-----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, Bp3i6wyk5Fpxxyuey+QaIbRDsdEeMiPHLiRMjYqu3haQPLo7CiaheN587GlOc2no ZhvTQat0x8jEwFVDHeNeoQ== 0000793307-99-000003.txt : 19990402 0000793307-99-000003.hdr.sgml : 19990402 ACCESSION NUMBER: 0000793307-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCNEIL REAL ESTATE FUND XXVI LP CENTRAL INDEX KEY: 0000793307 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330168395 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15460 FILM NUMBER: 99580755 BUSINESS ADDRESS: STREET 1: 13760 NOEL RD STE 700 LB70 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144485800 MAIL ADDRESS: STREET 2: 13760 NOEL ROAD SUITE 700 LB 70 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHMARK EQUITY PARTNERS III 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, 1998 ------------------------------------------------- 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 0-15460 --------- MCNEIL REAL ESTATE FUND XXVI, L.P. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 33-0168395 - -------------------------------------------------------------------------------- (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. [ ] 83,535,671 of the registrant's 86,530,671 limited partnership units are held by non-affiliates. The aggregate market value of units held by non-affiliates is not determinable since there is no public trading market for limited partnership units and transfers of units are subject to certain restrictions. Documents Incorporated by Reference: See Item 14, Page 35 TOTAL OF 36 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XXVI, L.P., (the "Partnership"), formerly known as Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate residential and commercial 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 30, 1992, at which time an amended and restated partnership agreement (the "Amended Partnership Agreement") was adopted. Prior to March 30, 1992, the general partner of the Partnership was Southmark Investment Group 86, Inc. (the "Original General Partner"), a wholly-owned subsidiary of Southmark Corporation ("Southmark"). The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas 75240. On July 22, 1986, the Partnership registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 33-5568) and commenced a public offering for sale of $90,000,000 of limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the holders thereof to participate in certain allocations and distributions of the Partnership. The sale of Units closed on July 21, 1987 with 86,553,913 Units sold at one dollar each, or gross proceeds of $86,553,913 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. 0-15460). Between 1995 and 1998, 23,242 Units were relinquished leaving 86,530,671 Units outstanding as of December 31, 1998. 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. On March 13, 1991, McREMI commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates. On March 30, 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 XXVI, L.P. Under the Amended Partnership Agreement, the Partnership began accruing an asset management fee, retroactive to March 13, 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 30, 1992 meeting were implemented as of that date. 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, $45,263 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 $14,611, which combined with the cash proceeds from Southmark, resulted in a gain on legal settlement of $59,874. CURRENT OPERATIONS - ------------------ General: The Partnership is engaged in diversified real estate activities, including the ownership, operation and management of residential, commercial office and retail real estate. At December 31, 1998, the Partnership owned four income-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. 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: As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. Competitive Conditions: Since the principal business of the Partnership is to own and operate real estate, the Partnership is subject to all of the risks incident to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic or rent controls. The illiquidity of real estate investments generally impairs the ability of the Partnership to respond promptly to changed circumstances. The Partnership competes with numerous established companies, private investors (including foreign investors), real estate investment trusts, limited partnerships and other entities (many of which have greater resources than the Partnership) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosures of the Partnership's properties, is described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. For a detailed discussion of the competitive conditions for the Partnership's properties see Item 2 - Properties. Forward-Looking Information: Within this document, certain statements are made as to the expected occupancy trends, financial condition, results of operations, and cash flows of the Partnership for periods after December 31, 1998. 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: Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described above, Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. Other Information: In September 1996, High River Limited Partnership, a Delaware limited partnership controlled by Carl C. Icahn ("High River") made an unsolicited tender offer (the "HR Offer") to purchase any and all of the outstanding Units of the Partnership for a purchase price of $0.092 (the original offer price of $0.096 was reduced by the August 1996 distribution of $0.004 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 HR Offer made with respect to the Partnership and not tender their Units pursuant to the HR Offer. The HR Offer terminated, after numerous extensions, on November 22, 1996. The General Partner believes that as of February 1, 1999, High River has purchased approximately 1.03% of the Partnership's outstanding Units. In addition, all litigation filed by High River, Mr. Icahn and his affiliates in connection with the HR Offer has been dismissed without prejudice. ITEM 2. PROPERTIES - ------- ---------- The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1998. All of the buildings and the land on which they are located are owned by the Partnership in fee and are encumbered by mortgage indebtedness, with the exception of Continental Plaza and Westwood Center. See Item 8 - Note 5 "Mortgage Notes Payable". 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 of 1998 Date Property Description Property Debt Property Taxes Acquired - -------- ----------- ------------- ---- -------------- -------- Real Estate Investments: Amargosa Creek Apartments Lancaster, CA 216 units $ 5,035,018 $ 4,648,038 $ 37,440 12/86 Continental Plaza Office Building Scottsdale, AZ 54,537 sq. ft. 2,226,394 - 116,764 11/86 Northway Mall Retail Center Pittsburgh, PA 395,000 sq. ft. 21,637,071 14,333,349 437,204 6/87 Westwood Center Office Building Tampa, FL 126,175 sq. ft. 6,710,205 - 230,676 3/87 ------------ ------------ ---------- $ 35,608,688 $ 18,981,387 $ 822,084 ============ ============ ========== - -----------------------------------
Total: Apartments - 216 Units Retail Centers - 395,000 sq. ft. Office Buildings - 180,712 sq. ft. The following table sets forth the properties' occupancy rate and rent per square foot for the last five years:
1998 1997 1996 1995 1994 ------------- ------------- -------------- ------------- ---------- Amargosa Creek Occupancy Rate............ 93% 94% 91% 92% 89% Rent Per Square Foot...... $ 7.77 $ 7.39 $ 6.96 $ 7.15 $ 7.17 Continental Plaza Occupancy Rate............ 90% 100% 100% 100% 98% Rent Per Square Foot...... $13.14 $13.12 $12.55 $12.03 $10.50 Northway Mall Occupancy Rate............ 94% 94% 90% 87% 61% Rent Per Square Foot...... $12.55 $11.99 $11.19 $ 8.97 $ 5.74 Westwood Center Occupancy Rate............ 99% 98% 99% 92% 90% Rent Per Square Foot...... $15.01 $14.46 $13.44 $11.95 $11.78
Occupancy rate represents all units leased divided by the total number of units for residential properties and square footage leased divided by 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 - ---------------------- Amargosa Creek Apartments - ------------------------- Amargosa Creek Apartments, built in 1984, is located in the Mojave Desert, east of the Antelope Valley Freeway, south of downtown Lancaster, California. The major industry in the Antelope Valley is aerospace and Edward's Air Force Base is located 26 miles from the property. During the past three years the property has had interior and exterior upgrades that were necessary to compete with the market as well as to overcome the negative reputation created by being located in a high-crime locale. These improvements have proven to be effective, as the property ended the year at an occupancy rate of 93%, which is slightly below the market average of 94%. The rental rates at Amargosa Creek are comparable to the average market rate. Amargosa Creek is expected to continue to demonstrate stabilized economic growth during 1999 and beyond; however, since the market is strongly affected by the aerospace industry, any layoffs or growth would significantly impact the property's performance. Continental Plaza - ----------------- Continental Plaza is an office building located in prestigious north Scottsdale, Arizona, an eastern suburb of Phoenix. The garden-style property consists of two Spanish style buildings surrounding a courtyard. Continental Plaza ended the year at a 90% occupancy rate as compared to a market average of 96%. New construction in the area is adding an additional 100,000 square feet to the market. Management is currently searching for tenants to fill the vacated space. Northway Mall - ------------- Northway Mall, built in the early 1960's and opened in 1962, is a multi-level facility consisting of 395,000 square feet of retail space and mezzanine level office suites. It is located 12 miles south of the Pennsylvania State Turnpike in the North Hills area of Pittsburgh, Pennsylvania. A $13.5 million renovation completed early in 1995 has reestablished the mall in the area. Management is currently searching for two tenants to occupy approximately 33,000 square feet. The occupancy rate at December 31, 1998 was 94% and the greater Pittsburgh area is very stable with occupancies approaching the 96% mark, with shopping centers adjacent to Northway Mall currently 95% occupied. Westwood Center - --------------- Westwood Center, an eight-story office building built in 1984, is located in the Westshore Business District of Tampa, Florida. Improvements over the past few years have allowed the property to maintain competitiveness with the local market. Overall, the Westshore Business District continues to hold stable occupancies of 94% and Westwood Center ended the year with a 99% occupancy. Current market concerns include the property's location near a declining neighborhood and the area's higher than average crime rate. Presently, there is no new office building construction in the Westshore Business District, and the property is positioned for steady growth in the coming years. Westwood Center is located in a stable market and management does not anticipate any difficulty in re-leasing the space that may come available during the year. The following schedule shows lease expirations for each of the Partnership's commercial properties for 1999 through 2008:
Number of Annual % of Gross Expirations Square Feet Rent Annual Rent ------------ ----------- ------ ----------- Continental Plaza 1999 2 1,631 $ 23,834 3% 2000 6 20,481 282,106 37% 2001 11 15,116 246,129 32% 2002 4 6,592 114,664 15% 2003 - - - - 2004 2 6,124 102,177 13% 2005-2008 - - - - Northway Mall 1999 4 6,321 $ 115,073 5% 2000 9 18,917 240,313 10% 2001 9 34,397 408,074 17% 2002 7 16,114 237,245 10% 2003 3 8,037 90,924 4% 2004 4 157,244 892,646 37% 2005 2 15,958 226,276 9% 2006 - - - - 2007 1 11,096 99,864 4% 2008 1 4,947 71,736 3% Westwood Center 1999 5 10,683 $ 157,173 8% 2000 3 10,955 177,217 9% 2001 1 35,811 525,828 28% 2002 4 11,535 179,525 10% 2003 3 31,937 453,209 24% 2004 4 25,641 377,663 20% 2005-2008 - - - -
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 - --------- -------------- ----------- ---------- Continental Plaza General Business 5,952 $ 75,888 2000 General Business 10,433 140,846 2000 Northway Mall Department Store 73,500 $ 294,000 2004 Department Store 69,639 461,954 2004 Westwood Center General Office 35,811 $ 525,828 2001 General Office 31,266 438,944 2003 General Office 19,838 297,570 2004
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 XXIII, 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., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - 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 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. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. 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. For a discussion of the Southmark bankruptcy, see Item 1 - Business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND - ------- ------------------------------------------------------------ RELATED SECURITY HOLDER MATTERS ------------------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. (B) Title of Class Number of Record Unit Holders Limited partnership units 6,204 as of February 1, 1999 (C) Distributions of $2,538,360 and $749,988 were paid to the limited partners in 1998 and 1997, respectively. During the last week of March 1999, the Partnership distributed approximately $500,000 to the limited partners of record as of March 1, 1999. 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 notes to the Partnership's financial statements appearing in Item 8 - Financial Statements and Supplementary Data.
Statements of Years Ended December 31, Operations 1998 1997 1996 1995 1994 - ------------------ ------------- ------------- -------------- ------------- -------- Rental revenue............... $ 8,985,277 $ 8,824,653 $ 8,579,073 $ 7,568,361 $ 6,385,998 Write-down for impair- ment of real estate....... - - (1,087,000) (2,200,000) - Net loss..................... (695,742) (1,003,689) (2,347,920) (5,063,046) (1,938,063) Loss per thousand limited partnership units......... $ (7.96) $ (11.48) $ (26.86) $ (57.91) $ (22.17) ============ =========== ============= ============ =========== Distributions per thousand limited partnership units..................... $ 29.33 $ 8.67 $ 4.33 $ - $ - ============ =========== ============= ============ ===========
As of December 31, Balance Sheets 1998 1997 1996 1995 1994 - -------------- ------------ ------------- -------------- ------------- -------------- Real estate investments, net....................... $ 35,608,688 $ 37,259,312 $ 38,979,116 $ 44,629,001 $ 41,738,690 Asset held for sale.......... - 3,047,765 3,008,374 -- - Total assets................. 40,048,693 45,464,752 47,124,512 54,217,223 45,208,188 Mortgage notes payable....... 18,981,387 21,442,045 21,815,746 23,097,459 9,350,045 Partners' equity............. 19,628,145 22,862,247 24,615,924 27,338,809 32,401,855
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 income-producing real properties, and holding the properties for investment. Since completion of its capital formation and property acquisition phases in 1987, when it completed the purchase of five properties, the Partnership has operated its properties for production of income. The original acquisitions of properties were all cash. On April 27, 1998, the Partnership sold its investment in Edison Ford Square. RESULTS OF OPERATIONS - --------------------- 1998 compared to 1997 Revenue: Total Partnership revenues for 1998 increased by $292,893 or 3% as compared to 1997. Rental revenue increased $160,624 or 2% while interest income increased $15,972 or 10%. Interest income increased due to an increase in the average cash balance being invested in interest bearing accounts. A gain of $116,297 was recognized in 1998 due to the sale of Edison Ford Square. No such gain was recorded in 1997. Expenses: Total expenses decreased by $15,054 in 1998 as compared to 1997. Edison Ford Square, sold in 1998, accounted for $180,183 of the decrease. The remaining $165,129 increase in expenses was mainly due to an increase in property taxes and general and administrative expenses. In addition, bad debt expense showed an increase in 1998, which was offset by decreases in interest expense, other property operating expense and utilities. Interest expense decreased $71,133 in 1998 primarily due to mortgage note payoff at Westwood Center in October 1998. Property taxes for 1998 (excluding Edison Ford Square) increased $126,406 or 17% as compared 1997 due to an increase in the estimated tax liability at Continental Plaza, Northway Mall and Westwood Center. Bad debt expense (excluding Edison Ford Square) increased $17,335 or 17% in 1998 as compared to 1997. This increase can be attributed to the write-off of tenant balances that were deemed uncollectible at Northway Mall General and administrative expenses increased by $207,482 in 1998 as compared to the same period in 1997. The increase was mainly due to the costs incurred to explore alternatives to maximize the value of the Partnership. 1997 compared to 1996 Revenue: Partnership revenues increased by $227,178 or 3% in 1997 as compared to 1996. Rental revenue increased $245,580 and interest income decreased $18,402. Rental revenue increases were mainly due to increased occupancies at Amargosa Creek, Northway Mall and Edison Ford Square. The increase in rental revenue can also be attributed to the increase in rental rates at four of the Partnership's five properties. Expenses: Total expenses decreased by $1,117,053 or 10% in 1997 as compared to 1996. The decrease was mainly due to a write-down for impairment of real estate at Edison Ford Square of $1,087,000 in 1996. No such write-down was recorded in 1997. Interest expense - affiliates decreased $16,090 due to the repayment of the loan from McNeil Real Estate Fund XXVII, L.P. in January 1996, as well as the repayment of all advances from affiliates in May 1996. Property taxes increased by $78,966 or 12% in 1997 as compared to 1996. This increase is due to an increase in estimated tax liability at Northway Mall. During 1996, the Partnership also received a tax refund relating to Westwood; no such refund was received in 1997. Bad debt expense increased $91,384 in 1997 as compared to 1996. This increase can be attributed to the write-off of tenant balances that were deemed uncollectible at Northway Mall. General and administrative expenses decreased $101,815 or 37% for the year ended December 31, 1997 as compared to the same period in 1996. In 1996, the Partnership incurred costs to evaluate and disseminate information regarding an unsolicited tender offer. The decrease in 1997 as compared to 1996 was slightly offset by charges for investor services, which beginning in 1997, were provided by a third party vendor. In 1996, these costs were paid to an affiliate of the General Partner and were included in general and administrative - affiliates. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Partnership has experienced positive cash flow from operations of $3,165,025 for the three years ended December 31, 1998. Over the last three years the Partnership has used cash to fund $3,056,569 in additions to real estate investments, $3,163,534 in principal payments and debt retirement, $28,183 for additions to deferred borrowing costs, $1,083,055 for the repayment of advances and mortgage loans from affiliates and $3,663,313 in limited partner distributions. During 1998, the Partnership received $3,324,955 as proceeds from the sale of Edison Ford Square. The Partnership generated $2,035,352 through operating activities in 1998 as compared to $2,718,546 in 1997. The decrease of $683,194 can be attributed to an increase in cash paid to suppliers and a increase in property taxes paid. These increases were offset by a decrease in cash paid to affiliates. The Partnership generated $2,718,546 through operating activities in 1997 as compared to cash used in operating activities of $1,588,873 in 1996. The increase in cash provided by operating activities of $4,307,419 can be attributed to the decrease of $3,047,898 in the cash paid to affiliates. In 1996, the Partnership used the proceeds from the mortgage note refinancing on Northway Mall to pay all deferred asset management fees and overhead reimbursements to McREMI. Short-term liquidity: At December 31, 1998, the Partnership held cash and cash equivalents of $2,256,842. The present cash balance plus cash to be provided by operating activities is considered adequate to meet the Partnership's needs for debt service, normal amounts of repairs and maintenance and capital improvements to preserve and enhance the value of the properties. The Partnership has budgeted $1.3 million for necessary capital improvements for all properties in 1999. The Partnership had significant mortgage maturities during 1998. On October 1, 1998, the Partnership paid off the mortgage note payable on Westwood Center in the amount of $2,091,627 and on November 1, 1998 the Partnership was successful in negotiating a two-year extension on the mortgage note payable on Amargosa Creek. The General Partner has, at its discretion, advanced funds to the Partnership to fund working capital requirements. All outstanding advances from affiliates and the related accrued interest were repaid in 1996. The General Partner is not obligated to advance funds to the Partnership and there is no assurance that the Partnership will receive additional funds. Long-term liquidity: While the present outlook for Partnership's liquidity is favorable, market conditions may change and property operations could deteriorate. In that event, the Partnership would require other sources of working capital. No such other sources have been identified, and the Partnership has no established lines of credit. Other possible actions to resolve working capital deficiencies include refinancing or renegotiating terms of existing loans, deferring major capital expenditures on Partnership properties except where improvements are expected to enhance the competitiveness or marketability of the properties, or arranging working capital support from affiliates. There is no assurance that affiliate support could be arranged, since neither the General Partner nor any affiliates have any obligation in this regard. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. Distributions: During 1998, the limited partners received a cash distribution of $2,538,360. The distribution consisted of funds from operations and cash reserves. During the last week of March 1999, the Partnership distributed approximately $500,000 to the limited partners of record as of March 1, 1999. The General Partner will continue to monitor the cash reserves and working capital needs of the Partnership to determine when cash flows will support distributions to the limited partners. YEAR 2000 DISCLOSURE - -------------------- State of readiness - ------------------ 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. Management has assessed its information technology ("IT") infrastructure to identify any systems that could be affected by the year 2000 problem. The IT used by the Partnership for financial reporting and significant accounting functions was made year 2000 compliant during recent systems conversions. The software utilized for these functions are licensed by third party vendors who have warranted that their systems are year 2000 compliant. Management is in the process of evaluating the mechanical and embedded technological systems at the various properties. Management has inventoried all such systems and queried suppliers, vendors and manufacturers to determine year 2000 compliance. Management will complete assessment of findings by May 1, 1999. In circumstances of non-compliance management will work with the vendor to remedy the problem or seek alternative suppliers who will be in compliance. 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. However, no estimates can be made as to the potential adverse impact resulting from the failure of third party service providers and vendors to be year 2000 compliant. Cost - ---- The cost of IT and embedded technology systems testing and upgrades is not expected to be material to the Partnership. Because all the IT systems have been upgraded over the last three years, all such systems were compliant, or made compliant at no additional cost by third party vendors. Management anticipates the costs of assessing, testing, and if necessary replacing embedded technology components will be less than $50,000. Such costs will be funded from operations of the Partnership. Risks - ----- Ultimately, the potential impact of the year 2000 issue will depend not only on the corrective measures the Partnership undertakes, but also on the way in which the year 2000 issue is addressed by government agencies and entities that provide services or supplies to the Partnership. Management has not determined the most likely worst case scenario to the Partnership. As management studies the findings of its property systems assessment and testing, management will develop a better understanding of what would be the worst case scenario. Management believes that progress on all areas is proceeding and that the Partnership will experience no adverse effect as a result of the year 2000 issue. However, there is no assurance that this will be the case. Contingency plans - ----------------- Management is developing contingency plans to address potential year 2000 non-compliance of IT and embedded technology systems. Management believes that failure of any IT system could have an adverse impact on operations. However, management believes that alternative systems are available that could be utilized to minimize such impact. Management believes that any failure in the embedded technology systems could have an adverse impact on that property's performance. Management will assess these risks and develop plans to mitigate possible failures by June, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ---------------------------------------------------------- Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
Page Number ------ INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 16 Balance Sheets at December 31, 1998 and 1997................................... 17 Statements of Operations for each of the three years in the period ended December 31, 1998..................................................... 18 Statements of Partners' Equity (Deficit) for each of the three years in the period ended December 31, 1998.......................................... 19 Statements of Cash Flows for each of the three years in the period ended December 31, 1998..................................................... 20 Notes to Financial Statements.................................................. 22 Financial Statement Schedule - Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization............................................ 30
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 XXVI, L.P.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XXVI, L.P. (a California limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. 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 XXVI, L.P. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, 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 19, 1999 McNEIL REAL ESTATE FUND XXVI, L.P. BALANCE SHEETS
December 31, --------------------------------- 1998 1997 ------------ ------------- ASSETS - ------ Real estate investments: Land ...................................................... $ 6,750,456 $ 6,750,456 Buildings and improvements ................................ 55,757,865 54,854,340 ------------ ------------ 62,508,321 61,604,796 Less: Accumulated depreciation and amortization .......... (26,899,633) (24,345,484) ------------ ------------ 35,608,688 37,259,312 Asset held for sale .......................................... -- 3,047,765 Cash and cash equivalents .................................... 2,256,842 2,823,216 Cash segregated for security deposits ........................ 232,083 235,617 Accounts receivable, net of allowance for doubtful accounts of $203,657 and $572,392 at December 31, 1998 and 1997 ................................ 1,123,136 1,221,528 Prepaid commissions .......................................... 387,092 381,923 Prepaid expenses and other assets ............................ 254,614 229,664 Deferred borrowing costs, net of accumulated amortization of $255,443 and $307,435 at December 31, 1998 and 1997, respectively .................. 186,238 265,727 ------------ ------------ $ 40,048,693 $ 45,464,752 ============ ============ LIABILITIES AND PARTNERS' EQUITY (DEFICIT) - ------------------------------------------ Mortgage notes payable ....................................... $ 18,981,387 $ 21,442,045 Accounts payable and accrued expenses ........................ 247,764 488,719 Accrued property taxes ....................................... 40,161 81,308 Payable to affiliates - General Partner ...................... 931,891 292,574 Security deposits and deferred rental income ................. 219,345 297,859 ------------ ------------ 20,420,548 22,602,505 ------------ ------------ Partners' equity (deficit): Limited partners - 90,000,000 limited partnership units authorized; 86,530,671 limited partnership units issued and outstanding at December 31, 1998 and 1997 ........................................... 20,046,031 23,273,176 General Partner ........................................... (417,886) (410,929) ------------ ------------ 19,628,145 22,862,247 ------------ ------------ $ 40,048,693 $ 45,464,752 ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. STATEMENTS OF OPERATIONS
For the Years Ended December 31, ------------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Revenue: Rental revenue ......................... $ 8,985,277 $ 8,824,653 $ 8,579,073 Interest ............................... 173,940 157,968 176,370 Gain on sale of real estate ............ 116,297 -- -- ------------ ------------ ------------ Total revenue ........................ 9,275,514 8,982,621 8,755,443 ------------ ------------ ------------ Expenses: Interest ............................... 1,671,325 1,742,458 1,770,932 Interest - affiliates .................. -- -- 16,090 Depreciation and amortization .......... 2,554,149 2,663,083 2,713,247 Property taxes ......................... 838,337 752,719 673,753 Bad debt ............................... 111,651 105,143 13,759 Personnel expenses ..................... 830,841 816,221 799,842 Repairs and maintenance ................ 935,321 942,549 971,273 Property management fees - affiliates ........................... 516,838 524,356 499,835 Utilities .............................. 936,911 985,081 996,025 Other property operating expenses....... 482,950 559,091 584,823 General and administrative ............. 377,580 170,098 271,913 General and administrative - affiliates ........................... 715,353 725,511 704,871 Write-down for impairment of real estate ....................... -- -- 1,087,000 ------------ ------------ ------------ Total expenses ....................... 9,971,256 9,986,310 11,103,363 ------------ ------------ ------------ Net loss .................................. $ (695,742) $(1,003,689) $ (2,347,920) ============ ============ ============ Net loss allocable to limited partners ............................... $ (688,785) $ (993,652) $ (2,324,441) Net loss allocable to General Partner ................................ (6,957) (10,037) (23,479) ------------ ------------ ------------ Net loss .................................. $ (695,742) $ (1,003,689) $ (2,347,920) ============ ============ ============ Net loss per thousand limited partnership units ...................... $ (7.96) $ (11.48) $ (26.86) ============ ============ ============ Distribution per thousand limited partnership units ...................... $ 29.33 $ 8.67 $ 4.33 ============ ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. STATEMENTS OF PARTNERS' EQUITY (DEFICIT) For the Years Ended December 31, 1998, 1997 and 1996
Total General Limited Partners' Partner Partners Equity ------------- ------------- ------------- Balance at December 31, 1995 ........... $ (377,413) $ 27,716,222 $ 27,338,809 Net loss ............................... (23,479) (2,324,441) (2,347,920) Distributions to limited partners....... -- (374,965) (374,965) ------------ ------------ ------------ Balance at December 31, 1996 ........... (400,892) 25,016,816 24,615,924 Net loss ............................... (10,037) (993,652) (1,003,689) Distributions to limited partners ...... -- (749,988) (749,988) ------------ ------------ ------------ Balance at December 31, 1997 ........... (410,929) 23,273,176 22,862,247 Net loss ............................... (6,957) (688,785) (695,742) Distributions to limited partners ...... -- (2,538,360) (2,538,360) ------------ ------------ ------------ Balance at December 31, 1998 ........... $ (417,886) $ 20,046,031 $ 19,628,145 ============ ============ ============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Cash received from tenants ................ $ 8,782,369 $ 8,834,211 $ 8,380,164 Cash paid to suppliers .................... (3,832,374) (2,840,370) (3,723,971) Cash paid to affiliates ................... (592,874) (1,048,755) (4,096,653) Interest received ......................... 173,940 157,968 176,370 Interest paid ............................. (1,581,247) (1,653,436) (1,587,720) Interest paid to affiliates ............... -- -- (53,903) Property taxes paid ....................... (914,462) (731,072) (683,160) ----------- ----------- ----------- Net cash provided by (used in) operating activities .................... 2,035,352 2,718,546 (1,588,873) ----------- ----------- ----------- Cash flows from investing activities: Additions to real estate investments and asset held for sale ................ (915,163) (982,670) (1,158,736) Proceeds from sale of real estate ......... 3,324,955 -- -- ----------- ----------- ----------- Net cash provided by (used in) investing activities .................... 2,409,792 (982,670) (1,158,736) ----------- ----------- ----------- Cash flows from financing activities: Principal payments on mortgage notes payable ........................... (369,031) (373,701) (329,175) Retirement of mortgage note payable ....... (2,091,627) -- -- Repayment of mortgage note - affiliate ............................... -- -- (952,538) Repayment of advances from affiliates - General Partner ............ -- -- (130,517) Deferred borrowing costs paid ............. (12,500) -- (15,683) Distributions to limited partners ......... (2,538,360) (749,988) (374,965) ----------- ----------- ----------- Net cash used in financing activities ........ (5,011,518) (1,123,689) (1,802,878) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents .......................... (566,374) 612,187 (4,550,487) Cash and cash equivalents at beginning of year ....................... 2,823,216 2,211,029 6,761,516 ----------- ----------- ----------- Cash and cash equivalents at end of year ................................. $ 2,256,842 $ 2,823,216 $ 2,211,029 =========== =========== ===========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. STATEMENTS OF CASH FLOWS Reconciliation of Net Loss to Net Cash Provided by (Used in) Operating Activities
For the Years Ended December 31, ---------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net loss ................................... $ (695,742) $(1,003,689) $(2,347,920) ----------- ----------- ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ........... 2,554,149 2,663,083 2,713,247 Amortization of deferred borrowing costs ................................. 91,989 91,795 89,999 Allowance for doubtful accounts ......... -- -- (23,764) Interest added to advances from affiliates - General Partner, net ..... -- -- (37,813) Write-down for impairment of real estate ........................ -- -- 1,087,000 Gain on sale of real estate ............. (116,297) -- -- Changes in assets and liabilities: Cash segregated for security deposits ............................ 3,534 (2,191) (31,030) Accounts receivable ................... (16,277) 55,469 (156,296) Prepaid commissions ................... (39,755) (32,905) 30,426 Prepaid expenses and other assets .............................. (24,950) 479,366 7,061 Accounts payable and accrued expenses ............................ (240,955) 182,435 (52,572) Accrued property taxes ................ (41,147) 22,648 (1,204) Payable to affiliates - General Partner ............................. 639,317 201,112 (2,891,947) Security deposits and deferred rental income ....................... (78,514) 61,423 25,940 ----------- ----------- ----------- Total adjustments ................. 2,731,094 3,722,235 759,047 ----------- ----------- ----------- Net cash provided by (used in) operating activities .................. $ 2,035,352 $ 2,718,546 $(1,588,873) =========== =========== ===========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------ McNeil Real Estate Fund XXVI, L.P., (the "Partnership"), formerly known as Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited partnership under the provisions of the California Revised Limited Partnership Act to acquire and operate residential and commercial 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 30, 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 residential, commercial office and retail real estate. At December 31, 1998, the Partnership owned four income-producing properties as described in Note 4 - Real Estate Investments. As previously announced, the Partnership has retained PaineWebber, Incorporated ("PaineWebber") as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership, including, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The Partnership, through PaineWebber, provided financial and other information to interested parties as part of an auction process and until early March 1999 was conducting discussions with one bidder in an attempt to reach a definitive agreement with respect to a sale transaction. In early March 1999, because the Partnership had been unable to conclude negotiations for a transaction with such bidder, the Partnership terminated such discussions and commenced discussions with respect to a sale transaction with another well-financed bidder who had been involved in the original auction process. During the last full week of March, the Partnership entered into a 45 day exclusivity agreement with such party. It is possible that the General Partner and its affiliates will receive non-cash consideration for their ownership interests in connection with any such transaction. There can be no assurance regarding whether any such agreement will be reached nor the terms thereof. 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. Adoption of Recent Accounting Pronouncements - -------------------------------------------- The Partnership has adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires an enterprise to report financial information about its reportable operating segments, which are defined as components of a business for which separate financial information is evaluated regularly by the chief decision maker in allocating resources and assessing performance. The Partnership does not prepare such information for internal use, since it analyzes the performance of and allocates resources for each property individually. The Partnership's management has determined that it operates one line of business and it would be impracticable to report segment information. Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial statements. 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 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". 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. 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 and amortization on this asset ceased at the time it 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. 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 terms of the related mortgage notes payable. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations. Prepaid Commissions - ------------------- Leasing commissions incurred to obtain leases on commercial properties are capitalized and amortized using the straight-line method over the term of the related leases. Amortization of leasing commissions is included in other property operating expenses in the Statement of Operations. Rental Revenue - -------------- The Partnership leases its residential property under short-term operating leases. Lease terms generally are less than one year in duration. Rental income is recognized as earned. The Partnership leases its commercial properties under non-cancelable operating leases. Certain leases provide concessions and/or periods of escalating or free rent. Rental income 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 one percent (1%) to the General Partner and ninety-nine percent (99%) to the limited partners. For financial statement purposes, net income and net loss arising from sales or refinancing shall be allocated one percent (1%) to the General Partner and ninety-nine percent (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 partner's share of the net decrease in Partnership Minimum Gain determined under Treasury Regulations, (b) second, to the General Partner and limited partners in proportion to, and to the extent of, the amount by which their respective capital account balances are negative by more than their respective remaining shares of the Partnership's Minimum Gain attributable to 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 1998, 1997 and 1996 have been made in accordance with these provisions. Distributions - ------------- At the discretion of the General Partner, distributable cash (other than cash from sales or refinancings) 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. Also at the discretion of the General Partner, the limited partners will receive 100% of distributable cash from sales or refinancings with such distributions first paying the limited partners Priority Return; as defined, then the limited partners' Additional 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 8 1/4% cumulative return on their Adjusted Invested Capital balance, as defined. The limited partners' Additional Priority Return represents a 1% cumulative return on their Adjusted Invested Capital balance, as defined. In connection with a Terminating Disposition, as defined, cash from sales or refinancings and any remaining reserves shall be allocated among, and distributed to, the General Partner and limited partners in proportion to, and to the extent of, their positive capital account balances after the net income has been allocated pursuant to the above. Cash distributions of $2,538,360, $749,988 and $374,965 were made to the limited partners during 1998, 1997 and 1996, respectively. During the last week of March 1999, the Partnership distributed approximately $500,000 to the limited partners of record as of March 1, 1999. Net Loss Per Thousand Limited Partnership Units - ----------------------------------------------- Net loss per thousand Units is computed by dividing net loss allocated to the limited partners by the weighted average number of Units outstanding expressed in thousands. Per Unit information has been computed based on 86,531 thousand Units outstanding in 1998 and 1997 and 86,534 thousand Units outstanding in 1996. 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 its 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 its partnership agreement, the Partnership pays a disposition fee to the General Partner equal to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties. The fee is due and payable at the time the sale closes. The Partnership paid a disposition fee of $106,500 in connection with the sale of Edison Ford Square. 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% to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property and $50 per gross square foot for commercial property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. 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, ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Property management fees - affiliates ........ $ 516,838 $ 524,356 $ 499,835 Charged to gain on sale of real estate: Disposition fee ........................... 106,500 -- -- Charged to interest - affiliates: Interest on mortgage note payable - affiliate ............................... -- -- 11,398 Interest on advances from affiliates - General Partner ............ -- -- 4,692 Charged to general and administrative - affiliates: Partnership administration ................ 184,697 147,389 198,810 Asset management fee ...................... 530,656 578,122 506,061 ---------- ---------- ---------- $1,338,691 $1,249,867 $1,220,796 ========== ========== ==========
Payable to affiliates - General Partner at December 31, 1998 and 1997 consisted primarily of unpaid property management fees, Partnership general and administrative expenses and asset management fees and is due and payable from current operations. During 1998, the Partnership paid or accrued a total of $715,353 to McREMI for asset management fees and overhead reimbursements. The General Partner has, at its discretion, advanced funds to the Partnership to meet its working capital requirements. The advances were repaid during 1996. The General Partner is not obligated to advance funds to the Partnership and there is no assurance that the Partnership will receive additional funds. The advances were unsecured, due on demand and accrued interest at the prime lending rate of the Bank of America plus 1%. The prime lending rate was 8.25% on May 20, 1996, the date when the Partnership repaid all outstanding affiliate advances and the related accrued interest. In 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII, L.P., an affiliate of the General Partner, totaling $952,538. The note was secured by Continental Plaza and required monthly interest-only payments equal to the prime lending rate of Bank of America plus 2 1/2% with the principal balance due March 1, 1996. On January 8, 1996, the Partnership repaid the mortgage loan. NOTE 3 - TAXABLE INCOME (LOSS) - ------------------------------ McNeil Real Estate Fund XXVI, 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 $19,628,145 in 1998, $38,816,004 in 1997and $38,453,377 in 1996. NOTE 4 - REAL ESTATE INVESTMENTS - -------------------------------- The basis and accumulated depreciation and amortization of the Partnership's real estate investments at December 31, 1998 and 1997, are set forth in the following tables:
Accumulated Buildings and Depreciation Net Book 1998 Land Improvements & Amortization Value ---- -------------- ------------ -------------- ---------------- Amargosa Creek Lancaster, CA $ 794,635 $ 8,697,067 $ (4,456,684) $ 5,035,018 Continental Plaza Scottsdale, AZ 1,975,324 2,232,521 (1,981,451) 2,226,394 Northway Mall Pittsburgh, PA 2,965,329 31,603,934 (12,932,192) 21,637,071 Westwood Center Tampa, FL 1,015,168 13,224,343 (7,529,306) 6,710,205 ------------- -------------- -------------- -------------- $ 6,750,456 $ 55,757,865 $ (26,899,633) $ 35,608,688 ============= ============== ============== ============== Accumulated Buildings and Depreciation Net Book 1997 Land Improvements & Amortization Value ---- -------------- ------------ -------------- --------------- Amargosa Creek $ 794,635 $ 8,626,877 $ (4,085,865) $ 5,335,647 Continental Plaza 1,975,324 2,072,184 (1,903,860) 2,143,648 Northway Mall 2,965,329 31,280,032 (11,396,878) 22,848,483 Westwood Center 1,015,168 12,875,247 (6,958,881) 6,931,534 ------------- -------------- -------------- -------------- $ 6,750,456 $ 54,854,340 $ (24,345,484) $ 37,259,312 ============= ============== ============== ==============
On April 1, 1996, the General Partners placed Edison Ford Square, located in Fort Meyers, Florida, on the market for sale. A write-down for impairment in the amount of $1,087,000 was recorded against the property's buildings and improvements during the fourth quarter of 1996 after a major tenant announced termination of their lease in 1997 and determination that its carrying value could not be realized through future cash flows. Edison Ford Square was sold to an unaffiliated buyer on April 28, 1998 (See Note 6). The results of operations for the asset held for sale are $40,483 for the period from January 1, 1998 to April 28, 1998 and $213,631 and $312,321 for the years ended December 31, 1997 and 1996, respectively. Results of operations are operating revenues less operating expenses including depreciation and amortization and interest expense. The Partnership leases its commercial properties under non-cancelable operating leases. Future minimum rents to be received as of December 31, 1998 are as follows: 1999.............................. $ 5,304,573 2000.............................. 5,018,352 2001.............................. 3,647,958 2002.............................. 2,792,427 2003.............................. 2,490,304 Thereafter........................ 7,994,336 ----------- Total $ 27,247,950 =========== Future minimum rents do not include contingent rentals based on sales volume of tenants. Contingent rents amounted to $18,984, $21,625 and $7,943 for the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum rents also do not include expense reimbursements for common area maintenance, property taxes, and other expenses. These expense reimbursements amounted to $1,518,211, $1,398,132 and $1,563,150 for the years ended December 31, 1998, 1997, and 1996, respectively. These contingent rents and expense reimbursements, which include amounts for the asset held for sale, are included in rental revenue on the Statement of Operations. NOTE 5 - MORTGAGE NOTES PAYABLE - ------------------------------- The following sets forth the mortgage notes payable of the Partnership at December 31, 1998 and 1997. The mortgage notes are secured by the related real estate investments.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position (a)Rates % Maturity Date(d) 1998 1997 - -------- ------------------- ------------------- ------------- ------------- Amargosa Creek First (b) 7.875 $ 35,528 11/00 $ 4,648,038 $ 4,705,850 Northway Mall First 7.500 110,849 12/02 14,333,349 14,578,464 Westwood Center First (c) 8.000 22,457 12/98 - 2,157,731 ------------ ----------- $ 18,981,387 $ 21,442,045 ============ ===========
(a) The debt is non-recourse to the Partnership. (b) On November 1, 1998, the Partnership extended the maturity date on the mortgage note payable. The note was extended until November 1, 2000. The Partnership incurred $12,500 of deferred borrowing costs related to the extension of the mortgage note. (c) On October 1, 1998, the Partnership paid off the mortgage note payable. (d) Balloon payments on the mortgage notes are due as follows: Property Balloon Payment Date -------- --------------- ---- Amargosa Creek $ 4,529,511 11/00 Northway Mall 13,118,565 12/02 Scheduled principal maturities of the mortgage notes payable are as follows: 1999.................................... $ 326,677 2000.................................... 4,870,155 2001.................................... 306,749 2002.................................... 13,477,806 2003 and thereafter..................... - ---------- Total $18,981,387 ========== Based on borrowing rates currently available to the Partnership for mortgage loans with similar terms and average maturities, the fair value of the mortgage notes payable was approximately $19,003,000 at December 31, 1998 and $21,404,000 at December 31, 1997. NOTE 6 - DISPOSITION OF REAL ESTATE - ----------------------------------- On April 28, 1998, the Partnership sold Edison Ford Square, an 145,417 square foot shopping center located in Fort Myers, Florida to an unaffiliated buyer for a cash purchase price of $3,550,000. Cash proceeds from this transaction, as well as the gain on sale is detailed below:
Gain on Sale Cash Proceeds ------------ ------------- Cash sales price.................................... $ 3,550,000 $ 3,550,000 Selling costs....................................... (225,045) (225,045) Straight-line rents receivable written off.......... (114,669) - Prepaid leasing commissions written off............. (34,586) Basis of real estate sold........................... (3,059,403) ------------- Gain on sale of real estate......................... $ 116,297 ============= ------------ Proceeds from sale of real estate................... $ 3,324,955 ============
The selling costs above include a disposition fee at 3% of the gross sales price paid to the General Partner in the amount of $106,500 - see Note 2. NOTE 7 - 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 XXIII, 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., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P., - 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 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. The case was stayed pending settlement discussions. A Stipulation of Settlement dated September 15, 1998 has been signed by the parties. Preliminary Court approval was received on October 6, 1998. A hearing for Final Approval of Settlement, initially scheduled for December 17, 1998, has been continued to May 25, 1999. Because McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. would be part of the transaction contemplated in the settlement and Plaintiffs claim that an effort should be made to sell the McNeil Partnerships, Plaintiffs have included allegations with respect to McNeil Real Estate Fund XXIII, L.P., Hearth Hollow Associates, McNeil Midwest Properties I, L.P. and Regency North Associates, L.P. in the third consolidated and amended complaint. Plaintiff's counsel intends to seek an order awarding attorney's fees and reimbursements of their out-of-pocket expenses. The amount of such award is undeterminable until final approval is received from the court. Fees and expenses shall be allocated amongst the Partnerships on a pro rata basis, based upon tangible asset value of each such partnership, less total liabilities, calculated in accordance with the Amended Partnership Agreements for the quarter most recently ended. 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. NOTE 8 - COMMITMENTS AND CONTINGENCIES - -------------------------------------- Environmental laws create potential liabilities that may affect property owners. The environmental laws of Federal and certain state governments, for example, impose liability on current and certain past owners of property from which there is a release or threat of release of hazardous substances. This liability includes costs of investigation and remediation of the hazardous substances and natural resource damages. Liability for costs of investigation and remediation is strict and may be imposed irrespective of whether the property owner was at fault, although there are a number of defenses. Both governments and third parties may seek recoveries under these laws. Third parties also may seek recovery under the common law for damages to their property or person, against owners of property from which there has been a release of hazardous and other substances. The presence of contamination or the failure to remediate contaminations may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. Various buildings at properties do or may contain building materials that are the subject of various regulatory programs intended to protect human health. Such building materials include, for example, asbestos, lead-based paint, and lead plumbing components. The Company has implemented programs to deal with the presence of those materials, which include, as appropriate, reduction of potential exposure situations. The Company does not believe that the costs of such programs are likely to have a material adverse effect. Failure to implement such programs can result in regulatory violations or liability claims resulting from alleged exposure to such materials. In connection with the proposed sale transaction as more fully described in Note 1 - "Organization and Summary of Significant Accounting Policies", Phase I environmental site assessments have been completed for each property owned by the Partnership. Such environmental assessments performed on the properties have not revealed any environmental liability that the Partnership believes would have a material adverse effect on the Partnership's business, assets, or results of operations. The Partnership has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of its properties. There can be no assurances, however, that environmental liabilities have not developed since such environmental assessments were prepared, or that future uses or conditions (including, without limitation, changes in applicable environmental laws and regulations) will not result in imposition of environmental liability. McNEIL REAL ESTATE FUND XXVI, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
Costs Initial Cost Cumulative Capitalized Related Buildings and Write-down Subsequent Description Encumbrances Land Improvements for Impairment To Acquisition - ----------- -------------- ---- ------------- -------------- --------------- Apartments: Amargosa Creek Lancaster, CA (b) $ 4,648,038 $ 947,277 $ 9,578,026 $ (1,696,024) $ 662,423 Office Buildings: Continental Plaza Scottsdale, AZ (c) - 4,211,854 4,059,113 (5,662,360) 1,599,238 Westwood Center Tampa, FL (d) - 1,465,168 14,814,477 (5,000,000) 2,959,866 Retail Center: Northway Mall Pittsburgh, PA (e) 14,333,349 4,523,305 17,186,915 (6,000,000) 18,859,043 -------------- -------------- -------------- ------------- ------------- $ 18,981,387 $ 11,147,604 $ 45,638,531 $ (18,358,384) $ 24,080,570 ============== ============== ============== ============= =============
(b) The carrying value of Amargosa Creek Apartments was reduced by $1,696,024 in 1992. (c) The carrying value of Continental Plaza was reduced by $1,239,353 in 1993, $1,803,007 in 1992, $620,000 in 1991 and $2,000,000 in 1989. (d) The carrying value of Westwood Center was reduced by $5,000,000 in 1989. (e) The carrying value of Northway Mall was reduced by $6,000,000 in 1993. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVI, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
Gross Amount at Which Carried at Close of Period Accumulated Buildings and Depreciation Description Land Improvements Total (a) and Amortization - ----------- ---- ------------- --------- ---------------- Apartment: Amargosa Creek Lancaster, CA (b) $ 794,635 $ 8,697,067 $ 9,491,702 $ (4,456,684) Office Buildings: Continental Plaza Scottsdale, AZ (c) 1,975,324 2,232,521 4,207,845 (1,981,451) Westwood Center Tampa, FL (d) 1,015,168 13,224,343 14,239,511 (7,529,306) Retail Center: Northway Mall Pittsburgh, PA (e) 2,965,329 31,603,934 34,569,263 (12,932,192) ------------- ------------- --------------- ------------- $ 6,750,456 $ 55,757,865 $ 62,508,321 $ (26,899,633) ============= ============= =============== =============
(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 $86,128,424 and accumulated depreciation was $23,180,125 at December 31, 1998. (b) The carrying value of Amargosa Creek Apartments was reduced by $1,696,024 in 1992. (c) The carrying value of Continental Plaza was reduced by $1,239,353 in 1993, $1,803,007 in 1992, $620,000 in 1991 and $2,000,000 in 1989. (d) The carrying value of Westwood Center was reduced by $5,000,000 in 1989. (e) The carrying value of Northway Mall was reduced by $6,000,000 in 1993. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVI, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1998
Date of Date Depreciable Description Construction Acquired lives (years) - ----------- ------------ -------- ------------- Apartment: Amargosa Creek Lancaster, CA (b) 1984/85 12/86 5-25 Office buildings: Continental Plaza Scottsdale, AZ (c) 1984 11/86 5-25 Westwood Center Tampa, FL (d) 1984 03/87 5-25 Retail center: Northway Mall Pittsburgh, PA (e) 1962 06/87 5-25
(b) The carrying value of Amargosa Creek Apartments was reduced by $1,696,024 in 1992. (c) The carrying value of Continental Plaza was reduced by $1,239,353 in 1993, $1,803,007 in 1992, $620,000 in 1991 and $2,000,000 in 1989. (d) The carrying value of Westwood Center was reduced by $5,000,000 in 1989. (e) The carrying value of Northway Mall was reduced by $6,000,000 in 1993. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVI, 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, ----------------------------------------------------- 1998 1997 1996 ------------ ------------- ------------ Real estate investments: Balance at beginning of year ................... $ 61,604,796 $ 60,661,517 $ 65,884,142 Improvements ................................... 903,525 943,279 1,002,815 Reclassification to asset held for sale ........ -- -- (6,225,440) ------------ ------------ ------------ Balance at end of year ......................... $ 62,508,321 $ 61,604,796 $ 60,661,517 ============ ============ ============ Accumulated depreciation and amortization: Balance at beginning of year ................... $ 24,345,484 $ 21,682,401 $ 21,255,141 Depreciation and amortization .................. 2,554,149 2,663,083 2,713,247 Reclassification to asset held for sale ........ -- -- (2,285,987) ------------ ------------ ------------ Balance at end of year ......................... $ 26,899,633 $ 24,345,484 $ 21,682,401 ============ ============ ============ Asset held for sale: Balance at beginning of year ................... $ 3,047,765 $ 3,008,374 $ -- Sale of asset .................................. (3,059,403) -- -- Reclassification to asset held for sale ........ -- -- 3,939,453 Improvements ................................... 11,638 39,391 155,921 Write-down for impairment of real estate .............................. -- -- (1,087,000) ------------ ------------ ------------ Balance at end of year ......................... $ -- $ 3,047,765 $ 3,008,374 ============ ============ ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- 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, 78 Mr. McNeil is also Chairman of the Chairman of the Board and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such an entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil is a member of the International Board of Directors of the Salk Institute, which promotes research in improvements in health care. Carole J. McNeil 55 Mrs. McNeil is Co-Chairman, with husband Co-Chairman of the Robert A. McNeil, of McNeil Investors, Board Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute. Ron K. Taylor 41 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, 1998, 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, 1998. The Partnership has no plans to pay any such remuneration to any directors or officers of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, known to the Partnership is the beneficial owner of more than 5 percent of the Partnership's securities. (B) Security ownership of Management. Affiliates of the General Partner and the officers or directors of its general partner, collectively, own 2,995,000 Units at February 1, 1999, which is 3.5% of the outstanding Units. (C) Change in control. None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of General Partner compensation other than property management fees and reimbursements of certain costs. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property and $50 per gross square foot for commercial property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases to .75% in 2000, .50% in 2001 and .25% thereafter. For the year ended December 31, 1998, the Partnership paid or accrued $530,656 of such asset management fees. The Partnership pays property management fees equal to 5% of the gross receipts of its residential property 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, 1998, the Partnership paid or accrued $701,535 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". Under the terms of its partnership agreement, the Partnership pays a disposition fee to the General Partner equal to 3% of the gross sales price for brokerage services performed in connection with the sale of the Partnership's properties. The fee is due and payable at the time the sale closes. The Partnership paid a $106,500 disposition fee to the General Partner during 1998 in connection with the sale of Edison Ford Square. 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 30, 1992. (Incorporated by reference to Current Report of the Registrant on Form 8-K dated March 30, 1992, as filed on April 10, 1992). 4.1 Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXVI, 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). 10.1 Assignment of Partnership Advances dated March 13, 1991 between Southmark Investment Group 86, Inc. and McNeil Partners, L.P. (Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1990, as filed on March 29, 1991). 10.5 Property Management Agreement dated March 30, 1992, between McNeil Real Estate Fund XXVI, L.P. and McNeil Real Estate Management, Inc.(1) 10.6 Amendment of Property Management Agreement dated March 5, 1993 by McNeil Real Estate Fund XXVI, L.P. and McNeil Real Estate Management, Inc.(1) 10.7 Promissory Note dated October 7, 1993, between McNeil Real Estate Fund XXVI, L.P. and John Hancock Mutual Life Insurance Company relating to Amargosa Creek Apartments.(2) 10.11 Promissory note payable dated December 15, 1995, between McNeil Real Estate Fund XXVI, L.P. and The Variable Annuity Life Insurance. (Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1995, as filed on March 29, 1996). 11. Statement regarding computation of Net Loss per Limited Partnership Unit (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies"). (1) 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. (2) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1993, as filed on March 31, 1994. (B) Reports on Form 8-K. There were no reports on Form 8-K filed by the Partnership during the quarter ended December 31, 1998. McNEIL REAL ESTATE FUND XXVI, 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 XXVI, L.P. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 31, 1999 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 31, 1999 By: /s/ Ron K. Taylor - -------------- -------------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 31, 1999 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-31-1998 DEC-31-1998 2,256,842 0 1,326,793 (203,657) 0 0 62,508,321 (26,899,633) 40,048,693 0 18,981,387 0 0 0 0 40,048,693 8,985,277 9,275,514 0 0 8,299,931 0 1,671,325 0 0 (695,742) 0 0 0 (695,742) 0 0
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