-----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, HvVHbeWBkYOK9K118CTTvp0rOv6ASN9rlygzkxGM68OHUaPxSaYcnGW8Dq3TOapy QSd8fdm8103IM7wG6IZLMg== 0000810481-98-000003.txt : 19980401 0000810481-98-000003.hdr.sgml : 19980401 ACCESSION NUMBER: 0000810481-98-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCNEIL REAL ESTATE FUND XXVII LP CENTRAL INDEX KEY: 0000810481 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 330214387 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17173 FILM NUMBER: 98580816 BUSINESS ADDRESS: STREET 1: 13760 NOEL ROAD STREET 2: SUITE 700 LB70 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144485800 MAIL ADDRESS: STREET 2: 13760 NOEL ROAD SUITE 700 LB 70 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHMARK PRIME PLUS L P DATE OF NAME CHANGE: 19920413 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K405 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to_____________ Commission file number 0-17173 --------- McNEIL REAL ESTATE FUND XXVII, L.P. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0214387 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (972) 448-5800 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None - ---------------------------------------------------------- ------------------- Securities registered pursuant to Section 12(g) of the Act: Limited partnership units - ---------------------------------------------------------- ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 4,529,267 of the registrant's 5,199,901 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 45 TOTAL OF 47 PAGES PART I ITEM 1. BUSINESS - ------- -------- ORGANIZATION - ------------ McNeil Real Estate Fund XXVII, L.P. (the "Partnership"), formerly known as Southmark Prime Plus, L.P., was organized by affiliates of Southmark Corporation ("Southmark") on January 16, 1987 as a limited partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act to make short-term loans to affiliates of the general partner. 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 Prime Plus Corp. (the "Original General Partner"), a wholly-owned subsidiary of McNeil. The Original General Partner was purchased from Southmark by McNeil on March 13, 1991, as discussed further below. The principal place of business for the Partnership and the General Partner is 13760 Noel Road, Suite 600, Dallas, Texas 75240. The sole limited partner of the Partnership was initially Southmark Depositary Corp. (the "Depositary"), a wholly-owned subsidiary of Southmark. On August 14, 1987, the Partnership registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (File No. 33-11824) and commenced a public offering for sale of $100,000,000 of Depositary units. The sale of Depositary units closed on August 14, 1988, with 5,548,888 units sold at $10 each, or gross proceeds of $55,488,880 to the Partnership. The Partnership subsequently filed a Form 8-A Registration Statement with the SEC and registered its Depositary units under the Securities Exchange Act of 1934 (File No. 0-17173). The Depositary assigned the principal attributes of its aggregate limited partner interest in the Partnership to the Depositary unit holders. As further discussed, the Depositary units were subsequently converted to limited partnership units ("Units"). The Units represent equity interests in the Partnership and entitle the limited partners to participate in certain allocations and distributions of the Partnership. As of December 31, 1997, 348,987 of the Units have been repurchased pursuant to the terms of the Amended Partnership Agreement. SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER - -------------------------------------------------- On July 14, 1989, Southmark filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Neither the Partnership, the General Partner nor the Original General Partner were included in the filing. Southmark's reorganization plan became effective August 10, 1990. Under the plan, most of Southmark's assets, which included Southmark's interests in the Original General Partner, were sold or liquidated for the benefit of creditors. In accordance with Southmark's reorganization plan, Southmark, McNeil and various of their affiliates entered into an asset purchase agreement on October 12, 1990, providing for, among other things, the transfer of control to McNeil or his affiliates of 34 limited partnerships (including the Partnership) in the Southmark portfolio. On February 14, 1991, pursuant to the asset purchase agreement as amended on that date, McNeil Real Estate Management, Inc. ("McREMI"), an affiliate of McNeil, acquired the assets relating to the property management and partnership administrative business of Southmark and its affiliates. On March 13, 1991, McREMI commenced management of the Partnership's properties pursuant to an assignment of the existing property management agreements from the Southmark affiliates. On March 30, 1992, the unitholders approved a restructuring proposal that provided for (i) the replacement of the Original General Partner with the General Partner; (ii) the adoption of the Amended Partnership Agreement which (a) substantially alters the provisions of the original Partnership Agreement relating to, among other things, compensation, reimbursements of expenses, and voting rights and (b) makes Depositary unit holders direct limited partners of the Partnership; (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 XXVII, L.P. Under the Amended Partnership Agreement, the Partnership began accruing an asset management fee, retroactive to March 13, 1991, which is payable to the General Partner. For a discussion of the methodology for calculating the asset management fee, see Item 13 - Certain Relationships and Related Transactions. The proposals approved at the March 30, 1992 meeting were implemented as of that date. Settlement of Claims: The Partnership filed claims with the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court") against Southmark for damages relating to improper overcharges, breach of contract and breach of fiduciary duty. The Partnership settled these claims in 1991, which totaled approximately $17,024,326, for the full amount claimed and such settlement was approved by the Bankruptcy Court. Pursuant to the settlement agreement, the Partnership released Southmark and its affiliates and the Original General Partner from any further liability in connection with the claims made with the Bankruptcy Court. In return, an affiliate of McNeil agreed to waive payment on a dollar for dollar basis in an amount equal to the settled claims against Partnership advances owed at that time. In addition, the Partnership received Southmark bankruptcy plan assets in respect to its claims which were not offset against the Partnership advances. Because the Partnership's claims against Southmark were settled for $17,024,326, the Partnership advances of $223,800 owed at that time were reduced in their entirety and the claims had a remaining balance of $16,800,526. Although the Partnership settled the claims against Southmark for the full amount claimed, the settlement agreement provided that the Partnership receive a distribution of Southmark bankruptcy plan assets based on a claim amount of approximately $9,157,000. 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, $984,649 in cash, and common and preferred stock in the reorganized Southmark which was subsequently sold for $317,675. These amounts represent the Partnership's pro-rata share of Southmark assets available for Class 8 Claimants. CURRENT OPERATIONS - ------------------ General: Under the original partnership agreement, the Partnership's primary business was to make short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring revenue-producing real properties. Due to borrower defaults and foreclosures on the properties securing all but one of these mortgages, the Partnership's business also includes ownership and operation of real estate. Since the beginning of operations and prior to the restructuring, the Partnership funded twelve mortgage loans, seven in 1987 and five in 1988, which completed the Partnership's investment of the proceeds from the sale of Units. The borrowers on the mortgage loan investments held by the Partnership were all affiliates of Southmark. During the early part of the terms of the loans, to the extent that property operations were insufficient to pay required interest, Southmark supported the borrowers with cash and the Partnership's loans were kept current. On July 14, 1989, Southmark filed for bankruptcy protection, and such support ceased and all loans went into default. In 1994, the remaining mortgage loan investment, which was secured by a mini-storage warehouse in Stone Mountain, Georgia that was sold to an unaffiliated borrower, was modified. Principal and interest payments under the modified terms were received by the Partnership. The loan was repaid in full in 1996. See Item 8 - Note 5 "Mortgage Loan Investment." In 1992, the Partnership received the proceeds from a $7,000,000 mortgage note payable secured by five of the Partnership's mini-storage warehouses located in Florida. A portion of the proceeds from the loan was used to make nonrecourse mortgage loans to affiliates of the General Partner in accordance with the Amended Partnership Agreement. The loans were secured by revenue-producing real estate and were either junior or senior to other indebtedness as more fully described in Item 8 - Note 6 - "Mortgage Loan Investments - Affiliates." The mortgage note payable was repaid by the Partnership in 1995. A $5 million line of credit was obtained during 1995 for the purpose of funding additional loans to affiliates of the General Partner. See Item 8 - Note 7 - "Revolving Credit Agreement." The Partnership is engaged in the ownership, operation and management of commercial real estate and the servicing of mortgage loan investments secured by real estate. At December 31, 1997, the Partnership had four mortgage loan investments to affiliates of the General Partner as described in Item 8 - Note 6 - - "Mortgage Loan Investments - Affiliates" and owned ten revenue-producing properties as described in Item 2 - Properties. The Partnership does not directly employ any personnel. The General Partner conducts the business of the Partnership directly and through its affiliates. The Partnership reimburses affiliates of the General Partner for such services rendered in accordance with the Amended Partnership Agreement. See Item 8 - Note 2 "Transactions With Affiliates." The business of the Partnership to date has involved only one industry segment. See Item 8 - Financial Statements and Supplementary Data. The Partnership has no foreign operations. The Partnership's business is not seasonal. Business Plan: Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof. The Partnership has placed AAA Century Airport Self-Storage and Burbank Mini-Storage on the market for sale effective August 1, 1997. Competitive Conditions: Since the principal business of the Partnership is to own and operate real estate and to service notes receivable secured by real estate, the Partnership is subject to all of the risks incidental to ownership of real estate and interests therein, many of which relate to the illiquidity of this type of investment. These risks include changes in general or local economic conditions, changes in supply or demand for competing properties in an area, changes in interest rates and availability of permanent mortgage funds which may render the sale or refinancing of a property difficult or unattractive, changes in real estate and zoning laws, increases in real property tax rates and Federal or local economic 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 and the borrowers) in connection with the sale, financing and leasing of properties. The impact of these risks on the Partnership, including losses from operations and foreclosures of the Partnership's properties, is described in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 2 - Properties for a discussion of the competitive conditions at each of the Partnership's properties. Forward-Looking Information: Within this document, certain statements are made as to the expected occupancy trends, financial condition, results of operations, and cash flows of the Partnership for periods after December 31, 1997. All of these statements are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical and involve risks and uncertainties. The Partnership's actual occupancy trends, financial condition, results of operations, and cash flows for future periods may differ materially due to several factors. These factors include, but are not limited to, the Partnership's ability to control costs, make necessary capital improvements, negotiate sales or refinancings of its properties, collect payments on mortgage loan investments and respond to changing economic and competitive factors. Environmental Matters: The environmental laws of the Federal government and of certain state and local governments impose liability on current property owners for the clean-up of hazardous and toxic substances discharged on the property. This liability may be imposed without regard to the timing, cause or person responsible for the release of such substances onto the property. The Partnership could be subject to such liability in the event that it owns properties having such environmental problems. The Partnership has no knowledge of any pending claims or proceedings regarding such environmental problems. Other Information: In August 1995, High River Limited Partnership, a Delaware limited partnership controlled by Carl C. Icahn ("High River") made unsolicited tender offers to purchase from holders of limited partnership units up to approximately 45% of the outstanding limited partnership units of certain other partnerships controlled by the General Partner. High River did not offer to purchase Units of the Partnership at that time. In September 1996, High River made an unsolicited tender offer to purchase any and all of the outstanding Units of the Partnership for a purchase price of $5.62 per unit. In addition High River made unsolicited tender offers for certain other partnerships controlled by the General Partner. The Partnership recommended that the limited partners reject the tender offers made with respect to the Partnership and not tender their Units. The General Partner believes that as of January 31, 1998, High River has purchased approximately 1.8% of the outstanding Units pursuant to the tender offers. In addition, all litigation filed by High River, Mr. Icahn and his affiliates in connection with the tender offers has been dismissed without prejudice. On October 17, 1996, the Partnership announced that it had received an unsolicited offer from an unaffiliated third party to acquire all outstanding Units of the Partnership at $6.50 per Unit. After meeting with the offeror in Dallas and considering the $6.50 offer, the Partnership rejected it as being inadequate. Management has begun to review its information technology infrastructure to identify any systems that could be affected by the year 2000 problem. The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major systems failure or miscalculations. The information systems used by the Partnership for financial reporting and significant accounting functions were made year 2000 compliant during recent systems conversions. The Partnership is in the process of evaluating the computer systems at the various properties. The Partnership also intends to communicate with suppliers, financial institutions and others to coordinate year 2000 issues. Management believes that the remediation of any outstanding year 2000 conversion issues will not have a material or adverse effect on the Partnership's operations. ITEM 2. PROPERTIES - ------- ---------- The following table sets forth the real estate investment portfolio of the Partnership at December 31, 1997. All of the buildings and the land on which they are located are owned in fee. The two office buildings and Kendall Sunset Mini-Storage secure a $5 million line of credit as described more fully in Item 8 - Note 7 - "Revolving Credit Agreement." The remaining properties are unencumbered by mortgage indebtedness. See also Item 8 - Note 4 - "Real Estate Investments" and Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization. In the opinion of management, the properties are adequately covered by insurance.
Net Basis 1997 Date Property Description of Property Debt (a) Property Taxes Acquired - -------- ----------- ----------- -------- -------------- --------- Real Estate Investments: AAA Sentry Mini-Storage N. Lauderdale, FL 798 units $ 471,764 $ - $ 54,741 10/90 Forest Hill Mini-Storage W. Palm Beach, FL 682 units 1,908,111 - 40,584 8/90 Fountainbleau Mini-Storage Miami, FL 771 units 1,173,349 - 62,857 11/90 Kendall Sunset Mini-Storage Miami, FL 940 units 3,444,192 1,298,667 72,988 10/90 Margate Mini-Storage Margate, FL 640 units 1,176,833 - 49,294 10/90 Military Trail Mini-Storage W. Palm Beach, FL 685 units 1,881,506 - 42,045 8/90 One Corporate Center I Office Building Edina, MN 111,146 sq. ft. 4,337,900 1,025,838 287,740 12/89 One Corporate Center III Office Building Edina, MN 111,252 sq. ft. 4,236,921 1,113,143 292,080 12/89 -------------- ------------ ----------- $ 18,630,576 $ 3,437,648 $ 902,329 ============== ============ ===========
Net Basis 1997 Date Property Description of Property Debt (a) Property Taxes Acquired - -------- ----------- ----------- -------- -------------- --------- Assets Held For Sale: AAA Century Airport Mini-Storage Inglewood, CA 567 units $ 1,908,947 $ - $ 33,860 9/90 Burbank Mini-Storage Burbank, CA 982 units 2,640,934 - 41,894 9/90 -------------- ------------ ----------- $ 4,549,881 $ - $ 75,754 ============== ============ ===========
- ----------------------------------------- Total: Office Buildings - 222,398 sq. ft. Mini-storage and self-storage warehouses - 6,065 units (a) For purposes of this table, the revolving credit agreement has been allocated among the properties securing the debt based on their estimated relative market values. The following table sets forth the properties' occupancy rate and rent per square foot for the last five years:
1997 1996 1995 1994 1993 ------------- ------------- -------------- ------------- ----------- Real Estate Investments: AAA Sentry Occupancy Rate............ 94% 96% 96% 95% 98% Rent Per Square Foot...... $8.23 $8.01 $7.70 $7.00 $6.17 Forest Hill Occupancy Rate............ 100% 98% 97% 99% 100% Rent Per Square Foot...... $10.72 $10.41 $9.82 $9.22 $8.45 Fountainbleau Occupancy Rate............ 93% 96% 97% 99% 100% Rent Per Square Foot...... $9.27 $8.98 $8.38 $8.08 $7.66 Kendall Sunset Occupancy Rate............ 94% 92% 95% 96% 99% Rent Per Square Foot...... $12.06 $11.75 $11.72 $11.71 $11.23 Margate Occupancy Rate............ 88% 94% 90% 100% 98% Rent Per Square Foot...... $10.42 $9.95 $9.90 $10.06 $9.55
1997 1996 1995 1994 1993 ------------- ------------- -------------- ------------- ----------- Military Trail Occupancy Rate............ 88% 88% 91% 90% 91% Rent Per Square Foot...... $9.82 $10.11 $9.35 $8.46 $7.76 One Corporate Center I Occupancy Rate............ 98% 100% 93% 95% 99% Rent Per Square Foot...... $13.07 $11.88 $10.92 $10.34 $11.56 One Corporate Center III Occupancy Rate............ 94% 95% 97% 96% 78% Rent Per Square Foot...... $13.72 $12.31 $11.17 $11.03 $7.38 Assets Held For Sale: AAA Century Airport Occupancy Rate............ 95% 96% 94% 95% 82% Rent Per Square Foot...... $10.31 $10.12 $10.19 $8.87 $7.90 Burbank Occupancy Rate............ 92% 87% 81% 81% 84% Rent Per Square Foot...... $11.25 $10.80 $10.29 $10.32 $8.74
Occupancy rate represents all units leased divided by the total number of units for mini-storage 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 Real Estate Investments: AAA Sentry - ---------- AAA Sentry Mini-Storage consists of five, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 798 units, with 85% of these units air conditioned. The property is located in a predominately commercial area, with a mixture of single and multi-family residential properties. New competition in the area has created a surplus in storage units and limited demand. Specials are being offered by competitors to attract new renters and many long-term customers of AAA Sentry are now relocating to other new or renovated facilities. AAA Sentry's occupancy and rental rates are competitive with properties of the same age in the area. For 1998, management will continue to provide excellent customer service. Rental rates will be closely monitored and adjusted according to market conditions with minimal discounts and free rent. The Partnership expects to maintain occupancy in the mid-90% range in 1998. Forest Hill - ----------- Forest Hill Mini-Storage consists of nine, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 682 units, with 22 of these units being recreational vehicle parking spaces. 35% of the units are air conditioned. The property is located in a predominately residential neighborhood in West Palm Beach, Florida, consisting of single family homes and small businesses to the east and multi-family apartment communities to the south and west. A competing facility opened in December 1996 that allows drive-in accessibility to the units. Another new facility within one mile of Forest Hill opened in January 1998. Currently, Forest Hill's occupancy has remained strong with rental rates slightly higher than the competition. However, these two facilities could have a negative impact on the property. The Partnership expects to maintain occupancy in the mid 90% range in 1998 by offering rental concessions to tenants and continuing to emphasize customer service. Fountainbleau - ------------- Fountainbleau Mini-Storage consists of three, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 771 units. 56% of the units are air conditioned. The property is located in the central western quadrant of the Miami metroplex and is in close proximity to the Miami International Airport. The property has poor drive-by exposure with a limited view from the Florida Turnpike. The street located in front of the property is currently a dead end street but is scheduled to be opened to traffic by the end of 1998. The immediate neighborhood is predominately industrial with single family residential and multi-family communities further to the south and north. The tenant profile currently consists of local businesses. The area is being saturated by new mini-storage construction along with renovation of existing facilities. A competing facility located within three miles of Fountainbleau is expected to open in March 1998. A major international moving company that leased more than 90 of Fountainbleau's units in 1995 gradually began moving out during the last quarter of 1996 and vacated all of their units in 1997. For 1998, Fountainbleau will offer discounts and concessions to attract and retain tenants. The Partnership expects to maintain occupancy in the low 90% range in 1998. Kendall Sunset - -------------- Kendall Sunset Mini-Storage consists of ten, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 940 units. 35% of the units are air conditioned. The property is located in a residential neighborhood at the southwestern edge of the Miami metroplex. The area is tropical in nature and is in close proximity to the Everglades and Key West. The property's rental rates and occupancy are slightly higher than the competition in the immediate area. However, occupancy declined in 1996 due to new competitors being added to the market. Rent concessions and discounts were offered to maintain occupancy and compete within the market. Occupancy increased slightly in 1997 as the new storage units were absorbed. Currently, there is little available land in the immediate area on which to build new storage facilities. The Partnership expects to offer fewer discounts to tenants in 1998 and to maintain occupancy in the low to mid 90% range. Margate - ------- Margate Mini-Storage consists of four, one-story and one, three-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 640 units, with 11 of the units being recreational vehicle parking spaces. 52% of the units are air conditioned. The property is located in a predominately commercial/retail neighborhood with single family homes and multi-family communities along the secondary streets. Major repairs on the road fronting the property have resulted in heavy traffic congestion. A competing facility was built last year adjacent to Margate that offers truck rentals, boxes and packing supplies. Competition from new self-storage facilities over the past several years has had an adverse effect on the property's occupancy, and discounts and concessions have been given to attract new renters. The property has an excellent reputation in the marketplace and management expects to maintain occupancy in the low 90% range in 1998. Military Trail - -------------- Military Trail Mini-Storage consists of eight, one-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 685 units, with 23 of the units being recreational vehicle parking spaces. 35% of the units are air conditioned. The property is located in a predominately commercial/retail neighborhood. The majority of the apartment complexes in the area are to the north with single family residences to the west. The location is the most positive feature with direct access to Military Trail, a major thoroughfare. During 1997 and 1996, occupancy began to drop due to four new facilities being built in the area. An increased amount of discounts and concessions were given to attract and retain renters. Another older facility is currently being renovated. For 1998, the Partnership will continue to offer discounts and concessions and expects to maintain occupancy in the low 90% range throughout 1998. One Corporate Center I and One Corporate Center III - --------------------------------------------------- One Corporate Center I and III are six-story class "B" office buildings located in the southwest suburban Minneapolis/St. Paul metropolitan area. The buildings are two of four identical buildings located in a commercial development identified as One Corporate Center. Rental rates increased in 1996 and 1997 due to renewing leases at current market rates. Average occupancy rates in the area decreased slightly due to several new office buildings being built in 1997. Although there are substantial lease expirations at both properties in 1998, management will attempt to renew the leases at least six months prior to the expiration of the lease. This will allow management to market the space to a new tenant if the existing tenant declines to renew their lease. The properties will continue to perform capital improvements in 1998 in order to replace aging building systems and to upgrade common areas to remain competitive in the marketplace. The Partnership expects to maintain occupancy in the mid 90% range. Assets Held for Sale: AAA Century Airport - ------------------- AAA Century Airport Self-Storage consists of three, two-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 567 units, including 10 recreational vehicle parking spaces. Each unit is individually alarmed for additional security. The property does not offer climate-controlled units. The property is located approximately two miles from the Los Angeles International Airport in Inglewood, California. Inglewood is a relatively mature area with growth to the west generated by development around the airport. The property is located in a low income area with a high unemployment and crime rate. The competition is inferior in appearance and management. However, one competitor offers a truck and driver and another competitor offers crates and pick-up trucks for use by its renters. AAA Century has an advantage in that it is able to offer individually alarmed units for additional security. AAA Century's occupancy is currently above the average occupancy in the area of 90%, and the Partnership expects to maintain occupancy in the mid 90% range in 1998. Burbank - ------- Burbank Mini-Storage consists of two, two-story and one, three-story self-storage warehouse buildings and one apartment/leasing office. The rentable space is divided into 982 units, with 10 of these units being recreational vehicle parking spaces. All of the buildings have fire sprinklers, but do not offer climate-controlled environments. The property is located in the eastern quadrant of Burbank, California, just west of Interstate 5 and approximately twenty miles north of downtown Los Angeles and seven miles south of the Burbank Airport. There are two competing self-storage properties with superior visibility and highway access. However, one of these properties will be demolished in 1998 to make room for a new retail center. Management increased occupancy in 1997 by aggressively marketing the upstairs units that are seldom rented. Management will continue to offer discounts for the upstairs units while rents will be increased on the lower level units which are in high demand. The Partnership expects to maintain occupancy in the low 90% range in 1998. The following schedule shows lease expirations for each of the Partnership's commercial properties for 1998 through 2007:
Number of Annual % of Gross Expirations Square Feet Rent Annual Rent ----------- ----------- ------------ ----------- One Corporate Center I 1998 9 28,561 $ 390,588 27% 1999 6 17,705 220,550 15% 2000 3 5,705 85,680 6% 2001 7 19,849 313,693 22% 2002 7 36,879 421,662 30% 2003-2007 - - - - One Corporate Center III 1998 11 41,718 $ 531,224 37% 1999 7 26,749 356,102 25% 2000 4 15,021 230,956 16% 2001 3 7,953 124,146 9% 2002 3 8,725 107,539 7% 2003 - - - - 2004 1 3,639 70,481 5% 2005 - - - - 2006 1 920 17,484 1% 2007 - - - -
No mini-storage 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 - --------- -------------- ----------- ---------- One Corporate Center I General Office 10,761 $ 134,954 1998 Bank 13,666 160,576 1999 General Office 10,750 198,875 2002 General Office 19,626 106,721 2002 One Corporate Center III General Office 12,988 $ 158,454 1998
ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: 1) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners, L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., et al. - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the fourteen limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. Defendants must move, answer or otherwise respond to the second consolidated and amended complaint by June 30, 1998. 2) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership and other affiliated partnerships (as defined in this Section 1, the "Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District Court of Dallas County. The petition sought recovery against the Partnership's former auditors, Ernst & Young, for negligence and fraud in failing to detect and/or report overcharges of fees/expenses by Southmark, the former general partner. The former auditors initially asserted counterclaims against the Affiliated Partnerships based on alleged fraudulent misrepresentations made to the auditors by the former management of the Affiliated Partnerships (Southmark) in the form of client representation letters executed and delivered to the auditors by Southmark management. The counterclaims sought recovery of attorneys' fees and costs incurred in defending this action. The counterclaims were later dismissed on appeal, as discussed below. The trial court granted summary judgment against the Affiliated Partnerships based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Affiliated Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 1996. Shortly before trial, the district court judge once again granted summary judgment against the Affiliated Partnerships on December 2, 1996. The Partnership is continuing to pursue vigorously its claims against Ernst & Young; however, the final outcome of this litigation cannot be determined at this time. 3) Helen Pasco v. McNeil Real Estate Fund XXVII, L.P., Southmark Prime Plus Corp., et al. and Does 1-50 Inclusive. This complaint alleges that several limited partnerships and funds, including the Partnership, along with McMachen, Prudential Securities, Inc. and other unidentified defendants, transmitted false and misleading information to the plaintiff which was used to entice the plaintiff into investing her money with the defendants. The complaint also alleges that the defendants misrepresented speculative, illiquid limited partnerships as safe, revenue-producing investments suitable for safety-conscious and conservative investors. Although the Partnership is included as a defendant, the plaintiff's allegations do not specify in what way the Partnership was involved in improper conduct. The complaint does not state, other than by broad allegations, that the Partnership acted in an improper manner with regard to the operation or management of the limited partnership. An answer was filed on behalf of the Partnership in February 1994. Although plaintiff's counsel stated plaintiff was going to amend the complaint, no such amended complaint was ever served on the Partnership and it presumes that plaintiff either deleted the Partnership as a defendant or abandoned the action. Accordingly, the Partnership has taken no further action on this claim and it appears to have been abandoned. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP - ------- -------------------------------------------------------- AND RELATED SECURITY HOLDER MATTERS ----------------------------------- (A) There is no established public trading market for limited partnership units, nor is one expected to develop. B) Title of Class Number of Record Unit Holders Limited partnership units 2,339 as of January 31, 1998 (C) Distributions paid to the limited partners totaled $3,999,970 in 1997 and $5,999,994 in 1996 from cash from operations. No distributions were paid to the General Partner in 1997 or 1996. During the last week of March 1998, the Partnership distributed approximately $2,250,000 to the limited partners of record as of March 1, 1998. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies - Distributions." ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- The following table sets forth a summary of certain financial data for the Partnership. This summary should be read in conjunction with the Partnership's financial statements and notes thereto appearing in Item 8 - Financial Statements and Supplementary Data.
Statements of Years Ended December 31, Operations 1997 1996 1995 1994 1993 - ------------------ ------------- ------------- -------------- ------------- ------------- Rental revenue............... $ 8,366,664 $ 7,943,383 $ 7,517,404 $ 7,234,070 $ 6,546,936 Interest income on mort- gage loan investments..... 766,211 268,665 440,658 451,841 674,118 Income before extra- ordinary item............. 2,788,653 2,245,414 3,268,110 1,355,563 1,306,745 Extraordinary item........... - - (252,402) - - Net income................... 2,788,653 2,245,414 3,015,708 1,355,563 1,306,745 Net income per weighted average hundred limited partnership units: Income before extra- ordinary item........... $ 52.72 $ 42.15 $ 60.93 $ 25.09 $ 24.00 Extraordinary item........ - - (4.71) - - ------------ ------------ ------------ ------------ ------------ Net income................ $ 52.72 $ 42.15 $ 56.22 $ 25.09 $ 24.00 ============ ============ ============ ============ ============ Distributions per weighted average hundred limited partnership units......... $ 76.38 $ 113.77 $ - $ - $ - ============ ============ ============ ============ ============
As of December 31, Balance Sheets 1997 1996 1995 1994 1993 - -------------- ------------- ------------- -------------- ------------- -------- Real estate investments, net... $ 18,630,576 $ 23,888,948 $ 24,977,575 $ 25,921,989 $ 26,674,164 Assets held for sale........... 4,549,881 - - - - Mortgage loan investments, net......................... 6,956,487 4,692,760 3,597,673 4,679,929 5,718,144 Total assets................... 33,681,114 32,641,270 35,489,741 39,501,853 38,779,870 Long-term debt................. 3,437,648 1,101,619 - 6,726,266 6,853,753 Partners' equity............... 28,999,177 30,543,422 34,630,930 31,948,150 30,925,518
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- FINANCIAL CONDITION - ------------------- Under the original partnership agreement, the Partnership was formed to engage in the business of making short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring revenue-producing real properties and reinvesting the proceeds from repayment of such loans in additional affiliate loans. In 1989, the Partnership initiated foreclosure proceedings on the collateral securing each of its mortgage loan investments. The Partnership acquired two office buildings in 1989 and eight mini-storage warehouses in 1990 as a result of the foreclosures. Also in 1990, one loan was collected in full when the borrower sold the mini-storage warehouse securing the loan. The remaining mortgage loan investment, secured by a mini-storage warehouse owned by an unaffiliated limited partnership, was collected in full in 1996. In October 1992, the Partnership received approximately $6.5 million of net proceeds from a $7 million loan secured by five of the Partnership's mini-storage warehouses located in Florida. A portion of the proceeds were used for working capital and for general partnership purposes. The loan proceeds were also used to make such loans to affiliates in accordance with the Amended Partnership Agreement as more fully described in Item 8 - Note 6 - "Mortgage Loan Investments - Affiliates" and Item 13 - Certain Relationships and Related Transactions. The mortgage note payable was paid in full in 1995. A $5 million line of credit was obtained during 1995 for the purposing of funding additional loans to affiliates of the General Partner. See Item 8 - Note 7 - "Revolving Credit Agreement." RESULTS OF OPERATIONS - --------------------- 1997 compared to 1996 Revenue: Total revenue increased by $718,361 in 1997 as compared to 1996. The increase was mainly due to an increase in rental revenue and interest income on mortgage loan investments - affiliates, partially offset by decreases in interest income on the Partnership's mortgage loan investment to an unaffiliated borrower, other interest income and a gain on extinguishment of mortgage loan investment, as discussed below. Rental revenue increased by $423,281 in 1997 as compared to 1996. The increase was mainly due to increases of approximately $133,000 and $157,000 at One Corporate Center I and III office buildings, respectively, as a result of increases in rental rates in 1997 as well as decreased discounts and concessions given to tenants. Also, there was an increase in expense reimbursements billed to tenants as a result of an increase in property taxes incurred by the two office buildings in 1997, as discussed below. In addition, rental revenue increased at all of the mini-storage properties, except for Military Trail, as a result of an increase in rental rates in 1997. Rental revenue at Military Trail decreased slightly due to a small decline in average occupancy rates in 1997. See Item 2 - Properties for a more detailed analysis of occupancy and rents per square foot. In 1996, the Partnership recorded $32,444 of interest income on the mortgage loan investment related to the A-Quality Mini-Storage loan. Since this loan was repaid by the borrower in the first quarter of 1996, no such income was recorded in 1997. Interest income on mortgage loan investments - affiliates increased by $529,990 in 1997 as compared to 1996. The increase was mainly due to a higher average amount of loans outstanding during 1997. The Partnership had loaned approximately $7 million to affiliates as of December 31, 1997 and approximately $4.7 million as of December 31, 1996. Other interest income in 1997 decreased by $149,625 in relation to 1996, primarily due to a lower amount of cash available for short-term investment in 1997. The Partnership held approximately $5.7 million of cash and cash equivalents at the beginning of 1996. Cash and cash equivalents decreased to approximately $3 million at the end of 1996 and further decreased to approximately $2.4 million at the end of 1997. In 1996, the Partnership recognized a $52,841 gain on extinguishment of mortgage loan investment due to the early payoff of the A-Quality note. No such gain was recognized in 1997. Expenses: Total expenses increased by $175,122 in 1997 as compared to 1996. The increase was mainly due to an increase in interest expense and property taxes, partially offset by a decrease in depreciation and amortization and general and administrative expenses, as discussed below. Interest expense in 1997 increased by $146,982 as compared to 1996, due to a greater amount borrowed under the Partnership's line of credit agreement in 1997. The interest expense recorded in 1997 and 1996 represents interest costs and amortization of deferred borrowing costs relating to the Partnership's $5 million line of credit. The Partnership did not borrow any funds under the line of credit agreement until November 1996. The Partnership had borrowed approximately $3.4 million under the agreement at December 31, 1997 as compared to approximately $1.1 million at December 31, 1996. Depreciation and amortization expense decreased by $195,828 in 1997 as compared to 1996. The decrease was due to AAA Century Airport and Burbank mini-storages being classified as assets held for sale by the Partnership effective August 1, 1997. In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Partnership ceased recording depreciation on the assets at the time they were placed on the market for sale. Property taxes in 1997 increased by $174,483 in relation to 1996, due to an increase in the assessed taxable value of One Corporate Center I and III office buildings by taxing authorities. General and administrative expenses decreased by $33,750 in 1997 as compared to 1996, mainly due to a decrease in costs relating to evaluation and dissemination of information regarding an unsolicited tender offer as discussed in Item 1 - Business. 1996 compared to 1995 Revenue: Total revenue decreased by $1,085,785 in 1996 as compared to 1995. The decrease was due to a decrease in interest income, a non-recurring 1995 property tax refund and gain on legal settlement, partially offset by an increase in rental revenue and a non-recurring 1996 gain on extinguishment of mortgage loan investment, as discussed below. Rental revenue for 1996 increased by $425,979 in relation to 1995. The increase was mainly due to increases of approximately $107,000 and $127,000 at One Corporate Center I and III office buildings as a result of an increase in rental rates in 1996. In addition, rental revenue increased by approximately $44,000, $31,000 and $37,000 at Fountainbleau, Forest Hill and Military Trail mini-storages as a result of an increase in rental rates in 1996. Rental revenue at Burbank Mini-Storage increased by approximately $43,000 due to an increase in occupancy in 1996. See Item 2 - Properties for a more detailed analysis of occupancy and rents per square foot. Interest income on mortgage loan investment decreased by $116,890 in 1996 as compared to 1995. The decrease was due to the repayment of the A-Quality Mini-Storage loan by the borrower in the first quarter of 1996. Interest income on mortgage loan investments - affiliates decreased by $55,103 in 1996 as compared to 1995. The decrease was due to a lower average amount of loans outstanding during 1996. Although there was a greater amount of loans outstanding at the end of 1996, $3.4 million of those loans were made in late November 1996. Other interest income in 1996 decreased by $59,773 in relation to 1995. The decrease was primarily due to a lower amount of cash available for short-term investment as a result of approximately $6 million of distributions being paid to the limited partners in 1996. In 1995, the Partnership received a $30,515 refund of prior years' property taxes for AAA Century Airport Mini-Storage as a result of an appeal filed on behalf of the property. No such property tax refunds were received in 1996. As discussed in Item 1, 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 $1,302,324 gain as a result of this settlement. No such gain was recognized in 1996. In 1996, the Partnership recognized a $52,841 gain on extinguishment of mortgage loan investment due to the early payoff of the A-Quality note. No such gain was recognized in 1995. Expenses: Total expenses decreased by $63,089 in 1996 as compared to 1995. The decrease was mainly due to a decrease in interest expense and general and administrative - - affiliates, partially offset by an increase in general and administrative expenses, as discussed below. Interest expense in 1996 decreased by $262,907 in relation to 1995. The Partnership's mortgage note payable was repaid in the second half of 1995. The Partnership borrowed additional funds under its line of credit agreement in November 1996, as further discussed in Item 8 - Note 7 - "Revolving Credit Agreement." Interest expense includes amortization of deferred borrowing costs. General and administrative expenses increased by $84,894 in 1996 as compared to 1995. The increase was due to costs incurred in 1996 relating to evaluation and dissemination of information regarding an unsolicited tender offer in 1996 as discussed in Item 1 - Business. General and administrative - affiliates decreased by $112,735 in 1996 as compared to 1995. The decrease was mainly due to a decrease in overhead expenses allocated to the Partnership by McREMI. In 1995, the Partnership recognized a $252,402 extraordinary loss incurred in connection with the repayment of its mortgage note payable as discussed in Item 8 - Note 7 - "Revolving Credit Agreement." The loss consisted of $66,949 in prepayment penalties and a $185,453 write off of deferred borrowing costs. No such loss was recorded in 1996. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Partnership generated $4,409,938 of cash through operating activities in 1997, $4,134,772 in 1996 and $5,157,580 in 1995. The increase in 1997 as compared to 1996 was mainly due to an increase in cash received from tenants and interest received from affiliates. The increases were partially offset by a decrease in interest received from non-affiliates, and an increase in interest paid and property taxes paid (see discussion of changes in corresponding revenue and expense accounts, above). The decrease in cash generated through operating activities in 1996 as compared to 1995 was mainly due to cash received in 1995 from the settlement of bankruptcy claims against Southmark, partially offset by a decrease in interest paid in 1996. The Partnership's mortgage note payable was repaid in the second half of 1995 and additional funds were not borrowed under the line of credit until late November 1996; thus the related interest expense decreased. The Partnership expended $724,380, $540,072 and $563,333 for additions to its real estate investments and assets held for sale in 1997, 1996 and 1995, respectively. The increase in 1997 as compared to 1996 and 1995 was mainly due to a greater amount of tenant improvements being performed at One Corporate Center I Office Building in 1997. In 1996, the Partnership received cash of $1,404,026 as repayment in full of the Partnership's mortgage loan investment to an unaffiliated borrower. The Partnership received $282,420 of principal payments on the loan in 1995. No such funds were received in 1997. The Partnership made loans to affiliates (net of collections) of $2,263,727 in 1997 and $2,456,858 in 1996. The Partnership collected $972,000 from affiliates in 1995. In 1997 and 1996, the Partnership received $2,336,029 and $1,101,619, respectively, in proceeds from its revolving credit agreement, which were used to make loans to affiliates. In 1995, the Partnership expended a total of $6,726,266 to repay in full its mortgage note payable and paid $66,949 in prepayment penalties associated with such repayment. The Partnership also paid $195,059 in deferred borrowing costs to secure a $5 million line of credit. The Partnership distributed $3,999,970 and $5,999,994 to the limited partners in 1997 and 1996, respectively, from cash from operations. No distributions were paid to the partners in 1995. Short-term liquidity: At December 31, 1997, the Partnership held cash and cash equivalents of $2,440,084. This balance provides a reasonable level of working capital for the Partnership's immediate needs in operating its properties. For the Partnership as a whole, management projects positive cash flow from operations in 1998. The Partnership has budgeted approximately $1,255,000 for necessary capital improvements for all properties in 1998, which are expected to be funded from available cash reserves or from operations of the properties. Additional efforts to maintain and improve Partnership liquidity have included continued attention to property management activities. The objective has been to obtain maximum occupancy rates while holding expenses to levels necessary to maximize cash flows. The Partnership has made capital expenditures on its properties where improvements were expected to increase the competitiveness and marketability of the properties. During the last week of March 1998, the Partnership distributed approximately $2,250,000 to the limited partners of record as of March 1, 1998. Long-term liquidity: While the outlook for maintenance of adequate levels of liquidity is favorable, should operations deteriorate and present cash resources be insufficient for current needs, the Partnership would require other sources of working capital. The Partnership acquired a $5 million line of credit in 1995 that may be used for property operations. Other possible actions to resolve cash deficiencies include refinancings, deferral of capital expenditures on Partnership properties except where improvements are expected to increase the competitiveness and marketability of the properties, arranging financing from affiliates or the ultimate sale of the properties. Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof. The Partnership has placed AAA Century Airport Self-Storage and Burbank Mini-Storage on the market for sale effective August 1, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
Page Number ------ INDEX TO FINANCIAL STATEMENTS - ----------------------------- Financial Statements: Report of Independent Public Accountants....................................... 20 Balance Sheets at December 31, 1997 and 1996................................... 21 Statements of Operations for each of the three years in the period ended December 31, 1997..................................................... 22 Statements of Partners' Equity (Deficit) for each of the three years in the period ended December 31, 1997....................................... 23 Statements of Cash Flows for each of the three years in the period ended December 31, 1997..................................................... 24 Notes to Financial Statements.................................................. 26 Financial Statement Schedule - Schedule III - Real Estate Investments and Accumulated Depreciation and Amortization............................................ 39
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 XXVII, L.P.: We have audited the accompanying balance sheets of McNeil Real Estate Fund XXVII, L.P. (a Delaware limited partnership) as of December 31, 1997 and 1996, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McNeil Real Estate Fund XXVII, L.P. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen, LLP Dallas, Texas March 20, 1998 MCNEIL REAL ESTATE FUND XXVII, L.P. BALANCE SHEETS
December 31, ------------------------------------ 1997 1996 --------------- --------------- ASSETS - ------ Real estate investments: Land..................................................... $ 4,196,277 $ 5,387,855 Buildings and improvements............................... 23,241,031 27,175,885 -------------- ------------- 27,437,308 32,563,740 Less: Accumulated depreciation and amortization......... (8,806,732) (8,674,792) -------------- ------------- 18,630,576 23,888,948 Assets held for sale........................................ 4,549,881 - Mortgage loan investments - affiliates...................... 6,956,487 4,692,760 Cash and cash equivalents................................... 2,440,084 3,022,851 Cash segregated for security deposits and repurchase of limited partnership units.................. 442,193 427,123 Accounts receivable......................................... 426,825 297,942 Accrued interest receivable................................. 64,991 43,200 Deferred borrowing costs, net of accumulated amortization of $195,059 and $146,294 at December 31, 1997 and 1996, respectively................. - 48,765 Prepaid expenses and other assets........................... 170,077 219,681 -------------- ------------- $ 33,681,114 $ 32,641,270 ============== ============= LIABILITIES AND PARTNERS' EQUITY (DEFICIT) - ------------------------------------------ Revolving credit agreement.................................. $ 3,437,648 $ 1,101,619 Accounts payable and accrued expenses....................... 107,549 77,635 Payable to limited partners................................. 332,928 332,928 Payable to affiliates....................................... 542,045 370,837 Security deposits and deferred rental revenue............... 261,767 214,829 -------------- ------------- 4,681,937 2,097,848 -------------- ------------- Partners' equity (deficit): Limited partners - 10,000,000 limited partnership units authorized; 5,199,901 and 5,236,893 limited partner- ship units outstanding at December 31, 1997 and 1996, respectively........................................... 29,076,126 30,648,258 General Partner.......................................... (76,949) (104,836) -------------- ------------- 28,999,177 30,543,422 -------------- ------------- $ 33,681,114 $ 32,641,270 ============== =============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------------------------- 1997 1996 1995 -------------- -------------- --------------- Revenue: Rental revenue.......................... $ 8,366,664 $ 7,943,383 $ 7,517,404 Interest income on mortgage loan investment............................ - 32,444 149,334 Interest income on mortgage loan investments - affiliates.............. 766,211 236,221 291,324 Other interest income................... 150,357 299,982 359,755 Property tax refund..................... - - 30,515 Gain on legal settlement................ - - 1,302,324 Gain on extinguishment of mortgage loan investment....................... - 52,841 - ------------- ------------- -------------- Total revenue......................... 9,283,232 8,564,871 9,650,656 ------------- ------------- -------------- Expenses: Interest................................ 269,289 122,307 385,214 Depreciation and amortization........... 1,432,871 1,628,699 1,507,747 Property taxes.......................... 978,083 803,600 751,848 Personnel costs......................... 719,441 667,758 627,809 Repairs and maintenance................. 594,984 590,986 579,543 Property management fees - affiliates............................ 462,289 435,159 426,203 Utilities............................... 459,243 455,718 444,526 Other property operating expenses....... 590,887 581,026 597,611 General and administrative.............. 107,560 141,310 56,416 General and administrative - affiliates............................ 879,932 892,894 1,005,629 ------------- ------------- -------------- Total expenses........................ 6,494,579 6,319,457 6,382,546 ------------- ------------- -------------- Net income before extraordinary item....... 2,788,653 2,245,414 3,268,110 Extraordinary item......................... - - (252,402) -------------- ------------- -------------- Net income................................. $ 2,788,653 $ 2,245,414 $ 3,015,708 ============== ============= ============== Net income allocable to limited partners................................ $ 2,760,766 $ 2,222,960 $ 2,985,551 Net income allocable to General Partner................................. 27,887 22,454 30,157 -------------- ------------- -------------- Net income................................. $ 2,788,653 $ 2,245,414 $ 3,015,708 ============== ============= ============== Net income per weighted average hundred limited partnership units: Net income before extraordinary item.... $ 52.72 $ 42.15 $ 60.93 Extraordinary item...................... - - (4.71) -------------- ------------- ------------- Net income................................. $ 52.72 $ 42.15 $ 56.22 ============== ============= ============= Distributions per weighted average hundred limited partnership units....... $ 76.38 $ 113.77 $ - ============== ============= =============
See accompanying notes to financialstatements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF PARTNERS' EQUITY (DEFICIT) For the Years Ended December 31, 1997, 1996 and 1995
Total General Limited Partners' Partner Partners Equity ---------------- ----------------- ---------------- Balance at December 31, 1994.............. $ (157,447) $ 32,105,597 $ 31,948,150 Repurchase of 36,992 limited partnership units...................... - (332,928) (332,928) Net income................................ 30,157 2,985,551 3,015,708 -------------- --------------- --------------- Balance at December 31, 1995.............. (127,290) 34,758,220 34,630,930 Repurchase of 36,992 limited partnership units...................... - (332,928) (332,928) Net income................................ 22,454 2,222,960 2,245,414 Distributions to limited partners......... - (5,999,994) (5,999,994) -------------- --------------- --------------- Balance at December 31, 1996.............. (104,836) 30,648,258 30,543,422 Repurchase of 36,992 limited partnership units...................... - (332,928) (332,928) Net income................................ 27,887 2,760,766 2,788,653 Distributions to limited partners......... - (3,999,970) (3,999,970) -------------- ----------------- ---------------- Balance at December 31, 1997.............. $ (76,949) $ 29,076,126 $ 28,999,177 ============== ================= ================
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents
For the Years Ended December 31, ----------------------------------------------------- 1997 1996 1995 --------------- --------------- ---------------- Cash flows from operating activities: Cash received from tenants.............. $ 8,203,733 $ 7,881,796 $ 7,754,299 Cash paid to suppliers.................. (2,308,949) (2,278,401) (2,107,840) Cash paid to affiliates................. (1,171,013) (1,210,260) (1,405,977) Interest received....................... 150,357 344,947 336,925 Interest received from affiliates....... 744,420 215,064 316,719 Interest paid........................... (230,527) (14,774) (317,537) Property taxes paid..................... (978,083) (803,600) (751,848) Property tax refund..................... - - 30,515 Cash received from legal settlement..... - - 1,302,324 ------------- ------------- -------------- Net cash provided by operating activities.............................. 4,409,938 4,134,772 5,157,580 ------------- ------------- -------------- Cash flows from investing activities: Additions to real estate investments and assets held for sale.............. (724,380) (540,072) (563,333) Proceeds from collection of mortgage loan investments...................... - 1,404,026 282,420 Mortgage loan investments - affiliates............................ (2,336,029) (3,409,396) - Proceeds from collection of mortgage loan investments - affiliates......... 72,302 952,538 972,000 ------------- ------------- -------------- Net cash provided by (used in) investing activities.................... (2,988,107) (1,592,904) 691,087 ------------- ------------- -------------- Cash flows from financing activities: Net increase in cash segregated for repurchase of limited partnership units..................... (7,729) (6,371) (5,215) Deferred borrowing costs paid........... - - (195,059) Proceeds from revolving credit agreement............................. 2,336,029 1,101,619 - Principal payments on mortgage note payable.......................... - - (6,726,266) Mortgage prepayment penalty paid........ - - (66,949) Repurchase of limited partnership units................................. (332,928) (332,928) (332,931) Distributions to limited partners....... (3,999,970) (5,999,994) - ------------- ------------- -------------- Net cash used in financing activities...... (2,004,598) (5,237,674) (7,326,420) ------------- ------------- -------------- Net decrease in cash and cash equivalents........................ (582,767) (2,695,806) (1,477,753) Cash and cash equivalents at beginning of year....................... 3,022,851 5,718,657 7,196,410 ------------- ------------- -------------- Cash and cash equivalents at end of year................................. $ 2,440,084 $ 3,022,851 $ 5,718,657 ============= ============= ==============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. STATEMENTS OF CASH FLOWS Reconciliation of Net Income to Net Cash Provided by Operating Activities
For the Years Ended December 31, ---------------------------------------------------- 1997 1996 1995 -------------- -------------- --------------- Net income................................. $ 2,788,653 $ 2,245,414 $ 3,015,708 ------------- ------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 1,432,871 1,628,699 1,507,747 Amortization of deferred borrowing costs................................. 48,765 97,530 67,677 Allowance for impairment of mortgage loan investment.............. - - (172,164) Gain on extinguishment of mortgage loan investment....................... - (52,841) - Extraordinary item...................... - 252,402 Changes in assets and liabilities: Cash segregated for security deposits............................ (7,341) (13,187) 1,962 Accounts receivable................... (128,883) 1,893 225,452 Accrued interest receivable........... (21,791) (8,636) 25,395 Prepaid expenses and other assets.............................. 49,604 98,482 202,024 Accounts payable and accrued expenses............................ 29,914 9,164 (3,960) Payable to affiliates................. 171,208 117,793 25,855 Security deposits and deferred rental revenue...................... 46,938 10,461 9,482 ------------- ------------- -------------- Total adjustments................. 1,621,285 1,889,358 2,141,872 ------------- ------------- -------------- Net cash provided by operating activities.............................. $ 4,409,938 $ 4,134,772 $ 5,157,580 ============= ============= ==============
See accompanying notes to financial statements. McNEIL REAL ESTATE FUND XXVII, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Organization - ------------ McNeil Real Estate Fund XXVII, L.P. (the "Partnership"), formerly known as Southmark Prime Plus, L.P., was organized by affiliates of Southmark Corporation ("Southmark") on January 16, 1987, as a limited partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act to make short-term loans to affiliates of the general partner. 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 Prime Plus Corp. (the "Original General Partner"), a wholly-owned subsidiary of McNeil. 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 600, Dallas, Texas 75240. The sole limited partner of the Partnership was initially Southmark Depositary Corp. (the "Depositary"), a wholly-owned subsidiary of Southmark. The Depositary assigned the principal attributes of its aggregate limited partner interest in the Partnership to the Depositary unit holders. The Depositary units were subsequently converted to limited partnership units ("Units"). Under the original partnership agreement, the Partnership's primary business was to make short-term nonrecourse mortgage or deed of trust loans to affiliates of the Original General Partner and to partnerships or real estate investment trusts sponsored by affiliates of the Original General Partner formed for the purpose of acquiring revenue-producing real properties. Due to borrower defaults and foreclosures on the properties securing all but one of these mortgages, the Partnership's business also includes ownership and operation of real estate. In 1992, the Partnership used a portion of proceeds from a mortgage note payable to make nonrecourse mortgage loans to affiliates of the General Partner in accordance with the Amended Partnership Agreement. The mortgage note payable was repaid by the Partnership in 1995, and a $5 million revolving credit agreement was obtained that is being used to fund additional loans made to affiliates of the General Partner. See Note 7 - "Revolving Credit Agreement." The loans made to affiliates are secured by revenue-producing real estate and are either junior or senior to other indebtedness as more fully described in Note 6 - "Mortgage Loan Investments - Affiliates." The Partnership is engaged in the ownership, operation and management of commercial real estate and the servicing of mortgage loan investments secured by real estate. At December 31, 1997, the Partnership had four mortgage loan investments to affiliates of the General Partner as described in Note 6 - "Mortgage Loan Investments Affiliates" and owned ten revenue-producing properties as described in Note 4 - "Real Estate Investments." Pursuant to the Partnership's previously announced liquidation plans, the Partnership has recently retained PaineWebber, Incorporated as its exclusive financial advisor to explore alternatives to maximize the value of the Partnership. The alternatives being considered by the Partnership include, without limitation, a transaction in which limited partnership interests in the Partnership are converted into cash. The General Partner of the Partnership or entities or persons affiliated with the General Partner will not be involved as a purchaser in any of the transactions contemplated above. Any transaction will be subject to certain conditions including (i) approval by the limited partners of the Partnership, and (ii) receipt of an opinion from an independent financial advisory firm as to the fairness of the consideration received by the Partnership pursuant to such transaction. Finally, there can be no assurance that any transaction will be consummated, or as to the terms thereof. The Partnership has placed AAA Century Airport Self-Storage and Burbank Mini-Storage on the market for sale effective August 1, 1997. Basis of Presentation - --------------------- The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Investments - ----------------------- Real estate investments are generally stated at the lower of depreciated cost or fair value. Real estate investments are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. When the carrying value of a property exceeds the sum of all estimated future cash flows, an impairment loss is recognized. At such time, a write-down is recorded to reduce the basis of the property to its estimated fair value. The Partnership's method of accounting for real estate investments is in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which the Partnership adopted effective January 1, 1996. The adoption of SFAS 121 did not have a material impact on the accompanying financial statements. Improvements and betterments are capitalized and expensed through depreciation charges. Repairs and maintenance are charged to operations as incurred. Assets Held for Sale - -------------------- Assets held for sale are stated at the lower of depreciated cost or fair value less costs to sell. Depreciation on these assets ceases at the time they are placed on the market for sale. Depreciation and Amortization - ----------------------------- Buildings and improvements are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 25 years. Tenant improvements are capitalized and are amortized over the terms of the related tenant lease, using the straight-line method. Mortgage Loan Investments - ------------------------- Mortgage loan investments are recorded at their original basis, net of any allowance for impairment. Interest income is recognized as it is earned. 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 term of the revolving credit agreement. Amortization of deferred borrowing costs is included in interest expense on the Statements of Operations. Rental Revenue - -------------- The Partnership leases its mini-storage warehouses under short-term operating leases. Lease terms generally are less than one year in duration. Rental revenue is recognized as earned. The Partnership leases its commercial properties under non-cancelable operating leases. Certain leases provide concessions and/or periods of escalating or free rent. Rental revenue is recognized on a straight-line basis over the term 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 provides for net income and net loss of the Partnership to be allocated 99% to the limited partners and 1% to the General Partner. Federal income tax law provides that the allocation of loss to a partner will not be recognized unless the allocation is in accordance with a partner's interest in the partnership or the allocation has substantial economic effect. Internal Revenue Code Section 704(b) and accompanying Treasury Regulations establish criteria for allocation of Partnership deductions attributable to debt. The Partnership's tax allocations for 1997, 1996, and 1995 have been made in accordance with these provisions. Distributions - ------------- At the discretion of the General Partner, distributions to the partners are paid from cash from operations available after payment of affiliate compensation. Under the terms of the Amended Partnership Agreement, the General Partner is not entitled to distributions from operations. Cash from operations available for distribution is determined by provisions of the Amended Partnership Agreement, and differs from the amount reported as net cash provided by operating activities in the accompanying Statements of Cash Flows. Cash from operations available for distribution consists of cash received from operations of the Partnership during a given period of time less (1) operational cash disbursements during the same period of time including capital improvements, unscheduled mortgage principal reductions and repayment of Partnership advances from affiliates, (2) a reasonable allowance for reserves, contingencies and anticipated obligations as determined at the discretion of the General Partner, (3) proceeds held pending investment in affiliate loans, and (4) any monies reserved for repurchase of Units. Liquidation proceeds will be distributed when the Partnership is dissolved after taking into account all items of income, gain, loss or deduction. Distribution of liquidation proceeds will then be made to the partners with positive capital account balances. The Partnership distributed $3,999,970 and $5,999,994 of cash from operations in 1997 and 1996, respectively. No distributions were paid to the partners in 1995. No distributions were paid to the General Partner in 1997, 1996 or 1995. During the last week of March 1998, the Partnership plans to distribute approximately $2,250,000 to the limited partners of record as of March 1, 1998. Net Income Per Hundred Limited Partnership Units - ------------------------------------------------ Net income per one hundred Units is computed by dividing net income allocated to the limited partners by the weighted average number of Units outstanding expressed in hundreds. Per unit information has been computed based on 52,369, 52,739 and 53,109 (in hundreds) Units outstanding in 1997, 1996 and 1995, respectively. NOTE 2 - TRANSACTIONS WITH AFFILIATES - ------------------------------------- The Partnership pays property management fees equal to 5% of the gross rental receipts for its mini-storage warehouses 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 mini-storage warehouses and commercial properties and leasing services for its mini-storage warehouses. McREMI may also choose to provide leasing services for the Partnership's commercial properties, in which case McREMI will receive property management fees from such commercial properties equal to 3% of the property's gross rental receipts plus leasing commissions based on the prevailing market rate for such services where the property is located. The Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. Under the terms of the Amended Partnership Agreement, the Partnership is paying an asset management fee to the General Partner. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $30 per gross square foot for mini-storage warehouses and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases subsequent to 1999. Compensation and reimbursements paid to or accrued for the benefit of the General Partner or its affiliates are as follows: For the Years Ended December 31, ---------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Property management fees........... $ 462,289 $ 435,159 $ 426,203 Charged to general and administrative - affiliates: Partnership administration...... 270,653 314,832 432,998 Asset management fee............ 609,279 578,062 572,631 ---------- ---------- ---------- $ 1,342,221 $ 1,328,053 $ 1,431,832 ========== ========== ========== Until March 13, 1991, the Original General Partner was entitled to receive, out of cash from operations, a performance incentive fee equal to 20% of all points received by the Partnership on mortgage loans if the limited partners received distributions of cash from operations equal to a 10% cumulative noncompounding annual return on their original capital investment. Such fees were cumulative, were accrued in the years earned and are to be paid when conditions were met. Conditions for payment have not yet been met and, at December 31, 1997 and 1996, $141,647 of amounts accrued in prior years are included in payable to affiliates on the Balance Sheets. Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make loans to affiliates of the General Partner, so long as such loans meet certain conditions. See Note 6 - "Mortgage Loan Investments - Affiliates" for a discussion of these transactions. Payable to affiliates at December 31, 1997 and 1996 consisted primarily of the performance incentive fee of $141,647 accrued in prior years, property management fees, Partnership general and administrative expenses, asset management fees and prepaid interest as further discussed in Note 6 - "Mortgage Loan Investments - Affiliates." Except for the performance incentive fee and prepaid interest, all accrued fees are due and payable from current operations. NOTE 3 - TAXABLE INCOME - ----------------------- McNeil Real Estate Fund XXVII, 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 $12,759,576 in 1997, $12,040,518 in 1996 and $11,258,459 in 1995. NOTE 4 - REAL ESTATE INVESTMENTS - -------------------------------- The basis and accumulated depreciation and amortization of the Partnership's real estate investments at December 31, 1997 and 1996 are set forth in the following tables:
Accumulated Buildings and Depreciation Net Book 1997 Land Improvements and Amortization Value ---- -------------- ------------ ---------------- --------------- AAA Sentry N. Lauderdale, FL $ 70,337 $ 612,992 $ (211,565) $ 471,764 Forest Hill W. Palm Beach, FL 510,780 1,995,632 (598,301) 1,908,111 Fountainbleau Miami, FL 287,114 1,237,674 (351,439) 1,173,349 Kendall Sunset Miami, FL 672,756 3,915,577 (1,144,141) 3,444,192 Margate Margate, FL 233,575 1,354,964 (411,706) 1,176,833 Military Trail W. Palm Beach, FL 571,715 1,869,813 (560,022) 1,881,506 One Corporate Center I Edina, MN 925,000 5,975,937 (2,563,037) 4,337,900 One Corporate Center III Edina, MN 925,000 6,278,442 (2,966,521) 4,236,921 ------------- ------------- -------------- ------------- $ 4,196,277 $ 23,241,031 $ (8,806,732) $ 18,630,576 ============= ============= ============= =============
Accumulated Buildings and Depreciation Net Book 1996 Land Improvements and Amortization Value ---- -------------- ------------ ---------------- --------------- AAA Century Airport (a) $ 361,535 $ 2,145,958 $ (543,658) $ 1,963,835 AAA Sentry 70,337 558,674 (162,724) 466,287 Burbank (b) 830,043 2,505,647 (639,212) 2,696,478 Forest Hill 510,780 1,987,092 (509,267) 1,988,605 Fountainbleau 287,114 1,232,975 (288,860) 1,231,229 Kendall Sunset 672,756 3,905,730 (979,692) 3,598,794 Margate 233,575 1,340,085 (341,757) 1,231,903 Military Trail 571,715 1,833,280 (470,276) 1,934,719 One Corporate Center I 925,000 5,621,079 (2,199,151) 4,346,928 One Corporate Center III 925,000 6,045,365 (2,540,195) 4,430,170 ------------- ------------- -------------- ------------- $ 5,387,855 $ 27,175,885 $ (8,674,792) $ 23,888,948 ============= ============= ============= =============
(a) On August 1, 1997, the General Partner placed AAA Century Airport Self-Storage, located in Inglewood, California, on the market for sale. Accordingly, the property was classified as such at December 31, 1997 with a net book value of $1,908,947. (b) On August 1, 1997, the General Partner placed Burbank Mini-Storage, located in Burbank, California, on the market for sale. Accordingly, the property was classified as such at December 31, 1997 with a net book value of $2,640,934. The results of operations for the assets held for sale at December 31, 1997 were $836,166, $724,265 and $702,833 for the years ended December 31, 1997, 1996 and 1995, respectively. Results of operations are operating revenues less operating expenses including depreciation and interest expense. The Partnership leases its office buildings under non-cancelable operating leases. Future minimum rents to be received as of December 31, 1997 are as follows: 1998.................................... $ 2,620,623 1999.................................... 1,818,405 2000.................................... 1,540,167 2001.................................... 1,110,987 2002.................................... 754,779 Thereafter.............................. 120,710 ---------- Total $ 7,965,671 ========== Future minimum rents do not include expense reimbursements for common area maintenance, property taxes and other expenses. These expense reimbursements amounted to $265,764, $132,563 and $130,560 for the years ended December 31, 1997, 1996 and 1995, respectively, and are included in rental revenue on the Statements of Operations. NOTE 5 - MORTGAGE LOAN INVESTMENT - --------------------------------- In 1987, the Partnership made a nonrecourse mortgage loan to an affiliate of Southmark secured by A-Quality Mini-Storage. The property was subsequently sold to an unaffiliated borrower subject to the Partnership's first priority mortgage loan. In April 1994, the borrower, who had filed for bankruptcy in 1990, and the Partnership reached a settlement concerning the loan. Under the settlement, the borrower paid the Partnership $150,000 in cash and the loan was renewed for $1,453,194 (representing the original $2,100,000 principal balance less all post bankruptcy petition payments made by the borrower) effective January 1, 1994. An additional second lien loan was executed in the amount of $134,397 at an interest rate of 6%, which was paid in full in the third quarter of 1995. Principal and interest at a rate of prime plus 2% were payable monthly on the first lien loan. On March 21, 1996, the Partnership received $1,404,026 as full settlement of the first lien loan. In connection with the settlement, the Partnership recorded a $52,841 gain on extinguishment of mortgage loan investment, which represents the excess of the settlement amount over the net carrying amount of the mortgage loan investment and related accrued interest accounts. In accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), the measure of impairment for a loan restructured in a troubled debt restructuring is based on the present value of expected future cash flows discounted at the original contractual rate. Accordingly, upon the April 1994 modification, the Partnership measured the impairment of the mortgage loan investment and determined that an allowance for impairment was still required. The allowance for impairment was written off in March 1996, when the first lien loan was paid in full. For the year ended December 31, 1995, the allowance for impairment decreased by $172,164 due to the passage of time (the allowance was measured based on discounted cash flows). Subsequent to the April 1994 modification, interest income was recorded at an interest rate that equated the expected future cash flows to the mortgage loan investment balance. The expected cash flows changed slightly from year to year. Additionally, any changes in the allowance for impairment that resulted from changes in the discount rate or passage of time were also recorded as interest income. This accounting treatment resulted in the recognition of $32,444 and $149,334 of interest income for the years ended December 31, 1996 and 1995, respectively. The effective interest rate of this interest income was 10.8% and 10.4% for 1996 and 1995, respectively. Interest income of $32,444 and $154,909 would have been recognized under the terms of the modification agreement for the years ended December 31, 1996 and 1995, respectively, if the Partnership had not adopted SFAS 114. NOTE 6 - MORTGAGE LOAN INVESTMENTS - AFFILIATES - ----------------------------------------------- Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make nonrecourse mortgage loans to affiliates of the General Partner so long as such loans meet certain conditions, including that such loans bear interest at a rate equal to the prime lending rate of Bank of America plus 2.5%, or plus 3.5% if the loan is junior to other indebtedness. These loans are secured by revenue-producing real estate and may be either junior or senior to other indebtedness secured by such property. At December 31, 1997, the Partnership had outstanding mortgage loan investments to affiliates of $6,956,487, all of which were first priority loans. For the year ended December 31, 1997, the Partnership recognized $766,211 of interest income related to these loans. The following sets forth the Partnership's mortgage loan investments to affiliates of the General Partner at December 31, 1997 and 1996. Loans were funded by the proceeds from the mortgage note payable entered into in October 1992, the line of credit obtained in June 1995 (see Note 7 - "Revolving Credit Agreement") or other available funds. Interest only payments are due monthly. The monthly payment varies according to the prime lending rate.
Mortgage Annual Lien Interest December 31, Property Position Rate % (a) Maturity 1997 1996 - -------- --------- ---------- ----------- ------------- ----------- McNeil Pension Investment Fund, Ltd.: Brice Road Office Building First 11.00 05/98 $ 411,062 $ 483,364 Verre Center Office Building First 11.00 11/99 820,426 820,426 McNeil Real Estate Fund X, Ltd.: La Plaza Business Center First 11.00 02/00 3,136,029 - Lakeview Plaza Shopping Center Second 12.00 08/97 - 800,000 McNeil Real Estate Fund XI, Ltd.: The Village Apartments First 11.00 11/99 2,588,970 2,588,970 ------------- ---------- $ 6,956,487 $ 4,692,760 ============= ==========
(a) The loans bear interest at the prime lending rate of Bank of America plus 2.5% for senior priority loans and prime plus 3.5% for junior priority loans. The prime lending rate was 8.5% at December 31, 1997 and 8.25% at December 31, 1996. On May 1, 1992, the Partnership agreed to loan an aggregate of $1.115 million to McNeil Pension Investment Fund, Ltd. ("McPIF"), an affiliate of the General Partner, at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). A total of $483,364 was borrowed by McPIF pursuant to this commitment, $72,302 of which was repaid in 1997. This loan is secured by a first lien on Brice Road Office Building located in Reynoldsburg, Ohio. The original loan matured in May 1995, at which time a new loan under substantially the same terms was executed. Interest on the loan is payable monthly. Principal is payable in May 1998. Management intends to renegotiate the note if it is not repaid at maturity. On October 25, 1996, the Partnership agreed to loan an aggregate of $1.68 million to McPIF at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). In 1996, $820,426 was borrowed by McPIF pursuant to this commitment. This loan is secured by a first lien on Verre Center Office Building located in Chamblee, Georgia. Interest on the loan is payable monthly. Principal is payable in November 1999. On February 28, 1997, the Partnership loaned $2,336,029 to McNeil Real Estate Fund X, Ltd. ("Fund X"), at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). On August 1, 1997, the mortgage note was amended and the principal balance was increased by $800,000, for total borrowings from the Partnership of $3,136,029. Fund X used the $800,000 additional proceeds to repay the $800,000 mortgage loan investment secured by Lakeview Plaza Shopping Center, as discussed below. This loan is secured by a first lien on La Plaza Business Center located in Las Vegas, Nevada. Interest on the loan is payable monthly, with principal payable in February 2000. On August 15, 1994, the Partnership loaned $800,000 to Fund X at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). This loan was secured by a second lien on Lakeview Plaza Shopping Center located in Lexington, Kentucky. Interest on the loan was payable monthly, with principal originally due and payable in August 1997. On August 1, 1997, Fund X repaid the loan with proceeds received from a new loan from the Partnership secured by La Plaza Business Center, as discussed above. On October 25, 1996, the Partnership loaned $2,588,970 to McNeil Real Estate Fund XI, L.P. ("Fund XI") at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund XI in connection with borrowings from affiliates pursuant to Fund XI's partnership agreement). This loan is secured by a first lien on The Village Apartments located in Gresham, Oregon. Interest on the loan is payable monthly. Principal is payable in November 1999. On March 1, 1993, the Partnership loaned $952,538 to McNeil Real Estate Fund XXVI, L.P. ("Fund XXVI") at an interest rate of prime plus 2.5%. This loan was secured by a first lien on Continental Plaza Office Building located in Scottsdale, Arizona. Interest on the loan was payable monthly, with principal payable on the third anniversary date of issuance. The loan was paid in full in January 1996. In order to induce the Partnership to lend funds to the foregoing affiliates of the General Partner, the General Partner entered into agreements with the Partnership whereby the General Partner agreed to pay: (i) the difference between the interest rate required by the Partnership's Amended Partnership Agreement to be charged to affiliates (either prime plus 2.5% or prime plus 3.5%) and the interest rate actually paid by Fund X, Fund XI and McPIF to the Partnership (prime plus 1%), and (ii) all points (1.5% of the principal amount if a first priority security interest is obtained and 2% of the principal amount if a junior priority security interest is obtained), closing costs and expenses required to be received by the Partnership pursuant to the Partnership's Amended Partnership Agreement in connection with such affiliated financing arrangements. At December 31, 1997, 1996 and 1995, the General Partner had paid $113,432, $78,391 and $27,250, respectively, representing the aggregate amount of interest which would be owed for one year pursuant to this arrangement. In addition, the General Partner paid $139,236, $83,510 and $27,193 of interest, points, closing costs and expenses required to be received by the Partnership on all affiliate loans during 1997, 1996 and 1995, respectively. All other requirements for affiliated loans, as specified in the Partnership's Amended Partnership Agreement, were met at December 31, 1997, 1996 and 1995, in connection with these loans. A summary of activity for the mortgage loan investments - affiliates is as follows: For the Years Ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Balance at beginning of year......... $ 4,692,760 $ 2,235,902 $ 3,207,902 Mortgage loans funded................ 2,336,029 3,409,396 - Mortgage loans repaid................ (72,302) (952,538) (972,000) ---------- ---------- ---------- Balance at end of year............... $ 6,956,487 $ 4,692,760 $ 2,235,902 ========== ========== ========== Based on the lending rates prescribed by the Amended Partnership Agreement for each applicable affiliate, the fair value of mortgage loan investments-affiliates approximated book value at December 31, 1997 and 1996. The cost of the mortgage loan investments for Federal income tax purposes is the same as the carrying amount for financial statement purposes. NOTE 7 - REVOLVING CREDIT AGREEMENT - ----------------------------------- The following sets forth the revolving credit agreement of the Partnership at December 31, 1997 and 1996. The revolving credit agreement is secured by the related real estate investments.
Mortgage Annual Monthly Lien Interest Payments/ December 31, Property Position Rate % Maturity 1997 1996 - -------- ------------ ------ ---------------- ----------- ------------ Kendall Sunset, One Corporate Center I and One Corporate Center III First 7.9375 (a) (a) 7/99 $ 3,437,648 $ 1,101,619 ========== ==========
(a) The interest rate and monthly payment vary based on the London Interbank Offered Rate plus 2%. The rate listed above represents the rate in effect as of December 31, 1997. A $5 million revolving credit agreement was secured by the Partnership in June 1995. The Partnership had borrowed $3,437,648 and $1,101,619 under the revolving credit agreement at December 31, 1997 and 1996, respectively. Any borrowings under the revolving credit agreement bear interest at prime plus one half of one percent or a LIBOR-based rate, if so elected by the Partnership. The Partnership is required to pay a commitment fee equal to one quarter of one percent per annum on any unused portion of the line of credit. Total commitment fees paid during 1997, 1996 and 1995 were $3,887, $12,708 and $3,542, respectively. In 1995, the Partnership incurred loan costs of $195,059 related to the line of credit. The line of credit, which originally expired in July 1997, was extended during 1997 to mature in July 1999 and is secured by One Corporate Center I and III office buildings and Kendall Sunset Mini-Storage. The line of credit contains financial covenants that require the Partnership to maintain an Interest Expense Coverage Ratio of 3:1, as defined, among other restrictions. The Partnership was in compliance with all financial covenants associated with the revolving credit agreement as of December 31, 1997 and 1996. In February 1997, $2,336,029 was borrowed by the Partnership under the revolving credit agreement and loaned to an affiliate of the General Partner (see Note 6 - "Mortgage Loan Investments - Affiliates"). Based on borrowing rates currently available to the Partnership for long-term debt with similar terms and average maturities, the fair value of the revolving credit agreement borrowings approximated book value at December 31, 1997 and 1996. In October 1992, the Partnership entered into a loan agreement to borrow an aggregate of $7 million. Principal on this loan was due and payable seven years following issuance, with interest payable annually at a rate of 10.5% per annum for the first three years and prime plus 2% thereafter. The loan was secured by certain mini-storage warehouses owned by the Partnership. McNeil personally guaranteed up to $1.75 million of the aggregate loan amount. The Partnership received net proceeds of approximately $6.5 million from the loan, the balance of the loan amount being used to defray certain closing costs and to establish an escrow account for real estate taxes. The net loan proceeds were used to make loans to various affiliates of the General Partner and to fund working capital needs. The balance of the proceeds was invested, in accordance with the terms of the Amended Partnership Agreement, in short-term interest-bearing accounts. In May 1995, the Partnership paid down its mortgage note payable by $4,628,250. In connection with obtaining the revolving credit agreement discussed above, the Partnership paid off the remaining $2,019,844 balance of its mortgage note payable. In connection with the repayments, the Partnership paid prepayment penalties of $66,949 and wrote off $185,453 of deferred borrowing costs, resulting in an extraordinary loss of $252,402 in 1995. NOTE 8 - REPURCHASE OF LIMITED PARTNERSHIP UNITS - ------------------------------------------------ Under the provisions of both the original partnership agreement and the Amended Partnership Agreement, the Partnership is required to repurchase Units in amounts totaling up to 0.6% of gross proceeds per year. The repurchase amount is equal to the lesser of 90% of adjusted invested capital, or $9 per Unit. Repurchase is based on written requests from limited partners submitted between October 1 and October 20 of each year. The requirement was first effective in 1989. In January 1998, 1997 and 1996, $332,928 was used to repurchase 36,992 Units for requests submitted in 1997, 1996 and 1995, respectively. 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, which totaled approximately $17,024,326, for the full amount claimed and such settlement was approved by the Bankruptcy Court. Pursuant to the settlement agreement, the Partnership released Southmark and its affiliates and the Original General Partner from any further liability in connection with the claims made with the Bankruptcy Court. In return, an affiliate of McNeil agreed to waive payment on a dollar for dollar basis in an amount equal to the settled claims against Partnership advances owed at that time. In addition, the Partnership received Southmark bankruptcy plan assets in respect to its claims which were not offset against the Partnership advances. Because the Partnership's claims against Southmark were settled for $17,024,326, the Partnership advances of $223,800 owed at that time were reduced in their entirety and the claims had a remaining balance of $16,800,526. Although the Partnership settled the claims against Southmark for the full amount claimed, the settlement agreement provided that the Partnership receive a distribution of Southmark bankruptcy plan assets based on a claim amount of approximately $9,157,000. 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, $984,649 in cash, and common and preferred stock in the reorganized Southmark which was subsequently sold for $317,675. These amounts represent the Partnership's pro-rata share of Southmark assets available for Class 8 Claimants and were recorded as a gain on legal settlement on the Statements of Operations. NOTE 10 - LEGAL PROCEEDINGS - --------------------------- The Partnership is not party to, nor are any of the Partnership's properties the subject of, any material pending legal proceedings, other than ordinary, routine litigation incidental to the Partnership's business, except for the following: 1) James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger, Elizabeth Jung, Robert Lewis, and Warren Heller et al. v. McNeil Partners, L.P., McNeil Investors, Inc., McNeil Real Estate Management, Inc., Robert A. McNeil, Carole J. McNeil, McNeil Pacific Investors Fund 1972, Ltd., McNeil Real Estate Fund IX, Ltd., McNeil Real Estate Fund X, Ltd., McNeil Real Estate Fund XI, Ltd., McNeil Real Estate Fund XII, Ltd., McNeil Real Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate Fund XX, L.P., McNeil Real Estate Fund XXI, L.P., McNeil Real Estate Fund XXII, L.P., McNeil Real Estate Fund XXIV, L.P., McNeil Real Estate Fund XXV, L.P., McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund XXVII, L.P., et al. - Superior Court of the State of California for the County of Los Angeles, Case No. BC133799 (Class and Derivative Action Complaint). The action involves purported class and derivative actions brought by limited partners of each of the fourteen limited partnerships that were named as nominal defendants as listed above (the "Partnerships"). Plaintiffs allege that McNeil Investors, Inc., its affiliate McNeil Real Estate Management, Inc. and three of their senior officers and/or directors (collectively, the "Defendants") breached their fiduciary duties and certain obligations under the respective Amended Partnership Agreement. Plaintiffs allege that Defendants have rendered such Units highly illiquid and artificially depressed the prices that are available for Units on the resale market. Plaintiffs also allege that Defendants engaged in a course of conduct to prevent the acquisition of Units by an affiliate of Carl Icahn by disseminating purportedly false, misleading and inadequate information. Plaintiffs further allege that Defendants acted to advance their own personal interests at the expense of the Partnerships' public unit holders by failing to sell Partnership properties and failing to make distributions to unitholders. On December 16, 1996, the Plaintiffs filed a consolidated and amended complaint. Plaintiffs are suing for breach of fiduciary duty, breach of contract and an accounting, alleging, among other things, that the management fees paid to the McNeil affiliates over the last six years are excessive, that these fees should be reduced retroactively and that the respective Amended Partnership Agreements governing the Partnerships are invalid. Defendants filed a demurrer to the consolidated and amended complaint and a motion to strike on February 14, 1997, seeking to dismiss the consolidated and amended complaint in all respects. A hearing on Defendant's demurrer and motion to strike was held on May 5, 1997. The Court granted Defendants' demurrer, dismissing the consolidated and amended complaint with leave to amend. On October 31, 1997, the Plaintiffs filed a second consolidated and amended complaint. Defendants must move, answer or otherwise respond to the second consolidated and amended complaint by June 30, 1998. 2) HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young, BDO Seidman et al. (Case #92-06560-A). This suit was filed on behalf of the Partnership and other affiliated partnerships (as defined in this Section 1, the "Affiliated Partnerships") on May 26, 1992, in the 14th Judicial District Court of Dallas County. The petition sought recovery against the Partnership's former auditors, Ernst & Young, for negligence and fraud in failing to detect and/or report overcharges of fees/expenses by Southmark, the former general partner. The former auditors initially asserted counterclaims against the Affiliated Partnerships based on alleged fraudulent misrepresentations made to the auditors by the former management of the Affiliated Partnerships (Southmark) in the form of client representation letters executed and delivered to the auditors by Southmark management. The counterclaims sought recovery of attorneys' fees and costs incurred in defending this action. The counterclaims were later dismissed on appeal, as discussed below. The trial court granted summary judgment against the Affiliated Partnerships based on the statute of limitations; however, on appeal, the Dallas Court of Appeals reversed the trial court and remanded for trial the Affiliated Partnerships' fraud claims against Ernst & Young. The Texas Supreme Court denied Ernst & Young's application for writ of error on January 11, 1996. Shortly before trial, the district court judge once again granted summary judgment against the Affiliated Partnerships on December 2, 1996. The Partnership is continuing to pursue vigorously its claims against Ernst & Young; however, the final outcome of this litigation cannot be determined at this time. 3) Helen Pasco v. McNeil Real Estate Fund XXVII, L.P., Southmark Prime Plus Corp., et al. and Does 1-50 Inclusive. This complaint alleges that several limited partnerships and funds, including the Partnership, along with McMachen, Prudential Securities, Inc. and other unidentified defendants, transmitted false and misleading information to the plaintiff which was used to entice the plaintiff into investing her money with the defendants. The complaint also alleges that the defendants misrepresented speculative, illiquid limited partnerships as safe, revenue-producing investments suitable for safety-conscious and conservative investors. Although the Partnership is included as a defendant, the plaintiff's allegations do not specify in what way the Partnership was involved in improper conduct. The complaint does not state, other than by broad allegations, that the Partnership acted in an improper manner with regard to the operation or management of the limited partnership. An answer was filed on behalf of the Partnership in February 1994. Although plaintiff's counsel stated plaintiff was going to amend the complaint, no such amended complaint was ever served on the Partnership and it presumes that plaintiff either deleted the Partnership as a defendant or abandoned the action. Accordingly, the Partnership has taken no further action on this claim and it appears to have been abandoned. McNEIL REAL ESTATE FUND XXVII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1997
Costs Initial Cost Cumulative Capitalized Related Buildings and Write-down for Subsequent Description Encumbrances (a) Land Improvements Impairment (b) To Acquisition - ----------- ---------------- --------------- --------------- ---------------- -------------- MINI-STORAGE WAREHOUSES: AAA Sentry N. Lauderdale, FL $ - $ 69,890 $ 380,110 $ - $ 233,329 Forest Hill West Palm Beach, FL - 507,422 1,862,578 - 136,412 Fountainbleau Miami, FL - 285,854 864,146 - 374,788 Kendall Sunset Miami, FL 1,298,667 672,000 3,808,000 - 108,333 Margate Margate, FL - 233,101 1,156,899 - 198,539 Military Trail West Palm Beach, FL - 568,405 1,681,595 - 191,528 OFFICE BUILDINGS: One Corporate Center I Edina, MN 1,025,838 925,000 5,250,000 (1,300,000) 2,025,937 One Corporate Center III Edina, MN 1,113,143 925,000 5,255,000 (1,300,000) 2,323,442 -------------- -------------- -------------- ---------- ------------- $ 3,437,648 $ 4,186,672 $ 20,258,328 $(2,600,000) $ 5,592,308 ============== ============== ============== ========== ============= Assets Held For Sale (d): AAA Century Airport Inglewood, CA $ - Burbank Burbank, CA - -------------- $ - ==============
(a) The Partnership's $3,437,648 debt at December 31, 1997 is secured by three separate properties. For purposes of Schedule III, the revolving credit agreement has been allocated among the properties based on their estimated relative market values. (b) The carrying value of One Corporate Center I and III Office Buildings were each reduced by $1,300,000 in 1991. (d) Assets held for sale are stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation ceases at the time the assets are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1997
Gross Amount at Which Carried at Close of Period Accumulated Buildings and Depreciation Description Land Improvements Total (c) and Amortization - ----------- --------------- --------------- ----------------- ----------------- MINI-STORAGE WAREHOUSES: AAA Sentry N. Lauderdale, FL $ 70,337 $ 612,992 $ 683,329 $ (211,565) Forest Hill West Palm Beach, FL 510,780 1,995,632 2,506,412 (598,301) Fountainbleau Miami, FL 287,114 1,237,674 1,524,788 (351,439) Kendall Sunset Miami, FL 672,756 3,915,577 4,588,333 (1,144,141) Margate Margate, FL 233,575 1,354,964 1,588,539 (411,706) Military Trial West Palm Beach, FL 571,715 1,869,813 2,441,528 (560,022) OFFICE BUILDINGS: One Corporate Center I Edina, MN 925,000 5,975,937 6,900,937 (2,563,037) One Corporate Center III Edina, MN 925,000 6,278,442 7,203,442 (2,966,521) -------------- -------------- ---------------- ------------- $ 4,196,277 $ 23,241,031 $ 27,437,308 $ (8,806,732) ============== ============== ================ ============= Assets Held For Sale (d): AAA Century Airport Inglewood, CA $ 1,908,947 Burbank Burbank, CA 2,640,934 ---------------- $ 4,549,881 ================
(c) For Federal income tax purposes, the properties are depreciated over lives ranging from 5-39 years using ACRS or MACRS methods. The aggregate cost of real estate investments for Federal income tax purposes was $35,739,964 and accumulated depreciation was $6,882,639 at December 31, 1997. (d) Assets held for sale are stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation ceases at the time the assets are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVII, L.P. SCHEDULE III REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION December 31, 1997
Date of Date Depreciable Description Construction Acquired Lives (Years) - ----------- ------------ -------- ------------- MINI-STORAGE WAREHOUSES: AAA Sentry N. Lauderdale, FL 1987 10/90 5-25 Forest Hill West Palm Beach, FL 1985 08/90 5-25 Fountainbleau Miami, FL 1987 11/90 5-25 Kendall Sunset Miami FL 1986 10/90 5-25 Margate Margate, FL 1985 10/90 5-25 Military Trial West Palm Beach, FL 1986 08/90 5-25 OFFICE BUILDINGS: One Corporate Center I Edina, MN 1979 12/89 5-25 One Corporate Center III Edina, MN 1980 12/89 5-25 Assets Held For Sale (d): AAA Century Airport Inglewood, CA 1987 09/90 Burbank Burbank, CA 1987 09/90
(d) Assets held for sale are stated at lower of depreciated cost or fair value less costs to sell. Historical cost, net of accumulated depreciation and write-downs, becomes the new cost basis when the asset is classified as "Held for Sale." Depreciation ceases at the time the assets are placed on the market for sale. See accompanying notes to Schedule III. McNEIL REAL ESTATE FUND XXVII, L.P. Notes to Schedule III Real Estate Investments and Accumulated Depreciation and Amortization A summary of activity for the Partnership's real estate investments and accumulated depreciation and amortization is as follows:
For the Years Ended December 31, ---------------------------------------------------- 1997 1996 1995 -------------- -------------- --------------- Real estate investments: Balance at beginning of year............... $ 32,563,740 $ 32,023,668 $ 31,460,335 Improvements............................... 720,137 540,072 563,333 Reclassification to assets held for sale... (5,846,569) - - ------------- ------------- -------------- Balance at end of year..................... $ 27,437,308 $ 32,563,740 $ 32,023,668 ============= ============= ============== Accumulated depreciation and amortization: Balance at beginning of year............... $ 8,674,792 $ 7,046,093 $ 5,538,346 Depreciation and amortization.............. 1,432,871 1,628,699 1,507,747 Reclassification to assets held for sale... (1,300,931) - - ------------- ------------- -------------- Balance at end of year..................... $ 8,806,732 $ 8,674,792 $ 7,046,093 ============= ============= ============== Assets Held For Sale: Balance at beginning of year............... $ - $ - $ - Reclassification to assets held for sale... 4,545,638 - - Improvements............................... 4,243 - - ------------- ------------- -------------- Balance at end of year..................... $ 4,549,881 $ - $ - ============= ============= ==============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURES --------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- Neither the Partnership nor the General Partner has any directors or executive officers. The names and ages of, as well as the positions held by, the officers and directors of McNeil Investors, Inc., the general partner of the General Partner, are as follows:
Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Robert A. McNeil, 77 Mr. McNeil is also Chairman of the Board Chairman of the and Director of McNeil Real Estate Board and Director Management, Inc. ("McREMI") which is an affiliate of the General Partner. He has held the foregoing positions since the formation of such entity in 1990. Mr. McNeil received his B.A. degree from Stanford University in 1942 and his L.L.B. degree from Stanford Law School in 1948. He is a member of the State Bar of California and has been involved in real estate financing since the late 1940's and in real estate acquisitions, syndications and dispositions since 1960. From 1986 until active operations of McREMI and McNeil Partners, L.P. began in February 1991, Mr. McNeil was a private investor. Mr. McNeil has been a member of the international board of directors of the Salk Institute, which promotes research in improvements in health care. Carole J. McNeil 54 Mrs. McNeil is Co-Chairman, with Co-Chairman of the husband Robert A. McNeil, of McNeil Board Investors, Inc. Mrs. McNeil has twenty years of real estate experience, most recently as a private investor from 1986 to 1993. In 1982, she founded Ivory & Associates, a commercial real estate brokerage firm in San Francisco, CA. Prior to that, she was a commercial real estate agent and analyst with Marcus and Millichap in San Francisco. In 1978, Mrs. McNeil established the Escrow Training Company, California's first accredited commercial training program for title company escrow officers and real estate agents needing college credits to qualify for brokerage licenses. She began in real estate as Manager and Marketing Director of Title Insurance and Trust in Marin County, CA. Mrs. McNeil serves on the international board of directors of the Salk Institute.
Other Principal Occupations and Other Name and Position Age Directorships During the Past 5 Years - ----------------- --- ------------------------------------- Ron K. Taylor 40 Mr. Taylor is the President and Chief President and Chief Executive Officer of McNeil Real Estate Executive Officer Management which is an affiliate of the General Partner. Mr. Taylor has been in this capacity since the resignation of Donald K. Reed on March 4, 1997. Prior to assuming his current responsibilities, Mr. Taylor served as a Senior Vice President of McREMI. Mr. Taylor has been in this capacity since McREMI commenced operations in 1991. Prior to joining McREMI, Mr. Taylor served as an Executive Vice President for a national syndication/property management firm. In this capacity, Mr. Taylor had the responsibility for the management and leasing of a 21,000,000 square foot portfolio of commercial properties. Mr. Taylor has been actively involved in the real estate industry since 1983.
Each director shall serve until his successor shall have been duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- No direct compensation was paid or payable by the Partnership to directors or officers (since it does not have any directors or officers) for the year ended December 31, 1997, nor was any direct compensation paid or payable by the Partnership to directors or officers of the general partner of the General Partner for the year ended December 31, 1997. The Partnership has no plans to pay any such remuneration to any directors or officers of the general partner of the General Partner in the future. See Item 13 - Certain Relationships and Related Transactions for amounts of compensation and reimbursements paid by the Partnership to the General Partner and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- (A) Security ownership of certain beneficial owners. No individual or group, as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, was known by the Partnership to own more than 5% of the Units, other than the General Partner, as noted in (B) below. (B) Security ownership of management. The General Partner and the officers and directors of its general partner, collectively own 670,634 limited partnership units, which represents approximately 12.9% of the outstanding limited partnership units at January 31, 1998. (C) Change in control. None ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The amendments to the Partnership compensation structure included in the Amended Partnership Agreement provide for an asset management fee to replace all other forms of general partner compensation other than property management fees and reimbursements of certain costs. Through 1999, the asset management fee is calculated as 1% of the Partnership's tangible asset value. Tangible asset value is determined by using the greater of (i) an amount calculated by applying a capitalization rate of 9 percent to the annualized net operating income of each property or (ii) a value of $30 per gross square foot for mini-storage warehouses and $50 per gross square foot for commercial properties to arrive at the property tangible asset value. The property tangible asset value is then added to the book value of all other assets excluding intangible items. The fee percentage decreases subsequent to 1999. For the year ended December 31, 1997, the Partnership paid or accrued $609,279 of such asset management fees. Until March 13, 1991, the Original General Partner was entitled to receive, out of cash from operations, a performance incentive fee equal to 20% of all points received by the Partnership on mortgage loans if the Unit holders receive distributions of cash from operations equal to a 10% cumulative noncompounding annual return on their original capital investment. Such fees were cumulative and were accrued in the years earned and are to be paid when conditions are met. Conditions for payment have not yet been met and, at December 31, 1997, $141,647 of amounts accrued in prior years are included in payable to affiliates on the Balance Sheets. The Partnership pays property management fees equal to 5% of the gross rental receipts of mini-storage properties (6% for commercial) to McREMI, an affiliate of the General Partner, for providing property management services. Additionally, the Partnership reimburses McREMI for its costs, including overhead, of administering the Partnership's affairs. For the year ended December 31, 1997, the Partnership paid or accrued $732,942 of such property management fees and reimbursements. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Note 2 - "Transactions With Affiliates." Under the terms of the Amended Partnership Agreement, the Partnership is expressly permitted to make loans to affiliates of the General Partner, so long as such loans meet certain conditions, including that such loans bear interest at a rate of either prime of Bank of America plus 2.5% or prime plus 3.5%, depending on whether the security for such loans is first priority or junior priority. On May 1, 1992, the Partnership agreed to loan an aggregate of $1.115 million to McNeil Pension Investment Fund, Ltd. ("McPIF"), an affiliate of the General Partner, at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by McPIF in connection with borrowings from affiliates pursuant to McPIF's partnership agreement). A total of $483,364 was borrowed by McPIF pursuant to this commitment, $72,302 of which was repaid in 1997. This loan is secured by a first lien on Brice Road Office Building located in Reynoldsburg, Ohio. The original loan matured in May 1995, at which time a new loan under substantially the same terms was executed. Interest on the loan is payable monthly. Principal is payable in May 1998. On February 28,1997, the Partnership loaned $2,336,029 to McNeil Real Estate Fund X, Ltd. ("Fund X"), at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund X in connection with borrowings from affiliates pursuant to Fund X's partnership agreement). On August 1, 1997, the mortgage note was amended and the principal balance was increased by $800,000, for total borrowings from the Partnership of $3,136,029. Fund X used the $800,000 additional proceeds to repay an $800,000 mortgage loan investment secured by Lakeview Plaza Shopping Center. This loan is secured by a first lien on La Plaza Business Center located in Las Vegas, Nevada. Interest on the loan is payable monthly, with principal payable in February 2000. On October 25, 1996, the Partnership loaned $2,588,970 to McNeil Real Estate Fund XI, L.P. ("Fund XI") at an interest rate of prime plus 1% per annum (the maximum rate allowed to be incurred by Fund XI in connection with borrowings from affiliates pursuant to Fund XI's partnership agreement). This loan is secured by a first lien on The Village Apartments located in Gresham, Oregon. Interest on the loan is payable monthly. Principal is payable in November 1999. In order to induce the Partnership to lend funds to affiliates of the General Partner, the General Partner entered into agreements with the Partnership whereby the General Partner agreed to pay: (i) the difference between the interest rate required by the Partnership's Amended Partnership Agreement to be charged to affiliates (either prime of Bank of America plus 2.5% or 3.5%) and the interest rate actually paid by Fund X, Fund XI and McPIF to the Partnership (prime plus 1%), and (ii) all points (1.5% of the principal amount if a first priority security interest is obtained and 2% of the principal amount if a junior priority security interest is obtained), closing costs and expenses required to be received by the Partnership pursuant to the Partnership's Amended Partnership Agreement in connection with such affiliated financing arrangements. In 1997, the General Partner paid $139,236 of interest, points, closing costs and expenses required to be received by the Partnership on all affiliate loans during 1997. In connection with these loans, all other requirements for affiliated loans, as specified in the Partnership's Amended Partnership Agreement, were met. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K - -------- ------------------------------------------------------------------ See accompanying Index to Financial Statements at Item 8 - Financial Statements and Supplementary Data. (A) Exhibits
Exhibit Number Description ------- ----------- 4.2 Amended and Restated Limited Partnership Agreement of McNeil Real Estate Fund XXVII, L.P. (incorporated by reference to the 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 Prime Plus Corp. 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.) 10.3 Promissory Note dated November 25, 1996 between McNeil Real Estate Fund XXVII, L.P. and Village Fund XI Associates Limited. (1) 10.4 Promissory Note dated November 25, 1996 between McNeil Real Estate Fund XXVII, L.P. and McNeil Pension Investment Fund, Ltd. (1) 10.5 Property Management Agreement dated March 30, 1992, between McNeil Real Estate Fund XXVII, L.P. and McNeil Real Estate Management, Inc. (2) 10.6 Amendment of Property Management Agreement dated March 5, 1993, by McNeil Real Estate Fund XXVII, L.P. and McNeil Real Estate Management, Inc. (2) 10.7 Promissory Note dated October 23, 1992, between Community Bank, N.A. and McNeil Real Estate Fund XXVII, L.P. (2)
Exhibit Number Description ------- ----------- 10.8 Loan Agreement dated October 23, 1992, between Community Bank, N.A. and McNeil Real Estate Fund XXVII, L.P. (2) 10.10 Revolving Credit Loan Agreement dated June 21, 1995, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. (3) 10.11 Consolidated, Amended and Restated Revolving Credit Note dated June 21, 1995, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. (3) 10.12 First Amendment to Revolving Credit Loan Agreement dated June 21, 1997, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. 10.13 First Amendment to Consolidated, Amended and Restated Revolving Credit Note dated June 21, 1997, between PNC Bank, National Association and McNeil Real Estate Fund XXVII, L.P. 11. Statement regarding computation of net income per hundred limited partnership units (see Item 8 - Note 1 - "Organization and Summary of Significant Accounting Policies"). (1) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1996, as filed on March 28, 1997. (2) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1992, as filed on March 30, 1993. (3) Incorporated by reference to the Annual Report of the registrant on Form 10-K for the period ended December 31, 1995, as filed on March 29, 1996.
(B) Reports on Form 8-K. There were no reports on Form 8-K filed by the Partnership during the quarter ended December 31, 1997. McNEIL REAL ESTATE FUND XXVII, 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 XXVII, L.P. By: McNeil Partners, L.P., General Partner By: McNeil Investors, Inc., General Partner March 31, 1998 By: /s/ Robert A. McNeil - -------------- ---------------------------------------- Date Robert A. McNeil Chairman of the Board and Director Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 31, 1998 By: /s/ Ron K. Taylor - -------------- ---------------------------------------- Date Ron K. Taylor President and Director of McNeil Investors, Inc. (Principal Financial Officer) March 31, 1998 By: /s/ Carol A. Fahs - -------------- ---------------------------------------- Date Carol A. Fahs Vice President of McNeil Investors, Inc. (Principal Accounting Officer) EX-27 2
5 12-MOS DEC-31-1997 DEC-31-1997 2,440,084 0 426,825 0 0 0 27,437,308 (8,806,732) 33,681,114 0 3,437,648 0 0 0 28,999,177 33,681,114 8,366,664 9,283,232 3,804,927 5,237,798 987,492 0 269,289 2,788,653 0 2,788,653 0 0 0 2,788,653 0 0
EX-10.13 3 FIRST AMENDMENT TO CONSOLIDATED, AMENDED AND RESTATED REVOLVING CREDIT NOTE THIS FIRST AMENDMENT TO CONSOLIDATED, AMENDED AND RESTATED REVOLVING CREDIT NOTE (this "First Amendment") is made as of the 21st day of June, 1997, by MCNEIL REAL ESTATE FUND XXVII, L.P., a Delaware limited partnership (the "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a national banking association (the "Lender"). WITNESSETH: WHEREAS, pursuant to the terms of a Revolving Credit Loan Agreement dated as of June 21, 1995 between Borrower and Lender (the "Credit Agreement"), Lender had agreed to provide a revolving credit facility to Borrower in a principal amount not to exceed $5,000,000 (the "Loan") as evidenced by a certain Consolidated, Amended and Restated Revolving Credit Note dated as of June 21, 1995, executed and delivered by Borrower to Lender in the original principal amount of $5,000,000 (the "Note") (all capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement unless defined to the contrary herein); and WHEREAS, the Borrower has requested that the Lender agree to extend the Maturity Date of the Note provided for in the Note and Credit Agreement until June 21, 1999; and WHEREAS, as a condition to the consent of Lender to the extension of the Maturity Date, Lender and Borrower have agreed to make certain modifications to the Note upon the terms and conditions hereinafter set forth; and THIS FIRST AMENDMENT AMENDS THAT CERTAIN CONSOLIDATED, AMENDED AND RESTATED REVOLVING CREDIT NOTE DATED JUNE 21, 1995 FROM BORROWER TO LENDER, IN THE MAXIMUM PRINCIPAL AMOUNT OF $5,000,000 (THE "ORIGINAL NOTE"). THE ORIGINAL NOTE IS ATTACHED HERETO. THE TERMS AND CONDITIONS SET FORTH IN THIS FIRST AMENDMENT SHALL CONTROL THE OBLIGATIONS OR BORROWER WITH RESPECT TO THE INDEBTEDNESS EVIDENCED BY THE ORIGINAL NOTE. THIS FIRST AMENDMENT DOES NOT EVIDENCE ANY INDEBTEDNESS OF BORROWER IN EXCESS OF THE ORIGINAL NOTE AS AMENDED HEREBY. ALL REQUIRED INTANGIBLE AND DOCUMENTARY STAMP TAXES HAVE BEEN PAID IN CONNECTION WITH THE ORIGINAL NOTE. WHEREAS, to evidence the modifications to the Note, Borrower and Lender have executed and entered into a certain First Amendment to Revolving Credit Loan Agreement of even date herewith (the Credit Agreement as amended by the First Amendment to Revolving Credit Loan Agreement is hereinafter collectively referred to as the "Amended Credit Agreement"). NOW THEREFORE, the parties hereto, for good and valuable consideration, the receipt and sufficiency thereof being hereby acknowledged and intending to be legally bound hereby, covenant and agree as follows: 1. The Borrower and the Lender hereby agree that the Maturity Date of the Note is hereby extended until June 21, 1999. 2. Borrower hereby acknowledges and agrees that it shall have no right to extend the Maturity Date of the Note beyond June 21, 1999. 3. All references in the Note to the "Loan Agreement" shall be deemed to refer to and include the Amended Credit Agreement. 4. Except as specifically modified herein, the Note is hereby ratified and confirmed and shall remain in full force and effect. The Amended Credit Agreement and the Note as amended by this First Amendment shall continue to be secured by the other Loan Documents and nothing contained herein shall affect the priority of any lien or security interest securing the Amended Credit Agreement and the Note as amended by this First Amendment. All references to the "Note" contained in the Loan Documents shall be deemed to refer to and include the Note as amended by this First Amendment. 5. This First Amendment is to be construed and enforced in all respects in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the principles of conflicts of laws. 6. This First Amendment is binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 7. The Borrower hereby represents and warrants to Lender that (a) no Event of Default, and no event or condition which, with the passage of time or the giving of notice or both, would constitute an Event of Default, has occurred and is continuing on the date of execution hereof, and (b) the Borrower has no set-off claim or other defense with respect to its obligations under the Note, Amended Credit Agreement or any of the Loan Documents. 8. This First Amendment may be executed in any number of counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] IN WITNESS WHEREOF, the Lender and Borrower have duly executed this First Amendment as of the day and year first above written. WITNESS/ATTEST: McNEIL REAL ESTATE FUND XXVII, L. P., a Delaware limited partnership By: McNeil Partners, L.P., a Delaware limited partnership, its general partner By: McNeil Investors, Inc., a Delaware corporation, its general partner Illegible By: /s/ Ron Taylor - -------------------------- -------------------------------- Title: President ---------------------------- PNC BANK, NATIONAL ASSOCIATION left blank By: Illegible - -------------------------- ------------------------------------- Title: Vice President ---------------------------------- STATE OF Texas ) ) COUNTY OF Dallas ) On this 26th day of June, 1997, before me, a notary public, personally appeared Ron K. Taylor who acknowledged himself before me to be the President of McNeil Investors, Inc., a Delaware corporation, general partner of McNeil Partners, L.P., a Delaware limited partnership, general partner of MCNEIL REAL ESTATE FUND XXVII, L.P., a Delaware limited partnership, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the limited partnership by himself before me as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Mary Kay Schwartz ------------------------------------------ Notary Public My Commission expires: Notary Seal Here EX-10.12 4 FIRST AMENDMENT TO REVOLVING CREDIT LOAN AGREEMENT THIS FIRST AMENDMENT TO REVOLVING CREDIT LOAN AGREEMENT is made as of the 21st day of June, 1997, by McNEIL REAL ESTATE FUND XXVII, L.P., a Delaware limited partnership (the "Borrower") and PNC BANK, NATIONAL ASSOCIATION, a national banking association (the "Lender"). WITNESSETH: WHEREAS, pursuant to the terms of a Revolving Credit Loan Agreement dated as of June 21, 1995 between Borrower and Bank (the "Credit Agreement"), Bank had agreed to provide a revolving credit facility to Borrower in a principal amount not to exceed $5,000,000 (the "Loan") as evidenced by a certain Consolidated, Amended and Restated Revolving Credit Note dated as of June 21, 1995, executed and delivered by Borrower to Bank in the original principal amount of $5,000,000 (the "Note") (all capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement unless defined to the contrary herein); and WHEREAS, the Borrower has requested that the Bank agree to extend the Maturity Date of the Note provided for in the Note and Credit Agreement until June 21, 1999; and WHEREAS, as a condition to the consent of Bank to the extension of the Maturity Date, Bank and Borrower have agreed to make certain modifications to the Credit Agreement upon the terms and conditions hereinafter set forth; and WHEREAS, to evidence the modifications to the Note, Borrower and Bank have executed and entered into a certain First Amendment to Consolidated, Amended and Restated Revolving Credit Note of even date herewith (the Note as amended by the First Amendment to Consolidated, Amended and Restated Revolving Credit Note is hereinafter collectively referred to as the "Amended Note"). NOW, THEREFORE, the parties hereto, for good and valuable consideration, the receipt and sufficiency thereof being hereby acknowledged, and intending to be legally bound hereby, covenant and agree as follows: 1. (a) The following definitions contained in Article 1, Paragraph 1.01 of the Credit Agreement are hereby deleted in their entirety:"Consolidated Net Worth" and "Closing Fee". (b) The following definition is hereby added to Article 1, Paragraph 1.01 of the Credit Agreement: "Extension Fee" shall have the meaning assigned to that term in Section 2.02(a) hereof. 2. Paragraph 2.02(a) of the Note is hereby amended in its entirety to provide in full as follows: 2.02(a) Extension Fee. Simultaneous with the execution and delivery of this First Amendment to Credit Agreement, Borrower shall pay to Bank a nonrefundable fee of $12,500 (the "Extension Fee"). (b) Paragraph 2.08 of the Credit Agreement is hereby deleted in its entirety and Borrower hereby acknowledges and agrees that it shall have no right to extend the Maturity Date beyond June 21, 1999. 3. Paragraph 3.03 of the Credit Agreement is hereby amended in its entirety to provide in full as follow: 3.03 Maturity. The entire outstanding principal balance due under the Revolving Credit Loan, together with all unpaid interest at the aforesaid rate or rates shall be payable on June 21, 1999, unless accelerated upon an Event of Default or sooner terminated under the terms hereof or terminated by Borrower upon payment of the outstanding principal balance of the Revolving Credit Loan and payment of Reimbursement Obligations and termination of all Letters of Credit, together with all unpaid interest and fees which are due and payable as the date of termination, including but not limited to the Commitment Fee accruing to and including the termination date, (the date determined in accordance herewith shall be called the "Maturity Date"). 4. Paragraph 7.02 of the Credit Agreement is hereby amended by deletion of subparagraph (a)(i) in its entirety. 5. All references in the Credit Agreement to the "Note" shall be deemed to refer to and include the Amended Note. 6. Except as specifically modified herein, the Credit Agreement is hereby ratified and confirmed and shall remain in full force and effect. The Amended Note and Credit Agreement as amended by this First Amendment to Credit Agreement shall continue to be secured by the Loan Documents and nothing contained herein shall affect the priority of any lien or security interest securing the Amended Note and Credit Agreement as amended by this First Amendment to Credit Agreement. All references to the "Loan Agreement" or "Credit Agreement" contained in the Loan Documents shall be deemed to refer to and include the Credit Agreement as amended by this First Amendment to Credit Agreement. 7. This First Amendment to Credit Agreement is to be construed and enforced in all respects in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the principles of conflicts of laws. 8. This First Amendment to Credit Agreement is binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 9. The Borrower hereby represents and warrants to Bank that (a) no Event of Default, and no event or condition which, with the passage of time or the giving of notice or both, would constitute an Event of Default, has occurred and is continuing on the date of execution hereof, and (b) the Borrower has no set-off claim or other defense with respect to its obligations under the Credit Agreement or any of the Loan Documents. 10. This First Amendment to Credit Agreement may be executed in any number of counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] IN WITNESS WHEREOF, the Bank and Borrower have duly executed this First Amendment to Credit Agreement as of the day and year first above written. WITNESS/ATTEST: McNEIL REAL ESTATE FUND XXVII, L. P., a Delaware limited partnership By: McNeil Partners, L.P., a Delaware limited partnership, its general partner Illegible By: /s/ Ron Taylor - -------------------------- -------------------------------------- Title: President ---------------------------------- Illegible By: McNeil Investors, Inc., a Delaware corporation its general partner WITNESS/ATTEST: By: /s/ Ron Taylor -------------------------------------- Title: President ---------------------------------- PNC BANK, NATIONAL ASSOCIATION Illegible By: Illegible - -------------------------- -------------------------------------- Title: Vice President ----------------------------------- STATE OF Texas ) ) COUNTY OF Dallas ) On this 26th day of June, 1997, before me, a notary public, personally appeared Ron K. Taylor who acknowledged himself before me to be the President of McNeil Investors, Inc., a Delaware corporation, general partner of McNeil Partners, L.P., a Delaware limited partnership, general partner of MCNEIL REAL ESTATE FUND XXVII, L.P., a Delaware limited partnership, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the limited partnership by himself before me as such officer. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Mary Kay Schwartz ----------------------------------------- Notary Public My Commission expires: Notary Seal Here -----END PRIVACY-ENHANCED MESSAGE-----