1,779 1,802 Expenses: Operating 411 345 General and administrative 237 295 Maintenance 187 181 Depreciation 655 645 Interest 421 413 Property taxes 143 161 Bad debt expense (recovery), net 7 (10) Total expenses 2,061 2,030 Loss before equity in (loss) income of joint ventures (282) (228) Equity in (loss) income of joint venture(s) (Note F) (793) 460 Loss on disposal of property -- (8) Net (loss) income $ (1,075) $ 224 (Loss) income allocated to general partners (1%) $ (11) $ 2 (Loss) income allocated to limited partners (99%) (1,064) 222 Net (loss) income $ (1,075) $ 224 Net (loss) income per limited partnership unit $ (12.26) $ 2.56 See Accompanying Notes to Consolidated Financial Statements ANGELES INCOME PROPERTIES, LTD. III CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT (in thousands) Limited Partnership General Limited Units Partners Partners Total Original capital contributions 86,920 $ 1 $ 43,460 $ 43,461 Partners' deficit at December 31, 1994 86,818 $ (389) $ (1,010) $ (1,399) Net income for the year ended December 31, 1995 -- 2 222 224 Partners' deficit at December 31, 1995 86,818 (387) (788) (1,175) Net loss for the year ended December 31, 1996 -- (11) (1,064) (1,075) Abandonment of partnership units (Note H) (40) -- -- -- Partners' deficit at December 31, 1996 86,778 $ (398) $ (1,852) $ (2,250) See Accompanying Notes to Consolidated Financial Statements ANGELES INCOME PROPERTIES, LTD. III CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 1996 1995 Cash flows from operating activities: Net (loss) income $ (1,075) $ 224 Adjustments to reconcile net (loss) income to net cash provided by operating activities Equity in loss (income) of joint ventures 793 (460) Depreciation 655 645 Amortization of loan costs and leasing commissions 79 61 Bad debt expense (recovery), net 7 (10) Loss on disposal of property -- 8 Change in accounts: Restricted cash (1) 3 Accounts receivable 25 12 Escrows for taxes 4 (20) Other assets (75) (46) Accounts payable 16 1 Tenant security deposit liabilities 1 (4) Property taxes (3) (14) Other liabilities (35) 34 Net cash provided by operating activities 391 434 Cash flows from investing activities: Property improvements and replacements (169) (167) Advances to joint venture (721) (482) Distributions from joint venture -- 966 Deposits to restricted escrows (207) -- Net cash (used in) provided by investing activities (1,097) 317 Cash flows used in financing activities: Payments on mortgage notes payable (48) (49) Payment of loan costs (161) (35) Repayment of mortgage note payable (3,402) -- Proceeds from new loan 3,800 -- Net cash provided by (used in) financing activities 189 (84) Net (decrease) increase in cash and (517) 667 cash equivalents Cash and cash equivalents at beginning of year 1,888 1,221 Cash and cash equivalents at end of year $ 1,371 $ 1,888 Supplemental disclosure of cash flow information: Cash paid for interest $ 377 $ 382 See Accompanying Notes to Consolidated Financial Statements
Angeles Income Properties, Ltd. III Notes to Consolidated Financial Statements December 31, 1996 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization: Angeles Income Properties, Ltd. III (the "Partnership" or "Registrant") is a California limited partnership organized in May 1983 to acquire and operate residential and commercial real estate properties. The Partnership's Managing General Partner is Angeles Realty Corporation II ("ARC II"), an affiliate of Insignia Financial Group, Inc. As of December 31, 1996, the Partnership operates one residential and one commercial property located in or near major urban areas in the United States. Principles of Consolidation: The financial statements include all of the accounts of the Partnership and its majority owned partnerships. All significant interpartnership balances have been eliminated. Minority interest is immaterial and is not shown separately in the financial statements. Investment in Joint Venture: The Partnership accounts for its investment in joint venture using the equity method of accounting (see "Note F"). Under the equity method, the Partnership records its equity interest in earnings or losses of the joint venture. The investment in the joint venture will be recorded at an amount less than zero (a liability) to the extent of the Partnership's share of net liabilities of the joint venture. Allocations and Distributions to Partners: In accordance with the Agreement, any gain from the sale or other disposition of Partnership assets will be allocated first to the Managing General Partner to the extent of the amount of any Incentive Interest (as defined below) to which the Managing General Partner is entitled. Any gain remaining after said allocation will be allocated to the General Partners and Limited Partners in proportion to their interests in the Partnership; provided that the gain shall first be allocated to Partners with negative account balances, in proportion to such balances, in an amount equal to the sum of such negative capital account balances. The Partnership will allocate other profits and losses .5% to the Managing General Partner, .5% to the Non-Managing General Partners, and 99% to the Limited Partners. Except as discussed below, the Partnership will allocate distributions 1% to the General Partners and 99% to the Limited Partners. Upon the sale or other disposition, or refinancing of any asset of the Partnership, the Distributable Net Proceeds shall be distributed as follows: (i) First, to the Partners in proportion to their interest until the Limited Partners have received proceeds equal to their Original Capital Investment applicable to the property; (ii) Second, to the Partners until Limited Partners have received distributions from all sources equal to their 6% Cumulative Distribution, (iii) Third, to the Managing General Partner until it has received its Brokerage Compensation; (iv) Fourth, to the Partners in proportion to their interests until the Limited Partners have received distributions from all sources equal to their additional 2% Cumulative Distribution; and (v) Thereafter, 85% to the Partners in proportion to their interests and 15% ("Incentive Interest") to the Managing General Partner. Depreciation: Depreciation is computed utilizing the straight-line method over the estimated lives of the investment properties and related personal property. For Federal income tax purposes, depreciation is computed by using the straight- line method over an estimated life of 5 to 20 years for personal property and 15 to 40 years for real property. Cash and Cash Equivalents: The Partnership considers all highly liquid investments with a maturity when purchased of three months or less to be cash equivalents. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Investment Properties: Prior to the fourth quarter of 1995, investment properties were carried at the lower of cost or estimated fair value, which was determined using the higher of the property's non-recourse debt amount, when applicable, or the net operating income of the investment property capitalized at a rate deemed reasonable for the type of property. During the fourth quarter of 1995 the Partnership adopted "FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. The effect of adoption was not material. Loan Costs: Loan costs of $161,000 are included in "Other assets" in the accompanying balance sheet and are being amortized on a straight-line basis over the life of the loan. At December 31, 1996, accumulated amortization is $4,000. Lease Commissions: Lease commissions are included in "other assets" and are being amortized using the straight-line method over the term of the respective leases. Fair Value: In 1995, the Partnership implemented "Statement of Financial Accounting Standards No. 107, Disclosure about Fair Value of Financial Instruments," which requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The carrying amount of the Partnership's cash and cash equivalents approximates fair value due to short-term maturities. The Partnership estimates the fair value of its fixed rate mortgage by discounted cash flow analysis, based on estimated borrowing rates currently available to the Partnership (see "Note B"). Leases: The Partnership generally leases apartment units for twelve-month terms or less. Commercial building lease terms are generally for twelve months to 16 years. Several tenants have percentage rent clauses which provide for additional rent upon the tenant achieving certain objectives. Percentage rent recognized was $2,000 and $14,000 in 1996 and 1995, respectively. Tenant Security Deposits: The Partnership generally requires security deposits from apartment lessees for the duration of the lease. Deposits are refunded when the tenant vacates the apartment space if there has been no damage to the unit. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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 1995 balances to conform to the 1996 presentation. NOTE B - MORTGAGE NOTE PAYABLE (in thousands) The principal terms of the mortgage note payable are as follows: Monthly Principal Principal Payment Stated Balance Balance At Including Interest Maturity Due At December 31, Property Interest Rate Date Maturity 1996 Poplar Square Shopping Center First mortgage $ 32 9.2% 11/01/06 $ 3,167 $ 3,797 On October 31, 1996, the Partnership, through its 99.99% owned subsidiary (Poplar Square AIP III, L.P.), refinanced the mortgage debt secured by Poplar Square Shopping Center. The previous indebtedness had matured in June 1996. The Partnership paid off the previous mortgage debt and related accrued interest of approximately $3,435,000 at closing. The remainder of the proceeds from the refinance were used to pay closing costs, fund tax and insurance escrows and fund repair and replacement reserves. Scheduled principal payments of the mortgage note payable subsequent to December 31, 1996, are as follows (in thousands): 1997 $ 41 1998 45 1999 50 2000 55 2001 60 Thereafter 3,546 $ 3,797 The mortgage note payable is non-recourse and is secured by pledge of the Partnership's investment property and by pledge of revenues from the investment property. The estimated fair value of the Partnership's debt approximates its carrying amount. NOTE C - INCOME TAXES Taxable income or loss of the Partnership is reported in the income tax returns of its partners. Accordingly, no provision for income taxes is made in the financial statements of the Partnership. Differences between the net income (loss) as reported and Federal taxable income (loss) result primarily from differences in methods of accounting for joint ventures and depreciation over different methods and lives and on differing cost bases of the properties. The following is a reconciliation of reported net (loss) income and Federal taxable loss: 1996 1995 (in thousands) Net (loss) income as reported $ (1,075) $ 224 Add (deduct): Depreciation differences 31 30 Joint venture differences 202 (2,541) Other (54) 44 Federal taxable loss $ (896) $ (2,243) Federal taxable loss per limited partnership unit $ (10.23) $ (25.58) The following is a reconciliation between the Partnership's reported amount and Federal tax basis of net assets and liabilities: Net deficiency as reported $ (2,250) Land and buildings 1,913 Accumulated depreciation (398) Syndication and distribution costs 5,807 Investment in joint ventures 1,964 Other (182) Net assets - Federal tax basis $ 6,854 NOTE D - TRANSACTIONS WITH AFFILIATED PARTIES The Partnership has no employees and is dependent on the Managing General Partner and its affiliates for the management and administration of all partnership activities. The Partnership Agreement provides for payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were made to the Managing General Partner and affiliates in 1996 and in 1995: 1996 1995 (in thousands) Property management fees $ 64 $ 71 Reimbursement for services of affiliates 225 235 Included in "Reimbursement for services of affiliates" in 1996 is a $38,000 brokerage commission paid relating to the refinance of the mortgage secured by Poplar Square Shopping Center; they were capitalized as loan costs. The Partnership insures its properties under a master policy through an agency and insurer unaffiliated with the Managing General Partner. An affiliate of the Managing General Partner acquired, in the acquisition of a business, certain financial obligations from an insurance agency which were later acquired by the agent who placed the current year's master policy. The current agent assumed the financial obligations to the affiliate of the Managing General Partner, who receives payments on these obligations from the agent. The amount of the Partnership's insurance premiums accruing to the benefit of the affiliate of the Managing General Partner by virtue of the agent's obligations is not significant. NOTE E - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION Initial Cost To Partnership (in thousands) Cost Buildings Capitalized and Related (Removed) Personal Subsequent to Description Encumbrance Land Property Acquisition Poplar Square Shopping Center $ 3,797 $ 957 $ 10,302 $ (1,562) Lake Forest Apts. -- 657 3,160 648 Totals $ 3,797 $ 1,614 $ 13,462 $ (914)
Gross Amount At Which Carried At December 31, 1996 (in thousands) Buildings And Related Personal Accumulated Date Depreciable Description Land Property Total Depreciation Acquired Life-Years Poplar Square Shopping Center $ 870 $ 8,827 $ 9,697 $ 6,233 05/15/85 5-20 Lake Forest Apartments 657 3,808 4,465 2,351 06/27/84 5-40 Totals $ 1,527 $ 12,635 $ 14,162 $ 8,584
The depreciable lives included above are for the buildings and components. The depreciable lives for related personal property are for 3 to 10 years. Reconciliation of "Investment Properties and Accumulated Depreciation": Year Ended December 31, 1996 1995 (in thousands) Investment Properties Balance at beginning of year $ 13,993 $ 13,859 Property improvements and replacements 169 167 Disposal of property -- (33) Balance at end of year $ 14,162 $ 13,993 Accumulated Depreciation Balance at beginning of year $ 7,929 $ 7,309 Additions charged to expense 655 645 Disposal of property (25) Balance at end of year $ 8,584 $ 7,929 The aggregate cost of the real estate for Federal income tax purposes at December 31, 1996 and 1995, is $16,075,000 and $15,906,000. The accumulated depreciation taken for Federal income tax purposes at December 31, 1996 and 1995, is $8,982,000 and $8,358,000. NOTE F - INVESTMENT IN JOINT VENTURE The Partnership has a 33.3% investment in Northtown Mall Partners ("Northtown") which is shown as "Equity interest in net liabilities of joint venture". The Partnership had a 57% investment in Burlington Outlet Mall Joint Venture ("Burlington") and a 50% investment in Moraine West Carrollton Joint Venture ("Moraine"). The Partnership no longer has an investment in these joint ventures due to the foreclosure of Burlington's investment property and the dissolution of Moraine during 1995 as discussed below. The condensed balance sheet information as of December 31, 1996 for Northtown is as follows: (in thousands) Northtown Cash $ 277 Accounts receivable 857 Other assets 5,264 Investment property, net 26,806 Total assets $ 33,204 Mortgage note payable $ 51,387 Other liabilities 1,368 Due to partners 3,285 Partners' deficit (22,836) Total liabilities and partners' deficit $ 33,204 The condensed statements of operations information for the joint ventures are as follows: Northtown Burlington Moraine 1996 Revenues $ 10,765 $ -- $ -- Costs and expenses (13,136) -- -- Net loss $ (2,371) $ -- $ -- 1995 Revenues $ 11,036 $ 230 $ 13 Costs and expenses (13,024) (762) (1) (Loss) income before gain on foreclosure and loss on disposal of property (1,988) (532) 12 Gain on foreclosure of property -- 2,607 -- Loss on disposal of property (141) -- -- Net (loss) income $ (2,129) $ 2,075 $ 12 The Partnership's equity in the loss of the joint venture was $793,000 for the year ended December 31, 1996, and the Partnership's equity in the income of the joint ventures was $460,000 for the year ended December 31, 1995. This increase in loss can be primarily attributed to the gain recognized on the foreclosure of Burlington in 1995. Northtown: The net loss at Northtown Mall increased from 1995 to 1996 due to a loss in tenants, which decreased revenues, and an increase in maintenance expense. The $141,000 loss on disposal of property at Northtown Mall in 1995 is the result of a roof replacement at the investment property. This loss is due to the write- off of the old roof which was not fully depreciated. Northtown is in default on its non-recourse mortgage note payable due to allowing a mechanics lien to remain on its mortgaged property which is in violation of its mortgage agreement. The Partnership incurred significant costs for tenant improvements and other expenditures for a new tenant during 1996. In November 1996, the lender and the Partnership disagreed on the funding for these costs, resulting in the Partnership refusing to authorize any further disbursements from its "Improvements and Leasing Commissions Reserve Escrow" to pay the remaining balance of approximately $1 million due to the contractors and other vendors. In January 1997, the contractors filed a mechanics lien against the property. The Partnership and the lender are presently in negotiations to settle their disagreement over the funding of the tenant improvements. Upon settlement, the Partnership will authorize the remaining payments to the contractors and vendors and ensure that the mechanics lien will be removed. There can be no assurance that these negotiations will be successful. On March 15, 1991, Northtown and the holder of the Northtown Mall mortgage note payable entered into an Option Agreement ("Option") whereby the lender has the right and an option to purchase the Northtown Mall property on the terms and conditions as set forth in the Option. The purchase price of the property, as set forth in the Option, is defined as the fair market value of the property. Such Option can be exercised by written notice by the lender at specified dates. The option expires in 2006. In accordance with the Option, the lender gave notice to Northtown in November 1996, that it intended to exercise this Option. The lender and Northtown have begun the determination of the property's fair value as defined in the Option and in the loan agreement. If the determined fair value exceeds the annual appraisal by more than 5%, the lender may withdraw its exercise of the Option and the Option continues in full force. The fair value of the property, as defined in the Option and loan agreement, has not been determined; therefore, Northtown cannot presently determine if the property will be sold. Burlington: On October 30, 1995, Burlington lost its investment property, the Burlington Outlet Mall located in Burlington, NC, through foreclosure by an unaffiliated mortgage holder. The property was not generating sufficient cash flow to meet debt service requirements. The non-payment of principal and interest constituted a default under the terms of the mortgage agreement and allowed the holder of the nonrecourse mortgage to foreclose on the property. Burlington recognized a gain of $2,607,000 as a result of the foreclosure (of which the Partnership's share was $1,486,000), and subsequently the General Partners decided to terminate the joint venture. All remaining cash was used to pay the joint venture's liabilities in 1996, at which time Burlington was dissolved. Moraine: The sale of Moraine to an affiliate of the third party managing agent closed on July 21, 1994. Moraine received a net amount of $2,199,000 in proceeds after satisfying all indebtedness. Moraine realized a $141,000 gain on the transaction of which the Partnership's share was $70,000. Moraine made a final distribution of $1,931,000 in 1995, of which the Partnership's share was $966,000, and the joint venture was then dissolved. NOTE G - OPERATING LEASES Tenants of the commercial property are responsible for their own utilities and maintenance of their space, and payment of their proportionate share of common area maintenance, utilities, insurance and real estate taxes. Tenants are generally not required to pay a security deposit. Bad debt expense has been within the Managing General Partner's expectations. As of December 31, 1996, the Partnership had minimum future rentals under noncancellable leases with tenants with terms ranging from twelve months to sixteen years. (in thousands) 1997 $ 767 1998 685 1999 661 2000 442 2001 178 Thereafter 110 $ 2,843 NOTE H - ABANDONMENT OF LIMITED PARTNERSHIP UNITS In 1996, the number of Limited Partnership Units decreased by 40 units due to limited partners abandoning their units. In abandoning his or her Limited Partnership Units, a limited partner relinquishes all right, title and interest in the Partnership as of the date of abandonment. However, during the year of abandonment, the limited partner is still allocated his or her share of net income or loss for that year. The (loss) income per Limited Partnership Unit in the accompanying Statements of Operations is calculated based on the number of units outstanding at the beginning of the year. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with Ernst & Young LLP regarding the 1996 or 1995 audits of the Partnership's financial statements. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The names of the directors and executive officers of Angeles Realty Corporation II ("ARC II"), the Partnership's Managing General Partner as of December 31, 1996, their ages and the nature of all positions with ARC II presently held by them are as follows: Name Age Position Carroll D. Vinson 56 President, Director Robert D. Long, Jr. 29 Controller and Principal Accounting Officer William H. Jarrard, Jr. 50 Vice President John K. Lines, Esq. 37 Vice President and Secretary Kelley M. Buechler 39 Assistant Secretary Carroll D. Vinson has been President of Metropolitan Asset Enhancement, L.P., and subsidiaries since August of 1994. Prior to that, during 1993 to August 1994, Mr. Vinson was affiliated with Crisp, Hughes & Co. (regional CPA firm) and engaged in various other investment and consulting activities. Briefly, in early 1993, Mr. Vinson served as President and Chief Executive Officer of Angeles Corporation, a real estate investment firm. From 1991 to 1993, Mr. Vinson was employed by Insignia in various capacities including Managing Director-President during 1991. From 1986 to 1990, Mr. Vinson was President and a Director of U.S. Shelter Corporation, a real estate services company, which sold substantially all of its assets to Insignia in December 1990. Robert D. Long, Jr. is Controller and Principal Accounting Officer. Prior to joining Metropolitan Asset Enhancement, L.P., he was an auditor for the State of Tennessee and was associated with the accounting firm of Harshman Lewis and Associates. He is a graduate of the University of Memphis. William H. Jarrard, Jr. has been Managing Director - Partnership Administration of Insignia since January 1991. Mr. Jarrard served as Managing Director - Partnership Administration & Asset Management from July 1994 until January 1996. John K. Lines, Esq. has been Insignia's General Counsel since June 1994 and General Counsel and Secretary since July 1994. From May 1993 until June 1994, Mr. Lines was the Assistant General Counsel and Vice President of Ocwen Financial Corporation, West Palm Beach, Florida. From October 1991 until May 1993, Mr. Lines was a Senior Attorney with BANC ONE CORPORATION, Columbus, Ohio. From May 1984 until October 1991, Mr. Lines was an attorney with Squire Sanders & Dempsey, Columbus, Ohio. Kelley M. Buechler is Assistant Secretary of the Managing General Partner and has served as Assistant Secretary of Insignia since 1991. ITEM 10. EXECUTIVE COMPENSATION No direct form of compensation or remuneration was paid by the Partnership to any officer or director of ARC II. The Partnership has no plan, nor does the Partnership presently propose a plan, which will result in any remuneration being paid to any officer or director upon termination of employment. However, fees and other payments have been made to the Partnership's Managing General Partner and its affiliates, as described in "Note D" of the Financial Statements included under "Item 7.", which is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of January 1, 1997, no person owned of record more than 5% of Limited Partnership Units of the Partnership nor was any person known by the Partnership to own of record and beneficially, or beneficially only, more than 5% of such securities. The Partnership knows of no contractual arrangements, the operation of the terms of which may at a subsequent date result in a change in control of the Partnership, except for: Article 12.1 of the Agreement, which provides that upon a vote of the Limited Partners holding more than 50% of the then outstanding Limited Partnership Units the General Partners may be expelled from the Partnership upon 90 days written notice. In the event that successor general partners have been elected by Limited Partners holding more than 50% of the then outstanding Limited Partnership Units and if said Limited Partners elect to continue the business of the Partnership, the Partnership is required to pay in cash to the expelled General Partners an amount equal to the accrued and unpaid management fee described in Article 10 of the Agreement and to purchase the General Partners' interest in the Partnership on the effective date of the expulsion, which shall be an amount equal to the difference between (i) the balance of the General Partners' capital account and (ii) the fair market value of the share of Distributable Net Proceeds to which the General Partners would be entitled. Such determination of the fair market value of the share of Distributable Net Proceeds is defined in Article 12.2(b) of the Agreement. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS No transactions have occurred between the Partnership and any officer or director of ARC II. During the year ended December 31, 1996, the transactions that occurred between the Partnership and ARC II and affiliates of ARC II pursuant to the terms of the Agreement are disclosed under "Note D" of the Partnership's Financial Statements included under "Item 7.", which is hereby incorporated by reference. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-B: Refer to Exhibit Index. (b) Reports on Form 8-K: None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANGELES INCOME PROPERTIES, LTD. III (A California Limited Partnership) (Registrant) By: Angeles Realty Corporation II By: /s/ Carroll D. Vinson Carroll D. Vinson President Date: March 26, 1997 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/ Carroll D. Vinson President, Director Date: March 26, 1997 Carroll D. Vinson /s/ Robert D. Long, Jr. Controller and Principal Date: March 26, 1997 Robert D. Long, Jr. Accounting Officer ANGELES INCOME PROPERTIES, LTD. III EXHIBIT INDEX Exhibit Number Description of Exhibit 3.1 Amended Certificate and Agreement of the Limited Partnership file in Form S-11 dated June 2, 1983, which is incorporated herein by reference. 10.1 Agreement of Purchase and Sale of Real Property with Exhibits - Lake Forest Apartments file in Form 8-K dated June 28, 19984, which is incorporated herein by reference. 10.3 Agreement of Purchase and Sale of Real Property with Exhibits - Poplar Square Shopping Center filed in Form 8-K dated May 15, 1985, which is incorporated herein by reference. 10.4 Agreement of Purchase and Sale of Real Property with Exhibits - Northtown Mall filed in Form 8-K dated July 15, 1985, which is incorporated herein by reference. 10.5 General Partnership Agreement of Northtown Partners filed in Form 10-K dated October 31, 1986, which is incorporated herein by reference. 10.6 Agreement of Purchase and Sale of Real Property with Exhibits - Burlington Mall Partners filed in Form 8-K dated December 19, 1985, which is incorporated herein by reference. 10.7 Agreement of Purchase and Sale of Real Property Exhibits - Moraine-West Carrollton Partners file in Form 8-K dated December 20, 1985, which is incorporated herein by reference. 10.9 Promissory Note - Burlington Outlet Mall filed in Form 10-K dated December 31, 1989, which is incorporated herein by reference. 10.10 Agreement of Purchase and Sale of Real Property - Lake Highlander Mobile Home Park filed in Form 8-k dated January 10, 1991, which is incorporated herein by reference. 10.11 Promissory Note - Northtown Mall filed Form 10-K dated December 31, 1990, which is incorporated herein by reference. 10.12 Stock Purchase Agreement dated November 24, 1992 showing the purchase of 100% of the outstanding stock of Angeles Realty Corporation II by IAP GP Corporation, a subsidiary of MAE GP Corporation, filed in Form 8-K dated December 31, 1992, which is incorporated herein by reference. 10.13 Agreement of Purchase and Sale of Real Property - Moraine West Carrollton Partners filed in Form 8-K dated July 21, 1994, which was incorporated herein by reference. 10.14 Foreclosure of Burlington Outlet Mall by lender in the Burlington Outlet Mall Joint Venture. 10.15 Promissory Note - dated October 31, 1996, between Poplar Square AIP III, L.P., and Union Capital Investments, LLL. 16.1 Letter from Registrant's former accountant regarding its concurrence with the statements made by the Registrant is incorporated by reference to the Exhibit filed with Form 8-K dated September 1, 1993. 27 Financial Data Schedule. EX-27 2
5 This schedule contains summary financial information extracted from Angeles Income Properties Ltd. III 1996 Year-End 10-KSB and is qualified in its entirety by reference to such 10-KSB filing. 0000720460 ANGELES INCOME PROPERTIES LTD. III 1,000 12-MOS DEC-31-1996 DEC-31-1996 1,371 0 11 0 0 0 14,162 8,584 7,632 0 3,797 0 0 0 (2,250) 7,632 0 1,779 0 0 2,061 0 421 (1,075) 0 (1,075) 0 (793) 0 (1,075) (12.26) 0 Registrant has an unclassified balance sheet. Multiplier is 1.
EX-10.15 3 PROMISSORY NOTE $3,800,000.00 October 31, 1996 Medford, Oregon FOR VALUE RECEIVED, the undersigned, POPLAR SQUARE AIP III, L.P., A SOUTH CAROLINA LIMITED PARTNERSHIP("Borrower"), jointly and severally, if more than one, promises to pay to the order of UNION CAPITAL INVESTMENTS, LLC, a Georgia limited liability company ("Lender"), at the office of Lender at 5901-A Peachtree Dunwoody Road, Suite 220, Atlanta, Georgia 30328, or at such other place as Lender may designate to Borrower in writing from time to time, the principal sum of Three Million Eight Hundred Thousand and NO/100 DOLLARS ($3,800,000.00), together with interest on so much thereof as is from time to time outstanding and unpaid, from the date of the advance of the principal evidenced hereby, at the rate of 9.2% per annum (the "Note Rate"), in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of all debts and dues, public and private. ARTICLE I - TERMS AND CONDITIONS 1.01 Payment of Principal and Interest. Said interest shall be computed hereunder based on a 360-day year and based on twelve (12) 30-day months for each full calendar month and on the actual number of days elapsed for any partial month in which interest is being calculated. In computing the number of days during which interest accrues, the day on which funds are initially advanced shall be included regardless of the time of day such advance is made, and the day on which funds are repaid shall be included unless repayment is credited prior to close of business. Payments in federal funds immediately available in the place designated for payment received by Lender prior to 2:00 p.m. local time at said place of payment on a day on which Lender is open for business shall be credited prior to close of business, while other payments may, at the option of Lender, not be credited until immediately available to Lender in federal funds in the place designated for payment prior to 2:00 p.m. local time at said place of payment on a day on which Lender is open for business. Such principal and interest shall be payable in equal consecutive monthly installments of $32,411.50 each, beginning on the date that is (x) the first day of the second full calendar month following the date of this Note or (y) on the first day of the first full calendar month following the date hereof in the event the advance of the principal amount evidenced by this Note is the first day of a calendar month, and continuing on the first day of each and every month thereafter through and including November 1, 2006 (the "Maturity Date"), at which time the entire outstanding principal balance hereof, together with all accrued but unpaid interest thereon, shall be due and payable in full. Each such monthly installment shall be applied first to the payment of accrued interest and then to reduction of principal. If the advance of the principal amount evidenced by this Note is made on a date other than the first day of a calendar month, then Borrower shall pay to Lender contemporaneously with the execution hereof interest at the foregoing interest rate for a period from the date hereof through and including the first day of the next succeeding calendar month. 1.02 Prepayment. (a) This Note may be prepaid in whole but not in part (except as otherwise specifically provided herein) at any time after the date of the 24th monthly installment of principal and interest due hereunder (the "Lockout Expiration Date"), provided (i) written notice of such prepayment is received by Lender not more than sixty (60) days and not less than thirty (30) days prior to the date of such prepayment, (ii) such prepayment is received on the first day of a calendar month (or, if such prepayment is not received on the first day of a calendar month, interest is paid through the last day of said calendar month) and is accompanied by all interest accrued hereunder and all other sums due hereunder or under the other Loan Documents, and (iii) if such prepayment occurs on or prior to the date of the 114th monthly installment of principal and interest due hereunder (the "Yield Maintenance Expiration Date), Lender is paid a prepayment fee as set forth in this Section 1.02. In the event that such prepayment occurs on or prior to the date of the 48th monthly installment of principal and interest due hereunder, Lender must be paid a prepayment fee equal to the greater of (A) five percent (5%) of the principal amount being prepaid, and (B) "Yield Maintenance" (as hereunder defined), and if such prepayment occurs after the 48th monthly installment of principal and interest due hereunder but on or prior to the date of the 114th monthly installment of principal and interest due hereunder, Lender must be paid a prepayment fee equal to the greater of (A) one percent (1.0%) of the principal amount being prepaid, and (B), "Yield Maintenance" (as hereunder defined). For purposes of this Note, the term "Yield Maintenance" shall mean the positive excess of (i) the present value ("PV") of all future installments of principal and interest due under this Note including the principal amount due at maturity (collectively, "All Future Payments"), discounted at an interest rate per annum equal to the sum of (a) the Treasury Constant Maturity Yield Index published during the second full week preceding the date on which such premium is payable for instruments having a maturity coterminous with the remaining term of this Note, and (b) fifty (50) basis points, over (ii) the principal amount of this Note outstanding immediately before such prepayment [(PV of All Future Payments) - (principal balance at time of prepayment) = prepayment fee]. "Treasury Constant Maturity Yield Index" shall mean the average yield for "This Week" as reported by the Federal Reserve Board in Federal Reserve Statistical Release H.15 (519). If there is no Treasury Constant Maturity Yield Index for instruments having a maturity coterminous with the remaining term of this Note, then the index shall be equal to the weighted average yield to maturity of the Treasury Constant Maturity Yield Indices with maturities next longer and shorter than such remaining average life to maturity, calculated by averaging (and rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the average is not such a multiple) the yields of the relevant Treasury Constant Maturity Yield Indices (rounded, if necessary, to the nearest 1/100 of 1% with any figure of 1/200 of 1% or above rounded upward). In the event that any prepayment fee is due hereunder, Lender shall deliver to Borrower a statement setting forth the amount and determination of the prepayment fee, and, provided that Lender shall have in good faith applied the formula described above, Borrower shall not have the right to challenge the calculation or the method of calculation set forth in any such statement in the absence of manifest error, which calculation may be made by Lender on any day during the thirty (30) day period preceding the date of such prepayment. Lender shall not be obligated or required to have actually reinvested the prepaid principal balance at the Treasury Constant Maturity Yield or otherwise as a condition to receiving the prepayment fee. No prepayment fee or premium shall be due or payable in connection with any prepayment of the indebtedness evidenced by the Note made on or after the Yield Maintenance Expiration Date, or upon prepayment resulting from application of insurance or condemnation proceeds as provided in the Security Instrument at any time during the loan term. With regard to any prepayment made hereunder (whether prior to or after the Yield Maintenance Expiration Date), if the prior written notice required in (i) above has not been received by Lender, the prepayment fee shall be increased by an amount equal to the lesser of (i) thirty (30) days' unearned interest computed on the outstanding principal balance of this Note so prepaid and (ii) unearned interest computed on the outstanding principal balance of this Note so prepaid for the period from, and including, the date of prepayment through the Maturity Date. (b) Partial prepayments of this Note shall not be permitted, except partial prepayments resulting from Lender applying insurance or condemnation proceeds to reduce the outstanding principal balance of this Note as provided in the Security Instrument, in which event no prepayment fee or premium shall be due. No notice of prepayment shall be required under the circumstance specified in the preceding sentence. No principal amount repaid may be reborrowed. Partial payments of principal shall be applied to the unpaid principal balance evidenced hereby but such application shall not reduce the amount of the fixed monthly installments required to be paid pursuant to Section 1.01 above. (c) Except as otherwise expressly provided in Section 1.02(b) above, the prepayment fees provided above shall be due, to the extent permitted by applicable law, under any and all circumstances where all or any portion of this Note is paid prior to the Maturity Date, whether such prepayment is voluntary or involuntary, even if such prepayment results from Lender's exercise of its rights upon Borrower's default and acceleration of the Maturity Date of this Note (irrespective of whether foreclosure proceedings have been commenced), and shall be in addition to any other sums due hereunder or under any of the other Loan Documents. Borrower acknowledges that, in establishing the Note Rate, Lender has assumed and taken into account the fact that the loan evidenced hereby will not be prepaid (other than at the times, and on the terms, herein provided) and that there will be no prohibited transfer of the Security Property or any other event which would cause Lender to accelerate the Maturity Date. The following provisions relating to Borrower's payment of a premium in the event of an acceleration are intended to compensate Lender in the event that this assumption proves to be incorrect. No tender of a prepayment of this Note with respect to which a prepayment fee is due shall be effective unless such prepayment is accompanied by the prepayment fee. If, prior to the Lockout Expiration Date, Lender exercises its option to declare the entire unpaid principal balance due and payable and/or causes to be recorded a notice of default in accordance with any applicable statute or law following the occurrence of a default, there shall be due and payable in the absence of reinstatement in accordance with any applicable statute or law, in addition to the unpaid principal balance and accrued interest and any other sums due hereunder or under any of the other Loan Documents, a prepayment fee computed as provided in Section 1.02(a) above plus an additional prepayment fee of one percent (1%) of the principal balance of this Note. /s/ R.L. PLEASE INITIAL 1.03 Security. The indebtedness evidenced by this Note and the obligations created hereby are secured by that certain Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (the "Security Instrument") from Borrower, as trustor, to ____________ Title Insurance Company of ___________, as trustee, in favor of Lender, as beneficiary, dated on or about the date hereof, concerning property located in Jackson County, Oregon. The Security Instrument together with this Note and all other documents to or of which Lender is a party or beneficiary now or hereafter evidencing, securing, guarantying, modifying or otherwise relating to the indebtedness evidenced hereby, are herein referred to collectively as the "Loan Documents". All of the terms and provisions of the Loan Documents are incorporated herein by reference. Some of the Loan Documents are to be recorded on or about the date hereof in the appropriate public records. 1.04 Default. It is hereby expressly agreed that should any default occur in the payment of principal or interest as stipulated above and such payment is not made within five (5) days of the date such payment is due (provided that no grace period is provided for the payment of principal and interest due on the Maturity Date), or should any other default occur under any of the Loan Documents which is not cured within any applicable grace or cure period, then a default shall exist hereunder, and in such event the indebtedness evidenced hereby, including all sums advanced or accrued hereunder or under any other Loan Document, and all unpaid interest accrued thereon, shall, at the option of Lender and without notice to Borrower, at once become due and payable and may be collected forthwith, whether or not there has been a prior demand for payment and regardless of the stipulated date of maturity. In the event that any payment is not received by Lender on the date when due (subject to the applicable grace period), then in addition to any default interest payments due hereunder, Borrower shall also pay to Lender a late charge in an amount equal to five percent (5.0%) of the amount of such overdue payment. So long as any default exists hereunder, regardless of whether or not there has been an acceleration of the indebtedness evidenced hereby, and at all times after maturity of the indebtedness evidenced hereby (whether by acceleration or otherwise), interest shall accrue on the outstanding principal balance of this Note at a rate per annum equal to four percent (4.0%) plus the interest rate which would be in effect hereunder absent such default or maturity, or if such increased rate of interest may not be collected under applicable law, then simple interest at the maximum rate of interest, if any, which may be collected from Borrower under applicable law (the "Default Interest Rate"), and such default interest shall be immediately due and payable. Borrower acknowledges that it would be extremely difficult or impracticable to determine Lender's actual damages resulting from any late payment or default, and such late charges and default interest are reasonable estimates of those damages and do not constitute a penalty. The remedies of Lender in this Note or in the Loan Documents, or at law or in equity, shall be cumulative and concurrent, and may be pursued singly, successively or together in Lender's discretion. Time is of the essence of this Note. In the event this Note, or any part hereof, is collected by or through an attorney-at-law, Borrower agrees to pay all costs of collection including, but not limited to, reasonable attorney's fees. 1.05 Exculpation. Notwithstanding anything in the Loan Documents to the contrary, but subject to the qualifications hereinbelow set forth, Lender agrees that (i) Borrower shall be liable upon the indebtedness evidenced hereby and for the other obligations arising under the Loan Documents to the full extent (but only to the extent) of the security therefor and any rents and leases assigned to Lender, the same being all properties (whether real or personal), rights, estates and interests now or at any time hereafter securing the payment of this Note and/or the other obligations of Borrower under the Loan Documents (collectively, the "Security Property") and any interest of Lender as assignee under any assignment of rents and/or leases; (ii) if default occurs in the timely and proper payment of all or any part of such indebtedness evidenced hereby or in the timely and proper performance of the other obligations of Borrower under the Loan Documents, any proceedings brought by Lender against Borrower shall be limited to the preservation, enforcement and foreclosure, or any thereof, of the liens, security titles, estates, assignments, rights and security interests now or at any time hereafter securing the payment of this Note and/or the other obligations of Borrower under the Loan Documents, and exercise of power of sale and/or other rights granted under the Security Instrument and the exercise of any rights set forth in the Security Instrument or any other instrument given to secure this Note, or in any assignment of rents and leases contained in the Security Instrument or in any separate instrument affecting the Security Property and given in connection with this Note, and no attachment, execution or other writ of process shall be sought, issued or levied upon any assets, properties or funds of Borrower other than the Security Property except with respect to the liability described below in this section; and (iii) in the event of a foreclosure or enforcement of such liens, security titles, estates, assignments, rights or security interests securing the payment of this Note and/or the other obligations of Borrower under the Loan Documents, whether by judicial proceedings or exercise of power of sale, no judgment for any deficiency upon the indebtedness evidenced hereby shall be sought or obtained by Lender against Borrower, except with respect to the liability described below in this section; provided, however, that, notwithstanding the foregoing provisions of this section, Borrower shall be fully and personally liable and subject to legal action (a) for proceeds paid under any insurance policies (or paid as a result of any other claim or cause of action against any person or entity) by reason of damage, loss or destruction to all or any portion of the Security Property, to the full extent of such proceeds not previously delivered to Lender, but which, under the terms of the Loan Documents, should have been delivered to Lender; (b) for proceeds or awards resulting from the condemnation or other taking in lieu of condemnation of all or any portion of the Security Property, or any of them, to the full extent of such proceeds or awards not previously delivered to Lender, but which, under the terms of the Loan Documents, should have been delivered to Lender; (c) for all tenant security deposits or other refundable deposits paid to or held by Borrower or any other person or entity in connection with leases of all or any portion of the Security Property which are not applied in accordance with the terms of the applicable lease or other agreement; (d) for rent and other payments received from tenants under leases of all or any portion of the Security Property paid more than one month in advance; (e) for rents, issues, profits and revenues of all or any portion of the Security Property received or applicable to a period after any notice of default from Lender hereunder or under the Loan Documents in the event of any default by Borrower hereunder or thereunder which are not either applied to the ordinary and necessary expenses of owning and operating the Security Property or paid to Lender; (f) for damage to all or any portion of the Security Property as a result of the intentional misconduct or gross negligence of Borrower or any of its principals, officers or general partners, or any agent or employee of any such persons, or any removal of all or any portion of the Security Property in violation of the terms of the Loan Documents, to the full extent of the losses or damages incurred by Lender on account of such damage or removal; (g) for failure to pay any valid taxes, assessments, mechanic's liens, materialmen's liens or other liens which could create liens on any portion of the Security Property which would be superior to the lien or security title of the Security Instrument or the other Loan Documents, to the full extent of the amount claimed by any such lien claimant; (h) for all obligations and indemnities of Borrower under the Loan Documents relating to hazardous or toxic substances or compliance with environmental laws and regulations to the full extent of any losses or damages (including those resulting from diminution in value of any Security Property) incurred by Lender as a result of the existence of such hazardous or toxic substances or failure to comply with environmental laws or regulations; and (i) for fraud or material misrepresentation by Borrower or any of its principals, officers, or general partners, any guarantor, any indemnitor or any agent, employee or other person authorized or apparently authorized to make statements or representations on behalf of Borrower, any principal, officer or partner of Borrower, any guarantor or any indemnitor, to the full extent of any losses, damages and expenses of Lender on account thereof. References herein to particular sections of the Loan Documents shall be deemed references to such sections as affected by other provisions of the Loan Documents relating thereto. Nothing contained in this section shall (i) be deemed to be a release or impairment of the indebtedness evidenced by this Note or the other obligations of Borrower under the Loan Documents or the lien of the Loan Documents upon the Security Property; or (ii) preclude Lender from foreclosing the Loan Documents in case of any default or from enforcing any of the other rights of Lender except as stated in this section; or (iii) limit or impair in any way whatsoever the Hazardous Substances Indemnity Agreement or the Indemnity and Guaranty Agreement, both of which are of even date and executed and delivered in connection with the indebtedness evidenced by this Note, or release, relieve, reduce, waive or impair in any way whatsoever, any obligation of any party to either of such Agreements. ARTICLE II - GENERAL CONDITIONS 2.01 No Waiver; Amendment. No failure to accelerate the debt evidenced hereby by reason of default hereunder, acceptance of a partial or past due payment, or indulgences granted from time to time shall be construed (i) as a novation of this Note or as a reinstatement of the indebtedness evidenced hereby or as a waiver of such right of acceleration or of the right of Lender thereafter to insist upon strict compliance with the terms of this Note, or (ii) to prevent the exercise of such right of acceleration or any other right granted hereunder or under any other Loan Document or by any applicable laws; and Borrower hereby expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing. Borrower consents to any extension of time for the payment hereof, release of all or any part of the security for the payment hereof or release of any party liable for this obligation. No extension of the time for the payment of this Note or any installment due hereunder or release of any party, made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the original liability of Borrower under this Note, either in whole or in part unless Lender agrees otherwise in writing. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 2.02 Waivers. Presentment for payment, demand, protest and notice of demand, protest and nonpayment and all other notices are hereby waived by Borrower. Borrower hereby further waives and renounces, to the fullest extent permitted by law, all rights to the benefits of any statute of limitations and any moratorium, reinstatement, marshaling, forbearance, valuation, stay, extension, redemption, appraisement, exemption and homestead now or hereafter provided by the Constitution and laws of the United States of America and of each state thereof, both as to itself and in and to all of its property, real and personal, against the enforcement and collection of the obligations evidenced by this Note or the other Loan Documents. In addition, Borrower waives any rights it may have under California Civil Code Sections 2819 and 2822 or any comparable laws of the state in which the Property is located. 2.03 Limit of Validity. The provisions of this Note and of all agreements between Borrower and Lender, whether now or existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity of this Note or otherwise, shall the amount paid, or agreed to be paid ("Interest"), to Lender for the use, forbearance or retention of the money loaned under this Note exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between Borrower and Lender shall, at the time performance or fulfillment of such provision shall be due, exceed the limit for Interest prescribed by law or otherwise transcend the limit of validity prescribed by applicable law, then ipso facto the obligation to be performed or fulfilled shall be reduced to such limit and if, from any circumstance whatsoever, Lender shall ever receive anything of value deemed Interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive Interest shall be applied to the reduction of the principal balance owing under this Note in the inverse order of its maturity (whether or not then due) or at the option of Lender be paid over to Borrower, and not to the payment of Interest. All Interest (including any amounts or payments deemed to be Interest) paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period until payment in full of the principal balance of this Note so that the Interest thereof for such full period will not exceed the maximum amount permitted by applicable law. This Section 2.03 will control all agreements between Borrower and Lender. 2.04 Use of Funds. Borrower hereby warrants, represents and covenants that no funds disbursed hereunder shall be used for personal, family or household purposes. 2.05 Unconditional Payment. Borrower is and shall be obligated to pay principal, interest and any and all other amounts which become payable hereunder or under the other Loan Documents absolutely and unconditionally and without any abatement, postponement, diminution or deduction and without any reduction for counterclaim or set off. In the event that at any time any payment received by Lender hereunder shall be deemed by a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under any bankruptcy, insolvency or other debtor relief law, then the obligation to make such payment shall survive any cancellation or satisfaction of this Note or return thereof to Borrower and shall not be discharged or satisfied with any prior payment thereof or cancellation of this Note, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof, and such payment shall be immediately due and payable upon demand. 2.06 Miscellaneous. This Note shall be interpreted, construed and enforced according to the laws of the State of Oregon. The terms and provisions hereof shall be binding upon and inure to the benefit of Borrower and Lender and their respective heirs, executors, legal representatives, successors, successors-in-title and assigns, whether by voluntary action of the parties or by operation of law. As used herein, the terms "Borrower" and "Lender" shall be deemed to include their respective heirs, executors, legal representatives, successors, successors-in-title and assigns, whether by voluntary action of the parties or by operation of law. If Borrower consists of more than one person or entity, each shall be jointly and severally liable to perform the obligations of Borrower under this Note. All personal pronouns used herein, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of articles and sections are for convenience only and in no way define, limit, amplify or describe the scope or intent of any provisions hereof. Time is of the essence with respect to all provisions of this Note. This Note and the other Loan Documents contain the entire agreements between the parties hereto relating to the subject matter hereof and thereof and all prior agreements relative hereto and thereto which are not contained herein or therein are terminated. 2.07 Whether or not suit or action is instituted to enforce any of the terms of this Note, Lender shall be entitled to recover its attorneys' fees and costs. In the event suit is instituted or bankruptcy proceedings occur, the prevailing party shall be entitled to recover its attorneys' fees and costs in such proceedings, at trial, on any appeal, and on any petition for review, in addition to all other sums provided by law. Even though other provisions in this Note may refer to recovery of attorneys' fees and costs, this Section shall also apply to every instance in which suit or action is instituted or bankruptcy proceedings occur. IN WITNESS WHEREOF, Borrower has executed this Note as of the date first above written. POPLAR SQUARE AIP III, L.P., a South Carolina limited partnership By:POPLAR SQUARE GP LIMITED PARTNERSHIP, a South Carolina limited partnership and sole general partner of Poplar Square AIP III, L.P. By:GP SERVICES IX, INC., a South Carolina corporation and sole general partner of Poplar Square GP Limited Partnership By: /s/ Robert D. Long, Jr. Name: Robert D. Long, Jr. Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----