-----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, NnT8MlkE/uEw4iVCdvrRJErIjc4hBHOQ39p0LdOuRGe40Qkv4ly3vb1y88BeAlmv ffX7Ex3LxZAck7Z7DfL4kQ== 0000758745-97-000002.txt : 19970329 0000758745-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000758745-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCNEIL REAL ESTATE FUND XXII L P CENTRAL INDEX KEY: 0000758745 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330085680 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14268 FILM NUMBER: 97567612 BUSINESS ADDRESS: STREET 1: 13760 NOEL RD STE 700 LB70 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144485800 MAIL ADDRESS: STREET 2: 13760 NOEL ROAD SUITE 700 LB 70 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHMARK REALTY PARTNERS II LTD DATE OF NAME CHANGE: 19920413 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to_____________ Commission file number 0-14268 --------- McNEIL REAL ESTATE FUND XXII, L.P. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 33-0085680 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (972) 448-5800 ------------------------------ Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: - ----------------------------------------------------------- Current Income Limited Partnership Units Growth/Shelter Limited Partnership Units Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] All of the Registrant's 33,003,117 limited partnership units are held by non-affiliates. The aggregate market value of units held by non-affiliates is not determinable since there is no public trading market for limited partnership units and transfers of units are subject to certain restrictions. Documents Incorporated by Reference: See Item 14, Page 35 TOTAL OF 38 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XXII, L.P., (the "Partnership"), formerly known as Southmark Realty Partners II, Ltd. was organized on November 30, 1984 as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate commercial and residential properties. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The General Partner was elected at a meeting of limited partners on March 26, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 26, 1992, the general partner of the Partnership was Southmark Investment Group, Inc. (the "Original General Partner"), a wholly-owned subsidiary of Southmark Corporation ("Southmark"). The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. On February 26, 1985, the Partnership registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 2-94740) and commenced a public offering for sale of $55,000,000 of limited partnership units. There were two classes of limited partnership units, designated as Current Income Units and Growth/Shelter Units offered (referred to collectively as "Units"). The Units represent equity interests in the Partnership and entitle the holders thereof to participate in certain allocations and distributions of the Partnership. The sale of Units closed on December 31, 1985, with 33,333,867 Units (19,922,588 Current Income Units and 13,411,279 Growth/Shelter Units) sold at one dollar each, or gross proceeds of $33,333,867. The Partnership subsequently filed a Form 8-A Registration Statement with the SEC and registered its Units under the Securities Exchange Act of 1934 (File No. 0-14268). During the years 1991 through 1995, 125,750 Units were rescinded. In 1996, 32,000 Units were relinquished leaving 33,176,117 Units (19,818,088 Current Income Units and 13,358,029 Growth/Shelter Units) outstanding at December 31, 1996. SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - -------------------------------------------------- On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General Partner nor the Original General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Original General Partner, were being sold or liquidated for the benefit of creditors. In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio. On February 14, 1991, pursuant to the asset purchase agreement as amended on that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates and commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates. On March 26, 1992, the limited partners approved a restructuring proposal that provided for (i) the replacement of the Original General Partners with a new general partner, the General Partner; (ii) the adoption of the Amended Partnership Agreement which substantially alters the provisions of the original partnership agreement relating to, among other things, compensation, reimbursement of expenses and voting rights; (iii) the approval of an amended management agreement with McREMI, the Partnership's property manager; and (iv) the approval to change the Partnership's name to McNeil Real Estate Fund XXII, L.P. Under the Amended Partnership Agreement, the Partnership began accruing an asset management fee, retroactive to February 14, 1991, which is payable to the new General Partner. For a discussion of the methodology for calculating the asset management fee, see Item 13 - Certain Relationships and Related Transactions. The proposals approved at the March 26, 1992 meeting were implemented as of that date. Concurrent with the approval of the restructuring, the General Partner acquired from Southmark and its affiliates, for aggregate consideration of $18,861, (i) the right to receive payment on the advances owing from the Partnership to Southmark and its affiliates in the amount of $16,397, and (ii) the general partner interest of the Original General Partner. None of the Units are owned by the General Partner or its affiliates. Settlement Of Claims: The Partnership filed claims with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court") against Southmark for damages relating to improper overcharges, breach of contract and breach of fiduciary duty. The Partnership settled these claims in 1991, and such settlement was approved by the Bankruptcy Court. An Order Granting Motion to Distribute Funds to Class 8 Claimants dated April 14, 1995 was issued by the Bankruptcy Court. In accordance with the Order, in May 1995 the Partnership received in full satisfaction of its claims, $29,292 in cash, and common and preferred stock in the reorganized Southmark which amounts represent the Partnership's pro-rata share of Southmark assets available for Class 8 Claimants. The Partnership sold the Southmark common and preferred stock in May 1995 for $9,457 which, combined with the cash proceeds from Southmark, resulted in a gain on legal settlement of $38,749. CURRENT OPERATIONS - ------------------ General: The Partnership is engaged in real estate activities, including the ownership, operation and management of residential and retail real estate. At December 31, 1996, the Partnership owned one income-producing property as described in Item 2 - - Properties. The Partnership does not directly employ any personnel. The General Partner conducts the business of the Partnership directly and through its affiliates. The Partnership reimburses affiliates of the General Partner for such services rendered in accordance with the Amended Partnership Agreement. See Item 8 - Note 2 - "Transactions With Affiliates". The business of the Partnership to date has involved only one industry segment. See Item 8 - Financial Statements and Supplementary Data. The Partnership has no foreign operations. The business of the Partnership is not seasonal. Business Plan: The Partnership determined to evaluate market and other economic conditions to establish the optimum time to commence liquidation of the Partnership's asset in accordance with the terms of the Amended Partnership Agreement. Although there can be no assurance as to the timing of the liquidation due to real estate market conditions, the general difficulty of disposing of real estate, and other general economic factors, it is anticipated that such liquidation would result in the dissolution of the Partnership followed by a liquidating distribution to Unit holders by December 2001. Until such time as the Partnership's asset is liquidated, the Partnership's plan of operations is to preserve or increase the net operating income of its asset whenever possible, while at the same time making whatever capital expenditures are reasonable under the circumstances in order to preserve and enhance the value of the Partnership's asset. Competitive Conditions: Since the principal business of the Partnership is to own and operate real estate, the Partnership is subject to all of the risks incident to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic or rent controls. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changed circumstances. The Partnership competes with numerous established companies, private investors (including foreign investors), real estate investment trusts, limited partnerships and other entities (many of which have greater resources than the Partnership) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosure of the Partnership's property, is described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. For a detailed discussion of the competitive conditions for the Partnership's property see Item 2 - Properties. Forward Looking Information: Within this document, certain statements are made as to the expected occupancy trends, financial condition, results of operations, and cash flows of the Partnership for periods after December 31, 1996. All of these statements are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical and involve risks and uncertainties. The Partnership's actual occupancy trends, financial condition, results of operations, and cash flows for future periods may differ materially due to several factors. These factors include, but are not limited to, the Partnership's ability to control costs, make necessary capital improvements, negotiate the sale or refinancing of its property and respond to changing economic and competitive factors Other information: The environmental laws of the Federal government and of certain state and local governments impose liability on current property owners for the clean-up of hazardous and toxic substances discharged on the property. This liability may be imposed without regard to the timing, cause or person responsible for the release of such substances onto the property. The Partnership could be subject to such liability in the event that it owns a property having such environmental problems. The Partnership has no knowledge of any pending claims or proceedings regarding such environmental problems. ITEM 2. PROPERTIES - ------- ---------- The following table sets forth the investment portfolio of the Partnership at December 31, 1996. The buildings and the land on which they are located are owned in fee, subject in each case to a first lien deed of trust as set forth more fully in Item 8 - Note 5 - "Mortgage Note Payable". See also Item 8 - Note 4 - "Real Estate Investment" and Schedule III - "Real Estate Investment and Accumulated Depreciation and Amortization". In the opinion of management, the property is adequately covered by insurance.
Net Basis of 1996 Date Property Description Property Debt Property Tax Acquired - -------- ----------- -------------- ---- ------------ -------- Harbour Club III (1) Apartments Belleville, MI 331 units $ 5,318,692 $ 5,979,501 $ 153,318 5/86
(1) Harbour Club III Apartments is owned by Harbour Club Associates Limited Partnership, which is wholly-owned by the Partnership and its General Partner. The following table sets forth the property's occupancy rate and rent per square foot for the last five years:
1996 1995 1994 1993 1992 ------------- ------------- -------------- ------------- ---------- Harbour Club III Occupancy Rate............ 94% 96% 91% 90% 95% Rent Per Square Foot...... $ 7.38 $ 7.21 $ 6.75 $ 6.74 $ 6.42
Occupancy rate represents all units leased divided by the total number of units of the property as of December 31 of the given year. Rent per square foot represents all revenue, except interest, derived from the property's operations divided by the leasable square footage of the property. Competitive conditions - ---------------------- Harbour Club III - ---------------- Harbour Club III, located in Belleville, Michigan, was built in 1972 as a part of a four-phase apartment complex. The property offers a complete package of amenities including a golf course, clubhouse, exercise room, tanning beds, tennis courts, saunas, boat docks and launch, and playgrounds. The apartments located in this phase of the complex offer lake and golf course views. The Belleville market has significantly rebounded to an occupancy rate of 93%. Harbour Club III is operating at an occupancy rate of 94% and has not increased rents for six years due to restrictions imposed by the Department of Housing and Urban Development ("HUD"), the property's former mortgage holder, as well as the lack of capital improvements. The property's closest competitor has rental rates approximately $100 per month above Harbour Club III's rates. Security concerns are prompting demands from tenants for improved lighting, limited access gates and fencing, as offered by competitors. The property has a large amount of deferred maintenance and the property is unable to generate cash to meet its capital improvement needs. Management is currently seeking alternatives to fund the needed capital improvements. The ability of the property to compete in the market will be directly determined by the amount of capital dollars spent to upgrade the property to community standards. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Partnership is not party to, nor is the Partnership's property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to the Partnership, except for the following: 1) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership and other affiliated partnerships (as defined in this Section 1, the "Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District Court of Dallas County. The petition sought recovery against the Partnership's former auditors, Ernst & Young, for negligence and fraud in failing to detect and/or report overcharges of fees/expenses by Southmark, the former general partner. The former auditors initially asserted counterclaims against the Affiliated Partnerships based on alleged fraudulent misrepresentations made to the auditors by the former management of the Affiliated Partnerships (Southmark) in the form of client representation letters executed and delivered to the auditors by Southmark management. The counterclaims sought recovery of attorneys' fees and costs incurred in defending this action. The counterclaims were later dismissed on appeal, as discussed below. The trial court granted summary judgment against the Affiliated Partnerships based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Affiliated Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 1996. Shortly before trial, the district court judge once again granted summary judgment against the Affiliated Partnerships on December 2, 1996. The Partnership is continuing to pursue vigorously its claims against Ernst & Young; however, the final outcome of this litigation cannot be determined at this time. 2) Martha Hess, et al. v. Southmark Equity Partners II, Ltd., Southmark Income Investors, Ltd., Southmark Equity Partners, Ltd., Southmark Realty Partners III, Ltd., Southmark Realty Partners II, Ltd. (McNeil Real Estate Fund XXII, L.P.), McNeil Partners, L.P. et al. ("Hess"); Kotowski v. Southmark Equity Partners, Ltd. and Donald Arceri v. Southmark Income Investors, Ltd. - Illinois Appellate Court for the First District, Fifth Division, as consolidated Case No. 90-107 (remanded back to Trial Court - Circuit Court of Cook County, Illinois County Department, Chancery Division, as consolidated Case No. 88 CH 4670 (L92026). Consolidated with these cases were an additional 14 matters against unrelated partnership entities. The Hess case was filed on May 20, 1988, by Martha Hess, individually, and on behalf of a putative class of parties similarly situated. The original, first, second and third amended complaints in Hess sought rescission, pursuant to the Illinois Securities Act, of over $2.7 million of principal invested in five (5) Southmark (now McNeil) partnerships (as defined in this Section 2, the "Defendants"), and other relief including damages for breach of fiduciary duty and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The original, first, second and third amended complaints in Hess were dismissed against the defendant-group because the Appellate Court held that they were not the proper subject of a class action complaint. Hess was, thereafter, amended a fourth time to state causes of action against unrelated partnership entities. Hess went to judgment against that unrelated entity and the judgment, along with the prior dismissal of the class action, was appealed. The Hess appeal was decided by the Appellate Court during 1992. The Appellate Court affirmed the dismissal of the breach of fiduciary duty and consumer fraud claims. The Appellate Court did, however, reverse in part, holding that certain putative class members could file class action complaints against the defendant-group, which pursuant to the Appellate Court's ruling, included the Partnership. Although leave to appeal to the Illinois Supreme Court was sought, the Illinois Supreme Court refused to hear the appeal. On June 15, 1994, the Appellate Court issued its mandate sending the case back to Trial Court. In late January 1995, plaintiffs filed a Motion to File an Amended Consolidated Class Action Complaint, which amends the complaint to name McNeil Partners, L.P. as the successor general partner to Southmark Investment Group. In February 1995, Plaintiffs filed a Motion for Class Certification. The amended cases against the defendant-group, and others are proceeding under the caption George and Joy Krugler v. I.R.E. Real Estate Income Fund, Jerry and Barbara Neumann v. Southmark Equity Partners II (McNeil Real Estate Fund XXV, L.P.), Richard and Theresa Bartoszewski v. Southmark Realty Partners III (McNeil Real Estate Fund XXIII, L.P.), and Edward and Rose Weskerna v. Southmark Realty Partners II (McNeil Real Estate Fund XXII, L.P.). In September 1995, the Court granted plaintiffs' Motion to File an Amended Complaint, to Consolidate and for Class Certification. Defendants answered the complaint and plead that the plaintiffs did not give timely notice of their desire to rescind within six months of knowing that right, as required by law. Plaintiffs filed a Motion for Summary Judgment against the remaining partnership defendants, as well as the initial general partners. The Court ruled on plaintiffs' Motion for Summary Judgment on April 25, 1996, and entered partial summary judgment against the Partnership, as well as the initial general partner. Summary judgment against McNeil Partners, L.P., as the successor general partner, was not sought. On October 22, 1996, the Court entered judgment against the Partnership to rescind 178,000 limited partnership Units with total claims of $347,809. The claims consisted of the $178,000 original purchase price of the Units, net of distributions previously paid of $23,713, plus $193,522 in interest. The Defendants were able to negotiate a settlement for a lesser amount; and accordingly, on December 23, 1996, the amount of $300,000 was paid as full and complete settlement of all claims, including attorneys' fees. 3) Nicpon v. Southmark Realty Partners II (presently known as McNeil Real Estate Fund XXII, L.P.) 89 CH 4118. Currently proceeding as Edward and Rose Weskerna v. Southmark Realty Partners II (McNeil Real Estate Fund XXII, L.P.). This action was consolidated in September 1995 with the Hess case discussed above. 4) Dick and Aloma Anderson v. McNeil Real Estate Fund XXII, L.P. , McNeil Partners, L.P., Wayne T. Shipp, the Wayne Shipp Agency, Inc., Southmark Investment Group, Inc. and Southmark Realty Partners, Ltd. This lawsuit was filed in November 1993, in Washington State in the Clark County Superior Court. In 1985, the plaintiffs apparently spent $22,000 to purchase limited partnership interests in Southmark Realty Partners Ltd. II , (not named by them as a defendant ) whose name is now McNeil Real Estate Fund XXII, L.P. (the "Partnership"). Plaintiffs allege that in connection with the transactions by which McNeil Partners, L.P. became general partner of the Partnership, and by which certain changes were made in the Partnership, the McNeil entities engaged in the offer and/or sale of unregistered securities in violation of Washington law. The plaintiffs have alleged that certain of the other defendants -- specifically Mr. Shipp and the Shipp Insurance Agency -- engaged in fraud in connection with the sale of limited partnership interests in the Partnership to plaintiffs. The plaintiffs have not made fraud allegations against any of the McNeil or Southmark entities. The majority of plaintiffs' claims against the Partnership are based on allegations that the securities are not registered in the State of Washington. Counsel's research indicates that there are two possible exemptions to the registration of securities which apply to this matter. These statutory exceptions are under review by the plaintiffs' attorney. Counsel for the Partnership was contacted recently and asked whether the Partnership would be interested in repurchasing Plaintiffs' units at a discount. Plaintiffs will be advised of their option to abandon their units back to the Partnership for no consideration. The ultimate outcome of this proceeding cannot be determined at this time. 5) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., et al. - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the fourteen limited partnerships that were named as nominal defendants as listed above (as defined in this Section 5, the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (as defined in this Section 5, collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. On January 7, 1997, the Court ordered consolidation with three other similar actions. The Partnerships filed a demurrer to the complaint and a motion to strike on February 14, 1997, seeking to dismiss the complaint in all respects. The demurrer is pending. The Partnerships deny that there is any merit to Plaintiff's allegations and intend to vigorously defend this action. For a discussion of the Southmark bankruptcy, see Item 1 - Business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND - ------- ------------------------------------------------------------ RELATED SECURITY HOLDER MATTERS ------------------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. (B) Title of Class Number of Record Unit Holders -------------- ----------------------------- Limited partnership units 2,382 as of January 31, 1997 (C) No distributions were made to the partners in 1996 or 1995 and none are anticipated in 1997. The General Partner will continue to monitor the cash reserves and working capital needs of the Partnership to determine when cash flows will support distributions to the partners. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 1 "Organization and Summary of Significant Accounting Policies - Distributions." ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data.
Statements of Years Ended December 31, Operations 1996 1995 1994 1993 1992 - ------------------ ------------- ------------- -------------- ------------- ------------- Rental revenue............... $ 2,251,970 $ 2,456,308 $ 2,950,795 $ 5,655,988 $ 6,168,199 Write-down for permanent impairment of real estate.. - - - 735,288 5,101,763 Loss on disposition of real estate...................... - 245,637 - 1,443,330 - Loss before extraordinary items....................... (220,762) (308,378) (565,993) (3,829,270) (7,801,365) Extraordinary items.......... - - - 3,583,014 119,606 Net loss..................... (220,762) (308,378) (565,993) (246,256) (7,681,759) Net loss per thousand limited partnership units: Loss before extraordinary items: Current Income Units........ $ (1.00) $ (1.40) $ (2.56) $ (17.32) $ (35.24) Growth/Shelter Units........ (14.88) (20.74) (38.04) (257.23) (524.05) Extraordinary items: Current Income Units........ - - - 16.20 .54 Growth/Shelter Units........ - - - 240.69 8.03 Net loss: Current Income Units........ (1.00) (1.40) (2.56) (1.12) (34.70) Growth/Shelter Units........ (14.88) (20.74) (38.04) (16.54) (516.02) As of December 31, Balance Sheets 1996 1995 1994 1993 1992 - -------------- ------------- ------------- -------------- ------------- ------------- Real estate, net............. $ 5,318,692 $ 5,504,538 $ 5,632,109 $ 10,543,632 $ 26,473,696 Asset held for sale.......... - - 4,393,157 - - Total assets................. 6,164,365 6,407,931 11,314,161 11,558,910 27,626,566 Mortgage notes payable, net.. 5,979,501 6,026,515 9,534,751 9,622,454 25,289,348 Partners' deficit............ (1,794,073) (1,419,024) (1,110,646) (544,653) (298,397)
Abbey Lane Apartments and Lexington Green Apartments were conveyed via a deed in lieu of foreclosure on September 30, 1993. Wyoming Mall was sold on March 31, 1995. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Partnership had $452,443 of cash provided by operations in 1996 as compared to $448,347 in 1995. Cash received from tenants, cash paid to suppliers, cash paid to affiliates, interest paid, and property taxes paid decreased due to the sale of Wyoming Mall in March 1995. The Partnership paid $145,713 of interest relating to the rescission of limited partnership units in 1996. With the proceeds from the sale of Wyoming Mall, the Partnership was able to repay all the affiliate advances and accrued interest in 1995. Therefore, no interest was paid to affiliates in 1996. The Partnership provided $448,347 of cash from operations during 1995 as compared to $500,253 in 1994. The Partnership experienced a reduction in cash received from tenants due to the sale of Wyoming Mall in March 1995. The Partnership also experienced declines in cash paid to suppliers, interest paid and property taxes paid as a result of the sale. With the proceeds from the sale of Wyoming Mall, the Partnership was able make a $250,000 payment for asset management fees and repay all the affiliate advances and accrued interest. During 1995, the Partnership also received $38,749 for a legal settlement with Southmark and $134,434 as a property tax refund as a result of a successful tax appeal. The Partnership expended $241,207, $270,552 and $146,836 for capital improvements to its properties in 1996, 1995 and 1994, respectively. The Partnership also received proceeds of $738,914 for the sale of Wyoming Mall on March 31, 1995. Net cash used in financing activities was $238,521 for 1996 as compared to $876,173 and $142,626 in 1995 and 1994, respectively. The Partnership paid $154,287 to the Limited Partners to rescind 178,000 units in 1996. Principal payments on mortgage notes payable were $84,234, $91,519 and $121,752 in 1996, 1995 and 1994, respectively. The decrease since 1995 was due to the retirement of the mortgage note related to Wyoming Mall. The Partnership had received cash advances from the General Partner or its affiliates and $20,874 of such advances were repaid in 1994, and during 1995, the improved cash position allowed the Partnership to repay all outstanding advances from affiliates of the General Partner in the amount of $784,654. The Partnership's remaining property, through improved operations as well as curtailment of expenses, has been able to provide sufficient cash flow to meet its own working capital requirements. In addition, the sale of Wyoming Mall enabled the Partnership to meet its general and administrative expenses. Short-term liquidity At December 31, 1996, the Partnership held cash and cash equivalents of $602,462. The General Partner considers this level of cash reserves to be adequate to meet the Partnership's operating needs. The General Partner believes that anticipated operating results for 1997 will be sufficient to fund the Partnership's budgeted capital improvements for 1997 and to repay the current portion of the Partnership's mortgage note. Effective January 23, 1997, the mortgage note payable was sold by HUD to an unaffiliated buyer. The Partnership is attempting to negotiate a restructuring or refinancing of the mortgage note with the new lender. Long-term liquidity The Partnership determined to evaluate market and other economic conditions to establish the optimum time to commence liquidation of the Partnership's asset in accordance with the terms of the Amended Partnership Agreement. Although there can be no assurance as to the timing of the liquidation due to real estate market conditions, the general difficulty of disposing of real estate, and other general economic factors, it is anticipated that such liquidation would result in the dissolution of the Partnership followed by a liquidating distribution to Unit holders by December 2001. Distributions To maintain adequate cash balances of the Partnership, distributions to Current Income Unit holders were suspended in 1988. There have been no distributions to Growth/Shelter Units holders. Distributions to Unit holders will remain suspended for the foreseeable future. The General Partner will continue to monitor the cash reserves and working capital needs of the Partnership to determine when cash flows will support distributions to the Unit holders. FINANCIAL CONDITION - ------------------- The accompanying financial statements have been prepared assuming the Partnership will continue as a going concern. The Partnership incurred losses of $220,762, $308,378 and $565,993 in 1996, 1995, and 1994, respectively. At December 31, 1996, the Partnership held cash and cash equivalents of $602,462. The balance of cash and cash equivalents can be no more than a minimum level of cash reserves for the remaining property's operations. Operations of the property in 1997 are expected to provide sufficient positive cash flow for normal operations and debt service payments. However, Harbour Club III is in need of major capital improvements in order to maintain occupancy and rental rates at a level to continue to support operations and debt service. The necessary capital improvements will have to be funded from outside sources. No such sources have been identified. Management is currently seeking to negotiate a restructuring or refinancing to fund these improvements, however such financing is not assured. If the property is unable to obtain additional funds and cannot maintain operations at a level to support its current debt, the property may ultimately be foreclosed on by the lender. Harbour Club III is part of a four-phase apartment complex located in Belleville, Michigan. Phases I and II of the complex are owned by partnerships in which McNeil Partners, L.P. is the general partner; while Phase IV is owned by University Real Estate Fund 12, Ltd., ("UREF 12") whose general partner is an affiliate of Southmark. McREMI had been managing all four phases of the complex until December 1992, when the property management agreement between McREMI and UREF 12 was canceled. Additionally, in January 1993, Phase I defaulted on its mortgage loan to the United States Department of Housing and Urban Development ("HUD"), the former mortgage holder, and, unless a refinancing agreement can be reached with the new mortgage holder, the property is subject to foreclosure. If Phase I is lost to foreclosure, it would be extremely difficult to operate Phases II and III because the pool and clubhouse are located in Phase I. As of year end, no steps have been taken towards foreclosure of Phase I. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Partnership was formed to engage in the business of acquiring and operating income-producing real properties and holding the properties for investment. Since completion of its capital formation and property acquisition phases in 1986, when it completed the purchase of five properties, the Partnership has operated its properties for production of income. The Partnership's properties were adversely affected by competitive and overbuilt markets, resulting in continuing cash flow problems. In 1988, Southmark Tower in Houston, Texas, was foreclosed on by the lender in full settlement of the mortgage indebtedness on the property. In 1993, two of the Partnership's properties, Abbey Lane and Lexington Green, were conveyed via a deed in lieu of foreclosure in full settlement of the mortgage indebtedness on the properties. After the sale of Wyoming Mall in March 1995, the Partnership continues to operate its remaining property, Harbour Club III. The Partnership has had little ready cash reserves since its inception, and has been largely dependent on affiliates to support its operations. Payable to affiliates for property management fees, Partnership general and administrative expenses and asset management fees totaled $1,756,367 at December 31, 1996. Until the Partnership is able to generate cash from operations or sales, the Partnership will be dependent on its present cash reserves, operation of the property, or financial support from affiliates. Distributions will remain suspended until cash reserves are judged adequate. RESULTS OF OPERATIONS - --------------------- 1996 compared to 1995 Revenue: Total Partnership revenues in 1996 decreased $368,709 or 14% as compared to 1995. This decrease is due to the sale of Wyoming Mall in March 1995. Also, in 1995, the Partnership recorded a $38,749 gain on legal settlement and recorded $134,434 in other income as a result of property tax refund on Harbour Club III. No such income was recorded in 1996. Rental revenue decreased $204,338 or 8% for the year ended December 31, 1996 as compared to the same period in 1995, primarily due to the sale of Wyoming Mall. Interest income increased $8,812 or 34% in 1996 as compared to 1995. The increase is primarily due to higher average cash balances that resulted from the sale proceeds of Wyoming Mall. Expenses: Total expenses decreased $456,325 or 15% for the year ended December 31, 1996 as compared to the same period of 1995. During 1995, Wyoming Mall was sold and the effects from the sale were declines of $97,610 in interest, $74,606 in depreciation and amortization, $10,516 in property taxes, $24,740 in personnel expenses, $17,518 in property management fees - affiliates, $11,916 in repairs and maintenance and $33,819 in other property operating expenses. A $245,637 loss on the sale of Wyoming Mall was recorded in 1995. In addition to the sale of Wyoming Mall, other factors affected the level of expenses reported by the remaining property. Interest - affiliates decreased $18,568 as compared to 1995. This decrease is due to the sale of Wyoming Mall which enabled the Partnership to repay all outstanding affiliate advances, thereby eliminating affiliate interest expense. The Partnership recorded $145,713 of interest relating to the rescission of Units in 1996. The Court entered judgment against the Partnership in October 1996 to rescind 178,000 Units with total claims of $347,809. The Plaintiffs agreed to accept $300,000 in satisfaction of the judgment and the claims for attorneys' fees pending the approval of the Court. Depreciation expense increased by $36,042 in 1996 due to the capital improvements made at Harbour Club III Apartments. Repairs and maintenance decreased by $35,528 in 1996 as compared to 1995 after the effect of the sale of Wyoming Mall, noted above. The decrease is due to reductions in grounds maintenance, courtesy patrol, and other repairs. 1995 compared to 1994 Revenue: Total Partnership revenues in 1995 decreased $312,327 or 11% as compared to 1994. This decrease is primarily due to the sale of Wyoming Mall in March 1995. Rental revenue decreased $494,487 or 17% for the year ended December 31, 1995 as compared to the same period in 1994, primarily due to the sale of Wyoming Mall. Interest income increased $8,977 or 54% in 1995 as compared to 1994. The increase is primarily due to higher average cash balances that resulted from the sale proceeds of Wyoming Mall. The Partnership recorded a $38,749 gain on legal settlement during the first half of 1995. In May 1995, the Partnership received cash of $29,292 and common and preferred stock in the reorganized Southmark that was subsequently sold for $9,457, as full satisfaction of claims previously filed in the Bankruptcy Court. The Partnership also recorded $134,434 in other income during 1995 as a result of 1993-1994 property tax refund on Harbour Club III. This was the result of the successful tax appeal to reduce the property's taxable base value. Expenses: Total expenses decreased $569,942 or 16% for the year ended December 31, 1995 as compared to the same period of 1994. During 1995, Wyoming Mall was sold and the effects from the sale were declines of $293,450 in interest, $225,217 in depreciation and amortization, $42,455 in property taxes, $25,418 in personnel expenses, $35,249 in property management fees - affiliates, $29,219 in repairs and maintenance and $79,833 in other property operating expenses. In addition to the sale of Wyoming Mall, other factors affected the level of expenses reported by the remaining property. Interest - affiliates decreased $53,034 or 74% in 1995 as compared to 1994. The sale of Wyoming Mall enabled the Partnership to repay all outstanding affiliate advances, thereby reducing affiliate interest expense. Depreciation and amortization increased by $25,632, net of the effect of Wyoming Mall, due to the capital improvements made at Harbour Club III. Property tax expense decreased $53,554, net of the effect of Wyoming Mall, in 1995 as compared to 1994 due to the reduction in property tax expense at Harbour Club III Apartments that occurred from a successful tax appeal. Property management fees-affiliates increased by $7,272, net of the effect of Wyoming Mall, in 1995 as compared to 1994 due to the increase in rental revenue generated at Harbour Club III. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
Page Number INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 15 Balance Sheets at December 31, 1996 and 1995................................... 16 Statements of Operations for each of the three years in the period ended December 31, 1996........................................................ 17 Statements of Partners' Deficit for each of the three years in the period ended December 31, 1996............................................. 18 Statements of Cash Flows for each of the three years in the period ended December 31, 1996........................................................ 19 Notes to Financial Statements.................................................. 21 Financial Statement Schedules - Schedule III - Real Estate Investment and Accumulated Depreciation and Amortization............................................ 31
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of McNeil Real Estate Fund XXII, L.P.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XXII, L.P. (a California limited partnership) as of December 31, 1996 and 1995, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XXII, L.P. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 7 to the financial statements, the Partnership has suffered recurring losses from operations and the Partnership's only property is in need of major capital improvements in order to maintain occupancy and rental rates at a level to continue to support operations and debt service. Additionally, the property is part of a four phase complex. Phase I of the complex defaulted on its mortgage loan in January 1993. The property is subject to foreclosure unless a refinancing agreement can be reached with the lender. If Phase I is lost to foreclosure, it would have a significant impact on the operations of Phase III, owned by the Partnership, as the pool and clubhouse are located in Phase I. As of year end, no steps have been taken towards the foreclosure of Phase I. Management's plans in regard to these matters are also described in Note 7. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Dallas, Texas March 10, 1997 McNEIL REAL ESTATE FUND XXII, L.P. BALANCE SHEETS
December 31, ----------------------------------- 1996 1995 ---------------- -------------- ASSETS - ------ Real estate investments: Land..................................................... $ 380,414 $ 380,414 Buildings and improvements............................... 10,084,053 9,842,846 -------------- ------------- 10,464,467 10,223,260 Less: Accumulated depreciation and amortization........................................... (5,145,775) (4,718,722) -------------- ------------- 5,318,692 5,504,538 Cash and cash equivalents................................... 602,462 629,747 Cash segregated for security deposits....................... 66,510 76,490 Accounts receivable......................................... 4,614 4,683 Escrow deposits............................................. 160,642 180,537 Prepaid expenses and other assets, net...................... 11,445 11,936 -------------- ------------- $ 6,164,365 $ 6,407,931 ============== ============= LIABILITIES AND PARTNERS' DEFICIT - --------------------------------- Mortgage notes payable, net................................. $ 5,979,501 $ 6,026,515 Accounts payable and accrued expenses....................... 90,572 133,150 Accrued property taxes...................................... 66,427 65,931 Payable to affiliates - General Partner..................... 1,756,367 1,527,935 Security deposits and deferred rental income................ 65,571 73,424 -------------- ------------- 7,958,438 7,826,955 -------------- ------------- Partners' deficit: Limited partners - 55,000,000 Units authorized; 33,176,117 and 33,208,117 Units issued and outstanding at December 31, 1996 and 1995, respectively, (19,688,088 and 19,825,588 Current Income Units outstanding at December 31, 1996 and 1995, respectively, and 13,310,029 and 13,382,529 Growth/Shelter Units at December 31, 1996 and 1995, respectively).... (1,541,156) (1,168,315) General Partner.......................................... (252,917) (250,709) -------------- ------------- (1,794,073) (1,419,024) -------------- ------------- $ 6,164,365 $ 6,407,931 ============== =============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXII, L.P. STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------------------------- 1996 1995 1994 -------------- -------------- --------------- Revenue: Rental revenue.......................... $ 2,251,970 $ 2,456,308 $ 2,950,795 Interest................................ 34,461 25,649 16,672 Gain on settlement of legal expenses.............................. - 38,749 - Other income............................ - 134,434 - ------------- ------------- -------------- Total revenue......................... 2,286,431 2,655,140 2,967,467 ------------- ------------- -------------- Expenses: Interest................................ 581,533 683,664 981,281 Interest - affiliates................... - 18,568 71,602 Interest - rescission of limited partnership units..................... 145,713 - - Depreciation and amortization........... 427,053 465,617 665,202 Property taxes.......................... 153,318 169,039 265,048 Personnel expenses...................... 291,417 317,753 350,089 Repairs and maintenance................. 266,224 313,668 310,645 Property management fees - affiliates............................ 112,374 126,807 154,784 Other property operating expenses....... 227,802 279,043 365,478 General and administrative.............. 73,568 64,085 73,968 General and administrative - affiliates............................ 228,191 279,637 295,363 Loss on disposition of real estate...... - 245,637 - ------------- ------------- -------------- Total expenses........................ 2,507,193 2,963,518 3,533,460 ------------- ------------- -------------- Net loss................................... $ (220,762) $ (308,378) $ (565,993) ============ ============= ============= Net loss allocable to limited partners - Current Income Unit.......... $ (19,868) $ (27,754) $ (50,939) Net loss allocable to limited partners - Growth/Shelter Unit.......... (198,686) (277,540) (509,394) Net loss allocable to General Partner................................. (2,208) (3,084) (5,660) ------------- ------------- -------------- Net loss................................... $ (220,762) $ (308,378) $ (565,993) ============= ============= ============== Net loss per thousand limited partnership units: Current Income Units....................... $ (1.00) $ (1.40) $ (2.56) ============= ============= ============= Growth/Shelter Units....................... $ (14.88) $ (20.74) $ (38.04) ============= ============= =============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXII, L.P. STATEMENTS OF PARTNERS' DEFICIT For the Years Ended December 31, 1996, 1995 and 1994
Total General Limited Partners' Partner Partners Deficit --------------- --------------- --------------- Balance at December 31, 1993.............. $ (241,965) $ (302,688) $ (544,653) Net loss General Partner........................ (5,660) - (5,660) Current Income Units................... - (50,939) (50,939) Growth/Shelter Units................... - (509,394) (509,394) ------------- ------------- ------------- Total net loss............................ (5,660) (560,333) (565,993) ------------- ------------- ------------- Balance at December 31, 1994.............. (247,625) (863,021) (1,110,646) Net loss General Partner........................ (3,084) - (3,084) Current Income Units................... - (27,754) (27,754) Growth/Shelter Units................... - (277,540) (277,540) ------------- ------------- -------------- Total net loss............................ (3,084) (305,294) (308,378) ------------- ------------- ------------- Balance at December 31, 1995.............. (250,709) (1,168,315) (1,419,024) Rescission of 178,000 limited partnership units (net of distribution previously paid of $23,713)............ - (154,287) (154,287) Net loss General Partner........................ (2,208) - (2,208) Current Income Units................... - (19,868) (19,868) Growth/Shelter Units................... - (198,686) (198,686) ------------- ------------- -------------- Total net loss............................ (2,208) (218,554) (220,762) ------------- ------------- ------------- Balance at December 31, 1996.............. $ (252,917) $ (1,541,156) $ (1,794,073) ============= ============= =============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXII, L.P. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, ---------------------------------------------------- 1996 1995 1994 -------------- -------------- --------------- Cash flows from operating activities: Cash received from tenants.............. $ 2,261,315 $ 2,527,267 $ 2,945,966 Cash received from legal settlement..... - 38,749 - Cash paid to suppliers.................. (918,922) (945,403) (1,021,436) Cash paid to affiliates................. (112,133) (380,456) (153,489) Interest received....................... 34,461 25,649 16,672 Interest paid........................... (544,804) (676,971) (936,355) Interest paid to affiliates............. - (149,043) - Interest paid to Limited Partners for rescission of units................... (145,713) - - Property taxes paid..................... (121,761) (125,879) (351,105) Property taxes refunded................. - 134,434 - ------------- ------------- -------------- Net cash provided by operating activities.............................. 452,443 448,347 500,253 ------------- ------------- -------------- Cash flows from investing activities: Additions to real estate investments........................... (241,207) (270,552) (146,836) Proceeds from disposition of real estate........................ - 738,914 - ------------- ------------- -------------- Net cash provided by (used in) investing activities (241,207) 468,362 (146,836) ------------- ------------- -------------- Cash flows from financing activities: Principal payments on mortgage notes payable......................... (84,234) (91,519) (121,752) Repayment of advances from affiliates - General Partner.......... - (784,654) (20,874) Rescission of limited partnership units................................. (154,287) - - ------------- ------------- -------------- Net cash used in financing activities...... (238,521) (876,173) (142,626) ------------- ------------- -------------- Net increase (decrease) in cash and cash equivalents........................ (27,285) 40,536 210,791 Cash and cash equivalents at beginning of year....................... 629,747 589,211 378,420 ------------- ------------- -------------- Cash and cash equivalents at end of year................................. $ 602,462 $ 629,747 $ 589,211 ============= ============= ==============
See discussion of noncash investing and financing activities in Note 6. See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXII, L.P. STATEMENTS OF CASH FLOWS Reconciliation of Net Loss to Net Cash Provided by Operating Activities
For the Years Ended December 31, ----------------------------------------------------- 1996 1995 1994 --------------- --------------- ---------------- Net loss................................... $ (220,762) $ (308,378) $ (565,993) ------------- ------------- -------------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........... 427,053 465,617 665,202 Amortization of discounts on mortgage notes payable................ 37,220 35,620 34,049 Amortization of deferred borrowing costs................................. - 2,936 11,744 Interest added to advances from affiliates - General Partner.......... - - 71,602 Loss on disposition of real estate...... - 245,637 - Changes in assets and liabilities: Cash segregated for security deposits............................ 9,980 11,348 (14,465) Accounts receivable................... 69 54,836 32,100 Escrow deposits....................... 19,895 177,321 (101,497) Prepaid expenses and other assets..... 491 7,902 9,292 Accounts payable and accrued expenses............................ (42,578) (145,096) 28,306 Accrued property taxes ............... 496 (130,323) 17,911 Payable to affiliates - General Partner............................. 228,432 25,988 296,658 Security deposits and deferred rental income....................... (7,853) 4,939 15,344 ------------- ------------- -------------- Total adjustments................. 673,205 756,725 1,066,246 ------------- ------------- -------------- Net cash provided by operating activities.................... $ 452,443 $ 448,347 $ 500,253 ============= ============= ==============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXII, L.P. NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------ McNeil Real Estate Fund XXII, L.P., (the "Partnership"), formerly known as Southmark Realty Partners II, Ltd. was organized on November 30, 1984 as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate commercial and residential properties. The general partner of the Partnership is McNeil Partners, L.P. (the "General Partner"), a Delaware limited partnership, an affiliate of Robert A. McNeil ("McNeil"). The General Partner was elected at a meeting of limited partners on March 26, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240. The Partnership is engaged in real estate activities, including the ownership, operation and management of residential and retail real estate and other real estate related assets. The Partnership has determined to evaluate market and other economic conditions to establish the optimum time to commence a liquidation of the Partnership's asset in accordance with the terms of the Amended Partnership Agreement. At December 31, 1996, the Partnership owned one income-producing property as described in Note 4 - Real Estate Investment. Basis of Presentation - --------------------- The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership's financial statements include the accounts of Harbour Club Associates Limited Partnership ("Harbour Club"), a single asset limited partnership formed to accommodate the refinancing of Harbour Club III Apartments. The Partnership is the general partner of Harbour Club, and holds a 99.99% interest in Harbour Club. The Partnership exercises effective control of Harbour Club. The minority interest is not presented as it is both negative and immaterial. % of Ownership Interest Tier Partnership Partnership General Partner - ---------------- ----------- --------------- General Partnerships: Harbour Club Associates 99% 1% Real Estate Investments - ----------------------- The real estate investment is generally stated at the lower of depreciated cost or fair value. The real estate investment is reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated recoverable amount. The Partnership's method of accounting for real estate investments is in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which the Partnership adopted effective January 1, 1996. The adoption of SFAS 121 did not have a material impact on the accompanying financial statements. Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred. Depreciation and Amortization - ----------------------------- Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant improvements were capitalized and amortized over the terms of the related tenant lease using the straight-line method. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash on hand and cash on deposit with financial institutions with original maturities of three months or less. Carrying amounts for cash and cash equivalents approximate fair value. Escrow Deposits - --------------- The Partnership is required to maintain escrow accounts in accordance with the terms of its mortgage indebtedness agreement. These escrow accounts are controlled by the mortgagee and are used for payment of property taxes, hazard insurance, capital improvements and/or property replacements. Carrying amounts for escrow deposits approximate fair value. Deferred Borrowing Costs - ------------------------ Loan fees and other related costs incurred to obtain long-term financing on real property are capitalized and are included in prepaid expenses and other assets. Amortization is recorded using a method that approximates the effective interest method over the term of the related mortgage note payable. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations. Discount on Mortgage Note Payable - --------------------------------- Discount on mortgage note payable is being amortized over the remaining term of the related notes using the effective interest method. Amortization of discount on mortgage note payable is included in interest expense on the Statements of Operations. Rental Revenue - -------------- The Partnership leases its residential property under short-term operating leases. Lease terms generally are less than one year in duration. Rental income is recognized as earned. The Partnership leased its commercial property (which was sold in 1995 - see Note 6 - "Property Disposition") under non-cancelable operating leases. Certain leases provided concessions and/or periods of escalating or free rent. Rental income was recognized on a straight-line basis over the term of the related lease. Income Taxes - ------------ No provision for Federal income taxes is necessary in the financial statements of the Partnership because, as a partnership, it is not subject to Federal income tax and the tax effect of its activities accrues to the partners. Allocation of Net Income and Net Loss - ------------------------------------- The Amended Partnership Agreement generally provides that net income (other than net income arising from sales or refinancing) shall be allocated one percent (1%) to the General Partner and ninety-nine percent (99%) to the limited partners equally as a group, and net loss shall be allocated one percent (1%) to the General Partner, nine percent (9%) to the limited partners owning Current Income Units and ninety percent (90%) to the limited partners owning Growth/Shelter Units. For financial statement purposes, net income arising from sales or refinancings shall be allocated one percent (1%) to the General Partner and ninety-nine percent (99%) to the limited partners equally as a group, and net loss shall be allocated one percent (1%) to the General Partner, nine percent (9%) to the limited partners owning Current Income Units and ninety percent (90%) to the limited partners owning Growth/Shelter Units. For tax reporting purposes, net income arising from sales or refinancing shall be allocated as follows: (a) first, amounts of such net income shall be allocated among the General Partner and limited partners in proportion to, and to the extent of, the portion of such partner's share of the net decrease in Partnership Minimum Gain determined under Treasury Regulations, (b) second, to the General Partner and limited partners in proportion to, and to the extent of, the amount by which their respective capital account balances are negative by more than their respective remaining shares of the Partnership's Minimum Gain attributable to property still owned by the Partnership and (c) third, 1% of such net income shall be allocated to the General Partner and 99% of such net income shall be allocated to the limited partners. Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocation of Partnership deductions attributable to debt. The Partnership's tax allocations for 1996, 1995 and 1994 have been made in accordance with these provisions. Distributions - ------------- At the discretion of the General Partner, distributable cash (other than cash from sales or refinancing) shall be distributed 100% to the limited partners, with such distributions first paying the Current Income Priority Return and then the Growth/Shelter Priority Return. Also at the discretion of the General Partner, the limited partners will receive 100% of distributable cash from sales or refinancings, with such distributions first paying the Current Income Priority Return, then the Growth/Shelter Priority Return, then repayment of Original Invested Capital, and of the remainder, 16.66% to limited partners owning Current Income Units and 83.34% to limited partners owning Growth/Shelter Units. The limited partners' Current Income and Growth/Shelter Priority Returns represent a 10% cumulative return on their Adjusted Invested Capital balance, as defined. No distributions of Current Income Priority Returns have been made since 1988, and no distributions of Growth/Shelter Priority Returns have been made since the Partnership began. In connection with a Terminating Disposition, as defined, cash from sales or refinancings and any remaining reserves shall be allocated among, and distributed to, the General Partner and limited partners in proportion to, and to the extent of, their positive capital account balances after the net income has been allocated pursuant to the above. Net Loss Per Thousand Limited Partnership Units - ----------------------------------------------- Net loss per thousand limited partnership units ("Units") is computed by dividing net loss allocated to the limited partners by the weighted average number of limited partnership Units outstanding expressed in thousands. Per thousand unit information has been computed based on 19,794, 19,826 and 19,876 weighted average Current Income Units outstanding in 1996, 1995 and 1994, respectively, and 13,349, 13,383 and 13,393 weighted average Growth/Shelter Units outstanding in 1996, 1995, and 1994, respectively. NOTE 2 - TRANSACTIONS WITH AFFILIATES - -------------------------------------- The Partnership pays property management fees equal to 5% of the gross rental receipts for its residential property and paid 6% of gross rental receipts for its commercial property to McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of the General Partner, for providing property management services for the Partnership's residential and commercial properties and leasing services for its residential property. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. Under the terms of the Amended Partnership Agreement, the Partnership is paying an asset management fee, retroactive to February 14, 1991, which is payable to the new General Partner. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property and $50 per gross square foot for commercial property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets, excluding intangible items. The fee percentage decreases subsequent to 1999. Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows:
For the Years Ended December 31, ---------------------------------------------------- 1996 1995 1994 -------------- -------------- --------------- Property management fees................... $ 112,374 $ 126,807 $ 154,784 Charged to interest - affiliates: Interest on advances from affiliates - General Partner.......... - 18,568 71,602 Charged to general and administrative - affiliates: Partnership administration.............. 81,704 114,003 114,924 Sale disposition fee - Wyoming Mall..... - 138,750 - Asset Management Fee.................... 146,487 165,634 180,439 ------------- ------------- -------------- $ 340,565 $ 563,762 $ 521,749 ============= ============= ==============
Payable to affiliates - General Partner at December 31, 1996 and 1995 consisted primarily of unpaid property management fees, Partnership general and administrative expenses, and asset management fees and are due and payable from current operations. Prior to the restructuring of the Partnership, affiliates of the Original General Partner advanced funds to enable the Partnership to meet its working capital requirements. These advances were purchased by, and were repaid to, the General Partner. The General Partner has, at its discretion, advanced funds to the Partnership to fund working capital requirements. The advances were unsecured, due on demand and accrued interest at the prime lending rate of Bank of America plus 1%. All advances to the General Partner were paid in full during 1995. The General Partner is not obligated to advance funds to the Partnership and there is no assurance that the Partnership will receive additional funds. McNeil Real Estate Fund XXI, L.P., an affiliate of the General Partner and the joint owner of Wyoming Mall, advanced $320,874 in 1992 to the Partnership for use in tenant improvements and operations at Wyoming Mall. During 1994, the Partnership repaid $20,874 of these advances. During 1995, the Partnership repaid the $300,000 remaining advance. The advances were unsecured, due on demand and accrued interest at a rate of prime plus 3 1/2%. In April 1995, the Partnership utilized the proceeds from the sale of Wyoming Mall to repay all outstanding affiliate advances and the related accrued interest. NOTE 3 - TAXABLE LOSS - --------------------- McNeil Real Estate Fund XXII, L.P. is a partnership and is not subject to Federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. The tax returns of the Partnership are subject to examination by Federal and state taxing authorities. If such examinations result in adjustments to distributive shares of taxable income or loss, the tax liability of the partners could be adjusted accordingly. The Partnership's net assets and liabilities for tax purposes exceeded the net assets and liabilities for financial reporting purposes by $6,503,402 in 1996, $6,235,169 in 1995 and $6,774,370 in 1994. NOTE 4 - REAL ESTATE INVESTMENT - ------------------------------- The basis and accumulated depreciation of the Partnership's real estate investment at December 31, 1996 and 1995, is set forth in the following tables:
Buildings and Accumulated Net Book Land Improvements Depreciation Value ----------- -------------- -------------- ------------ Harbour Club III Belleville, MI 1996 $ 380,414 $ 10,084,053 $ (5,145,775) $ 5,318,692 ========== ============ ============ =========== 1995 $ 380,414 $ 9,842,846 $ (4,718,722) $ 5,504,538 ========== ============ ============ ===========
NOTE 5 - MORTGAGE NOTE PAYABLE - ------------------------------ The following sets forth mortgage note payable of the Partnership at December 31, 1996 and 1995. The mortgage note is secured by the underlying real estate investment.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rates % Maturity 1996 1995 - -------- --------------- ------- ------------------- --------------- --------------- Harbour Club III First 7.000 $ 49,395 04/24 $ 7,218,427 $ 7,302,661 Discount (b) (1,238,926) (1,276,146) -------------- ------------- $ 5,979,501 $ 6,026,515 ============== =============
(a) The debt is non-recourse to the Partnership. (b) The discount is based on an effective interest rate of 9.09%. Scheduled principal maturities of the mortgage note under the existing agreement, excluding the discount of $1,238,926, are as follows: 1997.................................... $ 90,321 1998.................................... 96,851 1999.................................... 103,852 2000.................................... 111,360 2001.................................... 119,410 Thereafter.............................. 6,696,633 ---------- Total $ 7,218,427 ========== Based on borrowing rates currently available to the Partnership for a mortgage loan with similar terms and average maturities, the fair value of the mortgage note payable was approximately $6,262,000 as of December 31, 1996 and $6,507,000 as of December 31, 1995. NOTE 6 - PROPERTY DISPOSITION - ----------------------------- On March 31, 1995, Wyoming Mall was sold to an unrelated third party for a cash price of $9,250,000. The Partnership had a 50% undivided interest in the assets, liabilities and operations of Wyoming Mall, owned jointly with McNeil Real Estate Fund XXI, L.P. Cash proceeds and the loss on the disposition is detailed below: Loss on Sale Cash Proceeds ------------ ------------- Sales Price............................. $ 4,625,000 $ 4,625,000 Selling costs........................... (234,838) (234,838) Mortgage note prepayment penalty........ (138,441) (138,441) Carrying value.......................... (4,325,663) Accounts receivable..................... (81,749) Deferred borrowing costs................ (49,910) Prepaid expenses........................ (40,036) ------------ Loss on disposition of real estate...... $ (245,637) ============ Retirement of mortgage note............. (3,452,337) Payment of 1994 taxes at closing........ (23,735) Real estate tax proration............... (14,154) Credit for security deposit liability... (22,581) ----------- Net cash proceeds....................... $ 738,914 =========== The selling costs above include a disposition fee at 3% of the gross sales price paid the to General Partner in the amount of $138,750. NOTE 7 - FINANCIAL CONDITION AND GOING CONCERN CONSIDERATIONS - ------------------------------------------------------------- The accompanying financial statements have been prepared assuming the Partnership will continue as a going concern. The Partnership incurred losses of $220,762, $308,378 and $565,993 in 1996, 1995, and 1994, respectively. The Partnership's remaining property, through improved operations as well as curtailment of expenses, has been able to provide sufficient cash flow to meet its own working capital requirements. In addition, the sale of Wyoming Mall enabled the Partnership to meet its general and administrative expenses; therefore, no cash advances were required during 1996. At December 31, 1996, the Partnership held cash and cash equivalents of $602,462. The balance of cash and cash equivalents can be no more than a minimum level of cash reserves for the remaining property's operations. Operations of the property in 1997 are expected to provide sufficient positive cash flow for normal operations and debt service payments. However, Harbour Club III is in need of major capital improvements in order to maintain occupancy and rental rates at a level to continue to support operations and debt service. The necessary capital improvements will have to be funded from outside sources. No such sources have been identified. Management is currently seeking to negotiate a restructuring or refinancing to fund these improvements, however such financing is not assured. If the property is unable to obtain additional funds and cannot maintain operations at a level to support its current debt, the property may ultimately be foreclosed on by the lender. Harbour Club III is part of a four-phase apartment complex located in Belleville, Michigan. Phases I and II of the complex are owned by partnerships in which McNeil Partners, L.P. is the general partner; Phase IV is owned by University Real Estate Fund 12, Ltd., ("UREF 12") whose general partner is an affiliate of Southmark. McREMI had been managing all four phases of the complex until December 1992, when the property management agreement between McREMI and UREF 12 was canceled. Additionally, in January 1993, Phase 1 defaulted on its mortgage loan to the United States Department of Housing and Urban Development, the former mortgage holder, and, unless a refinancing agreement can be reached with the new mortgage holder, the property is subject to foreclosure. If Phase I is lost to foreclosure, it would be extremely difficult to operate Phases II and III because the pool and clubhouse are located in Phase I. As of year end, no steps have been taken towards the foreclosure of Phase I. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. NOTE 8 - LEGAL PROCEEDINGS - -------------------------- The Partnership is not party to, nor are any of the Partnership's property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to the Partnership, except for the following: 1) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership and other affiliated partnerships (as defined in this Section 1, the "Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District Court of Dallas County. The petition sought recovery against the Partnership's former auditors, Ernst & Young, for negligence and fraud in failing to detect and/or report overcharges of fees/expenses by Southmark, the former general partner. The former auditors initially asserted counterclaims against the Affiliated Partnerships based on alleged fraudulent misrepresentations made to the auditors by the former management of the Affiliated Partnerships (Southmark) in the form of client representation letters executed and delivered to the auditors by Southmark management. The counterclaims sought recovery of attorneys' fees and costs incurred in defending this action. The counterclaims were later dismissed on appeal, as discussed below. The trial court granted summary judgment against the Affiliated Partnerships based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Affiliated Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 1996. Shortly before trial, the district court judge once again granted summary judgment against the Affiliated Partnerships on December 2, 1996. The Partnership is continuing to pursue vigorously its claims against Ernst & Young; however, the final outcome of this litigation cannot be determined at this time. 2) Martha Hess, et al. v. Southmark Equity Partners II, Ltd., Southmark Income Investors, Ltd., Southmark Equity Partners, Ltd., Southmark Realty Partners III, Ltd., Southmark Realty Partners II, Ltd. (McNeil Real Estate Fund XXII, L.P.), McNeil Partners, L.P. et al. ("Hess"); Kotowski v. Southmark Equity Partners, Ltd. and Donald Arceri v. Southmark Income Investors, Ltd. - Illinois Appellate Court for the First District, Fifth Division, as consolidated Case No. 90-107 (remanded back to Trial Court - Circuit Court of Cook County, Illinois County Department, Chancery Division, as consolidated Case No. 88 CH 4670 (L92026). Consolidated with these cases were an additional 14 matters against unrelated partnership entities. The Hess case was filed on May 20, 1988, by Martha Hess, individually, and on behalf of a putative class of parties similarly situated. The original, first, second and third amended complaints in Hess sought rescission, pursuant to the Illinois Securities Act, of over $2.7 million of principal invested in five (5) Southmark (now McNeil) partnerships (as defined in this Section 2, the "Defendants"), and other relief including damages for breach of fiduciary duty and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The original, first, second and third amended complaints in Hess were dismissed against the defendant-group because the Appellate Court held that they were not the proper subject of a class action complaint. Hess was, thereafter, amended a fourth time to state causes of action against unrelated partnership entities. Hess went to judgment against that unrelated entity and the judgment, along with the prior dismissal of the class action, was appealed. The Hess appeal was decided by the Appellate Court during 1992. The Appellate Court affirmed the dismissal of the breach of fiduciary duty and consumer fraud claims. The Appellate Court did, however, reverse in part, holding that certain putative class members could file class action complaints against the defendant-group, which pursuant to the Appellate Court's ruling, included the Partnership. Although leave to appeal to the Illinois Supreme Court was sought, the Illinois Supreme Court refused to hear the appeal. On June 15, 1994, the Appellate Court issued its mandate sending the case back to Trial Court. In late January 1995, plaintiffs filed a Motion to File an Amended Consolidated Class Action Complaint, which amends the complaint to name McNeil Partners, L.P. as the successor general partner to Southmark Investment Group. In February 1995, Plaintiffs filed a Motion for Class Certification. The amended cases against the defendant-group, and others are proceeding under the caption George and Joy Krugler v. I.R.E. Real Estate Income Fund, Jerry and Barbara Neumann v. Southmark Equity Partners II (McNeil Real Estate Fund XXV, L.P.), Richard and Theresa Bartoszewski v. Southmark Realty Partners III (McNeil Real Estate Fund XXIII, L.P.), and Edward and Rose Weskerna v. Southmark Realty Partners II (McNeil Real Estate Fund XXII, L.P.). In September 1995, the Court granted plaintiffs' Motion to File an Amended Complaint, to Consolidate and for Class Certification. Defendants answered the complaint and plead that the plaintiffs did not give timely notice of their desire to rescind within six months of knowing that right, as required by law. Plaintiffs filed a Motion for Summary Judgment against the remaining partnership defendants, as well as the initial general partners. The Court ruled on plaintiffs' Motion for Summary Judgment on April 25, 1996, and entered partial summary judgment against the Partnership, as well as the initial general partner. Summary judgment against McNeil Partners, L.P., as the successor general partner, was not sought. On October 22, 1996, the Court entered judgment against the Partnership to rescind 178,000 limited partnership Units with total claims of $347,809. The claims consisted of the $178,000 original purchase price of the Units, net of distributions previously paid of $23,713, plus $193,522 in interest. The Defendants were able to negotiate a settlement for a lesser amount; and accordingly, on December 23, 1996, the amount of $300,000 was paid as full and complete settlement of all claims, including attorneys' fees. 3) Nicpon v. Southmark Realty Partners II (presently known as McNeil Real Estate Fund XXII, L.P.) 89 CH 4118. Currently proceeding as Edward and Rose Weskerna v. Southmark Realty Partners II (McNeil Real Estate Fund XXII, L.P.). This action was consolidated in September 1995 with the Hess case discussed above. 4) Dick and Aloma Anderson v. McNeil Real Estate Fund XXII, L.P. , McNeil Partners, L.P., Wayne T. Shipp, the Wayne Shipp Agency, Inc., Southmark Investment Group, Inc. and Southmark Realty Partners, Ltd. This lawsuit was filed in November 1993, in Washington State in the Clark County Superior Court. In 1985, the plaintiffs apparently spent $22,000 to purchase limited partnership interests in Southmark Realty Partners Ltd. II , (not named by them as a defendant ) whose name is now McNeil Real Estate Fund XXII, L.P. (the "Partnership"). Plaintiffs allege that in connection with the transactions by which McNeil Partners, L.P. became general partner of the Partnership, and by which certain changes were made in the Partnership, the McNeil entities engaged in the offer and/or sale of unregistered securities in violation of Washington law. The plaintiffs have alleged that certain of the other defendants -- specifically Mr. Shipp and the Shipp Insurance Agency -- engaged in fraud in connection with the sale of limited partnership interests in the Partnership to plaintiffs. The plaintiffs have not made fraud allegations against any of the McNeil or Southmark entities. The majority of plaintiffs' claims against the Partnership are based on allegations that the securities are not registered in the State of Washington. Counsel's research indicates that there are two possible exemptions to the registration of securities which apply to this matter. These statutory exceptions are under review by the plaintiffs' attorney. Counsel for the Partnership was contacted recently and asked whether the Partnership would be interested in repurchasing Plaintiffs' units at a discount. Plaintiffs will be advised of their option to abandon their units back to the Partnership for no consideration. The ultimate outcome of this proceeding cannot be determined at this time. 5) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., et al. - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the fourteen limited partnerships that were named as nominal defendants as listed above (as defined in this Section 5, the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (as defined in this Section 5, collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. On January 7, 1997, the Court ordered consolidation with three other similar actions. The Partnerships filed a demurrer to the complaint and a motion to strike on February 14, 1997, seeking to dismiss the complaint in all respects. The demurrer is pending. The Partnerships deny that there is any merit to Plaintiff's allegations and intend to vigorously defend this action. NOTE 9 - PRO FORMA INFORMATION (UNAUDITED) - ------------------------------------------ The following unaudited pro forma information for the years ended December 31, 1995 and 1994 reflects the results of operations of the Partnership as if the sale of Wyoming Mall had occurred as of January 1, 1994. The unaudited pro forma information is not necessarily indicative of the results of operations which actually would have occurred or those which might be expected to occur in the future. 1995 1994 ------------- ------------ Total revenue.................. $ 2,389,866 $ 2,086,148 Net loss....................... (57,289) (445,746) Net loss per thousand limited partnership units: Current Income Units......... (.26) (2.02) Growth/Shelter Units......... (3.85) (29.95) NOTE 10 - RESCISSION OF LIMITED PARTNERSHIP UNITS - ------------------------------------------------- As discussed in Note 8, on October 22, 1996, a judgment was entered against the Partnership which effectively rescinded 178,000 Units of the Partnership as of October 31, 1996. The judgment was for $347,809. As part of a negotiation, however, the plaintiffs agreed to accept $300,000 as full and complete settlement of all claims, including attorney fees. Accordingly, the Partnership made settlement payments to an escrow agent on behalf of the plaintiff limited partners totaling $300,000 on December 23, 1996. The payments consisted of two components. The first component of $154,287, which is recorded as a rescission of limited partnership units on the Statements of Partners' Deficit, represents the return of the limited partners' equity investments net of all distributions previously paid to them. The second component of $145,713, which is recorded as interest rescission of limited partnership units on the Statements of Operations, represents interest paid on the rescinded Units pursuant to the court judgment. McNEIL REAL ESTATE FUND XXII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1996
Cumulative Costs Initial Cost Write-down Capitalized Related Buildings and and Permanent Subsequent Description Encumbrances (b) Land Improvements Impairment To Acquisition - ----------- ---------------- ---- -------------- ------------ -------------- APARTMENTS: Harbour Club III Belleville, MI (c) $ 5,979,501 $ 561,491 $ 13,475,784 $ 4,526,936 $ 954,128 ============= ========= ============= ============= ===========
(b) The encumbrances reflect the present value of future loan payments discounted, if appropriate, at a rate estimated to be the prevailing interest rate at the date of acquisition or refinancing. (c) The carrying value of Harbour Club III Apartments was reduced by $4,526,936 in 1992. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1996
Gross Amount at Which Carried at Close of Period Accumulated Buildings and Depreciation Description Land Improvements Total (a) and Amortization - ----------- ---- -------------- --------- ---------------- APARTMENTS: Harbour Club III Belleville, MI (c) $ 380,414 $ 10,084,053 $ 10,464,467 $ (5,145,775) ============= ============= ============ ===========
(a) For Federal income tax purposes, the properties are depreciated over lives ranging from 5-27.5 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was approximately $16,475,705 and accumulated depreciation was $9,921,399 at December 31, 1996. (c) The carrying value of Harbour Club III Apartments was reduced by $4,526,936 in 1992. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION December 31, 1996
Date of Date Depreciable Description Construction Acquired lives (years) - ----------- ------------ -------- ------------- APARTMENTS: Harbour Club III Belleville, MI (c) 1972 5/86 5-25
(c) The carrying value of Harbour Club III Apartments was reduced by $4,526,936 in 1992. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXII, L.P. Notes to Schedule III Real Estate Investments and Accumulated Depreciation and Amortization A summary of activity for the Partnership's real estate investments and accumulated depreciation and amortization is as follows:
For the Years Ended December 31, ------------------------------------------------ 1996 1995 1994 -------------- ------------- ------------- Real estate investments: Balance at beginning of year............... $ 10,223,260 $ 9,959,820 $ 16,906,946 Improvements............................... 241,207 263,440 146,836 Reclassification to asset held for sale.... - (7,093,962) ------------- ------------ ------------ Balance at end of year..................... $ 10,464,467 $ 10,223,260 $ 9,959,820 ============= ============ ============ Accumulated depreciation and amortization: Balance at beginning of year............... $ 4,718,722 $ 4,327,711 $ 6,363,314 Depreciation and amortization.............. 427,053 391,011 665,202 Reclassification to asset held for sale.... - - (2,700,805) ------------- ------------ ------------ Balance at end of year..................... $ 5,145,775 $ 4,718,722 $ 4,327,711 ============= ============ ============ Asset held for sale: Balance at beginning of year............... $ - $ 4,393,157 $ - Improvements............................... - 7,112 - Depreciation and amortization.............. - (74,606) - Reclassification from real estate investment.............................. - - 4,393,157 Dispositions............................... - (4,325,663) - ------------- ----------- ------------ Balance at end of year..................... $ - $ - $ 4,393,157 ============= =========== ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- ---------------------------------------------------------------- FINANCIAL DISCLOSURES --------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows: Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Robert A. McNeil, 76 Mr. McNeil is also Chairman of the Chairman of the Board and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such an entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the International Board of Directors of the Salk Institute, which promotes research in improvements in health care. Carole J. McNeil 53 Mrs. McNeil is Co-Chairman, with Co-Chairman of the husband Robert A. McNeil, of McNeil Board Investors, Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute. Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Ron K. Taylor 39 Mr. Taylor is the President and Chief President and Chief Executive Officer of McNeil Real Estate Executive Officer Management which is an affiliate of the General Partner. Mr. Taylor has been in this capacity since the resignation of Donald K. Reed on March 4, 1997. Prior to assuming his current responsibilities, Mr. Taylor served as a Senior Vice President of McREMI. Mr. Taylor has been in this capacity since McREMI commenced operations in 1991. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management firm. In this capacity, Mr. Taylor had the responsibility for the management and leasing of a 21,000,000 square foot portfolio of commercial properties. Mr. Taylor has been actively involved in the real estate industry since 1983. Each director shall serve until his successor shall have been duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1996, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1996. The Partnership has no plans to pay any such remuneration to any directors or officers of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, known to the Partnership is the beneficial owner of more than 5 percent of the Partnership's Units. (B) Security ownership of management. Neither the General Partner nor any of its officers or directors of its general partner own any limited partnership units. (C) Change in control. None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of General Partner compensation other than property management fees and reimbursements of certain costs. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property and $50 per gross square foot for commercial property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases subsequent to 1999. For the year ended December 31, 1996, the Partnership paid or accrued $146,487 of such asset management fees. Total accrued but unpaid asset management fees of $1,135,278 were outstanding at December 31, 1996. The Partnership pays property management fees equal to 5% of the gross receipts of the residential property and paid 6% for the commercial property to McREMI, an affiliate of the General Partner, for providing property management services. Additionally, the Partnership reimburses McREMI for its costs, including overhead of administering the Partnership's affairs. For the year ended December 31, 1996, the Partnership paid or accrued $194,078 of such property management fees and reimbursements. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------- See accompanying Index to Financial Statements at Item 8. (A) Exhibits The following exhibits are incorporated by reference and are an integral part of this Form 10-K. Exhibit Number Description ------- ----------- 4. Amended and Restated Limited Partnership Agreement dated March 26, 1992. (Incorporated by reference to the Current Report of the Registrant on Form 8-K dated March 26, 1992, as filed on April 9, 1992). 10.2 Portfolio Services Agreement, dated February 14, 1991, between Southmark Realty Partners II, Ltd. and McNeil Real Estate Management, Inc. (1) 10.3 Promissory Note, dated June 14, 1989, among Southmark Realty Partners, Ltd., Southmark Realty Partners II, Ltd. and Woodmen of the World Life Insurance Society relating to Wyoming Mall. (1) 10.6 Modification of Note and Mortgage, dated May 1, 1984, between Knoblinks Associates III and Samuel R. Pierce, Jr., as Secretary of Housing and Urban Development relating to Harbour Club III. (1) 10.7 Property Management Agreement dated March 26, 1992, between McNeil Real Estate Fund XXII, L.P. and McNeil Real Estate Management, Inc. (2) 10.8 Amendment of Property Management Agreement dated March 5, 1993. (2) 10.9 Revolving Credit Agreement dated August 6, 1991, between McNeil Partners, L.P. and various selected partnerships, including the Registrant. (Incorporated by reference to the Annual Report of McNeil Real Estate Fund XI, Ltd., on Form 10-K for the period ended December 31, 1991 as filed on March 29, 1992.) Exhibit Number Description ------- ----------- 10.10 Property Management Agreement dated March 26, 1992, between Harbour Club Associates and McNeil Real Estate Management Inc. (Incorporated by reference to the Annual Report of the Registrant on Form 10-K for the period ended December 31, 1993, as filed on March 31, 1994.) 11. Statement regarding computation of Net Loss per Limited Partnership Unit (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies".) 22. Following is a list of subsidiaries of the Partnership:
Names Under Jurisdiction Which It Is Name of Subsidiary Incorporation Doing Business ------------------ ------------- -------------- Harbour Club Associates Limited Partnership Michigan None
The Partnership has omitted instruments with respect to long-term debt where the total amount of the securities authorized thereunder does not exceed 10% of the total assets of the Partnership. The Partnership agrees to furnish a copy of each such instrument to the Commission upon request. (1) Incorporated by reference to the Quarterly Report of the Registrant, on Form 10-Q for the period ended March 31, 1991, as filed on May 14, 1991. (2) Incorporated by reference to the Annual Report of the Registrant on Form 10-K for the period ended December 31, 1992, as filed on March 30, 1993. (B) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 1996. McNEIL REAL ESTATE FUND XXII, L.P. A Limited Partnership SIGNATURE PAGE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. McNEIL REAL ESTATE FUND XXII, L.P. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 28, 1997 By: /s/ Robert A. McNeil - -------------- ---------------------------------------- Date Robert A. McNeil Chairman of the Board and Director Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 28, 1997 By: /s/ Ron K. Taylor - -------------- ---------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 28, 1997 By: /s/ Carol A. Fahs - -------------- ---------------------------------------- Date Carol A. Fahs Vice President of McNeil Investors, Inc. (Principal Accounting Officer) EX-27 2
5 12-MOS DEC-31-1996 DEC-31-1996 602,462 0 4,614 0 0 0 10,464,467 (5,145,775) 6,164,365 0 5,979,501 0 0 0 0 6,164,365 2,251,970 2,286,431 0 0 1,925,660 0 581,533 0 0 (220,762) 0 0 0 (220,762) 0 0
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