-----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, TelleHdNQhquBUV7ChmJTT8pTucyYEbNaFIqWxv4h70T6Iut1h9SXYMgJpJJAOkv TsLLLWm8HVJoGJ80BGmCVQ== 0000892626-97-000093.txt : 19970401 0000892626-97-000093.hdr.sgml : 19970401 ACCESSION NUMBER: 0000892626-97-000093 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARVIDA JMB PARTNERS L P II CENTRAL INDEX KEY: 0000852494 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 581809884 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19245 FILM NUMBER: 97571166 BUSINESS ADDRESS: STREET 1: 900 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3124404800 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission file number 0-19245 ARVIDA/JMB PARTNERS, L.P. - II (Exact name of registrant as specified in its charter) Delaware 58-1809884 (State of organization) (IRS Employer Identification No.) 900 N. Michigan Ave., Chicago, IL 60611 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code 312/440-4800 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each Class which registered - ------------------- ------------------------------ None None Securities registered pursuant to Section 12(g) of the Act: LIMITED PARTNERSHIP INTERESTS AND ASSIGNEE INTERESTS THEREIN (Title of Class) 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 (or for such shorter period that the registrant was required to file such reports), 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 State the aggregate market value of the voting stock held by non-affiliates of the registrant. Not applicable. Portions of the Prospectus of the registrant dated October 27, 1989 and filed with the Commission pursuant to Rules 424(b) and 424(c) under the Securities Act of 1933 are incorporated by reference in Parts II and III of this Annual Report on Form 10-K. TABLE OF CONTENTS Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . 5 Item 3. Legal Proceedings. . . . . . . . . . . . . . 7 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . 7 PART II Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters. . . . . . . 8 Item 6. Selected Financial Data. . . . . . . . . . . 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data. 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . 46 PART III Item 10. Director and Executive Officers of the Registrant. . . . . . . . . . . . . . 46 Item 11. Executive Compensation . . . . . . . . . . . 49 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . 50 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . 50 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . 51 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . 55 i PART I ITEM 1. BUSINESS There is substantial doubt about the Partnership's ability to continue as a concern. Reference is made to Item 7 -Management's Discussion and Analysis of Financial Condition and Results of Operation. All references to "Notes" are to Notes to Consolidated Financial Statements contained in this report. The registrant, Arvida/JMB Partners, L.P.-II (the "Partnership"), is a limited partnership formed in June 1989 and currently governed under the Revised Uniform Limited Partnership Act of the State of Delaware. The Partnership was formed to acquire and develop through merger or purchase the real estate and other assets of certain affiliated partnerships ("Affiliated Partnerships") and certain other assets. On October 27, 1989, the Partnership commenced an offering to the public of $225,000,000 in Limited Partnership Interests ("Interests") (subject to increase by an additional 75,000 Interests) pursuant to a Registration Statement on Form S-1 under the Securities Act of 1933 (No. 33-29608). A total of 234,428 Interests were issued and assigned to the public (at an offering price of $1,000 per Interest before discounts) and such assignee holders ("Holders of Interests" or "Holders") were admitted to the Partnership. The offering of Interests terminated in February 1990 and no Holder of Interests has made any additional capital contribution after such date. The Holders of Interests of the Partnership generally share in their portion of the benefits of ownership of the Partnership's real property investments and other assets according to the number of Interests held. A description of the maximum term of the Partnership is included in Item 5 to which reference is hereby made for such description. The Partnership's assets, other than Talega, consisted principally of interests in land developed or planned for development into master-planned residential communities (the "Communities"). Such Communities and other development parcels and assets owned directly or indirectly by the Partnership, are referred to herein as the "Properties". The Partnership had principally been engaged in the development of comprehensively planned, primary and secondary home Communities containing a diversified product mix designed for the various markets in which the Partnership operates. The Partnership's credit facilities matured without repayment on December 30, 1994. Although to date the lender has not pursued all of its remedies under the credit facility agreements, which could include, among other things, realizing upon the security interests in the Partnership's Properties, the lender has reserved the right to assert any or all of such remedies in the future. Reference is made to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the current plan for the orderly disposition of its remaining assets. The Partnership sold individual residential lots and undeveloped land. The unaffiliated third-party builders and developers to whom the Partnership sold parcels and lots were generally small to mid-size local builders and developers who required project specific financing for their developments and whose operations were susceptible to fluctuations in the availability of financing. In addition, within certain Properties, the Partnership constructed, or caused to be constructed, a variety of products, including single-family homes and patio homes developed for sale. The Partnership also owned and operated a golf club facility and a cable television system within its Heathrow Community. The Partnership's remaining Properties are located near Atlanta, Georgia and Orlando, Florida and in Orange County, California. Arvida Company ("Arvida"), an affiliate of the General Partner has provided certain development, construction, management and other personnel and services to the Partnership for all of its projects and operations, subject, in each case, to the overall control of the General Partner on behalf of the Partnership. The Partnership, directly or through certain subsidiaries, provided development and management services to Community home ownership associations within the Communities. The business of the Partnership was cyclical in nature and certain aspects of the development of the Properties were to some degree seasonal. Such seasonality has not had a material impact on the Partnership's business. A presentation of information about industry segments, geographic regions or raw materials is not applicable and would not be material to an understanding of the Partnership's business taken as a whole. The Partnership had previously been following the practice with respect to Communities of (i) developing an overall master plan for the Community, (ii) creating a unifying architectural theme that is consistent with the Community's master plan, (iii) offering a variety of recreational facilities, (iv) imposing architectural standards and other property restrictions on residents and third-party developers in order to enhance the long-term value of the Community, (v) establishing property owners' associations to maintain compliance with architectural, landscaping and other requirements and to provide for ownership and maintenance of certain facilities, and/or (vi) operating and controlling access to golf, tennis and other recreational facilities. The Partnership's development approach, individually or by joint venture, was intended to enhance the value of real estate in successive phases. The first step in development had been to design a Community master plan that addressed the appropriate land uses and product mix, including residential, recreational and, where appropriate, commercial and industrial uses (which generally have not been developed by the Partner- ship). The Partnership then sought to obtain the necessary regulatory and environmental approvals for the development of the Community in accordance with the master plan. This approval process was a major factor in determining the viability and prospects for profitability of the Partnership's development projects. The first phase in the regulatory approval process usually consisted of obtaining the proper zoning approvals for the intended development. The Partnership also had to comply with state and local laws governing large planned developments which may vary from state to state and community to community. In Florida, for example, land development is subject to the Florida Local Government Comprehensive Planning and Land Development Regulation Act, as administered by the State and implemented by regional, county and municipal authorities. In addition, prior to or contemporaneously with zoning approval, the Partnership, if subject to the applicable filing requirements, was required to obtain "Development of Regional Impact" ("DRI") approval from the applicable local governmental agency after review and recommendations from the appropriate regional planning agency, with oversight by the Florida State Department of Community Affairs. In addition, state laws generally provide further that a parcel of land cannot be subdivided into distinct segments without having a plat filed and finalized with the local or municipal authority, which, in general, required the approval of various local agencies, such as environmental and public works departments. In addition to the foregoing, the Partnership was required to secure the actual permits for development from applicable Federal (e.g., the Army Corps of Engineers and the Environmental Protection Agency with respect to coastal and wetlands developments, including dredging of waterways) and state or local agencies, including construction, dredging, grading, tree removal and water management and drainage district permits. The foregoing discussion and the discussion which follows are also generally applicable to the Partnership's commercial and industrial developments. In addition to obtaining receipt of all approvals and permits required to be obtained by the Partnership for a specific Community other than actual approvals or permits for final platting and/or construction activities, the Partnership had also applied for the permits and other approvals necessary to undertake the construction of infrastructure, including roads, water and sewer lines and amenities such as lakes, clubhouses, golf courses, tennis courts and swimming pools. These expenditures for infrastructure and amenities are generally significant and are usually required early in the development of a Community, although the Partnership has attempted, to the extent feasible, to develop Communities in a phased manner. See Note 8 for further discussion regarding Tax-Exempt Bond Financing with regard to infrastructure improvements at the Partnership's Talega Property. Certain of the Florida Communities described below have applied for and have been designated as Planned Unit Developments ("PUD") by the local zoning authority (usually the governing body of the municipality or the county in which the Community is or will be located). Designation as a PUD generally establishes permitted densities (i.e., the number of residential units which may be constructed) with respect to the land covered thereby and, upon receipt, enables the developer to proceed in an orderly, planned fashion. Generally, such PUD approvals permit flexibility between single- unit and multi-unit products since the developer can plan Communities in either fashion as long as permitted densities are not exceeded. As a consequence, developments with PUD status are able to meet changing demand patterns in housing through such flexibility. It should be noted that some of the Communities, while not having received PUD approval, have obtained the necessary zoning approvals to create a planned community development with many of the benefits of PUD approval such as density shifting. In developing the infrastructure and amenities of its Communities and building its own housing products, the Partnership has functioned as a general contractor although it has also from time to time hired firms for general contracting work. The Partnership followed the practice of hiring subcontractors, architects, engineers and other professionals on a project- by-project basis rather than maintaining in-house capabilities, principally to be able to select the subcontractors and consultants it believed were most suitable for a particular development project and to control fixed overhead costs. The Partnership has never been faced with any significant material or labor shortages; however, the construction industry in general has from time to time experienced serious difficulties in obtaining certain construction materials and in having available a sufficiently large and adequately trained work force. In addition, certain of the Partnership's Communities contained acreage zoned for commercial use, on which shopping centers, office buildings and other commercial buildings could be built. In the opinion of the General Partner of the Partnership, all of the Properties held at December 31, 1996 are adequately insured. The Partnership currently owns no patents, trademarks, licenses or franchises other than those trademarks and tradenames in respect of the names of its Communities. The Arvida name and the service marks with respect to the Arvida name are owned by Arvida, subject to the Partner- ship's non-exclusive right to use the name and the service marks under its supervisory and management agreement with Arvida and subject to the non- exclusive right of certain third parties to the limited use of the name. The principal assets in which interests had been acquired by the Partnership are described in more detail under Item 2 below to which reference is hereby made for a description of such assets. The Partnership will not acquire and/or develop any real properties in addition to its existing Properties. The Partnership's real properties have been subject to competition from similar types of properties in the vicinities in which they are located, including properties owned, advised or managed by affiliates of the General Partner. The Partnership has no real estate assets located outside of the United States. The Partnership has no employees. Reference is made to Note 10 for a discussion of certain arrangements with Arvida Company and Arvida/JMB Partners, L.P., both of which provide personnel to perform services on behalf of the Partnership. The terms of transactions between the Partnership and the General Partner and its affiliates are set forth in Items 10, 11 and 12 below to which reference is hereby made for a description of such terms and transactions. ITEM 2. PROPERTIES The principal assets in which interests have been acquired by the Partnership are described below. Unless otherwise indicated, the acreage amounts set forth herein are approximations of the gross acreage of the Communities or other properties referred to or described and are not necessarily indicative of the net developable acreage currently owned by the Partnership or its joint ventures. Except where noted, the Partnership was the developer of the Properties. All of the Partnership's remaining Properties are subject to mortgages to secure repayment of the Partnership's indebtedness as described in Note 8, to which reference is made for a description of such indebtedness. (a) Orange County, California The Partnership acquired through a merger with an Affiliated Partnership, ownership of 2,290 undeveloped acres located in southern Orange County, California originally planned for a master-planned Community, known as Talega. It was originally intended that the Community would offer a complete range of residential product types ranging from low- density single-family to higher density multi-family, almost all of which would be targeted to the primary-home buyer. The residential areas were planned for a variety of products at varying price points which would be oriented around major amenities such as golf courses, parks, schools, trails, neighborhood centers and transit centers. Approximately 900 acres are approved in the specific plan for residential use, and approximately 170 acres for commercial use. To date, certain development work has been completed. Given economic and market conditions as well as other factors, the Partnership ceased further development of this Community in late 1991. Reference is made to Notes 8 and 12 for discussions regarding the Talega Community. (b) Palm Beach County, Florida The Partnership acquired, through merger with an Affiliated Partnership, ownership of 115 remaining developable acres within the 2,250- acre Palm Beach Polo and Country Club Community, which is located in Palm Beach County, Florida. The Community was an existing development of an unaffiliated third-party developer, Landmark Land Company of Florida, Inc., who filed for bankruptcy in late 1991. The Partnership's Property within Palm Beach Polo and Country Club was encumbered by a mortgage. In July 1991, the Partnership ceased making debt service payments and was seeking a modification of the non-recourse mortgage loan, as a result of slower than anticipated sales absorptions which had been impacted by the financial viability of the third-party developer, among other reasons. The Partnership was unsuccessful in its efforts either to obtain a modification of the loan or to resolve certain issues with the current mortgage note holder, the Resolution Trust Corporation ("RTC"). Therefore, on June 25, 1993, the Partnership executed a deed in lieu of foreclosure agreement with the RTC to transfer its interest in the Property. The Partnership also acquired, through merger with an Affiliated Partnership, ownership of 24 acres in Wycliffe, a 600-acre PUD, located in Palm Beach County, Florida, which was being developed by an unaffiliated third-party developer. The Partnership offered patio home products at this Property targeted to the secondary and primary home market, all of which were sold and closed as of December 31, 1993. (c) Orange County, Florida The Partnership acquired, through merger with an Affiliated Partnership, ownership of a 230-acre Community located in Southwest Orange County, Florida (approximately 10 miles west of Orlando, Florida), known as Wesmere. Amenities include an open air pavilion, tennis courts, basketball courts, a swimming pool and a park. The Partnership constructed and sold housing products targeted towards the primary home buyer and sold homesites to unaffiliated third-party builders. The Partnership sold the remaining land within this Community during 1995. (d) Seminole County, Florida In January 1990, the Partnership acquired a controlling interest and became the managing general partner of a limited partnership which was the developer/owner of the remaining residential acreage (approximately 1,800 acres), existing Community amenities and certain commercial and other real estate assets within a 2,700-acre Community development known as Heathrow. Heathrow is located approximately 15 miles northeast of Orlando, in Seminole County, Florida. The Partnership developed and sold a wide range of housing products targeted primarily to the primary home buyer and sold homesites to unaffiliated third-party builders. The Community amenities include golf, tennis, swimming and other recreational facilities. During June 1996, the Heathrow joint venture, in which the Partnership is the managing general partner, closed on the sale of the remaining land, the country club and certain related assets within the Partnership's Heathrow Community. The Partnership's remaining asset in the Heathrow Community is a 100,000 square foot community shopping center. The Partnership intends to sell this remaining asset during 1997. (e) Cherokee County, Georgia Eagle Watch is a 1,000-acre residential and golf course community development located within a larger PUD in Cherokee County, Georgia, northwest of Atlanta. The Partnership purchased from an Affiliated Partnership a 99.9% partnership interest in a partnership that owns the parcels comprising Eagle Watch. The remaining 1/10 of 1% partnership interest is held by the General Partner. The Community offers developed homesites for sale to third party builders. Community amenities include an 18-hole public golf course, swimming, tennis and other recreational facilities. The Partnership closed on the sale of the Eagle Watch Golf Club in December 1993. As of December 31, 1996, the Partnership has three remaining homesites for sale within this Community. The Partnership intends to sell-out these remaining homesites during 1997. (f) Clayton County, Georgia The Partnership acquired through merger with an Affiliated Partnership ownership of Rock Creek, a 190-acre single-family Community located in Clayton County, Georgia, southeast of Atlanta. The Community offered developed homesites for sale to third-party builders and features an eight- acre recreational area including lakes, playgrounds, and a pavilion with swimming and tennis courts. All homesites in this Community had closed as of December 31, 1995. (g) Cobb County, Georgia The Partnership acquired through merger with an Affiliated Partnership ownership of Burnt Hickory Lakes, a 180-acre single-family Community located in western Cobb County, Georgia, west of Atlanta. Amenities include lakes, tennis courts, a swimming pool and a recreational facility. The Community offered developed homesites for sale to third-party builders, all of which were closed as of December 31, 1995. (h) Tarrant County, Texas The Partnership acquired through merger with an Affiliated Partnership ownership of SouthRidge Lakes, a 270-acre Community located in northeast Tarrant County, Texas, near Dallas/Ft. Worth. Amenities include tennis, swimming and other recreational areas. The Partnership sold homesites to third-party builders for construction of homes catering to the primary home market, all of which were closed as of December 31, 1994. ITEM 3. LEGAL PROCEEDINGS The Partnership has been named a defendant in a lawsuit filed in the Circuit Court in and for the Eighteenth Judicial Circuit, Seminole County, Florida entitled Land Investment I, Ltd., Heathrow Land & Development Corporation, Heathrow Shopping Center Associates, and Paulucci Investments v. Arvida/JMB Managers-II, Inc., Arvida/JMB Partners, L.P.-II, Arvida Company and JMB Realty Corporation. The complaint, as amended, includes counts for breach of the management agreement, breach of fiduciary duty, fraud in the inducement and conspiracy to commit fraud in the inducement, breach of the partnership agreement and rescission in connection with the purchase and management of the Heathrow development. Plaintiffs seek, among other things, unspecified compensatory damages, the right to add a claim for punitive damages, rescission, attorneys fees, costs, and such other relief as the Court deems appropriate. The Partnership believes that the lawsuit is without merit and intends to vigorously defend itself in this matter. On or before October 31, 1996, a lawsuit entitled Seagate At San Clemente, L.L.C. v. Arvida/JMB Partners, L.P.-II, and does 1 through 20 was filed in the Superior Court of the State of California for the County of Orange. In the verified complaint for specified performance of contract, plaintiff claimed that on October 10, 1996 it entered into an oral agreement with the Partnership for the purchase of the Talega Property. The complaint purported to set forth the essential terms of the deal and claimed that plaintiff reasonably relied on various representations of the Partnership in obtaining financing to close the alleged deal on October 31, 1996. Plaintiff sought a judgment against the Partnership that it execute and deliver a complete conveyance of the Talega Property in accordance with the parties' alleged agreement, costs, and such other relief as the court may deemed just and proper. The plaintiff filed a lis pendens on the Property. On November 18, 1996, the plaintiff voluntarily dismissed the lawsuit without prejudice and released the lis pendens on the Property. The Partnership is not subject to any other material pending legal proceedings, other than ordinary litigation incidental to the business of the Partnership. However, reference is made to Note 11 for a discussion of certain claims asserted by Merrill Lynch for indemnification by the Partnership and the General Partner in connection with claims for arbitration filed by certain investors in the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during 1996 and 1995. PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS As of December 31, 1996, there were 15,763 record Holders of the 234,190 Interests outstanding of the Partnership. There is no public market for Interests, and it is not anticipated that a public market for Interests will develop. Upon request, the General Partner may provide information relating to a prospective transfer of Interests to an investor desiring to transfer his Interests. The price to be paid for the Interests, as well as any other economic aspects of the transaction, will be subject to negotiation by the investor. For provisions governing the transferability of Interests, reference is made to "Transferability of Partnership Interests" on pages A-31 to A-34 of the Partnership Agreement and Sections 3 and 4 on page B-2 of the Assignment Agreement which are hereby incorporated herein by reference to Exhibit 99.1 to this report. Pursuant to Section 5.5J of the Partnership Agreement, which is hereby incorporated herein by reference to pages A-25 through A-26 included in Exhibit 99.1 to this report, the General Partner shall elect to pursue one of the following courses of action: (i) to cause the Interests to be listed on a national exchange or reported by the National Association of Securities Dealers Automated Quotation System (a "Listing") at any time on or prior to the date ten years from the termination date of the offering of Interests; (ii) to purchase, or cause JMB or its affiliates to purchase, all of the Interests on the date ten years from the termination of the offering of Interests at their then appraised fair market value (which is determined to be fair by an independent nationally recognized investment banking firm or real estate advisory company); or (iii) to commence a liquidation phase on the date ten years from the termination of the offering of Interests, in which all Partnership assets will be sold prior to the end of the fifteenth year from the termination of the offering. The Partnership Agreement provides that the Partnership may continue in existence (subject to earlier termination under certain circumstances, including upon a liquidation of the Partnership as described in (iii) above) until December 31, 2039. The Partnership Agreement also provides that the General Partner shall not cause a Listing of the Interests (as described in (i) above) unless it receives an opinion of tax counsel to the Partnership to the effect that such Listing will not result in the Partnership being classified for Federal income tax purposes as a corporation, rather than as a partnership. Reference is made to Note 9 for a discussion of the provisions of the Partnership Agreement relating to cash distributions. Reference is made to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 8 for a discussion of the Partnership's inability to reinstate distributions. ITEM 6. SELECTED FINANCIAL DATA ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994, 1993 AND 1992
1996 1995 1994 1993 1992 ------------- ------------- ----------- ------------ ------------ Total revenues. . . . . . $ 25,753,220 25,775,598 52,940,395 60,904,431 56,723,906 ============ ============ ============ ============ ============ Net operating income (loss). . . . . . $ 4,602,058 1,904,695 (43,143,395) (18,502,496) (59,199,630) ============ ============ ============ ============ ============ Net income (loss) . . . . $ 12,366,476 (18,242,348) (61,324,519) (28,388,874) (73,543,759) ============ ============ ============ ============ ============ Net income (loss) per Interest (a) . . . . $ 64.05 (52.00) (287.36) (95.33) (327.00) ============ ============ ============ ============ ============ Total assets (b). . . . . $ 4,849,917 24,239,158 43,945,587 93,530,462 142,934,421 ============ ============ ============ ============ ============ Total liabilities (b). . . . . . . . . . . $117,271,102 149,026,819 150,490,900 138,751,256 159,766,341 ============ ============ ============ ============ ============ Cash distributions per Interest . . . . . . $ -- -- -- -- -- ============ ============ ============ ============ ============ The above selected financial data should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this report. (a) The net income (loss) per Interest is based upon the average number of Interests outstanding during each period. (b) The Partnership does not present a classified balance sheet as a matter of industry practice and, as such, does not distinguish between current and non-current assets and liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES As discussed below, there is substantial doubt about the Partnership's ability to continue as a going concern. At December 31, 1996 and 1995, the Partnership had cash and cash equivalents of approximately $182,000 and $1,387,000, respectively. The decrease in cash and cash equivalents at December 31, 1996 as compared to December 31, 1995 is due to the reduction of working capital to fund the Partnership's operations. Bank overdrafts, which represent checks in transit, of approximately $10,000 and $551,000 at December 31, 1996 and 1995, respectively, were repaid from cash on hand in January 1997 and 1996, respectively. Remaining cash and cash equivalents were available for working capital requirements. The Partnership is currently in default, as discussed below, of the terms of its credit facilities. The source of the Partnership's short- and long-term future liquidity is dependent upon its lender continuing to forbear from exercising its remedies under the Partnership's credit facility agreements and permitting the Partnership to use certain sales proceeds to finance the Partnership's limited operations, as discussed more fully below. The Partnership suspended cash distributions to its partners in late 1990 due to, among other things, deteriorating market conditions. The Partnership is unable to reinstate distributions due to its financial condition, which is also discussed more fully below. The terms of the Partnership's credit facilities are discussed in detail in Note 8. The Partnership's credit facilities matured on December 30, 1994. However, the Partnership did not have the funds to pay off the balances outstanding under the credit facilities. At December 31, 1996, approximately $11.4 million, $56.0 million and $11.5 million was outstanding under the $52.5 million term loan, the $67.5 million term loan and the revolving line of credit facility, respectively. The Partnership has not made the required interest payments on its credit facilities since September 1994. The amount of interest which remains payable at December 31, 1996 totals approximately $16.8 million. During 1994, the Partnership had attempted to negotiate a restructuring of its credit facilities with its lender to, among other things, obtain additional borrowing capacity for the development of new phases of land and housing inventories at certain of its Communities, but was unable to obtain such restructuring. The Partnership's $67.5 million term loan has a certain loan-to-value covenant relative to the Partnership's Talega Property. Based upon independent appraisals of Talega as of December 31, 1993 and 1994, which were prepared on behalf of the Partnership's lender, the Partnership has not been in compliance with this covenant. On March 4, 1994, pursuant to the terms of this loan-to-value covenant, the Partnership received a notice of default from its lender. The Partnership was required to make a term loan payment, including accrued interest, of approximately $59 million in order to cure this default. The Partnership did not have the funds to make such payment. In September 1994, the lender informed the Partnership that it would not advance any funds for the construction of additional homes by the Partnership which were not under construction or under contract for sale by October 1994 and would not advance funds for the development of land parcels or homesites not fully developed or in process by October 1994, unless and until the lender and the Partnership agreed to a plan for the disposition of the Partnership's remaining assets. The two Communities in which the Partnership had been building homes were Heathrow and Wesmere. The restriction on the construction of new homes by the Partnership did not prohibit it from selling to third-party builders, land parcels or homesites that were either fully developed or in process, and did not prevent the construction and sale of homes by such builders in the Heathrow and Wesmere Communities. However, the uncertainty surrounding the future availability of partially or fully developed homesites, as well as the uncertainty of maintaining a sales and marketing program within these Communities, affected the construction and sale of homes by such builders. Proceeds from the sales of housing units, homesites, land parcels and other collateral securing the credit facilities, net of brokerage commissions and certain other customary selling expenses are delivered to the lender to be applied against the outstanding principal balance on one of the term loans. Through December 31, 1996, the Partnership has remitted proceeds totaling approximately $40.2 million from sales made after becoming subject to this requirement in September 1994. Pursuant to a request by the Partnership's lender during 1994, the Partnership prepared a plan for the orderly disposition of its remaining assets (other than the Talega Property) for its lender's review and approval. While the duration of such orderly disposition was expected to be within a certain range of time, the plan assumed the Partnership would complete the construction and development of housing and homesite projects that had already commenced within the Heathrow and Wesmere Communities, and sell those products within two years from the commencement of the plan. In addition, the plan assumed the Partnership would complete the general development necessary to prepare the remaining parcels in those Communities for sale, as well as sell related assets in the Heathrow Community, to unaffiliated third-party purchasers within the two-year period. The accompanying Consolidated Financial Statements reflect writedowns to the carrying values of real estate inventories and property and equipment which were recorded during 1994 totaling approximately $31.2 million to reflect the estimated difference between the net realizable value of the Partnership's assets under the 1994 proposed plan, as compared to the net realizable value of such assets assuming their build-out and sale in the Partnership's ordinary course of business at such time. In March 1995, the Partnership and its lender entered into Forbearance Agreements pursuant to which, among other things, approximately $2.3 million was applied to the outstanding principal balance of one of the Partnership's term loans and $3 million was deposited in a restricted collateral account to pay direct operational costs and general and administrative expenses of the Partnership's limited operations, subject to the approval of the lender of such costs and expenses and its continued forbearance from the exercise of its other remedies under the credit facility agreements. An additional $0.2 million was paid to the lender to fund certain legal fees, appraisal costs and construction services which were expenses of the Partnership. Such amounts were funded out of sale proceeds previously withheld by the Partnership. In September 1995, the Partnership's lender informed the Partnership that it would not accept the proposed plan for the orderly disposition of its remaining assets (other than the Talega Property). The lender asked the Partnership to prepare a new shorter term plan for the sale of the assets which included, among other things, a reduction of proposed development and general and administrative expenses. On October 31, 1995, the Partnership and its lender reached an agreement to amend the March 1995 Forbearance Agreements agreeing to, among other things, a new plan whereby the Partnership would attempt to sell its remaining assets (other than the Talega Property) in accordance with set minimum sales prices for each of the assets over the course of a six-month period with payment of certain operational costs to be made out of available funds in the restricted collateral account. The agreement is subject to the lender's continued forbearance from the exercise of its remedies under the credit facilities and its right to cease funding costs not yet then incurred. The expected disposition of assets in accordance with the new six-month plan did not result in any additional writedowns to the carrying values of real estate inventories and property and equipment. During November 1995, the Partnership closed on the sale of the remaining land within its Wesmere Community to an unaffiliated third party for a sales price of approximately $4.25 million. In addition, the buyer reimbursed the Partnership at closing for certain prepaid impact fees which had been paid by the Partnership. Such fees totaled approximately $1 million. The net proceeds from such sale were paid to the Partnership's lender and applied against the outstanding principal balance on one of the Partnership's term loans. The sale resulted in a gain for financial reporting purposes and a loss for Federal income tax purposes in 1995. During June 1996, the Heathrow Joint Venture, in which the Partnership is the managing general partner, closed on the sale of the remaining land, the country club and certain related assets within the Partnership's Heathrow Community. This transaction is reflected in Land and property operations on the accompanying consolidated statements of operations. This sale is the primary cause for various significant changes on the accompanying consolidated balance sheets at December 31, 1996 as compared to December 31, 1995 and on the accompanying consolidated statements of operations for the year ended December 31, 1996 as compared to 1995. The net proceeds from this sale, after prorations and closing costs, of approximately $18.4 million were paid to the Partnership's lender and applied against the outstanding principal balances on both of the Partnership's term loans. The sale resulted in a gain for financial reporting purposes and a loss for Federal income tax purposes in 1996. During September 1996, the Partnership and its lender agreed to another amendment of the March 1995 Forbearance Agreement agreeing to, among other things, a revised plan whereby the Partnership would sell its remaining assets by no later than March 31, 1997. Upon the execution of the amended agreement, the Partnership's lender agreed to forgive, waive and cancel a portion of the unpaid interest on the Partnership's credit facilities in the aggregate amount of $20 million, of which $2 million was allocated to interest on the revolving line of credit and $18 million was allocated to one of the term loans. The forgiveness of this interest is reflected as an Extraordinary gain on the accompanying consolidated statements of operations for the year ended December 31, 1996, and is the primary cause for the decrease in Accrued expenses and other liabilities on the accompanying consolidated balance sheets at December 31, 1996 as compared to December 31, 1995. The amended agreement also includes the forgiveness, by the Partnership's lender, of any remaining outstanding principal balance and accrued interest on the Partnership's credit facilities upon the satisfaction of certain specified conditions, including, among other things, the sale of the Partnership's remaining real estate assets at specified minimum prices, the payment of the net proceeds from such sales to the Partnership's lender, and the assignment of any other net assets of the Partnership to the lender. However, the lender's obligations under such agreement terminate on March 31, 1997. The Partnership and its lender are currently negotiating the terms of another amendment to the March 1995 Forbearance Agreement which would include, among other things, an extension of the existing plan whereby the Partnership would sell its remaining assets by no later than June 30, 1997. The Partnership currently anticipates that such amendment will also include the forgiveness, by the Partnership's lender, of any remaining outstanding principal balance and accrued interest on the Partnership's credit facilities, upon the satisfaction of certain specified conditions, including, among other things, the sale of the Partnership's remaining real estate assets at specified minimum prices, the payment of the net proceeds from such sales to the Partnership's lender, and the assignment of any other net assets of the Partnership to the lender. Such forgiveness of principal and interest would result in an extraordinary gain for financial reporting purposes. During April 1996, the Partnership entered into a non-binding letter of intent with an unaffiliated third party for the sale of the retail shopping plaza at its Heathrow Community. This letter of intent subsequently expired by its terms without the sale of the shopping plaza being consummated. The Partnership continues to actively market this Property for sale. During October 1996, the Partnership reached an agreement with an unaffiliated third party for the sale of the Talega Property. The sale was originally expected to close during 1996. However, at the prospective purchaser's request, the Partnership, its lender and the prospective purchaser subsequently agreed to extend the closing until April 1997. The closing of the sale is subject to the satisfaction of various conditions. The proceeds from such sale, if consummated, after payment of the unpaid real estate taxes on the Talega Property and certain past-due amounts and prorated items related to the bond financing and other assessments on the Talega Property (Note 12), would be paid to the Partnership's lender and applied against the outstanding principal balance on the Partnership's term loans. The sale, if consummated, would result in a gain for financial reporting purposes and a loss for Federal income tax purposes during 1997. Although there can be no assurance, the Partnership is currently working to dispose of all of its remaining assets during 1997. The Partnership's ability to dispose of all of its assets during 1997 is dependent upon, among other things, the Partnership closing on the sale of its Talega Property, as well as the Heathrow venture contracting for the sale, and closing the sale, of the shopping plaza at the Heathrow Community. It is expected that any proceeds from the sale or other disposition of such assets, in excess of the costs of sale and general and administrative expenses attributable thereto, will be paid to the lender or other creditors of the Partnership. In addition, the Partnership is currently involved in certain litigation, as discussed in Item 3. Legal Proceedings in this report, to which reference is hereby made. Upon completion of the sale of the Partnership's remaining assets, the Partnership expects to terminate. However, termination of the Partnership could be delayed until resolution (or other acceptable treatment) of the pending litigation. Holders of Interests should not expect to receive any future distributions from the Partnership. The possibility still remains that the lender may pursue its remedies under the credit facilities, including realizing upon substantially all of the Partnership's remaining assets, which are collateral security for the credit facilities. These issues raise substantial doubt about the Partnership's ability to continue as a going concern. If the Partnership is unable to continue as a going concern, it may be forced to dispose of its Properties in a manner that would realize less than would be realized under the current plan for an orderly disposition. If this were to occur, any proceeds received could be less than the current carrying values of the Properties, resulting in the recognition of additional losses by the Partnership. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Partnership has not generated the cash flow necessary and, as described above, does not have the available borrowing capacity to pay for all of the carrying costs relative to its Talega Property. As a result, at December 31, 1996, approximately $1.4 million of real estate taxes assessed on the Property remain unpaid and are included in Accrued expenses and other liabilities on the accompanying consolidated balance sheets at December 31, 1996. All unpaid real estate taxes owed by the Partnership will be paid by the Partnership with proceeds from the sale of the Talega Property, if consummated. Talega's carrying costs include assessments attributable to the debt service and other obligations related to the District and its tax-exempt bond financing, which the Partnership has utilized to construct certain on-site and off-site water and sewer infrastructure improvements. The details of this bond financing are discussed in detail in Note 12. The total of such carrying costs paid, excluding interest under the Partnership's credit facility, associated with this Property for the years ended December 31, 1996 and 1995 were approximately $351,000 and $6,336,000, respectively. These amounts do not include penalties and interest incurred on unpaid District assessments. The reduction in the carrying costs paid in 1996 as compared to 1995 is due to the Partnership not having the funds to make the required debt service payments and other obligations related to the District and its tax exempt- exempt bond financing for 1996. As a result, Accrued expenses and other liabilities on the accompanying consolidated balance sheets include an approximate $7.1 million accrual reflecting the Partnership's obligation to the District, including penalties and interest incurred on unpaid District assessments. Certain of the Partnership's unpaid obligations to the District will be paid by the Partnership with the proceeds from the sale of Talega. The Partnership was obligated to pay the District approximately $6.7 million in June 1994 for assessments attributable to its share of the operating deficits of the District, payments related to the filtration plant and reservoir capacity, and principal and interest on the bonds for the District's fiscal year ended June 30, 1994. As mentioned above, given the Partnership's current financial condition, the Partnership did not have sufficient cash resources or available borrowing capacity to pay the June 1994 assessments to the District. As a result, on July 5, 1994, the District drew the entire amount of an $11.4 million letter of credit, which increased the total funded indebtedness of the Partnership under its credit facilities by $11.4 million. Of this amount, approximately $5.7 million represented additional collateral securing payments of assessments attributable to principal and interest due on the bonds in June 1995. As discussed in greater detail below, the Partnership contends that the draw on the letter of credit in July 1995 satisfied its requirement to pay assessments related to the June 1994 and June 1995 bond debt service obligations to the District. Although the District had expended all original bond proceeds on infrastructure improvements, bond reserves and other related offering costs, certain funds generated from the sale of District assets, which were improved using proceeds from the Partnership's bond financing, were held by the District in reserve accounts for the benefit of the Talega Property. The District has notified the Partnership that certain of their reserve accounts were invested through the Orange County Treasurer's Office. In light of the developments with Orange County, some of those investment funds may have been lost. The District has asserted a default by the Partnership, under a certain agreement between the Partnership and the District, for the Partnership's alleged failure to pay the June 1994 assessments of approximately $6.7 million. The District filed a lien on the Talega Property to secure the unpaid assessments and penalties and interest thereon in August 1994 and subsequently filed a notice of foreclosure for the Property. Under California Water District Code Law, the Partnership had a six-month period in which to cure any such default by the payment of these amounts. After the expiration of the six-month period without cure of an outstanding default, the unpaid assessments are delinquent and the District may seek to enforce its remedy with respect to the Talega Property, which would generally involve a sale of the Property by the local taxing authority to the District for the amount of unpaid assessments plus penalties and interest. The Partnership, as the owner of the Property, would have a right to redeem the Property during a three-year period following the sale of the Property to the District by paying all delinquent assessments plus penalties, interest and costs. During this period additional assessments would continue to be levied against the Property in the same manner as before and additional penalties and interest would accrue. After the end of the three-year period, the Partnership's right of redemption could be terminated upon execution and delivery to the District of a tax collector's deed to the Property. The Partnership contends that the draw on the letter of credit in July 1994 satisfied its requirement to pay assessments for the June 1994 and 1995 bond debt service obligations totaling approximately $11.4 million and, therefore, the Partnership is not in default as to these amounts. Considering the high level of bond indebtedness on the Talega Property, the reduced value of the Property and the funds currently on deposit in various reserve accounts for the bonds, the Partnership approached the District to discuss a plan of restructuring or partial defeasance of the bonds utilizing some of the reserve account funds to pay down the bonds and thereby reduce the level of indebtedness of the Property. However, the Partnership has not received a formal response from the District regarding this proposal. As discussed in Note 8, the Partnership has reached an agreement with an unaffiliated third party for the sale of its Talega Property. One condition of such sale is the satisfactory release of the Partnership's obligation under such bonds as well as under various agreements with the District, subject to the payment by the Partnership of certain past-due amounts and prorated items related to such bonds and other assessments. The payment of these items would be made from the proceeds of the sale of the Property. As stipulated in a management agreement with the Partnership, Arvida Company ("Arvida") provides development, construction, management and other personnel and services to the Partnership for all of its projects and operations. In accordance with this agreement, the Partnership reimburses Arvida for all of its out-of-pocket expenditures (including salary and salary-related costs). Pursuant to a requirement under the Partnership's credit facilities, a portion of the reimbursements paid to Arvida and to Arvida/JMB Partners, L.P., as well as portions of the Partnership's insurance and loan refinancing costs, incurred in 1992 and 1993 had been funded on the Partnership's behalf by advances from the General Partner. As of April 30, 1993, the General Partner had advanced the total amount required under the terms of the credit facilities. Such advances, which do not bear interest, total approximately $4,609,400. The repayment of such advances is subordinated to the receipt by the Holders of Interests of certain levels of return, and therefore, is not expected to be made. In addition, prior to the sale of the remaining land, the country club and certain related assets within the Heathrow Community during June 1996, Arvida was entitled to receive a management fee in connection with providing development management services to the Heathrow venture. Cumulative management fees of approximately $3,005,000 and $2,793,000 have been earned through December 31, 1996 and 1995, respectively, the payment of which has been deferred. The ultimate payment of these management fees is not expected to be made as it is subordinated to certain levels of return to the Holders of Interests. Reference is made to Note 11 for further discussion of certain claims by Merrill Lynch for indemnification by the Partnership and its General Partner against losses and expenses suffered by Merrill Lynch relating to claims for arbitration against it by certain investors of the Partnership. RESULTS OF OPERATIONS The results of operations, before writedowns of the carrying values of real estate inventories and property and equipment, for the years ending December 31, 1996, 1995 and 1994 are primarily attributable to the development and sale or operation of the Partnership's assets. See Note 1 for a discussion of the recognition of profit from sales of real estate. For the year ended December 31, 1996, the Partnership (including its consolidated ventures) closed on the sale of one housing unit, 20 homesites and the remaining land, the country club and certain related assets within the Partnership's Heathrow Community. This compares to closings for the year ended December 31, 1995 of 37 housing units, 146 homesites and the remaining land within the Partnership's Wesmere Community. Closings in 1994 were for 155 housing units, 268 homesites and approximately 56 acres of undeveloped and developed land. Outstanding contracts ("backlog") at December 31, 1996 consisted of the remaining land within the Partnership's Talega Community. This compares to a backlog at December 31, 1995 of one housing unit, nine homesites and the retail shopping plaza at the Partnership's Heathrow Community, the contract for which was subsequently terminated by the prospective purchaser. Backlog at December 31, 1994 consisted of 18 housing units and 10 homesites. Revenues from housing and homesite activities are recognized upon the closing of homes and developed lots, respectively, within the Partnership's Communities. Land and property revenues are generated from the closing of developed and undeveloped residential and/or commercial land tracts. Cost of revenues pertaining to the Partnership's housing sales reflect the cost of the acquired assets as well as development and construction expenditures, certain capitalized overhead costs, capitalized interest, real estate taxes and marketing and disposition costs. The costs related to the Partnership's homesite sales reflect the cost of the acquired assets, related development expenditures, certain capitalized overheads, capitalized interest and real estate taxes, and disposition costs. Land and property cost of revenues reflect the cost of the acquired assets, certain development costs and the related disposition costs. Housing revenues have been negatively impacted since 1994 due to the prohibition placed on the Partnership by its lender regarding the construction of new homes within the Partnership's Heathrow and Wesmere Communities, as discussed in Liquidity and Capital Resources above. During the year ended December 31, 1996, the Partnership closed on the remaining unit in its Heathrow Community. Due to the sale of the Partnership's Heathrow and Wesmere Communities in 1996 and 1995, respectively, as discussed above, no housing units remain in inventory as of December 31, 1996. Revenues for 1995 decreased as compared to 1994 due to the overall decrease in the number of units closed in the Heathrow and Wesmere Communities during 1995. Homesite revenues include amounts earned from the sale of developed lots within the Partnership's Communities. The decrease in homesite revenues for the year ended December 31, 1996 as compared to 1995 is due to a decrease in the availability of lots for sale at the Partnership's Heathrow and Atlanta Communities. The Partnership generated homesite revenues for the year ended December 31, 1996 from 20 lot closings within these Communities. Homesite revenues decreased for the year ended December 31, 1995 as compared to 1994 due in part to the absence of lot closings during 1995 in the Partnership's SouthRidge Lakes Community in Texas, which closed-out during 1994. Also contributing to the unfavorable variance was a reduction in lot closings in Heathrow. The development and sale of lots in Heathrow had been negatively impacted by the restrictions placed on the Partnership by its lender, as discussed in Liquidity and Capital Resources above. At December 31, 1996, three lots at the Partnership's Eagle Watch Community remain in inventory. The decline in the gross operating profit margin for the year ended December 31, 1996 as compared to 1995 is due primarily to the reduction in the number of closings of higher margin product at the Partnership's Heathrow Community. The decline in the gross operating profit margin for the year ended December 31, 1995 as compared to 1994 is due primarily to lower average sales prices generated for lots closed within the Partnership's Heathrow Community and its Rock Creek and Eagle Watch Communities in Atlanta in 1995. Land and property revenues are generated from the sale of developed and undeveloped residential and commercial land tracts. Land and property revenues for the year ended December 31, 1996 were generated primarily from the sale of the remaining land, the country club and certain related assets within the Partnership's Heathrow Community, as discussed above. Land and property revenues for the year ended December 31, 1995 represent the revenues generated from the sale of the remaining land in the Wesmere Community, which closed in November 1995. Land and property revenues for 1994 were generated from the sale of an approximate 39 acre commercial tract in the Partnership's Heathrow Community as well as an approximate 17 acre commercial tract in its SouthRidge Lakes Community. Operating properties represents the activity from the club operation, retail shopping plaza and cable operations at the Partnership's Heathrow Community. Revenues from operating properties decreased during 1996 as compared to 1995 due primarily to the June 1996 sale of the country club and cable operations within the Partnership's Heathrow Community, as discussed above. Brokerage and other operations represents activity from the sale of builders' homes within the Partnership's Communities, the resale of real estate inside and outside of the Partnership's Communities, and proceeds from the Partnership's property management activities. The continued decrease in brokerage revenues and cost of revenues since 1994 is due to a reduction in the number of closings of homes built by unaffiliated third- party builders within the Partnership's Communities due to lower levels of inventories offered for sale by third-party builders. Selling, general and administrative expenses include all marketing costs, with the exception of those costs capitalized in conjunction with the construction of housing units, and project and general administrative costs. These expenses are net of the marketing fee reimbursements received from third-party builders. Such costs continue to decrease as a direct result of the restrictions placed on development and construction by the Partnership's lender, and the Partnership's current financial condition. Writedowns of the carrying values of real estate inventories and property and equipment for the year ended December 31, 1994 include writedowns of approximately $20.6 million and $7.9 million to the carrying values of the Partnership's Heathrow and Wesmere Communities, respectively, as well as an approximate $2.7 million writedown to the carrying value of its retail shopping plaza at Heathrow. As discussed in detail above in Liquidity and Capital Resources, the Partnership, pursuant to a request by its lender during 1994, prepared a plan for the orderly disposition of its remaining assets. As a result, the Partnership recorded the above- mentioned writedowns of its carrying values of real estate inventories and property and equipment to reflect the estimated difference between the net realizable value of the Partnership's assets assuming the lender's acceptance of the proposed plan, as compared to the value of such assets assuming their build-out and sale in the Partnership's ordinary course of business. Due to the Partnership's inability to secure additional financing to continue the development of the Talega Property, this Property is recorded at its estimated fair value at December 31, 1996 and 1995. Fair value accounting assumes a bulk sale of the property in its current state of development under present market conditions. The 1994 writedown of the carrying values of real estate inventories and other assets includes a writedown of approximately $14.3 million to reduce the carrying value of the Partnership's Talega Property. This writedown was taken as a result of the continued deteriorating economic and market conditions and other factors which resulted in the decision not to proceed with Talega's future development, as well as the restrictions on the funding of development costs for Talega under the terms of the credit facilities and property specific factors. The fair value estimate at December 31, 1994 was at the lower end of a range of possible values. The low end of the range was recorded due to the continued uncertainties regarding the Talega Property, including issues related to its tax-exempt bond financing and defaults or alleged defaults with respect to payment of assessments to the District, as more fully described in Liquidity and Capital Resources above and in Notes 8 and 12. As a result of this writedown of the carrying value, the Partnership no longer has any recorded investment in the Talega Property. The decrease in interest and real estate taxes for the year ended December 31, 1996 as compared to 1995 is due primarily to an approximate $5.5 million adjustment recorded during 1996 to reduce real estate taxes related to the Talega Property. During the fourth quarter of 1996, the Partnership received correspondence from the District which indicated that the Partnership's obligation to the District had been reduced by proceeds from the sale of property previously improved by the District. Such improvements had been funded by the bond financing described in Note 12. The decrease in interest and real estate taxes for 1996 as compared to 1995 is also due to a decrease in the average amount of borrowings outstanding during the period. Interest and real estate taxes increased for the year ended December 31, 1995 as compared to 1994 due primarily to an increase in the interest rate charged on the Partnership's credit facility as discussed in Note 8, as well as a decrease in the amount of inventories which met the requirements for interest capitalization. Due to the development and construction restrictions placed on the Partnership by its lenders, only minimal amounts of inventories met such capitalization requirements during 1995. This unfavorable variance was partially offset by a reduction in the amount of real estate taxes incurred in 1995 as compared to 1994, as the Partnership continues to dispose of its inventories. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES INDEX Report of Independent Certified Public Accountants Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Partners' Capital Accounts (Deficits) for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements SCHEDULES NOT FILED: All schedules have been omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or related notes. REPORT OF ERNST & YOUNG LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Partners Arvida/JMB Partners, L.P.-II: We have audited the accompanying consolidated balance sheets of Arvida/JMB Partners, L.P.-II and Consolidated Ventures as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in partners' capital accounts (deficits), and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements 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 misstatements. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arvida/JMB Partners, L.P.-II and Consolidated Ventures at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that Arvida/JMB Partners,L.P.-II and Consolidated Ventures will continue as a going concern. The Partnership has incurred recurring operating losses and has a partners' deficit of $112.6 million at December 31, 1996. As more fully described in Notes 6, 8, and 12, the Partnership has ceased further development of its Talega Property, has failed to pay the outstanding balance due on December 30, 1994, which at December 31, 1996 is approximately $79 million, under its credit facilities and has not obtained waivers for events of default under its credit facilities. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 8. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts and timing of payments of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP Miami, Florida February 21, 1997 ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS ------
1996 1995 ------------ ------------ Cash and cash equivalents (note 4). . . . . . . . . . . . . . . . . . $ 181,623 1,387,313 Restricted cash (note 4). . . . . . . . . . . . . . . . . . . . . . . 955,077 2,552,834 Trade and other accounts receivable (net of allowance for doubtful accounts of $76,289 and $18,431 at December 31, 1996 and 1995, respectively) (note 5). . . . . . . . . 103,650 1,218,015 Real estate inventories (notes 2, 6, 8 and 12). . . . . . . . . . . . 57,598 10,766,333 Property and equipment, net (note 7). . . . . . . . . . . . . . . . . 2,701,441 6,404,217 Prepaid expenses and other assets (including security deposits totaling $636,211 and $618,066 at December 31, 1996 and 1995, respectively). . . . . . . . . . . . . . . . . . . . 850,528 1,910,446 ------------ ------------ Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 4,849,917 24,239,158 ============ ============ ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES CONSOLIDATED BALANCE SHEETS - CONTINUED LIABILITIES AND PARTNERS' CAPITAL ACCOUNTS (DEFICITS) ----------------------------------------------------- 1996 1995 ------------ ------------ Liabilities: Bank overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,222 550,666 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 129,281 450,129 Deposits (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . 33,700 1,121,423 Accrued expenses and other liabilities (notes 8 and 12) . . . . . . 30,605,394 39,137,504 Amounts due to affiliates (notes 3 and 10). . . . . . . . . . . . . 7,621,046 7,591,889 Notes and mortgages payable (in default) (note 8) . . . . . . . . . 78,871,459 100,175,208 ------------ ------------ Commitments and contingencies (notes 3, 8, 10, 11 and 12) Total liabilities . . . . . . . . . . . . . . . . . . . . . 117,271,102 149,026,819 ------------ ------------ Partners' capital accounts (deficits) (note 9) General Partner and Associate Limited Partner: Capital contributions. . . . . . . . . . . . . . . . . . . . . . 2,000 2,000 Cumulative net income (loss) . . . . . . . . . . . . . . . . . . (8,448,354) (5,809,930) Cumulative cash distributions. . . . . . . . . . . . . . . . . . (246,771) (246,771) ------------ ------------ (8,693,125) (6,054,701) ------------ ------------ Holders of Interests (note 1): Capital contributions, net of offering costs . . . . . . . . . . 209,753,671 209,753,671 Cumulative net loss. . . . . . . . . . . . . . . . . . . . . . . (304,260,557) (319,265,457) Cumulative cash distributions. . . . . . . . . . . . . . . . . . (9,221,174) (9,221,174) ------------ ------------ (103,728,060) (118,732,960) ------------ ------------ Total partners' deficits. . . . . . . . . . . . . . . . . . (112,421,185) (124,787,661) ------------ ------------ Total liabilities and partners' deficits. . . . . . . . . . $ 4,849,917 24,239,158 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Revenues: Housing . . . . . . . . . . . . . . . . . . . . . $ 140,810 6,203,400 25,345,666 Homesites . . . . . . . . . . . . . . . . . . . . 1,243,074 7,436,745 15,430,776 Land and property . . . . . . . . . . . . . . . . 20,286,616 4,250,000 3,087,690 Operating properties. . . . . . . . . . . . . . . 3,315,655 5,289,574 5,172,836 Brokerage and other operations. . . . . . . . . . 767,065 2,595,879 3,903,427 ------------ ------------ ------------ Total revenues . . . . . . . . . . . . . 25,753,220 25,775,598 52,940,395 ------------ ------------ ------------ Cost of revenues: Housing . . . . . . . . . . . . . . . . . . . . . 336,186 5,440,703 22,540,279 Homesites . . . . . . . . . . . . . . . . . . . . 1,075,568 5,785,737 11,057,430 Land and property . . . . . . . . . . . . . . . . 14,115,847 442,363 1,855,343 Operating properties. . . . . . . . . . . . . . . 3,023,179 5,399,440 5,071,582 Brokerage and other operations. . . . . . . . . . 600,742 2,393,648 3,154,728 ------------ ------------ ------------ Total cost of revenues. . . . . . . . . . 19,151,522 19,461,891 43,679,362 ------------ ------------ ------------ Gross operating profit. . . . . . . . . . . . . . . 6,601,698 6,313,707 9,261,033 Selling, general and administrative expenses (notes 3, 8 and 10) . . . . . . . . . . . . . . . 1,999,640 4,409,012 6,875,013 Writedowns of the carrying values of real estate inventories and property and equipment (notes 1, 7 and 8). . . . . . . . . . . . . . . . -- -- 45,529,415 ------------ ------------ ------------ Net operating income (loss) . . . . . . . 4,602,058 1,904,695 (43,143,395) Interest income . . . . . . . . . . . . . . . . . . 28,484 200,267 157,352 Interest and real estate taxes, net (notes 1, 8 and 12) . . . . . . . . . . . . . (12,264,066) (20,347,310) (18,338,476) ------------ ------------ ------------ ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED 1996 1995 1994 ------------ ------------ ------------ Loss before extraordinary item. . . . . . (7,633,524) (18,242,348) (61,324,519) Extraordinary item: Gain on early extinguishment of debt (note 8). . . . . . . . . . . 20,000,000 -- -- ------------ ------------ ------------ Net income (loss) . . . . . . . . . . $ 12,366,476 (18,242,348) (61,324,519) ============ ============ ============ Income (loss) before extraordinary item per Interest . . . . . . . . . . . $ 64.05 (52.00) (287.36) ============ ============ ============ Net income (loss) per Interest (note 1). . . . . . . . . . . . . . . . $ 64.05 (52.00) (287.36) ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL ACCOUNTS (DEFICITS) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GENERAL PARTNER HOLDERS AND ASSOCIATE OF LIMITED PARTNER INTERESTS TOTAL --------------- ------------ ------------ Capital accounts (deficits) at December 31, 1993 . . . . . $(6,040,710) (39,180,084) (45,220,794) Net income (loss) . . . . . . 6,040,710 (67,365,229) (61,324,519) ----------- ------------ ------------ Capital accounts (deficits) at December 31, 1994 . . . . . -- (106,545,313) (106,545,313) Net loss. . . . . . . . . . . (6,054,701) (12,187,647) (18,242,348) ----------- ------------ ------------ Capital accounts (deficits) at December 31, 1995 . . . . . (6,054,701) (118,732,960) (124,787,661) Net income (loss) . . . . . . (2,638,424) 15,004,900 12,366,476 ----------- ------------ ------------ Capital accounts (deficits) at December 31, 1996 . . . . . $(8,693,125) (103,728,060) (112,421,185) =========== ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Net income (loss) . . . . . . . . . . . . . . . . . $ 12,366,476 (18,242,348) (61,324,519) Charges (credits) to net income (loss) not requiring (providing) cash: Amortization . . . . . . . . . . . . . . . . . . 73,032 538,616 2,342,485 Provision for doubtful accounts. . . . . . . . . 98,975 (14,522) 28,576 (Gain) loss on sale of property and equipment. . 1,866,865 (2,702) (6,000) Writedowns of the carrying values of real estate inventories and property and equipment (notes 1, 7 and 8). . . . . . . . -- -- 45,529,415 Extraordinary gain on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . (20,000,000) -- -- Changes in: Restricted cash. . . . . . . . . . . . . . . . . 1,597,757 (2,348,639) 334,300 Trade and other accounts receivable. . . . . . . 1,015,390 193,373 544,578 Real estate inventories: Additions to real estate inventories . . . . . (4,818,866) (1,003,367) (26,408,127) Cost of revenues . . . . . . . . . . . . . . . 15,527,601 11,668,803 35,453,052 Capitalized real estate taxes. . . . . . . . . -- (51,688) (159,395) Capitalized interest . . . . . . . . . . . . . -- (279,639) (1,591,932) Prepaid expenses and other assets. . . . . . . . 986,886 3,045,175 (2,785,827) Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . 11,147,042 15,529,990 4,803,311 Deposits . . . . . . . . . . . . . . . . . . . . (1,087,723) (66,580) (614,397) Amounts due to affiliates. . . . . . . . . . . . 29,157 593,847 630,034 ------------ ------------ ------------ Net cash provided by (used in) operating activities. . . . . . . . . . 18,802,592 9,560,319 (3,224,446) ------------ ------------ ------------ Investing activities: Acquisitions of property and equipment. . . . . . -- (180,641) (198,522) Proceeds from disposals of property and equipment 1,835,911 2,702 6,000 ------------ ------------ ------------ Net cash provided by (used in) investing activities. . . . . . . . . . 1,835,911 (177,939) (192,522) ------------ ------------ ------------ ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED 1996 1995 1994 ------------ ------------ ------------ Financing activities: Proceeds from notes and mortgages payable . . . . -- -- 12,134,466 Payments of notes and mortgages payable . . . . . (21,303,749) (16,803,614) (5,148,279) Repayments of bank overdrafts, net. . . . . . . . (540,444) (717,724) (65,491) ------------ ------------ ------------ Net cash provided by (used in) financing activities. . . . . . . . . . (21,844,193) (17,521,338) 6,920,696 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . (1,205,690) (8,138,958) 3,503,728 Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . 1,387,313 9,526,271 6,022,543 ------------ ------------ ------------ Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . $ 181,623 1,387,313 9,526,271 ============ ============ ============ Supplemental disclosure for cash flow information: Cash paid for mortgage and other interest, net of amounts capitalized. . . . . . . . . . . $ -- -- 2,366,749 ============ ============ ============ Non-cash investing and financing activities . . . $ -- -- -- ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
ARVIDA/JMB PARTNERS, L.P.-II (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) OPERATIONS AND BASIS OF ACCOUNTING Operations The Partnership's Properties consist principally of interests in land developed or planned for development into master-planned residential communities. The Partnership had principally been engaged in the development of comprehensively planned, primary and secondary home Communities containing a diversified product mix designed for the various markets in which the Partnership operates. Reference is made to note 8 for further discussion of the current plan for disposition of the Partnership's remaining assets. Principles of Consolidation The consolidated financial statements include the accounts of the Partnership and its consolidated ventures. All material intercompany balances and transactions have been eliminated in consolidation. Recognition of Profit from Sales of Real Estate For sales of real estate, profit is recognized in full when the collectibility of the sales price is reasonably assured and the earnings process is virtually complete. When the sale does not meet the require- ments for recognition of income, profit is deferred until such requirements are met. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements and accompanying notes. Actual results could differ from those estimates. Real Estate Inventories and Cost of Real Estate Revenues The majority of the Partnership's real estate inventories, with the exception of the Talega Community, are carried at the lower of carrying amount or fair value less costs to sell as determined through an evaluation of individual projects. Prior to the adoption of Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which was issued by the Financial Accounting Standards Board ("FASB") in March 1995 and effective January 1, 1995, adjustments to book value, as they became necessary, were reported in the period in which they became known. Reference is made to notes 6 and 7 for a detailed discussion of writedowns of the carrying values of real estate inventories and property and equipment recorded for the year ended December 31, 1994. No additional writedowns were recorded during 1996 and 1995. In addition, due to the Partnership's inability to secure additional financing to continue the development of its Talega Community, this Property is recorded at its fair value at December 31, 1996 and 1995. Fair value accounting assumes a bulk sale of the property in its current state of development under present market conditions. The fair value estimate at December 31, 1996 and 1995 is at the lower end of a range of possible values. The low end of the range was recorded due to the continued uncertainties regarding the Talega Property, including issues related to its tax-exempt bond financing and defaults or alleged defaults with respect to payment of assessments to the Santa Margarita Water District (the "District"), as more fully described in notes 8 and 12. As a result of the writedowns of the carrying value, the Partnership no longer has any recorded investment in the Talega Property. The total cost of land, land development and common costs were apportioned among the projects on the relative sales value method. Costs pertaining to the Partnership's housing, homesites and land and property revenues reflect the cost of the acquired assets, as well as development, construction, capitalized interest and real estate taxes and capitalized overheads. Certain marketing costs relating to housing projects, including exhibits and displays, were capitalized and charged to housing cost of revenues as sales of related units were closed. A warranty reserve was provided as sales of housing units were closed. This reserve is reduced by the cost of subsequent work performed. Capitalized Interest and Real Estate Taxes Interest and real estate taxes are capitalized as incurred to qualifying assets, principally real estate inventories. Such capitalized interest and real estate taxes are charged to cost of revenues as revenue from real estate inventories is recognized. Interest, including the amortization of loan fees, of $10,294,290, $13,416,110 and $11,903,211 was incurred for the years ended December 31, 1996, 1995 and 1994, respectively, of which $0, $279,639 and $1,591,932 was capitalized. Interest payments, including amounts capitalized, totaling $0, $0 and $3,958,681 were made for the years ended December 31, 1996, 1995 and 1994, respectively. The Partnership has not made the required monthly interest payments on its credit facility since September 1994. Real estate taxes of $1,969,776, $7,262,527 and $8,186,592 were incurred for the years ended December 31, 1996, 1995 and 1994, respectively, of which $0, $51,688 and $159,395 were capitalized. Real estate tax payments of $524,024, $484,409 and $12,135,892 were made for the years ended December 31, 1996, 1995 and 1994, respectively. During 1996 and 1995, the Partnership received $68,443 and $625,142, respectively of real estate tax refunds (not included in the real estate tax payments reported above) in connection with previously contested property taxes related to the Partnership's Talega Property. The decrease in real estate taxes for the year ended December 31, 1996 as compared to 1995 is due primarily to an approximate $5.5 million adjustment recorded during 1996 to reduce real estate taxes related to the Talega Property. During the fourth quarter of 1996, the Partnership received correspondence from the District which indicated that the Partnership's obligation to the District had been reduced by proceeds from the sale of property previously improved by the District. Such improvements had been funded by the bond financing described in note 12. The decrease in real estate taxes incurred for the year ended December 31, 1995 as compared to 1994 is due to the decrease in the District tax assessments at the Partnership's Talega Community. The decrease in real estate taxes paid for the year ended December 31, 1995 as compared to 1994 is due to the pre-payment of the June 1995 assessments in July 1994 as a result of a draw down by the District of the Partnership's letter of credit collateralizing payment of such assessments. Reference is made to notes 8 and 12 for further discussion regarding these assessments. The preceding analysis of real estate taxes does not include real estate taxes incurred or paid with respect to the Partnership's club facilities and operating properties as these taxes are included in cost of revenues for operating properties. Property and Equipment and Other Assets Property and equipment and other assets, subject to impairment considerations (note 13), are carried at cost less accumulated depreciation and amortization. Prior to the adoption of Statement No. 121 in 1996, property and equipment were depreciated on the straight-line method over the estimated useful lives of the assets, which range from three to 25 years. In accordance with Statement No. 121, the Partnership has discontinued recording depreciation on assets held for disposal. Other assets are amortized on the straight-line method over the useful lives of the assets, which range from one to five years. Expenditures for maintenance and repairs are charged to expense as incurred. Costs of major renewals and improvements which extend useful lives are capitalized. Provisions for value impairment are recorded with respect to such assets whenever the estimated future undiscounted cash flows from operations and projected sales proceeds are less than the net carrying value. Reference is made to notes 6 and 7 for a discussion of writedowns of the carrying values of real estate inventories and property and equipment recorded for the years ended December 31, 1995 and 1994. Amortization of other assets, excluding loan fees, of approximately $73,000, $119,000 and $142,000 was recorded for the years ended December 31, 1996, 1995 and 1994, respectively. Amortization of loan fees, which is included in interest expense, of approximately $0, $0 and $1,648,000 was recorded for the years ended December 31, 1996, 1995 and 1994, respectively. Partnership Records The Partnership's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying consolidated financial statements have been prepared from such records after making appropriate adjustments where applicable to reflect the Partnership's accounts in accordance with GAAP and to consolidate the accounts of the ventures as described above. Such GAAP and consolidation adjustments are not reflected on the records of the Partnership. The net effect of these items is summarized as follows:
1996 1995 ------------------------------ ------------------------------ GAAP BASIS TAX BASIS GAAP BASIS TAX BASIS ------------ ----------- ------------ ----------- Total assets. . . . . . . . . . . . $ 4,849,917 263,097,617 24,239,158 281,631,438 Partners' capital accounts (deficits): General and Associate Limited Partner. . . . . . . . . (8,693,125) -- (6,054,701) -- Holders of Interests. . . . . . . (103,728,060) 103,022,213 (118,732,960) 111,638,592 Net income (loss): General and Associate Limited Partner, net . . . . . . (2,638,424) -- (6,054,701) -- Holders of Interests. . . . . . . 15,004,900 (8,616,379) (12,187,647) (22,908,647) Net income (loss) per Interest. . . . . . . . . . . . . 64.05 (36.79) (52.00) (97.76) =========== ============ ============= =============
Reference is made to note 9 for further discussion of the allocation of profits and losses to the General Partner, Associated Limited Partner and Holders of Interests. The net income (loss) per Interest is based upon the average number of Interests outstanding during the period. Reclassifications Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform with the 1996 presentation. Income Taxes No provision for state or Federal income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership. (2) INVESTMENT PROPERTIES At December 31, 1996, the Partnership's assets include completed inventories, commercial properties, and brokerage and other ancillary operations. The development of the Talega Property has ceased due to the Partnership's inability to secure financing for its further development and the weak economic and market conditions in Orange County, California. Reference is made to notes 6 and 7 for a detailed discussion of writedowns of the carrying values of real estate inventories and property and equipment recorded for the year ended December 31, 1994. (3) VENTURE AGREEMENT - HEATHROW The Partnership is the managing general partner in the limited partnership which was the developer/owner of the Heathrow Community, prior to the sale during June 1996 of the remaining land, the country club and certain related assets within the Heathrow Community. The Heathrow venture agreement provides that the Partnership would receive distributions of cash flow from the Heathrow project equal to a cumulative, compounded preferred return on its capital contribution, plus the return of its capital contribution, with all remaining cash flow expected to be distributable 75% to the Partnership and 25% to the venture partner, who is the prior developer/owner of Heathrow. Arvida Company ("Arvida") had previously entered into a development management agreement with the prior owner of Heathrow to provide development management services with respect to the Heathrow Property for an annual fee equal to the greater of (i) approximately $470,000 or (ii) 10% of the excess, if any, of cash receipts (which include sale and financing proceeds) for such period over cash expenditures (excluding the manager's fee). Arvida continued to provide such development management services to the Heathrow Partnership pursuant to the agreement through June 1996; however, as the managing partner of the Heathrow Partnership, the Partnership retained control over major decisions affecting the Property. For the year ended December 31, 1996, management fees of approximately $212,200 had been earned, the payment of which has been deferred. For each of the years ended December 31, 1995 and 1994, management fees of approximately $468,800 had been earned, the payment of which has also been deferred. The cumulative amount of such deferred fees as of December 31, 1996 is approximately $3,005,200. Such deferred fees do not bear interest and remain payable. The ultimate payment of these management fees is not expected to be made as it is subordinated to certain levels of return to the Holders of Interests. (4) CASH, CASH EQUIVALENTS AND RESTRICTED CASH Cash and cash equivalents may consist of U.S. Government obligations with original maturities of three months or less, money market demand accounts and repurchase agreements, the cost of which approximate market value. The decrease in Cash and cash equivalents at December 31, 1996 as compared to December 31, 1995 is due primarily to principal paydowns which were applied to the outstanding balance on one of the Partnership's term loans. Included in Restricted cash at December 31, 1996 is approximately $955,100 remaining from the original $3 million which was deposited into a restricted collateral account in March 1995 pursuant to an agreement between the Partnership and its lender, as well as the balance of amounts restricted under various escrow agreements. Reference is made to note 8 for a further discussion of the agreement entered into between the Partnership and its lender. There are no treasury bills or other short- term investments with original maturity dates of three months or less included in Cash and cash equivalents as of December 31, 1996 and 1995. Credit risk associated with cash, cash equivalents and restricted cash is considered low due to the high quality of the financial institutions in which these assets are held. (5) TRADE AND OTHER ACCOUNTS RECEIVABLE At December 31, 1996 and 1995, Trade and other accounts receivable consisted primarily of operating receivables which resulted from the normal course of operations. The decrease in Trade and other accounts receivable at December 31, 1996 as compared to 1995 is due to the sale of the Partnership's club operation within the Heathrow Community in June 1996. (6) REAL ESTATE INVENTORIES Real estate inventories at December 31, 1996 and 1995 consist of completed inventory. Due to the restrictions placed on future development and construction by the Partnership's lender, as discussed in detail in note 8, and the Partnership's intention to sell its remaining inventory in its current stage of development, remaining real estate inventories have been classified as completed inventory at December 31, 1996 and 1995. Writedowns of the carrying values of real estate inventories and property and equipment for the year ended December 31, 1994 includes writedowns of approximately $20.6 million and $7.9 million to the carrying values of the Partnership's Heathrow and Wesmere Communities, respectively. As discussed in detail in note 8, the Partnership, pursuant to a request by its lender, prepared a plan for the orderly disposition of its remaining assets (other than the Talega Property). As a result, the Partnership recorded the above-mentioned writedowns of its carrying values of real estate inventories to reflect the estimated difference between the net realizable value of the Partnership's assets assuming the lender's acceptance of the proposed plan, as compared to the net realizable value of such assets assuming their build-out and sale in the Partnership's ordinary course of business at such time. Real estate inventories at December 31, 1994 were reduced by writedowns of the carrying value of the Partnership's Talega Property of approximately $14.3 million. This writedown was taken as a result of the deteriorating economic and market conditions and other factors, as well as the restrictions on the funding of its development costs under the terms of the credit facilities as more fully discussed in note 8. Due to the uncertainty surrounding the Partnership's ability to secure additional financing to develop Talega, this Property is recorded at its estimated fair value at December 31, 1996 and 1995. Fair value accounting assumes a bulk sale of the property in its current stage of development under present market conditions. The fair value estimate at December 31, 1996 and 1995 is at the lower end of a range of possible values. The low end of the range was recorded due to the continued uncertainties regarding the Talega Property, including issues related to its tax-exempt bond financing and defaults or alleged defaults with respect to payment of assessments to the District, as more fully described in notes 8 and 12. As a result of the writedowns of the carrying value, the Partnership no longer has any recorded investment in the Talega Property. Reference is made to note 13 for a discussion regarding the impairment of long-lived assets. (7) PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 and 1995 are summarized as follows: 1996 1995 ------------ ---------- Land . . . . . . . . . . . . . . . $ 289,279 693,577 Land improvements. . . . . . . . . -- 1,124,947 Buildings. . . . . . . . . . . . . 4,106,232 6,488,077 Equipment and furniture. . . . . . 28,091 1,274,379 Construction in progress . . . . . -- 291,920 ----------- ----------- Total . . . . . . . . . . . . 4,423,602 9,872,900 Accumulated depreciation. . . (1,722,161) (3,468,683) ----------- ----------- Property and equipment, net . $ 2,701,441 6,404,217 =========== =========== Writedowns of the carrying values of real estate inventories and property and equipment for the year ended December 31, 1994 include a writedown of approximately $2.7 million to the carrying value of the Partnership's retail shopping plaza at Heathrow. As discussed in detail in note 8, the Partnership, pursuant to a request by its lender during 1994, prepared a plan for the orderly disposition of its remaining assets (other than the Talega Property). As a result, the Partnership recorded the above-mentioned writedown to reflect the estimated difference between the net realizable value of the shopping plaza assuming the lender's acceptance of the proposed plan, as compared to the net realizable value of such asset assuming its sale in the Partnership's ordinary course of business. Depreciation expense of approximately $419,400 and $552,600 was recorded for the years ended December 31, 1995 and 1994, respectively. In conjunction with the provisions of FASB Statement No. 121, (note 13), no depreciation expense was recorded in 1996. Reference is made to note 13 for a discussion regarding the impairment of long-lived assets. (8) NOTES AND MORTGAGES PAYABLE (IN DEFAULT) Notes and mortgages payable (in default) at December 31, 1996 and 1995 are summarized as follows: 1996 1995 ------------ ---------- Term loan credit facility of $52,500,000, bearing interest at approximately 9.75% and 10.0% at December 31, 1996 and 1995, respectively . . . . . . . . . . . . . $11,420,548 21,745,868 Term loan credit facility of $67,500,000, bearing interest at approximately 10.25% and 10.50% at December 31, 1996 and 1995, respectively . . . . . . . . . . . . . 55,967,084 66,921,709 1996 1995 ------------ ---------- Revolving line of credit of $14,301,839, bearing interest at approximately 9.75% and 10.0% at December 31, 1996 and 1995, respectively . . . . . . . . . . . . . 11,483,827 11,483,827 Other notes and mortgages payable . . . -- 23,804 ----------- ----------- Total Notes and Mortgages Payable (In Default). . . . . . $78,871,459 100,175,208 =========== =========== The Partnership's credit facilities consist of a $52.5 million term loan, a $67.5 million term loan, a revolving line of credit of approximately $14.3 million and approximately $4.3 million of outstanding letters of credit securing performance obligations of the Partnership. There is also a $5 million letter of credit facility which secures performance obligations of the Partnership. Availability under such facility is reduced to the extent there are performance letters of credit outstanding under the Partnership's credit facility. The term loans, the revolving line of credit and the letter of credit facilities matured on December 30, 1994. However, the Partnership did not have the funds to pay off the balances outstanding under the credit facilities. Prior to the maturity of the credit facilities on December 30, 1994, the loans carried varying rates of interest based, at the Partnership's option, on the Inter-Bank Offering Rate ("IBOR") plus 3.25% to 3.75% per annum or on the lender's reference rate plus 1.5% to 2.0% per annum. Due to its inability to pay off the balances outstanding under the credit facilities at the maturity date, the Partnership began accruing interest on all of the loans at the post maturity rate of prime plus 3.25% per annum, effective December 31, 1994, as specified in the credit facility agreement. For the year ended December 31, 1996, the effective interest rate for the combined term loans and the revolving line of credit facility was approximately 11.5% per annum. Interest on the facilities was payable monthly, with the exception of interest on a portion of the $67.5 million term loan, which accrued and was payable on the maturity date. The Partnership has not made the required interest payments on its credit facilities since September 1994. The amount of interest which remains payable at December 31, 1996 totals approximately $16.8 million. The Partnership was required to pay the lenders certain commitment and administration fees, as well as all closing costs relating to these facilities. Loan fees incurred in connection with the Partnership's credit facilities were capitalized and had been completely amortized to interest expense as of December 31, 1994. The credit facilities contain significant restrictions with respect to payment of distributions to partners and the use of excess net cash flow, require the maintenance of various established loan-to-value ratios, prohibit the incurrence of additional indebtedness without the lenders' consent, require the General Partner and its affiliates to defer certain reimbursements of costs and fees (see note 10), and prohibit the use of the facilities to fund future development of the Partnership's Talega Property beyond certain identified carrying costs during the term of the facilities, in addition to other restrictions and provisions. The Partnership's $67.5 million term loan has a certain loan-to-value covenant relative to the Partnership's Talega Property. Based upon an independent appraisal of Talega dated December 31, 1993, which was prepared on behalf of the Partnership's lender, the Partnership has not been in compliance with this covenant. On March 4, 1994, pursuant to the terms of this loan-to-value covenant, the Partnership received a notice of default from its lender. The Partnership was required to make a term loan payment, including accrued interest, of approximately $59 million in order to cure this default. The Partnership did not have the funds to make such payment. During 1994, the Partnership had attempted to negotiate a restructuring of its credit facilities with its lender to, among other things, obtain additional borrowing capacity for the development of new phases of land and housing inventories at certain of its Communities. However, the Partnership was unable to obtain such a restructuring. The Partnership's $67.5 million term loan has a certain loan-to-value covenant relative to the Partnership's Talega Property. Based upon independent appraisals of Talega as of December 31, 1993 and 1994, which were prepared on behalf of the Partnership's lender, the Partnership has not been in compliance with this covenant. On March 4, 1994, pursuant to the terms of this loan-to-value covenant, the Partnership received a notice of default from its lender. The Partnership was required to make a term loan payment, including accrued interest, of approximately $59 million in order to cure this default. The Partnership did not have the funds to make such payment. In September 1994, the lender informed the Partnership that it would not advance any funds for the construction of additional homes by the Partnership which were not under construction or under contract for sale by October 1994 and would not advance funds for the development of land parcels or homesites not fully developed or in process by October 1994, unless and until the lender and the Partnership agreed to a plan for the disposition of the Partnership's remaining assets. The two Communities in which the Partnership had been building homes were Heathrow and Wesmere. The restriction on the construction of new homes by the Partnership did not prohibit it from selling to third-party builders, land parcels or homesites that were either fully developed or in process, and did not prevent the construction and sale of homes by such builders in the Heathrow and Wesmere Communities. However, the uncertainty surrounding the future availability of partially or fully developed homesites, as well as the uncertainty of maintaining a sales and marketing program within these Communities, affected the construction and sale of homes by such builders. Proceeds from the sales of housing units, homesites, land parcels and other collateral securing the credit facilities, net of brokerage commissions and certain other customary selling expenses are to be delivered to the lender to be applied against the outstanding principal balance on one of the term loans. Through December 31, 1996, the Partnership has remitted proceeds totaling approximately $40.2 million from sales made after becoming subject to this requirement in September 1994. Pursuant to a request by the Partnership's lender during 1994, the Partnership prepared a plan for the orderly disposition of its remaining assets (other than the Talega Property) for its lender's review and approval. While the duration of such orderly disposition was expected to be within a certain range of time, the plan assumed the Partnership would complete the construction and development of housing and homesite projects that had already commenced within the Heathrow and Wesmere Communities, and sell those products within two years from the commencement of the plan. In addition, the plan assumed the Partnership would complete the general development necessary to prepare the remaining parcels in those Communities for sale, as well as sell related assets in the Heathrow Community, to unaffiliated third-party purchasers within the two-year period. The accompanying consolidated financial statements reflect writedowns of the carrying values of real estate inventories and property and equipment which were recorded during 1994 totaling approximately $31.2 million to reflect the estimated difference between the net realizable value of the Partnership's assets under the 1994 proposed plan, as compared to the net realizable value of such assets assuming their build-out and sale in the Partnership's ordinary course of business at such time. In March 1995, the Partnership and its lender entered into Forbearance Agreements pursuant to which, among other things, approximately $2.3 million was applied to the outstanding principal balance of one of the Partnership's term loans and $3 million was deposited in a restricted collateral account to pay direct operational costs and general and administrative expenses of the Partnership's limited operations, subject to the approval of the lender of such costs and expenses and its continued forbearance from the exercise of its other remedies under the credit facility agreements. An additional $0.2 million was paid to the lender to fund certain legal fees, appraisal costs and construction services which were expenses of the Partnership. Such amounts were funded out of sales proceeds previously withheld by the Partnership. In September 1995, the Partnership's lender informed the Partnership that it would not accept the proposed plan for the orderly disposition of its remaining assets (other than the Talega Property). The lender asked the Partnership to prepare a new shorter term plan for the sale of the assets which included, among other things, a reduction of proposed development and general and administrative expenses. On October 31, 1995, the Partnership and its lender reached an agreement to amend the March 1995 Forbearance Agreements agreeing to, among other things, a new plan whereby the Partnership would attempt to sell its remaining assets (other than the Talega Property) in accordance with set minimum sales prices for each of the assets over the course of a six-month period with payment of certain operational, development and marketing costs to be made out of available funds in the restricted collateral account. The agreement is subject to the lender's continued forbearance from the exercise of its remedies under the credit facilities and its right to cease funding costs not yet then incurred. The expected disposition of assets in accordance with the new six-month plan did not result in any additional writedowns of the carrying values of real estate inventories and property and equipment. During November 1995, the Partnership closed on the sale of the remaining land within its Wesmere Community to an unaffiliated third party for a sales price of approximately $4.25 million. In addition, the seller reimbursed the Partnership at closing for certain prepaid impact fees which had been paid by the Partnership. Such fees totaled approximately $1 million. The net proceeds from such sale were paid to the Partnership's lender and applied against the outstanding principal balance on one of the Partnership's term loans. The sale resulted in a gain for financial reporting purposes and a loss for Federal income tax purposes. During June 1996, the Heathrow joint venture, in which the Partnership is the managing general partner, closed on the sale of the remaining land, the country club and certain related assets within the Partnership's Heathrow Community. This transaction is reflected in Land and property operations on the accompanying consolidated statements of operations. This sale is the primary cause for various significant changes on the accompanying consolidated balance sheets at December 31, 1996 as compared to December 31, 1995 and on the accompanying consolidated statements of Operations for the year ended December 31, 1996 as compared to 1995. The net proceeds from this sale, after prorations and closing costs, of approximately $18.4 million were paid to the Partnership's lender and applied against the outstanding principal balances on both of the Partnership's term loans. The sale resulted in a gain for financial reporting purposes and a loss for Federal income tax purposes in 1996. During September 1996, the Partnership and its lender agreed to another amendment of the March 1995 Forbearance Agreement agreeing to, among other things, a revised plan whereby the Partnership would sell its remaining assets by no later than March 31, 1997. Upon the execution of the amended agreement, the Partnership's lender agreed to forgive, waive and cancel a portion of the unpaid interest on the Partnership's credit facilities in the aggregate amount of $20 million, of which $2 million was allocated to interest on the revolving line of credit and $18 million was allocated to one of the term loans. The forgiveness of this interest is reflected as an Extraordinary gain on the accompanying consolidated statements of operations for the year ended December 31, 1996, and is the primary cause for the decrease in Accrued expenses and other liabilities on the accompanying consolidated balance sheets at December 31, 1996 as compared to December 31, 1995. The amended agreement also includes the forgiveness, by the Partnership's lender, of any remaining outstanding principal balance and accrued interest on the Partnership's credit facilities upon the satisfaction of certain specified conditions, including, among other things, the sale of the Partnership's remaining real estate assets at specified minimum prices, the payment of the net proceeds from such sales to the Partnership's lender, and the assignment of any other net assets of the Partnership to the lender. However, the lender's obligations under such agreement terminated March 31, 1997. The Partnership and its lender are currently negotiating the terms of another amendment to the March 1995 Forbearance Agreement which would include, among other things, an extension of the existing plan whereby the Partnership would sell its remaining assets by no later than June 30, 1997. The Partnership currently anticipates that such amendment will also include the forgiveness, by the Partnership's lender, of any remaining outstanding principal balance and accrued interest on the Partnership's credit facilities, upon the satisfaction of certain specified conditions, including, among other things, the sale of the Partnership's remaining real estate assets at specified minimum prices, the payment of the net proceeds from such sales to the Partnership's lender, and the assignment of any other net assets of the Partnership to the lender. Such forgiveness of principal and interest would result in an extraordinary gain for financial reporting purposes. During April 1996, the Partnership entered into a non-binding letter of intent with an unaffiliated third party for the sale of the retail shopping plaza at its Heathrow Community. This letter of intent subsequently expired by its terms without the sale of the shopping plaza being consummated. The Partnership continues to actively market this Property for sale. During October 1996, the Partnership reached an agreement with an unaffiliated third party for the sale of the Talega Property. The sale was originally expected to close during 1996. However, at the prospective purchaser's request, the Partnership, its lender and the prospective purchaser subsequently agreed to extend the closing until April 1997. The closing of the sale is subject to the satisfaction of various conditions. The proceeds from such sale, if consummated, after payment of the unpaid real estate taxes on the Talega Property and certain past-due amounts and prorated items related to the bond financing and other assessments on the Talega Property, would be paid to the Partnership's lender and applied against the outstanding principal balance on the Partnership's term loans. The sale, if consummated, would result in a gain for financial reporting purposes and a loss for Federal income tax purposes during 1997. Although there can be no assurance, the Partnership is currently working to dispose of all of its remaining assets during 1997. The Partnership's ability to dispose of all of its assets during 1997 is dependent upon, among other things, the Partnership closing on the sale of its Talega Property, as well as the Heathrow venture contracting for the sale, and closing the sale, of the shopping plaza at the Heathrow Community. It is expected that any proceeds from the sale or other disposition of such assets, in excess of the costs of sale and general and administrative expenses attributable thereto, will be paid to the lender or other creditors of the Partnership. In addition, the Partnership is currently involved in certain litigation, as discussed in Item 3. Legal Proceedings in this report, to which reference is hereby made. Upon disposition of its remaining assets, or if the Partnership determines the plan is no longer viable or lacks sufficient funds for maintaining the affairs of the Partnership, the Partnership would then proceed to terminate its affairs. However, termination of the Partnership could be delayed until resolution (or other acceptable treatment) of the pending litigation. Holders of Interests should not expect to receive any future distributions from the Partnership. The possibility still remains that the lender may pursue its remedies under the credit facilities, including realizing upon substantially all of the Partnership's remaining assets, which are collateral security for the credit facilities. These issues raise substantial doubt about the Partnership's ability to continue as a going concern. If the Partnership is unable to continue as a going concern, it may be forced to dispose of its Properties in a manner that would realize less than would be realized under the current plan for an orderly disposition. If this were to occur, any proceeds received could be less than the current carrying values of the Properties, resulting in the recognition of additional losses by the Partnership. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (9) PARTNERSHIP AGREEMENT Pursuant to Section 4.2A of the Partnership Agreement, subject to Sections 4.2C and 4.2F (described below), profits or losses of the Partnership generally will be allocated as follows: (i) profits will be allocated such that the General Partner and the Associate Limited Partner will be allocated profits equal to the amount of cash flow distributed to them for such fiscal period, except that the General Partner shall be allocated at least 1% of profits, and the Holders of Interests shall be allocated the remaining profits and (ii) losses will be allocated 1% to the General Partner, 1% to the Associate Limited Partner and 98% to the Holders of Interests. For tax and financial reporting purposes, subject to Sections 4.2C and 4.2F (described below), all profits of the Partnership will be allocated such that the General Partner and the Associate Limited Partner will be allocated profits equal to the amount of cash flow distributed to them, except that the General Partner will be allocated at least 1% of profits, and the Holders of Interests will be allocated the remaining profits. Losses will be allocated 98% to the Holders of Interests, 1% to the Associate Limited Partner and 1% to the General Partner. Section 4.2C of the Partnership Agreement limits the allocation of losses to the Holders of Interests to the extent that such allocation would create a deficit balance in such Holder's capital account which exceeds the Minimum Gain (as defined) which would be allocable to them if applicable assets were disposed in a hypothetical sale at their carrying value and the non-recourse debt secured by those assets was repaid or discharged. For financial reporting purposes, the amount of loss allocated to the General Partners and Associate Limited Partner, collectively, as a result of the limitation under Section 4.2C was approximately $2,640,000 and $6,055,000 for 1996 and 1995, respectively. For tax purposes for 1996 and 1995, the limitations under Section 4.2C did not apply and losses were allocated in accordance with Section 4.2F as discussed below. Section 4.2F of the Partnership Agreement requires the allocation of Profits (as defined) to the General Partner and Associate Limited Partner in order to take account of a current or anticipated reduction in the Partnership's indebtedness and certain other circumstances. In accordance with Section 4.2F of the Partnership Agreement, the General Partner and Associate Limited Partner received allocations of Profits for tax purposes for 1996 and 1995 in addition to their respective allocations, pursuant to Section 4.2A of the Partnership Agreement, of the Partnership's 1996 and 1995 losses for tax purposes, as adjusted for such allocation of Profits. The General Partner and Associate Limited Partner have made capital contributions to the Partnership of $1,000 each. Except under certain limited circumstances, upon dissolution and termination of the Partnership or a liquidation (as defined) of their Partnership Interests, the General Partner and the Associate Limited Partner are not required to make any additional capital contributions to the Partnership. In general, and subject to certain limitations, distributions of Cash Flow (as defined) are to be allocated 90% to the Holders of Interests and 10% to the General Partner and the Associate Limited Partner (collectively) until the Holders of Interests have received cumulative distributions of Cash Flow equal to a 10% per annum return (non-compounded) on their Adjusted Capital Investments (as defined) plus the return of their Capital Investments; provided, however, that one-half of the 10% amount otherwise distributable to the General Partner and Associate Limited Partner (collectively) will be deferred, and such amount will be paid to the Holders of Interests, until the Holders of Interests receive Cash Flow distributions equal to certain cumulative, non-compounded preferred per annum returns (as defined, the "Preferred Amount"). Any such deferred amount owed to the General Partner and Associate Limited Partner (collectively) will be distributable to them out of Cash Flow otherwise distributable to the Holders of Interests at such time as such Holders have received cumulative Cash Flow distributions equal to the Preferred Amount or in any event, to the extent of one-half of Cash Flow otherwise distributable to the Holders of Interests at such time as they have received total distributions of Cash Flow equal to their Capital Investments (as defined). The Partnership's credit facilities discussed in note 8 contain significant restrictions with respect to the payment of distributions. Given the financial condition of the Partnership, it is unlikely that the Holders of Interests will receive any future distributions from the Partnership. (10) TRANSACTIONS WITH AFFILIATES Fees, commissions and other expenditures, associated with administering the Partnership, required to be paid to affiliates of the General Partner, other than Arvida Company ("Arvida"), as of and for the years ended December 31, 1996, 1995 and 1994 are as follows: UNPAID AT DECEMBER 31, 1996 1995 1994 1996 ------- ------- ------- ------------ Insurance commissions . . $ 1,921 38,255 45,797 -- Reimbursement (at cost) for accounting services . . . . . . . . 7,806 50,424 54,150 32 Reimbursement (at cost) for portfolio manage- ment . . . . . . . . . . 11,645 16,646 -- 2,401 Reimbursement (at cost) for legal services . . . 28,465 26,643 36,358 10,066 Reimbursement (at cost) for other adminis- trative and out-of- pocket expenses. . . . . 2,372 50,588 6,707 -- ------- -------- -------- ------ $52,209 182,556 143,012 12,499 ======= ======== ======== ====== The Partnership also receives reimbursements from affiliates of the General Partner for certain general and administrative costs including, and without limitation, salary and salary-related costs relating to work performed by employees of the Partnership and certain out-of-pocket expenditures incurred on behalf of such affiliates. The Partnership was entitled to receive approximately $0, $9,900 and $35,600 for the years ended December 31, 1996, 1995 and 1994, respectively, for such costs. At December 31, 1996, no amounts were owed to the Partnership. Arvida pursuant to an agreement with the Partnership, provides development, construction, management and other personnel and services to the Partnership for its projects and operations. In accordance with such agreement, the Partnership reimburses Arvida for all of its out-of-pocket expenditures (including salary and salary-related costs). The total of such costs for the years ended December 31, 1996, 1995 and 1994 was approximately $192,300, $819,600 and $1,115,800, respectively. At December 31, 1996, approximately $22,500 was unpaid, all of which was paid as of February 21, 1997. The Partnership and Arvida/JMB Partners, L.P. (a publicly-held limited partnership affiliated with the General Partner, "Arvida/JMB-I") each employ project-related and administrative personnel who perform services on behalf of both partnerships. In addition, certain out-of-pocket expenditures related to such services and certain general and administrative expenditures are incurred and charged to each partnership as appropriate. The Partnership reimburses or receives reimbursements from Arvida/JMB-I for such costs (including salary and salary-related costs). For the year ended December 31, 1996, the Partnership was obligated to reimburse Arvida/JMB-I approximately $1,255,500. At December 31, 1996, approximately $7,100 was unpaid, all of which was paid as of February 21, 1997. In addition, for the year ended December 31, 1996, the Partnership was entitled to receive approximately $113,700 from Arvida/JMB-I. At December 31, 1996, approximately $21,100 was outstanding, all of which was received as of February 21, 1997. For the years ended December 31, 1995 and 1994, the Partnership was obligated to reimburse Arvida/JMB-I approximately $1,021,800 and $1,338,900, respectively, and the Partnership was entitled to receive approximately $245,100 and $537,700, respectively, from Arvida/JMB-I. Pursuant to a requirement under the Partnership's credit facilities, a portion of the reimbursements paid to Arvida and Arvida/JMB-I as discussed above, as well as portions of the Partnership's insurance and loan refinancing costs incurred in 1992 and 1993 had been funded on the Partnership's behalf by advances from the General Partner. Such advances totaled approximately $4,609,400 at December 31, 1996 and 1995, and do not bear interest. The repayment of such advances is subordinated to the receipt by the Holders of Interests of certain levels of return, and therefore is not expected to be made. In addition, the Partnership was entitled to receive approximately $12,900 from an affiliate of the General Partner for salary and salary-related costs incurred by the Partnership on behalf of such affiliate of the General Partner, all of which was outstanding as of December 31, 1996 and December 31, 1995, none of which was received as of February 21, 1997. Reference is made to note 3 for a discussion of a management agreement between Arvida and the prior owner of Heathrow. The Partnership incurs certain general and administrative costs which are paid by the Partnership on behalf of its affiliated homeowners associations. The Partnership receives reimbursements from the affiliates for such costs. For the year ended December 31, 1996, the Partnership was entitled to receive approximately $3,300 from such affiliates. At December 31, 1996, approximately $1,800 was owed to the Partnership, none of which was received as of February 21, 1997. For the years ended December 31, 1995 and 1994, the Partnership was entitled to receive approximately $38,600 and $57,400, respectively, from such affiliates. In accordance with the Partnership Agreement, the General Partner and Associate Limited Partner have deferred a portion of their distributions of net cash flow from the Partnership totaling approximately $247,000 at December 31, 1996 and 1995. This amount, which does not bear interest, is not expected to be paid. Effective October 1, 1995, the General Partner of the Partnership engaged independent third-parties to perform certain administrative services for the Partnership which were previously performed by, and partially reimbursed to, affiliates of the General Partners. Use of such third-parties is not expected to have a material effect on the operations of the Partnership. (11) COMMITMENTS AND CONTINGENCIES As security for performance of certain development obligations, including the Partnership's obligations with respect to the District (notes 8 and 12), the Partnership is contingently liable in the amounts of approximately $2,590,500 and $428,000 under standby letters of credit and bonds, respectively, at December 31, 1996. Reference is made to note 12 for a discussion regarding the letters of credit which collateralized certain of the Partnership's obligations to the District. The Partnership has been named a defendant in a lawsuit filed in the Circuit Court in and for the Eighteenth Judicial Circuit, Seminole County, Florida entitled Land Investment I, Ltd., Heathrow Land & Development Corporation, Heathrow Shopping Center Associates, and Paulucci Investments v. Arvida/JMB Managers-II, Inc., Arvida/JMB Partners, L.P.-II, Arvida Company and JMB Realty Corporation. The complaint, as amended, includes counts for breach of the management agreement, breach of fiduciary duty, fraud in the inducement and conspiracy to commit fraud in the inducement, breach of the partnership agreement and rescission in connection with the purchase and management of the Heathrow development. Plaintiffs seek, among other things, unspecified compensatory damages, the right to add a claim for punitive damages, rescission, attorneys fees, costs, and such other relief as the Court deems appropriate. The Partnership believes that the lawsuit is without merit and intends to vigorously defend itself in this matter. The Partnership has been advised by Merrill Lynch that various investors of the Partnership have sought to compel Merrill Lynch to arbitrate claims brought by certain investors of the Partnership and has been named as a respondent in various arbitrations representing approximately 11% of the total Interests outstanding. These claimants have sought and are seeking to arbitrate claims involving unspecified damages based on Merrill Lynch's alleged violations of applicable state and/or federal securities laws and alleged violations of the rules of the National Association of Securities Dealers, Inc., together with pendent state law claims. The Partnership believes that Merrill Lynch has resolved some of these claims through litigation, and otherwise, and that Merrill Lynch is defending other claims. Merrill Lynch has asked the Partnership and its General Partner to confirm an obligation of the Partnership and its General Partner to indemnify Merrill Lynch in these claims against all loss, liability, claim, damage and expense, including without limitation attorney's fees and expenses, under the terms of a certain Agency Agreement dated October 23, 1989 ("Agency Agreement") with the Partnership relating to the sale of Interests through Merrill Lynch on behalf of the Partnership. The Agency Agreement generally provides that the Partnership and its General Partner shall indemnify Merrill Lynch against losses occasioned by an actual or alleged misstatement or omission of material fact in the Partnership's offering material used in connection with the sale of Interests and suffered by Merrill Lynch in performing its duties under the Agency Agreement, under certain specified conditions. The Agency Agreement also generally provides, under certain conditions, that Merrill Lynch shall indemnify the Partnership and its General Partner for losses suffered by the Partnership and occasioned by certain specified conduct by Merrill Lynch in the course of Merrill Lynch's solicitation of subscriptions for, and sale of, Interests. The Partnership is unable to determine at this time the ultimate investment of investors who have filed arbitration claims as to which Merrill Lynch might seek indemnification in the future. At this time, and based upon the information presently available about the arbitration statements of claims filed by some of these investors, the Partnership and its General Partner believe that they have meritorious defenses to demands for indemnification made by Merrill Lynch and intend to vigorously pursue such defenses. Although there can be no assurance regarding the outcome of the claims for indemnification, at this time, based on information presently available about such arbitration statements of claims, the Partnership and its General Partner do not believe that the demands for indemnification by Merrill Lynch will have a material adverse effect on the financial condition of the Partnership. Rental expense was $84,868, $99,350 and $195,252 for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, the Partnership could potentially be liable for certain amounts incidental to other matters, the amount of which could be substantial. (12) TAX-EXEMPT BOND FINANCING In connection with the development of Talega (which was suspended during 1990), the Partnership has utilized bond financing to construct certain on-site and off-site water and sewer infrastructure improvements which the Partnership would otherwise be obligated to finance and construct as a condition to obtain certain approvals for the project. The use of this type of bond financing is a common practice for major land developers in Southern California. The bond offering was issued, and is administered by, the District. The principal amount of the bonds issued was $62 million, although debt service on $2 million of such amount has been assumed by the Coastal Municipal Water District. The bonds mature on July 1 of various years commencing in 1993 through 2015 and bear interest, depending on their maturity dates, at rates ranging from 6.4% to 7.5% per annum. At December 31, 1996, $56,970,000 of the bonds were outstanding. The Partnership also is billed and makes certain payments to the District to reserve capacity at a filtration plant and reservoir utilized by the District to serve the Talega Property. Additionally, the Partnership, along with other developers with similar bond financing, pays a portion of the operating deficits incurred by the District. Principal and interest on the bonds, amounts incurred to reserve capacity at the filtration plant and reservoir, and amounts needed to fund the Partnership's share of the District's operating deficits are payable from separate ad valorem and other assessments levied by the District on the Talega Property, which effectively collateralizes the obligation to pay these assessments. As land is sold, however, liability for these assessments transfers to the purchasers. The assessments are currently made on an annual basis, although the District could increase the frequency to quarterly. All of the proceeds from the original bond offering have been utilized. Approximately $46.5 million of the original proceeds has been expended by the District on infrastructure improvements through December 31, 1996. Approximately $8.6 million of the original proceeds was specifically identified as an interest reserve and has been utilized in its entirety to meet debt services obligations. Approximately $5.7 million of the original proceeds was specifically identified and set aside as a bond reserve. The remaining proceeds were utilized to pay miscellaneous costs associated with the original bond offering. The Partnership was obligated to pay the District approximately $6.7 million in June 1994 for assessments attributable to its share of the operating deficits of the District, payments related to the filtration plant and reservoir capacity, and principal and interest on the bonds for the fiscal year ended June 30, 1994. Such payment included the initial principal payment due on the outstanding bonds. The Partnership had provided the District with an $11.4 million letter of credit as additional collateral securing payment of the assessments attributable to principal and interest due on the bonds. According to the terms of the letter of credit agreement between the Partnership and the District, the Partnership was obligated to maintain the letter of credit in the amount of $11.4 million until 1,000 homes had been constructed within the Community, subject to earlier draw down by the District. Given the Partnership's financial condition, the Partnership did not have sufficient cash resources or available borrowing capacity to pay the June 1994 assessments to the District. As a result, on July 5, 1994, the District drew the entire amount of the $11.4 million letter of credit, which increased the total funded indebtedness of the Partnership under its credit facilities by $11.4 million. Of this amount, approximately $5.7 million represented additional collateral securing payments of assessments attributable to principal and interest due on the bonds in June 1995. As discussed in greater detail below, the Partnership contends that the draw on the letter of credit in July 1995 satisfied its requirement to pay assessments for the June 1994 and June 1995 bond debt service obligations to the District. Although the District had expended all original bond proceeds on infrastructure improvements, bond reserves and other related offering costs, certain funds generated from the sale of District assets, which were improved using proceeds from the Partnership's bond financing, were held by the District in reserve accounts for the benefit of the Talega Property. The District has notified the Partnership that certain of their reserve accounts were invested through the Orange County Treasurer's Office. In light of the developments with Orange County, some of those investment funds may have been lost. The District has asserted a default by the Partnership, under a certain agreement between the Partnership and the District, for alleged failure to pay the June 1994 assessments of approximately $6.7 million. The District filed a lien on the Talega Property to secure the unpaid assessments and penalties and interest thereon in August 1994 and subsequently filed a notice of foreclosure for the Property. Under California Water District Code Law the Partnership had a six-month period in which to cure such default by the payment of these amounts. After the expiration of the six-month period without cure of an outstanding default, the unpaid assessments are delinquent and the District may seek to enforce its remedy with respect to the Talega Property, which would generally involve a sale of the Property by the local taxing authority to the District for the amount of unpaid assessments plus penalties and interest. The Partnership, as the owner of the Property, would have a right to redeem the Property during a three-year period following the sale to the District by paying all delinquent assessments, plus penalties, interest and costs. During this period additional assessments would continue to be levied against the Property in the same manner as before and additional penalties and interest would be accrued. After the end of the three-year period, the Partnership's right of redemption could be terminated upon execution and delivery to the District of a tax collector's deed to the Property. The Partnership contends that the draw on the letter of credit in July 1994 satisfied its requirement to pay the assessments for the June 1994 and 1995 bond debt service obligations totaling approximately $11.4 million for principal and interest on the bonds and, therefore, the Partnership is not in default as to those amounts. Considering the high level of bond indebtedness on the Talega Property, the reduced value of the Property and the funds currently on deposit in various reserve accounts for the bonds, the Partnership approached the District to discuss a plan of restructuring or partial defeasance of the bonds utilizing some of the reserve account funds to pay down the bonds and thereby reduce the level of indebtedness of the Property. However, the Partnership has not received a formal response from the District regarding this proposal. As discussed in note 8, the Partnership has reached an agreement with an unaffiliated third party for the sale of its Talega Property. One condition of such sale is the satisfactory release of the Partnership's obligation under such bonds as well as under various agreements with the District, subject to the payment by the Partnership of certain past-due amounts and prorated items related to such bonds and other assessments. The payment of these items would be made from the proceeds of the sale of the Property. In addition, the Partnership has not generated the cash flow necessary and, as described above, does not have the available borrowing capacity to pay for all of the carrying costs relative to its Talega Property. As a result, at December 31, 1996, approximately $1.4 million of real estate taxes assessed on the Property remain unpaid and are included in Accrued expenses and other liabilities on the accompanying consolidated balance sheets at December 31, 1996. All unpaid real estate taxes owed by the Partnership will be paid by the Partnership from the proceeds from the sale of the Talega Property. Talega's carrying costs include assessments attributable to the debt service and other obligations related to the District and its tax-exempt bond financing, which the Partnership has utilized to construct certain on-site and off-site water and sewer infrastructure improvements. The details of this bond financing are discussed in detail in Note 12. The total of such carrying costs paid, excluding interest under the Partnership's credit facility, associated with this Property for the years ended December 31, 1996 and 1995 were approximately $351,000 and $6,336,000, respectively. These amounts do not include penalties and interest incurred on unpaid District assessments. The reduction in the carrying costs paid in 1996 as compared to 1995 is due to the Partnership not having the funds to make the required debt service payments and other obligations related to the District and its tax exempt- exempt bond financing for 1996. As a result, Accrued expenses and other liabilities on the accompanying consolidated balance sheets include an approximate $7.1 million accrual reflecting the Partnership's obligation to the District, including penalties and interest incurred on unpaid District assessments. The Partnership's unpaid obligations to the District will be paid by the Partnership with the proceeds from the sale of Talega. (13) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of, and requires that assets to be disposed of be reported in the balance sheet at the lower of their carrying amount or fair value less costs to sell. At December 31, 1996, all of the Partnership's remaining assets are held for sale. The Partnership requires no impairment losses or other adjustments to be recorded as of December 31, 1996 as a result of the application of the Statement. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes of or disagreements with auditors during 1995 and 1996. PART III ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT The General Partner of the Partnership is Arvida/JMB Managers-II, Inc., a Delaware corporation, of which all of the outstanding shares of stock are owned by Northbrook Corporation, a Delaware corporation. Substantially all of the outstanding shares of stock of Northbrook Corporation are owned by JMB Realty Corporation, a Delaware corporation ("JMB"), and certain of its officers, directors, members of their families and affiliates. Substantially all of the outstanding shares of stock of JMB are owned by its officers, directors, members of their families and affiliates. Arvida/JMB Managers-II, Inc. was substituted as general partner of the Partnership as a result of a merger on March 30, 1990 of an affiliated corporation that was the then general partner of the Partnership into Arvida/JMB Managers-II, Inc., which, as the surviving corporation of such merger, continues as the General Partner. All references herein to "General Partner" include Arvida/JMB Managers-II, Inc. and/or its predecessor, as appropriate. The General Partner has responsibility for all aspects of the Partnership's operations. The Associate Limited Partner of the Partnership is Arvida/JMB Associates Limited Partnership-II, an Illinois limited partnership, whose general partner is Arvida/JMB Managers- II, Inc. and whose limited partners consist of partnerships comprised of certain officers, directors, and shareholders of JMB, Arvida and their affiliates. Various relationships of the Partnership to the General Partner and its affiliates are described under the caption "Conflicts of Interest" at pages 21-24 of the Prospectus of the Partnership dated October 27, 1989 (the "Prospectus"), certain portions of which description are hereby incorporated herein by reference to Exhibit 99.1 of this report. The director, executive officers and certain other officers of the General Partner of the Partnership are as follows: SERVED IN NAME OFFICE OFFICE SINCE ---- ------ ------------ Judd D. Malkin Chairman 12/17/87 Neil G. Bluhm President 12/17/87 H. Rigel Barber Vice President 12/17/87 Gailen J. Hull Vice President 12/18/90 Howard Kogen Vice President 08/09/88 and Treasurer 01/01/91 Gary Nickele Vice President, General Counsel12/17/87 and Director 12/18/90 James D. Motta Vice President 06/23/89 John Grab Vice President 04/01/93 There is no family relationship among any of the foregoing director or officers. The foregoing director has been elected to serve a one-year term until the annual meeting of the General Partner to be held on August 12, 1997. All of the foregoing officers have been elected to serve one-year terms until the first meeting of the Board of Directors held after the annual meeting of the General Partner to be held on August 12, 1997. There are no arrangements or understandings between or among any of said director or officers and any other person pursuant to which any director or officer was selected as such. The foregoing director and certain of the officers are also officers and/or directors of various affiliated companies, including JMB, which is the corporate general partner of Carlyle Real Estate Limited Partnership-VII ("Carlyle-VII"), Carlyle Real Estate Limited Partnership-IX ("Carlyle-IX"), Carlyle Real Estate Limited Partnership-XI ("Carlyle-XI"), Carlyle Real Estate Limited Partnership-XII ("Carlyle-XII"), Carlyle Real Estate Limited Partnership-XIII ("Carlyle-XIII"), Carlyle Real Estate Limited Partnership-XIV ("Carlyle-XIV"), Carlyle Real Estate Limited Partnership-XV ("Carlyle-XV"), Carlyle Real Estate limited Partnership-XVI ("Carlyle-XVI"), Carlyle Real Estate Limited Partnership-XVII ("Carlyle- XVII"), JMB Mortgage Partners, Ltd.-III ("Mortgage Partners-III"), JMB Mortgage Partners, Ltd-IV ("Mortgage Partners-IV"), Carlyle Income Plus. Ltd. ("Carlyle Income Plus") and Carlyle Income Plus, Ltd.-II ("Carlyle Income Plus-II") and the managing general partner of JMB Income Properties, Ltd.-IV ("JMB Income-IV"), JMB Income Properties, Ltd.-V ("JMB Income-V"), JMB Income Properties, Ltd.-VI ("JMB Income-VI"), JMB Income Properties, Ltd.-VII ("JMB Income-VII"), JMB Income Properties, Ltd.-X ("JMB Income-X"), JMB Income Properties, Ltd.-XI ("JMB Income-XI"), JMB Income Properties, Ltd.-XII ("JMB Income-XII") and JMB Income Properties, Ltd.- XIII ("JMB-XIII). JMB is also the sole general partner of the associate general partners of most of the foregoing partnerships. The foregoing director and most of the foregoing officers are also officers and/or directors of various affiliated companies of JMB including Arvida/JMB Managers, Inc. (the general partner of Arvida/JMB Partners, L.P. ("Arvida/JMB-I")) and Income Growth Managers, Inc. (the corporate general partner of IDS/JMB Balanced Income Growth, Ltd. ("IDS/BIG")). Such director and most of such officers are also partners, directly or indirectly, of certain partnerships (the "Associate Partnerships") which are associate general partners in the following real estate limited partnerships: Carlyle-VII, Carlyle-IX, Carlyle-XI, Carlyle-XII, Carlyle- XIII, Carlyle-XIV, Carlyle-XV, Carlyle-XVI, Carlyle-XVII, JMB Income-VI, JMB Income-VII, JMB Income-X, JMB Income-XI, JMB Income-XII, JMB Income- XIII, Mortgage Partners-III, Mortgage Partners-IV, Carlyle Income Plus, Carlyle Income Plus-II and IDS/BIG. Most of such director and officers are also partners, indirectly through other partnerships, of the Associate Limited Partner of the Partnership and the associate limited partners of Arvida/JMB-I. The business experience during the past five years of the director and such officers of the General Partner of the Partnership in addition to that described above includes the following: Judd D. Malkin (age 59) is Chairman of the Board of JMB, an officer and/or director or various JMB affiliates and a partner, directly or indirectly, of the Associate Partnerships. He is also an individual general partner of JMB Income Properties-IV and JMB Income Properties-VI. Mr. Malkin has been associated with JMB since October, 1969. Mr Malkin is a director of Urban Shopping Centers, Inc. ("USC, Inc."), an affiliate of JMB that is a real estate investment trust in the business of owning, managing and developing shopping centers. He is a Certified Public Accountant. Neil G. Bluhm (age 59) is President and a director of JMB, and an officer and/or director of various JMB affiliates and a partner, directly or indirectly, of the Associate Partnerships. He is also an individual general partner of JMB Income Properties-IV and JMB Income Properties-VI. Mr. Bluhm has been associated with JMB since August, 1970. Mr. Bluhm is a director of USC, Inc. He is a member of the Bar of the State of Illinois and a Certified Public Accountant. H. Rigel Barber (age 47) is Chief Executive Officer and Executive Vice President of JMB, an officer of various JMB affiliates and a partner, directly or indirectly, of various Associate Partnerships. Mr. Barber has been associated with JMB since March, 1982. He received a J.D. degree from the Northwestern Law School and is a member of the Bar of the State of Illinois. Gailen J. Hull (age 48) is a Senior Vice President of JMB, an officer of various JMB affiliates and a partner, directly or indirectly, of various Associate Partnerships. Mr. Hull has been associated with JMB since March, 1982. He holds a Masters Degree in Business Administration from Northern Illinois University and is a Certified Public Accountant. Howard Kogen (age 61) is Senior Vice President and Treasurer of JMB, an officer of various JMB affiliates and a partner of various Associate Partnerships. Mr. Kogen has been associated with JMB since March, 1973. He is a Certified Public Accountant. Gary Nickele (age 44) is Executive Vice President and General Counsel of JMB, an officer of various JMB affiliates and a partner, directly or indirectly, of various Associate Partnerships. Mr. Nickele has been associated with JMB since February, 1984. He holds a J.D. degree from the University of Michigan Law School and a member of the Bar of the State of Illinois. James D. Motta (age 41) has been President and Chief Executive Officer of Arvida since April 1, 1995. Prior thereto, he was Executive Vice President and Chief Operating Officer of Arvida (May, 1994 to March, 1995). Prior thereto, he was President-Community Development Division of Arvida (August, 1993 to April, 1994), President-Southeast Division of Arvida (July, 1992 to July, 1993) and President-South Florida Division of Arvida (January, 1989 to July, 1992). Mr. Mota is also an officer or partner of various affiliates of Arvida. John R. Grab (age 41) is Vice President and General Manager - Club/Hotel Operations of Arvida. Prior thereto, he was Vice President and Project General Manager - Weston Hills of Arvida (October 1990 to October 1993) and Vice President and Project General Manager - Jacksonville Golf & Country Club of Arvida (June 1988 to October 1990). He is a Certified Public Accountant. Mr. Grab is also an officer or partner of various affiliates of Arvida. ITEM 11. EXECUTIVE COMPENSATION The officers and the director of the General Partner receive no current direct remuneration in such capacities from the Partnership. The General Partner and the Associate Limited Partner are entitled to receive a share of cash distributions, when and as cash distributions are made to the Holders of Interests, and a share of profits or losses as described under the caption "Cash Distributions and Allocations of Profit and Losses" at pages 58 to 60 of the Prospectus and at pages A-10 to A-14 of the Partnership Agreement, which descriptions are incorporated herein by reference to Exhibit 99.1 of this report. Reference is also made to Notes 9 and 10 filed with this annual report for a description of such distributions, allocations and transactions. The General Partner and the Associate Limited Partner did not receive any cash distributions in 1996 or 1995. Pursuant to the Partnership Agreement, the General Partner and Associate Limited Partner were not allocated any profits for tax purposes for 1996 or 1995. Reference is made to Note 9 for further discussion of this allocation. The Partnership is permitted to engage in various transactions involving the General Partner and its affiliates, as described under the captions "Management of the Partnership" at pages 48 to 55 of the Prospectus, "Conflicts of Interest" at pages 21-24 of the Prospectus and "Rights, Powers and Duties of the General Partner" at pages A-15 to A-28 of the Partnership Agreement, which descriptions are hereby incorporated herein by reference to Exhibit 99.1 of this report. The relationship of the General Partner (and its director and executive officers and certain other officers) and its affiliates to the Partnership is set forth above in Item 10. Arvida may be reimbursed fully for all of its out-of-pocket expenditures (including salary and salary-related costs) incurred while supervising the development and management of the Partnership's properties and other operations. In 1996, such expenses were approximately $192,300, approximately $22,500 of which was unpaid as of December 31, 1996. The Partnership and Arvida/JMB Partners, L.P. (a publicly-held limited partnership affiliated with the General Partner, "Arvida/JMB-I") each employ project-related and administrative personnel who perform services on behalf of both partnerships. In addition, certain out-of-pocket expenditures related to such services and certain general and administrative costs are paid and charged to each partnership as appropriate. The Partnership reimburses or receives reimbursements from Arvida/JMB-I for such costs (including salary and salary-related costs). The Partnership owed approximately $1,255,500 to Arvida/JMB-I for such costs and services incurred in 1996. Approximately $7,100 was unpaid as of December 31, 1996. In addition, for the year ended December 31, 1996, the Partnership was entitled to receive approximately $113,700 from Arvida/JMB- I, of which approximately $21,100 was outstanding at December 31, 1996. Pursuant to a requirement under the Partnership's restructured and new credit facility agreements, a portion of the reimbursements paid to Arvida and Arvida/JMB-I discussed above, as well as portions of the Partnership's insurance and loan refinancing costs for 1992, have been funded on the Partnership's behalf by advances from the General Partner. Such advances, which do not bear interest, totaled approximately $4,609,400 as of December 31, 1996. The repayment of such advances is subordinated to the receipt by the Holders of Interests of certain levels of return, and therefore is not expected to be made. In addition, the Partnership was entitled to receive approximately $12,900 from an affiliate of the General Partner for salary and salary-related costs incurred by the Partnership on behalf of such affiliate of the General Partner, all of which was outstanding as of December 31, 1996. JMB Insurance Agency, Inc., an affiliate of the General Partner, earned insurance brokerage commissions in 1996 of approximately $2,000, all of which was paid at December 31, 1996, in connection with providing insurance coverage for certain of the properties of the Partnership. Such commissions are at rates set by insurance companies for the classes of coverage provided. The General Partner of the Partnership or its affiliates may be reimbursed for their direct costs or out-of-pocket costs relating to the administration of the Partnership and the acquisition, development, ownership, supervision, and operation of the Partnership assets. In 1996, the General Partner of the Partnership or its affiliates were due reimbursement for such direct or other administrative and out-of-pocket expenditures in the amount of approximately $2,400, all of which was paid as of December 31, 1996. Additionally, the General Partner and its affiliates are entitled to reimbursements for legal, accounting and portfolio management services. Such costs for 1996 were approximately $47,900, of which approximately $12,500 was paid as of December 31, 1996. The Partnership also periodically reimburses or receives reimbursements from affiliates of the General Partner for certain general and administrative costs including, without limitation, salary and salary- related costs relating to work performed by employees of the Partnership and certain out-of-pocket expenditures incurred on behalf of such affiliates. The Partnership was not entitled to receive any reimbursements for the year ended December 31, 1996. Arvida is entitled to receive a management fee in connection with providing development management services to the Heathrow venture. The amount of such fee for 1996 was approximately $212,200. Through December 31, 1996, management fees of approximately $3,005,200 had been earned, the payment of which has been deferred. Reference is made to Note 3. In accordance with the Partnership Agreement, the General Partner and Associate Limited Partner have deferred a portion of their distributions of net cash flow from the Partnership totaling approximately $247,000 at December 31, 1996. This amount, which does not bear interest, is not expected to be paid. Amounts payable by the Partnership to the General Partner, Associate Limited Partner and their affiliates (including Arvida) do not bear interest. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) No person or group is known by the Partnership to own beneficially more than 5% of the outstanding Interests of the Partnership. (b) The General Partner and its officers and director do not own Interests of the Partnership. No officer or director of the General Partner of the Partnership possesses a right to acquire beneficial ownership of Interests of the Partnership. (c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There were no significant transactions or business relationships with the General Partner, affiliates or their management other than those described in Items 10, 11 and 12 above. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: I. Financial Statements. (See Index to Financial Statements filed with this annual report on Form 10-K). II. Exhibits. 3. Amended and Restated Agreement of Limited Partnership incorporated herein by reference.*** 4.1. Assignment Agreement by and among the Partnership, the General Partner, the Initial Limited Partner and the Holders of Interests incorporated herein by reference.*** 4.2. Amended and Restated Credit Agreement dated June 23, 1992 between Arvida/JMB Partners, L.P.-II and Continental Bank N.A. and Bank of America National Trust and Savings Association is incorporated herein by reference.** 4.3. Various mortgages and other security interests dated April 30, 1992 related to Arvida/JMB Partners, L.P.-II's Heathrow, Talega, Wesmere, Wycliffe, Eagle Watch, Burnt Hickory Lakes, Rock Creek and SouthRidge Lakes properties which secure loans under the Amended and Restated Credit Agreement referred to in Exhibit 4.3 are incorporated herein by reference.** 4.4. Revolving Loan and Letter of Credit Facility Credit Agreement dated June 23, 1992 between Arvida/JMB Partners, L.P.-II and Continental Bank N.A. and Bank of America National Trust and Savings Association is incorporated herein by reference.** 4.5. Various mortgages and other security interests dated June 23, 1992 related to Arvida/JMB Partners, L.P.-II's Heathrow, Talega, Wesmere, Wycliffe, Eagle Watch, Burnt Hickory Lakes, Rock Creek and SouthRidge Lakes properties which secure loans under the Revolving Loan and Letter of Credit Facility Credit Agreement referred to in Exhibit 4.5 are incorporated herein by reference.** 4.6. Interim Bank Letter Agreement dated March 25, 1992 between Arvida/JMB Partners, L.P.-II and Continental Bank N.A., Bank of America National Trust and Savings Association, and Unibank is incorporated herein by reference.** 4.7. Promissory Note effective July 1, 1992 between Arvida/JMB Partners, L.P.-II and Arvida/JMB Managers-II, Inc. is incorporated herein by reference to Exhibit 4.8 to the Partnership's Form 10-K (File No. 0-19245) filed on April 14, 1995. 4.8. Forbearance and Modification Agreement (Credit Agreement) dated March 21, 1995 by and among Arvida/JMB Partners, L.P.-II, Heathrow Development Associates, Ltd., Eagle Watch Partners, Bank of America Illinois and Bank of America National Trust and Savings Association is incorporated herein by reference. **** 4.9 Forbearance and Modification Agreement (Amended and Restated Credit Agreement) dated March 21, 1995 by and among Arvida/JMB Partners, L.P.-II, Heathrow Development Associates, Ltd., Eagle Watch Partners, Bank of America Illinois and Bank of America National Trust and Savings Association is incorporated herein by reference. **** 4.10. Letter dated September 20, 1994 from the Partnership to Bank of America regarding the Partnership's acknowledgement that all proceeds from the sale of Collateral shall be delivered immediately to Co-Lenders is herein incorporated by reference to Exhibit 4.9 to the Partnership's Report on Form 10-Q (File No. 0-19245) filed on November 11, 1994. 4.11. Letter Agreement dated October 31, 1995 supplementing Forbearance Agreements with Lenders is herein incorporated by reference to Exhibit 4.12 to the Partnership's Form 10-Q Report (File No. 0-19245) filed on November 9, 1995. 4.12. Amendment of Forbearance and Modification Agreement dated September 24, 1996 is herein incorporated by reference to Exhibit 4.13 to the Partnership's Report on Form 10-Q (File No. 0-19245) dated November 8, 1996. 10.1. Management, Advisory and Supervisory Agreement between the Partnership and Arvida Company is incorporated herein by reference.** 10.2. First Amended and Restated Limited Partnership Agreement of Heathrow Development Associates, Ltd. and Assignment of Partnership Interests dated January 17, 1990 are incorporated herein by reference.** 10.3. Amended and Restated Heathrow Management Agreement dated January 17, 1990 is incorporated herein by reference.** 10.4. Eagle Watch Partners General Partnership Agreement dated December 27, 1989 is incorporated herein by reference.** 10.5. Letter of Credit Agreement dated July 27, 1990 between Arvida/JMB Partners, L.P.-II and Santa Margarita Water District regarding collateral for Tax-Exempt Bond Financing is incorporated herein by reference.** 10.6. Agreement for the Payment of the Diemer Intertie Sublease Payments, Principal and Interest of Bonds of Improvement District No. 7 and Annual Budget Deficits Between Arvida/JMB Partners, L.P.-II and Santa Margarita Water District dated January 15, 1990 is incorporated herein by reference.*** 10.7. Agreement for Purchase and Sale dated August 14, 1995 by and between Arvida/JMB Partners, L.P.-II and Heritage Development South, Inc. for the sale of certain real property within the Wesmere Community is incorporated herein by reference. ***** 10.8. Agreement for Sale and Purchase of Real Property dated October 25, 1996 by and between Arvida/JMB Partners, L.P. - II and Starwood/ Talega Associates, L.L.C. for the sale of certain real property within the Talega Property is incorporated by reference to Exhibit 10.16 to the Partnership's report for September 30, 1996 on Form 10-Q (File No. 0-19245) filed with the Securities and Exchange Commission dated November 8, 1996. 10.9. Agreement for Sale and Purchase of Real Property dated March 22, 1996 among Heathrow Development Associates, Ltd., Heathrow Golf and Country Club Limited Partnership, Heathrow Cable Limited Partnership and 4/46A Corporation is incorporated herein by reference to Exhibit 10.15 to the Partnership's report for March 31, 1996 on Form 10-Q (File No. 0-19245) filed with the Securities and Exchange Commission dated May 10, 1996. 21. Subsidiaries of the Registrant. 27. Financial Data Schedule 99.1 A copy of the following pages of the Partnership's Prospectus dated October 27, 1989, including certain pages of the Partnership's Amended and Restated Agreement of Limited Partnership, which is Exhibit A to the Prospectus, and the Assignment Agreement, which is Exhibit B to the Prospectus, are filed herewith: pages 21-24; 48-55; 58- 60; A-10 --A-14; A-15 -- A-28; A-31 -- A-34; and B-2. ** Previously filed with the Securities and Exchange Commission as Exhibits 4.3, 4.4, 4.5, 4.6, 4.7, 10.1, 10.7, 10.8, 10.9 and 10.10, respectively, to the Partnership's Form 10-K Report (File No. 0- 19245) filed on April 13, 1992 and are herein incorporated by reference. *** Previously filed with the Securities and Exchange Commission as Exhibits 3, 4.1 and 10.11, respectively, to the Partnership's Form 10-K Report (File No. 0-19245) under the Securities Act of 1934 filed on April 12, 1993 and herein incorporated by reference. **** Previously filed with the Securities and Exchange Commission as Exhibits 4.9 and 4.10, respectively, to the Partnership's Form 10-K Report (File No. 0-19245) under the Securities Act of 1934 filed on April 14, 1995 and herein incorporated by reference. ***** Previously filed with the Securities and Exchange Commission as Exhibits and 10.14 to the Partnership's Form 10-Q Report (File No. 0-19245) under the Securities Act of 1934 filed on November 9, 1995 and herein incorporated by reference. The Registrant agrees to furnish to the Securities and Exchange Commission upon its request a copy of each instrument with respect to the Registrant and its consolidated subsidiaries the authorized principal amount of which does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. (b) No reports on Form 8-K were required or filed since the beginning of the last quarter of the period covered by this report. No annual report or proxy material for the fiscal year 1996 has been sent to the Partners of the Partnership. An annual report will be sent to the Partners subsequent to this filing. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARVIDA/JMB PARTNERS, L.P.-II BY: Arvida/JMB Managers-II, Inc. (The General Partner) GAILEN J. HULL By: Gailen J. Hull Vice President Date: March 21, 1997 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. By: Arvida/JMB Managers-II, Inc. (The General Partner) NEIL G. BLUHM By: Neil G. Bluhm, President (Principal Executive Officer) Date: March 21, 1997 JUDD D. MALKIN By: Judd D. Malkin, Chairman (Principal Financial Officer) Date: March 21, 1997 GARY NICKELE By: Gary Nickele, Vice President, General Counseland Director Date: March 21, 1997 GAILEN J. HULL By: Gailen J. Hull, Vice President (Principal Accounting Officer) Date: March 21, 1997 ARVIDA/JMB PARTNERS, L.P.-II EXHIBIT INDEX DOCUMENT EXHIBIT INCORPORATED SEQUENTIALLY NO. EXHIBIT BY REFERENCE NUMBERED PAGE - ------- ------- ------------ ------------- 3. Amended and Restated Agreement of Limited Partnership. Yes 4.1. Assignment Agreement between and among the Partnership, the General Partner, the Initial Limited Partner and the Holders of Interests. Yes 4.2. Amended and Restated Credit Agreement dated June 23, 1992 between Arvida/JMB Partners, L.P.-II and Continental Bank N.A. and Bank of America National Trust and Savings Association. Yes 4.3. Various mortgages and other security interests dated April 30, 1992 related to Arvida/JMB Partners, L.P.-II's Heathrow, Talega, Wesmere, Wycliffe, Eagle Watch, Burnt Hickory Lakes, Rock Creek and SouthRidge Lakes properties which secure loans under the Amended and Restated Credit Agreement referred to in Exhibit 4.3 Yes 4.4. Revolving Loan and Letter of Credit Facility Credit Agreement dated June 23, 1992 between Arvida/JMB Partners, L.P.-II and Continental Bank N.A. and Bank of America National Trust and Savings Association. Yes 4.5. Various mortgages and other security interests dated June 23, 1992 related to Arvida/JMB Partners, L.P.-II's Heathrow, Talega, Wesmere, Wycliffe, Eagle Watch, Burnt Hickory Lakes, Rock Creek and SouthRidge Lakes properties which secure loans under the Revolving Loan and Letter of Credit Facility Credit Agreement referred to in Exhibit 4.5. Yes 4.6. Interim Bank Letter Agreement dated March 25, 1992 between Arvida/JMB Partners, L.P.-II and Continental Bank N.A., Bank of America National Trust and Savings Association, and Unibank. Yes 4.7. Promissory Note effective July 1, 1992 between Arvida/JMB Partners, L.P.-II and Arvida/JMB Managers-II, Inc. Yes DOCUMENT EXHIBIT INCORPORATED SEQUENTIALLY NO. EXHIBIT BY REFERENCE NUMBERED PAGE - ------- ------- ------------ ------------- 4.8. Forbearance and Modification Agree- ment (Credit Agreement) dated March 21, 1995 by and among Arvida/ JMB Partners, L.P.-II, Heathrow Development Associates, Ltd., Eagle Watch Partners, Bank of America Illinois and Bank of America National Trust and Savings Association. Yes 4.9. Forbearance and Modification Agreement (Amended and Restated Credit Agreement) dated March 21, 1995 by and among Arvida/JMB Partners, L.P.-II, Heathrow Development Associates, Ltd., Eagle Watch Partners, Bank of America Illinois and Bank of America National Trust and Savings Association. Yes 4.10. Letter dated September 20, 1994 from the Partnership to Bank of America regarding the Partnership's acknowledgement that all proceeds from the sale of Collateral shall be delivered immediately to Co-Lenders. Yes 4.11. Letter Agreement dated October 31, 1995 supplementing Forbearance Agreements with Lenders. Yes 4.12. Amendment of Forbearance and Modification Agreement dated September 24, 1996 Yes 10.1. Management, Advisory and Super- visory Agreement between the Partnership and Arvida Company. Yes 10.2. First Amended and Restated Limited Partnership Agreement of Heathrow Development Associates, Ltd. and Assignment of Partnership Interests dated January 17, 1990. Yes 10.3. Amended and Restated Heathrow Management Agreement dated January 17, 1990. Yes 10.4. Eagle Watch Partners General Partnership Agreement dated December 27, 1989. Yes 10.5. Letter of Credit Agreement dated July 27, 1990 between Arvida/JMB Partners, L.P.-II and Santa Margarita Water District regarding collateral for Tax-Exempt Bond Financing. Yes DOCUMENT EXHIBIT INCORPORATED SEQUENTIALLY NO. EXHIBIT BY REFERENCE NUMBERED PAGE - ------- ------- ------------ ------------- 10.6. Agreement for the Payment of Diemer Intertie Sublease Payments, Principal and Interest on Bonds of Improvement District No. 7 and Annual Budget Deficits between Arvida/JMB Partners, L.P.-II and Santa Margarita Water District dated January 15, 1990. Yes 10.7. Agreement for Purchase and Sale dated August 14, 1995 by and between Arvida/JMB Partners, L.P.-II and Heritage Development South, Inc. for the sale of certain real property within the Wesmere Community Yes 10.8. Agreement for Sale and Purchase of Real Property dated October 25, 1996 by and between Arvida/JMB Partners, L.P. - II and Starwood/ Talega Associates, L.L.C. for the sale of certain real property within the Talega Property Yes 10.9. Agreement for Sale and Purchase of Real Property between Heathrow Development Associates, Ltd., Heathrow Golf and Country Club Limited Partnership, Heathrow Cable Limited Partnership and 4/46A Corporation. Yes 21. Subsidiaries of the Registrant. No 27. Financial Data Schedule No 99.1 A copy of the following pages of the Partnership's Prospectus dated October 27, 1989, including certain pages of the Partnership's Amended and Restated Agreement of Limited Partnership, which is Exhibit A to the Prospectus, and the Assignment Agreement, which is Exhibit B to the Prospectus, are filed herewith: pages 21-24; 48-55; 58-60; A-10-A-14; A-15-A-28; A-31-A-34; and B-2. No EX-21 2 EXHIBIT 21 LIST OF SUBSIDIARIES The Partnership is a limited partner in Arvida Contractors-II Limited Partnership, a Delaware limited partnership. The Partnership is a general partner in Eagle Watch Partners, a Georgia general partnership. The Partnership is the owner of Planned Communities Corporation, a Delaware Corporation. The Partnership is a general partner in Heathrow Development Associates, Ltd., a Florida Limited Partnership. EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN SUCH REPORT. 12-MOS DEC-31-1996 DEC-31-1996 1,136,700 0 179,939 76,289 57,598 0 4,423,602 1,722,161 4,849,917 0 0 0 0 0 (112,421,185) 4,849,917 25,753,220 25,753,220 19,151,522 19,151,522 14,235,222 0 0 (7,633,524) 0 (7,633,524) 0 20,000,000 0 12,366,476 64.05 64.05
EX-99.1 4 EXHIBIT 99.1 - ------------ (ARVIDA-II) CONFLICTS OF INTEREST The Partnership is and will be subject to various conflicts of interest arising out of its relationships with the General Partner and its affiliates (including Arvida) as well as the fact that the General Partner and its affiliates are engaged in a wide range of real estate activities. Where conflicts arise from anticipated transactions with affiliates of the General Partner, certain provisions and limitations described below have been adopted to protect the interests of the Holders of Interests. Where no such provisions and limitations are described, none has been adopted and these conflicts may be resolved only through the exercise of the General Partner's judgement consistent with its fiduciary obligations to the Partnership and the Holders as set forth in the Partnership Agreement. See "Fiduciary Responsibility of the General Partner" below. The conflicts of interest to which the Partnership is and will be subject include those described below. DETERMINATIONS BY THE GENERAL PARTNER The General Partner and the Associate Limited Partners have certain interests in the Cash Flow and Profits or Losses of the Partnership (see "Cash Distributions and Allocations of Profits or Losses"). Because the timing and amount of Cash Flow and Profits or Losses of the Partnership received by, or allocated to, the General Partner and the Associate Limited Partners may be affected by various determinations by the General Partner under the Partnership Agreement, including whether or not to refinance or sell any property and the timing of any such sale or refinancing, the establishment and maintenance of reasonable reserves, the allocation of certain tax items under the Partnership Agreement, the timing of expenditures, the level of amortization of indebtedness and other matters, the General Partner may have a conflict of interest with respect to such determinations. The Partnership Agreement provides that the General Partner shall elect, in its sole discretion, to cause a Listing of the Interests, or, on the date ten years from the termination of this offering, to purchase (or to cause JMB or its affiliates to purchase) the interests at their appraised fair market value, or commence liquidation of the Partnership on the date ten years from the termination of this offering and sell all properties within fifteen years from the termination of this offering. In the event the General Partner elects to commence a liquidations phase, JMB and its affiliates will be permitted to purchase at appraised fair market value any of the joint interests held by the Partnership in Communities and Future Communities in which JMB or any of its affiliates (other than the Partnership) has an interest. In the event the General Partner elects, in accordance with the foregoing, to purchase, or to cause the purchase of, the Interests, or to commence a liquidation phase of the Partnership and to purchase any affiliate In the event that the proceeds of this offering plus maximum initial aggregate indebtedness are not sufficient to permit the payment of the cost of acquiring the assets from the Seller, the General Partner expects to cause the Partnership to enter into a joint venture or joint participation with affiliates of the General Partner under which the assets acquired from the Seller would be owned and developed. Any joint investment made by the Partnership in any Community with an affiliate of the General Partner will be on a strictly pro rata basis with the investment made by another JMB affiliate. In addition, each party will pay only its allocable share of Arvida's expenses in developing and managing the project. However, at any particular time, it is possible that the Partnership, the other investing JMB affiliate and Arvida may have differing interests with respect to certain decisions affecting such joint investments, including the timing of expenditures, sale of certain assets and other matters. Thus, there exists the possibility of an impasse in the event the joint venture partners disagree. See "Risks of Joint Ventures". However, in the event of a disagreement regarding a proposed sale or other disposition of the property, the party desiring not to sell or otherwise dispose would have a right of first refusal to purchase the affiliated joint venture partner's interest in the property. Such right of first refusal would be exercisable at the pro rata share of the proposed sale price or other disposition price to any unaffiliated third party; however, there can be no assurance that the Partnership would have the financial resources to exercise its right of first refusal at any such time. The Partnership may permit an affiliate of the General Partner and JMB to invest jointly with the Partnership and its joint venturer in a portion of an approximately 200-acre parcel of land located near Sarasota which may be suitable for development as a regional shopping mall. See "Business of the Partnership-- Description of Current Developments--Commercial and Industrial". This affiliate has expertise in the development and operation of regional shopping malls. Neither the Partnership nor Arvida currently has expertise in these matters. In the event of such a joint venture investment, the Partnership and the Partnership's unaffiliated joint venturer would contribute the land at appraised value and the JMB affiliate would contribute a pro rata share of capital. It should be noted that appraisals are only estimates of value and should not be relied upon as measures of realizable value. The JMB affiliate would be entitled to earn certain development fees from the joint venture for its services, subject to certain limitations. See "Management of the Partnership-- Management Compensation". PARTNERSHIP'S PARTICIPATION IN NET CASH FLOW OF FUTURE COMMUNITIES While Arvida has no current intent to move its principal business away from Community development, it is under no obligation to maintain Community development as its principal business. Arvida's only obligation in respect of future developments to the Partnership is to permit the Partnership to receive a 10% interest in net cash flow (in excess of certain base amounts) from Future Communities, subject to the limitations set forth under "Description of Business-Future Developments". The Partnership will not participate in any other future developments. Arvida is not restricted to development of Community properties and may participate or assist in the development and management of other types of real property investments developed by affiliates of JMB and Arvida. Different parcels of the same tract of land may be developed by various JMB affiliates, including Arvida. In certain cases, the most significant portions of such properties, principally office or other commercial buildings, may be developed by JMB and affiliates other than Arvida, and the Partnership will not participate in the net cash flow in respect of those developments. POSSIBLE COMPETITION BY THE PARTNERSHIP WITH AFFILIATES A substantial number of real estate investment partnerships and other entities are presently managed or advised by or through affiliates of JMB (see "Management of the Partnership--JMB Realty Corporation"). JMB and its affiliates also invest in real estate for their own accounts. JMB is presently planning to form and to manage or advise, directly or through affiliates, additional real estate investment partnerships and other investment entities in the future, and expects to continue to invest in real estate for its own account. JMB and certain of these affiliates engage in the development of retail, commercial and office projects, although none (either individually or in the aggregate) presently engage in the business of Community development to the extent that the Partnership and Arvida do. See "Business of the Partnership" and "Management of the Partnership--Affiliate Supervisory Agreement". The Partnership Agreement expressly provides that neither the General Partner nor any affiliate of the General Partner (including JMB and Arvida) will be obligated to present to the Partnership any particular investment or development opportunity that comes to its attention; provided, however, that the Partnership shall be entitled to receive a 10% interest in net cash flow (in excess of certain base amounts) with respect to each Future Community, subject to the limitations set forth under "Business of the Partnership--Future Community Developments". See "Fiduciary Responsibility of the General Partner". JMB and existing or future real estate investment entities advised or managed by JMB or its affiliates may be in competition under some circumstances with Arvida, and thereby the Partnership, for real property investments. Such conflicts could arise, for example, if the purchase of a particular undeveloped property should appear to be suitable for development for more than one purpose including as an Arvida-sponsored Community development. In addition, JMB or its affiliates may acquire and develop properties located nearby or adjacent to Communities or proposes Arvida Community developments, and the Partnership shall have no right to receive an interest in such developments. As a result of its relationship with its affiliates and the nature of such affiliates' development business, Arvida may be unable to develop certain properties in the manner, and to the extent, which it otherwise would, and, as a result, the Partnership may not be able to receive an interest in certain development projects. Arvida and its staff may supply certain development and management services to other JMB affiliates and may develop properties for such affiliates independent of Future Communities. Affiliates of the General Partner may also be in competition with the Partnership in connection with the sale or operation of properties under some circumstances. For example, the Partnership may own certain interest in Community properties adjacent to properties owned by JMB or other affiliated entities. As a result, the Partnership and one or more affiliated entities may be competing in particular geographical markets for residents or for tenants in commercial or office projects. There may also be similar sorts of competition in connection with the sales of property in certain markets. Any adjacent commercial properties owned by the Partnership and an affiliated entity will offer economic terms for tenant leases in such adjacent properties which are comparable considering all relevant factors including, but not limited to, age and quality of construction. RELATIONSHIP OF AFFILIATES TO PARTNERSHIP JMB or its affiliates are not prohibited from providing services to, and otherwise dealing or doing business with, persons who deal with the Partnership. However, no rebates or "giveups" may be received by the General Partner or any affiliate of the General Partner, nor may the General Partner or any such affiliate participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the Partnership Agreement. JMB and its affiliates may provide certain services to the Partnership as described under "Management of the Partnership". If any other transactions between the Partnership and JMB or its affiliates occur, they must also be negotiated on a basis not less favorable to the Partnership than that available from third parties providing comparable services and shall be terminable on 60 days' notice. REMUNERATION OF JMB, ARVIDA AND AFFILIATES JMB and its affiliates, including Arvida, will receive substantial compensation and other amounts from the Partnership, regardless of whether the Partnership achieves its investment objectives. See "Management of the Partnership--Management Compensation" and" --Affiliate Supervisory Agreement". PARTICIPATION OF AN AFFILIATE AS A SELECTED DEALER JMB Securities Corporation, a broker-dealer affiliated with JMB, is expected to participate as a Selected Dealer in the offering of Interests and will be entitled to the same selling commission as other dealers. See "Plan of Distribution". JMB Securities Corporation may be subject to a conflict of interest in performing any "due diligence" obligations that may arise out of its participation in the offering because of its affiliation with the General Partner. RELATIONSHIP OF MERRILL LYNCH TO AFFILIATE An affiliate of Merrill Lynch, the Selling Agent for this offering, is purchasing Interests to 1% of the total Interests sold to the public pursuant to this offering at a cost of $1 per Interest and is a limited partner in one of the Associate Limited Partners. As a result, Merrill Lynch as selling agent may be subject to a conflict of interest in performing any "due diligence" obligations that may arise out of its participation in the offering because of such relationship with its affiliate. In addition, the issuance of such Interests at $1 per Interest to the Merrill Affiliate effectively dilutes the Interests purchased by other Holders of Interests. LEGAL REPRESENTATION As noted under "Legal Matters", counsel for the Partnership in connection with the offering ia also counsel to JMB and various affiliates, including the General Partner of the Partnership, on various matters. No counsel has been independently retained to represent the Holders of Interests. In the event any controversy arises following the termination of the offering in which the interests of the Partnership appear to be in conflict with those of JMB or its affiliates, other counsel would be retained for one or both of the parties. FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER The General Partner is accountable to the Partnership as a fiduciary and consequently must exercise good faith and integrity in handling Partnership affairs. This is an uncertain area of the law, and Holders of Interests who have questions concerning the fiduciary duties of the General Partner should consult with their counsel. The Partnership Agreement provides that neither the General Partner nor any affiliate thereof engaged in the performance of services on behalf of the Partnership (the "Indemnified Parties") will be liable to the Partnership or the Holders of Interests for any loss or liability resulting from any act or omission performed or omitted by them if the General Partner or its affiliates have determined, in good faith, that the act or omission which caused the loss or liability, was in the best interests of the Partnership and such loss or liability was not the result of misconduct or negligence and that, subject to certain limitations, the Indemnified Parties will be indemnified by the Partnership against any loss or liability suffered by them if the General Partner or its affiliates have determined, in good faith, that the act or omission which caused the loss or liability was in the best interests of the Partnership and such loss or liability was not the result of misconduct or negligence. See "Summary of the Partnership Agreement--Indemnification of the General Partner". Thus, the Limited Partners or Holders of Interests, as the case may be, may have a more limited right of action than would otherwise be the case absent such provisions. In the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under the Securities Act of 1933, as amended, is contrary to public policy and therefore unenforceable. The Partnership Agreement expressly provides that neither the General Partner nor any affiliate of the General Partner will be obligated to present to the Partnership any particular investment opportunity that comes to its attention. See "Business of the Partnership" and "Conflicts of Interest--Possible Competition by Partnership with Affiliates". OWNERSHIP OF GENERAL PARTNER All of the outstanding shares of the General Partner are owned by JMB Holdings Corporation, an Illinois corporation, 75% of the outstanding shares of which are owned by JMB Realty Corporation and the remaining 25% of which is owned by certain officers and directors of JMB. The General Partner is not prohibited from paying dividends to its stockholder. The Partnership Agreement provides that the purchasers of Interests will acquire no interest in the stock or assets of the General Partner, or in any proceeds of any sales thereof by virtue of acquiring or owning Interests and becoming Holders. MANAGEMENT COMPENSATION The following describes the types and estimated amounts of fees, compensation, and other payments, and distributions that the General Partner and its affiliates (including the Associate Limited Partners) will or may receive in connection with the business of the Partnership and/or the acquisition of its assets. These amounts were not determined by arm's-length bargaining. Acquisition and Financing Guaranty Fee. The Partnership is obligated to pay JMB or its affiliates an Acquisition and Financing Guaranty Fee equal to $20,000,000 (subject to reduction as set forth below and in the Partnership Agreement) for services of JMB and such affiliates in negotiating and arranging, and guaranteeing repayment of the Acquisition Notes and certain other obligations incurred in connection with, the acquisition of the assets by the Partnership from the Seller. Such fee will be payable upon the date of the admission of Holders of Interests to the Partnership ("Admission Date"), or, in the event of multiple Admission Dates, pro rata upon each Admission Date based upon the percentage of the maximum offering sold (without giving effect to the right to increase the size of the offering to 400,000 Interests); to the extent that less than all of the Interests are sold, therefore, the Acquisition and Financing Guaranty Fee will be proportionately less than $20,000,000. Fees for Property Management and Other Services. The Partnership may engage affiliates of the General Partner for property management, insurance brokerage, or other services to be performed, if necessary, in connection with the properties of the Partnership. Property management fees may be charged at rates prevailing for comparable services in the localities where properties are located, in the event such services are provided, but not to exceed 6% of the gross receipts from a commercial or industrial property (if leasing and re-leasing services are performed by such affiliate; otherwise the maximum fee is 3% of the gross receipts) and 3% of the gross receipts (reduced to 1% after the first five years) from a commercial or industrial property leased for ten years or more on a net basis. Subject to certain limitations in the Partnership Agreement, insurance brokerage services may be performed and commissions may be received at rates prevailing for comparable classes of coverage in the localities where the properties are located. If affiliates of the General Partner perform other services for the Partnership, the fee for such services must be not less favorable to the Partnership than that available from third parties providing comparable services and the arrangement in respect of such services shall be terminable, without penalty, on 60 days' notice. As described under "Business of the Partnership--Description of Current Developments", an affiliate of JMB which develops malls and shopping centers nationally may participate as a joint venture partner with a joint venture between the Partnership and an unaffiliated third party in the development of a regional shopping mall at Sarasota, Florida on property owned (including under an option) by a joint venture in which the Partnership is a 50% partner; in such event, the affiliate would be entitled to receive development fees equal to the lesser of 5% of the cost of development or the amount which would be charged by an independent third party rendering comparable services, together with allocable reimbursements of allocable expenses. In the event of a joint venture between the Partnership and its joint venture partner and an affiliate of JMB, the joint venture shall obtain a report of the appraised value of the mall or shopping center upon completion of the property. To the extent that the actual costs of development, including the development fees paid to such affiliate, exceed the appraised value of the project, the development fees will be remitted by such affiliate to the extent of the excess, if any, of such development costs over such appraised value. Distributive Share of Cash Flow. Following admission of Limited Partners, the General Partner and the Associate Limited Partners (collectively) will be entitled to receive (i) until the Holders of Interests have received cumulative distributions of Cash Flow equal to a cumulative 10% per annum return (on a non- compounded basis) on their adjusted capital Investments (which shall be deemed return (on a non-compound basis) on their Adjusted Capital Investments), 5% of the distibutions of Cash Flow remaining after Cash Flow distributions to the General Partner and the Associate Limited Partners (collectively) equal to 1% per annum of the Gross Asset Value of the Partnership (subject to certain limitations set forth in the Partnership Agreement); provided, however, that until such time as the Holders of Interests have received total distributions of Cash Flow equal to their Capital Investments, receipt by the General Partner and the Associate Limited Partners (collectively) of their 5% share of Cash Flow shall be deferred (the "Deferred Amount") until receipt by the Holders of Interests of Cash Flow distributions equal to a 12% per annum cumulative, non-compounded return on their initial Capital Investments; any Deferred Amount shall be distributable to the General Partner and the Associate Limited Partners (collectively), (x) out of any Cash Flow otherwise distributable to the Holders of Interests at such time as the Holders of Interests have received a 12% per annum cumulative, non-compounded return on their Capital Investments, or (y) in any event, to the extent of one-half of Cash Flow otherwise distributable to the Holders of Interests at such time as the Holders of Interests have received total distributions of Cash Flow equal to their Capital Investments; and (ii) thereafter, 15% of all distributions of Cash Flow shall be made to the General Partner and the Associate Limited Partners (collectively) and 85% to the Holders of Interests; provided, however, that the General Partner and the Associate Limited Partners (collectively) shall be entitled to receive an additional share of Cash Flow otherwise distributable to the Holders of Interests under clause (ii) equal to the lesser of (a) 13% of the aggregate distributions of Cash Flow under clause (ii) to all parties or (b) an amount equal to 2% of the gross selling prices of all interests in real property of the Partnership (subject to certain limitations). See "Cash Distributions and Allocations of Profits or Losses". The General Partner and Arvida/JMB Associates (collectively) will be entitled to receive a distribution of Cash Flow of the Partnership in an amount equal to $20,000,000 on September 30, 1987. The definition of Cash Flow includes, and this distribution may be paid from, the proceeds of sales or other dispositions of assets in the ordinary course of business and the proceeds of borrowings of the Partnership. See "Acquisition of Assets". Reimbursable Expenses. The Partnership will reimburse the General Partner and its affiliates (including Arvida) for their direct expenses relating to this offering and relating to the administration of the Partnership and the acquisition, development, ownership, supervision and operation of the Partnership assets (subject to certain limitations contained in Section 5.1D of the Partnership agreement). In addition, certain other expenses of JMB and its affiliates will be reimbursed as described below. JMB and its affiliates will be reimbursed by the Partnership and all expenses of the offering, sale and distribution of Interests, and the cost of goods, materials and services used for or by the Partnership and obtained from entities which are not affiliated with the General Partner. Except for organizational expenses incurred in the creation of the Partnership and offering, selling and distribution expenses incurred in selling and distribution expenses incurred in the sale of Interests, JMB and the General Partner will not be reimbursed by the Partnership for the salaries and related salary expenses of any of the Director, the Chairman, President or any Executive Vice President of JMB or the General Partner or any individual who holds 5% or more of an equity interest in JMB or the General Partner or has the power to direct or cause the direction of JMB or the General Partner, whether through ownership of voting securities, by contract or otherwise, or for any indirect, general or administrative overhead expenses incurred in performing services for the Partnership which are not directly attributable to such services. The Partnership, however, will subject to certain limitations in 5.1D of the Partnership Agreement, reimburse JMB and its affiliates for salaries (and related salary expenses) for services which could be performed directly for the Partnership by independent parties, such as legal, accounting, transfer agent, data processing, duplicating and other services. The amounts charged to the Partnership for such services will not exceed the lesser of the actual cost of such services, or 90% of the amount which the Partnership would be required to pay to independent parties for comparable services. It is estimated that such reimbursements for such services will be approximately $175,000 in 1987. In the Partnership's annual report to Holders of Interests, there will be provided an itemized breakdown of reimbursements made to JMB and its affiliates in the categories of legal, accounting, transfer agent, data processing and duplicating services. Such reimbursement of expenses will be made regardless of whether any distributions are made to the Holders of Interests. Pursuant to the Supervisory Agreement, the Partnership shall reimburse Arvida fully for all of its out-of-pocket expenses (including salary and salary-related expenses) incurred while supervising the development and management of the Partnership's properties and other operations; provided, however, such reimbursements shall not exceed 5% of the gross revenues from the business of the Partnership. Such reimbursements will be made regardless of whether any distributions are made to the Holders of Interests. CAPITAL CONTRIBUTIONS OF THE GENERAL PARTNER AND THE ASSOCIATE LIMITED PARTNERS The General Partner and the Associate Limited Partners have made capital contributions to the Partnership aggregating $1,000 and will make additional capital contributions so that total capital contributions of the General Partner and the Associate Limited Partners will aggregate at least $20,000. Except under certain limited circumstances upon liquidation of the Partnership or its Partnership interest (see "Summary of the Partnership Agreement--Dissolution and Liquidation"), the General Partner, in its capacity as such, will make no additional capital contributions to the Partnership. JMB Investor Services Corporation made a capital contribution to the Partnership of $5,000 when it purchased five Interests as the Initial Limited Partner of the Partnership. AFFILIATE SUPERVISORY AGREEMENT Arvida, an affiliate of JMB and the General Partner, will provide development and management supervisory personnel for the Partnership for all of its projects and operations in accordance with the objectives and criteria set forth under "Business of the Partnership". Pursuant to the Supervisory Agreement, Arvida will provide such supervisory management personnel at cost for the duration of the Partnership; provided, however, that the Supervisory Agreement may be terminated without cause by the Partnership without penalty upon sixty days' written notice. Arvida may terminate the Supervisory Agreement if the General Partner ceases to be an affiliate of JMB or if the Partnership is in material breach of the Supervisory Agreement which breach continues for a period of sixty days. See "Management of the Partnership--Management Compensation--Reimbursable Expenses". While these personnel will function primarily in an advisory and supervisory role with respect the Partnership's own operating employees, Arvida personnel will also assist Partnership personnel in the Partnership's management, development and sale of properties. These personnel will supervise the identification of Partnership-owned land for development, the design of a Community master plan, the obtaining of regulatory and governmental approvals, and assist with the installation of infrastructure and amenities, the sale of developed parcels and homesites to third- party developers and the construction of residential units and commercial and industrial properties. Arvida intends to follow the Seller's practice of hiring subcontractors and consulting firms on a project-by-project basis rather than maintaining in- house capabilities, in order to be able to select suitable professionals for a particular project. Arvida has granted the Partnership a non-exclusive license to the "Arvida" name for its use pursuant to, and for the term of, the Supervisory Agreement. Arvida intends, but has no obligation, to continue to seek to develop, among other real estate projects, additional Future Communities. The Partnership will be entitled to receive a 10% interest in net cash flow (above certain base amounts) from Future Communities. See "Business of the Partnership--Future Community Developments". Arvida will be reimbursed directly by the Partnership for all of its out-of-pocket expenses (including an allocable share of its salary and salary-related expenses) incurred while supervising the development and management of the Partnership's properties. Arvida will not be entitled to receive any fees or other payments, direct or indirect, from the Partnership. Arvida will reimburse the Partnership for any goods, services or facilities of the Partnership which it may use in connection with projects unrelated to the Partnership's business. Pursuant to the Supervisory Agreement, Arvida and each of its directors, officers and employees shall be indemnified for any liability arising out of their activities under the Supervisory Agreement, except for fraud, bad faith or negligence by them. Arvida may develop new commercial and industrial projects, which will be wholly separate and distinct from any future Communities developed under the name "Arvida"; the Partnership will not be entitled to participate in the net cash flow of any such projects. Arvida may participate in the development of Community projects for others without use of the name "Arvida" in which case the Partnership would have no right to participate. _________________________________________________________________ DESCRIPTION OF ASSIGNEE INTERESTS __________________________________________________________________ ASSIGNMENT OF INTERESTS An investor in the Partnership will hold all of his interest in the Partnership by virtue of an assignment to the investor of Interests held by the Initial Limited Partner which have been acquired with the subscription proceeds of such investor. The Initial Limited Partner will be the Limited Partner of record for the Interests purchased and held by the Assignee Holders, but all of the economic benefits of the Interests (including cash distributions or allocations of Profits or Losses) will be distributed or allocated to the Assignee Holders. The discussion in this Prospectus with respect to receipt of such Partnership distributions and allocations refers to Holders of Interests, rather than Limited Partners. Purchasers of such assigned Interests will not themselves become Limited Partners, unless they elect or are required to do so, as explained below. Attached to this Prospectus as part of Exhibit C is a form of Subscription Agreement Signature Page. Investors may subscribe to the Partnership through Merrill Lynch or Selected Dealers without executing the Subscription Agreement Signature Page (except where required by state law). By the payment of his subscription proceeds and acceptance by the General partner as an Assignee Holder, each investor will be recognized by the Partnership as an Assignee Holder of Interests and each investor will be bound by all the terms of the Subscription Agreement, as well as the Partnership Agreement and Assignment Agreement. Under the Assignment Agreement, included as Exhibit B to this Prospectus, among the Partnership, the Initial Limited Partner, the General Partner and each investor becoming an Assignee Holder pursuant to this offering, all of the ownership attributes of the Interests are granted to such Assignee Holders, including voting rights and rights to their proportionate percentage interest in the Partnership's income, gains, losses, deductions, credits and distributions, and Assignee Holders are bound by the terms of the Partnership Agreement. An Assignee Holder who wishes to become a Substituted Limited Partner may do so upon complying with the provisions pertaining to transfer of Interests under the Partnership Agreement. See "Transferability of Interests" below. An Assignee Holder who effects such a transfer and becomes a Substituted Limited Partner will not be permitted subsequently to reassign its Limited Partnership Interests to the Initial Limited Partner and once more become an Assignee Holder. The Initial Limited Partner holds five Interests for its own account and has all rights attributable to such Interests under the Partnership Agreement. An assignee Holder who wishes to become a Substituted Limited Partner may do so upon complying with the provisions pertaining to transfer of Interests under the Partnership Agreement. See "Transferability of Interests" below. An Assignee Holder who effects such a transfer and becomes a Substituted Limited Partner will not be permitted subsequently to reassign its Limited Partnership Interests to the Initial Limited Partner and once more become an Assignee Holder. The Initial Limited Partner holds five Interests for its own account and has all rights attributable to such Interests under the Partnership Agreement. No transfer (except for intra-family and certain other transfers, including transfers by gift or inheritance) will be recognized if following the transfer either the transferor or the transferee would hold fewer than five Interests. Additional restrictions on transfer of Interests are imposed in some states by their respective securities laws. No transfer may be made to any person that is a non-resident alien individual or foreign corporation or other entity or that may be subject to tax under Section 511 of the Code or to any "tax-exempt entity" (within the meaning of Section 168(h) of the Code for purposes of Section 168(h)(2) of the Code for purposes of Section 168(h)(6)(A) of the Code), except in the sole discretion of the General Partner. In the case of any transfer of Interests, the General Partner will impose upon the transferee the suitability requirements of state blue sky laws. Any member of the National Association of Securities Dealers ("NASD") assisting in such transfer will impose upon the transferee the suitability requirements imposed by the NASD. The rights of any transferee of an Interest who does not become a Substituted Limited Partner will be limited to his share of Partnership Profits or Losses and cash distributions as described above. The voting rights of a transferor (other than the Initial Limited Partner) who transfers an Interest will terminate with respect to such Interest upon such transfer, whether or not the transferee thereof is admitted as a Substituted Limited Partner with respect thereto. MERRILL LYNCH INVESTOR SERVICE It is not anticipated that a public market for the Interests will develop. However, Merrill Lynch may provide certain investor services which may assist investors desiring to sell their Interests. Merrill Lynch, acting as an agent of persons who desire to buy or sell Interests, will use its best efforts to match any buy order it receives with any sell order it receives, at specified prices (or price ranges) only, but will not solicit any sell orders for Interests. Any solicitation in respect of buy orders will be done in accordance with Federal securities laws. This service will be made available only after the Final Admission Date and only to investors who are not Substituted Limited Partners and who maintain or establish an account with Merrill Lynch. Any transactions effected through this service are subject to any restrictions on transfer imposed by applicable state securities laws. This service will not be available to residents of the State of California unless and until the Department of Corporations of the State of California modifies or waives its policy with respect to such service. To facilitate such transactions, Merrill Lynch will make available upon request, information as to the prices at which Interests have recently been sold. However, Merrill Lynch will not set the price at which Interests will be sold. Since this arrangement will not constitute a market for the Interests, no "market orders" or "stop orders" can be accepted by Merrill Lynch. Accordingly, it is possible that no buy orders will be received by Merrill Lynch at the prices specified in the sell orders which Merrill Lynch receives, and in that case it will not be possible for Merrill Lynch to arrange any sales. For its services in acting as agent for the buyer and seller in such transactions, Merrill Lynch will charge an appropriate fee or commission. Further information about this service can be obtained from Merrill Lynch. Merrill Lynch is under no obligation to provide this service to Holders of Interests, and this service may be discontinued or suspended at any time without notice. _________________________________________________________________ CASH DISTRIBUTIONS AND ALLOCATIONS OF PROFITS OR LOSSES _________________________________________________________________ In the event the minimum number of Interests is subscribed for, a Holder of Interests will be entitled to receive from the Partnership a distribution of Cash Flow (without regard to the distribution to the General Partner and Arvida/JMB Associates of Cash Flow (including the proceeds of any financings) on September 30, 1987, as described under "Management of the Partnership-- Management Compensation") in an amount equal to such Holder's Capital Investment from the day after his subscription proceeds are received in the Partnership escrow account through the end of the fiscal quarter in which the Final Admission Date occurs multiplied by an initial rate of 5% per annum. This rate, however, may be increased prospectively (in the sole discretion of the General Partner) at the end of any week or weeks, commencing with the following week. Such Cash Flow will be distributed within 60 days following the end of such fiscal quarter in which the First Admission Date occurs and each fiscal quarter thereafter through the fiscal quarter in which the Final Admission Date occurs. See "Plan of Distribution--Allocations of Benefits During the Offering Period". Beginning with the first fiscal quarter following the termination of the offering of Interests to the public, Cash Flow shall be distributed on a quarterly basis, within 60 days following the end of each fiscal quarter, as follows: (i) until the Holders of Interests have received cumulative distributions of Cash Flow equal to a 10% per annum return (on a non-compounded basis) on their Adjusted Capital Investments (as defined below) plus the return of their Capital Investments (which shall be deemed returned to the Holders of Interests only to the extent of cumulative distributions of Cash Flow to Holders of Interests in excess of 10% per annum (on a non- compounded basis) of their Adjusted Capital Investments), (a)95% to the Holders of Interests and 5% to the General Partner and Associate Limited Partners (collectively) remaining after (b) Cash Flow distributions to the General Partner and the Associate Limited Partners (collectively) equal to 1% per annum of the Gross Asset Value (as defined below) of the Partnership (subject to certain limitations set forth in the Partnership Agreement); provided, however, that until such time as the Holders of Interests have received total distributions of Cash Flow equal to their Capital Investments, receipt by the General Partner and the Associate Limited Partners (collectively) of their 5% share of Cash Flow under clause (a) above shall be deferred (the "Deferred Amount") to receipt by the Holders of Interests of Cash Flow distributions equal to a 12% per annum cumulative, non-compounded return on their Capital Investments; and Deferred Amount shall be distributable to the General Partner and the Associate Limited Partner (collectively), (x) out of any Cash Flow otherwise distributable to the Holders of Interests under clause (a) above at such time as the Holders of Interests have received a 12% per annum cumulative, non-compounded return on their Capital Investments, or (y) in any event, to the extent of one-half of Cash Flow otherwise distributable to the Holders of Interests under clause (a) above at such time as the Holders of Interests have received total distributions of Cash Flow equal to their Capital Investments; and (ii) thereafter, all distribution of Cash Flow shall be made 85% to the Holders of Interests and 15% to the General Partner and the Associate Limited Partners (Collectively); provided, however, that the General Partner and the Associate Limited Partners (collectively) shall be entitled to receive an additional share of Cash Flow otherwise distributable to the Holders of Interests under this clause (ii) equal to the lesser of (x) an amount equal to 2% of the gross selling prices of any interests in real property of the Partnership (subject to certain limitations) or (y) 13% of the aggregate distributions of Cash Flow under this clause (ii) to all parties. "Gross Asset Value" shall mean the dollar amount reflected on the books and records maintained by the Partnership, at the Final Admission Date, of the gross assets (including all of the Partnership's interests in joint venture assets) acquired by the Partnership, directly or indirectly, or, if sold or otherwise disposed, of the proceeds of such assets, increased by the dollar amount reflected on the books and records maintained by the Partnership, at the time of their respective acquisition, of any gross assets (including all of the Partnership's interests in joint venture assets) which the Partnership subsequently acquires, directly or indirectly, from the Seller or as otherwise contemplated by the Acquisition Agreement or this Prospectus. Distributions will be made on or before the last day of May, August, November and February of each year in respect of operations for the preceding fiscal quarter. "Adjusted Capital Investments", with respect to any fiscal quarter, shall mean the Capital Investments of the Holders of Interests reduced, as of the first day of any fiscal quarter following the fiscal quarter with respect to which a distribution is made, by cumulative, non-compounded distributions of Cash Flow to the Holders in excess of 10% per annum of their Adjusted Capital Investments for all prior fiscal quarters. The amount equal to 2% of the aggregate selling price of Partnership properties, which shall determine the amount of Cash Flow distributable to the General Partner under clause (ii) above, is subject to limitations as set forth in section 4.1 of the Partnership Agreement. These limitations include, but are not limited to, the following: such amount with respect to any Partnership property shall not exceed 50% of the compensation customarily changes in connection with sales of similar properties in arm's length transactions by non-affiliates of JMB rendering similar services as an ongoing public activity in the same geographical location and for comparable property, and the amount of such distribution plus the real estate commission paid to anyone (other than the Partnership) in connection with the sale of a Partnership property will not exceed the lesser of (i) 6% of the gross purchase price for the property or (ii) the amount customarily charged in connection with sales of properties in arm's-length transactions by non-affiliates of JMB rendering similar services as an ongoing public activity in the same geographical location and for comparable properly. If in any fiscal quarter the General Partner should determine that reserves of the Partnership exceed the amount deemed sufficient in connection with the Partnership's operations, such reserves might be reduced and, if so, the amount of such reduction for a particular quarter would be included in and distributed as a portion of Cash Flow. As described under "Plan of Distribution", the Merrill Affiliate, in consideration of consulting services rendered to the Partnership and the payment of $1 per Interest, will acquire Interests (which are subject to certain limitations) equal to 1% of the total Interests sold to the public hereby. In the event the General Partner causes a Listing of the Interests and the Merrill Affiliate's Interests are so listed, the Partnership Agreement provides for an allocation of Profits (in the form of gross income) in order to cause the capital account for each of the Merrill Affiliate's Interests to equal the capital accounts of other Holders for their Interests. As a result of such allocation, in the event of a liquidation of the Partnership after such allocation and such a listing, the Merrill Affiliate might be entitled, in some circumstances, to a larger share of the liquidation proceeds which share corresponds to such capital account increase. Except as set forth under "Plan of Distribution--Allocation of Benefits During the Offering Period", the portion of Cash Flow distributed to the Holders of Interests will be made pro rata to the persons recognized on the books of record of the Partnership as the Holders of Interests. See "Description of Assignee Interests--Transferability of Interests". As more fully described under "Business of the Partnership", the Partnership intends to invest amounts in additional development of its Communities, which amounts would otherwise be available for distribution as Cash Flow, subject to the limitation described in the following sentence. Under the Partnership Agreement, the General Partner must use its best efforts to distribute Cash Flow in amounts at least equal to Federal taxable income (or components thereof) allocable to the Holders, multiplied by the maximum individual Federal income tax rate for the year in which such taxable income (or component thereof) is realized. All Profits or Losses of the Partnership for each fiscal year (or portion thereof) beginning on or after the first date designated by the General Partner on which Assignee Holders are recognized as such generally will be allocated as follows: (i) Profits will be allocated such that the General Partner and the Associate Limited Partners will be allocated Profits equal to the amount of Cash Flow distributed to them and the Holders will be allocated the remaining Profits, and (ii) Losses will be allocated 2% to the General Partner and the Associate Limited Partners (collectively) and 98% to the Holders. Except as set forth under "Description of Assignee Interests--Transferability of Interests", all such allocations of Profits or Losses to the Holders of Interests generally will be made in proportion to the number of Interests owned by each Holder at the end of the fiscal year in which such Profits or Losses are incurred. _________________________________________________________________ SUMMARY OF THE PARTNERSHIP AGREEMENT _________________________________________________________________ The Partnership Agreement to be executed by the General Partner and each Limited Partner is included as Exhibit A to this Prospectus and each prospective purchaser should read it in full. Certain provisions of the Partnership Agreement have been described elsewhere in this Prospectus. With regard to fees, payments and distributions to be made to the General Partner and affiliates, the distribution of cash from the Partnership and the allocation of Partnership Profits or Losses, see "Management of the Partnership" and "Cash Distributions and Allocations of Profits or Losses"; with regard to various transactions and relationships of the Partnership with the General Partner and affiliates, see "Conflicts of Interest"; with regard to the Partnership's business objectives and policies, see "Business of the Partnership"; with regard to the management of the Partnership, see "Management of the Partnership"; with regard to the voting rights and certain other rights of Assignee Holders and as to the possibility of investors being admitted as Limited Partners of the Partnership, see "Description of Assignee Interests--Assignment of Interests"; and with regard to the transfer of interests, see "Description of Assignee Interests-- Transferability of Interests". The following briefly summarizes certain provisions of the Partnership Agreement which are not described elsewhere in this Prospectus. All statements made below and elsewhere in this Prospectus relating to the Partnership Agreement are hereby qualified in their entirety by reference to the Partnership Agreement attached hereto as Exhibit A. ALL ASSIGNEE HOLDERS WILL BE BOUND BY THE PROVISIONS OF THE PARTNERSHIP AGREEMENT, THE ASSIGNMENT AGREEMENT AND THE SUBSCRIPTION AGREEMENT ATTACHED TO THIS PROSPECTUS AS EXHIBIT C UPON PAYMENT OF THE SUBSCRIPTION AMOUNT AND ACCEPTANCE BY THE PARTNERSHIP. LIABILITY OF PARTNERS TO THIRD PARTIES The General Partner will be liable for all general obligations of the Partnership to the extent not paid by the Partnership. JMB Realty Corporation and JMB Holdings Corporation, affiliates of the General Partner, will not be liable for any such obligations (except to the extent of any note issued by JMB Holdings Corporation to the General Partner). The Partnership Agreement provides that Limited Partners will not be personally liable for the debts of the Partnership beyond the amount committed by them to the capital of the Partnership. Assuming that a Holder of Interests does not take part in the control of the business of the Partnership and otherwise acts in conformity with the provisions of the Partnership Agreement, the liability of such Holder will, under the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act"), be limited, subject to certain possible exceptions, generally to the amount contributed by such Holder or such Holder's predecessor in interest to the capital of the Partnership. Under the Delaware Act, (i) a Holder would be liable, for a period of one year after the date of the return to the Holder of any part of such Holder's capital contribution returned without violation of the Partnership Agreement or the Delaware Act, for the amount of the returned contribution to the extent necessary to discharge liabilities of the Partnership to creditors who extended credit while the returned contribution was held by the Partnership, and (ii) a Holder would be liable, for a period of six years after the date of the return to the Holder of any part of the Holder's capital contribution returned in violation of the Partnership Agreement or the Delaware Act, for the amount of the returned contribution. Under the Delaware Act, a Holder may not receive a distribution from the Partnership if, at the time of the distribution and after giving effect thereto, the all things which it deems to be necessary, convenient, appropriate or advisable in connection therewith, including, but not limited to, the preparation and filing on behalf of the Partnership of a registration statement with the Securities and Exchange Commission and the securities commissions (or similar agencies or offices) of such jurisdictions as the General Partner shall determine and the execution or performance of agreements with underwriters and others concerning the marketing of Additional Limited Partnership Interests on such basis and upon such terms as the General Partner shall determine. G. Notwithstanding any other provision of this Section 3.3 (i) within ten days after the commencement of the public offering contemplated by Section 3.3A, ML Real Estate Associates II may acquire an interest in the Partnership as provided herein upon its payment of $100.00 and (ii) to evidence such interest in the Partnership, as of the First Admission Date and any Later Admission Dates, the General Partner may issue Additional Limited Partnership Interests to the Initial Limited Partner for assignment to ML Real Estate Associates II (which shall be an Assignee Holder thereof for purposes of this Agreement) in an amount equal to 1% of the Additional Limited Partnership Limited Partnership Interest. It is hereby understood that such Additional Limited Partnership Interests shall be registered with the Securities and Exchange Commission contemporaneously with those described in Section 3.3A. SECTION 3.4 Partnership Capital A. No Partner shall be paid interest on any Capital Investment. B. No Partner shall have the right to withdraw, or receive any return of, his Capital Investment, except as may be specifically provided herein. C. Under circumstances requiring a return of any Capital Investment, no Partner shall have the right to receive property other than cash, except as may be specifically provided herein. SECTION 3.5 Liability of Partners No Limited Partner shall be liable for the debts, liabilities, contracts or any other obligations of the Partnership. Except as specifically provided herein with respect to the Associate Limited Partners, a Limited Partner shall be liable only to make the Capital Investment with respect to the Limited Partnership Interests which he holds and shall not be required to lend any funds to the Partnership or, after the Capital Investments with respect to such Interests shall have been paid, to make any further capital contribution to the Partnership. Subject to the provisions of Section 5.8, no General Partner shall have any personal liability for the repayment of the Capital Investments with respect to Limited Partnership Interests. No Limited Partner shall be entitled to the withdrawal or return of his capital contributions, except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Partnership may be considered as such by law and then only to the extent provided for therein. ARTICLE FOUR CASH DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES SECTION 4.1 Distributions of Cash Flow Beginning with the first fiscal quarter following the fiscal quarter in which the offering of Additional Limited Partnership Interests to the public terminates as contemplated by Section 3.3, all Cash Flow of the Partnership shall be distributed quarterly within sixty (60) days after the close of each fiscal quarter as follows: (i) 90% to the Holders of Interests and 10% to the General Partner and Associate Limited Partners (collectively) until the Holders of Interests have received a cumulative, non-compounded, 10% per annum return on their Adjusted Capital Investments plus the return of their Capital Investments; and (ii) thereafter, all Cash Flow shall be distributed 85% to the Holders of Interests and 15% to the General Partner and the Associate Limited Partners (collectively); provided, however, that the General Partner and the Associate Limited Partners (collectively) shall be entitled to receive distributions of amounts otherwise distributable to the Holders of Interests under this clause (ii) to the extent such additional amounts do not exceed the lesser of (A) 2% of the total cumulative selling price of all interests in real property of the Partnership which have been sold or otherwise disposed of subsequent to the First Admission Date and (B) 13% of the cumulative amount distributed under this clause (ii) to all Persons. Notwithstanding the foregoing clause (i), the 10% of Cash Flow distributable to the General Partner and Associate Limited Partners (collectively) under such clause (i) shall be limited as follows: (A) to the extent, if any, that one percent (1%) of the Gross Asset Value (as defined below) is less than 5.2631% of Cash Flow, the amount, distributed to the General Partner and Associate Limited Partners (collectively) shall be reduced by the amount of any such deficiency and the Holders of Interests shall receive additional Cash Flow in the amount of such reduction; (B) the receipt by the General Partner and the Associate Limited Partners (collectively) of 4.7369% of total Cash Flow under said clause (i) (the "Remainder") shall be deferred (and such deferred amount shall be distributed to the Holders of Interests) unless the Holders of Interests have received Cash Flow distributions equal to a 12% per annum cumulative, non-compounded return on their Capital Investments; provided, however, that such deferral shall terminate at such time as the Holders of Interest have received total distributions of Cash Flow equal to their Capital Investments; any deferred amount of the Remainder shall be distributable to the General Partner and the Associate Limited Partners (collectively), (x) out of any Cash Flow otherwise distributable to the Holders of Interests under the foregoing clause (i) at such time as the Holders of Interests have received a 12% per annum cumulative, non-compounded return on their Capital Investments, or (y) in any event, to the extent of one-half of Cash Flow otherwise distributable to the Holders of Interests at such time as the Holders of Interests have received total distributions of Cash Flow equal to their Capital Investments. "Gross Asset Value" shall mean the dollar amount reflected on the books and records maintained by the Partnership, at the Final Admission Date, of the gross assets (including all of the Partnership's interests in joint venture assets) acquired by the Partnership, directly or indirectly, or, if sold or otherwise disposed of, the proceeds of such assets, increased by the dollar amount reflected on the books and records maintained by the Partnership, at the time of their respective acquisition, of any gross assets (including all of the Partnership's interests in joint venture assets) which the Partnership subsequently acquires, directly or indirectly, from the Seller or otherwise as contemplated by the Acquisition Agreement or the Prospectus. No amounts computed as 2% of the selling price of any real property in connection with sale of a Property under (ii) above shall exceed 50% of the amount customarily charged in connection with sales of real properties in arm's-length transactions by non- affiliates of JMB rendering services as an ongoing public activity in the same geographical location and for comparable real property; provided, however, that the amount computed as 2% of the selling price of any Property plus the real estate commission paid to anyone (other than commissions which inure to the benefit of the (Partnership) in connection with the sale of a Property shall in no event exceed the lesser of (i) 6% of the gross purchase price of the Property or (ii) the amount customarily charged in connection with sales or real properties in arm's-length transactions by non-affiliates of JMB rendering real estate brokerage services as an on-going public activity in the same geographical location and for comparable real property. The General Partner shall use its best efforts to operate the Partnership so that such operation will provide sufficient Cash Flow (including distributions under Section 3.3B) in order that the aggregate Cash Flow distributions for each year distributable to the Holders (other than ML Real Estate Associates II) are at least equal to Federal taxable income (or components thereof) allocable to the Holders (other than ML Real Estate Associates II), multiplied by the maximum individual Federal income tax rate for the year in which such taxable income (or component thereof) is realized. Except as otherwise provided in this Agreement, this Section 4.1 shall apply in determining Cash Flow distributions upon dissolution. If, upon the completion of the liquidation and termination of the Partnership and final distribution of all Partnership funds, the aggregate capital contributions with respect to Limited Partnership Interests issued under Section 3.3A exceed the sum of the distributions of Cash Flow with respect to such number of such Limited Partnership Interests under clause (i) of Section 4.1, distributions with respect to such number of such Limited Partnership Interests under Section 8.3C of Liquidation proceeds and distributions, if any, with respect to such number of such Limited Partnership Interests made with the proceeds of any capital contributions made by the General Partner and Arvida/JMB Associates (said excess is hereinafter referred to as the "Excess Amount"), then the General Partner, the Associate Limited Partners and ML Real Estate Associates II (excluding its successors and assigns and except as provided in the succeeding paragraph) shall make aggregate payments to the Holders (other than ML Real Estate Associates II but including any unaffiliated successor or assign thereof) in an amount equal to the lesser of the Excess Amount or the amounts of Cash Flow received by the General Partner, the Associate Limited Partners and ML Real Estate Associates II pursuant to Section 4.1(i), such payments to be made by the General Partner, the Associated Limited Partners and ML Real Estate Associates II based upon the relative cumulative distributions of Cash Flow received by each of them pursuant to Section 4.1(i) up to the time of such payments. In the event that the General Partner shall elect under Section 5.5(i)(a) to cause Interests to be listed and quoted on a United States national exchange or to be reported by the National Association of Securities Dealers Automated Quotation System and the Interests issued to ML Real Estate Associates II under Section 3.3G are to be so listed and quoted or reported, the obligation of ML Real Estate Associates II to make payments pursuant to the preceding paragraph shall terminate on the date on which such Interests are first listed and quoted or reported pursuant to such election; provided that ML Real Estate Associates II, by prompt notification to the General Partner, may elect to cause all (but not less than all) of the Interests issue to ML Real Estate Associates II under Section 3.3G not to be so listed and quoted or reported. In the event of such an election by ML Real Estate Associates II, ML Real Estate Associates II may subsequently notify the general Partner that such Interests issued to ML Real Estate Associates II under Section 3.3G shall be so listed and quoted or reported and the General Partner shall cause such Interests to be so listed and quoted or reported, provided that ML Real Estate Associates II shall have agreed to pay all costs and expenses of such listing and quotation or reporting. Any such subsequent listing and quotation or reporting of such Interests of ML Real Estate Associates II shall be treated for purposes of this Section 4.1 and Section 4.3G as made pursuant to the election of the General Partner under Section 5.5(i)(a). Except as aforesaid, the obligation of ML Real Estate Associates II to make payments under the preceding paragraph shall constitute the personal obligation of ML Real Estate Associates II, and such obligation shall continue to exist whether or not ML Real Estate Associates II owns or holds any additional Limited Partnership Interests at the time payments are required to be made pursuant to the preceding paragraph. Notwithstanding anything to the contrary in the foregoing provisions of this Section 4.1, on September 30, 1987, subject to the making by the General Partner of the determination provided below, a distribution of Cash Flow of the Partnership in an amount equal to $20,000,000 shall be made to the General Partner and Arvida/JMB Associates. Such distribution shall be made whether or not the Partnership receives any Capital Investments with respect to Additional Limited Partnership Interests in connection with the public offering contemplated by Section 3.3A. Prior to making such distribution, the General Partner shall determine that there is sufficient working capital available or sufficient funds available from debt financing to permit such distribution to be made. SECTION 4.2 Allocation of Profits or Losses A. The Profits or Losses for each fiscal year of the Partnership (or portion thereof) during the term of this Agreement for any period beginning on or after the First Admission Date shall, except as provided in Sections 4.2F and 4.3G, be allocated as follows: (i) Profits shall be allocated, with respect to any such fiscal period, such that the General Partner, each of the Associate Limited Partners and ML Real Estate Associates II shall be allocated Profits equal to the amount of Cash Flow actually distributed to each of them, respectively, for such fiscal period (without taking into account any distribution made pursuant to the last paragraph of Section 4.1), except that in all events the General Partner shall be allocated at least 1% of Profits, and the Holders (other than ML Real Estate Associates II) shall be allocated the remaining Profits and (ii) Losses shall be allocated, with respect to any such fiscal period, 1% to the General Partners 1% to the Associate Limited Partners (collectively) and 98% to the Holders, except that, if ML fungibility is achieved as provided in Section 4.3G, then with respect to any fiscal period which commences on or after the date on which Interests are first listed and quoted or reported pursuant to an election made by the General Partner under Section 5.5J(i)(a), for the purpose of allocating Profits under clause (i) above. ML Real Estate Associates II shall not be allocated Profits equal to the amount of Cash Flow actually distributed to it but instead shall be treated for such purpose as a Holder (other than ML Real Estate Associates II). The Profits of the Partnership for each fiscal year of the Partnership (or portion thereof) during the term of this Agreement for any period ending prior to the First Admission Date shall, except as provided in Section 4.2F, be allocated 1% to the General Partner, 98% to the Associate Limited Partners (collectively), and 1% to the Initial Limited Partner and (commencing on its acquisition of a Partnership interest under Section 3.3G) ML Real Estate Associates II, and the Losses of the Partnership for each such fiscal year (or portion thereof) shall be allocated 70% to the General Partner, 29% to the Associate Limited Partners (collectively), and 1% to the Initial Limited Partner and (commencing on its acquisition of a Partnership interest under Section 3.3G) ML Real Estate Associates II. Such Profits or Losses shall be determined on the basis of an interim closing of the Partnership's books on the First Admission Date. B. Syndication commissions for any fiscal year of the Partnership shall be allocated to the Holders of Interests in an amount equal to the syndication commission actually paid by the Partnership in connection with the acquisition of the Interest of such Holder. Such allocation shall take into account the existence of any discount applicable to the syndication commission of a particular Holder. C. No allocation of Losses (which include items thereof) under Section 4.2A shall be made to any Holder to the extent that such allocation (a) would create a deficit balance in such Holder's Capital Account which in absolute amount exceeds the Minimum Gain allocable to such Holder as of the end of the fiscal year for which such allocation would be made or (b) in the good faith judgment of the General Partner and upon advice by the Partnership's independent certified public accountants or legal counsel, would otherwise likely not be respected under Section 704(b) of the Code. In any such event, the allocation of such Losses thereof to such Holder shall be reduced to that extent. D. Any credits of the Partnership as determined for Federal income tax purposes for a fiscal year shall be allocated as Profits of the Partnership in accordance with Section 4.2A. In the event the adjusted tax basis of any "Section 38 property" (within the meaning of Section 48 of the Code) of the Partnership is increased pursuant to Section 48(q)(2) of the Code, such increase shall be allocated among the Partners (as if such item were in the nature of income or gain) in the same proportions as the investment tax credit that is recaptured with respect to such property is shared among the Partners. Any reduction in the adjusted tax basis or cost of (or the qualified investment in) such Section 38 property made pursuant to Section 48(q)(1) of the Code shall be allocated among the Partners (as if such item were in the nature of an expense or loss) in the same proportions as the credit for such Section 38 property is allocated under this Section 4.2D. E. Notwithstanding anything to the contrary that may be expressed or implied in this Agreement, the interest of the General Partner, in each material item of Partnership income, gain, loss, deduction or credit will be equal to at least 1% of each such item at all times during the existence of the Partnership. In determining the General Partner's interest in such items, Limited Partnership interests owned by the General Partner shall not be taken into account. F. Beginning on and after September 30, 1987, any gain which is realized by the Partnership (or any partnership or joint venture through which the Partnership holds Property) on the sale or other disposition of Property which constitutes Distributed Gain (as defined below) allocable to such Property shall be allocated to the General Partner and Arvida/JMB Associates. "Distributed Gain" with respect to all Properties shall be equal to an amount equal to (i) the product of the Built-In Gain (as defined below) multiplied by a fraction, the numerator of which is the amount of Cash Flow distributed to the General Partner and Arvida/JMB Associates under the last paragraph of Section 4.1 and the denominator of which is the Built-In Gain, minus (ii) the amount of any Profit allocated to the General Partner and Arvida/JMB Associates pursuant to the third succeeding sentence of this Section 4.2F. "Built-In Gain" shall be equal to the amount of net gain which would be realized in the aggregate by the Partnership for Federal income tax purposes if, on September 30, 1987, all Properties were sold for their fair market value as determined by the General Partner. The General Partner shall determine the portion of Built-In Gain attributable to each Property and shall allocate at such time or times as may be required under this Agreement Distributed Gain among Properties to which Built-In Gain is attributable on a proportionate basis based upon the ratio that the portion of Built-In Gain attributable to each Property bears to the aggregate Built-In Gain. Notwithstanding any allocation contained in this Agreement (but subject to Section 4.2E and the succeeding sentences of this Section 4.2F), if at any time Profit is realized by the Partnership, any current or anticipated reduction of the share of the Partnership's indebtedness (including the Partnership's share of partnership or joint venture indebtedness) of any, some or all of the General Partner, Arvida/JMB Associates, Arvida/JMB Partners or ML Real Estate Associates II or any anticipated cash distribution to the General Partner, Arvida/JMB Associates, Arvida/JMB Partners or ML Real Estate Associates II would cause the deficit balances in absolute amount in the Capital Accounts of any, some or all of the General Partner, Arvida/JMB Associates, Arvida/JMB Partners or ML Real Estate Associates II to be greater than its or their share of the Partnership's indebtedness (including the Partnership's share of partnership or joint venture indebtedness) after such reduction or distribution, then the allocation of Profit under this Article Four to the General Partner, Arvida/JMB Associates/ Arvida/JMB Partners and ML Real Estate Associates II shall be increased (to be shared by them in proportion to the deficit balances in their respective Capital Accounts) to the extent necessary to cause the deficit balance in the Capital Account of each of the General Partner, Arvida/JMB Associates, Arvida/JMB Partners and ML Real Estate Associates II to be no less than their respective shares of the Partnership's indebtedness (including the Partnership's share of partnership or joint venture indebtedness) after such reduction or distribution; provided, however, that the allocation of Profit contained in this sentence shall not apply to ML Real Estate Associates II if at the times as of which such allocation is made ML Fungibility has been achieved as provided in Section 4.3G, and further provided that to the extent the amount of Profit allocated under this sentence is insufficient to cause the deficit balance in the Capital Account of each of the General Partner, Arvida/JMB Associates, Arvida/JMB Partners and ML Real Estate Associates II to be no less than their respective shares of the Partnership's indebtedness (including the Partnership's share of partnership or joint venture indebtedness) after such reduction or distribution, such Profit shall be allocated, until Profit in an aggregate amount equal to $20,000,000 has been allocated under this Section 4.2F to the General Partner and Arvida/JMB Associates for the current and prior Partnership years, first to the General Partner and Arvida/JMB Associates (in proportion to the respective deficit balances in their Capital Accounts), in preference and priority to Arvida/JMB Partners and ML Real Estate Associates II, to the extent necessary to cause the deficit balance in the Capital Account of each of the General Partner and Arvida/JMB Associates to be no less than their respective shares of the Partnership's indebtedness (including the Partnership's share of partnership or joint venture indebtedness) after such reduction or distribution. Not withstanding anything to the contrary in this Agreement (but after giving effect to Section 8.2 and subject to the last sentence of this Section 4.2F), if the General Partner or Arvida/JMB Associates has a deficit balance in its Capital Account following the Liquidation of its interest in the Partnership, as determined after taking into account all Capital Account adjustments for the Partnership taxable year during which such Liquidation occurs (other than any adjustment for a capital contribution made pursuant to this sentence) and after adjusting Capital Accounts for actual or anticipated Profits or Losses allocable among the Partners in accordance with, or as if there had been (in accordance with adjustments under the first sentence of Section 11.4), an actual disposition of the Partnership properties at their fair market value, the General Partner and Arvida/JMB Associates will make capital contributions in an aggregate amount (to be shared by them in proportion to the deficit balances in their respective Capital Accounts) which is equal to the smaller of (i) such deficit balances or (ii) $20,000,000; provided, however, that neither the $20,000,000 amount specified in (ii) nor the General Partner's share of such amount shall limit any contribution which the General Partner is required to make under Section 8.2. Such capital contributions shall be made on or before the end of the Partnership taxable year during which such Liquidation occurs (or, if later, within 90 days after the date of such Liquidation). Notwithstanding the foregoing, if the distributions to the General Partner and Arvida/JMB Associates under the last paragraph of Section 4.1 were determined not to cause (without taking into account any Profit or Loss which might arise from such distribution), in the fiscal year in which such distribution occurs, an aggregate reduction in their capital accounts (as determined under Section 704(b) of the Code) equal to the amount of such distribution, then the first four sentences of this Section 4.2F shall not apply for any period. SECTION 4.3 Determination of Allocations and Distributions Among Partners A. Any Assignee Holder of an Additional Limited Partnership Interest who is recognized as such pursuant to Section 7.2 shall be allocated all Profits or Losses of the Partnership allocable, and shall be entitled to all Cash Flow distributable, with respect to such Additional Limited Partnership Interest as herein provided; provided, however, that without limitation the share of Profits allocable with respect to Additional Limited Partnership Interests held by ML Real Estate Associates II shall be as provided in Sections 4.2A, 4.2F and 4.3G. Except as otherwise provided in Sections 4.2C, 4.3D, 4.3E, 4.3F and 4.3G and subject to the proviso in the preceding sentence, all Profits or Losses allocable with respect to Limited Partnership Interests and, except as provided in Section 3.3B, all Cash Flow distributable with respect to Limited Partnership Interests, shall be allocated or distributed, as the case may be, to each of the Holders of Interests entitled to such allocation or distribution in the ratio which the Capital Investments with respect to such Limited Partnership Interests bear to the aggregate Capital Investments with respect to all Limited Partnership Interests entitled to such allocation or distribution. B. Except as provided in Sections 4.3C, 4.3E and 4.3G, all Profits or Losses allocable with respect to Limited Partnership Interests shall be allocated, and all Cash Flow distributable with respect to Limited Partnership Interests shall be distributed, as the case may be, to the Holders of Interests recognized as such as of the last day of the fiscal period for which such allocation or distribution is to be made. C. Except in the case of Limited Partnership Interests held by ML Real Estate Associates II during any fiscal quarter before or which is the fiscal quarter in which ML Fungibility is achieved as provided in Section 4.3G, to the extent permitted by law, all Profits or Losses of the Partnership for a fiscal year allocable with respect to any Limited Partnership Interest which may have been transferred during such year shall be allocated between the transferor and the transferee based upon the number of quarterly periods that each was the recognized Holder of Interests, without regard to the results of Partnership operations during particular quarterly periods of such fiscal year and without regard to whether cash distributions were made to the transferor or transferee. D. Except as provided in the last paragraph of Section 4.1 and subject to the second paragraph of Section 4.1, the General Partner's and Associate Limited Partners' distributive share of Cash Flow shall be distributed 10.1% to Arvida/JMB Partners, to the General Partner in an amount equal to 1% of the total Cash Flow being distributed at such time under Section 4.1 (i) on 4.1 (ii), as the case may be, and the remainder to Arvida/JMB Associates. Profits or Losses allocable to the Associate Limited Partners (collectively) under the second paragraph of Section 4.2A and Losses allocable to the Associate Limited Partners under the first paragraph of Section 4.2A shall be allocated 89.0% to Arvida/JMB Associates and 11.0% to Arvida/JMB Partners. Except as otherwise provided in Section 4.2F, distributive shares of Cash Flow and Distributed Gain allocable to the General Partner and Arvida/JMB Associates under the last paragraph of Section 4.1 and under Section 4.2F shall be distributed or allocated, respectively, 1% to the General Partner and 99% to Arvida/JMB Associates. Profits or Losses allocable to the Initial Limited Partner and ML Real Estate Associates II under the second paragraph of Section 4.2A shall be allocated between them in the ratio of the respective amounts paid by them for their Partnership Interests at that time. Notwithstanding anything to the contrary in Section 4.2A and this Section 4.3D, any Partnership deduction directly resulting from the receipt of a Partnership Interest by any Partner or Holder (other than a Holder which is not ML Real Estate Associates II) shall be allocated entirely to such Partner or Holder. E. In the event that there are Later Admission Dates, all Profits or Losses allocable to the Holders of Interests for the period from the First Admission Date or any such Later Admission Date through the next succeeding Later Admission Date will be allocated in accordance with Section 4.3A solely to the Holders of Interests as of or prior to such preceding First Admission Date or Later Admission Date. For purposes of this Section 4.3E, Holders of Interests will be deemed to have acquired their Limited Partnership Interests on the first day or such other day as the General Partner may determine of the month in which such Additional Limited Partnership Interests have been assigned to such Persons. Profits or Losses incurred for the period from any such First Admission Date or Later Admission Date through the next succeeding Later Admission date will be allocated on the basis of an interim closing of the Partnership's books on such Later Admission Date. The General Partner may, in its sole and absolute discretion and at any time, adopt any other convention or conventions (including without limitation a daily, semi-monthly or full-month convention) regarding the distribution of Cash Flow or the allocation of Profits or Losses with respect to any Limited Partnership Interest that may be or may have been transferred during any year. F. Subject to Section 4.2C, if at the time of an allocation pursuant to Section 42.A of Profits or Losses for a fiscal year of the Partnership (or portion thereof) during the term of this Agreement for a period beginning on or after the Final Admission Date the Capital Accounts with respect to each Limited Partnership Interest (other than any Limited Partnership Interest held by ML Real Estate Associates II) are not then equal: (i) Profits allocated to the Holders (other than ML Real Estate Associates II) pursuant to Section 4.2A shall be allocated to the Holder (other than ML Real Estate Associates II) of a Limited Partnership Interest with a Capital Account which is smaller in amount (or greater in deficit) than the Capital Account for any other such Interest (other than any Limited Partnership Interest held by ML Real Estate Associates II) until the balance in such Capital Account equals the balance of the Capital Account of such Limited Partnership Interest (other than any Limited Partnership Interest held by ML Real Estate Associates II) which was next smallest in amount (or next greatest in deficit) before such allocation, and thereafter such Profits shall continue to be allocated to each successive Holder or groups of Holders of Interests (other than ML Real Estate Associates II) with Capital Accounts which are smallest in amount (or greatest in deficit), until either the balances of all Capital Accounts with respect to Limited Partnership Interests (other than any Limited Partnership Interest held by ML Real Estate Associates II) are equal or all such Profits have been allocated; and (ii) Losses allocated to the Holders pursuant to Section 4.2A shall be allocated to the Holder (other than ML Real Estate Associates II) of a Limited Partnership Interest with a Capital Account which is greater in amount (or smaller in deficit) than the Capital Account for any other such Interest (other than any Limited Partnership Interest held by ML Real Estate Associates II) until the balance in such Capital Account equals the balance of the Capital Account of such Limited Partnership Interest (other than any Limited Partnership Interest held by ML Real Estate Associates II) which was next greatest in amount (or next smallest in deficit) before such allocation, and thereafter such Losses shall continue to be allocated to each successive Holder or groups of Holders of Interests (other than ML Real Estate Associates II) with Capital Accounts which are greatest in amount (or smallest in deficit), until either the balances of all Capital Accounts with respect to Limited Partnership Interests (other than any Limited Partnership Interest held by ML Real Estate Associates II) are equal or all such Losses have been allocated. The foregoing subparagraphs (i) and (ii) shall not apply to, or with reference to, any Limited Partnership Interest held by ML Real Estate Associates II. G. In the event that the General Partner shall elect under Section 5.5(i)(a) to cause Interests to be listed and quoted on a United States national exchange or to be reported by the National Association of Securities Dealers Automated Quotation System and Interests of ML Real Estate Associates II are so listed and quoted or reported, to the extent permitted by law and subject to Section 4.2F, for the fiscal year of the Partnership during the term of this Agreement in which such Interests are first listed and quoted or reported pursuant to such election, Profits (in the form of gross income) realized by the Partnership during the portion of such fiscal year ending on the day immediately preceding the date on which such Interests are first so listed and quoted or reported shall be allocated to ML Real Estate Associates II in such amount as is necessary to cause the Capital Account for each Limited Partnership Interest held by ML Real Estate Associates II and issued to it under Section 3.3G to equal the largest balance in the Capital Account for any Limited Partnership Interest held by a Holder (other than ML Real Estate Associates II (the completion of such equalization pursuant to this Section 4.3G or another provision of this Agreement and such listing and quotation or reporting is herein referred to as "ML Fungibility"). Such allocation of Profits (in the form of gross income) to ML Real Estate Associates II shall be made as of the end of the day immediately preceding the date on which such Interests are first listed and quoted or reported pursuant to the aforementioned election. ARTICLE FIVE RIGHTS, POWERS AND DUTIES OF GENERAL PARTNER SECTION 5.1 Management and Control of the Partnership A. Subject to the Consent of the Limited Partners where required by this Agreement, the General Partner, within the authority granted to it under this Agreement, shall have the exclusive right to manage the business of the Partnership and is hereby authorized to take any action of any kind and to do anything and everything it deems necessary in accordance with the provisions of this Agreement. B. No Limited Partner (except one who may also be a General Partner, and then only in its capacity as General Partner within the scope of its authority hereunder) shall participate in or have any control over the Partnership business or shall have any authority or right to act for or bind the Partnership. The Limited Partners hereby Consent to the exercise by the General Partner of the powers conferred on it by this Agreement. C. The General Partner shall initially, upon completion of the offering contemplated by the Prospectus, establish Reserves for working capital and to pay taxes, insurance, Debt Service, repairs, replacements or renewals, or other costs and expenses incident to the ownership or operation of the Properties and for such other purposes, as the General Partner may determine, in an amount equal to not less than 2% of the Gross Proceeds of the Offering and thereafter shall maintain such Reserves in such amounts as the General Partner deems appropriate under the circumstances from time to time. D. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. Reimbursements to the General Partner or any Affiliates shall not be allowed (other than for Organization and Offering Expenses, which shall be allowed), except for (i) the actual cost to the General Partner or such Affiliates of goods, materials and services used for or by the Partnership and obtained from entities which are not affiliated with the General Partner; (ii) salaries and related salary expenses for administrative services which could be performed directly for the Partnership by independent parties, such as legal, accounting, transfer agent, data processing, duplicating and other such services; (iii) Partnership reports and communications to investors; (iv) other administrative services, provided that such services are necessary to the prudent operation of the Partnership; and (v) reimbursements to Arvida in connection with its carrying out the duties described in the Management and Supervisory Agreement authorized in Section 5.2 a (ix) hereof. No reimbursement under clause (ii) through (v) above shall be permitted for services for which the General Partner or its Affiliates receive a separate fee. No reimbursement under clause (ii) through (iv) above shall be permitted for (a) the salaries of and related salary expenses incurred by any Controlling Person (as defined hereinafter) and (b) any indirect general or administrative overhead expenses, such as rent, travel expenses and other items generally falling under the category of overhead, incurred in performing services for the Partnership which are not directly attributable to such services. "Controlling Person" for purposes of this Section 5.1D shall mean any Person, regardless of title, who performs executive or senior management functions for the Sponsor or the General Partner similar to those of directors, executive management and senior management, or any Person who either holds a 5% or more equity interest in the Sponsor or the General Partner or has the power to direct or cause the direction of the Sponsor or the General Partner, whether through the ownership of voting securities, by contract, or otherwise, or, in the absence of a specific role or title, any Person having the power to direct or cause the direction of the management level employees and policies of the Sponsor or the General Partner. It is not intended that every Person who carries a title such as vice president, senior vice president, secretary or treasurer be included in the definition of Controlling Person. In no event shall any amount charged to the actual cost of such services or (b) in the case of reimbursements under clause (ii) through (iv) above 90% of the amount which the Partnership would be required to pay to independent parties for comparable services. In the Partnership's annual report to Limited Partners, there shall be provided an itemized breakdown of reimbursements made pursuant to this Section 5.1D. The reimbursement for expenses provided for in this Section 5.1D shall be made regardless of whether any distributions are made to the Limited Partners under the provisions of Section 4.1. The provision of any goods, material or services for which reimbursements are authorized under Section 5.1D(i) shall be set forth in a written contract which precisely describes the goods, materials or services to be provided and all compensation therefor. Such contract shall provide that it may be modified only with the consent of Limited Partners holding a majority of the then outstanding Limited Partnership Interests (except as to immaterial or conforming modifications, which shall require only the consent of the General Partner) and that it shall be terminable by either party, without penalty, upon sixty (60) days' prior written notice. E. In the event the General Partner deems the approximately 200-acre site near Sarasota which is owned by an existing joint venture in which the Partnership owns an interest to be suitable for development as a regional shopping mall or other shopping center, development of such Property may be done jointly with Affiliates of JMB. In the event of such a development through a joint venture with Affiliates of JMB, the existing joint venture's interest in the land would be valued at its appraised fair market value, and the Affiliate would make a pro rata cash contribution. All other contributions would be strictly pro rata. Such joint venture development shall not be entered into by the Partnership unless (x) there are no duplicate property management or other fees, and (y) the Partnership and such Affiliate each enjoy a right of first refusal as regards the sale of the equity interest of the other. SECTION 5.2 Authority of the General Partner A. Except to the extent otherwise provided herein, the General Partner, for, and in the name and on behalf of, the Partnership is hereby authorized: (i) to acquire, either directly or indirectly through any joint venture, joint participation, partnership (other than any public or privately offered limited partnership) or otherwise, by purchase, lease, exchange or otherwise any real or personal property (including the Properties) which may be necessary, convenient or incidental to the accomplishment of the purposes of the Partnership; provided, however, that real properties shall not be acquired at an aggregate purchase price in excess of their aggregate appraised value as determined by appraisals prepared by competent independent appraisers, and further provided that investments by the Partnership in other partnerships or ventures shall be limited to partnerships or ventures which own and operate (directly or through an interest in another partnership or joint venture) a particular Property in which the Partnership (either alone or with an Affiliate of the General Partner) acquires a controlling interest and which do not involve duplicate property management or other fees; (ii) to operate, maintain, finance, improve, own, grant options with respect to, sell, convey, assign, mortgage, exchange or lease and to cause to have constructed any real estate and any personal property necessary, convenient or incidental to the accomplishment of the purposes of the Partnership and to perform construction work or hire contractors to perform construction work in connection with any of the foregoing: (iii) to execute any and all agreements, contracts, documents, certifications and instruments necessary or convenient in connection with the development, management, maintenance and operation of the Properties; (iv) to borrow money and issue evidences of indebtedness necessary, convenient or incidental to the accomplishment of the purposes of the Partnership, and to secure the same by mortgage, pledge or other lien on any Properties or other assets of the Partnership; provided, however, that in connection with the borrowing of money, recourse for the repayment of which is limited solely to property of the Partnership, no lender shall be granted or acquire, at any time as a result of making such a loan, any direct or indirect interest in the profits, capital or property of the Partnership other than as a secured creditor; (v) to execute, in furtherance of any or all of the purposes of the Partnership, any deed, lease, mortgage, mortgage note, bill of sale, contract or other instrument purporting to convey, exchange or encumber the real or personal property of the Partnership; (vi) to prepay in whole or in part, refinance, recast, increase, modify or extend any mortgages affecting the Properties and in connection therewith to execute any extensions or renewals of mortgages on any of the Properties; (vii) to execute an agency agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated pursuant to which said firm would assist the Partnership in the sale of Interests and pursuant to which the Partnership would agree, subject to the final four sentences of Section 5.8, to indemnify and hold harmless said firm or any selected dealer from any liability incurred by it in so acting as agent for the Partnership; (viii) to deal with, or otherwise engage in business with, or provide service to and receive compensation therefor from, any Person who has provided or may in the future provide any services to, lend money to, sell property to, or purchase property from, any Affiliate of the General Partner; provided, however, that no such dealing, engaging in business or providing services may involve any direct or indirect payment by the Partnership of any rebate or any reciprocal arrangement which would have the effect of circumventing any restriction set forth herein upon dealings with Affiliates of the General Partner; (ix) to execute the Management and Supervisory Agreement with Arvida; (x) to, in its sole discretion, make or revoke (and in the case of any partnership or joint venture through which the Partnership holds an interest in property, cause to be made or revoked) the election referred to in Section 754 of the Code; (xi) to request such information from any Holder as may be reasonably required (as determined by the General Partner) to comply with any Federal, state or local tax laws; (xii) to, in its sole discretion, designate itself or any other General Partner as the Tax Matters Partner within the meaning of Section 6231(a)(7) of the Code; (xiii) to engage in any kind of activity and to perform and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of the purposes of the Partnership, as may be lawfully carried on or performed by a partnership under the laws of each state in which the Partnership is then formed or qualified; and (xiv) to obtain consulting services from ML Real Estate Associates II or its Affiliates. In the case of the making or revocation of any election under (x) above or any designation under (xii) above, each of the Partners will, upon request, supply such information and execute such documents as are necessary to effectuate such election or revocation, or such designation. In the case of any request for information under (xi), any Holder to which any such request is sent shall comply with such request. B. Any Person dealing with the Partnership or the General Partner may rely upon a certificate signed by the General Partner, thereunto duly authorized, as to: (i) the identity of any General Partner or Limited Partner hereof; (ii) the existence or non-existence of any fact or facts which constitute a condition precedent to acts by a General Partner or which are in any other manner germane to the affairs of the Partnership; (iii) the Persons who are authorized to execute and deliver any instrument or document of the Partnership; or (iv) any act or failure to act by the Partnership or as to any other matter whatsoever involving the Partnership or any Partner. C. The General Partner shall maintain in its records for at least five years any appraisal required to be obtained under the provisions of clause (i) of section 5.2A. SECTION 5.3 Authority of Partners to Deal with Partnership A. Without limitation upon the other powers set forth herein, the General Partner is expressly authorized (and where indicated, directed), in the name of and on behalf of the Partnership, to do the following: (i) The General Partner shall commit a percentage of Gross Proceeds of the Offering to Investment in Properties which, at a minimum, is equal to the greater of: (i) 80% of the Gross Proceeds of the Offering reduced by .1625% for each 1% of the aggregate indebtedness of the Partnership; or (ii) 67% of Gross Proceeds of the Offering. For purposes of this calculation, "aggregate indebtedness" is the percentage resulting when such aggregate indebtedness is divided by the aggregate purchase price of all Properties, excluding Front-End Fees. If the Front-End Fees must be reduced for the Partnership to commit the minimum percentage of Gross Proceeds of the Offering to Investment in Properties as set forth above, the General Partner shall cause JMB or its Affiliates to reimburse the Partnership for the amount of any such excess Acquisition Fees and Acquisition and Financing Guaranty Fee received by them. (ii) The General Partner may enter into an agency agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated providing for the payment of commissions to JMB Securities Corporation for participating as a selected dealer in the offering of Additional Limited Partnership Interests to the public pursuant to Section 3.3; provided, however, that there shall be no selling commissions paid or received by any Person in connection with the sale of Additional Limited Partnership Interests to (and for the account of) any Assignee Holder who is the General Partner, an Affiliated Person of the General Partner or an officer, director, shareholder, employee or partner thereof. (iii) The General Partner may, subject to the conditions of this Agreement, enter into agreements with and pay fees to JMB or other Affiliated Persons of the General Partner in consideration of property management and leasing services respecting commercial and industrial Properties which are necessary to the prudent operation of the Partnership (it being understood and agreed that the provision of such property management and leasing services does not constitute a part of the duties or obligations of the General Partner as a general partner of the Partnership); provided, however, that the General Partner shall not enter into any agreement for property management with an Affiliate on terms less favorable to the Partnership than those customarily charged for similar services in the relevant geographical area and in no event shall fees to an Affiliate of the General Partner for property management and leasing services exceed the following schedule: (a) in the case of industrial or commercial Property other than that described in the following subparagraph (b), the maximum fee from such Property shall be 6% of the gross receipts from the Property being managed where the Affiliate of the General Partner performs leasing, re-leasing and leasing- related services, and the maximum fee shall be 3% of gross receipts from the Property being managed if the Affiliate of the General Partner does not perform leasing, re-leasing and leasing- related services with respect to the Property; and (b) in the case of industrial or commercial Properties which are leased for ten or more years on a net (or a similar) basis, the maximum fee shall be 1% of the gross receipts from the Property being managed, except for a one-time initial leasing fee of 3% of the gross receipts on each lease payable over the first five full years of the original term of the lease. Where a property management agreement with an Affiliate has been entered into with respect to a Property, no fees in addition to those payable to such Affiliate under such agreement shall be paid by the Partnership to any Persons in consideration of their performance of property management, bookkeeping services or other property management services with respect to the same Property. Any property management agreements with Affiliates shall be terminable by either party, without penalty, upon sixty (60) days' prior written notice and may be modified only with the consent of the Holders of the majority of the Interests (except as to immaterial or conforming amendments which shall require only the consent of the General Partner). (iv) The General Partner may pay or cause to be paid brokerage commissions to JMB Insurance Agency, Inc. or other Affiliated Persons of the General Partner in connection with insurance covering the Properties subject to the conditions that: (a) before any such brokerage services are provided, there will have been received quotations from two independent insurance brokers or carriers or underwriters relating to the proposed coverage, which quotations shall be upon coverage and terms comparable to those proposed to be provided by JMB Insurance Agency, Inc., and such agency shall not provide such insurance brokerage services unless it can obtain such insurance at a cost which is no greater than the lower of the two unaffiliated entities; (b) if at any time JMB Insurance Agency, Inc. ceases to derive at least 75% of its income from its business with entities which are not sponsored by JMB and its Affiliates, JMB Insurance Agency, Inc. shall not earn income from any additional insurance placements on behalf of the Partnership or any Property then owned by it; and (c) any agreement with Affiliates to provide insurance brokerage services to the Partnership shall be terminable by either party, without penalty, upon sixty (60) days' prior written notice. (v) The General Partner may, in the event that Gross Proceeds of the Offering are less than $325,000,000, in its discretion, (a) obtain additional financing to pay the costs of owning the Properties; (b) if the additional financing under the immediately preceding clause (a) is insufficient, to enter into a joint venture or joint participation with an Affiliate or Affiliates of the General Partner which would provide for the ownership of such Properties on a pro rata basis; provided, however, that with respect to such investment with an Affiliate, (s) the Partnership and such Affiliate, considered together, have or acquire a controlling interest in any ventures or partnerships which own the Properties, (t) there are no duplicate property management or other fees, (u) the Partnership's investment is on substantially the same terms and conditions as the investment of such Affiliate, (v) the purchase price of the Partnership's investment has been confirmed by independent appraisal as not greater than the appraised value of such investment, (w) such investment shall not result in the breach, abrogation or circumvention of any of the terms, conditions or provisions of this Agreement, (x) the investments are not in publicly or privately offered limited partnerships or other publicly offered real estate investment entities, (y) the compensation to the General Partner, JMB and their Affiliates received attributable to such investment is substantially identical to the compensation received by the general partners and sponsors of such Affiliate and by the Affiliates of such general partners and sponsors attributable to such investment, and (z) the Partnership and such Affiliate must each enjoy a right of first refusal as regards the sale of the equity interest of the other. (vi) The General Partner may, notwithstanding any other provision of this Agreement, pay or cause to be paid to an Affiliate allocable reimbursements of overhead expenses with respect to any Partnership Property being developed pursuant to Section 5.1E as a mall or shopping center through a joint venture with one or more Affiliates of JMB, together with development fees in connection therewith in an amount equal to the lesser of 5% of the cost of development or the amount which would be charged by an independent third party rendering comparable services; provided, however, that such joint venture shall obtain a report from an independent appraiser of the appraised value of the mall or shopping center upon completion of the Property; provided, further, that to the extent that the actual costs of development, including the development fees paid to such Affiliate, exceed such appraised value of the project, the development fees will be remitted by such Affiliate to the Partnership to the extent of the excess, if any, of such development costs over such appraised value. Development services provided by such Affiliate shall be embodied in a written contract which describes the terms thereof and the compensation to be paid therefor. Such contract shall be terminable by either party, without penalty, upon sixty (60) days' written notice, and may be modified only with the consent of the Holders of the majority of the Interests (except as to immaterial or conforming amendments which shall only require the consent of the General Partner). Such contract shall be disclosed to all Partners in the reports provided pursuant to Sections 9.4A and 9.4C (stating the compensation paid to such Affiliate). Such Affiliate must be independently engaged in performing development services rendered for the development of shopping malls or shopping centers. (vii) The validity of any transaction, agreement or payment involving the Partnership and the General Partner or any Affiliate thereof not otherwise prohibited by the terms of this Agreement shall not be affected by reason of the relationship between the Partnership and the General Partner or such Affiliate. All transactions, agreements or payments involving the Partnership and the General Partner or any Affiliate thereof shall be on terms no less favorable to the Partnership than those available to the Partnership in similar dealings with unaffiliated third parties. B. The General Partner shall be subject to the following prohibitions: (i) except to the extent that related commissions inure to the benefit of the Partnership neither the General Partner nor any Affiliate of the General Partner shall be given the exclusive right to sell or exclusive employment to sell any Community Property of the Partnership and no amounts shall be computed under Section 4.1 as 2% of the selling price of a Community Property under Section 4.1(ii) unless the General Partner or Affiliates of the General Partner perform substantial services in connection with the sale of a Community Property; (ii) neither any General Partner nor any Affiliated Person of the General Partner shall receive directly or indirectly a commission or fee in connection with the reinvestment of the proceeds of the sale, exchange or refinancing of any Property; (iii) neither any General Partner nor any Affiliated Person of the General Partner shall loan money to the Partnership unless (a) the principal amount of such financing shall be scheduled to be paid over a period of less than 48 months, and more than 50% of the principal amount of such financing shall be scheduled to be paid during the first 24 months and (b) the interest rates and other finance charges and fees shall not be in excess of the lessor of (x) if the loan was made in connection with a particular Property, the amounts that are charged by unrelated banks on comparable loans for the same purpose in the locality of the Property in connection with which the loan was made or (y) the rate per annum equal to 2% plus the reference rate of Continental Illinois National Bank and Trust Company of Chicago, or provide permanent financing to the Partnership on a Property owned by the Partnership or make loans with a prepayment charge or penalty which are evidenced or secured by either a first or junior or all-inclusive note or mortgage except to the extent that such prepayment charge or penalty is attributable to an underlying encumbrance. In the event the Partnership utilizes any all-inclusive note, said note shall provide that (a) the Partnership shall receive credit on its obligation under said note for payments made by the Partnership directly on the underlying encumbrance; (b) that a bank, escrow company or other paying agent shall collect payments (other than amounts not to be applied to the underlying encumbrance) on the all inclusive note and make disbursements therefrom to the holder of the underlying encumbrance prior to making any disbursement to the holder of the all-inclusive note or, in the alternative, all payments on the all-inclusive note and underlying notes shall be made directly by the Partnership; and (c) the rate of any interest charged by the General Partner or an Affiliated Person on such all-inclusive note will not exceed the rate of interest payable to the holder on the underlying encumbrance. C. Any agreements, contracts and arrangements with the General Partner or Affiliated Person of the General Partner permitted by Section 5.3(iii) and Section 5.3A(vii) (with respect to both such sections to the extent not otherwise specifically authorized in this Agreement) shall be subject to the following conditions: (i) any such agreements, contracts or arrangements shall be embodied in a written contract which describes the subject matter thereof and all compensation to be paid therefor; (ii) no rebates or "give-ups" may be received by the General Partner or any such Affiliated Person, nor may the General Partner or any such Affiliated Person participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of this Agreement; (iii) neither the General Partner (in any capacity other than a General Partner) nor any such Affiliated Person may act as paying or purchasing agent for the Partnership and no funds of the Partnership may be paid to the General Partner or any such Affiliated Person by way of reimbursement for Partnership expenses other than Organization and Offering Expenses or expenses as permitted by Section 5.1D and the amount of compensation paid to the General Partner or any such Affiliated Person may not exceed 90% of the amount which the Partnership would be required to pay to independent parties; (iv) any such agreements, contracts or arrangements shall be fully and promptly disclosed to all Partners in the reports provided in Sections 9.4A and 9.4C (stating the compensation to be paid by the Partnership); (v) any such agreements, contracts or arrangements shall be terminable by either party, without penalty, upon sixty (60 days' prior written notice and may be modified only with the Consent of the Holders of a majority of the Interests (except as to immaterial or conforming amendments which shall only require the consent of the General Partner); and (vi) the General Partner or the Affiliated Person performing the services for the Partnership previously shall have been independently engaged in performing services of the type to be performed for the Partnership for a period of at least two years. SECTION 5.4 Restrictions on Authority of General Partner A. Without the Consent of all the Limited Partners, the General Partner shall not have the authority to: (i) do any act in contravention of this Agreement; (ii) do any act which would make it impossible to carry on the ordinary business of the Partnership; (iii) confess a judgment against the Partnership; (iv) possess Partnership Property, or assign its rights in specific Partnership Property, for other than a Partnership purpose; (v) admit a Person as a General Partner, except as provided in this Agreement; (vi) admit a Person as a Limited Partner, except as provided in this agreement; (vii) knowingly perform any act that would subject any Limited Partner to liability as a general partner in any jurisdiction; or (viii) invest in junior trust deeds or similar obligations, except that the Partnership may advance a portion of the purchase price of a Property to the seller in the form of a loan, the except that junior trust deeds or similar obligations may be taken back from purchasers of Properties in connection with the sale thereof by the Partnership. B. Except as provided in Section 5.5J and subject to Section 10.3, without the Consent of a majority in interest of the Limited Partners, the General Partner shall not have the authority to: (i) sell or otherwise dispose of all or substantially all of the Partnership's real property developments and investments in real property (except for the sale or other disposition of real property developments or investments in real property (or portions thereof) in the ordinary course of business as contemplated by the Prospectus, including the sale or other disposition of the final real property development or investment in real property remaining as a result of such sales or dispositions); or (ii) elect to dissolve the Partnership. C. The General Partner on behalf of the Partnership shall not purchase, lease or acquire any Property from any General Partner or any Affiliated Person of any General Partner or from any Person in which any General Partner or any Affiliated Person of any General Partner has a material interest. Notwithstanding the foregoing, the General Partner or an Affiliate may purchase Property in its own name, and assume loans in connection therewith and temporarily hold title thereto for the purpose of facilitating the acquisition of such Property or the borrowing of money or obtaining of financing for the Partnership, or completion of construction of the Property, provided that such Property is purchased by the Partnership for an investment no greater than the cost of such Property to the General Partner (or such Affiliate), that there is no amendment to the stated interest rate of any note secured by such Property between the time it is acquired by the General Partner (or such Affiliate) and the time it is acquired by the Partnership and that no other benefit directly or indirectly arising out of such transaction (other than those incidental to the ownership of the property during the time it was held by the General Partner or such Affiliate) is received by any General Partner or Affiliated Person thereof apart from compensation otherwise permitted by this Agreement. Except as otherwise provided herein, the Partnership shall not sell Property to any General Partner or any Affiliated Person of a General Partner. The General Partner or its Affiliates may lease office space in Properties; provided, however, that any such lease (a) shall be for rentals and on terms not less favorable to the Partnership than those available to the Partnership from unaffiliated tenants, (b) shall be terminable on 60 days' prior written notice by the Partnership without penalty and (c) shall provide that any rentals from subleases relating thereto which are in excess of the rentals from such lease shall be paid to the Partnership and, provided further, that no more than 3% of the office space of the Properties shall be leased to JMB or its Affiliates (other than the Partnership and Arvida). The Partnership shall not make any loans to any General Partner or any Affiliate of the General Partner nor to any other Person except as provided in Section 5.4A(viii). The foregoing provision shall not, however, prohibit (i) transfers incident to the formation of joint ventures with Affiliates of the General Partner permitted by Sections 5.1E and 5.3A(v), (ii) the making of loans or advances by the Partnership to a joint venture partnership which owns a particular property as provided for in Section 5.2A(i) or (iii) advancing a portion of the purchase price of a Property to a seller which is not an Affiliated Person of the General Partner in the form of a loan. D. The General Partner shall not on behalf of the Partnership acquire any Property (other than cash) in exchange for Interests in the Partnership. E. The General Partner, in its capacity as such, or in its capacity as a general partner in any partnership or joint venture which may hold title to any Property under Section 5.3A(v), shall not do or cause the Partnership to do, any act which would not be permitted under this Agreement to be done by it as the General Partner if title to such Property were held directly by the Partnership, and shall, in general, act, and cause the Partnership to act, in such capacity in the same manner as if title to such Property were held directly by the Partnership. SECTION 5.5 Duties and Obligations of the General Partner A. The General Partner shall take action which may be necessary or appropriate (i) for the continuation of the Partnership's valid existence as a limited partnership under the laws of the State of Delaware (and of each other jurisdiction in which such existence is necessary to the limited liability of the Limited partners or to enable the Partnership to conduct the business in which it is engaged) and (ii) for the acquisition, development, maintenance, preservation and operation of the Properties as contemplated by the Prospectus in accordance with the provisions of this Agreement and applicable laws and regulations (it being understood and agreed, however, that the performance of day-to-day development and property management services for specific Properties is not the obligation of the General Partner of the Partnership). B. The General Partner shall devote to the Partnership such time as may be necessary for the proper performance of its duties hereunder, but neither the officers nor the directors of the General Partner shall be expected to devote their full time to the performance of such duties. C. The General Partner shall at all times use its best efforts to maintain its net worth at a sufficient level to meet all requirements of the Code, under currently applicable rulings, regulations and policies of the Internal Revenue Service and as hereafter interpreted by the Internal Revenue Service, any agency of the Federal government or the courts, to assure that the Partnership will be classified for Federal income tax purposes as a partnership and not as an association taxable as a corporation, and shall, irrespective of such requirements, maintain its net worth at an amount at least equal to the lessor of 10% of the aggregate capital contributions to the Partnership or $25,000,000. The General Partner shall use its best efforts to cause JMB Holdings Corporation to comply in all respects with the terms of its obligation which shall be comparable to the General Partner's obligation and which shall be set forth in a written commitment of JMB Holdings Corporation to be received by the Partnership prior to the issuance of Additional Limited Partnership Interests under Section 3.3A. D. The General Partner shall take such action as may be necessary or appropriate in order to form or qualify the Partnership under the laws of any jurisdiction in which the Partnership is doing business or in which such formation or qualification is necessary in order to protect the limited liability of the Limited Partners or in order to continue in effect such formation or qualification. The General Partner shall file or cause to be filed for recordation in the office of the appropriate authorities of the State of Delaware, and in the proper office or offices in each other jurisdiction in which the Partnership is formed or qualified, such certificates (including limited partnership and assumed name certificates) and other documents as are required by the applicable statutes, rules or regulations of any such jurisdiction or are required to reflect the identity of the Partners and the amounts of the Capital Investments with respect to the Interests. E. The General Partner shall prepare or cause to be prepared and shall file on or before the due date (or any extension thereof) any Federal state or local information or tax returns required to be filed by the Partnership. The General Partner shall cause the Partnership to pay any taxes payable by the Partnership unless the General Partner determines in its sole discretion to contest the payment of such taxes. F. The General Partner shall obtain and keep in force during the term hereof fire and extended coverage, workmen's compensation and public liability insurance in favor of the Partnership with such insurers and in such amounts as the General Partner shall deem advisable, but in amounts not less ( and with deductible amounts not greater) than those customarily maintained with respect to properties comparable to the Properties. G. The General Partner shall be under a fiduciary duty to conduct the affairs of the Partnership in the best interests of the Partnership and of the Limited Partners, including the safekeeping and use of all Partnership funds and assets for the exclusive benefit of the Partnership, whether or not in its immediate possession or control. H. In the case of any vote, Consent or other action by the Limited Partners pursuant to the terms of this Agreement which shall become binding upon the General Partner, the General Partner, in acting on behalf of the Partnership in the Partnership's capacity as a partner in any partnership or joint venture which may hold title to any Property, shall, to the extent permitted by the partnership agreement relating to such partnership or joint venture, take corresponding or identical action or cause an Affiliate of the General Partner in its capacity as a general partner of such partnership or joint venture to take such action pursuant to the terms of the partnership agreement relating to such partnership or joint venture and, in general, shall not act on behalf of the Partnership in such capacity in a manner inconsistent with any such vote, Consent or other action pursuant to this Agreement. I. The General Partner shall use its best efforts to assure that the Partnership shall not be deemed an investment company as such term is defined in the Investment Company Act of 1940. J. (i) The General Partner shall elect to pursue one of the following courses of action: (a) to cause the Interests of the Holders to be listed and quoted on a United States national exchange or to be reported by the National Association of Securities Dealers Automated Quotation System (which may be done at any time on or prior to the date ten years from the Offering Termination Date); (b) to purchase, or to cause JMB or its Affiliates to purchase, on the date ten years from the offering Termination date all of the Interests of the Holders at their ten appraised fair market value in accordance with the procedure set forth in subparagraph (ii) below; or (c) to commence a liquidation phase on the date ten years from the Offering Termination date which liquidation shall be completed within fifteen years after the Offering Termination Date; provided, however, that if the General Partner elects to pursue the course of action set forth in clause (a) above, the General Partner shall have the authority to cause the Interests of the Holders to be delisted or otherwise not so listed and quoted if the General Partner determines that such listing or quoting may result in adverse tax consequences to the Partnership or any Holder. (ii) In the event that the General Partner elects to purchase, or to cause JMB or its Affiliates to purchase, all of the Interests of the Holders on the date ten years from the Offering Termination Date, an independent appraiser shall be selected by ML Real Estate Associates II and proposed by the General Partner for approval by the Limited Partners. Such appraiser shall be deemed approved by the Limited Partners unless objected to in writing by the Holders of a majority of the then outstanding Limited Partnership Interests within 45 days after Notification thereof is sent by the General Partner. The appraisal shall be requested by the General Partner sufficiently in advance to be received by the date ten years from the Offering Termination Date. The appraisal shall value the Interests as limited partnership interests in the Partnership with all of the rights and obligations pertinent thereto. The cost of obtaining the appraisal shall be borne equally by the Partnership and the purchaser of the Interests. The General Partner shall then submit the appraisal of the value of the Interests to an independent nationally-recognized investment banking firm or real estate advisory company, which shall be retained by the General Partner specifically with respect to the determination of such value. The purchase of the Interests shall not be consummated unless the General Partner has obtained from such investment banking firm or real estate advisory company a letter of opinion, addressed to the Partnership, concluding that the appraised fair market value and the terms of the purchase are fair to the Holders of Interests. The General Partner shall have 120 days from receipt of a favorable letter of opinion to purchase, or to cause JMB or its Affiliates to purchase, the Interests from the Holders at their appraised fair market value. (iii) In the event the General Partner elects to commence a liquidation phase of the Partnership on the date ten years from the Offering Termination Date as provided in subparagraph (i) above, JMB and its Affiliates will be permitted to purchase at appraised fair market value any of the interests held by the Partnership in Properties in which JMB or any of its Affiliates (other than the Partnership) has an interest. The purchase price for the interest of the Partnership shall be determined by independent appraisal in the same manner as set forth in subparagraph (ii) above; provided, however, that the General Partner may not permit the sale of such interest of Partnership to JMB or any Affiliate unless and until the Partnership has received a letter of opinion from an independent nationally recognized investment banking firm or real estate advisory company, addressed to the Partnership, to the effect that the appraised sales price and the other terms of the purchase are fair to the Partnership. K. In the event Arvida uses any goods, services or facilities of the Partnership in connection with any developments or activities in which the Partnership does not own an interest, then the General Partner shall require Arvida to reimburse the Partnership for its allocable cost of such services or assets to the extent the Partnership does not own an interest in such development or activity. SECTION 5.6 Compensation of General Partner The General Partner shall not in its capacity as General Partner receive any salary, fees, profits or distributions except profits, distributions, fees and allocations to which it may be entitled under Articles Four, Five, Eight and Eleven, it being understood, however that the Partnership is obligated to pay JMB or its Affiliates an Acquisition and Financing Guaranty Fee equal to $20,000,000 (subject to reduction as provided below) for services of JMB and such Affiliates in negotiating and arranging, and guaranteeing repayment of certain indebtedness and certain other obligations incurred in connection with, the acquisition of the assets by the Partnership under the Acquisition Agreement. The obligation to pay such fee in the event at least the minimum offering amount under Section 3.3A is obtained will be required to be satisfied as follows: on or about each Admission Date, the Partnership shall pay to JMB or its Affiliates a portion of the maximum amount of such Acquisition and Financing Guaranty Fee based upon the ration that the number of Additional Limited Partnership Interests being issued under Section 3.3A on such Admission Date bears to 325,000; to the extent that less than an aggregate of 325,000 Additional Limited Partnership Interests are issued under Section 3.3A for all Admission dates, the corresponding proportion of the Acquisition and Financing Guaranty Fee will not be paid by the Partnership. In no event shall the total of the Acquisition and Financing Guaranty Fee paid to JMB or its Affiliates plus any Acquisition Fees paid to all parties exceed the lesser of (a) the compensation customarily charged in arm's-length transactions by others rendering similar services as an ongoing public activity in the same geographical location and for comparable property or (b) an amount equal to 18% of the Capital Investments in the Partnership. SECTION 5.7 Other Business of Partners Any Partner may engage independently or with others in business venturers of every nature and description, including, without limitation, the rendering of advice or services of any kind to other investors and the making or management of other investments. Nothing in this Agreement shall be deemed to prohibit the General Partner or any Affiliate of the General Partner or any officer, director, employee, shareholder or partner of the General Partner or any such Affiliate from dealing, or otherwise engaging in business with, Persons transacting business with the Partnership or from providing service relating to the purchase, sale, management, development or operation of real property and receiving compensation therefor, not involving any rebate or reciprocal arrangement which would have the effect of circumventing any restriction set forth herein upon dealing with Affiliates of the General Partner. Neither the Partnership nor any Partner shall have any right by virtue of this Agreement or the partnership relationship created hereby in or to such other ventures or activities or to the income or proceeds derived therefrom, and the pursuit of such ventures shall not be deemed wrongful or improper. Except as provided in the Management and Supervisory Agreement referred to in Section 5.2 a (ix), neither the General Partner nor any Affiliate of any General Partner shall be obligated to present any particular investment opportunity to the Partnership. The General Partner and Limited Partners agree that the Partners have no right to expect that the Partnership's Properties will consist of anything other than the assets acquired in connection with the Acquisition Agreement and the interest of the Partnership in future communities as described in and subject to the terms and limitations set forth in the Management and Supervisory Agreement. SECTION 5.8 Limitation on Liability of General Partner; Indemnification Neither the General Partner nor any affiliate (for purposes of this Section 5.8 hereof "affiliate" shall mean any person performing services on behalf of the Partnership who (1) directly controls, is controlled by, or is under common control with, the General Partner or the Associate Limited Partners; or (2) owns or controls 10% or more of the outstanding voting securities of the General Partner or the Associate Limited Partners; or (3) is an officer, director, partner or trustee of the General Partner or the Associate Limited Partners; or (4) if the General Partner is an officer, director, partner or trustee, any company for which the General Partner acts in any such capacity) thereof engaged in the performance of services on behalf of the Partnership (the "Indemnified Parties") shall be liable, responsible or accountable in damages or otherwise to any Holder for any act or omission performed or omitted by such Indemnified Party pursuant to the authority granted to such Indemnified Party by this Agreement or by law if the General Partner or its affiliates have determined, in good faith, that the act or omission which caused the loss or liability was in the best interests of the Partnership and such liability was not the result of misconduct or negligence. The Partnership shall indemnify and hold harmless each Indemnified Party from and against any loss or liability suffered or sustained by him by reason of any acts, omissions or alleged acts or omissions arising out of his activities on behalf of the Partnership or in furtherance of the interests of the Partnership, including, but not limited to, any judgment, award, settlement, reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any pending or threatened action, proceeding or claim and including any payments made by the General Partner to any of its officers or directors who are affiliates pursuant to an indemnification agreement no broader than this Section 5.8; provided that the General Partner or its affiliates have determined, in good faith, that the act or omission which caused the loss or liability was in the best interests of the Partnership and such loss or liability was not the result of misconduct or negligence by such Indemnified Party. The satisfaction of any indemnification and any saving harmless shall be from thereof. Notwithstanding the foregoing, the Indemnified Parties and any person acting as a broker-dealer shall not be indemnified for any loss or damage incurred by them in connection with any claim involving allegations that Federal or state securities laws were violated, unless: (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations and a court approves indemnification of litigation costs; (2) such claim has been dismissed, with prejudice on the merits, by a court of competent jurisdiction and a court approves indemnification of litigation costs; or (3) such claim has been settled, and a court of competent jurisdiction approves indemnification of litigation costs (specifically, the settlement of any claim against the Indemnified Parties and finds that indemnification of the settlement and related costs should be made). Additionally, such a court shall have been advised by the party seeking indemnification as to the current position of the Securities and Exchange Commission, the California Commissioner of Corporations, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts, the Tennessee Securities Division, the Texas State Securities Board and the securities commissioners of the states which subscribe to the provisions of the North American Securities Administrators, Association, Inc. Statement of Policy Regarding Real Estate Programs effective on January 1, 1987 regarding indemnification for violations of securities laws. Notwithstanding the foregoing, the Indemnified Parties shall not be indemnified for any liability, loss, expense or damage incurred by them in connection with any judgment entered arising from or out of a violation of Federal or state securities laws which were violated by any Indemnified Party in connection with the offer or sale of the Interests. In addition, the Partnership may not incur the cost of that portion of liability insurance which insures the Indemnified Parties for any liability as to which the Indemnified Parties are prohibited from being indemnified as described above. ARTICLE SIX ADMISSION OF SUCCESSOR AND ADDITIONAL GENERAL PARTNERS SECTION 6.1 Admission of Successor and Additional General Partners A. With the Consent of the General Partner and of such number of the Limited Partners as are then required under the Revised Uniform Limited Partnership Act of the State of Delaware, and under the applicable laws of such other jurisdictions in which the Partnership is formed or qualified, to Consent to or ratify the admission of a General Partner, but in no event with the Consent of less than a majority of all the outstanding Limited Partnership Interests, the General Partner may at any time designate one or more Persons to be successors to such General Partner or to be additional General Partners, in each case with such participation in such General Partner's Interest as such General Partner and such successor or additional General Partners may agree upon, provided that the Interests of the Limited Partners shall not be adversely affected thereby. Each such designee shall become a successor or additional General Partner upon satisfying the conditions of Section 11.2. B. Except in connection with a transfer to a successor or additional General Partner pursuant to Section 6.1A, the General Partner shall not have any right to retire or withdraw voluntarily from the Partnership or to sell, transfer or assign its Interest, except that (i) it may substitute in its stead as General Partner any entity which has, by merger, consolidation or otherwise, acquired substantially all of its assets or stock and continued its business or (ii) it may cause to be admitted to the Partnership an additional General Partner or Partners to enable the aggregate net worth of the General Partners to comply with the provisions of Section 5.5C. Each such successor or additional General Partner shall be admitted as such to the Partnership upon satisfying the conditions of Section 11.2. Each Limited Partner hereby Consents to the admission of any additional or successor General Partner pursuant to this Section 6.1B, and no further Consent or approval shall be required. C. Any voluntary withdrawal by the General Partner from the Partnership or any sale, transfer or assignment by such General Partner of its Interest shall be effective only upon the admission in accordance with Section 6.1A or Section 6.1B, whichever is applicable, of a successor or additional General Partner, as the case may be,and full discharge for all amounts owing to the General Partner and the Associate Limited Partners on account of their respective Interests in the Partnership. For purposes of this Section 6.6 the independent appraiser selected by the Limited Partners shall be selected by ML Real Estate Associates II (excluding for this purpose its assigns) and proposed by the General Partner for selection by the Limited Partners. Such appraiser shall be deemed selected by the Limited Partners unless objected to in writing by the Holders of a majority of the then outstanding Limited Partnership Interests within 45 days after Notification thereof is sent by the General Partner. B. In the event that a replacement General Partner is elected by the Limited Partners under Section 10.2 such replacement or successor General Partner (the "Acquiring Partner") shall purchase from the Partnership, within 60 days of the date on which it becomes a General Partner, the Interests in the Partnership which the Partnership purchased from the Person ceasing to be a General Partner as provided in Section 6.6A above and from the Associate Limited Partners. For such Interests, the Acquiring Partner shall pay the amounts determined pursuant to Section 6.6A to be the fair market values of such Interests. Payment for the Interests shall be made by promissory notes bearing simple interest at a rate per annum equal to the lesser of the reference rate from time to time announced by Continental Illinois National Bank and Trust Company of Chicago plus 2% per annum or 10% interest per annum on the unpaid principal amount of such promissory notes and shall be secured, on a pro rata basis according to the face amount of each promissory note, by assignment by the Acquiring Partner to the Partnership of all its future distributions of Cash Flow from the Partnership to the Acquiring Partner. ARTICLE SEVEN TRANSFERABILITY OF PARTNERS' INTERESTS SECTION 7.1 Restrictions on Transfers of Interests A. No transfer or assignment with respect to any Limited Partnership Interest or any Additional Limited Partnership Interest, or any fraction thereof, shall be effective if such transfer or assignment would, in the opinion of counsel for the Partnership, result in the termination of the Partnership or the treatment of the Partnership as an association taxable as a corporation, for purposes of the then applicable provisions of the Code. B. No transfer or assignment with respect to any Limited Partnership Interest, or any fraction thereof, shall be effective if counsel for the Partnership shall be of the opinion that such transfer or assignment would be in violation of any state securities or "Blue Sky" laws (including any investment suitability standards) applicable to the Partnership. C. No purported transfer or assignment with respect to a Limited Partnership Interest, or any fraction thereof, after which the transferor or the transferee would hold an Interest representing a Capital Investment of less than $5,000 will be permitted or recognized or be valid for any purpose (except for transfers by gift, inheritance or family dissolution, transfers to Affiliates or intra-family transfers). Prior to the first date on which an Additional Limited Partnership Interest is issued to an Assignee Holder (other than ML Real Estate Associates II), no purported transfer or assignment with respect to any Interest, or any fraction thereof, shall be permitted or recognized or be valid for any purpose. D. No transfer or assignment with respect to any Limited Partnership Interest or any Additional Limited Partnership Interest, or any fraction thereof, shall be effective if as a result of such transfer or assignment such limited partnership Interest or Additional Limited Partnership Interest (or fraction thereof) would be held by any person that is a non-resident alien individual or foreign corporation or other entity or that may be subject to tax under Section 511 of the Code, or by any "tax- exempt entity" (within the meaning of Section 168(h)(2) of the Code for purposes of Section 168(h)(6)(A) of the Code), except that the foregoing restriction shall not apply to any transfer or assignment permitted in the sole discretion of the General Partner. SECTION 7.2 Assignees and Substituted Limited Partners A. If a Limited Partner dies, his executor, administrator or trustee or, if he is adjudicated incompetent (including by reason of insanity), his committee, guardian or conservator, or, if he becomes bankrupt, the receiver or trustee of his estate, shall have all the rights of a Limited Partner for the purpose of settling or managing his estate and such power as the decedent or incompetent or bankrupt Person possessed to assign all or any part of his Interest and to join with the assignee thereof in satisfying conditions precedent to such assignee becoming a Substituted Limited Partner. The death, dissolution, adjudication of incompetence or bankruptcy of a Limited Partner shall not dissolve the Partnership. B. The Partnership shall recognize as the Assignee Holder of Additional Limited Partnership Interests each Person to whom the Initial Limited Partner assigns Additional Limited Partnership Interest which are purchased in the public offering pursuant to section 3.3 (including pursuant to Section 3.3G) as of such dates from time to time during the offering period as the General Partner shall determine (which in no event shall be later than the date on which the funds of such Assignee Holder are released from the escrow deposit account) provided that (a) the Partnership has received the capital set forth on Schedule A with respect to the Additional Limited Partnership Interests of such Assignee Holder and (b) the Initial Limited Partner has executed an instrument of assignment, in form and substance satisfactory to the General Partner, setting forth the name and address of such Assignee Holder to whom such Additional Limited Partnership Interests are being assigned. C. Except as provided in Section 7.2B above, the Partnership shall not recognize for any purpose any assignment with respect to all or any fraction of a Limited Partnership Interest unless there shall have been filed with the Partnership a duly executed and acknowledged counterpart of the instrument making such assignment and such instrument evidences the written acceptance by the assignee of all of the terms and provisions of this Agreement and represents that such assignment was made in accordance with all applicable laws and regulations (including investment suitability requirements). Such instrument shall be accompanied by a transfer fee not in excess of $100 that shall be paid to the Partnership or an Affiliate of the General Partner to cover all actual, necessary and reasonable expenses, fees and filing costs in connection with such transfer. Any assignee of a Limited Partnership Interest shall, for the purposes of Section 4.3C, be recognized as a Holder of Interests as of the first day of the fiscal quarter next succeeding the fiscal quarter in which the General Partner actually receives the instrument of assignment that complies with the requirements of this Section 7.2C; provided, however, that except as provided in Section 7.2B above, no assignee of a Limited Partnership Interest shall be recognized as a Holder of Interests prior to the first fiscal quarter following the fiscal quarter during which the final issuance of Additional Limited Partnership Interests pursuant to Section 3.3 occurs. D. Any Person who is an Assignee Holder of all or any fraction of a Limited Partnership Interest may become a Substituted Limited Partner only when such Person shall have satisfied the conditions of Section 7.2C and Section 11.2. The General Partner agrees to inform such Assignee Holder, within 60 days of receipt by the Partnership of the items set forth in Sections 7.2C and 11.2A herein, if he has been rejected a s Substituted Limited Partner. Assignee Holders (and any assignees with respect to any Limited Partnership Interests of such Assignee Holders) who effect such a transfer and become Substituted Limited Partners will not be permitted subsequently to reassign their Limited Partnership Interests to the Initial Limited Partner and once more become Assignee Holders. The right of an assignee to become a Substituted Limited Partner shall be subject to the written Consent of the General Partner, which Consent may be granted or denied in the sole and absolute discretion of the General Partner and prior to the giving of such Consent, such substitution shall not be effective. The written Consent or a notice of denial of Consent shall be given to the assignee not later than the last day of the calendar month following the month the General Partner actually receives the executed Signature Page and Power of Attorney and such other document or documents as may reasonably be requested by the General Partner and payment of an amount (not in excess of $100) required to cover all actual, necessary and reasonable expenses, fees and filing costs in connection with such substitution. The voting rights of a Substituted Limited Partner who transfers his entire economic interest in any Additional Limited Partnership Interests will terminate with respect to such Additional Limited Partnership Interests upon such transfer. SECTION 7.3 Indemnification and Terms of Admission A. Each Holder of Interests shall indemnify and hold harmless the Partnership, the General Partner and every Holder who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of or arising from any actual misrepresentation or misstatement of facts or omission to state facts made (or omitted to be made) by such Holder in connection with any facts or omission to state facts made (or omitted to be made) by such Holder in connection with any assignment, transfer, other disposition or encumbrance of all or any part of any Interest in the Partnership, or the admission of an Assignee Holder as a Substituted Limited Partner to the Partnership, against expenses for which the Partnership or such other Person has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by it or him in connection with such action, suit or proceeding. B. Any Person who acquires an Interest as an Assignee Holder (whether or not such Person becomes a Substituted Limited Partner) or who is admitted to the Partnership as a Substituted Limited Partner or as a successor or additional General Partner shall be subject to and bound by all the provisions of this Agreement as if originally a party to this Agreement. ARTICLE EIGHT DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP SECTION 8.1 Events Causing Dissolution The Partnership shall terminate upon the happening of any of the following events: (i) the bankruptcy, death, dissolution, adjudication of incompetence or withdrawal of a sole General Partner; (ii) the reduction to cash or cash equivalents of all the assets of the Partnership; (iii) the election by the General Partner pursuant to Section 5.5), Section 5.4B, or the vote by the Limited Partners pursuant to Section 10.2(ii), to dissolve the Partnership; or (iv) the happening of any other event causing the dissolution of the Partnership under the laws of the State of Delaware. Dissolution of the Partnership shall be effective on the day on which the event occurs giving rise to the dissolution, but the Partnership shall not terminate until the Partnership's certificate of limited partnership shall have been canceled and the assets of the Partnership shall have been distributed as provided in Section 8.3. Notwithstanding the dissolution of the partnership, prior to the termination of the Partnership, as aforesaid, the business of the Partnership and the affairs of the Partners, as such, shall continue to be governed by this Agreement. In the event of the bankruptcy, dissolution or withdrawal of a General Partner which is not then the sole General Partner at any time during the life of the Partnership, the remaining General Partner or General Partners shall promptly give the Limited Partners notice of the occurrence of any event constituting such bankruptcy, dissolution or withdrawal. The General Partner shall give the Limited Partners sixty (60) days' notice of its intent to withdraw voluntarily as a General Partner of the Partnership unless, prior to such withdrawal, written notice has been given to the Limited Partners as provided in the preceding sentence, and the Limited Partners have (or have not) elected to exercise their right pursuant to Section 10.2 (and subject to the conditions set forth in Section 10.3 to elect a new General Partner. Notwithstanding anything to the contrary in this Agreement, if any event specified in clauses (i) through (iii) of Section 8.1 occurs prior to the first date on which an Additional Limited Partnership Interest is issued to an Assignee Holder (other than ML Real Estate Associates II), no Partner or Partners shall have any right to cause the Partnership to be continued, and if any event specified in clause (iv) of Section 8.1 occurs prior to such date, no Partner or Partners shall have any right to cause the Partnership to be continued unless all Partners (including ML Real Estate Associates II and Arvida/JMB Partners, which shall consent for this purpose only with the affirmative approval of ML Real Estate Associates II as a partner therein) Consent to continue the Partnership. SECTION 8.2 Capital Contribution upon Dissolution Subject to Section 5.8 each Limited Partner shall look solely to the assets of the Partnership for all distributions with respect to the Partnership and his capital contribution thereto and share of Profits or Losses thereof, and, except as provided in Section 4.1 shall have no recourse therefor however, that upon dissolution and termination of the Partnership, the General Partner shall contribute to the Partnership an amount equal to the amount which is determined to be the smaller of (i) the deficit balance in its Capital Account or (ii) the excess of 1.01% of the Capital Investments with respect to Limited Partnership Interests held by Holders over the aggregate capital contributions made by the General Partner as provided in Schedule A and otherwise under this Agreement. If Arvida/JMB Associates shall in writing assume or otherwise agree to be personally liable on Partnership indebtedness owed to a third party, during the period that such assumption or other personal liability exists, Arvida/JMB Associates shall be obligated to contribute to the Partnership an amount equal to the amount of such indebtedness which it has assumed or on which it has otherwise agreed to be personally liable if needed to satisfy such Partnership indebtedness. No Limited Partner shall have any right to demand or receive property, other than cash, upon dissolution and termination of the Partnership. SECTION 8.3 Liquidation A. Upon dissolution of the Partnership, the General Partner shall dispose of the assets of the Partnership, apply and distribute the proceeds thereof as contemplated by this Agreement and cause the cancellation of the Partnership's certificate of limited partnership. B. Notwithstanding the foregoing, in the event the General Partner shall determine that an immediate sale of part or all of the Partnership assets would cause undue loss to the Partners, the General Partner, in order to avoid such loss, may (after having given Notification to all the Limited Partners), subject to Section 8.3C and to the extent not then prohibited by the Limited Partnership Act of any jurisdiction in which the Partnership is then formed or qualified and applicable in the circumstances, defer disposition of and withhold from distribution for a reasonable time any assets of the Partnership except those necessary to satisfy the Partnership's debts and obligations. C. Notwithstanding anything to the contrary in Articles Four and Six, upon Liquidation of the Partnership the proceeds of such Liquidation shall be distributed in the ratios of the positive Capital Account balances of the Partners, and upon Liquidation of any Partner's Interest in the Partnership the proceeds of such Liquidation shall be distributed in accordance with the positive Capital Account balance of such Partner, in each case as determined after taking into account all Capital Account adjustments for the Partnership taxable year during which such Liquidation occurs (other than those adjustments made pursuant to this sentence), by the end of such taxable year (or, if later, within 90 days after the date of such Liquidation), except that in the case of a Liquidation of the Partnership the proceeds of such Liquidation shall not be required to be distributed by the end of such taxable year (or, if later, within 90 days after the date of such Liquidation) to the extent such proceeds constitute (i) reserves reasonably required to provide for liabilities (contingent or otherwise) of the Partnership or (ii) installment obligations owed to the Partnership, so long as such withheld amounts are distributed as soon as practicable and in the ratios of the Partner's positive Capital Account balances. 2. Instrument of Assignment. Effective upon the transfer to the Partnership of the required capital contributions in respect of Additional Limited Partnership Interests from time to time during the Public Offering, and upon the amendment of the Certificate of Limited Partnership of the Partnership to reflect the issuance of Additional Limited Partnership Interests to the Initial Limited Partner, the Initial Limited Partner shall execute an Instrument of Assignment transferring and assigning all of its rights and interests in and to such Additional Limited Partnership Interests to the Assignee Holders. The names and addresses of the Assignee Holders who have purchased the Additional Limited Partnership Interests shall be set forth on such Instrument and, upon its receipt and acknowledgement by the General Partner, such instrument of Assignment shall be binding in all respects upon the Partnership, the General Partner, the Initial Limited Partner and the Assignee Holders name therein; provided that any such Instrument of Assignment may be amended by written instrument executed by the Initial Limited Partner and the General Partner for the purpose of correcting any error or omission contained therein. Notification of the name and address of an Assignee Holder set forth on any such Instrument of Assignment shall be mailed, postage prepaid, to such Assignee Holder named therein; and thereafter any address contained therein shall be subject to change only upon the receipt by the Initial Limited Partner of written notification of a change of an Assignee Holder's address signed by such Assignee Holder. 3. Subsequent Assignments. Any subsequent transfer or assignment or reassignment of Additional Limited Partnership Interests by any Assignee Holder to any other Person must conform in all respects with the requirements of Section 7.2 of the Partnership Agreement and shall be subject to all restrictions on transfer provided in Section 7.1 of the Partnership Agreement. 4. Voting. The Initial Limited Partner hereby agrees that, with respect to any matter on which a vote of Limited Partners is taken in accordance with the Partnership Agreement or as to which any Consent is requested, it will vote the Additional Limited Partnership Interests transferred to Assignee Holders pursuant to this Agreement or grant or withhold such Consent solely for the benefit of, and in accordance with the written instructions of, the respective Assignee Holders with respect to their respective Interests; provided, however, that the voting rights of an Assignee Holder who transfers Additional Limited Partnership Interests will terminate with respect to such Interests upon such transfer, whether or not the transferee thereof is admitted as a Substituted Limited partner with respect thereto. Additional Limited Partnership Interests assigned to Assignee Holders who do not provide such written instructions to the Initial Limited Partner will not be voted nor any Consent granted on any such matter. The Initial Limited partner will provide notice to the Assignee Holders containing information regarding any matters to be voted upon or as to which any Consent is requested sufficiently in advance of the date of the vote for which such Consent is requested to permit sufficiently in advance of the date of the vote for which such Consent is requested to permit such Assignee Holders to provide such written instructions and shall otherwise establish reasonable procedures for any such voting or the granting of such Consent. The Partnership and the General Partner hereby agree to permit Assignee Holders to attend any meetings of Limited Partners and the Initial Limited Partner shall, upon written request of Assignee Holders owning Additional Limited Partnership Interests which represent in the aggregate 10% or more of all of the outstanding Limited Partnership Interest, request the General Partner to call a meeting of Limited Partners or to submit a matter to the Limited Partners without a meeting pursuant to the Partnership Agreement. 5. Reports. The Initial Limited Partner will mail to any Assignee Holder (at the address provided under paragraph 2 above) any report, financial statement or other communication received from the Partnership or the General Partner with respect to the Additional Limited Partnership Interests transferred to such Assignee Holder. In lieu of the mailing of any such document by the Initial Limited Partner, the Initial Limited Partner may, at its option, request the Partnership to mail any such communications directly to the Assignee Holders, and the Initial Limited Partner shall be deemed to have satisfied its obligations under this paragraph 5. -----END PRIVACY-ENHANCED MESSAGE-----