-----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, MOFMh6YQJF2LUAM0uDM+z5PiF+t+aA4qgJpKxudjyOAyvXyhBFqRV41I/BvFV4jk LNO5OB8ntrp2TyXPZc2q3Q== 0000778921-98-000002.txt : 19980331 0000778921-98-000002.hdr.sgml : 19980331 ACCESSION NUMBER: 0000778921-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCNEIL REAL ESTATE FUND XXV LP CENTRAL INDEX KEY: 0000778921 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330120335 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15446 FILM NUMBER: 98579630 BUSINESS ADDRESS: STREET 1: 13760 NOEL RD SUITE 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: MCNEIL REAL ESTATE FUND XXV DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHMARK EQUITY 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, 1997 ----------------------------------------------- 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 0-15446 --------- McNEIL REAL ESTATE FUND XXV, L.P. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 33-0120335 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (972) 448-5800 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------- -------------------- Securities registered pursuant to Section 12(g) of the Act: Limited partnership units - ---------------------------------------------------------- -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 82,916,363 of the registrant's 82,943,685 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 37 TOTAL OF 39 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as Southmark Equity Partners II, Ltd., was organized on February 15, 1985 as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate commercial office, retail 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 Equity Partners (the "Original General Partner"), a Texas general partnership, which was formed by affiliates 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 December 23, 1985, the Partnership registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 33-746) and commenced a public offering for sale of $72,000,000 of limited partnership units ("Units"), with the general partner's right to increase the offering to $84,000,000. 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 August 8, 1986 with 84,000,000 Units sold at one dollar each, or gross proceeds of $84,000,000 to the Partnership. 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. 0-15446). 50,000, 49,473 and 5,879 Units were rescinded in 1986, 1991 and 1995, respectively. In 1996, an additional 950,963 Units were rescinded, leaving 82,943,685 Units outstanding at December 31, 1997. 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 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 Partner with a new general partner, McNeil Partners, L.P.; (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 property management agreement with McREMI, the Partnership's property manager; and (iv) the approval to change the Partnership's name to McNeil Real Estate Fund XXV, 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 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 $29,065, the general partner interest of the Original General Partner. The General Partner and its affiliates own in the aggregate less than 1% of the Units. 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, $73,122 in cash, and common and preferred stock in the reorganized Southmark which represents 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 $23,609, which combined with the cash proceeds from Southmark, resulted in a gain on legal settlement of $96,731. CURRENT OPERATIONS - ------------------ General: The Partnership is engaged in the ownership, operation and management of commercial office, retail and residential real estate. At December 31, 1997, the Partnership owned five revenue-producing properties 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: Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof. The Partnership has placed Northwest Plaza on the market for sale effective August 1, 1997. 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 incidental to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic or rent controls. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changed circumstances. The Partnership competes with numerous established companies, private investors (including foreign investors), real estate investment trusts, limited partnerships and other entities (many of which have greater resources than the Partnership) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosures of the Partnership's properties, is described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 2 - Properties for a discussion of the competitive conditions at each of the Partnership's properties. Forward-Looking Information: Within this document, certain statements are made as to the expected occupancy trends, financial condition, results of operations, and cash flows of the Partnership for periods after December 31, 1997. All of these statements are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical and involve risks and uncertainties. The Partnership's actual occupancy trends, financial condition, results of operations, and cash flows for future periods may differ materially due to several factors. These factors include, but are not limited to, the Partnership's ability to control costs, make necessary capital improvements, negotiate sales or refinancings of its properties and respond to changing economic and competitive factors. Environmental Matters: 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 properties having such environmental problems. The Partnership has no knowledge of any pending claims or proceedings regarding such environmental problems. Other Information: In August 1995, High River Limited Partnership, a Delaware limited partnership controlled by Carl C. Icahn ("High River") made an unsolicited tender offer to purchase from holders of Units up to approximately 45% of the outstanding Units of the Partnership for a purchase price of $0.24 per Unit. In September 1996, High River made another unsolicited tender offer to purchase any and all of the outstanding Units of the Partnership for a purchase price of $0.252 per Unit. In addition High River made unsolicited tender offers for certain other partnerships controlled by the General Partner. The Partnership recommended that the limited partners reject the tender offers made with respect to the Partnership and not tender their Units. The General Partner believes that as of January 31, 1998, High River has purchased approximately 9.08% of the outstanding Units pursuant to the tender offers. In addition, all litigation filed by High River, Mr. Icahn and his affiliates in connection with the tender offers has been dismissed without prejudice. Management has begun to review its information technology infrastructure to identify any systems that could be affected by the year 2000 problem. The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major systems failure or miscalculations. The information systems used by the Partnership for financial reporting and significant accounting functions were made year 2000 compliant during recent systems conversions. The Partnership is in the process of evaluating the computer systems at the various properties. The Partnership also intends to communicate with suppliers, financial institutions and others to coordinate year 2000 issues. Management believes that the remediation of any outstanding year 2000 conversion issues will not have a material or adverse effect on the Partnership's operations. ITEM 2. PROPERTIES - ------- ---------- The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1997. All of the buildings and the land on which they are located are owned by the Partnership in fee and are unencumbered by mortgage indebtedness, with the exception of Harbour Club I Apartments, which is subject to a first lien deed of trust as described more fully in Item 8 - Note 6 - - "Mortgage Note Payable" and Fidelity Plaza which is subject to four ground leases as described more fully in Item 8 - Note 5 - "Leases." See also Item 8 - Note 4 - "Real Estate Investments" and Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization. In the opinion of management, the properties are adequately covered by insurance.
Net Basis 1997 Date Property Description of Property Debt Property Taxes Acquired - -------- ----------- ----------- ---- -------------- -------- Real Estate Investments: Century Park Office Building Las Vegas, NV 113,459 sq. ft. $ 8,260,114 $ - $ 76,624 5/86 Fidelity Plaza Office Building Long Beach, CA 124,155 sq. ft. 5,010,020 205,902 72,935 12/85 Harbour Club I Apartments Belleville, MI (1) 294 units 6,315,271 7,155,626 207,603 6/86 Kellogg Office Building Littleton, CO 112,766 ft. 5,417,776 - 176,057 12/85 -------------- ------------ ------------ $ 25,003,181 $ 7,361,528 $ 533,219 ============== ============ ============ Asset Held for Sale: Northwest Plaza Retail Center Dayton, OH 443,551 sq. ft. $ 8,989,818 $ - $ 297,892 6/86 ============== ============ ============
- ----------------------------------------- Total: Apartments - 294 units Retail Center - 443,551 sq. ft. Office Buildings - 350,380 sq. ft. (1) Harbour Club I Apartments is owned by Van Buren Associates Limited Partnership, which is wholly-owned by the Partnership and the General Partner. The following table sets forth the properties' occupancy rate and rent per square foot for the last five years:
1997 1996 1995 1994 1993 ------------- ------------- -------------- ------------- ------- Real Estate Investments: Century Park Occupancy Rate............ 93% 93% 95% 92% 81% Rent Per Square Foot...... $16.75 $17.93 $15.41 $15.21 $14.40 Fidelity Plaza Occupancy Rate............ 93% 83% 79% 83% 76% Rent Per Square Foot...... $13.96 $13.99 $14.04 $14.79 $15.24 Harbour Club I Occupancy Rate............ 87% 93% 91% 90% 90% Rent Per Square Foot...... $7.28 $7.11 $6.91 $6.39 $6.16 Kellogg Occupancy Rate............ 100% 98% 99% 83% 99% Rent Per Square Foot...... $15.50 $14.91 $12.53 $13.38 $13.37 Asset Held for Sale: Northwest Plaza Occupancy Rate............ 87% 87% 98% 97% 88% Rent Per Square Foot...... $4.11 $4.53 $4.59 $5.24 $5.31
Occupancy rate represents all units leased divided by the total number of units for residential properties and square footage leased divided by the total square footage for other properties 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 - ---------------------- Real Estate Investments: Century Park - ------------ Century Park consists of twin two-story office buildings located in the heart of the East Flamingo Corridor in southeast Las Vegas. The area surrounding the building is abundant with commercial activity. A series of professional buildings line the busy thoroughfare. Development of new office space began toward the end of 1994 and Century Park is currently competing with existing buildings that lost tenants to the new buildings. The average occupancy rate in the area has declined and is currently 82%. Century Park's occupancy was 93% at the end of 1997 and the Partnership anticipates maintaining occupancy in the mid 90% range in 1998. 25% of the leases at Century Park are scheduled to expire in 1998. The Partnership expects approximately 8% of the leases to be renewed and new leases to be signed for the remaining vacated space. Fidelity Plaza - -------------- Fidelity Plaza is a ten-story office building located in downtown Long Beach, California, on Ocean Boulevard, parallel to the Pacific Ocean. The area is a strong business mix of legal and maritime businesses due to its close proximity to the Ports of Long Beach and Los Angeles. With extensive lobby and courtyard capital improvements completed in 1995, management was able to increase occupancy in 1996 and 1997. Fidelity Plaza's occupancy is currently above the average occupancy rate for the area. However, several competing properties are currently undergoing extensive renovations and aggressive leasing campaigns, and are offering rental rates that approximate the rates being charged by Fidelity Plaza. The Partnership anticipates maintaining occupancy around 90% in 1998 by offering responsive management, competitive rental rates and a prestigious address. Harbour Club I - -------------- Harbour Club I, located in Belleville, Michigan, was built in 1969 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. Harbour Club I's occupancy was below the market average of 92% at December 31, 1997 and its rental rates are slightly below that of its nearest competitor. During the four years prior to 1996, management's limited capital expenditures significantly affected the property's ability to effectively compete in the marketplace. In 1996, approximately $272,000 of escrow funds held by the mortgagee were released and the property was able to complete approximately $445,000 of capital improvements, which allowed the property to increase rents for the first time in five years. However, security concerns are prompting demands from tenants for improved lighting, limited access gates and fencing, as offered by competitors. With the improving economy and planned capital expenditures, management expects to increase rental rates in 1998 while maintaining occupancy in the high 80% to low 90% range. Kellogg - ------- Kellogg Building is located southwest of Denver and is the only high-rise office building in the Littleton area. The building is located within a mile of one of the strongest housing developments in the nation, with projected growth of over 100,000 residents expected over the next few years. The quality of lifestyle in Colorado is placing higher demands for professionals to work closer to home. Professionals are looking for nearby office space that replaces former downtown locations. Two small office buildings were built in the area in 1997 and another building with convenient highway access is being constructed. With occupancy rates averaging 99% in the area, the Partnership does not believe the additional office space will have a negative impact on the Kellogg Building's occupancy in 1998. Rental rates are scheduled to increase for all tenants under signed lease agreements and rental rate increases are projected for any new or renewing tenants. Due to the strong growth in the surrounding area and the great demand for office space, the Partnership expects to maintain occupancy in the high 90% range throughout 1998. Asset Held for Sale: Northwest Plaza - --------------- Northwest Plaza, located in Dayton, Ohio, is a retail strip shopping center with three anchor tenants that occupy 64% of the total leasable area. Management has increased security and lighting in the parking areas in response to increased criminal activity in the area. In late 1993, an anchor tenant vacated and the space was re-leased at a lower rate. Another anchor tenant's lease was restructured to provide for lower rent based on sales volume. The tenant declared bankruptcy in late 1995 and relinquished 50,000 square feet in 1996. Due to these factors, lower rental revenue was realized in 1997 and is expected for 1998. On August 1, 1997, the General Partner placed Northwest Plaza on the market for sale when it became evident that economic factors will not allow for the Partnership to recover its costs over a reasonable period of time. Based upon projected cash flows over the reduced holding period, the Partnership revised its estimated net realizable value of the property; and accordingly, a write-down for impairment of $3,130,000 was recorded in the fourth quarter of 1997. The following schedule shows lease expirations for each of the Partnership's commercial properties for 1998 through 2007:
Number of Annual % of Gross Expirations Square Feet Rent Annual Rent ----------- ----------- ------ ----------- Real Estate Investments: Century Park 1998 11 27,045 $ 489,986 25% 1999 11 16,844 310,593 16% 2000 15 31,438 593,145 31% 2001 3 10,140 188,953 10% 2002 8 16,749 308,942 16% 2003 1 1,872 34,819 2% 2004-2007 - - - - Kellogg 1998 12 31,740 $ 427,574 27% 1999 11 27,251 382,959 25% 2000 14 36,191 526,053 34% 2001 3 5,108 87,275 6% 2002 2 5,451 97,553 6% 2003 - - - - 2004 1 1,921 32,177 2% 2005-2007 - - - - Fidelity Plaza 1998 15 17,830 $ 280,248 17% 1999 12 23,048 348,329 21% 2000 9 22,219 343,168 21% 2001 9 24,301 339,019 21% 2002 4 6,205 97,668 6% 2003 1 6,300 88,893 6% 2004-2006 - - - - 2007 2 7,263 135,600 8%
Number of Annual % of Gross Expirations Square Feet Rent Annual Rent ----------- ----------- ------ ----------- Asset Held for Sale: Northwest Plaza 1998 7 23,191 $ 184,841 12% 1999 7 17,541 161,975 10% 2000 2 2,100 25,309 2% 2001 4 18,810 126,006 8% 2002 6 17,402 135,488 9% 2003 2 8,806 87,467 5% 2004 1 24,358 73,100 5% 2005 1 6,000 49,440 3% 2006 1 42,130 315,000 20% 2007 - - - -
No residential tenant leases 10% or more of the available rental space. The following schedule reflects information on commercial tenants occupying 10% or more of the leasable square feet for each property:
Nature of Business Square Footage Lease Use Leased Annual Rent Expiration - --------- -------------- ----------- ---------- Real Estate Investments: Century Park - ------------ None Kellogg - ------- General Office 14,522 $ 196,337 2000 Fidelity Federal Plaza - ---------------------- None Asset Held for Sale: Northwest Plaza - --------------- Department Store 217,077 $ 434,148 2012
ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business except for the following: 1) 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 (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. Defendants must move, answer or otherwise respond to the second consolidated and amended complaint by June 30, 1998. 2) 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. 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 7,863 as of January 31, 1998 (C) Cash distributions paid to the limited partners totaled $999,995 in 1997 and $250,006 in 1996. No distributions have been paid to the General Partner. During the last week of March 1998, the Partnership distributed approximately $2,250,000 to the limited partners of record as of March 1, 1998. 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 1997 1996 1995 1994 1993 - ------------------ ------------- ------------- -------------- ------------- ------------- Rental revenue............... $ 9,282,309 $ 9,494,477 $ 8,783,408 $ 9,110,749 $ 9,041,611 Write-down for impairment of real estate............ 3,130,000 - 4,633,000 - - Net loss..................... (3,192,087) (2,577,600) (5,943,886) (531,497) (183,926) Net loss per thousand limited partnership units. $ (38.10) $ (30.47) $ (70.14) $ (6.27) $ (2.17) =========== ============ ============ ============ =========== Distributions per thousand limited partnership units. $ 12.06 $ 2.99 $ - $ 4.77 $ 17.80 =========== ============ ============ ============ ============ As of December 31, Balance Sheets 1997 1996 1995 1994 1993 - -------------- ------------- ------------- -------------- ------------- ------------- Real estate investments, net... $ 25,003,181 $ 38,731,648 $ 40,620,473 $ 46,683,563 $ 47,668,916 Asset held for sale............ 8,989,818 - - - - Total assets................... 38,562,904 44,105,856 47,723,941 53,432,562 54,109,784 Mortgage note payable.......... 7,155,626 7,381,507 7,381,507 7,381,507 7,366,449 Partners' equity............... 29,789,239 33,981,321 37,464,982 43,408,868 44,340,572
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------ FINANCIAL CONDITION - ------------------- The Partnership was formed to engage in the business of acquiring and operating revenue-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. Northwest Plaza, located in Dayton, Ohio, is a retail strip shopping center with three anchor tenants that occupy 64% of the total leasable area. Management has increased security and lighting in the parking areas in response to increased criminal activity in the area. In late 1993, an anchor tenant vacated and the space was re-leased at a lower rate. Another anchor tenant's lease was restructured to provide for lower rent based on sales volume. The tenant declared bankruptcy in late 1995 and relinquished 50,000 square feet in 1996. Due to these factors, lower rental revenue was realized in 1997 and is expected for 1998. On August 1, 1997, the General Partner placed Northwest Plaza on the market for sale when it became evident that economic factors will not allow for the Partnership to recover its costs over a reasonable period of time. Based upon projected cash flows over the reduced holding period, the Partnership revised its estimated net realizable value of the property; and accordingly, a write-down for impairment of $3,130,000 was recorded in the fourth quarter of 1997. Fidelity Plaza Office Building is located in downtown Long Beach, California, an area that has experienced declining economic conditions over the past several years. The Partnership had originally intended to hold the asset until such time as the real estate market in the area and the performance of the property improved to permit the Partnership to achieve its capital preservation and capital gains objectives. While conditions had improved in 1995, the estimated holding period of the asset was reduced as it became evident that economic factors will not allow for the Partnership to recover its costs over a reasonable period of time. Based upon projected cash flows over the reduced holding period, as well as an analysis of comparable office buildings in the Long Beach area, the Partnership revised its estimated net realizable value of the property; and accordingly, a write-down for impairment of $4,633,000 was recorded in 1995. RESULTS OF OPERATIONS - --------------------- 1997 compared to 1996 Revenue: Total revenue decreased by $286,332 in 1997 as compared to 1996 due to a decline in rental revenue and interest income, as discussed below. Rental revenue in 1997 decreased by $212,168 in relation to 1996. Rental revenue decreased by approximately $187,000 at Northwest Plaza, mainly due to a decline in income based on sales volume of tenants and a decrease in average occupancy in 1997. At Century Park, two tenants paid a total of approximately $164,000 in lease termination fees in 1996 which was a large factor in the approximately $134,000 decrease in rental revenue in 1997. These decreases were partially offset by increases of approximately $48,000 and $67,000 at Harbour Club I and Kellogg Building, respectively, due to increases in rental rates in 1997. Interest income declined by $74,164 in 1997 as compared to 1996 due to a decrease in cash available for short-term investment in 1997. The Partnership held approximately$4 million of cash and cash equivalents at the beginning of 1996 which decreased to approximately $3.3 million at the end of 1996, mainly due to the payment of approximately $1.77 million to limited partners for the rescission of partnership units in late 1996. Cash and cash equivalents further decreased to approximately $3 million at December 31, 1997. Expenses: Total expenses increased by $328,155 in 1997 as compared to 1996. The increase was due to a write-down for impairment of real estate in 1997, partially offset by decreases in interest expense, depreciation and amortization, other property operating expenses and general and administrative expenses, as discussed below. In 1997, interest expense declined by $103,395 in relation to 1996. Interest on both the Harbour Club I mortgage note payable and the Fidelity Plaza capital lease is declining as the principal balance of the debt is reduced through regular monthly debt service payments. In addition, the non-HUD lender that purchased the Harbour Club I mortgage in January 1997 does not require the Partnership to pay for mortgage insurance, which the Partnership had recorded as interest expense. In 1996, the Partnership paid approximately $1.77 million to the plaintiffs in a lawsuit. Of this amount, $1,115,480 represented interest on limited partnership units that were rescinded by the Partnership. No such interest was paid in 1997. Depreciation and amortization expense decreased by $467,945 in 1997 as compared to 1996. The decrease was mainly due to Northwest Plaza being classified as an asset held for sale by the Partnership effective August 1, 1997. In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Partnership ceased recording depreciation on the asset at the time it was placed on the market for sale. Other property operating expenses in 1997 declined by $105,516 in relation to 1996. In 1996, the Partnership accrued approximately $88,000 of delinquent mortgage payment penalties relating to the Harbour Club I mortgage note payable. In addition, there was a greater amount of leasing commission amortization recorded in 1996 at Fidelity Plaza due to a tenant vacating prior to the expiration of their lease. In this case, the balance of the tenant's prepaid commission was fully amortized when the tenant vacated. General and administrative expenses decreased by $947,166 in 1997 as compared to 1996. In 1996, the Partnership incurred $690,000 of attorney fees relating to a lawsuit that resulted in the rescission of limited partnership units. In addition, in 1996, the Partnership incurred a greater amount of costs relating to evaluation and dissemination of information regarding an unsolicited tender offer. These decreases were partially offset by approximately $50,000 of costs incurred for investor services, which were paid to an unrelated third party in 1997. In 1996, such costs were paid to an affiliate of the General Partner and were included in general and administrative - affiliates on the Statements of Operations. In 1997, the Partnership recorded a $3,130,000 write-down for impairment of Northwest Plaza. No such write-down was recorded in 1996. 1996 compared to 1995 Revenue: Total Partnership revenues increased by $634,402 in 1996 as compared to 1995, mainly due to an increase in rental revenue, as discussed below. Rental revenue in 1996 increased by $711,069 in relation to 1995. The increase was mainly due to increases of approximately $286,000, $56,000, $218,000 and $153,000 at Century Park, Harbour Club I, Kellogg Building and Northwest Plaza, respectively. Rental revenue generated at Fidelity Plaza in 1996 remained comparable to 1995. The increase in rental revenue at Century Park was mainly due to an increase in average occupancy in 1996. Although occupancy at the end of 1996 was less than the occupancy at December 31 of the prior year, average occupancy in 1996 was 97% as compared to 90% in 1995. In addition, two tenants paid a total of approximately $164,000 in lease termination fees in 1996. Harbour Club I's increase in rental revenue in 1996 was due an increase in rental rates in 1996--the property's first rental rate increase in five years. The increase in rental revenue at Kellogg Building was mainly due to an increase in average occupancy in 1996. Kellogg Building had an occupancy rate in the high 90% range throughout 1996, while occupancy was in the low 80% range during the first quarter of 1995 and then rose up to the high 90% range during the remainder of 1995. In addition, there was an increase in reimbursements from tenants for common area maintenance at Kellogg Building in 1996. Rental revenue increased at Northwest Plaza due to increased income based on sales volume of tenants, partially offset by a decrease in rental revenue due to a decrease in occupancy in 1996. See Item 2 - Properties for a more detailed analysis of occupancy and rents per square foot. Interest income increased by $20,064 in 1996 as compared to 1995 due to a greater amount of cash available for short-term investment during most of 1996. Although there was a decrease in total cash and cash equivalents in 1996, the decrease was mainly due to the payment of approximately $1.77 million to the limited partners in late October 1996 for the rescission of partnership units. As discussed in Item 1 - Business, in 1995 the Partnership received cash and common and preferred stock in the reorganized Southmark in settlement of its bankruptcy claims against Southmark. The Partnership recognized a $96,731 gain in 1995 as a result of this settlement. No such gain was recognized in 1996. Expenses: Total expenses decreased by $2,731,884 in 1996 as compared to 1995 primarily due to the Partnership recording a $4,633,000 write-down for impairment of Fidelity Plaza Office Building to its estimated fair value in 1995 (see Item 8 - Note 4 - "Real Estate Investments"). The decrease was partially offset by $1,115,480 of interest paid on rescinded partnership units and an increase in general and administrative expenses during 1996, as discussed below. In 1996, the Partnership paid approximately $1.77 million to the plaintiffs in a lawsuit. Of this amount, $1,115,480 represented interest on limited partnership units that were rescinded by the Partnership. No such interest was incurred in 1995. Property taxes increased by $138,804 in 1996 as compared to 1995. In 1995, the Partnership received an $84,000 refund of property taxes due to a successful appeal of the property tax assessments on Harbour Club I Apartments. No such refund was received in 1996. Also, property taxes at Northwest Plaza and Kellogg Building increased in 1996 due to an increase in the assessed taxable values of those properties. Personnel expenses increased by $95,409 in 1996 as compared to 1995. The increase was mainly due to the addition of two maintenance technicians at Fidelity Plaza Office Building and the addition of temporary maintenance technicians at Northwest Plaza Shopping Center. Repairs and maintenance expense decreased by $115,779 in 1996 as compared to 1995. The decrease was mainly the result of a decrease in contracted repairs at Fidelity Plaza due to the hiring of two maintenance technicians in 1996. General and administrative expenses in 1996 increased by $714,707 in relation to 1995. The increase was mainly due to the Partnership incurring $690,000 of legal fees relating to the rescission of limited partnership units. In 1995, the Partnership recorded a $4,633,000 write-down for impairment of real estate relating to Fidelity Plaza Office Building. No such write-down was recorded in 1996. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Partnership generated $2,313,018 of cash through operating activities in 1997 as compared to $1,652,784 in 1996 and $2,949,445 in 1995. The increase in 1997 as compared to 1996 was primarily due to $1,115,480 of interest paid to limited partners in 1996 to rescind partnership units. This was partially offset by an increase in cash paid to suppliers in 1997, mainly due to the payment of $690,000 of attorney fees related to the rescission of partnership units. The decrease in 1996 as compared to 1995 was mainly due to the $1,115,480 paid to rescind partnership units, previously discussed. In addition, cash paid to suppliers increased due to a general increase in the related expense accounts. Additionally, in 1995 the Partnership received $96,731 in connection with the settlement of the Southmark bankruptcy. The Partnership expended $1,258,789, $1,446,558 and $2,044,998 on capital additions to its real estate investments and asset held for sale in 1997, 1996 and 1995, respectively. The decrease in 1997 as compared to 1996 was mainly due to a greater amount of improvements completed at Harbour Club I Apartments in 1996 which were partially made possible by the release of funds from an escrow account held by the mortgagee. The decrease in 1996 as compared to 1995 was partially due to fewer capital improvements made at Kellogg Building in 1996 since there was little tenant turnover at the building during 1996. In addition, there was a greater amount of lobby and courtyard improvements at Fidelity Plaza Office Building in 1995. Approximately $327,000 of improvements were made at Northwest Plaza Shopping Center for asbestos remediation in 1995. These decreases were partially offset by an increase in improvements at Harbour Club I Apartments, previously discussed. In 1997, the Partnership made $225,881 of principal payments on its mortgage note payable. No such payments were made in 1996 or 1995. Effective January 1, 1993, the Partnership ceased making regularly scheduled payments on its loan and began funding debt service with the excess cash flow of the property. In July 1997, monthly debt service payments were resumed after the Partnership made all delinquent payments and paid all accrued late charges. In 1996, the Partnership paid $656,055 to the limited partners to rescind limited partnership units. This amount represents the return of the limited partners' equity investments, net of all distributions previously paid to them. The Partnership distributed $999,995 and $250,006 to the limited partners in 1997 and 1996, respectively. No distributions were paid to the limited partners in 1995. Short-term liquidity: At December 31, 1997, the Partnership held cash and cash equivalents of $3,044,669. This balance provides a reasonable level of working capital for the Partnership's immediate needs in operating its properties. For the Partnership as a whole, management projects positive cash flow from operations in 1998. Only one property, Harbour Club I Apartments, is encumbered with mortgage debt and another property, Fidelity Plaza, is encumbered with lease obligations. The Partnership has budgeted approximately $1,179,000 for necessary capital improvements for all properties in 1998, which are expected to be funded from available cash reserves or from operations of the properties. Additional efforts to maintain and improve Partnership liquidity have included continued attention to property management activities. The objective has been to obtain maximum occupancy rates while holding expenses to levels necessary to maximize cash flows. The Partnership has made capital expenditures on its properties where improvements were expected to increase the competitiveness and marketability of the properties. During the last week of March 1998, the Partnership distributed approximately $2,250,000 to the limited partners of record as of March 1, 1998. Long-term liquidity: While the outlook for maintenance of adequate levels of liquidity is favorable, should operations deteriorate and present cash resources be insufficient for current needs, the Partnership would require other sources of working capital. No such sources have been identified. The Partnership has no established lines of credit from outside sources. Other possible actions to resolve cash deficiencies include refinancings, deferral of capital expenditures on Partnership properties except where improvements are expected to increase the competitiveness and marketability of the properties, arranging financing from affiliates or the ultimate sale of the properties. Sales and refinancings are possibilities only. Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof. The Partnership has placed Northwest Plaza on the market for sale effective August 1, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
Page Number ------- INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 17 Balance Sheets at December 31, 1997 and 1996................................... 18 Statements of Operations for each of the three years in the period ended December 31, 1997..................................................... 19 Statements of Partners' Equity (Deficit) for each of the three years in the period ended December 31, 1997.............................................. 20 Statements of Cash Flows for each of the three years in the period ended December 31, 1997..................................................... 21 Notes to Financial Statements.................................................. 23 Financial Statement Schedule - Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization......................................................... 32
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of McNeil Real Estate Fund XXV, L.P.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XXV, L.P. (a California limited partnership) as of December 31, 1997 and 1996, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. 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 XXV, L.P. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Dallas, Texas March 20, 1998 McNEIL REAL ESTATE FUND XXV, L.P. BALANCE SHEETS
December 31, ----------------------------------- 1997 1996 --------------- --------------- ASSETS - ------ Real estate investments: Land..................................................... $ 4,205,425 $ 5,524,462 Buildings and improvements............................... 47,835,062 65,777,015 -------------- ------------- 52,040,487 71,301,477 Less: Accumulated depreciation and amortization......... (27,037,306) (32,569,829) -------------- ------------- 25,003,181 38,731,648 Asset held for sale ........................................ 8,989,818 - Cash and cash equivalents................................... 3,044,669 3,256,746 Cash segregated for security deposits....................... 340,879 314,762 Note receivable............................................. - 344,225 Accounts receivable, net of allowance for doubtful accounts of $730,668 and $677,123 at December 31, 1997 and 1996, respectively................. 539,431 791,836 Escrow deposits............................................. 56,758 75,327 Deferred borrowing costs, net of accumulated amortization of $85,887 and $76,755 at December 31, 1997 and 1996, respectively................. 232,863 241,995 Prepaid expenses and other assets........................... 355,305 349,317 -------------- ------------- $ 38,562,904 $ 44,105,856 ============== ============= LIABILITIES AND PARTNERS' EQUITY (DEFICIT) - ------------------------------------------ Mortgage note payable....................................... $ 7,155,626 $ 7,381,507 Accounts payable and accrued expenses....................... 126,854 995,763 Accrued interest............................................ 61,121 178,277 Accrued property taxes...................................... 561,973 502,142 Payable to affiliates....................................... 279,505 146,998 Land lease obligation....................................... 205,902 246,332 Deferred gain............................................... - 344,225 Security deposits and deferred rental revenue............... 382,684 329,291 -------------- ------------- 8,773,665 10,124,535 -------------- ------------- Partners' equity (deficit): Limited partners - 84,000,000 limited partnership units authorized; 82,943,685 limited partnership units issued and outstanding at December 31, 1997 and 1996............................................... 30,280,535 34,440,696 General Partner.......................................... (491,296) (459,375) -------------- ------------- 29,789,239 33,981,321 -------------- ------------- $ 38,562,904 $ 44,105,856 ============== =============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF OPERATIONS
For the Years Ended December 31, --------------------------------------------------- 1997 1996 1995 ------------- ------------- -------------- Revenue: Rental revenue.......................... $ 9,282,309 $ 9,494,477 $ 8,783,408 Interest................................ 153,614 227,778 207,714 Gain on legal settlement................ - - 96,731 ------------- ------------- -------------- Total revenue......................... 9,435,923 9,722,255 9,087,853 ------------- ------------- -------------- Expenses: Interest................................ 781,344 884,739 826,447 Interest - rescission of limited partnership units..................... - 1,115,480 - Depreciation and amortization........... 2,867,438 3,335,383 3,475,088 Property taxes.......................... 831,111 785,113 646,309 Personnel expenses...................... 814,264 808,310 712,901 Repairs and maintenance................. 1,049,909 1,065,820 1,181,599 Property management fees - affiliates............................ 541,462 544,865 523,338 Utilities............................... 789,895 826,634 832,683 Other property operating expenses....... 829,833 935,349 876,510 General and administrative.............. 153,202 1,100,368 385,661 General and administrative - affiliates............................ 839,552 897,794 938,203 Write-down for impairment of real estate........................... 3,130,000 - 4,633,000 ------------- ------------- -------------- Total expenses........................ 12,628,010 12,299,855 15,031,739 ------------- ------------- -------------- Net loss................................... $ (3,192,087) $ (2,577,600) $ (5,943,886) ============= ============= ============== Net loss allocable to limited partners..... $ (3,160,166) $ (2,551,824) $ (5,884,447) Net loss allocable to General Partner...... (31,921) (25,776) (59,439) ------------- ------------- --------------- Net loss................................... $ (3,192,087) $ (2,577,600) $ (5,943,886) ============= ============= ============== Net loss per weighted average thousand limited partnership units................................... $ (38.10) $ (30.47) $ (70.14) ============= ============= ============== Distributions per weighted average thousand limited partnership units....................... $ 12.06 $ 2.99 $ - ============= ============= ==============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF PARTNERS' EQUITY (DEFICIT) For the Years Ended December 31, 1997, 1996 and 1995
Total General Limited Partners' Partner Partners Equity ------------- -------------- --------------- Balance at December 31, 1994.............. $ (374,160) $ 43,783,028 $ 43,408,868 Net loss.................................. (59,439) (5,884,447) (5,943,886) ------------- -------------- --------------- Balance at December 31, 1995.............. (433,599) 37,898,581 37,464,982 Rescission of 950,963 limited partnership units (net of distributions previously paid of $294,908)........... - (656,055) (656,055) Net loss.................................. (25,776) (2,551,824) (2,577,600) Distributions to limited partners......... - (250,006) (250,006) ------------- -------------- --------------- Balance at December 31, 1996.............. (459,375) 34,440,696 33,981,321 Net loss.................................. (31,921) (3,160,166) (3,192,087) Distributions to limited partners......... - (999,995) (999,995) ------------- -------------- --------------- Balance at December 31, 1997.............. $ (491,296) $ 30,280,535 $ 29,789,239 ============= ============== ===============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, --------------------------------------------------- 1997 1996 1995 ------------- ------------- -------------- Cash flows from operating activities: Cash received from tenants.............. $ 9,507,421 $ 9,467,928 $ 9,129,170 Cash paid to suppliers.................. (4,456,481) (4,048,866) (3,488,428) Cash paid to affiliates................. (1,248,507) (1,394,068) (1,445,561) Interest received....................... 153,614 227,778 207,714 Interest paid........................... (889,368) (784,518) (685,155) Interest paid to limited partners for rescission of partnership units....... - (1,115,480) - Property taxes paid and escrowed........ (753,661) (699,990) (865,026) Cash received from legal settlement..... - - 96,731 ------------- ------------- -------------- Net cash provided by operating activities.............................. 2,313,018 1,652,784 2,949,445 ------------- ------------- -------------- Cash flows from investing activities: Additions to real estate investments and asset held for sale............... (1,258,789) (1,446,558) (2,044,998) ------------- ------------- -------------- Cash flows from financing activities: Principal payments on mortgage note payable............................... (225,881) - - Payments on capitalized land lease obligation...................... (40,430) (30,800) (43,003) Rescission of limited partnership units................................. - (656,055) - Distributions to limited partners....... (999,995) (250,006) - ------------- ------------- -------------- Net cash used in financing activities...... (1,266,306) (936,861) (43,003) ------------- ------------- -------------- Net increase (decrease) in cash and cash equivalents.................... (212,077) (730,635) 861,444 Cash and cash equivalents at beginning of year....................... 3,256,746 3,987,381 3,125,937 ------------- ------------- -------------- Cash and cash equivalents at end of year................................. $ 3,044,669 $ 3,256,746 $ 3,987,381 ============= ============= ==============
See discussion of noncash investing and financing activities in Note 4 - "Real Estate Investments" and Note 8 "Deferred Gain." See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. STATEMENTS OF CASH FLOWS Reconciliation of Net Loss to Net Cash Provided by Operating Activities
For the Years Ended December 31, --------------------------------------------------- 1997 1996 1995 ------------- ------------- -------------- Net loss................................... $ (3,192,087) $ (2,577,600) $ (5,943,886) ------------- ------------- -------------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........... 2,867,438 3,335,383 3,475,088 Amortization of deferred borrowing costs................................. 9,132 9,132 9,132 Amortization of deferred gain........... - - (4,115) Allowance for doubtful accounts......... 53,545 (36,927) 152,624 Write-down for impairment of real estate........................... 3,130,000 - 4,633,000 Changes in assets and liabilities: Cash segregated for security deposits. (26,117) (14,539) (16,430) Accounts receivable................... 198,860 47,517 214,838 Escrow deposits....................... 18,569 904,611 175,339 Prepaid expenses and other assets.............................. (5,988) 88,831 (28,528) Accounts payable and accrued expenses............................ (868,909) 301,139 519,605 Accrued interest...................... (117,156) (508,225) 132,160 Accrued property taxes................ 59,831 51,612 (407,770) Payable to affiliates................. 132,507 48,591 15,980 Security deposits and deferred rental revenue...................... 53,393 3,259 22,408 ------------- ------------- -------------- Total adjustments................. 5,505,105 4,230,384 8,893,331 ------------- ------------- -------------- Net cash provided by operating activities.............................. $ 2,313,018 $ 1,652,784 $ 2,949,445 ============= ============= ==============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXV, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------ McNeil Real Estate Fund XXV, L.P. (the "Partnership"), formerly known as Southmark Equity Partners II, Ltd., was organized on February 15, 1985 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. 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 diversified real estate activities including the ownership, operation and management of commercial office, retail and residential real estate. At December 31, 1997, the Partnership owned five revenue-producing properties as described in Note 4 - "Real Estate Investments." Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof. The Partnership has placed Northwest Plaza on the market for sale effective August 1, 1997. 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 Van Buren Associates Limited Partnership ("Van Buren"), a single asset limited partnership formed to accommodate the refinancing of Harbour Club I Apartments. The Partnership is the general partner of Van Buren, and holds a 99.99% interest in Van Buren. The Partnership exercises effective control of Van Buren. The minority interest is not presented as it is both negative and immaterial. Real Estate Investments - ----------------------- Real estate investments are generally stated at the lower of depreciated cost or fair value. Real estate investments are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value. 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. Asset Held for Sale - ------------------- The asset held for sale is stated at the lower of depreciated cost or fair value less costs to sell. Depreciation on the asset held for sale ceased at the time the asset was placed on the market for sale. 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 are capitalized and are 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 in 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 amortized 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. Rental Revenue - -------------- The Partnership leases its residential property under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned. The Partnership leases its commercial properties under non-cancelable operating leases. Certain leases provide concessions and/or periods of escalating or free rent. Rental revenue is recognized on a straight-line basis over the life of the related leases. The excess of the rental revenue recognized over the contractual rental payments is recorded as accrued rent receivable and is included in accounts receivable on the Balance Sheets. 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 and net loss (other than net income arising from sales or refinancing) shall be allocated 1% to the General Partner and 99% to the limited partners. For financial statement purposes, net income arising from sales or refinancing shall be allocated 1% to the General Partner and 99% to the limited partners. 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 partners' 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 properties 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 1997, 1996 and 1995 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 limited partners' Priority Return and then to all limited partners on a per limited partnership unit ("Unit") basis. At the discretion of the General Partner, the limited partners will receive 100% of distributable cash from sales or refinancing with such distributions first paying the limited partners' Priority Return, then repayment of Original Invested Capital, and of the remainder, to the limited partners on a per Unit basis. The limited partners' Priority Return represents a 9.25% cumulative return on their Adjusted Invested Capital balance, as defined. In connection with a Terminating Disposition, as defined, cash from sales or refinancing 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. The Partnership distributed $999,995 of cash from operations to the limited partners in 1997 and $250,006 in 1996. No distributions were paid to the limited partners in 1995 and no distributions have been paid to the General Partner. During the last week of March 1998, the Partnership plans to distribute approximately $2,250,000 to the limited partners of record as of March 1, 1998. Net Loss Per Thousand Limited Partnership Units - ------------------------------------------------ Net loss per thousand limited partnership units is computed by dividing net loss allocated to the limited partners by the weighted average number of Units outstanding expressed in thousands. Per thousand Unit information has been computed based on 82,944, 83,736, and 83,895 weighted average thousand Units outstanding in 1997, 1996 and 1995, 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 6% of gross rental receipts for commercial properties 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 properties. McREMI may also choose to provide leasing services for the Partnership's commercial properties, in which case McREMI will receive property management fees from such commercial properties equal to 3% of the property's gross rental receipts plus leasing commissions based on the prevailing market rate for such services where the property is located. 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 to the 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 properties and $50 per gross square foot for commercial properties 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, ------------------------------------------------------- 1997 1996 1995 ----------------- -------------- --------------- Property management fees - affiliates ..... $ 541,462 $ 544,865 $ 523,338 Charged to general and administrative - affiliates: Partnership administration.............. 168,639 225,956 290,839 Asset management fee.................... 670,913 671,838 647,364 ---------------- ------------- -------------- $ 1,381,014 $ 1,442,659 $ 1,461,541 ================ ============= ==============
Payable to affiliates at December 31, 1997 and 1996 consisted primarily of unpaid property management fees, Partnership general and administrative expenses and asset management fees and is due and payable from current operations. NOTE 3 - TAXABLE INCOME - ----------------------- McNeil Real Estate Fund XXV, 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 $21,953,215 in 1997, $22,409,365 in 1996 and $21,873,312 in 1995. NOTE 4 - REAL ESTATE INVESTMENTS - --------------------------------- The basis and accumulated depreciation and amortization of the Partnership's real estate investments at December 31, 1997 and 1996 are set forth in the following tables:
Accumulated Buildings and Depreciation Net Book 1997 Land Improvements and Amortization Value ---- -------------- ------------ ---------------- --------------- Century Park Las Vegas, NV $ 1,439,077 $ 15,134,798 $ (8,313,761) $ 8,260,114 Fidelity Plaza Long Beach, CA 553,946 12,985,775 (8,529,701) 5,010,020 Harbour Club I Belleville, MI 1,069,513 9,638,815 (4,393,057) 6,315,271 Kellogg Office Building Littleton, CO 1,142,889 10,075,674 (5,800,787) 5,417,776 ------------- ------------- ------------- ------------- $ 4,205,425 $ 47,835,062 $ (27,037,306) $ 25,003,181 ============= ============= ============ ============= Accumulated Buildings and Depreciation Net Book 1996 Land Improvements and Amortization Value ---- -------------- ------------ ---------------- --------------- Century Park $ 1,439,077 $ 14,775,849 $ (7,525,841) $ 8,689,085 Fidelity Plaza 553,946 12,501,920 (7,897,655) 5,158,211 Harbour Club I 1,069,513 9,450,779 (3,918,017) 6,602,275 Kellogg Office Building 1,142,889 9,912,810 (5,316,049) 5,739,650 Northwest Plaza (a) 1,319,037 19,135,657 (7,912,267) 12,542,427 ------------- ------------- ------------- ------------- $ 5,524,462 $ 65,777,015 $ (32,569,829) $ 38,731,648 ============= ============= ============ =============
(a) On August 1, 1997, the General Partner placed Northwest Plaza, located in Dayton, Ohio, on the market for sale. Northwest Plaza was classified as such at December 31, 1997 with a net book value of $8,989,818. The results of operations for the asset held for sale at December 31, 1997 were $401,153, $244,207 and $150,415 for the years ended December 31, 1997, 1996 and 1995, respectively. Results of operations are operating revenues less operating expenses including depreciation and amortization and interest expense. Northwest Plaza, located in Dayton, Ohio, is a retail strip shopping center with three anchor tenants that occupy 64% of the total leasable area. Management has increased security and lighting in the parking areas in response to increased criminal activity in the area. In late 1993, an anchor tenant vacated and the space was re-leased at a lower rate. Another anchor tenant's lease was restructured to provide for lower rent based on sales volume. The tenant declared bankruptcy in late 1995 and relinquished 50,000 square feet in 1996. Due to these factors, lower rental revenue was realized in 1997 and is expected for 1998. On August 1, 1997, the General Partner placed Northwest Plaza on the market for sale when it became evident that economic factors will not allow for the Partnership to recover its costs over a reasonable period of time. Based upon projected cash flows over the reduced holding period, the Partnership revised its estimated net realizable value of the property; and accordingly, a write-down for impairment of $3,130,000 was recorded in the fourth quarter of 1997. Fidelity Plaza Office Building is located in downtown Long Beach, California, an area that has experienced declining economic conditions over the past several years. The Partnership had originally intended to hold the asset until such time as the real estate market in the area and the performance of the property improved to permit the Partnership to achieve its capital preservation and capital gains objectives. While conditions had improved in 1995, the estimated holding period of the asset was reduced as it became evident that economic factors will not allow for the Partnership to recover its costs over a reasonable period of time. Based upon projected cash flows over the reduced holding period, as well as an analysis of comparable office buildings in the Long Beach area, the Partnership revised its estimated net realizable value of the property; and accordingly, a write-down for impairment of $4,633,000 was recorded in 1995. The Partnership leases its commercial properties under non-cancelable operating leases. Future minimum rents to be received as of December 31, 1997 are as follows: Real Estate Asset Held Investments For Sale ------------ ---------- 1998.................................... $ 4,513,760 $ 1,490,582 1999.................................... 3,510,268 1,321,093 2000.................................... 2,156,331 1,242,372 2001.................................... 1,211,648 1,157,350 2002.................................... 632,907 1,011,332 Thereafter.............................. 831,162 5,495,706 ------------ ---------- Total................................. $ 12,856,076 $11,718,435 =========== ========== Future minimum rentals do not include contingent rentals based on sales volume of tenants. Contingent rentals amounted to $91,143, $227,311 and $0 for the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum rents also do not include expense reimbursements for common area maintenance, property taxes and other expenses. These expense reimbursements amounted to $244,032, $401,820 and $320,960 for the years ended December 31, 1997, 1996 and 1995, respectively. These contingent rents and expense reimbursements are included in rental revenue on the Statements of Operations. Harbour Club I Apartments is encumbered by mortgage indebtedness as discussed in Note 6 - "Mortgage Note Payable." Fidelity Plaza is subject to four ground leases as discussed in Note 5 - "Leases." NOTE 5 - LEASES - --------------- The Partnership leases the land on which Fidelity Plaza is located under four ground leases (one capital lease and three noncancelable operating leases). At December 31, 1997, minimum rental payments under such leases were as follows. Capital Operating Lease Leases ---------- ----------- 1998............................... $ 103,538 $ 204,396 1999............................... 103,538 204,396 2000............................... 94,910 204,396 2001............................... - 204,396 2002............................... - 204,396 Thereafter......................... - 11,647,965 --------- ----------- Total minimum payments due......... $ 301,986 $ 12,669,945 ========= =========== Less amount representing interest......................... $ (96,084) --------- Present value of land lease obligation....................... $ 205,902 ========= Monthly payments are required under the terms of the leases. The capital lease expires in December 2000. The largest operating lease expires in December 2065, while the other two operating leases expire in June and August 2021. Land recorded under the capital lease totaled $553,946 at December 31, 1997 and 1996. The lease contains an option to purchase the land for $1 in 2001. Ground lease expense of $206,096, $203,704 and $201,544 relating to the three operating leases is included in the Statements of Operations with other property operating expenses for the years ended December 31, 1997, 1996 and 1995, respectively. The ground leases contain certain provisions that may give the lessor the right to terminate the leases as a result of the March 1992 restructuring of the Partnership. The lessors have been requested to waive their right to terminate the leasehold, and they may require the payment of fees as a condition to granting such waiver. If the waivers are not obtained, the leases could be terminated. However, management believes the likelihood of this outcome is remote. NOTE 6 - MORTGAGE NOTE PAYABLE - ------------------------------ The following sets forth the mortgage note payable of the Partnership at December 31, 1997 and 1996. The mortgage note payable is secured by the related real estate investment.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a) Rate Maturity 1997 1996 - -------- ------------------ ------------------ --------------- ----------- Harbour Club I First 10.25 $66,011 06/23 $ 7,155,626 $ 7,381,507 ============ ==========
(a) The debt is non-recourse to the Partnership. Effective January 1, 1993, the Partnership ceased making regularly scheduled debt service and escrow payments. In lieu of the aforementioned payments, the Partnership funded debt service with the excess cash flow of the property. The Partnership was notified that the mortgage note payable was in default. During 1996, the mortgagee applied approximately $599,000 of mortgagee held escrow funds to the outstanding interest payable balance. Effective January 23, 1997, the mortgage note payable was sold by the mortgagee to an unaffiliated lender. In July 1997, the mortgage note was brought current after the Partnership made all delinquent payments and paid all accrued late charges. Regular monthly payments were resumed in July 1997. Scheduled principal maturities of the mortgage note payable under existing agreements are as follows: 1998.................................... $ 61,515 1999.................................... 68,125 2000.................................... 75,446 2001.................................... 83,553 2002.................................... 92,531 Thereafter.............................. 6,774,456 ---------- $ 7,155,626 ========== 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 $9,163,000 at December 31, 1997 and $8,675,000 at December 31, 1996. NOTE 7 - ACCOUNTS RECEIVABLE - ----------------------------- The accounts receivable balance includes amounts due from tenants for base rent, common area maintenance, percentage rents and other miscellaneous amounts. In addition, accounts receivable includes amounts relating to rental guarantees from the seller of Century Park Office Building of approximately $470,000 at December 31, 1997 and 1996 which are not expected to be collected. The reserve for this amount is included in allowance for doubtful accounts. NOTE 8 - DEFERRED GAIN - ---------------------- In October 1992, the Partnership agreed to restructure a lease with a major tenant of Kellogg Office Building. Under the terms of the restructuring, the tenant relinquished approximately 20,000 square feet of office space, of which approximately 10,000 square feet was subleased to another tenant, and retained existing space at a reduced rate. In connection with the restructuring, the tenant signed a promissory note in the amount of $500,000 secured by an interest in a coal mine, assigned an interest in a sublease with a third party, and transferred 50,000 shares of Confertech International, Inc. common stock to the Partnership. In 1992, the Partnership recorded a deferred gain of $628,938 as a result of this transaction. In 1993, the Partnership sold all 50,000 shares of the stock for $243,855 and recognized a $43,855 gain on sale of marketable securities. The Partnership also recognized the portion of the deferred gain that related to the common stock. The portion of the deferred gain that related to the promissory note was amortized as payments on the note were received. No amortization of deferred gain was recognized in 1996 or 1995 since no payments were received on the promissory note. The balance of the note and the corresponding deferred gain were $344,225 at December 31, 1996. In July 1997, the Partnership received $60,000 in full settlement of the promissory note, which was recognized as rental revenue on the Statement of Operations at December 31, 1997. NOTE 9 - LEGAL PROCEEDINGS - -------------------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: 1) 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 (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. Defendants must move, answer or otherwise respond to the second consolidated and amended complaint by June 30, 1998. 2) 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 Corporation ("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. NOTE 10 - RESCISSION OF LIMITED PARTNERSHIP UNITS - ------------------------------------------------- On October 26, 1996, a judgment was entered against the Partnership which effectively rescinded 950,963 Units of the Partnership as of October 31, 1996. Pursuant to the court order, the Partnership made settlement payments to an escrow agent on behalf of the plaintiff limited partners totaling $1,771,535 on October 30, 1996. The payments consisted of two components. The first component of $656,055, which was recorded as a rescission of limited partnership units on the Statements of Partners' Equity (Deficit), represented the return of the limited partners' equity investments, net of all distributions previously paid to them. The second component of $1,115,480, which was recorded as interest - rescission of limited partnership units on the Statements of Operations, represented interest paid on the rescinded Units pursuant to the court judgment. Additionally, on February 6, 1997, the Partnership agreed to pay the plaintiffs $690,000 for attorney fees in exchange for a release of all claims against the Partnership and General Partner. This attorney fees settlement amount was accrued at December 31, 1996, and was recorded as a general and administrative expense on the Statements of Operations. The settlement was paid in full during 1997. McNEIL REAL ESTATE FUND XXV, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1997
Costs Initial Cost Cumulative Capitalized Related Buildings and Write-down for Subsequent Description Encumbrances(c) Land Improvements Impairment(b) To Acquisition - ----------- --------------- ---- -------------- -------------- -------------- APARTMENTS: Harbour Club I Belleville, MI $ 7,155,626 $ 763,364 $ 8,792,575 $ (338,092) $ 1,490,481 OFFICE BUILDINGS: Century Park Las Vegas, NV - 1,549,077 12,537,373 (1,000,000) 3,487,425 Fidelity Plaza Long Beach, CA 205,902 541,239 13,172,687 (4,633,000) 4,458,795 Kellogg Office Building Littleton, CO - 1,743,070 12,804,735 (5,003,041) 1,673,799 ------------- ------------ ------------- ------------- ------------ $ 7,361,528 $ 4,596,750 $ 47,307,370 $ (10,974,133) $ 11,110,500 ============= ============= ============= ============= =============
Asset Held for Sale (d): Northwest Plaza Dayton, OH (b) The carrying value of Century Park and Kellogg Office Building were reduced by $1,000,000 and $4,000,000, respectively, in 1989. In 1992, the carrying value of Kellogg Office Building was further reduced by $1,003,041 and the carrying value of Harbour Club I Apartments was reduced by $338,092. The carrying value of Fidelity Plaza was reduced by $4,633,000 in 1995. (c) Related encumbrances include a mortgage note payable and a capitalized land lease obligation. (d) The asset held for sale is stated at lower of cost or fair value less costs to sell. Historical cost, net of accumulative depreciation and amortization and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation ceases at the time the asset is placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXV, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1997
Gross Amount at Which Carried at Close of Period Accumulated Buildings and Depreciation Description Land Improvements Total (a) and Amortization - ------------ ---- ------------- --------- ---------------- APARTMENTS: Harbour Club I Belleville, MI $ 1,069,513 $ 9,638,815 $ 10,708,328 $ (4,393,057) OFFICE BUILDINGS: Century Park Las Vegas, NV 1,439,077 15,134,798 16,573,875 (8,313,761) Fidelity Plaza Long Beach, CA 553,946 12,985,775 13,539,721 (8,529,701) Kellogg Office Building Littleton, CO 1,142,889 10,075,674 11,218,563 (5,800,787) ------------- ------------- --------------- -------------- $ 4,205,425 $ 47,835,062 $ 52,040,487 $ (27,037,306) ============= ============= =============== ============== Asset Held for Sale (d): Northwest Plaza Dayton, OH $ 8,989,818 ===============
(a) For Federal income tax purposes, the properties are depreciated over lives ranging from 5-39 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $83,828,119 and accumulated depreciation was $36,558,262 at December 31, 1997. (d) The asset held for sale is stated at lower of cost or fair value less costs to sell. Historical cost, net of accumulative depreciation and amortization and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation ceases at the time the asset is placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXV, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1997
Date of Date Depreciable Description Construction Acquired Lives (Years) - ----------- ------------ -------- ------------- APARTMENTS: Harbour Club I Belleville, MI 1969 06/86 5-25 OFFICE BUILDINGS: Century Park Las Vegas, NV 1984 05/86 5-25 Fidelity Plaza Long Beach, CA 1968 12/85 5-25 Kellogg Office Building Littleton, CO 1983 12/85 5-25 Asset Held for Sale (d): Northwest Plaza Dayton, OH 1964/1980 06/86
(d) The asset held for sale is stated at lower of cost or fair value less costs to sell. Historical cost, net of accumulative depreciation and amortization and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation ceases at the time the asset is placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXV, 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, --------------------------------------------------- 1997 1996 1995 ------------- ------------- -------------- Real estate investments: Balance at beginning of year............... $ 71,301,477 $ 69,854,919 $ 72,442,921 Improvements............................... 1,221,917 1,446,558 2,044,998 Reclassification to asset held for sale.... (20,482,907) - - Write-down for impairment of real estate.................................. - - (4,633,000) ------------- ------------- -------------- Balance at end of year..................... $ 52,040,487 $ 71,301,477 $ 69,854,919 ============= ============= ============== Accumulated depreciation and amortization: Balance at beginning of year............... $ 32,569,829 $ 29,234,446 $ 25,759,358 Depreciation and amortization.............. 2,867,438 3,335,383 3,475,088 Reclassification to asset held for sale.................................... (8,399,961) - - -------------- ------------- -------------- Balance at end of year..................... $ 27,037,306 $ 32,569,829 $ 29,234,446 ============= ============= ============== Asset held for sale: Balance at beginning of year............... $ - $ - $ - Reclassification to asset held for sale.... 12,082,946 - - Improvements............................... 36,872 - - Write-down for impairment of real estate.................................. (3,130,000) - - ------------- ------------- -------------- Balance at end of year..................... $ 8,989,818 $ - $ - ============= ============= ==============
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, 77 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 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 54 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 Center, 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 40 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, 1997, 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, 1997. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, was known by the Partnership to own more than 5% of the Units, other than High River Limited Partnership which owns 7,534,383 Units at January 31, 1998 (approximately 9.08% of the outstanding Units). The business address for High River Limited Partnership is 100 South Bedford Road, Mount Kisco, New York 10549. (B) Security ownership of management. The General Partner and the officers and directors of its general partner, collectively own 27,322 limited partnership units, which represents less than 1% of the outstanding limited partnership units at January 31, 1998. (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 properties and $50 per gross square foot for commercial properties 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, 1997, the Partnership paid or accrued $670,913 of such asset management fees. The Partnership pays property management fees equal to 5% of the gross rental receipts of residential properties and 6% for commercial properties 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, 1997, the Partnership paid or accrued $710,101 of such property management fees and reimbursements. See Item 1 - Business, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Note 2 - "Transactions With Affiliates." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------- See accompanying Index to Financial Statements at Item 8 - Financial Statements and Supplementary Data. (A) Exhibits
Exhibit Number Description ------- ------------ 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). 4.1 Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXV, L.P. dated June 1995 (incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the period ended June 30, 1995, as filed on August 14, 1995). 4.2 Certificate and Agreement of Van Buren Associates Limited Partnership (incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1991, as filed on March 24, 1992). 10.3 Mortgage note dated May 6, 1988, among Van Buren Associates Limited Partnership, Southmark Equity Partners II, Ltd. and DRG Funding Corporation relating to Harbour Club I. (1) 10.4 Property Management Agreement dated March 26, 1992, between McNeil Real Estate Fund XXV, L.P. and McNeil Real Estate Management, Inc. (2)
Exhibit Number Description ------- ------------ 10.5 Amendment of Property Management Agreement dated March 5, 1993 by McNeil Real Estate Fund XXV, L.P. and McNeil Real Estate Management, Inc. (2) 10.6 Property Management Agreement dated March 26, 1992 between Van Buren Associates Limited Partnership and McNeil Real Estate Management, Inc. (2) 10.7 Amendment of Property Management Agreement dated March 5, 1993, by Van Buren Associates Limited Partnership and McNeil Real Estate Management, Inc. (2) 11. Statement regarding computation of net loss per thousand limited partnership units (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 of Which It Is Name of Subsidiary Incorporation Doing Business ------------------ --------------- -------------- Van Buren Associates Limited Partnership Michigan None
(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, 1997. McNEIL REAL ESTATE FUND XXV, 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 XXV, L.P. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 30, 1998 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 30, 1998 By: /s/ Ron K. Taylor - -------------- ----------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 30, 1998 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-31-1997 DEC-31-1997 3,044,669 0 1,270,099 (730,668) 0 0 52,040,487 (27,037,306) 38,562,904 0 7,155,626 0 0 0 29,789,239 38,562,904 9,282,309 9,435,923 4,856,474 7,723,912 992,754 3,130,000 781,344 (3,192,087) 0 (3,192,087) 0 0 0 (3,192,087) 0 0
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