-----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, SN/2UPY2dk5yJB9G3RUo8ECmBPE3GZrq+kOJoSyf91jHmBzrE5IhJCBNPRGyUXPu 5/WUyo6QVi2HY+ABQ/77mA== 0000704271-98-000003.txt : 19980324 0000704271-98-000003.hdr.sgml : 19980324 ACCESSION NUMBER: 0000704271-98-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVIDSON DIVERSIFIED REAL ESTATE I LP CENTRAL INDEX KEY: 0000721673 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 621181565 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-13530 FILM NUMBER: 98571196 BUSINESS ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8032391000 MAIL ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLZ STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN DIVERSIFIED REAL ESTATE I LP DATE OF NAME CHANGE: 19910501 10KSB 1 FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the fiscal year ended December 31, 1997 [ ] 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 0-13530 DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. (Name of small business issuer in its charter) Delaware 62-1181565 (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: Units of Limited Partnership Interest (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 No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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: $3,056,000 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 a specified date within the past 60 days: Market value information for the registrant's partnership interests is not available. Should a trading market develop for these interests, it is the managing general partner's belief that the aggregate market value of the voting partnership interests would not exceed $25,000,000. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Prospectus of Registrant dated November 16, 1983 (included in Registration Statement, No. 2-84436 of Registrant) are incorporated by reference into Parts I and III. PART I ITEM 1. DESCRIPTION OF BUSINESS Davidson Diversified Real Estate I, L.P. (the "Registrant" or "Partnership") is a Delaware limited partnership organized in January 1983. The general partners of the Partnership are Davidson Diversified Properties, Inc., a Tennessee corporation ("Managing General Partner"); Diversified Equities, Limited, a Tennessee limited partnership ("Associate General Partner"); and David W. Talley ("Individual General Partner") (collectively, the "General Partners"). In 1992, 100% of the Managing General Partner's outstanding stock was purchased by MAE GP Corporation ("MAE GP"), which is wholly-owned by Metropolitan Asset Enhancement, L.P. ("MAE"), an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT"), which is an affiliate of Insignia. Thus the Managing General Partner is now a wholly-owned subsidiary of IPT. On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. The offering of the Partnership's limited partnership units ("Units") commenced on November 16, 1983, and terminated on September 14, 1984. The Partnership received gross proceeds from the offering of $15,008,000 and net proceeds of $13,507,200. The Partnership's primary business is to acquire, own, operate and ultimately dispose of existing income-producing residential real properties. Industry segment information is not relevant. The Partnership does not engage in any foreign operations nor derive any income from foreign sources. All of the net proceeds of the offering were invested in the Partnership's six properties, four of which have since been sold or foreclosed upon. See "Item 2. Description of Properties," below for a description of the Partnership's remaining properties. The Partnership receives income from its properties and is responsible for operating expenses, capital improvements and debt service payments under mortgage obligations secured by the properties. The Partnership financed its properties primarily through non-recourse debt. Therefore, in the event of default, the lender can generally only look to the subject property for recovery of amounts due. 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 over-supply of similar properties resulting from over-building, increases in unemployment or population shifts, reduced availability of permanent mortgage funds, changes in zoning laws, or changes in patterns or needs of users. In addition, there are risks inherent in owning and operating residential 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. The real estate business is highly competitive. The Partnership's properties are subject to competition from similar properties in the vicinity in which each property is located. The Partnership is not a significant factor in its industry. In addition, various limited partnerships have been formed by the General Partners and/or their affiliates to engage in businesses which may be competitive with the Partnership. The Partnership has no employees. Management and administrative services are performed by the Managing General Partner, and by affiliates of Insignia. See "Item 12. Certain Relationships and Related Transactions" for further discussion of transactions with affiliates during 1997 and 1996. ITEM 2. DESCRIPTION OF PROPERTIES The following table sets forth the Partnership's investments in properties: Date of Property Purchase Type of Ownership Use Versailles on the Lake 04/05/84 Fee ownership subject Apartment Ft. Wayne, Indiana to first and second 156 units mortgages. Ashley Woods 07/31/84 Fee ownership subject Apartment Cincinnati, Ohio to first mortgage. 352 units SCHEDULE OF PROPERTIES (IN THOUSANDS): Gross Carrying Accumulated Useful Federal Property Value Depreciation Life Method Tax Basis Versailles on the Lake $ 4,382 $2,351 5-25 yrs S/L $ 1,165 Ashley Woods 8,620 4,325 5-25 yrs S/L 3,003 $13,002 $6,676 $ 4,168 See "Note A" of the Notes to Consolidated Financial Statements included in "Item 7. Financial Statements" for a description of the Partnership's depreciation policy. SCHEDULE OF MORTGAGES (IN THOUSANDS): Principal Principal Balance At Stated Balance December 31, Interest Period Maturity Due At Property 1997 Rate Amortized Date Maturity Versailles on the Lake 1st mortgage $2,529 7.6% 21.42 yrs 11/15/02 $2,071 2nd mortgage 88 7.6% (1) 11/15/02 88 Ashley Woods 8,000 7.29% 30 yrs 12/01/04 7,334 10,617 Less unamortized discounts (112) Total $10,505 (1) Interest only payments. On November 20, 1997, the Partnership refinanced the debt encumbering Ashley Woods. The refinancing replaced indebtedness of approximately $5,941,000 with a new mortgage in the amount of $8,000,000. The new mortgage carries a stated interest rate of 7.29% and is amortized over 30 years. Payments of approximately $55,000 are due on the first day of each month until maturity. Total loan costs related to the refinancing were approximately $154,000. As a result of the refinancing, the Partnership recorded an extraordinary loss on early extinguishment of debt of approximately $145,000, as a result of the payment of prepayment penalties and the write off of the remaining unamortized loan costs. The above non-recourse mortgages are secured by the related property and improvements of the Partnership and by pledge of revenues from the apartment properties. The notes require prepayment penalties if repaid prior to maturity and prohibit resale of the properties subject to existing indebtedness. The Partnership exercised an interest rate buy-down option for Versailles on the Lake reducing the stated rate from 8.76% to 7.60% during 1992. The fee for the interest rate reduction was approximately $205,000 and is being amortized as a loan discount using the interest method over the term of the loans. The discount fee is reflected as a reduction of the mortgage notes payable and increases the effective rate of the debt to 8.76%. SCHEDULE OF RENTAL RATES AND OCCUPANCY: Average Annual Average Rental Rates Occupancy (per unit) Property 1997 1996 1997 1996 Versailles on the Lake $5,847 $5,696 95% 94% Ashley Woods 6,321 6,143 90% 92% 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 in the area. The Managing General Partner believes that all of the properties are adequately insured. The multi-family residential properties' lease terms are for one year or less. No residential tenant leases 10% or more of the available space. SCHEDULE OF REAL ESTATE TAXES (IN THOUSANDS) AND RATES: 1997 1997 Taxes Rate Versailles on the Lake $ 84 9.12% Ashley Woods 169 5.36% ITEM 3. LEGAL PROCEEDINGS The Partnership is unaware of any pending or outstanding litigation that is not of a routine nature. The Managing General Partner of the Partnership 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 During the fiscal year ended December 31, 1997, no matters were submitted to a vote of Unit holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS There is no established public market for the Units and it is not anticipated that any will exist in the foreseeable future. As of January 1, 1998, there were 1,056 holders of record owning an aggregate of 751.59 Units. For the years ended December 31, 1997 and 1996, the Partnership distributed cash flow from operations to the partners of $201,000 and $403,000, respectively. A distribution of $900,000 was made to the limited partners on February 15, 1998. This distribution represented a portion of the net proceeds from the mortgage refinancing of Ashley Woods Apartments. Pursuant to the terms of the Partnership Agreement, there are restrictions on the ability of the limited partners to transfer their Units. In all cases, the General Partners must consent to any transfer. The Revenue Act of 1987 contained provisions which have an adverse impact on investors in "publicly traded partnerships". Accordingly, the General Partners have established a policy of imposing limited restrictions on the transferability of the Units in secondary market transactions. Implementation of this policy should prevent a public trading market from developing and may impact the ability of an investor to liquidate his investment quickly. It is expected that such policy will remain in effect until such time, if ever, as further clarification of the Revenue Act of 1987 may permit the Partnership to lessen the scope of the restrictions. There are no material restrictions upon the Partnership's present or future ability to make distributions in accordance with the provisions of the Partnership's Partnership Agreement. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION This item should be read in conjunction with the consolidated financial statements and other items contained elsewhere in this report. Results of Operations The Partnership realized a net loss of $172,000 for the year ended December 31, 1997, compared to a net loss of $49,000 for the year ended December 31, 1996. The increase in net loss is attributable to the extraordinary loss on early extinghuishment of debt of $145,000 related to the refinancing of Ashley Woods Apartments, as discussed in "Liquidity and Capital Resources" below. The Partnership realized a loss before extraordinary item of $27,000 for the year ended December 31, 1997, compared to a loss of $49,000 for the year ended December 31, 1996. The decrease in loss before extraordinary item for the year ended December 31, 1997, is primarily due to an increase in rental income, partially offset by increased total expenses. Rental income increased due to rental rate increases at both properties. Total expenses increased primarily due to increased operating expenses and depreciation expense. Operating expenses were higher due to increases in personnel costs at Ashley Woods as well as increased promotions and advertising costs incurred at Ashley Woods in an attempt to increase occupancy. Partially offsetting the increases in property and advertising costs were decreases in maintenance expense and professional costs. Maintenance expense decreased due to deck repairs and other exterior projects at Ashley Woods and interior building repairs at Versailles being incurred in 1996. Included in operating expense for the year ended December 31, 1997, is approximately $47,000 of major repairs and maintenance comprised primarily of landscaping, parking lot repairs, and window coverings. For the year ended December 31, 1996, maintenance expense included approximately $103,000 of major repairs and maintenance comprised of interior and exterior building repairs, window coverings and landscaping. Depreciation expense increased as a result of property improvements and replacements completed during 1997 and 1996. Partially offsetting the increase in expenses was a decrease on general and administrative expenses due to decreased expense reimbursements. 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. Liquidity and Capital Reserves At December 31, 1997, the Partnership held cash and cash equivalents of approximately $1,976,000 compared to approximately $637,000 at December 31, 1996. The net increase in cash and cash equivalents for the year ended December 31, 1997 is $1,339,000 compared to a net decrease of $231,000 for the year ended December 31, 1996. Net cash provided by operations increased primarily as a result of a decrease in Ashley Woods' tax and insurance escrow deposits required by the previous mortgage holder. Net cash used in investing activities increased due to increased deposits to restricted escrows, as a result of capital reserves established with the refinancing of Ashley Woods. Net cash provided by financing activities increased due to the receipt of net proceeds from the refinancing of Ashley Woods, as discussed below. On November 20, 1997, the Partnership refinanced the debt encumbering Ashley Woods. The refinancing replaced indebtedness of approximately $5,941,000 with a new mortgage in the amount of $8,000,000. The new mortgage carries a stated interest rate of 7.29% and is amortized over 30 years. Payments of approximately $55,000 are due on the first day of each month until maturity. On December 1, 2004, at which time a balloon payment of approximately $7,334,000 is due. Total loan costs related to the refinancing were approximately $154,000. As a result of the refinancing, the Partnership recorded an extraordinary loss on early extinguishment of debt of approximately $145,000, as a result of the payment of prepayment penalties and the write off of the remaining unamortized loan costs. 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 Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The mortgage indebtedness of $10,505,000, net of discount, is amortized over varying periods. Of this amount, $8,000,000, which matures in 2004, relates to Ashley Woods and $2,505,000, which matures in 2002, relates to Versailles on the Lake. At the time of maturity, the properties will either be sold or refinanced. Distributions of cash from operations of $201,000 and $403,000 were made to the partners during the years ending December 31, 1997 and 1996, respectively. A distribution of $900,000 was made to the limited partners on February 15, 1998. This distribution represented a portion of the net proceeds from the mortgage refinancing of Ashley Woods. Future cash distributions will depend on the levels of net cash generated from operations, property refinancings, property sales and the availability of cash reserves. Year 2000 The Partnership is dependent upon the Managing General Partner and Insignia for management and administrative services. Insignia has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter (the "Year 2000 Issue"). The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Managing General Partner believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Partnership. Other Certain items discussed in this annual report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such forward-looking statements speak only as of the date of this annual report. The Partnership expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Partnership's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 7. FINANCIAL STATEMENTS DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. LIST OF FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheet - December 31, 1997 Consolidated Statements of Operations - Years ended December 31, 1997 and 1996 Consolidated Statement of Changes in Partners' Deficit - Years ended December 31, 1997 and 1996 Consolidated Statements of Cash Flows - Years ended December 31, 1997 and 1996 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Davidson Diversified Real Estate I, L.P. We have audited the accompanying consolidated balance sheet of Davidson Diversified Real Estate I, L.P. (A Limited Partnership) as of December 31, 1997, 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, 1997. 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 Davidson Diversified Real Estate I, L.P. (A Limited Partnership) at December 31, 1997, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/ERNST & YOUNG LLP Greenville, South Carolina February 25, 1998, except for Note G, as to which the date is March 17, 1998 DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. CONSOLIDATED BALANCE SHEET December 31, 1997 (in thousands, except unit data) Assets Cash and cash equivalents $ 1,976 Receivables and deposits 117 Restricted escrows 792 Other assets 233 Investment properties: Land $ 1,072 Buildings and related personal property 11,930 13,002 Less accumulated depreciation (6,676) 6,326 $ 9,444 Liabilities and Partners' Deficit Liabilities Accounts payable $ 32 Tenant security deposits payable 89 Accrued property taxes 250 Other liabilities 101 Due to affiliate 321 Mortgage notes payable 10,505 Partners' Deficit General partners' $ (114) Limited partners' (751.59 units issued and outstanding) (1,740) (1,854) $ 9,444 See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except unit data)
Years Ended December 31, 1997 1996 Revenues: Rental income $ 2,839 $ 2,773 Other income 217 225 Total revenues 3,056 2,998 Expenses: Operating 1,297 1,279 General and administrative 112 129 Depreciation 565 532 Interest 860 871 Property taxes 249 236 Total expenses 3,083 3,047 Loss before extraordinary item (27) (49) Extraordinary loss on early extinguishment of debt (Note C) (145) -- Net loss $ (172) $ (49) Net loss allocated to general partners (5%) $ (9) $ (2) Net loss allocated to limited partners (95%) (163) (47) $ (172) $ (49) Net loss per limited partnership unit: Loss before extraordinary item $ (33.59) $ (62.53) Extraordinary loss on early extinguishment of debt (183.28) -- Net loss $(216.87) $ (62.53) Distributions per limited partner unit $ 254.13 $ 509.59 See Accompanying Notes to Consolidated Financial Statements
DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT (in thousands, except unit data) Limited Partnership General Limited Units Partnrs' Partners' Total Original capital contributions 751.84 $ 1 $ 15,008 $15,009 Partners' deficit at December 31, 1995 751.59 $ (73) $ (956) $(1,029) Distributions to partners -- (20) (383) (403) Net loss for the year ended December 31, 1996 -- (2) (47) (49) Partners' deficit at December 31, 1996 751.59 (95) (1,386) (1,481) Distributions to partners -- (10) (191) (201) Net loss for the year ended December 31, 1997 -- (9) (163) (172) Partners' deficit at December 31, 1997 751.59 $ (114) $ (1,740) $(1,854) See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 1997 1996 Cash flows from operating activities: Net loss $ (172) $ (49) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 565 532 Amortization of discounts and loan costs 64 63 Extraordinary loss on early extinguishment of debt 145 -- Change in accounts: Receivables and deposits 122 17 Other assets (5) (1) Accounts payable (13) (1) Tenant security deposits payable (2) 5 Accrued property taxes 9 10 Other liabilities (36) (46) Net cash provided by operating activities 677 530 Cash flows from investing activities: Property improvements and replacements (308) (318) Net (deposits to) receipts from restricted escrows (563) 65 Net cash used in investing activities (871) (253) Cash flows from financing activities: Payments on mortgage notes payable (111) (105) Repayment of mortgage note payable (5,941) -- Proceeds from refinancing 8,000 -- Payment of loan costs (154) -- Distributions to partners (201) (403) Debt extinguishment costs (60) -- Net cash provided by (used in) financing activities 1,533 (508) Net increase (decrease) in cash and cash equivalents 1,339 (231) Cash and cash equivalents at beginning of year 637 868 Cash and cash equivalents at end of year $ 1,976 $ 637 Supplemental disclosure of cash flow information: Cash paid for interest $ 798 $ 807 See Accompanying Notes to Consolidated Financial Statements DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. Notes to Consolidated Financial Statements December 31, 1997 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Davidson Diversified Real Estate I, L.P. (the "Partnership") is a Delaware limited partnership organized on January 14, 1983, to acquire and operate residential real estate properties. As of December 31, 1997, the Partnership operates two residential properties located in Cincinnati, Ohio and Ft. Wayne, Indiana. The Partnership's managing general partner is Davidson Diversified Properties, Inc., (the "Managing General Partner"). In 1992, 100% of the Managing General Partner's outstanding stock was purchased by MAE GP Corporation ("MAE GP"), which is wholly-owned by Metropolitan Asset Enhancement, L.P. ("MAE"), an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT"), which is an affiliate of Insignia. Thus the Managing General Partner is now a wholly-owned subsidiary of IPT. PRINCIPLES OF CONSOLIDATION During the third quarter of 1997, Ashley Woods Associates L.P. was restructured into a limited liability company known as Ashley Woods L.L.C. ("Ashley Woods"). Davidson Diversified Real Estate I owns 100% of the new entity. As a result, the Partnership consolidates its interest in Ashley Woods (whereby all accounts of Ashley Woods are included in the consolidated financial statements of the Partnership with intercompany accounts being eliminated). ALLOCATIONS TO PARTNERS Net earnings (loss) of the Partnership and taxable income (loss) are allocated 95% to the limited partners and 5% to the general partners. Distributions of available cash (cash flow) are allocated among the limited partners and the general partners in accordance with the agreement of limited partnership. Allocation of net income for tax purposes, arising from the occurrence of a sale or refinancing shall be allocated as follows: First, an amount equal to the aggregate deficit in the capital accounts of the general and limited partners having deficits in their capital accounts shall be allocated to each such partner in the same ratio as the deficit such partner's capital account bears to the aggregate of all such partner's deficits. Second, to the limited partners in an amount equal to the cash distributed to them from a sale or refinancing. Third, the remainder, if any, 5% to the general partners and 95% to the limited partners. Distributions of cash from sales or refinancings shall be distributed in the following order of priority: First, to the limited partners, an amount which when added to all prior distributions of cash from sales or refinancings shall equal their original invested capital, plus an amount which, when added to all prior distributions to the limited partners (excluding distributions which are deducted in the calculation of adjusted invested capital), will equal 8% per annum cumulative noncompounded on their adjusted invested capital, commencing the last day of the calendar quarter in which each limited partner is admitted to the Partnership through the date of payment. Second, to an affiliate of the general partners, an amount equal to its subordinated real estate commission, which fee is equal to the lesser of (i) 3% of the gross sales price of a property or (ii) one-half of the competitive commission, as defined, but may only be paid after the limited partners have received their priority distributions as discussed in the previous paragraph. Third, 85% of the remaining cash from sales or refinancings to the limited partners and 15% of the remaining cash from sales or refinancings to the general partners. DEPRECIATION Depreciation is provided by the straight-line method over the estimated lives of the investment properties and related personal property. For Federal income tax purposes, the accelerated cost recovery method is used (1) 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, and (2) for personal property over 5 years for additions prior to 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 7 years. INVESTMENT PROPERTIES Investment properties are stated at cost. Acquisition fees are capitalized as a cost of real estate. 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. CASH AND CASH EQUIVALENTS The Partnership considers all highly liquid investments with a maturity, when purchased, of three months or less to cash equivalents. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. 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. The security deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on its rental payments. 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. ADVERTISING The Partnership expenses the costs of advertising as incurred. Advertising expense, included in operating expenses, was approximately $42,000 and $39,000 for the years ended December 31, 1997 and 1996, respectively. RESTRICTED ESCROWS Reserve Account - The Partnership has a general reserve account for Versailles to cover necessary repairs and replacements of existing improvements, debt service, out-of-pocket expenses incurred for ordinary and necessary administrative tasks, and payment of real property taxes and insurance premiums. At December 31, 1997, this reserve totaled approximately $166,000. Capital Reserve - At the time of the refinancing of Ashley Woods' mortgage note payable during 1997, approximately $626,000 of the proceeds were designated for "capital improvements escrows" for certain capital improvements. LOAN COSTS At December 31, 1997, loan costs of approximately $267,000, net of accumulated amortization of approximately $57,000, are included in other assets and are being amortized on a straight-line basis as interest expense over the term of the respective loans. LEASES The Partnership generally leases apartment units for twelve-month terms or less. The Partnership recognizes income as earned on its leases. FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership believes that the carrying amount of its financial instruments (except for long term debt) approximates their fair value 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, based on estimated rates currently available to the Partnership, approximates its carrying balance. RECLASSIFICATIONS Certain reclassifications have been made to the 1996 balances to conform to the 1997 presentation. NOTE B - DUE TO AFFILIATE The Partnership is liable to a company affiliated with the Managing General Partner through common ownership for real estate commissions in the amounts of $125,000 for Revere Village and $196,000 for Essex which were sold in previous years. Payment of the commissions will not be made to the affiliated company until after payment to the limited partners of their original invested capital, plus 8% per annum cumulative non-compounded on their adjusted invested capital commencing on the last day of the calendar quarter in which each limited partner was admitted to the Partnership through the date of payment. NOTE C - MORTGAGE NOTES PAYABLE The principle terms of mortgage notes payable are as follows (in thousands): Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At Property 1997 Interest Rate Date Maturity Versailles on the Lake 1st mortgage $ 2,529 $ 22 7.6% 11/15/02 $2,071 2nd mortgage 88 1 7.6% 11/15/02 88 Ashley Woods 8,000 55 7.29% 12/01/04 7,334 10,617 $ 78 Less unamortized discounts (112) Totals $10,505 On November 20, 1997, the Partnership refinanced the debt encumbering Ashley Woods. The refinancing replaced indebtedness of approximately $5,941,000 with a new mortgage in the amount of $8,000,000. The new mortgage carries a stated interest rate of 7.29% and is amortized over 30 years. Payments of approximately $55,000 are due on the first day of each month until maturity. Total loan costs related to the refinancing were approximately $154,000. As a result of the refinancing, the Partnership recorded an extraordinary loss on early extinguishment of debt of approximately $145,000, as a result of the payment of prepayment penalties and the write off of the remaining unamortized loan costs. The above non-recourse mortgages are secured by the related property and improvements of the Partnership and by pledge of revenues from the apartment properties. The notes require prepayment penalties if repaid prior to maturity and prohibit resale of the properties subject to existing indebtedness. The Partnership exercised an interest rate buy-down option for Versailles on the Lake reducing the stated rate from 8.76% to 7.60% during 1992. The fee for the interest rate reduction was approximately $205,000 and is being amortized as a loan discount using the interest method over the term of the loans. The discount fee is reflected as a reduction of the mortgage notes payable and increases the effective rate of the debt to 8.76%. Scheduled principal payments of mortgage notes payable subsequent to December 31, 1997, are as follows (in thousands): Years Ending December 31, 1998 $ 158 1999 170 2000 184 2001 198 2002 2,354 Thereafter 7,553 $10,617 NOTE D - INCOME TAXES The Partnership received a ruling from the Internal Revenue Service that it is to be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the 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 loss and Federal taxable loss (in thousands, except per unit data): 1997 1996 Net loss as reported $ (172) $ (49) Add (deduct) Depreciation differences 33 (55) Unearned income 65 (16) Miscellaneous (40) (35) Federal taxable loss $ (114) $ (155) Federal taxable loss per limited partnership unit $(144.09) $(195.92) The following is a reconciliation between the Partnership's reported amounts and Federal tax basis of net assets and liabilities at December 31, 1997 (in thousands): Net liabilities as reported $(1,854) Differences in basis of assets and liabilities: Buildings and Land 137 Accumulated depreciation (2,295) Other 486 Net liabilities - Federal tax basis $(3,526) NOTE E - 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 property management services based on a percentage of revenue and for reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were paid to affiliates of the Managing General Partner during each of the years ended December 31, 1997 and 1996 (in thousands): 1997 1996 Property management fees (included in operating expenses) $151 $149 Reimbursement for services of affiliates, including $5,000 of construction services reimbursements in both 1997 and 1996 (included in investment properties, general and administrative expenses and operating expenses) 80 92 Additionally, the Partnership paid approximately $33,000 to affiliates of Insignia for reimbursements of costs related to the refinancing of Ashley Woods in November 1997. These costs were capitalized as loan costs and are being amortized over the term of the loan. For the period of January 1, 1996, to August 31, 1997, the Partnership insured 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 was later acquired by the agent who placed the master policy. The agent assumed the financial obligations to the affiliate of the Managing General Partner who received 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. On September 26, 1997, an affiliate of the Managing General Partner purchased Lehman Brothers' Class "D" subordinated bonds of SASCO, 1992 - M1. These bonds are secured by 55 multi-family apartment mortgage loan pairs held in Trust, including Versailles on the Lake Apartments owned by the Partnership. NOTE F - INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION (IN THOUSANDS)
Initial Cost To Partnership Buildings Cost and Related Capitalized Personal Subsequent to Description Encumbrances Land Property Acquisition Versailles on the Lake Fort Wayne, Indiana $ 2,617 $ 191 $3,847 $ 344 Ashley Woods Cincinnati, Ohio 8,000 881 5,815 1,924 Totals $10,617 $1,072 $9,662 $2,268
Gross Amount At Which Carried At December 31, 1997 Buildings And Date of Personal Accumulated Construc- Date Depreciable Description Land Property Total Depreciation tion Acquired Life-Years Versailles on the Lake $ 191 $ 4,191 $ 4,382 $2,351 1970 04/84 5-25 Ashley Woods 881 7,739 8,620 4,325 1971 07/84 5-25 Totals $1,072 $11,930 $13,002 $6,676
Reconciliation of "Investment Properties and Accumulated Depreciation" (in thousands): Year Ended December 31, 1997 1996 Investment Properties Balance at beginning of year $12,694 $12,376 Property improvements 308 318 Balance at end of year $13,002 $12,694 Accumulated Depreciation Balance at beginning of year $ 6,111 $ 5,579 Depreciation expense 565 532 Balance at end of year $ 6,676 $ 6,111 The aggregate cost of the real estate for Federal income tax purposes at December 31, 1997 and 1996, is $13,139,000 and $12,831,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 1997 and 1996, is $8,971,000 and $8,438,000, respectively. NOTE G - SUBSEQUENT EVENTSS On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with Ernst & Young LLP regarding the 1997 and 1996 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 Partnership has no officers or directors. Davidson Diversified Properties, Inc. (the "Managing General Partner") manages and controls the Partnership and has general responsibility and authority in all matters affecting its business. In 1992, 100% of the Managing General Partner's outstanding stock was purchased by MAE GP Corporation ("MAE GP"), which is wholly-owned by Metropolitan Asset Enhancement, L.P. ("MAE"), an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT"), which is an affiliate of Insignia. Thus the Managing General Partner is now a wholly-owned subsidiary of IPT. On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. The names of the directors and executive officers of the Managing General Partner, their ages and the nature of all positions presently held by them are set forth below. There are no family relationships between or among any officers and directors. Name Age Position Carroll D. Vinson 57 President and Director William H. Jarrard, Jr. 51 Vice President Robert D. Long, Jr. 30 Vice President and Chief Accounting Officer Daniel M. LeBey 32 Secretary Kelley M. Buechler 40 Assistant Secretary Carroll D. Vinson has been President and Director of the Managing General Partner and President of MAE and subsidiaries since August 1994. He has acted as Chief Operating Officer of IPT since May 1997. 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 which included portfolio acquisitions, asset dispositions, debt restructurings and financial reporting. 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. William H. Jarrard, Jr. has been Vice President of the Managing General Partner since January 1991. He has acted as Senior Vice President of IPT since May 1997. Mr. Jarrard previously acted as Managing Director - Partnership Administration of Insignia from January 1991 through September 1997 and served as Managing Director - Partnership Administration and Asset Management of Insignia from July 1994 until January 1996. Robert D. Long, Jr. has been Vice President and Chief Accounting Officer of the Managing General Partner since August 1994. Mr. Long joined MAE in September 1993. Since 1994 he has acted as Vice President and Chief Accounting Officer of the MAE subsidiaries. Mr. Long was an accountant for Insignia until joining MAE in 1993. Prior to joining Insignia, Mr. Long was an auditor for the State of Tennessee and was associated with the accounting firm of Harsman Lewis and Associates. Daniel M. LeBey has been Secretary of the Managing General Partner since January 29, 1998, and Insignia's Assistant Secretary since April 30, 1997. Since July 1996 he has also served as Insignia's Associate General Counsel. From September 1992 until June 1996, Mr. LeBey was an attorney with the law firm of Alston & Bird LLP, Atlanta, Georgia. Kelley M. Buechler has been Assistant Secretary of the Managing General Partner and Assistant Secretary of Insignia since 1991. ITEM 10. EXECUTIVE COMPENSATION The Partnership was not required to and did not pay remuneration to officers and/or directors of the Managing General Partner during 1997 or 1996. See "Item 12. Certain Relationships and Related Transactions" below for a discussion of compensation and reimbursements paid to the General Partners and certain affiliates. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of January 1, 1998, no Unit holder was known by the Partnership to be the beneficial owner of more than 5% of the Units of the Partnership. As of January 1, 1998, no director or officer of the Managing General Partner owns, nor do the directors or officers as a group own any of the Partnership's Units. No such director or officer had any right to acquire beneficial ownership of additional Units of the Partnership. There are no arrangements known to the Managing General Partner the operation of which may, at a subsequent date, result in a change in control of the Ownership. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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 property management services based on a percentage of revenue and for reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were paid to affiliates of the Managing General Partner during each of the years ended December 31, 1997 and 1996 (in thousands): 1997 1996 Property management fees $151 $149 Reimbursement for services of affiliates, including $5,000 of construction services reimbursements in both 1997 and 1996 80 92 Additionally, the Partnership paid approximately $33,000 to affiliates of Insignia for reimbursements of costs related to the refinancing of Ashley Woods in November 1997. These costs were capitalized as loan costs and are being amortized over the term of the loan. For the period of January 1, 1996, to August 31, 1997, the Partnership insured 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 was later acquired by the agent who placed the master policy. The 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. On September 26, 1997, an affiliate of the Managing General Partner purchased Lehman Brothers' Class "D" subordinated bonds of SASCO, 1992 - M1. These bonds are secured by 55 multi-family apartment mortgage loan pairs held in Trust, including Versailles on the Lake Apartments owned by the Partnership. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: see Exhibit Index contained herein. (b) No Reports on Form 8-K were filed during the fourth quarter of 1997. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Partnership caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. By: Davidson Diversified Properties, Inc., Its Managing General Partner By: /s/Carroll D. Vinson Carroll D. Vinson President and Director Date: March 23, 1998 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Partnership and in the capacities and on the date indicated. /s/Carroll D. Vinson President and Director March 23, 1998 Carroll D. Vinson /s/Robert D. Long, Jr. Vice President and Chief March 23, 1998 Robert D. Long, Jr. Accounting Officer EXHIBIT INDEX Exhibit 3A Partnership Agreement dated January 14, 1983 is incorporated by reference to Exhibit A to the Prospectus of the Partnership dated November 16, 1983 as filed with the Commission pursuant to Rule 424(b) under the Act. 3B Amendment No. 1 dated January 1, 1986 to the Partnership Agreement is incorporated by reference to Exhibit 3B to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 4 Certificate of Limited Partnership dated December 2, 1982 is incorporated by reference to Exhibit 4 to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 4A Certificate of Amendment of Certificate of Limited Partnership dated March B4, 1983 is incorporated by reference to Exhibit 4A to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 4B Restated Certificate of Limited Partnership dated June 8, 1983 is incorporated by reference to Exhibit 4B to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 4C Amended and Restated Certificate of Limited Partnership dated January 1, 1986 is incorporated by reference to Exhibit 4C to the Partnership's Annual Report on form 10-K for the fiscal year ended December 31, 1987. 10A Agent's Agreement dated November 1, 1983 between the Partnership and Harvey Freeman & Sons, Inc. is incorporated by reference to Exhibit 10B to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1983. 10B Agreement Among Agents dated November 1, 1983 by and among Harvey Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas, Harvey Freeman & Sons, Inc. of Florida, Harvey Freeman & Sons, Inc. of Georgia, Harvey Freeman & Sons, Inc. of Indiana, Harvey Freeman & Sons, Inc. of Kentucky, Harvey Freeman & Sons, Inc. of Mississippi, Harvey Freeman & Sons, Inc. of North Carolina, Harvey Freeman and Sons, Inc. of Ohio and Harvey Freeman & Sons, Inc. of South Carolina is incorporated by reference to Exhibit 10C to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1983. 10C Acquisition and Disposition Services Agreement dated October 3, 1983 between the Partnership and Criswell Freeman Company is incorporated by reference to Exhibit 10D to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1983. 10D Contract for Sale of Real Estate for Versailles on the Lake dated March 16, 1984 between Versailles on the Lake Associates, an Illinois limited partnership and Tennessee Trust Company, Trustee, is incorporated by reference to Exhibit 10(b) to the Partnership's Current Report on Form 8- K dated April 4, 1984. 10E Assignment of Contract for Sale dated April 2, 1984 between Tennessee Trust Company, Trustee, and the Partnership (relating to Versailles on the Lake Apartments) is incorporated by reference to Exhibit 10L to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1984. 10F Note dated November 19, 1984 executed by the Partnership payable to American Fletcher National Bank and Trust Company relating to Versailles on the Lake Apartments is incorporated by reference to Exhibit 10W to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10G Real Estate Mortgage, Assignment of Rents and Security Agreement dated November 19, 1984 executed by the Partnership payable to American Fletcher National Bank and Trust Company relating to Versailles on the Lake is incorporated by reference to Exhibit 10EE to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10H Memorandum of Understanding among SEC Realty Corp., Tennessee Properties, L.P., Freeman Mortgage Corporation, J. Richard Freeman, W. Criswell Freeman and Jacques-Miller Properties, Inc. is incorporated by reference to Exhibit 10BB to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 10I Partnership Administration and Consultation Agreement among Freeman Properties, Inc., Freeman Diversified Properties, Inc., Residual Equities Limited and Jacques-Miller Properties, Inc. is incorporated by reference to Exhibit 10CC to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 10J Partnership Agreement of Ashley Woods Associates dated May 16, 1990 owned 99.9% by the Partnership relating to refinancing of Ashley Woods Apartments is incorporated by reference to Exhibit 10EE to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10K Multifamily Note with Addendum dated June 14, 1990 executed by Ashley Woods Associates payable to PW Funding Inc. relating to Ashley Woods Apartments is incorporated by reference to Exhibit 10FF to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10L Multifamily Open-end Mortgage with Rider dated June 14, 1990 executed by Ashley Woods Associates in favor of PW Funding Inc. relating to Ashley Woods Apartments is incorporated by reference to Exhibit 10GG to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10M Termination Agreement, dated December 31, 1991 among Jacques-Miller, Inc., Jacques-Miller Property Management, Davidson Diversified Properties, Inc., and Supar, Inc. is incorporated by reference to Exhibit 10HH to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10N Assignment of Limited Partnership Interest of Freeman Equities, Limited, dated December 31, 1991 between Davidson Diversified Properties, Inc. and Insignia Jacques-Miller, L.P. is incorporated by reference to Exhibit 10II to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10O Assignment of General Partner Interests of Freeman Equities, Limited, dated December 31, 1991 between Davidson Diversified Properties, Inc. and MAE GP Corporation is incorporated by reference to Exhibit 10JJ to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10P Stock certificate, dated December 31, 1991 showing ownership of 1,000 shares of Davidson Diversified Properties, Inc. by MAE GP Corporation is incorporated by reference to Exhibit 10KK to the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 10Q Contracts related to refinancing of debt: (a)First Deed of Trust and Security Agreement dated October 28, 1992 between Davidson Diversified Real Estate I, Limited Partnership and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Versailles on the Lake is incorporated by reference to Exhibit 10Q (a) to the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (b)Second Deed of Trust and Security Agreement dated October 28, 1992 between Davidson Diversified Real Estate I, Limited Partnership and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Versailles on the Lake is incorporated by reference to Exhibit 10Q (b) to the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (c)First Assignment of Leases and Rents dated October 28, 1992 between Davidson Diversified Real Estate I, Limited Partnership and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Versailles on the Lake is incorporated by reference to Exhibit 10Q (c) to the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (d)Second Assignment of Leases and Rents dated October 28, 1992 between Davidson Diversified Real Estate, I Limited Partnership and First Commonwealth Realty Credit Corporation, a Virginia Corporation, securing Versailles on the Lake is incorporated by reference to Exhibit 10Q (d) to the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (e)First Deed of Trust Note dated October 28, 1992 between Davidson Diversified Real Estate I Limited Partnership and First Commonwealth Realty Credit Corporation, relating to Versailles on the Lake is incorporated by reference to Exhibit 10Q (e) to the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (f) Second Deed of Trust Note dated October 28, 1992 between Davidson Diversified Real Estate I, Limited Partnership and First Commonwealth Realty Credit Corporation relating to Versailles on the Lake is incorporated by reference to Exhibit 10Q (f) to the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. 10R Promissory Note dated November 20, 1997, by and between Ashley Woods, L.L.C., a South Carolina limited liability company, and Lehman Brothers Holdings, Inc., a Delaware corporation. 16 Letter from the Partnership's former independent accountant regarding its concurrence with the statements made by the Partnership is incorporated by reference to the exhibit filed with Form 8-K dated September 30, 1992. 27 Financial Data Schedule EX-27 2
5 This schedule contains summary financial information extracted from Davidson Diversified Real Estate I, L.P. 1997 Year-End 10-KSB and is qualified in its entirety by reference to such 10-KSB filing. 0000721673 DAVIDSON DIVERSIFIED REAL ESTATE I, L.P. 1,000 12-MOS DEC-31-1997 DEC-31-1997 1,976 0 0 0 0 0 13,002 6,676 9,444 0 10,505 0 0 0 (1,854) 9,444 0 3,056 0 0 3,083 0 860 0 0 0 0 0 0 (172) (216.87) 0 Registrant has an unclassified balance sheet. Multiplier is 1.
EX-10 3 PROMISSORY NOTE $8,000,000 New York, New York As of November 20, 1997 FOR VALUE RECEIVED ASHLEY WOODS, L.L.C., a South Carolina limited liability company, having an address at c/o Insignia Financial Group, One Insignia Financial Plaza, Greenville, South Carolina 29602 (hereinafter referred to as "Borrower"), promises to pay to the order of LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, having an address at Three World Financial Center, 200 Vesey Street, New York, New York 10285 (hereinafter referred to as "Lender"), or at such other place as the holder hereof may from time to time designate in writing, the principal sum of EIGHT MILLION AND 00/100 DOLLARS ($8,000,000.00), in lawful money of the United States of America with interest thereon to be computed from the date of this Note at the Applicable Interest Rate (hereinafter defined), and to be paid as hereinafter provided. A. PAYMENT TERMS Borrower shall pay to Lender: (i) a payment of interest only on December 1, 1997; (ii) a constant payment of $54,791.32 (the "Monthly Payment") on January 1, 1998 and on the first day of each calendar month (the "Monthly Payment Date") thereafter to and including the first day of November, 2004, and (iii)the balance of the principal sum then outstanding and all interest thereon shall be due and payable on the first day of December, 2004 (the "Maturity Date"). Each of such payments shall be applied as follows: (i) First to the payment of interest computed at the Applicable Interest Rate; and (ii) The balance applied toward the reduction of the principal sum. B. INTEREST The term "Applicable Interest Rate" as used in this Note shall mean 7.29% per annum. Interest on the principal sum of this Note shall be calculated in arrears on the basis of a three hundred sixty (360) day year consisting of twelve (12) months of thirty (30) days each. C. DEFAULT AND ACCELERATION The whole of the principal sum of this Note, together with all interest accrued and unpaid thereon and all other sums due under the Security Instrument (hereinafter defined) and this Note (all such sums hereinafter collectively referred to as the "Debt") shall without notice become immediately due and payable at the option of Lender if any payment required in this Note is not paid within ten (10) days after written notice from the Lender notifying Borrower that the same is due or on the happening of any other default, after the expiration of any applicable notice and grace periods, herein or under the terms of the Security Instrument (hereinafter collectively an "Event of Default"). All of the terms, covenants and conditions contained in the Security Instrument and the Other Security Documents (hereinafter defined) are hereby made part of this Note to the same extent and with the same force as if they were fully set forth herein. In the event that it should become necessary to employ counsel to collect the Debt or to protect, sell or foreclose the security hereof, Borrower also agrees to pay reasonable attorney's fees for the services of such counsel whether or not suit be brought. D. PREPAYMENT Borrower shall not have the right or privilege to prepay all or any portion of the unpaid principal balance of this Note until November 31, 2000. Beginning December 1, 2000, provided no Event of Default exists, the principal balance of this Note may be prepaid, in whole but not in part, upon: (i) not less than 30 days and not more than 45 days prior written notice (the "Prepayment Notice") to Lender specifying the scheduled payment date on which prepayment is to be made (the "Prepayment Date"); (ii) payment of all accrued and unpaid interest on the outstanding principal balance of this Note to and including the Prepayment Date together with a payment of all interest which would have accrued on the principal balance of this Note to and including the first day of the calendar month immediately following the Prepayment Date, if such prepayment occurs on a date which is not the first day of a calendar month (the "Shortfall Interest Payment"); (iii) payment of all other sums then due under this Note, the Security Instrument and the Other Security Documents and (iv) if the Prepayment Date occurs prior to the date which is six months prior to the Maturity Date payment of a prepayment consideration (the "Prepayment Consideration") in an amount equal to the greater of: (A) one (1%) percent of the principal amount of this Note being prepaid; and (B) the present value of a series of payments each equal to the Payment Differential (hereinafter defined) and payable on each monthly payment date over the remaining original term of this Note and on the Maturity Date discounted at the Reinvestment Yield (hereinafter defined) for the number of months remaining from the Prepayment Date to each such monthly payment date and the Maturity Date. The term "Reinvestment Yield" as used herein shall be equal to the lesser of (a) the yield on the U.S. Treasury issue (primary issue) with a maturity date closest to the Maturity Date, or (b) the yield on the U.S. Treasury issue (primary issue) with a term equal to the remaining average life of the Debt, with each such yield being based on the bid price for such issue as published in The Wall Street Journal on the date that is 14 days prior to the Prepayment Date set forth in the Prepayment Notice (or, if such bid price is not published on that date, the next preceding date on which such bid price is so published) and converted to a monthly compounded nominal yield. The term "Payment Differential" as used herein shall be equal to (x) the Applicable Interest Rate minus the Reinvestment Yield, divided by (y) 12 and multiplied by (z) the principal sum outstanding on such Prepayment Date after application of the Constant Monthly Payment (if any) due on such Prepayment Date, provided that the Payment Differential shall in no event be less than zero. In no event, however, shall Lender be required to reinvest any prepayment proceeds in U.S. Treasury obligations or otherwise. Lender shall notify Borrower of the amount, and the basis of determination, of the required Prepayment Consideration. If a Prepayment Notice is given by Borrower to Lender pursuant to this Article D, the principal balance of this Note and the other sums required under this Article D shall be due and payable on the Prepayment Date. Lender shall not be obligated to accept any prepayment of the principal balance of this Note unless it is accompanied by all sums due in connection therewith. Notwithstanding anything contained herein to the contrary, provided no Event of Default exists, no Prepayment Consideration shall be due in connection with a complete or partial prepayment resulting from the application of insurance proceeds or condemnation awards pursuant to paragraphs 3 and 6 of the Security Instrument. In the event of any permitted partial prepayment of the principal balance of this Note, the amount of principal prepaid (but not including any Prepayment Consideration or interest) shall be applied to the principal last due under this Note and shall not release Borrower from the obligation to pay the Constant Monthly Payments next becoming due under this Note and the Constant Monthly Payment shall not be adjusted or recalculated as a result of such partial prepayment. If a Default Prepayment (defined herein) occurs prior to the date which is six months prior to the Maturity Date, Borrower shall pay to Lender the entire Debt, including, without limitation, the Prepayment Consideration. For purposes of this Note, the term "Default Prepayment" shall mean a prepayment of the principal amount of this Note made during the continuance of any Event of Default or after an acceleration of the Maturity Date under any circumstances, including, without limitation, a prepayment occurring in connection with reinstatement of the Security Instrument provided by statute under foreclosure proceedings or exercise of a power of sale, any statutory right of redemption exercised by Borrower or any other party having a statutory right to redeem or prevent foreclosure, any sale in foreclosure or under exercise of a power of sale or otherwise. Notwithstanding any provision of this Article D to the contrary, Lender may require Borrower, in lieu of a prepayment as contemplated in the first paragraph of this Article D, to deliver to Lender the Defeasance Collateral (hereinafter defined) in the manner contemplated herein. After Lender's receipt of the Prepayment Notice, Lender shall, if it so elects, advise Borrower that, in lieu of a prepayment, the Defeasance Collateral shall be required, in which event Borrower shall be entitled to a release of the Property (hereinafter defined) from the lien of the Security Instrument and the Other Security Documents upon satisfaction of the following: I. Lender shall have received written confirmation from the rating agencies that have rated the REMIC "real estate mortgage investment conduit" (defined in Section 860D of the Internal Revenue Code of 1986, as amended from time to time or any successor statute (the "Code")) ("REMIC") related to the Securities (as defined in the Security Instrument) that such substitution of Defeasance Collateral will not result in a downgrade, withdrawal or qualification of the ratings then assigned to any of the Securities; provided, however, that in the event that Lender or its agent is unable to obtain such confirmation, the Lender or its agent shall so advise Borrower and Borrower will then be subject to the other provisions of this Article D set forth above; II. all accrued and unpaid interest and all other sums due under this Note, the Security Instrument and other Security Documents up to the date of the delivery of the Defeasance Collateral (the "Release Date"), including, without limitation, all costs and expenses incurred by Lender or its agents in connection with such release (including, without limitation, the review of the proposed Defeasance Collateral and the preparation of the Defeasance Security Agreement (as hereinafter defined) and the related documentation), shall be fully paid on or before the Release Date; and III. Borrower shall have delivered to Lender on or before the Release Date: (a) a pledge and security agreement, in form and substance satisfactory to Lender in its sole discretion, creating a first priority security interest in favor of Lender in the Defeasance Collateral (the "Defeasance Security Agreement"), which shall provide, among other things, that any excess received by Lender from the Defeasance Collateral over the amount payable by Borrower hereunder shall be refunded to Borrower promptly following each Monthly Payment Date and the Maturity Date; (b) direct, non-callable obligations of the United States of America (the "US Obligations") that provide for payments prior, but as close as possible, to all successive Monthly Payment Dates occurring after the Release Date and the Maturity Date, with each such payment being equal to or greater than the amount of the corresponding Constant Monthly Payment required to be paid under this Note for the balance of the term hereof and the amount required to be paid on the Maturity Date (the "Defeasance Collateral"), each of which shall be duly endorsed by the holder thereof as directed by Lender or accompanied by a written instrument of transfer in form and substance wholly satisfactory to Lender (including, without limitation, such instrument as may be required by the depository institution holding such securities or the issuer thereof, as the case may be, to effectuate book-entry transfers and pledges through the book-entry facilities of such institution) in order to perfect upon the delivery of the Defeasance Security Agreement the first priority security interest therein in favor of the Lender in conformity with all applicable state and federal laws governing the granting of such security interests, provided, however, that the price of the Defeasance Collateral shall not exceed all sums that would otherwise be due in connection with a prepayment of the principal balance of this Note under the first paragraph of this Article D; Borrower shall authorize and direct that the payments received from the U.S. Obligations shall be made directly to Lender or Lender's designee and applied to satisfy the Obligations of Borrower under this Note; (c) evidence reasonably satisfactory to Lender that title to the Release Property has been transferred to an entity other than Borrower; (d) Lender shall have received an opinion of Borrower's counsel, dated as of the Release Date, in form reasonably satisfactory to Lender stating, among other things, that (A) the Defeasance Collateral and the U.S. Obligations have been duly and validly assigned and delivered to Lender and Lender has a valid, perfected, first priority lien and security interest in the Defeasance Collateral delivered by Borrower, (B) the Defeasance Collateral has been validly assigned to the REMIC, (C) the Defeasance has been effected in accordance with the requirements of Treasury Regulation 1.860(g)-2(a)(8) (as such regulation may be amended or substituted from time to time) and will not be treated as an exchange pursuant to Section 1001 of the Code and (D) the tax qualification and status of the REMIC will not be adversely affected or impaired as a result of the Defeasance; (e) a certificate by Borrower's independent public accountant certifying that all of the requirements set forth in Clause I and II above and this Clause III have been fully satisfied; (f) such other certificates, documents or instruments as Lender may reasonably require; and (g) Notwithstanding the foregoing, no such Release shall be made, given or be deemed effective under this Article D until the first day after expiration of the period during which the delivery to Lender of the Defeasance Collateral in connection therewith is subject to avoidance and recovery as a preferential transfer under 11 U.S.C. 547 in the event of a bankruptcy of the delivering person or entity without such avoidance and recovery (which day shall be identified in writing by Borrower at any time that Borrower delivers the Defeasance Collateral to Lender), unless Lender receives, at the time of such delivery, an opinion of counsel to the effect that such delivery of the Defeasance Collateral would not be avoided and recovered as a preferential transfer under 11 U.S.C. 547 in the event of the filing of a bankruptcy petition in respect of the conveying or delivering person or entity. Upon compliance with the foregoing requirements relating to the delivery of the Defeasance Collateral, the Property shall be released from the lien of the Security Instrument and the Other Security Documents and the Defeasance Collateral shall constitute collateral which shall secure this Note and the Debt. Lender will, at Borrower's expenses, execute and deliver any agreements reasonably requested by Borrower to release the lien of the Security Instrument from the Property. Upon the release by the Lender in accordance with this Article D, Borrower shall have no further right to prepay this Note pursuant to the other provisions of this Article D or otherwise. E. DEFAULT INTEREST Borrower does hereby agree that upon the occurrence of an Event of Default or upon the failure of Borrower to pay the Debt in full on the Maturity Date, Lender shall be entitled to receive and Borrower shall pay interest ("Default Interest") on the entire unpaid principal sum at the rate of (i) the greater of (a) two percent (2%) over the Prime Rate (hereinafter defined), as such Prime Rate shall change from time to time or (b) five percent (5%) over the Applicable Interest Rate then in effect or (ii) the maximum rate of interest which Borrower may by law pay, whichever is lower, to be computed from the occurrence of the Event of Default until the actual receipt and collection of the Debt (the "Default Interest Rate"). This charge shall be added to the Debt, and shall be deemed secured by the Security Instrument. This clause, however, shall not be construed as an agreement or privilege to extend the date of the payment of the Debt, nor as a waiver of any other right or remedy accruing to Lender by reason of the occurrence of any Event of Default. The term "Prime Rate" as used in this Note shall mean the daily "prime rate" published in The Wall Street Journal from the date of the Event of Default, as such "prime rate" shall change from time to time. In the event The Wall Street Journal ceases to publish the "prime rate" then Lender shall select an equivalent publication which publishes such "prime rate"; and in the event such prime rates are no longer generally published or are limited, regulated or administered by a governmental or quasi-governmental body, then Lender shall select a comparable interest rate index. F. SECURITY This Note is secured by the Security Instrument and the Other Security Documents. The term "Security Instrument" as used in this Note shall mean the Mortgage and Security Agreement dated as of the date hereof in the principal sum of $8,000,000 given by Borrower to Lender encumbering the fee estate of Borrower in certain premises located in Hamilton County, State of Ohio and other property, as more particularly described therein and intended to be duly recorded in said County. The term "Other Security Documents" as used in this Note shall mean all and any of the documents other than this Note or the Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender, which wholly or partially secure or guarantee payment of this Note. Whenever used, the singular number shall include the plural, the plural the singular, and the words "Lender" and "Borrower" shall include their respective successors, assigns, heirs, executors and administrators. G. SAVINGS CLAUSE This Note is subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the principal balance due hereunder at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay. If by the terms of this Note, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of such maximum rate, the Applicable Interest Rate shall be deemed to be immediately reduced to such maximum rate and all previous payments in excess of the maximum rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder. H. LATE CHARGE If any sum payable under this Note is not received by Lender within five (5) days of the date on which it is due, without taking into account or including within said five (5) day period any applicable notice or grace period, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid sum or the maximum amount permitted by applicable law to defray the expenses incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment and such amount shall be secured by the Security Instrument and the Other Security Documents. Nothing contained herein is intended to affect the rights of Lender in and to any Default Interest due to Lender pursuant to the provisions of paragraph E hereof entitled "Default Interest". I. MISCELLANEOUS This Note may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. If Borrower consists of more than one person or party, the obligations and liabilities of each such person or party shall be joint and several. The foregoing sentence, however, is not intended to affect the limited liability of any limited partner or stockholder of Borrower afforded by applicable partnership or corporate law. Borrower and all others who may become liable for the payment of all or any part of the Debt do hereby severally waive presentment and demand for payment, notice of dishonor, protest and notice of protest and non-payment. No release of any security for the Debt or extension of time for payment of this Note or any installment hereof, and no alteration, amendment or waiver of any provision of this Note, the Security Instrument or the Other Security Documents made by agreement between Lender and any other person or party shall release, modify, amend, waive, extend, change, discharge, terminate or affect the liability of Borrower, and any other who may become liable for the payment of all or any part of the Debt, under this Note, the Security Instrument or the Other Security Documents. Borrower (and the undersigned representative of Borrower, if any) represents that Borrower has full power, authority and legal right to execute and deliver this Note, the Security Instrument and the Other Security Documents and that this Note, the Security Instrument and the Other Security Documents constitute valid and binding obligations of Borrower. This Note shall be governed and construed in accordance with the laws of the State of New York and the applicable laws of the United States of America. J. EXCULPATION Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in this Note or the Security Instrument by any action or proceeding wherein a money judgment shall be sought against Borrower or any general or limited partner or member of Borrower (hereinafter collectively referred to as the "Exculpated Parties"), except that Lender may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Lender to enforce and realize upon this Note, the Security Instrument, the Other Security Documents, and the interest in the Property, the Rents (as defined in the Security Instrument) and any other collateral given to Lender created by this Note, the Security Instrument and the Other Security Documents; provided, however, that any judgment in any such action or proceeding shall be enforceable against the Exculpated Parties only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender. Lender, by accepting this Note and the Security Instrument, agrees that it shall not sue for, seek or demand any deficiency judgment against the Exculpated Parties in any such action or proceeding, under or by reason of or under or in connection with the Security Instrument, the Other Security Documents or this Note. The provisions of this paragraph shall not, however, (i) constitute a waiver, release or impairment of any obligation evidenced or secured by the Security Instrument, the Other Security Documents or this Note; (ii) impair the right of Lender to name Borrower as a party defendant in any action or suit for judicial foreclosure and sale under the Security Instrument; (iii) affect the validity or enforceability of any guaranty made in connection with the Security Instrument, this Note, or the Other Security Documents; (iv) impair the right of Lender to obtain the appointment of a receiver upon the occurrence and continuance of an Event of Default; (v) impair the enforcement of the Assignment of Leases and Rents dated the date hereof given by Borrower to Lender executed in connection herewith; (vi) impair the right of Lender to bring suit with respect to fraud or intentional misrepresentation by Borrower, the Exculpated Parties or any other person or entity in connection with the Security Instrument, this Note or the Other Security Documents; (vii) impair the right of Lender to obtain the Rents received by any of the Exculpated Parties after the occurrence and continuance of an Event of Default; (viii) impair the right of Lender to bring suit with respect to the Exculpated Parties' misappropriation of tenant security deposits or Rents collected in advance; (ix) impair the right of Lender to obtain insurance proceeds or condemnation awards due to Lender under the Security Instrument; (x) impair the right of Lender to enforce the provisions of sub- paragraphs 36(g) through 36(k), inclusive and paragraphs 34 and 35 of the Security Instrument against the Borrower (excluding the general and limited partners or members of Borrower); or (xi) impair the right of Lender to recover any part of the Debt from the Borrower (excluding the general and limited partners or members of Borrower) following the breach of any covenant contained in paragraphs 9 or 55 of the Security Instrument. THIS NOTE, AND THE OTHER SECURITY DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN LENDER, BORROWER AND THE OTHER RESPECTIVE PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, Borrower has duly executed this Note under seal as of the day and year first above written. ASHLEY WOODS, L.L.C., a South Carolina limited liability company By: DAVIDSON DIVERSIFIED REAL ESTATE I, L.P., a Delaware limited partnership, its sole member By: DAVIDSON DIVERSIFIED PROPERTIES, INC., a Tennessee corporation, its general partner By: /s/ Robert D. Long, Jr. Name: Robert D. Long, Jr. Title: Vice President STATE OF South Carolina ) )SS: COUNTY OF Greenville ) This instrument was acknowledged before me on the 20th day of November, 1997, by Robert D. Long, Jr., who is the Vice President of DAVIDSON DIVERSIFIED PROPERTIES, INC., a Tennessee corporation, on behalf of said corporation, which corporation is the general partner of DAVIDSON DIVERSIFIED REAL ESTATE I, L.P., a Delaware limited partnership which is the sole member and acknowledged this instrument on behalf of ASHLEY WOODS, L.L.C., a South Carolina limited liability company. [SEAL] /s/ S. Tamara T. Burdick Notary Public in and for the State of South Carolina My Commission Expires: Print name of Notary Public July 22, 2007 S. Tamara T. Burdick -----END PRIVACY-ENHANCED MESSAGE-----