-----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, DnCIO7MnJhoAc0+SZhUj0SOBYF74n6oCKwfp4/VdoxXNoEJz0UUPcBO/9s9FHIHG x0I6XYoa9JJCewhtnJI90Q== 0000793307-96-000004.txt : 19960401 0000793307-96-000004.hdr.sgml : 19960401 ACCESSION NUMBER: 0000793307-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15460 FILM NUMBER: 96541927 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 ------------------------------------------- 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 700, LB70, Dallas, Texas, 75240 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (214) 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. [ ] 83,583,671 of the registrant's 86,533,671 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 38 TOTAL OF 39 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 700, 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). In 1995, 4,930 Units were relinquished leaving 86,548,983 Units outstanding as of December 31, 1995. Subsequent to year end, 15,312 Units were relinquished leaving 86,533,671 Units outstanding as of February 16, 1996. SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - -------------------------------------------------- On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General Partner nor the Original General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Original General Partner, are being sold or liquidated for the benefit of creditors. In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio. On February 14, 1991, pursuant to the asset purchase agreement as amended on that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates. 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 new General Partner. For a discussion of the methodology for calculating the asset management fee, see Item 13 Certain Relationships and Related Transactions. The proposals approved at the March 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, 1995, the Partnership owned five 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: The Partnership's anticipated plan of operations for 1996 is to preserve or increase the net operating income of its properties whenever possible, while at the same time making whatever capital expenditures are reasonable under the circumstances in order to preserve and enhance the value of the Partnership's properties. The General Partner is evaluating market and other economic conditions to determine the optimum time to commence an orderly liquidation of the Partnership's properties in accordance with the terms of the Amended Partnership Agreement. In conjunction therewith, the General Partner will continue to explore potential avenues to enhance the value of the Units in the Partnership, which may include, among other things, asset sales or refinancings of the Partnership's properties which may result in distributions to the limited partners. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 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. Other Information: The environmental laws of the Federal government and of certain state and local governments impose liability on current property owners for the clean-up of hazardous and toxic substances discharged on the property. This liability may be imposed without regard to the timing, cause or person responsible for the release of such substances onto the property. The Partnership could be subject to such liability in the event that it owns properties having such environmental problems. The Partnership has no knowledge of any pending claims or proceedings regarding such environmental problems. ITEM 2. PROPERTIES - ------ ---------- The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1995. 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 Edison Ford Square. See Item 8 - Note 5 - "Mortgage Notes Payable" and Note 7 - "Mortgage Notes Payable - Affiliate". 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 1995 Date Property Description Property Debt Property Taxes Acquired - -------- ----------- ---------- ---------- -------------- -------- Amargosa Creek Apartments Lancaster, CA 216 units $5,970,957 $4,808,711 $ 74,373 12/86 Edison Ford Square Retail Center Ft. Myers, FL 144,069 sq. ft. 3,982,203 - 70,151 7/87 Continental Plaza Office Building Scottsdale, AZ 54,538 sq. ft. 2,260,886 952,538 46,003 11/86 Northway Mall Retail Center Pittsburgh, PA 390,045 sq. ft. 24,469,175 15,000,000 277,859 6/87 Westwood Center Office Building Tampa, FL 126,107 sq. ft. 7,945,780 2,336,210 185,874 3/87 ---------- ---------- ------- $44,629,001 $23,097,459 $654,260 ========== ========== ======= - ----------------------------------------- Total: Apartments - 216 Units Retail Centers - 534,114 sq. ft. Office Buildings - 180,645 sq. ft.
The following table sets forth the properties' occupancy rate and rent per square foot for the last five years: 1995 1994 1993 1992 1991 ------- -------- ------- ------- ------- Amargosa Creek Occupancy Rate............ 92% 89% 86% 95% 78% Rent Per Square Foot...... $ 7.15 $ 7.17 $ 6.94 $ 6.87 $ 6.98 Edison Ford Square Occupancy Rate............ 46% 54% 80% 83% 78% Rent Per Square Foot...... $ 4.80 $ 5.84 $ 6.43 $ 6.28 $ 6.24 Continental Plaza Occupancy Rate............ 100% 98% 98% 72% 65% Rent Per Square Foot...... $12.03 $10.50 $10.30 $ 8.68 $ 9.51 Northway Mall Occupancy Rate............ 87% 61% 53% 78% 83% Rent Per Square Foot...... $ 8.97 $ 5.74 $ 6.59 $ 8.37 $ 8.25 Westwood Center Occupancy Rate............ 92% 90% 95% 88% 63% Rent Per Square Foot...... $11.95 $11.78 $11.58 $ 8.77 $ 7.38
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 proved to be effective, as the property ended the year at an occupancy rate of 92% which is three percent ahead of the market average. Amargosa Creek is expected to continue to demonstrate stabilized economic growth during 1996 and beyond; however, since the market is strongly affected by the aerospace industry; any layoffs or growth will 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 100% occupancy rate as compared to a market average of 90%. Rental rates in the Scottsdale market declined in the early 1990's due to an oversupply of office space. Minimal commercial growth since then is allowing the market to recover. Occupancy rates at Continental Plaza are expected to remain at current levels during 1996 and revenue growth is expected due to escalating lease rates. Edison Ford Square - ------------------ Edison Ford Square, built in 1960 and located in downtown Fort Myers, Florida, has evolved from primarily a retail center to more of a service center. This transformation occurred as a result of demographic changes that reduced major retailers' interest in this location. Formerly known as Boulevard Plaza, the property was renamed to Edison Ford Square in 1993 due to the property's proximity to the Thomas Edison and Henry Ford estates. The property is located within walking distance of this historical attraction; thus the name was changed to capitalize on the tourism market. Plans for a major renovation that would capture the architecture and style of the Edison home began in 1993; however the loss of two major anchors in 1994 made this renovation impractical. The property, located in the center of the downtown entertainment district, offers easy access, high visibility and expansive parking; however the property is dated in appearance and has a lot of deferred maintenance. Northway Mall - ------------- Northway Mall, built in the early 1960's and opened in 1962, is a multi-level facility consisting of approximately 397,000 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. In August 1994 after the construction financing was secured, the mall was renovated and had a grand opening and ribbon cutting on May 6, 1995. Management is currently searching for two tenants to occupy approximately 20,000 square feet. The occupancy rate at December 31, 1995 was 87% and is projected to reach 93% during 1996. The greater Pittsburgh area is very stable with occupancies approaching the 90% mark and shopping centers adjacent to Northway Mall are currently 92% occupied. Westwood Center - --------------- Westwood Center, an eight-story office building built in 1984, is located in the Westshore Business District of Tampa, Florida. A three year capital plan to renovate the exterior as well as the interior common areas began in 1991 and was completed in 1993. These improvements 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 92% 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. The following schedule shows lease expirations for each of the Partnership's commercial properties for 1996 through 2005: Number of Annual % of Gross Expirations Square Feet Rent Annual Rent ----------- ----------- --------- ----------- Continental Plaza - ----------------- 1996 6 7,668 $ 94,242 15% 1997 8 11,549 151,390 23% 1998 8 14,570 178,532 27% 1999 2 3,074 38,929 6% 2000 4 17,677 191,787 29% 2001-2005 - - - -
Number of Annual % of Gross Expirations Square Feet Rent Annual Rent ----------- ----------- --------- ----------- Edison Ford Square - ------------------ 1996 7 19,519 $ 138,789 15% 1997 2 1,979 13,081 1% 1998 3 3,268 27,363 3% 1999 10 34,443 201,862 22% 2000 3 8,379 49,731 6% 2001 - - - - 2002 1 7,132 53,847 6% 2003 - - - - 2004 2 5,028 54,655 6% 2005 - - - - Northway Mall - ------------- 1996 12 39,559 $ 327,301 9% 1997 3 4,538 47,491 1% 1998 4 12,263 115,251 3% 1999 7 84,156 418,559 11% 2000 7 9,096 137,167 4% 2001 3 3,632 67,360 2% 2002 4 13,589 191,532 5% 2003 - - - - 2004 1 69,639 405,299 11% 2005 3 39,304 436,390 12% Westwood Center - --------------- 1996 10 18,992 $ 254,916 15% 1997 10 53,407 693,234 42% 1998 2 2,392 32,269 2% 1999 8 32,981 454,533 27% 2000 3 4,110 55,486 3% 2001-2005 - - - -
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 $ 71,424 2000 General Business 10,433 104,330 2000 Edison Ford Square - ------------------ None Northway Mall - ------------- Department Store 73,500 $275,625 1999 Department Store 69,639 405,299 2004 Westwood Center - --------------- General Office 13,009 $164,121 1997 General Office 17,225 232,538 1997 General Office 14,640 209,352 1999
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: 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 (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 Partnership based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 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. See also Item 8 - Note 9 - "Gain on Legal Settlement". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND - ------ ------------------------------------------------------------ RELATED SECURITY HOLDER MATTERS ------------------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. (B) Title of Class Number of Record Unit Holders -------------- ----------------------------- Limited partnership units 7,156 as of February 16, 1996 (C) No distributions were made to the partners in 1995 or 1994 and none are anticipated in 1996. 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 1995 1994 1993 1992 1991 - ------------------ ------------ ------------ ------------- ------------ ------------ Rental revenue............... $ 7,568,361 $ 6,385,998 $ 6,708,736 $ 6,942,367 $ 6,773,720 Write-down for permanent impairment of real estate. (2,200,000) - (7,239,353) (4,602,377) (620,000) Loss before extraordinary items..................... (5,063,046) (1,938,063) (8,843,767) (6,795,983) (4,563,202) Extraordinary items.......... - - - 91,952 1,377,921 Net loss..................... (5,063,046) (1,938,063) (8,843,767) (6,704,031) (3,185,281) Loss per thousand limited partnership units: Loss before extraordinary items..... $ (57.91) $ (22.17) $ (101.15) $ (77.73) $ (52.19) Extraordinary items....... - - - 1.05 15.76 ------------ ------------ ------------ ------------ ----------- Net loss.................. $ (57.91) $ (22.17) $ (101.15) $ (76.68) $ (36.43) ============ ============ ============ ============ =========== Distributions per thousand limited partnership units..................... $ - $ - $ - $ - $ 5.00 ============ ============ ============ ============ =========== As of December 31, ------------------------------------------------------------------------- Balance Sheets 1995 1994 1993 1992 1991 - -------------- ---------- ---------- ---------- ---------- ---------- Real estate, net $44,629,001 $41,738,690 $39,917,222 $48,201,116 $54,925,023 Total assets 54,217,223 45,208,188 45,097,635 49,921,437 56,677,241 Mortgage notes payable 23,097,459 9,350,045 8,343,376 4,871,326 4,906,644 Partners' equity 27,338,809 32,401,855 34,339,918 43,183,685 49,887,716
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. In 1993, the Partnership obtained refinancing on Amargosa Creek Apartments, financing on Westwood Center and also obtained financing on Continental Plaza from an affiliate of the General Partner. In 1994, the Partnership obtained a construction loan to finance the major capital improvement program at Northway Mall. The capital improvement program at Northway Mall was completed during 1995 and the property obtained permanent financing in December 1995, as discussed below. Occupancy rates at Continental Plaza increased in 1993, but rental rates in the Scottsdale, Arizona market remained depressed. During 1993, the market stabilized, but did so at a level which would have made it difficult for the Partnership to ultimately realize its then carrying value over the next five to seven years. Accordingly, the Partnership recorded a $1,239,353 write-down for permanent impairment during the second quarter of 1993. Edison Ford Square is a 141,000 sq. ft. retail center in Ft. Myers, Florida that has evolved from primarily retail, to more of a service center use It was 46%, 54% and 80% occupied at December 31, 1995, 1994 and 1993. The downtown area, where the shopping center is located, has experienced decay due to a shift in demographics. The center is within walking distance of the Thomas Edison and Henry Ford estates, significant historical attractions in the area. Plans for a major renovation that would have captured the architecture and style of the Edison home began in 1993. However, with the loss of two major anchors in 1994, it was not viable to continue this project. During 1995, a full, in-depth market analysis was performed to determine the center's highest and best use. It was determined that the only viable alternative would be a complete redevelopment and renovation of the center; however, the Partnership has decided not to pursue this alternative because of the inherent risks and economic uncertainties. An unsolicited offer from an unaffiliated third party to purchase the center was received during 1995, which approximated the value of the land. These facts have led to the conclusion that a permanent impairment has been sustained. Accordingly, the Partnership recorded a write-down for permanent impairment of $2.2 million against Edison Ford's building and improvements during the fourth quarter of 1995, to record the property at its estimated net realizable value, which approximates the value of the land. The Partnership has been undergoing a major capital improvements program to convert Northway Mall into a value oriented retail shopping center specializing in brand name merchandise at less-than-retail prices since 1994. In 1993, mortgage loans totaling $3.4 million on Westwood Center and Continental Plaza, previously unencumbered assets, were obtained. The proceeds from these loans were used to partially finance the capital improvement program at Northway Mall. In the third quarter of 1994, management finalized a construction loan on Northway Mall totaling $11 million to finance the balance of the capital improvement program. The mortgage note allowed for monthly withdrawals of principal in the amount of approved invoices. The principal amount was due August 1996 and accrued interest at a variable rate. The interest rate at December 17, 1995 (the date the mortgage note was repaid) was 9.75%. Interest payments were due from the Partnership upon repayment of the note. During 1995, $91,000 of this interest was capitalized as an addition to real estate investments, which is the portion related to the vacant square footage of Northway Mall that was under construction during the year. The Partnership incurred loan costs of $214,218 in 1994 related to the construction mortgage note financing, of which $70,000 were capitalized in 1995 as an addition to real estate investments to be depreciated over the life of the related asset. The remaining loan costs of $144,218 were amortized over the life of the construction mortgage note. The Partnership was provided cash flow of $1,121,473 during 1994 due to the construction mortgage note as discussed above. Management obtained permanent financing for the capital improvements program in December 1995. The new mortgage note, in the amount of $15 million, bears an interest rate of 7.5% with monthly principal and interest payments of $110,849 and matures in December 2002. The proceeds from the refinancing were used to pay off the construction mortgage note as well as the affiliate mortgage note discussed below. The renovations were completed during 1995. As a part of the renovations, assets valued at approximately $1,248,000 were demolished or removed and written off in the fourth quarter of 1995. Four anchor tenants and several smaller tenants have moved in during 1995 due to the completion of the renovation. The decision to renovate the mall was made after exhaustive analyses and studies conducted by management to determine future cash flows of the mall based upon stabilized leases. Accordingly, based upon the level of rental revenues that would be generated from these leases, management concluded at that time that the Partnership could not ultimately realize its then carrying value over the next five to seven years. Accordingly, a write-down for permanent impairment in the amount of $6 million was recorded during 1993 to record the asset to its net realizable value. RESULTS OF OPERATIONS - --------------------- 1995 compared to 1994 Revenue: Partnership revenues increased by $1,271,972 or 20% in 1995 as compared to 1994. Rental revenue and interest income increased by $1,182,363 and $29,735, respectively. Rental revenues for 1995 were $7,568,361 as compared to $6,385,998 for 1994. This increase is primarily due to the increase in occupancy rates at four of the five Partnership's properties, with the largest increase occurring at Northway Mall. Interest income increased $29,735 for 1995 as compared to 1994 primarily due to the Partnership's increased cash balance. The proceeds from the Northway Mall refinancing of approximately $5,800,000 were deposited in December 1995 resulting in an increase of approximately $11,000 of interest income for December 1995. In 1995 the Partnership received cash and common and preferred stock in the reorganized Southmark in settlement of its bankruptcy claims against Southmark. The Partnership recognized a $59,874 gain during 1995 as a result of this settlement. No such gain was recognized in 1994. Expenses: Total expenses increased $4,396,955 or 52% in 1995 as compared 1994 primarily due to an increase in interest, depreciation and amortization expense, the loss on demolition and replacement of assets, and the write-down for permanent impairment on Edison Ford Square, as discussed below. Interest expense increased $469,121 or 69% in 1995 as compared 1994 due to the construction financing at Northway Mall. Interest expense - affiliates increased $26,553 or 28% in 1995 as compared to 1994 due to a higher interest rate on the affiliate mortgage. Depreciation and amortization increased $241,374 or 10% in 1995 as compared to 1994 due to the renovation at Northway Mall. Personnel expenses increased $66,274 or 9% in 1995 as compared to 1994, due to an increase in personnel at Northway Mall because of the increased occupancy, as well as higher compensation for property personnel at the Partnership's remaining properties. Property management fees - affiliates increased $51,890 or 13% in 1995 as compared to 1994. The increased occupancy at Northway Mall led to an increase in tenant receipts on which the management fee is based. Bad debt expense decreased approximately $122,000 in 1995 as compared to 1994 at Westwood Center, Edison Ford Square, and Northway Mall due to 1994's tenant evictions and relocations. Other property operating expenses increased $51,470 or 9% in 1995 as compared to 1994 due to an increase in marketing and leasing expenses at Northway Mall. General and administrative expenses decreased $48,079 or 43% in 1995. During 1994, Westwood Center incurred $22,500 in professional fees for an appraisal; no such fees were incurred during 1995. The decrease was also due to decreased expenses relating to legal proceedings against an unaffiliated management company for mismanagement and other causes of action at Northway Mall. General and administrative - affiliates expenses increased $109,627 or 15% in 1995 as compared to 1994. There was an increase of $54,364 in asset management fees in 1995 due to the increase in the tangible assets of the Partnership, on which the fee is based. There was an increase of $55,263 in reimbursement to affiliates due to an increase in services provided in connection with the Northway Mall renovation. Edison Ford Square is a 141,000 sq. ft. retail center in Ft. Myers, Florida that has evolved from primarily retail, to more of a service center use It was 46%, 54% and 80% occupied at December 31, 1995, 1994 and 1993. The downtown area, where the shopping center is located, has experienced decay due to a shift in demographics. The center is within walking distance of the Thomas Edison and Henry Ford estates, significant historical attractions in the area. Plans for a major renovation that would have captured the architecture and style of the Edison home began in 1993. However, with the loss of two major anchors in 1994, it was not viable to continue this project. During 1995, a full, in-depth market analysis was performed to determine the center's highest and best use. It was determined that the only viable alternative would be a complete redevelopment and renovation of the center; however, the Partnership has decided not to pursue this alternative because of the inherent risks and economic uncertainties. An unsolicited offer from an unaffiliated third party to purchase the center was received during 1995, which approximated the value of the land. These facts have led to the conclusion that a permanent impairment has been sustained. Accordingly, the Partnership recorded a write-down for permanent impairment of $2.2 million against Edison Ford's building and improvements during the fourth quarter of 1995, to record the property at its estimated net realizable value, which approximates the value of the land. The Partnership recognized a loss on Northway Mall renovation of $1,247,940 in 1995. This loss is due to the demolition or removal of assets that were previously capitalized. 1994 compared to 1993 Revenue: Total Partnership revenues decreased by $392,393 in 1994 as compared to 1993. Rental revenue decreased $322,738 primarily due to decreased rental revenues at Northway Mall. Due to the capital improvement program, portions of the mall were unavailable for leasing in 1994. Rental revenues at Edison Ford Square also decreased during 1994 due to the loss of two anchor tenants in December 1993. Interest income increased $50,059 in 1994 as compared to 1993 due to higher cash balances from mortgage financings. In 1992, an anchor tenant at Northway Mall filed for bankruptcy protection and management deemed the amounts due from the tenant as uncollectible. During 1993, the Partnership received $119,714 of claims settlement from the tenant which were recorded as other income. Expenses: Total expenses decreased $7,298,097 in 1994 as compared to 1993. The 1993 expenses include a $7,239,353 write-down for permanent impairment of real estate on Northway Mall and Continental Plaza. Interest expense increased $146,568 in 1994 as compared to 1993. In October 1993, the Partnership obtained a $2.5 million loan secured by Westwood Center. The increase in interest expense from this loan was slightly offset by a decrease in interest expense at Amargosa Creek Apartments, due to the refinancing in October 1993 at a lower interest rate. Interest expense - affiliates increased $40,939 in 1994 as compared to 1993. The Partnership borrowed $952,538 from McNeil Real Estate Fund XXVII, L.P., an affiliate of the General Partner, during 1993. Property tax expense decreased $110,142 in 1994 as compared to 1993. During 1994, Amargosa Creek and Continental Plaza received tax refunds of $88,849 and $26,113, respectively, due to successful tax appeals for a reduction in taxable basis. The remaining properties' tax expenses were comparable to 1993. Personnel expenses increased $65,687 during 1994 as compared to 1993. Northway Mall had an increase in salaries expense of approximately $32,000 during 1994 due to the addition of personnel necessary to oversee the renovation. The remainder of the increase is attributable to higher employee and workers' compensation insurance expense due to higher rates. General and administrative expense decreased $82,416 in 1994 as compared to 1993. Prior to December 1991, Northway Mall had been managed by an unaffiliated management company. The Partnership instituted legal proceedings against the management company for mismanagement and other causes of action. The legal proceedings were stopped due to the bankruptcy filing by the management company in August 1993. Additionally, during 1993, the property required legal representation to amend tenant leases for relocations necessary for the capital renovations project. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Partnership generated $1,472,199 of cash through operating activities in 1995 as compared to $966,845 in 1994 and $1,144,158 in 1993. The change in cash provided by operations in 1995 as compared to 1994 is primarily due to an increase in tenant receipts and a decrease in property taxes paid and a gain on the settlement of bankruptcy claims against Southmark as discussed in Item 1 - Southmark Bankruptcy and Change in General Partner. These cash changes were offset by an increase in interest paid. The increased occupancy at Northway Mall and Continental Plaza which was substantially responsible for the increase in tenant receipts. The decrease in property tax payments is primarily due to a change in the due date of the tax payments for Edison Ford Square. The 1993 taxes were paid in February 1994 and the 1994 taxes were paid in December 1994. The decrease in cash from operations in 1994 as compared to 1993 was primarily due to the decrease of the outstanding accounts payable balance. During 1994, the Partnership was able to reduce the payables due to the improved cash position of the Partnership. Additionally, the Partnership incurred an increase in interest paid due to the new financings during 1993. These increases in cash used in operations were partially offset by a decrease in cash paid to affiliates due to the deferral of certain affiliate payables. Expenditures related to additions to real estate in 1995 utilized $9,732,038 of Partnership cash flows as compared to $3,551,769 during 1994 and $1,447,238 during 1993. The increase in the additions to real estate is primarily due to the capital improvement program at Northway Mall. In 1993, mortgage loans totaling $3.4 million on Westwood Center and Continental Plaza, previously unencumbered assets, were obtained. The proceeds from these loans were used to partially finance the capital improvement program at Northway Mall. In the third quarter of 1994, management finalized a construction loan on Northway Mall totaling $11 million to finance the balance for the capital improvement program. The mortgage note allowed for monthly withdrawals of principal in the amount of approved invoices. The principal amount was due August 1996 and accrued interest at a variable rate. The interest rate a December 17, 1995 (the date the mortgage note was repaid) was 9.75%. Interest payments were due from the Partnership upon repayment of the note. During 1995, $91,000 of this interest was capitalized as an addition to real estate investments, which is the portion related to the vacant square footage of Northway Mall that was under construction during the year. The Partnership incurred loan costs of $214,218 in 1994 related to the construction mortgage note financing, of which $70,000 were capitalized in 1995 as an addition to real estate investments to be depreciated over the life of the related asset. The remaining loan costs of $144,218 were amortized over the life of the construction mortgage note. The Partnership was provided cash flow of $1,121,473 during 1994 due to the construction mortgage note as discussed above. Management obtained permanent financing for the capital improvements program in December 1995. The new mortgage note, in the amount of $15 million, bears an interest rate of 7.5% with monthly principal and interest payments of $110,849 and matures in December 2002. The proceeds from the refinancing were used to pay off the construction mortgage note as well as the affiliate mortgage note discussed below. The renovations were completed during 1995. As a part of the renovation, assets valued at approximately $1,248,000 were demolished or removed and written off in the fourth quarter of 1995. Four anchor tenants and several smaller tenants have moved in during 1995 due to the completion of the renovation. In March 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII, L.P. which allows the Partnership to borrow funds totaling $1,536,000. Of this amount available, $952,538 was borrowed during 1993. The note is secured by Continental Plaza and requires monthly interest payments only equal to the prime lending rate the Bank of America plus 2 1/2%, with the principal balance due March in 1996. The mortgage note was repaid in January 1996. In October 1993, the Partnership refinanced the mortgage note secured by Amargosa Creek Apartments that had a principal balance of $4,839,966 and an interest rate of 9.875% with monthly payments of $43,458. The new mortgage loan, in the amount of $4,900,000, bears an interest rate of 7.875% with monthly payments of $35,528 and will mature in December 1998. In October 1993, the Partnership also obtained financing for Westwood Center, a previously unencumbered property. The new mortgage loan, in the amount of $2.5 million, bears an interest rate of 8% with monthly payments of $22,457 and will mature in December 1998. At December 31, 1995, the Partnership held cash and cash equivalents of $6,761,516. Short-term liquidity: The General Partner has established a revolving credit facility not to exceed $5,000,000 in the aggregate which is available on a "first-come, first-served" basis to the Partnership and other affiliated partnerships, if certain conditions are met. Borrowings under the facility may be used to fund deferred maintenance, refinancing obligations and working capital needs. There is no assurance that the Partnership will receive any funds under the facility because no amounts are reserved for any particular partnership. As of December 31, 1995, $2,662,819 remained available for borrowing under the facility; however, additional funds could become available as other partnerships repay existing borrowings. This commitment will terminate on March 30, 1997. The General Partner has, at its discretion, advanced funds to the Partnership. As discussed below, the Partnership received such advances that were used to fund working capital requirements. 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 from affiliates at December 31, 1995 and 1994 consist of the following: 1995 1994 ----------- ----------- Advances from General Partner $ 130,518 $ 130,518 Accrued interest payable 37,812 24,984 ------------ ----------- $ 168,330 $ 155,502 ============ ===========
The advances are unsecured, due on demand and accrue interest at the prime lending rate of Bank of America plus 1%. The prime lending rate was 8.5% at December 31, 1995 and 1994. 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 $1,941,000 for necessary capital improvements for all properties in 1996. Long-term liquidity: For the long term, property operations will remain the primary source of funds. While the present outlook for the Partnership's liquidity is favorable, market conditions may change and property operations can 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. All or a combination of these steps may be inadequate or unfeasible in resolving such potential working capital deficiencies. Distributions: To maintain adequate cash balances of the Partnership, distributions to the limited partners were suspended in 1991. 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. 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, 1995 and 1994................................... 17 Statements of Operations for each of the three years in the period ended December 31, 1995..................................................... 18 Statements of Partners' Equity (Deficit) for each of the three years in the period ended December 31, 1995.......................................... 19 Statements of Cash Flows for each of the three years in the period ended December 31, 1995..................................................... 20 Notes to Financial Statements.................................................. 22 Financial Statement Schedule - Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization............................................ 31
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of McNeil Real Estate Fund 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, 1995 and 1994, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, 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 13, 1996 McNEIL REAL ESTATE FUND XXVI, L.P. BALANCE SHEETS December 31, ------------------------------ 1995 1994 ---------- ---------- ASSETS - ------ Real estate investments: Land..................................................... $ 9,189,092 $ 9,189,092 Buildings and improvements............................... 56,695,050 51,745,169 ---------- ---------- 65,884,142 60,934,261 Less: Accumulated depreciation and amortization......... (21,255,141) (19,195,571) ---------- ---------- 44,629,001 41,738,690 Cash and cash equivalents................................... 6,761,516 1,473,850 Cash segregated for security deposits....................... 202,396 233,759 Accounts receivable, net of allowance for doubtful accounts of $596,156 and $864,014 at December 31, 1995 and 1994, respectively................. 1,096,937 789,641 Prepaid commissions......................................... 379,444 404,543 Prepaid expenses and other assets........................... 716,091 179,445 Deferred borrowing costs, net of accumulated amortization of $125,641 and $101,065 at December 31, 1995 and 1994, respectively................. 431,838 388,260 ---------- ---------- $54,217,223 $45,208,188 ========== ========== LIABILITIES AND PARTNERS' EQUITY (DEFICIT) - ----------------------------------------- Mortgage notes payable...................................... $22,144,921 $ 8,397,507 Mortgage note payable - affiliate........................... 952,538 952,538 Accounts payable and accrued expenses....................... 358,856 171,067 Accounts payable - Northway Mall renovation ................ - 711,056 Accrued property taxes...................................... 59,864 35,325 Payable to affiliates - General Partner..................... 2,983,409 2,151,614 Advances from affiliates - General Partner.................. 168,330 155,502 Security deposits and deferred rental income................ 210,496 231,724 ---------- ---------- 26,878,414 12,806,333 ---------- ---------- Partners' equity (deficit): Limited partners - 90,000,000 limited partnership units authorized; 86,548,983 and 86,553,913 limited partnership units issued and outstanding at December 31, 1995 and 1994, respectively................ 27,716,222 32,728,638 General Partner.......................................... (377,413) (326,783) ---------- ---------- 27,338,809 32,401,855 ---------- ---------- $54,217,223 $45,208,188 ========== ==========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. STATEMENTS OF OPERATIONS For the Years Ended December 31, ------------------------------------------------ 1995 1994 1993 ---------- --------- --------- Revenue: Rental revenue.......................... $7,568,361 $6,385,998 $6,708,736 Interest ............................... 98,207 68,472 18,413 Other income............................ - - 119,714 Gain on legal settlement................ 59,874 - - --------- --------- --------- Total revenue......................... 7,726,442 6,454,470 6,846,863 --------- --------- --------- Expenses: Interest................................ 1,148,546 679,425 532,857 Interest - affiliates................... 120,765 94,212 53,273 Depreciation and amortization........... 2,682,731 2,441,357 2,491,779 Property taxes.......................... 654,260 614,985 725,127 Bad debt................................ (13,025) 109,404 109,284 Personnel expenses...................... 781,301 715,027 649,340 Utilities............................... 1,060,645 1,003,866 1,023,452 Repairs and maintenance................. 962,791 955,631 975,508 Property management fees - affiliates............................ 437,006 385,116 373,823 Other property operating expenses....... 623,705 572,235 621,672 General and administrative.............. 62,701 110,780 193,196 General and administrative - affiliates............................ 820,122 710,495 701,966 Write-down for permanent impairment of real estate............. 2,200,000 - 7,239,353 Loss on demolition and replacement of assets............................. 1,247,940 - - ---------- ---------- ---------- Total expenses........................ 12,789,488 8,392,533 15,690,630 ---------- ---------- ---------- Net loss................................... $(5,063,046) $(1,938,063) $(8,843,767) ========== ========== ========== Net loss allocable to limited partners................................ $(5,012,416) $(1,918,682) $(8,755,329) Net loss allocable to General Partner................................. (50,630) (19,381) (88,438) ---------- ---------- ---------- Net loss................................... $(5,063,046) $(1,938,063) $(8,843,767) ========== ========== ========== Net loss per thousand limited partnership units....................... $ (57.91) $ (22.17) $ (101.15) ========== ========== ==========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. STATEMENTS OF PARTNERS' EQUITY (DEFICIT) For the Years Ended December 31, 1995, 1994 and 1993 Total' General Limited Partners Partner Partners Equity ---------- ---------- ---------- Balance at December 31, 1992.............. $ (218,964) $43,402,649 $43,183,685 Net loss.................................. (88,438) (8,755,329) (8,843,767) ---------- ---------- ---------- Balance at December 31, 1993.............. (307,402) 34,647,320 34,339,918 Net loss.................................. (19,381) (1,918,682) (1,938,063) ---------- ---------- ---------- Balance at December 31, 1994.............. (326,783) 32,728,638 32,401,855 Net loss.................................. (50,630) (5,012,416) (5,063,046) ---------- ---------- ---------- Balance at December 31, 1995.............. $ (377,413) $27,716,222 $27,338,809 ========== ========== ==========
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, ------------------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Cash received from tenants.............. $ 7,284,225 $ 6,369,873 $ 6,327,093 Cash received from legal settlement..... 59,874 - - Cash paid to suppliers.................. (3,729,096) (3,625,342) (3,319,961) Cash paid to affiliates................. (425,333) (408,803) (562,050) Interest received....................... 98,207 68,472 18,413 Interest paid........................... (1,008,659) (581,020) (485,764) Interest paid to affiliates............. (107,937) (98,941) (29,223) Property taxes paid..................... (699,082) (757,394) (804,350) ---------- ---------- ---------- Net cash provided by operating activities.................. 1,472,199 966,845 1,144,158 ---------- ---------- ---------- Net cash used in investing activities: Additions to real estate investments........................... (9,732,038) (3,551,769) (1,447,238) ---------- ---------- ---------- Cash flows from financing activities: Principal payments on mortgage notes payable......................... (131,113) (114,804) (40,522) Proceeds from mortgage notes refinancing........................... 13,878,527 1,121,473 2,560,034 Proceeds from mortgage note ............ payable - affiliate................... - - 952,538 Deferred borrowing costs paid........... (199,909) (214,218) (284,762) Advances from affiliates - General Partner............................... - - 12,570 ---------- ---------- ---------- Net cash provided by financing activities.................. 13,547,505 792,451 3,199,858 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents........................ 5,287,666 (1,792,473) 2,896,778 Cash and cash equivalents at beginning of year..................... 1,473,850 3,266,323 369,545 ---------- ---------- ---------- Cash and cash equivalents at end of year............................... $ 6,761,516 $ 1,473,850 $ 3,266,323 ========== ========== ==========
See discussion of noncash investing and financing activities in Note 4 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 Operating Activities For the Years Ended December 31, ----------------------------------------------- 1995 1994 1993 ---------- ---------- ---------- Net loss................................... $(5,063,046) $(1,938,063) $(8,843,767) ---------- ---------- ---------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........... 2,682,731 2,441,357 2,491,779 Amortization of deferred borrowing costs................................. 156,331 99,166 38,418 Allowance for doubtful accounts......... (267,858) 28,391 (141,593) Interest added to mortgage note payable - affiliate, net of payments.. - - 15,353 Interest added to advances from affiliates - General Partner.......... 12,828 10,624 8,697 Write-down for permanent impairment of real estate............. 2,200,000 - 7,239,353 Loss on demolition and replacement of assets............................ 1,247,940 - - Changes in assets and liabilities: Cash segregated for security deposits............................ 31,363 (14,079) (40,440) Accounts receivable................... (39,438) 72,453 (106,654) Prepaid expenses and other assets.............................. (536,646) 12,563 (28,841) Prepaid commissions................... 25,099 (65,834) 558 Accounts payable and accrued expenses............................ 187,789 (215,007) 4,365 Accrued property taxes................ 24,539 (142,695) (46,988) Payable to affiliates - General Partner............................. 831,795 671,455 513,739 Security deposits and deferred rental income....................... (21,228) 6,514 40,179 --------- --------- --------- Total adjustments................. 6,535,245 2,904,908 9,987,925 --------- --------- --------- Net cash provided by operating activities.................. $1,472,199 $ 966,845 $1,144,158 ========= ========= =========
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVI, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 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. 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 Original General Partner was purchased from Southmark by McNeil on March 13, 1991. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 700, 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, 1995, the Partnership owned five income-producing properties as described in Note 4 - Real Estate Investments. 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. Real Estate Investments - ----------------------- Real estate investments are generally stated at the lower of cost or net realizable value. Real estate investments are monitored on an ongoing basis to determine if the property has sustained a permanent impairment in value. At such time, a write-down is recorded to reduce the basis of the property to its net realizable value. A permanent impairment is determined to have occurred when a decline in property value is considered to be other than temporary based upon management's expectations with respect to projected cash flows and prevailing economic conditions. Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement is effective for financial statements for fiscal years beginning after December 15, 1995. The Partnership has not adopted the principles of this statement within the accompanying financial statements; however, it is not anticipated that adoption will have a material effect on the carrying value of the Partnership's long-lived assets. 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. 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 1995, 1994 and 1993 have been made in accordance with these provisions. Distributions - ------------- At the discretion of the General Partner, distributable cash (other than cash from sales or refinancing) shall be distributed 100% to the limited partners, with such distributions first paying the limited partners' Priority Return and then to all limited partners on a per limited partnership unit ("Unit") basis. Also at the discretion of the General Partner, the limited partners will receive 100% of distributable cash from sales or refinancing with such distributions first paying the limited partners Priority Return; 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 Returns represent a 8 1/4% cumulative return on their Adjusted Invested Capital balance, as defined. The limited partners' Additional Priority Returns represent a 1% cumulative return on their Adjusted Invested Capital balance, as defined. In connection with a Terminating Disposition, as defined, cash from sales or refinancing and any remaining reserves shall be allocated among, and distributed to, the General Partner and limited partners in proportion to, and to the extent of, their positive capital account balances after the net income has been allocated pursuant to the above. There were no distributions to partners in 1995, 1994 and 1993. 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 86,549 thousand Units outstanding in 1995, and 86,554 thousand Units outstanding in 1994 and 1993. Reclassification - ---------------- Certain reclassifications have been made to prior period amounts to conform with the current year presentation. 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 reimbursed an affiliate of the General Partner for costs incurred in connection with refinancing and modification of mortgage notes payable in 1993. These costs were recorded as prepaid expense until the refinancing or modification occurred, at which time the costs were capitalized and are amortized over the remaining term of the related mortgage. If these refinancings or modifications did not occur, these costs were expensed. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. Under the terms of the Amended Partnership Agreement, the Partnership is paying an asset management fee, retroactive to March 13, 1991, which is payable 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 subsequent to 1999. Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows: For the Years Ended December 31, ----------------------------------------------- 1995 1994 1993 --------- --------- --------- Charged to prepaid expenses and other assets: Deferred borrowing costs................ $ - $ - $ 9,654 Charged to deferred borrowing costs........ - - 27,028 Property management fees - affiliates...... 437,006 385,116 373,823 Charged to interest - affiliates: Interest on mortgage note payable - affiliate............................. 107,937 83,588 44,576 Interest on advances from affiliates - General Partner.......... 12,828 10,624 8,697 Charged to general and administrative - affiliates: Partnership administration.............. 300,846 245,583 237,431 Asset management fee.................... 519,276 464,912 464,535 --------- --------- --------- $1,377,893 $1,189,823 $1,165,744 ========= ========= =========
The payable to affiliates - General Partner at December 31, 1995 and 1994 consisted primarily of unpaid property management fees, Partnership general and administrative expenses and asset management fees and is due and payable from current operations. The General Partner has, at its discretion, advanced funds to the Partnership. As discussed below, the Partnership received such advances for the purpose of funding working capital requirements. 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 from affiliates at December 31, 1995 and 1994 consist of the following: 1995 1994 ----------- ----------- Advances from General Partner $ 130,518 $ 130,518 Accrued interest payable 37,812 24,984 ------------ ----------- $ 168,330 $ 155,502 ============ ===========
The advances are unsecured, due on demand and accrue interest at the prime lending rate of the Bank of America plus 1%. The prime lending rate was 8.5% at December 31, 1995 and 1994. In March 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII, L.P., an affiliate of the General Partner, which allows the Partnership to borrow funds totaling $1,536,000. Of this amount available, $952,538 was borrowed in 1993. The principal balance is due March 1, 1996. On January 8, 1996 the Partnership repaid the mortgage loan. NOTE 3 - TAXABLE INCOME - ------ -------------- 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 $39,813,538 in 1995, $35,628,694 in 1994 and $34,539,956 in 1993. NOTE 4 - REAL ESTATE INVESTMENTS - ------ ----------------------- The basis and accumulated depreciation and amortization of the Partnership's real estate investments at December 31, 1995 and 1994, are set forth in the following tables: Accumulated Buildings and Depreciation Net Book 1995 Land Improvements & Amortization Value ---- ---------- --------- ---------- --------- Amargosa Creek Lancaster, CA $ 794,635 $8,517,021 $ (3,340,699) $5,970,957 Edison Ford Square Ft. Myers, FL 2,438,636 3,786,804 (2,243,237) 3,982,203 Continental Plaza Scottsdale, AZ 1,975,324 1,955,198 (1,669,636) 2,260,886 Northway Mall Pittsburgh, PA 2,965,329 29,897,021 (8,393,175) 24,469,175 Westwood Center Tampa, FL 1,015,168 12,539,006 (5,608,394) 7,945,780 --------- ---------- ---------- ---------- $9,189,092 $56,695,050 $(21,255,141) $44,629,001 ========= ========== =========== ========== Accumulated Buildings and Depreciation Net Book 1994 Land Improvements & Amortization Value ---- ---------- ---------- ----------- ---------- Amargosa Creek $ 794,635 $8,439,269 $ (2,968,399) $ 6,265,505 Edison Ford Square 2,438,636 5,858,285 (1,951,908) 6,345,013 Continental Plaza 1,975,324 1,811,174 (1,554,713) 2,231,785 Northway Mall 2,965,329 23,603,663 (7,758,265) 18,810,727 Westwood Center 1,015,168 12,032,778 (4,962,286) 8,085,660 --------- ---------- ----------- ---------- $9,189,092 $51,745,169 $(19,195,571) $41,738,690 ========= ========== =========== ==========
Edison Ford Square is a 141,000 sq. ft. retail center in Ft. Myers, Florida that has evolved from primarily retail, to more of a service center use It was 46%, 54% and 80% occupied at December 31, 1995, 1994 and 1993. The downtown area, where the shopping center is located, has experienced decay due to a shift in demographics. The center is within walking distance of the Thomas Edison and Henry Ford estates, significant historical attractions in the area. Plans for a major renovation that would have captured the architecture and style of the Edison home began in 1993. However, with the loss of two major anchors in 1994, it was not viable to continue this project. During 1995, a full, in-depth market analysis was performed to determine the center's highest and best use. It was determined that the only viable alternative would be a complete redevelopment and renovation of the center; however, the Partnership has decided not to pursue this alternative because of the inherent risks and economic uncertainties. An unsolicited offer from an unaffiliated third party to purchase the center was received during 1995, which approximated the value of the land. These facts have led to the conclusion that a permanent impairment has been sustained. Accordingly, the Partnership recorded a write-down for permanent impairment of $2.2 million against Edison Ford's building and improvements during the fourth quarter of 1995, to record the property at its estimated net realizable value, which approximates the value of the land. Occupancy rates at Continental Plaza increased in 1993, but rental rates in the Scottsdale, Arizona market remained depressed. During 1993, the market stabilized, but did so at a level which would have made it difficult for the Partnership to ultimately realize its then carrying value over the next five to seven years. Accordingly, the Partnership recorded a $1,239,353 write-down for permanent impairment during the second quarter of 1993. In 1993, mortgage loans totaling $3.4 million on Westwood Center and Continental Plaza, previously unencumbered assets, were obtained. The proceeds from these loans were used to partially finance the capital improvement program at Northway Mall. In the third quarter of 1994, management finalized a construction loan on Northway Mall totaling $11 million to finance the balance for the capital improvement program. The mortgage note allowed for monthly withdrawals of principal in the amount of approved invoices. The principal amount was due August 1996 and accrued interest at a variable rate. The interest rate a December 17, 1995 (the date the mortgage note was repaid) was 9.75%. Interest payments were due from the Partnership upon repayment of the note. During 1995, $91,000 of this interest was capitalized as an addition to real estate investments, which is the portion related to the vacant square footage of Northway Mall that was under construction during the year. The Partnership incurred loan costs of $214,218 in 1994 related to the construction mortgage note financing, of which $70,000 was capitalized in 1995 as an addition to real estate investments to be depreciated over the life of the related asset. The remaining loan costs of $144,218 were amortized over the life of the construction mortgage note. The Partnership was provided cash flow of $1,121,473 during 1994 due to the construction mortgage note as discussed above. Management obtained permanent financing for the capital improvements program in December 1995. The new mortgage note, in the amount of $15 million, bears an interest rate of 7.5% with monthly principal and interest payments of $110,849 and matures in December 2002. The proceeds from the refinancing were used to pay off the construction mortgage note as well as the affiliate mortgage note discussed below. The renovations were completed during 1995. As a part of the renovation, assets valued at approximately $1,248,000 were demolished or removed and written off in the fourth quarter of 1995. Four anchor tenants and several smaller tenants have moved in during 1995 due to the completion of the renovation. The decision to renovate the mall was made after exhaustive analyses and studies conducted by management to determine future cash flows of the mall based upon stabilized leases. Accordingly, based upon the level of rental revenues that would be generated from these leases, management concluded that at the time that the Partnership could not ultimately realize its then carrying value over the next five to seven years. Accordingly, a write-down for permanent impairment in the amount of $6 million was recorded during 1993 to record the asset to its net realizable value. The Partnership leases its commercial properties under non-cancelable operating leases. Future minimum rents received as of Decemer 31, 1995 are as follows: 1996.................................... $5,403,000 1997.................................... 4,686,000 1998.................................... 3,925,000 1999.................................... 3,059,000 2000.................................... 2,502,000 Thereafter.............................. 13,795,000 ---------- Total $33,370,000 ==========
Future minimum rents do not include contingent rentals based on sales volume of tenants. Contingent rents amounted to $15,094, $11,793 and $81,620 for the years ended December 31, 1995, 1994 and 1993, respectively. Future minimum rents also do not include expense reimbursements for common area maintenance, property taxes, and other expenses. These expense reimbursements amounted to $1,176,119, $886,698 and $792,448 for the years ended December 31, 1995, 1994, and 1993, respectively. NOTE 5 - MORTGAGE NOTES PAYABLE - ------ ---------------------- The following sets forth the mortgage notes payable of the Partnership at December 31, 1995 and 1994. The mortgage notes are secured by the related real estate investments. Mortgage Annual Monthly December 31, Lien Interest Payments/ ------------------------------ Property Position (a) Rates % Maturity Date(d) 1995 1994 - -------- ----------- -------- ----------------- ---------- ---------- Amargosa Creek First 7.875 $ 35,528 12/98 $ 4,808,711 $ 4,854,394 ---------- ---------- Northway Mall (b) First Variable Variable 8/96 - 1,121,473 Northway Mall (c) First 7.500 110,849 12/02 15,000,000 - ---------- ---------- 15,000,000 1,121,473 ---------- ---------- Westwood Center First 8.000 22,457 12/98 2,336,210 2,421,640 ---------- ---------- $22,144,921 $ 8,397,507 ========== ==========
(a) The debt is non-recourse to the Partnership. (b) In August 1994, the Partnership obtained financing for the capital improvements program at Northway Mall. The construction mortgage note allowed for monthly withdrawals of principal in the amount of approved invoices up to $11 million. The principal amount was due August 1996 and accrued interest at a variable rate. The interest rate was 9.75% at December 17, 1995 (the date of repayment of the note). Interest payments were due from the Partnership to the extent of the excess cash flow from the property. The remaining amount of interest was due upon repayment of the note. During 1995, $91,000 of this interest was capitalized as an addition to real estate investments, which is the portion related to the vacant square footage of Northway Mall that was under construction during the year. The Partnership incurred loan costs of $214,218 in 1994 related to the construction mortgage note financing, of which $70,000 was capitalized as an addition to real estate investments to be depreciated over the related life of the asset. The remaining loan costs of $144,218 were amortized over the life of the construction mortgage note. (c) In December 1995, the Partnership obtained permanent financing for the capital improvements program at Northway Mall. The new mortgage note, in the amount of $15 million, bears an interest rate of 7.5% with monthly principal and interest payments of $110,849 and matures in December 2002. The proceeds from the refinancing were used to pay off the construction mortgage note of $9,153,530 as discussed above. (d) Balloon payments on the mortgages notes are due as follows: Property Balloon Payment Date -------- --------------- ------- Amargosa Creek $ 4,653,031 12/98 Westwood Center 2,074,545 12/98 Northway Mall 13,118,565 10/02 Scheduled principal maturities of the mortgage notes payable are as follows: 1996.................................... $ 340,083 1997.................................... 374,508 1998.................................... 7,118,247 1999.................................... 265,795 2000.................................... 286,429 Thereafter.............................. 13,759,859 ---------- Total $22,144,921 ========== 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 $21,796,000 at December 31, 1995. NOTE 6 - REFINANCING OF MORTGAGE NOTES PAYABLE - ------ ------------------------------------- On December 17, 1995, the Partnership refinanced the mortgage note payable on Northway Mall. The new mortgage loan bears an interest rate of 7.5%, requires monthly principal and interest payments of $110,849 and matures in December 2002. The following is a summary of the transaction: New loan proceeds....................... $15,000,000 Existing debt retired................... (9,153,530) ---------- Cash proceeds from refinancing.......... $ 5,846,470 ========== The Partnership deposited $591,500 into property tax and deferred maintenance escrows and incurred loan costs of $269,910. During 1995, the Partneship received additional proceeds of $8,0832,057 from the construction loan for Northway Mall's capital improvement program. On October 29, 1993, the Partnership obtained financing for Westwood Center, a previously unencumbered property. The new mortgage loan, in the amount of $2.5 million, bears an interest rate of 8% with monthly payments of $22,457 and matures in December 1998. The Partnership incurred loan costs of $142,641 related to the financing, which are being amortized over the life of the loan. On October 7, 1993, the Partnership refinanced the mortgage note payable on Amargosa Creek Apartments. The new mortgage loan bears an interest rate of 7.875%, requires monthly principal and interest payments of $35,528 and matures in December 1998. New loan proceeds....................... $4,900,000 Existing debt retired................... (4,839,966) --------- Cash proceeds from refinancing.......... $ 60,034 ========= The Partnership incurred loan costs of $142,121 related to the refinancing. NOTE 7 - MORTGAGE NOTE PAYABLE - AFFILIATE - ----- --------------------------------- The following sets forth the mortgage note payable - affiliate of the Partnership at December 31, 1995 and 1994. The mortgage note is secured by the underlying real estate investment. Mortgage Annual Monthly December 31, Lien Interest Payments/ ------------------------ Property Position(a) Rates % Maturity Date 1995 1994 - -------- ------------ ------- ------------------ --------- --------- Continental Plaza (b) First (c) Variable 03/96 $ 952,538 $ 952,538 ========= ========
(a) The debt is non-recourse to the Partnership. (b) In March 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII, L.P., an affiliate of the General Partner, which allows the Partnership to borrow funds totaling $1,536,000. Of this amount available, $952,538 was borrowed in 1993. The principal balance is due March 1, 1996. On January 8, 1996 the Partnership repaid the mortgage loan. (c) The note requires monthly payments of interest only equal to the prime lending rate of the Bank of America plus 2 1/2%. The prime rate at December 31, 1995 and 1994 was 8.5%. Under the terms of the Amended Partnership Agreement, borrowings from affiliates approximate fair market value. NOTE 8 - 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: 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 (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 Partnership based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 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. See also Note 9 - "Gain on Legal Settlement". NOTE 9 - GAIN ON LEGAL SETTLEMENT - ------ ------------------------ 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 McNEIL REAL ESTATE FUND XXVI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1995 Initial Cost Cumulative Costs ----------------------------- Write-down Capitalized Related (b) Buildings and and Permanent Subsequent Description Encumbrances Land Improvements Impairment To Acquisition - ----------- ---------- ---------- ----------- ----------- ---------- APARTMENTS: Amargosa Creek Lancaster, CA (b) $ 4,808,711 $ 947,277 $ 9,578,026 $ (1,696,024) $ 482,377 OFFICE BUILDINGS: Continental Plaza Scottsdale, AZ (c) 952,538 4,211,854 4,059,113 (5,662,360) 1,321,915 Westwood Center Tampa, FL (d) 2,336,210 1,465,168 14,814,477 (5,000,000) 2,274,529 RETAIL CENTER Edison Ford Square Fort Myers, FL (e) - 2,791,707 5,932,380 (3,303,346) 804,699 Northway Mall Pittsburgh, PA 15,000,000 4,523,305 17,186,915 (6,000,000) 17,152,130 ---------- ---------- ---------- ----------- ---------- $23,097,459 $13,939,311 $51,570,911 $(21,661,730) $22,035,650 ========== ========== ========== =========== ==========
See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVI, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1995 Gross Amount at Which Carried at Close of Period ------------------------------------------------ Accumulated Buildings and Depreciation Description Land Improvements Total (a) and Amortization - ----------- ---------- ---------- ---------- ---------- APARTMENTS: Amargosa Creek Lancaster, CA (b) $ 794,635 $ 8,517,021 $ 9,311,656 $(3,340,699) OFFICE BUILDINGS Continental Plaza Scottsdale, AZ (c) 1,975,324 1,955,198 3,930,522 (1,669,636) Westwood Center Tampa, FL (d) 1,015,168 12,539,006 13,554,174 (5,608,394) RETAIL CENTER Edison Ford Square Fort Myers, FL (e) 2,438,636 3,786,804 6,225,440 (2,243,237) Northwest Plaza Pittsburgh, PA (f) 2,965,329 29,897,021 32,862,350 (8,393,175) ---------- ---------- ---------- ----------- $ 9,189,092 $56,695,050 $65,884,142 $(21,255,141) ========== ========== ========== ===========
(a) For Federal Income tax purposes, the properties are depreciated over lives ranging from 15-25 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was approximately $88,408,467 and accumulated depreciation was $18,141,496 at December 31, 1995. (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 Edison Ford Square was reduced by $2,200,000 in 1995 and $1,103,346 in 1992. (f) 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, LTD. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1995 Date of Date Depreciable Description Construction Acquired lives (years) - ----------- ------------ -------- ------------ APARTMENTS: 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 Edison Ford Square Fort Myers, FL (e) 1960 07/87 5-25 Northway Mall Pittsburgh, PA (f) 1962 06/87 5-25
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, 1995 1994 1993 ---------- ---------- ---------- Real estate investments: Balance at beginning of year............... $60,934,261 $56,671,436 $62,463,551 Improvements............................... 9,020,982 4,262,825 1,447,238 Write-down for permanent impairment of real estate............... (2,200,000) - (7,239,353) Demolition and replacement of assets due to capital improvements............. (1,871,101) - - ---------- ---------- ---------- Balance at end of year..................... $65,884,142 $60,934,261 $56,671,436 ========== ========== ========== Accumulated depreciation and amortization: Balance at beginning of year............... $19,195,571 $16,754,214 $14,262,435 Depreciation and amortization.............. 2,682,731 2,441,357 2,491,779 Demolition and replacement of assets due to capital improvements............. (623,161) - - ---------- ---------- ---------- Balance at end of year..................... $21,255,141 $19,195,571 $16,754,214 ========== ========== ==========
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, 75 Mr. McNeil is also Chairman of the Board and Director of McNeil Real Chairman of the Estate Management, Inc. ("McREMI") which is an affiliate of the General Board and Director Partner. He has held the foregoing positions since the formation of such entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and 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 52 Mrs. McNeil is Co-Chairman, with husband Robert A. McNeil, of McNeil Co-Chairman of the Investors, Inc. Mrs. McNeil has twenty years of real estate experience, Board most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate associate with the Madison Company and, earlier, a commercial sales associate and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established Escrow Training Centers, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the International Board of Directors of the Salk Institute. Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Donald K. Reed, 50 Mr. Reed is President, Chief Executive Officer and Director of McREMI Director, President, which is an affiliate of the General Partner. Prior to joining McREMI in and Chief Executive March 1993, Mr. Reed was President, Chief Operating Officer and Director Officer of Duddlesten Management Corporation and Duddlesten Realty Advisors, Inc., with responsibility for a management portfolio of office, retail, multi-family and mixed-use land projects representing $2 billion in asset value. He was also Chief Operating Officer, Director and member of the Executive Committee of all Duddlesten affiliates. Mr. Reed started with the Duddlesten companies in 1976 and served as Senior Vice President and Chief Financial Officer and as Executive Vice President and Chief Operating Officer of Duddlesten Management Corporation before his promotion to President in 1982. He was President and Chief Operating Officer of Duddlesten Realty Advisors, Inc., which has been engaged in real estate acquisitions, marketing and dispositions, since its formation in 1989. Ron K. Taylor 38 Mr. Taylor is a Senior Vice President of McREMI and has been in this Vice President capacity since McREMI commenced active operations in 1991. He also serves as Acting Chief Financial Officer of McREMI since the resignation of Robert C. Irvine on January 31, 1996. Mr. Taylor is primarily responsible for Asset Management functions at McREMI, including property dispositions, commercial leasing, real estate finance and portfolio management. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management company. Mr. Taylor has been involved in the real estate industry since 1983.
Each director shall serve until his successor shall have been duly elected and qualified. Section 16 (a) of the Securities Exchange Act of 1934 requires the Partnership's General Partner and the directors and executive offers of the General Partner (Including McNeil Investors, inc. as the general partner of the General Partner and the officers and directors of McNeil Investors, Inc.) to file, with the Securities and Exchange Commission, reports of ownership and changes in ownership of the Partnership's Units. The Partnership is required to identify any of those persons who failed to file such reports on a timely basis. During 1995, Mrs. McNeil inadvertently failed to file on a timely basis one report relating to one transaction. In making this disclosure, the Partnership has relied solely on written representations of these and other individuals and on copies of the reports that they have filed with the Securities and Exchange Commission. 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, 1995, 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, 1995. 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. The General Partner and the officers or directors of its general partner, collectively, own 2,950,000 Units, which is 3% of the outstanding any Units. (C) Change in control. None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of General Partner compensation other than property management fees and reimbursements of certain costs. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $10,000 per apartment unit for residential property and $50 per gross square foot for commercial property to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases subsequent to 1999. For the year ended December 31, 1995, the Partnership paid or accrued $519,276 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 1995, the Partnership paid or accrued $737,852 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". The General Partner has, at its discretion, advanced funds to the Partnership. As of December 31, 1995, the Partnership had received $168,330 of such advances (including accrued interest of $37,812) that were used to meet working capital requirements. The advances, which are unsecured and due on demand, accrue interest at a rate equal to the prime lending rate of the Bank of America, plus 1%. In March 1993, the Partnership obtained a loan from McNeil Real Estate Fund XXVII, L.P., an affiliate of the General Partner, which allows the Partnership to borrow funds totaling $1,536,000. Of this amount available, $952,538 was borrowed in 1993. The note requires monthly interest-only payments equal to the prime lending rate of Bank of America plus 2.5% with the principal balance due March 1, 1996. At December 31, 1995, the prime lending rate was 8.5%. The loan was repaid in January 1996. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - ------- ----------------------------------------------------------------- See accompanying Index to Financial Statements at Item 8. (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). 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) 10.8 Secured Promissory Note dated October 27, 1993, between McNeil Real Estate Fund XXVI, L.P. and Sun Life Assurance Company of Canada (U.S.) relating to Westwood Center.(2) 10.9 Promissory Note dated March 1, 1993, between McNeil Real Estate Fund XXVI, L.P. and McNeil Real Estate Fund XXVII, L.P.(2) 10.10 Mortgage note payable dated August 24,1994 between McNeil Real Estate Fund XXVI L.P. and PNC Bank, National Association relating to Northway Mall.(Incorporated by reference to the Quarterly Report of the registrant on Form 10-Q for the period ended September 30, 1994, as filed on November 14, 1994). 10.11 Promissory note payable dated December 15, 1995, between McNeil Real Estate Fund XXVI, L.P. and The Variable Annuity Life Insurance. 11. Statement regarding computation of Net Loss per Limited Partnership Unit (see Note 1 to Financial Statements). (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, 1995. 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 29, 1996 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 29, 1996 By: /s/ Donald K. Reed - ----------------------------------- -------------------------------------- Date Donald K. Reed President and Director of McNeil Investors, Inc. March 29, 1996 By: /s/ Ron K. Taylor - ----------------------------------- -------------------------------------- Date Ron K. Taylor Acting Chief Financial Officer of McNeil Investors, Inc. March 29, 1996 By: /s/ Carol A. Fahs - ----------------------------------- -------------------------------------- Date Carol A. Fahs Chief Accounting Officer of McNeil Real Estate Management, Inc.
EX-27 2
5 12-MOS DEC-31-1995 DEC-31-1995 6,761,516 0 1,693,093 (596,156) 0 0 65,884,142 (21,255,141) 54,217,223 0 23,097,459 0 0 0 0 54,217,223 7,568,361 7,726,442 0 0 11,640,942 0 1,148,546 0 0 (5,063,046) 0 0 0 (5,063,046) 0 0
EX-99 3 PROMISSORY NOTE $15,000,000 00 Pittsburgh, Pennsylvania December 15, 1995 FOR VALUE RECEIVED, the undersigned, MCNEIL REAL ESTATE FUND XXVI, L.P., a California limited partnership (hereinafter called "Maker"), with offices at 13760 Noel Road, Suite 700, LB70, Dallas, Texas 75240, hereby agrees and promises to pay to the order of THE VARIABLE ANNUITY LIFE INSURANCE COMPANY, a Texas corporation (hereinafter called "Payee"), at 2929 Allen Parkway, Houston, Harris County, Texas, 77019 Attn: Director - Mortgage Loans, or at such other place as the holder hereof may from time to time designate in writing, the principal sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00) in lawful money of the United States of America, with interest on the principal balance from time to time remaining unpaid from the date of advancement until maturity at the rate of seven and one-half percent (7.50%) per annum, said principal and interest being payable in the manner and form as follows: An installment of interest on the unpaid principal balance hereof from the date of funding through December 31, 1995, shall be due and payable at the funding of this Note. Commencing January 1, 1996, this Note shall be payable in eighty-three (83) consecutive monthly installments of principal and interest in the amount of ONE HUNDRED TEN THOUSAND EIGHT HUNDRED FORTY-NINE AND NO/100 DOLLARS ($110,849.00) each (calculated on the basis of a 360-day year and an amortization period of twenty-five [25] years); the first installment shall be due and payable on February 1, 1996, and a like installment shall be due and payable on the first day of each of the next eighty-two (82) calendar months. A FINAL INSTALLMENT IN THE AMOUNT OF THE ENTIRE UNPAID PRINCIPAL BALANCE HEREOF TOGETHER WITH INTEREST ACCRUED THEREON SHALL BE DUE AND PAYABLE ON DECEMBER 1, 2002 (THE "MATURITY DATE"). Each payment shall be credited first to prepayment fees or other charges hereunder (other than interest), next on interest then due and the remainder on principal, and interest shall thereupon cease upon the principal so credited. Should default be made in payment of any of the indebtedness evidenced hereby, after the entire principal amount hereof shall have become due and payable, whether by acceleration, at maturity or otherwise, the entire unpaid balance of that principal shall bear interest at the lesser of (I) the maximum rate of interest permitted by applicable state and federal law or (ii) the rate of eighteen percent (18%) per annum. In the event that any payment required hereunder or under the "Security Instruments" (as hereinafter defined) shall not be made within ten (10) days after the date due, a late charge equal to the lesser of (I) an amount which, when added to all other amounts constituting "interest" under applicable state or federal law, does not exceed the maximum non-usurious amount permitted by applicable state or federal law, or (ii) four percent (4%) of the amount of any such delinquent payment so overdue may be charged by Payee for the purpose of defraying the expense incident to handling such delinquent payments. Such late charge represents the reasonable estimate of Payee and Maker of a fair average compensation for the loss that may be sustained by Payee due to the failure of Maker to make timely payments. Such late charge shall be paid without prejudice to the right of Payee to collect any other amounts provided to be paid or to declare a default hereunder or under the Security Instruments. 1. Maker shall have the right to prepay the entire principal sum (but not any lesser amount) of this Note on any regular monthly installment date for the payment of principal and interest hereunder, provided that (I) Payee shall have received at least sixty (60) days' prior written notice (the "Notice") of such full prepayment, (ii) at the time specified in the Notice for any prepayment there shall be no default under this Note or under any of the other Security Instruments, and (iii) such prepayment is accompanied by a prepayment fee in an amount equal to the lesser of (x) an amount which, when added to all other sums received, charged, or contracted for by Payee which are interest or are deemed to be interest by applicable laws, does not exceed the maximum non-usurious rate that may be received, charged, or contracted for by Payee under applicable laws from time to time in effect (the "Maximum Lawful Rate") or (y) the greater of an amount calculated as set forth in Paragraphs (a) or (b) (as applicable), below: (a) at the time of receipt by Payee of the Notice, the difference between (I) the then present value of all unpaid installments of principal and interest due and payable under this Note, calculated from the date of the proposed prepayment to the Maturity I) rate, discounted at the "Reinvestment Rate" (as hereinafter defined), and (ii) the outstanding principal balance under this Note on the date of the proposed prepayment; or (b) one percent (1%) of the then outstanding principal balance of this Note. As used in this Note, "Reinvestment Rate" shall be the yield to maturity on a United States treasury bond or note (the choice of which security to be used for such purposes being in the sole and absolute discretion of Payee), having a maturity date of December 1, 2002 (or the maturity date closest thereto if no such bond or note has a maturity date of December 1, 2002). 2. If Payee shall at any time come into possession of proceeds resulting from an acceleration of the maturity of this Note, tender prior to foreclosure, foreclosure, or any other reason (other than as a result of application of insurance or condemnation proceeds), such possession shall be deemed to be and shall be treated as a voluntary prepayment hereunder and consequently there shall be added to the outstanding unpaid principal sum of this Note as additional indebtedness immediately due and payable hereunder and secured by the Security Instruments, a prepayment fee equal to greater of that provided for in Paragraph (lXa) or (b), above, whichever is applicable. 3. Upon receipt by Payee of the Notice, Payee shall, within thirty (30) days thereafter, give notice to Maker of the Reinvestment Rate and, if applicable, the amount of the prepayment fee payable under Paragraph (1)(a), above. Determination of the Reinvestment Rate and the amount of any such prepayment fee by Payee shall be ending on Maker absent mathematical error. 4. If Maker gives Payee Notice of prepayment as herein provided and thereafter fails to prepay this Note (with payment of the applicable prepayment fee) at which time specified in the Notice, such failure shall be a default hereunder and, without further notice by Payee, entitle Payee, at its option, to accelerate the maturity of this Note and exercise any and all remedies available to Payee under the Security , instruments. 5. Notwithstanding any provisions to the contrary contained herein, there shall be no prepayment premium or fee payable hereunder with respect to prepayments made in accordance with the terms hereof during the last 90 days prior to the Maturity Date provided that Maker has timely delivered the Notice to Payee as required herein. This Note is secured by all mortgages, security agreements, assignments, and lien instruments (the "Security Instruments") executed by Maker, the "Principals" of Maker (as hereinafter defined), or any other party acting on behalf of Maker in favor of the Payee, pertaining to and securing the Note, including those executed simultaneously herewith, those executed heretofore and those executed hereafter and including specifically and without limitation that certain Mortgage and Security Agreement of even date herewith (the "Mortgage") executed by Maker, as Mortgagor, in favor of Payee, as Mortgagee, covering approximately 29.30 acres of land located in Allegheny County, Pennsylvania, together with all buildings and improvements now or hereafter erected thereon (hereinafter called the "Mortgaged Property"), all as more fully set forth and described in such instrument. This Note shall become immediately due and payable at the option of the Payee or other holder hereof, without presentment or demand or any notice (including, without limitation, notice of intent to accelerate or notice of acceleration) to the Maker, on Maker's failure to pay any installment hereon on the date such installment is due, upon default under the terms of any Security Instruments, or if any event occurs or condition exists which authorizes the acceleration of maturity hereof under any agreement made by the Maker in connection with the Security Instruments. If this Note is collected by suit, through probate, or bankruptcy court, or by any other judicial proceedings, or if this Note is not paid at maturity, howsoever such maturity may be brought about, and is placed in the hands of an attorney for collection, then the Maker promises to pay in addition to all other amounts owing hereunder, reasonable attorney's fees. It is the intention of the parties hereto to comply with the usury laws of the State of Pennsylvania and of the United States of America; accordingly, it is agreed that notwithstanding any provision to the contrary in this Note or in any Security Instrument, no such provision shall require the charging of, payment of, or permit the collection of sums deemed to be interest in excess of the maximum permitted by applicable state and federal law. If any excess of interest in such respect is provided for, or shall be adjudicated to be so provided for, in this Note or in any Security Instrument, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither the Maker nor its successors or assigns or any other party liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount permitted by applicable state and federal law, and the same shall be construed as a mutual mistake of the parties and, (c) any such excess which may have been collected shall be, at the option of Payee or any legal holder hereof, either applied as a credit against the then unpaid principal amount hereof or refunded to Maker. The Maker and all sureties, endorsers, and guarantors of this Note, to the extent permitted by law (I) waive demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate, acceleration and all other notice, filing of suit and diligence in collecting this Note or enforcing any of the security herefor, (ii) agree to any substitution, exchange or release of any party primarily or secondarily liable hereon, (iii) agree that the Payee or other holder hereof shall not be required first to institute suit or exhaust its remedies hereon against the Maker or others liable or to become liable hereon or to enforce its rights against any security hereof in order to enforce payment of this Note by them, and (iv) consent to any extension or postponement of time of payment of this note and to any other indulgence with respect hereto Without notice thereof to any of them. If an event of default occurs, Maker hereby authorizes and empowers the Prothonotary, Clerk of Court or similar official or any attorney of any court of record of Pennsylvania, or elsewhere, to appear for and to confess judgment against Maker in favor of Payee, its successors or assigns, as of any term, past, present or future, with or without declaration, or to sign for Maker an amicable action or actions and to confess judgment therein against Maker, for the debt evidenced by this Note and all other sums payable hereunder or on account hereof with interest thereon and/or under the Security Instruments, together with costs of suit and attorneys' fee for collection of $10,000.00, with release of all errors, and on which judgment Payee may, on failure of Maker to comply with any of the terms, provisions and conditions of this Note, or any of the Security Instruments, issue or cause to be issued, an execution or executions. The authority herein granted to confess judgment shall not be exhausted by any exercise thereof, but shall continue from time to time and at all times until full payment of all amounts due hereunder. This Note is intended to be performed in accordance with and only to the extent permitted by all applicable law. If any portion of this Note or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of this instrument nor the application of such provisions to other persons or circumstances shall be affected thereby, but rather shall be enforced to the greatest extent permitted by law. The liability of Maker and the Principals of Maker for failure to perform Maker's obligations hereunder or under the Mortgage and Security Instruments is expressly limited to the security for payment of the Note, the same being all properties, rights, and estates subject to the Security Instruments and Payee agrees not to seek any damages or money judgment against Maker or the Principals of Maker for any default on the part of Maker under the Note or any of the Security Instruments. Notwithstanding anything to the contrary contained in the Note or in any of the Security Instruments, and notwithstanding any delay on the part of Payee in exercising any right, power or remedy in connection with any default under the Note, the Mortgage or any of the other Security Instruments, Payee shall have full recourse against Maker and the Principals of Maker and Maker and the Principals of Maker shall be personally liable, jointly and severally, for and shall promptly account (by delivery of funds or proof that the same have been theretofore expended for costs incurred in connection with the Mortgaged Property) to Payee for (a) all condemnation awards and proceeds and insurance proceeds (to the extent same have not therefore been applied toward payment of the sums due under the Note or used for repair of the Mortgaged Property or otherwise used with Payee's written consent) and, with respect to such insurance proceeds which represent proceeds paid under any rent insurance, to the additional extent such rent insurance proceeds have not heretofore been applied toward the payment of taxes and insurance premiums or otherwise used with Payee's written consent); (b) all amounts necessary to repair any damage to the Mortgaged Property, excluding normal wear and tear, caused by acts or omissions of Maker, its agents, employees, or contractors; (c) all tenant security deposits as to which the tenants still have rights under applicable law; (d) failure to pay, in accordance with the Mortgage, taxes, assessments or other charges which can create liens on any portion of the Mortgaged Property and are payable hereunder or under the Security Instruments (to the full extent of any such taxes, assessments or other charges); (e) failure to pay charges for labor or materials or other charges which can create liens on any portion of the Mortgaged Property (to the full extent of the amount rightfully claimed by any such claimant); (f) prepaid rent (rent paid more than one (1) month in advance) and rental or other income derived from the Mortgaged Property (to the extent such rental or other income has not been applied toward payment of sums due hereunder or for repair of the Mortgaged Property or for payment of bonafide, third party operating costs of the Mortgaged Property) from and after receipt by Maker of notice of the occurrence of a default under the Note or the Security Instruments (g) any loss incurred by Payee as a result of Maker's forfeiture of the Mortgaged Property resulting from criminal activity by any person whether or not such criminal activity is conducted on or in any manner relates to the Mortgaged Property; and (h) all sums due Payee (excluding payments of principal and interest under this Note) following exercise by Payee of its right to perform Maker's obligations under the Security Instruments to preserve, protect and defend the Mortgaged Property after such notice and opportunity to cure as may be provided in the Security Instruments. Additionally, Payee shall have the right to offset against any sums owed by Maker under items (a) through (h), above, any funds held by Payee (including, without limitation, escrows for taxes and insurance) pursuant to the Note and any of the Security Instruments. Nothing herein contained shall be construed to prevent Payee from exercising and enforcing any other remedy allowed at law or in equity or by any statute or by the terms of the Note or the Security Instruments nor shall anything herein contained be deemed to be a release or impairment of the Mortgage, any of the other Security Instruments or the indebtedness evidenced by the Note or secured thereby or shall be deemed to prejudice the right of Payee as against Maker or any other entity now or hereafter liable under any guaranty, bond, or lease covering the Mortgaged Property or any portion thereof, policy of insurance or other agreement which Maker may have delivered to Payee in compliance with any of the terms, covenants, and conditions of the Note or any of the Security Instruments, or preclude the Payee from exercising its right to foreclose under the Mortgage (either by judicial means or nonjudicial means) in the event of a default under the Note or any of the Security Instruments, or except as may be limited by the foregoing provisions of this paragraph or any other express provisions of the Security Documents or this Note, from enforcing any of the Payee's rights under the Note or under any of the Security Instruments including, without limitation, the right to the appointment of a receiver for the Mortgaged Property, or limit the rights or remedies which Payee would otherwise be entitled to at law or in equity absent the limitation of liability provisions set forth in this paragraph against Maker for fraud perpetrated by Maker against Payee. In addition, notwithstanding any other provisions of the Note or the Security Instruments, Maker, jointly and severally, shall be personally liable for any loss, damage or injury sustained by Payee arising from the breach by Maker of any warranty or representation of Maker contained in any affidavit made by or on behalf of Maker or in any of the Security Instruments regarding hazardous wastes or other hazardous or toxic substances. Additionally, Maker shall be jointly and severally liable for any breach of the warranties, representations, covenants or indemnities contained in Article 11 of the Mortgage relating to "Hazardous Materials" (as therein defined). For purposes hereof the "Principals" of Maker shall mean McNeil Partners, L.P. (the general partner of Maker) and McNeil Investors, Inc. (the general partner of the general partner of Maker). This Note and the Security Instruments shall be governed by and construed in accordance with the laws of the State of Pennsylvania. McNeil Real Estate Fund XXVI, L.P., a California limited partnership, by its undersigned General Partner (SEAL) By: McNeil Partners, L.P., a Delaware limited partnership, by its undersigned sole General Partner (SEAL) By: McNeil Investors, Delaware corporation (SEAL) By: /s/ Donald K. Reed ------------------ Name: Donald K. Reed Title: President The undersigned McNeil Partners, L.P. and McNeil Investors, Inc. join in the execution hereof to acknowledge their liability as "Principals" of Maker subject to, as limited by and in accordance with, the terms of this Promissory Note. McNeil Partners, L.P., a Delaware limited partnership, by its undersigned sole General Partner (SEAL) By: McNeil Investors, Inc., a Delaware corporation (SEAL) By: Name: Title: McNeil Investors, Inc., a Delaware corporation By: Name Title: (SEAL) SIGNATURE PAGE TO $15,000,000.00 PROMISSORY NOTE DATED DECEMBER ls3 ,1995, EXECUTED BY MCNEIL REAL ESTATE FUND XXVI, L.P. PAYABLE TO THE ORDER OF THE VARIABLE ANNUITY LIFER INSURANCE COMPANY -----END PRIVACY-ENHANCED MESSAGE-----