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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____ to ____
Commission file number: 0-14207
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 33-0016355
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1100 94402-1708
San Mateo, California (Zip Code)
(Address of principal executive offices)
Partnership's telephone number, including area code (415) 343-9300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
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]
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
No market for the Limited Partnership Units exists and therefore a market value
for such Units cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE:
Prospectus dated December 29, 1986, as amended on January 5, 1987, filed
pursuant to Rule 424(b), File no. 2-90327, is incorporated by reference in Part
IV hereof.
Report on Form 10-K dated October 31, 1992 filed pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, File No. 0-14207, is incorporated by
reference in Part IV hereof.
Exhibit Index located on Page 42
Page 1 of 62
PART I
Item 1. Business
Rancon Realty Fund IV, a California Limited Partnership, ("the Partnership") was
organized in accordance with the provisions of the California Uniform Limited
Partnership Act for the purpose of acquiring, developing, operating and
ultimately selling real property. The Partnership was organized in 1984 and
reached final funding in July, 1987. The general partners of the Partnership are
Daniel L. Stephenson ("DLS") and Rancon Financial Corp. ("RFC"). RFC is wholly
owned by DLS. At December 31, 1996, 79,846 limited partnership units ("Units")
were outstanding. The Partnership has no employees.
In April, 1996, the Partnership formed Rancon Realty Fund IV Tri-City Limited
Partnership, a Delaware limited partnership ("RRF IV Tri-City") to satisfy
certain lender requirements for a loan obtained in 1996. This loan is secured by
three properties (see Item 2) which have been contributed to RRF IV Tri-City by
the Partnership. The limited partner of RRF IV Tri-City is the Partnership and
the general partner is Rancon Realty Fund IV, Inc. ("RRF IV, Inc."), a
corporation wholly owned by the Partnership. Since the Partnership owns 100% of
RRF IV, Inc. and indirectly owns 100% of RRF IV Tri-City, the Partnership
considers all assets owned by RRF IV, Inc. and RRF IV Tri-City to be owned by
the Partnership.
At December 31, 1996, the Partnership owns six rental properties totaling
approximately 412,000 square feet of space in a master-planned development known
as Tri-City Corporate Centre ("Tri-City") in San Bernardino, California and a
240-unit apartment complex in Vista, California. Tri-City is zoned for mixed
commercial, office, hotel, transportation-related, and light industrial uses and
all of the parcels thereof are separately owned by the Partnership and Rancon
Realty Fund V ("Fund V"), a partnership sponsored by the general partners of the
Partnership. The Partnership also owns for development or sale approximately
35.3 acres in Tri-City, 24.8 acres in Lake Elsinore, California, 17.14 acres in
Perris, California and 11.29 acres in Temecula, California.
Competition Within the Market
Management believes that characteristics influencing the competitiveness of a
real estate project are the geographic location of the property, the
professionalism of the property manager and the maintenance and appearance of
the property, in addition to external factors such as general economic
circumstances, trends, and the existence of new, competing properties in the
vicinity. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities, such as parking, and the ability to provide rent concessions
and tenant improvements commensurate with local market conditions. Although
management believes the Partnership properties are competitive with comparable
properties as to those factors within the Partnership's control, over-building
and other external factors could adversely affect the ability of the Partnership
to attract and retain tenants. The marketability of the properties may also be
affected (either positively or negatively) by these factors as well as by
changes in general or local economic conditions, including prevailing interest
rates. Depending on market and economic conditions, the Partnership may be
required to retain ownership of its properties for periods longer than
anticipated, or may need to sell earlier than anticipated or refinance a
property, at a time or under terms and conditions that are less advantageous
than would be the case if unfavorable economic or market conditions did not
exist.
Page 2 of 62
Working Capital
The Partnership's practice is to maintain cash reserves for normal repairs,
replacements, working capital and other contingencies. The Partnership knows of
no statistical information which allows comparison of its cash reserves to those
of its competitors.
Other Factors
Approximately 23 acres of the Tri-City Corporate Centre land owned by the
Partnership was part of a landfill operated by the City of San Bernardino ("the
City") from approximately 1950 to 1960. There are no records of which the
Partnership is aware disclosing that hazardous wastes exist at the landfill. The
Partnership's landfill monitoring program currently meets or exceeds all
regulatory requirements. The Partnership is currently working with the Santa Ana
Region of the California Regional Water Quality Control Board and the City to
determine the need and responsibility for any further testing. There is no
current requirement to ultimately clean up the site, however, no assurance can
be made that circumstances will not arise which could impact the Partnership's
responsibility related to the property.
Item 2. Properties
Tri-City Corporate Centre
On December 24, 1984, the Partnership acquired 68.97 acres on seven parcels of
partially developed land in Tri-City. On August 19, 1985, the Partnership
acquired an additional 7.59 acres on 4 parcels in Tri-City. During that time,
Fund V acquired the remaining 76.21 acres within Tri-City.
The Partnership acquired the initial seven parcels of land in Tri-City for
$9,019,000 and the additional 7.59 acres for $898,000.
Tri-City is located at the northeastern quadrant of the intersection of
Interstate 10 (San Bernardino Freeway) and Waterman Avenue in the southernmost
part of the City of San Bernardino.
The Partnership has constructed and owns the following six operating properties
in Tri-City:
Property Type Square Feet
- ----------------------- ----------------------------- -----------
One Vanderbilt Four story office building 73,809
Two Vanderbilt Four story office building 69,094
Carnegie Business
Center I Two light industrial buildings 62,605
Service Retail Center Two retail buildings 20,780
Promotional Retail Center Four strip center retail buildings 104,865
Inland Regional Center Two story office building 81,079
These properties total approximately 412,000 leasable square feet and offer a
wide range of retail, commercial, industrial and office product to the market.
The I-10/San Bernardino corridor consists of approximately 2,865,000 square feet
of office space, with a vacancy rate of 28% as of October, 1996, and
approximately 12,806,000 square feet of light industrial
Page 3 of 62
space, with a vacancy rate of 23% as of October, 1996 (the vacancy rates and
square feet amounts are according to research conducted by the Partnership's
property manager).
Within the Tri-City Corporate Centre at December 31, 1996, the Partnership has
223,982 square feet of office space with a vacancy rate of 28%, 125,645 square
feet of retail space with a vacancy rate of 1% and 62,605 square feet of light
industrial space with a vacancy rate of 10%.
The following are the occupancy levels for the Partnership's Tri-City buildings
at December 31, 1996, October 31, 1995, 1994 and 1993, expressed as a percentage
of the total net rentable square feet:
December 31, October 31, October 31, October 31,
1996 1995 1994 1993
----------- ---------- ---------- ----------
One Vanderbilt 86% 70% 100% 95%
Two Vanderbilt 25% 95% 100% 100%
Carnegie Business Center I 90% 97% 100% 89%
Service Retail Center 100% 90% 98% 82%
Promotional Retail Center 98% 97% 94% 94%
Inland Regional Center 100% N/A N/A N/A
In 1996, management renewed three leases totaling 5,709 square feet of space and
executed six new leases totaling 111,457 square feet of space. A major tenant
who occupied 73,914 square feet at various Tri-City properties vacated upon the
expiration of their lease on November 15, 1995. This tenant occupied 56,744
square feet in Two Vanderbilt which is approximately 82% of the total leasable
square feet of that property. Management has entered into a temporary ground
lease convertible to a 20-year triple net operating lease, when construction is
completed in April or May of 1997, with a nationally recognized retailer for a
38,600 square feet build-to-suit retail building. Management is currently in
various stages of negotiation for two new leases totaling 39,965 square feet of
space. In addition, management is negotiating three lease renewals totaling
27,801 square feet of space.
The annual effective rent per square foot for the years ended December 31, 1996
and October 31, 1995 were:
1996 1995
-------- --------
One Vanderbilt $ 18.07 $ 20.94
Two Vanderbilt $ 13.91 $ 19.16
Carnegie Business Center I $ 10.02 $ 11.00
Service Retail Center $ 14.37 $ 14.63
Promotional Retail Center $ 9.85 $ 10.49
Inland Regional Center $ 13.49 N/A
At December 31, 1996, annual rental rates ranged from $13.44 to $18.77 per
square foot for office space; $9.00 to $16.67 per square foot for retail space;
and $7.32 to $13.90 per square foot for industrial space. The Partnership also
has a temporary ground lease for $3.89 per square foot until construction is
completed in April or May of 1997.
The Two Vanderbilt property's annual effective rental rate decreased by 27% in
fiscal year 1996 compared to fiscal year 1995 due to the vacancy in November,
1995 of a tenant who occupied 73,914 total square feet of office space, 56,744
square feet of which was in Two Vanderbilt.
Page 4 of 62
According to research conducted by the property manager, the average annual
effective rent per square foot in the Partnership's competitive market averages
$17.76 for office buildings, $10.44 for retail and $9.00 for light industrial
space.
Tri-City's rental properties had the following five tenants which occupied a
significant portion of the net rentable square footage as of December 31, 1996:
Inland ITT
Regional Educational Comp Circuit
Tenant Center Services USA PetsMart City
Inland Carnegie
Regional Business Promotional Promotional Promotional
Building Center Center I Retail Retail Retail
Social Educational Pet
Nature of Business Services Services Computer Retail Electronics
Lease Term 13 yrs. 12 yrs. 10 yrs. 15 yrs. 20 yrs.
Expiration Date 7/16/09 12/31/04 8/31/03 1/10/09 1/31/18
Square Feet 81,079 33,551 23,000 25,015 38,600
(% of rentable total) 20% 8% 6% 6% 9%
Annual Rent $1,104,000 $330,089 $207,000 $249,940 $150,000
Future Rent Increases 6% every between 3% 10% in 5% in lesser of 10%
2.5 yrs. and 3.75% 1998 1999 and or 5 yr.CPI
annually 2004 every 5 yr.
during lease
three term
four 5-year 5 year
5 year options, fixed four 5-year
Renewal Options options None fixed rate rate options
In the opinion of management, the properties are adequately covered by
insurance.
The Partnership's Tri-City rental properties are owned by the Partnership, in
fee, subject to the following notes and deeds of trust:
Service Retail
Center, Carnegie Inland
One Business Center and Regional
Security Vanderbilt Promotional Retail Center Center
Principal balance
at December 31, 1996 $2,351,000 $6,457,000 $2,488,000
Interest Rate 9% 8.74% 8.75%
Monthly Payment $20,141 $53,413 $20,771
Maturity Date 1/1/05 5/1/06 4/23/01
Page 5 of 62
Approximately 26 acres of the Tri-City property owned by the Partnership remain
undeveloped. It is the Partnership's intention to develop parcels of this
property as tenants become available or dispose of the property at the optimal
time and sales price.
During 1996, the Partnership's Tri-City properties were assessed $751,000 in
property taxes based on an average realty tax rate of 2.62% (including
additional assessments and bonds).
Shadowridge Woodbend Apartments
On June 26, 1987, the Partnership acquired an apartment complex known as
Shadowridge Woodbend Apartments ("Shadowridge") in an all cash transaction for
$12,850,000. The apartment complex contains 240 units, consisting of 124 one
bedroom/one bath units, 44 two bedroom/one bath units and 72 two bedroom/two
bath units and is located in Vista, California. Some of the amenities the
complex has to offer include pool and spa, indoor racquetball court, tennis
court, fitness center and laundry facilities.
Seven communities within the area are considered to be in competition with
Shadowridge. At December 31, 1996, Shadowridge is 96% leased, just under the
average of its competition of 97% (according to research conducted by the
property manager). Also according to the property manager's research, all
complexes are offering some type of concessions. Shadowridge is offering lower
required security deposit on approved credit with a six or twelve month lease.
The other complexes in the area are offering from $150 up to the first month
rent free for a six or twelve month lease.
The December 31, 1996 average rental rates at Shadowridge and the market rents
at the competing properties are as follows:
Shadowridge Competition
---------- -----------
1 Bedroom/1 bath $587 $590-$640
2 Bedroom/1 bath $657 $660-$690
2 Bedroom/2 bath $708 $710-$750
The current rents at Shadowridge are slightly below market due to a number of
older leases with tenants that have below market rents.
In the opinion of management, the property is adequately covered by insurance.
The Shadowridge property is secured by a note and first deed of trust with a
current balance of $5,960,000. The note bears interest at 7.95% payable in
monthly installments of principal and interest of $48,416 and matures on April
15, 1998.
During 1996, the Shadowridge property was assessed $147,000 in property taxes
based on an average realty tax rate of 1.32%.
Page 6 of 62
Lake Elsinore Property
In 1988, the Partnership acquired 17 parcels, totaling approximately 24.8 acres
in Lake Elsinore, Riverside County, California for a purchase price of
$4,475,000.
The property is immediately west of Interstate 15 near the Lake Elsinore Outlet
Center. The undeveloped property is commercially zoned. The Partnership had
originally planned to develop this site as a neighborhood shopping center,
however, improvements to the property have been put on hold indefinitely. A
tentative parcel map expired and there is no development activity planned for
the near future.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1996, the Lake Elsinore Square property is unencumbered.
During 1996, the Lake Elsinore Square property was assessed $36,000 in property
taxes based on an average realty tax rate of 1.29%.
Perris Property
In 1988, the Partnership acquired 17.14 acres of unimproved land near Perris
Lake in Perris, Riverside County, California at a purchase price of $3,000,000.
There has been no development of this property to date. The Partnership
currently holds the property for sale to retail users and interested developers.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1996, the Perris property is unencumbered.
During 1996, the Perris property was assessed $17,000 in property taxes based on
an average realty tax rate of 1.12%.
Temecula Property
In June, 1992, the Partnership acquired 12.4 acres of undeveloped commercial
property in Temecula, Riverside County, California. The property has been
divided into twelve parcels via a tentative parcel map intending to accommodate
retail and commercial development. Final map approval was received on January 2,
1996. The Partnership sold a 1.11 acre parcel in March, 1996 for a sales price
of $275,000. The Partnership has completed the street utility and sewer
improvements on this site which will greatly assist in the marketing efforts of
the property. The Partnership currently has 3.16 acres under contract to sell to
a mini storage operator for $607,000, pending satisfactory completion of due
diligence. Negotiations are currently underway to sell another two lots totaling
1.56 acres. The remaining lots are currently held for sale by the Partnership.
In the opinion of management, the property is adequately covered by insurance.
The Partnership is also contingently liable for a subordinated note payable in
connection with the 11.29 acre property in Temecula, California, that the
Partnership reacquired in June, 1992 through a deed in lieu
Page 7 of 62
of foreclosure in satisfaction of a $2,276,000 note receivable held by the
Partnership that had gone into default during 1991. The subordinated note
payable and accrued interest total $532,000 as of December 31, 1996. This amount
is payable upon the sale of the property only after the Partnership receives the
full amount of the prior note receivable with accrued and unpaid interest, costs
of development, costs of sale, and other amounts paid to obtain good title to
the property, subject to certain release provisions.
During 1996, the Temecula property was assessed $75,000 in property taxes based
on an average realty tax rate of 2.60% (including additional assessments and
bonds).
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 8 of 62
PART II
Item 5. Market for Partnership's Common Equity and Related Stock Holder Matters
Market Information
There is no established trading market for the Units issued by the Partnership.
Holders
As of December 31, 1996, there were 11,880 holders of Partnership Units.
Dividends
Distributions are paid from either Cash From Operations or Cash From Sales or
Refinancing.
Cash From Operations is defined in the Partnership Agreement as all cash
receipts from operations in the ordinary course of business (except for the
sale, refinancing, exchange or other disposition of real property in the
ordinary course of business) after deducting payments for operating expenses.
All distributions of Cash From Operations are paid in the ratio of 90% to the
Limited Partners and 10% to the General Partners.
Cash From Sales or Refinancing is defined in the Partnership Agreement as the
net cash realized by the Partnership from the sale, disposition or refinancing
of any property after retirement of applicable mortgage debt and all expenses
related to the transaction, together with interest on any notes taken back by
the Partnership upon the sale of a property. All distributions of Cash From
Sales or Refinancing are generally allocated as follows (a more explicit
statement of these distribution policies is set forth in the Partnership
Agreement):
(i) First, 1 percent to the General Partners and 99 percent to
the Limited Partners until the Limited Partners have received
an amount equal to their capital contributions, plus a 12
percent return on their unreturned capital contributions (less
prior distributions of Cash from Operations); (ii) Second, to
Limited Partners who purchased their units of limited
partnership interest prior to April 1, 1985, an additional
return (depending on the date on which they purchased the
units) on their unreturned capital of either 9 percent, 6
percent or 3 percent (calculated through October 31, 1985);
and (iii) Third, 20 percent to the General Partners and 80
percent to the Limited Partners.
There were no distributions made by the Partnership during the three most recent
fiscal years (including the two month stub period ended December 31, 1995).
Page 9 of 62
Item 6. Selected Financial Data
The following is selected financial data for the year ended December 31, 1996,
the two months ended December 31, 1995 and the years ended October 31, 1995,
1994, 1993 and 1992 (in thousands, except per Unit data):
For the For the two
year ended months ended For the years ended October 31,
Dec. 31, Dec. 31, ------------------------------------------------------
1996 1995 1995 1994 1993 1992
---- ---- ------ ------ ------ -----
Rental Income $ 5,149 $ 768 $ 5,784 $ 5,465 $ 5,294 $ 4,708
Gain on sale of real estate $ -- $ -- $ -- $ -- $ 150 $ --
Provision for impairment
of real estate investments $ -- $ -- $ (12,224) $ -- $ (1,800) $ (250)
Net loss $ (1,510) $ (308) $ (13,417) $ (663) $ (2,027) $ (1,026)
Net loss Allocable
to Limited Partners $ (1,510) $ (308) $ (13,417) $ (663) $ (2,034) $ (1,026)
Net loss per Unit $ (18.91) $ (3.86) $ (168.03) $ (8.30) $ (25.44) $ (12.83)
Total assets $ 52,695 $ 48,282 $ 49,321 $ 59,537 $ 59,937 $ 61,377
Long-term obligations $ 17,256 $ 11,757 $ 11,766 $ 8,860 $ 8,647 $ 8,000
Cash distributions per Unit $ -- $ -- $ -- $ -- $ -- $ --
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL COMMITMENTS:
Background
At December 31, 1996, the Partnership had cash of $97,000. The remainder of the
Partnership's assets consist primarily of its investments in real estate,
totaling approximately $50,058,000 at December 31, 1996.
The Partnership's primary sources of funds consist of permanent financing,
construction financing, property sales and interest income on certificates of
deposit and other deposits of funds invested temporarily, pending their use in
the development of properties.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that the market
has flattened and is no longer falling in terms of sales prices. While prices
have not increased significantly, the Southern California real estate market
appears to be improving. Management continues to evaluate the real estate
markets in which the Partnership's assets are located in an effort to determine
the optimal time to dispose of them and realize their maximum value.
Page 10 of 62
Tri-City
The Partnership owns and operates six properties within the Tri-City Corporate
Centre project in San Bernardino, California ("Tri-City") totaling approximately
412,000 leasable square feet. This includes a 81,079 square foot build-to-suit
office building for Inland Regional Center ("IRC") which was completed in 1996.
A 38,600 square foot build-to-suit retail building is currently under
construction and is scheduled to be completed in April or May, 1997.
On April 19, 1996, the Partnership obtained permanent financing of $6,500,000
secured by Service Retail Center, Carnegie Business Center I and Promotional
Retail Center. The loan is a 10-year fixed rate loan with a 25-year
amortization, bearing interest at 8.744% per annum with monthly principal and
interest payments of $53,413. The loan proceeds were used to payoff three loans.
After paying refinancing and other fees, and placing funds in escrow for tenant
improvements for the Promotional Retail Center, the Partnership netted
approximately $448,000 in proceeds. The Partnership benefited from the extension
of the weighted average maturity of 1.75 years for the three previous loans to
10 years on the new loan, and the reduction of the weighted average interest
rate from 9.72% to 8.74%.
On May 14, 1996, the Partnership obtained a $2,500,000 construction loan,
secured by the IRC building. The loan converted to a permanent loan on July 23,
1996 and requires $20,771 in monthly principal and interest payments through the
maturity date of April 23, 2001.
At December 31, 1996, the Partnership holds a note receivable in the amount of
$405,000 related to the 1990 sale of the TGI Friday's restaurant. On February
28, 1997, the Partnership purchased the property known as TGI Friday's in San
Bernardino, California for $1,750,000. The Partnership paid $1,345,000 in cash
and the $405,000 note receivable was retired at the time of this acquisition. By
acquiring the TGI Friday's parcel, the Partnership will own all parcels within a
certain maintenance association. This gives the Partnership a greater control
over the future development of the remaining unimproved parcel within the
maintenance association.
The Partnership remains contingently liable for subordinated real estate
commissions payable to the Sponsor in the amount of $643,000 at December 31,
1996 for sales that transpired in previous years. The subordinated real estate
commissions are payable only after the Limited Partners have received
distributions equal to their original invested capital plus a cumulative
non-compounded return of 6% per annum on their adjusted invested capital.
Lake Elsinore
Offsite improvements remain on hold at Lake Elsinore Square in Lake Elsinore,
California. The tentative parcel map expired and there is no development
activity planned for the near future.
Perris
There has been no development of the Perris property to date. The property is
being marketed for sale by the Partnership to retail users and interested
developers. Negotiations are underway for the sale of two additional lots
totaling 1.56 acres. The remaining lots are currently held for sale by the
Partnership.
Page 11 of 62
Temecula
Final map approval was received on January 2, 1996 on the 12.4 acre property in
Temecula, California. The Partnership has an executed sales contract on a 3.16
acre parcel for $607,000, pending a due diligence period. The sale is expected
to close between June, 1997 and January, 1998. Negotiations are currently
underway for the sale of two additional lots totaling 1.56 acres and the
remaining lots are held for sale.
The Partnership has a $100,000 certificate of deposit ("CD") held as collateral
for subdivision improvements and monument bonds related to the 11.29 acres of
land held for sale in Temecula, California. It is anticipated that this CD will
be released in 1997. The Partnership also has a $2,000 CD pledged as security to
a utility district for construction of a sewer crossing which has been
completed. Management is currently waiting for the utility district to close
this project and release the pledged CD.
General Matters
The $357,000 or 100% increase in accounts payable and other liabilities at
December 31, 1996 from December 31, 1995 is only due to the timing of payments
of current payables. The balance in accounts payable at December 31, 1996 was
paid in early 1997.
Management believes that the Partnership's 1997 cash flow from operations will
improve primarily as a result of (i) the placement of the Inland Regional Center
into service and (ii) management of working capital and capital expenditures
such that, when taken together with the Partnership's cash balance at December
31, 1996 of $97,000, will allow the Partnership to meet its cash obligations,
including debt service, without requiring the disposal of the Partnership's
assets other than in the normal course of business.
In January, 1997, the Partnership obtained an unsecured promissory note for a
$1,500,000 revolving line of credit from Glenborough Inland Realty Corporation,
a California corporation, an affiliate of the Partnership. In February and
March, 1997, the Partnership drew a total of $1,000,000 on this line of credit
to fund capital expenditures and miscellaneous charges until permanent financing
can be obtained for the TGI Friday's and Circuit City properties. The promissory
note requires interest to be paid monthly at 11% per annum and matures on
December 31, 1997. In February 1997, the Partnership obtained a $1,200,000
unsecured loan to finance the acquisition of the TGI Friday's property.
Management is currently under negotiations for a $5,000,000 loan that would be
secured by the Circuit City property. The proceeds from the loan would be used
to pay-off the $1,200,000 unsecured loan as well as finance tenant improvements
at the Circuit City property and other Partnership expenditures.
The General Partners continue to assess the real estate market in Southern
California in an effort to determine an appropriate time to liquidate the
Partnership and realize the maximum value for its assets. Cash generated from
property sales may be utilized in the development of other properties or
distributed to the partners.
RESULTS OF OPERATIONS:
In 1995, the Partnership's reporting year end changed from October 31 to
December 31. Since the Partnership's operations are not seasonal, the analysis
of results of operations compares the fiscal years ended December 31, 1996 and
October 31, 1995.
Page 12 of 62
Revenues
Rental income for the year ended December 31, 1996 decreased $635,000 or 11%
from the year ended October 31, 1995, primarily as a result of the November,
1995 vacancy upon lease expiration of one tenant, Aetna Health Management
("Aetna"), who occupied an aggregate of 74,000 square feet of space at One
Vanderbilt, Two Vanderbilt and Carnegie Business Center I. This caused a
decrease in average occupancy, as reflected in the table of Tri-City properties
below. Aetna's vacancy was primarily a function of the tenant's desire to
consolidate its operations into one building. This decrease was partially offset
by the $40,000 income recognized by the Partnership as part of a settlement
agreement with a former tenant. $40,000 was received in cash with the remaining
$80,000 in the form of a note which has been fully reserved. The increase in
rental income of $319,000 or 6% for the year ended October 31, 1995 over the
year ended October 31, 1994 is largely due to the addition of Phase I of the
Promotional Retail Center in Tri-City.
The Tri-City properties account for 68%, 72% and 71% of the Partnership's total
rental income during the years ended December 31, 1996, October 31, 1995 and
October 31, 1994, respectively. The Shadowridge Woodbend Apartments in Vista,
California accounted for 32%, 28% and 29% of the total rental income during the
same periods (and was 96% leased at December 31, 1996).
Occupancy rates at the Partnership's Tri-City properties as of December 31,
1996, October 31, 1995, 1994 and 1993 were as follows:
1996 1995 1994 1993
---- ---- ---- ----
One Vanderbilt 86% 70% 100% 95%
Two Vanderbilt 25% 95% 100% 100%
Carnegie Business Center I 90% 97% 100% 89%
Service Retail Center 100% 90% 98% 82%
Promotional Retail Center 98% 97% 94% 94%
Inland Regional Center 100% N/A N/A N/A
In 1996, tenants at Tri-City occupying substantial portions of leased rental
space included: (i) ITT Educational Services with a lease which expires in
December, 2004; (ii) Inland Regional Center with a lease through July, 2009;
(iii) CompUSA with a lease through August, 2003; (iv) PetsMart with a lease
through January, 2009; and (v) Circuit City, currently on a ground lease which
will convert to a twenty year lease expiring in January, 2018 when construction
is completed in 1997. These five tenants, in the aggregate, occupied
approximately 201,000 square feet of the 412,000 total leasable square feet at
Tri-City in 1996. As of December 31, 1996, management is in various stages of
negotiation for two new leases totaling 39,965 square feet of space. In
addition, management is negotiating three lease renewals for 27,801 square feet
of space.
Interest and other income for the year ended December 31, 1996 decreased $88,000
or 58% from the year ended October 31, 1995 primarily due to the significant
decrease in cash during 1996 compared to fiscal year 1995, as cash was used to
fund the construction of the Inland Regional Center property. Interest and other
income for the year ended October 31, 1995 decreased $35,000 or 19% from the
year ended October 31, 1994 due to the $720,000 principal reduction to the
Partnership's note receivable received during 1995.
Page 13 of 62
Expenses
Operating expenses for the year ended December 31, 1996 remained comparable to
the operating expenses for the year ended October 31, 1995. The increase of
$286,000 or 12% during the fiscal year ended October 31, 1995 over the prior
year is primarily due to an increase in property taxes upon the completion of
Phase I of the Promotional Retail Center.
Depreciation and amortization decreased $98,000 or 6% during the year ended
December 31, 1996 compared to the year ended October 31, 1995 and increased
$43,000 or 3% while comparing the year ended October 31, 1995 to the year ended
October 31, 1994 as a result of fully amortizing lease commissions paid in
connection with a tenant's early vacancy in the One Vanderbilt building in 1995.
Interest expense increased $39,000 or 5% and $33,000 or 5% during the year ended
December 31, 1996 compared to the year ended October 31, 1995 and during the
year ended October 31, 1995 compared to the year ended October 31, 1994,
respectively, due to the increased debt to finance the construction of
properties over this two year period.
Prior to 1995, the Partnership's business strategy was to hold its properties
for future development and operations. Conclusions about the carrying value of
the Partnership's properties were based upon this strategy. In 1995, the
Partnership modified this strategy to focus on eventual disposition of its
assets at the optimal time and sales price, however, development opportunities
will be pursued for certain sites. The Partnership revalued certain of its
assets based upon the change in strategy, independent appraisals and
management's estimates of development value. Appraisals and development values
are estimates of fair value based upon assumptions about the property and the
market in which it is located. Due to the uncertainties inherent in these
processes, these valuations do not purport to be the price at which a sale
transaction involving these properties can or will take place. The Partnership
made the following provisions to reduce the carrying value of investments in
real estate for the year ended October 31, 1995:
Unimproved Land:
San Bernardino, CA $ 6,158,000
Perris, CA 2,024,000
Lake Elsinore, CA 4,042,000
-----------
Total $12,224,000
===========
No such provisions were recorded in 1996, the two month period ended December
31, 1995 or in 1994.
Expenses associated with undeveloped land include property taxes as well as
maintenance association fees. Any expenses associated with land currently under
construction (i.e., undergoing activities necessary to get it ready for its
intended use) have been capitalized pursuant to Statement of Financial
Accounting Standards No. 67 (SFAS 67) "Accounting for Costs and Initial Rental
Operations of Real Estate Projects". The $197,000 or 26% decrease in expenses
associated with undeveloped land during the year ended December 31, 1996
compared to the year ended October 31, 1995 was in large part due to the
capitalization of expenses at the Circuit City and Rancon Town Village projects
in 1996. Expenses associated with undeveloped land during the year ended October
31, 1995 compared to the year ended October 31, 1994 decreased by $116,000 or
13% due to: (i) the capitalization of property taxes during the construction of
a 15,000 square foot retail building in the Promotional Retail Center and the
81,000 square foot build-to-suit office building for Inland Regional Center and
(ii) a decrease in the assessed value of certain portions of the Partnership's
unimproved land and refunds of previously paid property taxes.
Page 14 of 62
Administrative expenses decreased $109,000 or 8% during the year ended December
31, 1996 from the year ended October 31, 1995, a result of a one-time severance
payment to RFC's terminated employees in 1995, but partially offset by a $72,000
increase in general overhead expenses related to the management of the
Partnership and a $28,000 increase in general partnership legal costs in 1996.
The increase in administrative expenses of $568,000 or 70% during the year ended
October 31, 1995 over the year ended October 31, 1994 is largely due to: (i) the
aforementioned severance payment to RFC; (ii) an increase in investor update
meetings and the associated costs in 1995; and (iii) the payment and expense of
1994 audit and tax return fees in 1995. Since January 1, 1995, audit and tax
fees have been accrued in the year to which they relate.
In December, 1994, RFC entered into an agreement with Glenborough Inland Realty
Corporation ("Glenborough") whereby RFC sold to Glenborough, for approximately
$4,466,000 and the assumption of $1,715,000 of RFC's debt, the contract to
perform the rights and responsibilities under RFC's agreement with the
Partnership and other related Partnerships (collectively, "the Rancon
Partnerships") to perform or contract on the Partnership's behalf for financial,
accounting, data processing, marketing, legal, investor relations, asset and
development management and consulting services for the Partnership for a period
of ten years or to the liquidation of the Partnership, whichever comes first.
According to the contract, the Partnership will pay Glenborough for its services
as follows: (i) a specified asset administration fee of $993,000 per year, which
is fixed for five years subject to reduction in the year following the sale of
assets; (ii) sales fees of 2% for improved properties and 4% for land; (iii) a
refinancing fee of 1% and (iv) a management fee of 5% of gross rental receipts.
As part of this agreement, Glenborough will perform certain responsibilities for
the General Partner of the Rancon Partnerships and RFC agreed to cooperate with
Glenborough, should Glenborough attempt to obtain a majority vote of the limited
partners to substitute itself as the Sponsor for the Rancon Partnerships.
Glenborough is not an affiliate of RFC.
RFC entered into the transaction with Glenborough described above, when it
determined to sell that portion of its business relating to investor relations
services, property management services and asset management services, and those
services are now rendered to the Partnership, eight other related partnerships
and third parties by Glenborough.
Item 8. Financial Statements and Supplementary Data
For information with respect to this Item 8, see Financial Statements and
Schedules as listed in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On June 6, 1995, Price Waterhouse LLP was dismissed as the principal independent
accountant for the Partnership. The decision to dismiss Price Waterhouse LLP was
made by the Partnership's General Partner.
The reports of Price Waterhouse LLP on the Partnership's financial statements
for the period ending October 31, 1994, do not contain an adverse opinion or a
disclaimer of an opinion, nor were such opinions modified as to uncertainty,
audit scope, or accounting principles.
During the fiscal years ended October 31, 1994 and 1993 and the subsequent
interim period from November 1, 1994 to June 6, 1995, there were no
disagreements between the Partnership and Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or
Page 15 of 62
auditing scope or procedure, which, if not resolved to the satisfaction of Price
Waterhouse LLP, would have caused it to make a reference to the subject matter
of the disagreement in connection with its reports. For this purpose the term
disagreement does not include initial differences of opinion based on incomplete
facts or preliminary information that were later resolved to the satisfaction of
Price Waterhouse LLP by obtaining additional relevant facts or information.
During the fiscal years ended October 31, 1994 and 1993 and the subsequent
interim period from November 1, 1994 to June 6, 1995, there were no "reportable
events" of the type described in Rule 304(a)(1)(v)(A) through (D) of Regulation
S-K.
On June 6, 1995, the Partnership engaged Arthur Andersen LLP as its new
principal independent accountant. During the fiscal years ended October 31, 1994
and 1993 and the subsequent interim period from November 1, 1994 through June 6,
1995, the Partnership did not consult with Arthur Andersen LLP as to the
application of accounting principles to a specified transaction or the type of
audit opinion that might be rendered on the Partnership's financial statements.
Page 16 of 62
Part III
Item 10. Directors and Executive Officers of the Partnership
Daniel Lee Stephenson and RFC are the General Partners of the Partnership. The
executive officer and director of Rancon is:
Daniel L. Stephenson Director, President, Chief Executive Officer and Chief
Financial Officer
There is no fixed term of office for Mr. Stephenson.
Mr. Stephenson, age 53, founded RFC (formerly known as Rancon Corporation) in
1971 for the purpose of establishing itself as a commercial, industrial and
residential property syndication, development and brokerage concern. Mr.
Stephenson has, from inception, held the position of Director. In addition, Mr.
Stephenson was President and Chief Executive Officer of RFC from 1971 to 1986,
from August 1991 to September 1992 and from March 31, 1995 to present. Mr.
Stephenson is Chairman of the Board of PacWest Group, Inc., a real estate firm
which has acquired a portfolio of assets from the Resolution Trust Corporation.
Effective January 1, 1994 RFC acquired all the outstanding shares of Partnership
Asset Management Company, a California corporation, which previously performed
or contracted on the Partnership's behalf for financial, accounting, data
processing, marketing, legal, investor relations, asset and development
management and consulting services for the Partnership. These services were
provided to the Partnership by RFC subject to the provisions of the Partnership
Agreement during calendar year 1994.
Rancon Development Fund VII (RDFVII), a partnership sponsored by the General
Partners, filed for protection under Chapter 11 of Federal Bankruptcy Law on May
6, 1994 in order to put an automatic stay on RDFVII's property and to forestall
the pending foreclosure. In March, 1994, the General partners were approached by
a non-affiliated party interested in acquiring the interests of RDFVII's general
partners and attempting to restructure the partnership and its secured debt.
Although the necessary majority-in-interest of RDFVII's limited partners was
received, an agreement regarding the terms of the transfer and the plan of
reorganization could not be reached. The holder of the note secured by RDFVII's
property filed for and was granted a relief from the stay thereby allowing the
foreclosure sale to proceed. Such sale took place on September 15, 1994 and the
bankruptcy was subsequently dismissed, as the property was RDFVII's only asset.
Six Stoneridge L.P. (SSRLP), a partnership formed by Rancon Development Fund VI
(RDFVI), a partnership sponsored by the General Partners filed for protection
under Chapter 11 of Federal Bankruptcy Law in December, 1992. Efforts to
negotiate a modification of the purchase agreement of StoneRidge I, to obtain
loans, joint venture partners or other vehicles to meet or modify the cash
payment requirements were unsuccessful. In February, 1993, an adversary
complaint was filed against SSRLP in the bankruptcy court to determine the
nature and extent of SSRLP's interest in StoneRidge I and the debt associated
with the property. A tentative agreement has been reached and the bankruptcy was
dismissed effective November 8, 1995. As of December 31, 1996, SSRLP and RDFVI
have been dissolved.
Page 17 of 62
Item 11. Executive Compensation
The Partnership has no executive officers. For information relating to fees,
compensation, reimbursement and distributions paid to related parties, reference
is made to Item 13 below.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
No person is known by the Partnership to be the beneficial owner of more than 5%
of the Units.
Security Ownership of Management
Title Amount and Nature of Percent
of Class Name of Beneficial Owner Beneficial Ownership of Class
- -------- -------------------------------- -------------------- --------
Units Daniel Lee Stephenson (I.R.A.) 4 Units (direct) *
Units Daniel Lee Stephenson Family Trust 100 Units (direct) *
* Less than 1 percent
Changes in Control
The Limited Partners have no right, power or authority to act for or bind the
Partnership. However, the Limited Partners have the power to vote upon the
following matters affecting the basic structure of the Partnership, each of
which shall require the approval of Limited Partners holding a majority of the
outstanding Units: (i) amendment of the Partnership's Partnership Agreement;
(ii) termination and dissolution of the Partnership; (iii) sale, exchange or
pledge of all or substantially all of the assets of the Partnership; (iv)
removal of the General Partners or any successor General Partner; (v) election
of a new General Partner or General Partners upon the removal, retirement,
death, insanity, insolvency, bankruptcy or dissolution of the General Partners
or any successor General Partner; and (vi) extension of the term of the
Partnership.
Item 13. Certain Relationships and Related Transactions
Due to the agreement with Glenborough whereby RFC sold to Glenborough the
contract to perform the rights and responsibilities under RFC's agreement with
the Partnership, there were no such fees or reimbursements for the year ended
December 31, 1996 or the two months ended December 31, 1995.
Page 18 of 62
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of the report
(1) Financial Statements:
Reports of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
and October 31, 1995
Consolidated Statements of Operations for the year ended
December 31, 1996, the two months ended December 31, 1995,
and the years ended October 31, 1995 and 1994
Consolidated Statements of Partners' Equity (Deficit) for the
year ended December 31, 1996, the two months ended December
31, 1995, and the years ended October 31, 1995 and 1994
Consolidated Statements of Cash Flows for the year ended
December 31, 1996, the two months ended December 31, 1995,
and the years ended October 31, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1996 and Note thereto
(3) Exhibits:
(3.1) Second Amended and Restated Certificate and Agreement
of Limited Partnership of the Partnership (included
as Exhibit B to the Prospectus dated December 29,
1986, as amended on January 5, 1987, filed pursuant
to Rule 424(b), file number 2-90327, is incorporated
herein by reference).
(3.2) First Amendment to the Second Amended and Restated
Agreement and Certificate of Limited Partnership of
the Partnership, dated March 11, 1991 (included as
Exhibit 3.2 to 10-K dated October 31, 1992, File
number 0-14207, is incorporated herein by reference).
(3.3) Limited Partnership Agreement of RRF IV Tri-City
Limited Partnership, A Delaware limited partnership
of which Rancon Realty Fund IV, A California Limited
Partnership is the limited partner (filed as Exhibit
3.3 to the Partnership's annual report on Form 10-K
for the year ended December 31, 1996 is incorporated
herein by reference)
Page 19 of 62
(10.1) Management, administration and consulting agreement
and amendment thereto for services rendered by
Glenborough Inland Realty Corporation dated December
20, 1994 and March 30, 1995, respectively.
(10.2) Construction loan agreement and promissory note on
the Discovery Zone site in the Promotional Retail
Center at Tri-City Corporate Centre in the amount of
$1,000,000 dated February 15, 1995.
(10.3) Promissory note secured by a deed of trust on the One
Vanderbilt building at the Tri-City Corporate Centre
in the amount of $2,400,000 dated January 17, 1995.
(10.4) Construction loan agreement and promissory note on
the Inland Regional Center at Tri-City Corporate
Centre in the amount of $1,000,000 dated May 12,
1995.
(10.5) Note secured by deed of trust on Carnegie Business
Center I and Service Retail Center at Tri-City
Corporate Centre in the amount of $2,800,000 dated
June 1, 1995.
(10.6) Promissory note in the amount of $6,500,000, dated
April 19, 1996, secured by Deeds of Trust on three of
the Partnership Properties (filed as Exhibit 10.6 to
the Partnership's annual report on Form 10-K for the
year ended December 31, 1996 is incorporated herein
by reference).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None.
Page 20 of 62
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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.
RANCON REALTY FUND IV,
a California Limited Partnership
(Partnership)
Date: March 27, 1997 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, General Partner and Director,
President, Chief Executive Officer and Chief
Financial Officer of Rancon Financial Corporation,
General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by following persons on behalf of the Partnership and in the
capacities and on the dates indicated.
Date: March 27, 1997 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, General Partner and Director,
President, Chief Executive Officer and Chief
Financial Officer of Rancon Financial Corporation,
General Partner
Page 21 of 62
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Financial Statements and Schedule Page
Financial Statements:
Reports of Independent Public Accountants 23 & 24
Consolidated Balance Sheets as of December 31, 1996
and 1995 and October 31, 1995 25
Consolidated Statements of Operations for the year
ended December 31, 1996 the two months ended December
31, 1995, and the years ended October 31, 1995 and
1994 26
Consolidated Statements of Partners' Equity (Deficit)
for the year ended December 31, 1996, the two months
ended December 31, 1995, and the years ended October
31, 1995 and 1994 27
Consolidated Statements of Cash Flows for the year
ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31,
1995 and 1994 28
Notes to Consolidated Financial Statements 30
Schedule:
III - Real Estate and Accumulated Depreciation
as of December 31, 1996 and Note thereto 41
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Page 22 of 62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
RANCON REALTY FUND IV, A CALIFORNIA LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of RANCON REALTY
FUND IV, A CALIFORNIA LIMITED PARTNERSHIP as of December 31, 1996 and 1995 and
October 31, 1995, and the related statements of operations, partners' equity
(deficit) and cash flows for the year ended December 31, 1996, the two months
ended December 31, 1995 and the year ended October 31, 1995. These consolidated
financial statements and the schedule referred to below are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RANCON
REALTY FUND IV, A CALIFORNIA LIMITED PARTNERSHIP, as of December 31, 1996 and
1995 and October 31, 1995 and the results of its operations and its cash flows
for the year ended December 31, 1996, the two months ended December 31, 1995,
and the year ended October 31, 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying schedule
listed in the index to financial statements and schedule is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic consolidated financial statements. This
information has been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
San Francisco, California
February 12, 1997 (except with regards to
the matter discussed in Note 3, as to which
the date is February 28, 1997)
Page 23 of 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the General and Limited Partners of
Rancon Realty Fund IV
In our opinion, the accompanying statements of operations, of partners' equity
and of cash flows present fairly, in all material respects, the results of
operations and cash flows of Rancon Realty Fund IV for the year ended October
31, 1994, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the statements of Rancon Realty Fund IV for any
period subsequent to October 31, 1994.
Our audit for the year ended October 31, 1994 was made for the purpose for
forming an opinion on the basic financial statements taken as a whole. Our audit
also included an audit of the Financial Statement Schedule listed in Item 14 (a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.
PRICE WATERHOUSE LLP
San Diego, California
January 20, 1995
Page 24 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
December 31, 1996 and 1995 and October 31, 1995
(in thousands, except units outstanding)
December 31, December 31, October 31,
Assets 1996 1995 1995
- ------ ----------- ---------- ---------
Investments in real estate:
Rental property, net of accumulated
depreciation of $13,077 as of December
31, 1996, $11,799 as of December 31, 1995
and $11,609 as of October 31, 1995 $ 38,094 $ 30,766 $ 30,915
Construction in progress 2,184 2,931 2,646
Land held for development 4,911 9,088 9,063
Land held for sale 4,869 1,632 1,630
--------- --------- --------
Total real estate investments 50,058 44,417 44,254
--------- --------- --------
Cash and cash equivalents 97 1,296 1,934
Restricted cash 102 926 1,213
Accounts and interest receivable 188 8 14
Notes receivable 405 405 405
Deferred financing costs and other fees,
net of accumulated amortization of $775
as of December 31, 1996, $675 as of December
31, 1995 and $643 as of October 31, 1995 1,223 640 643
Prepaid expenses and other assets 622 590 858
--------- -------- --------
Total assets $ 52,695 $ 48,282 $ 49,321
========= ======== ========
Liabilities and Partners' Equity (Deficit)
- -----------------------------------------
Notes payable $ 17,256 $ 11,757 $ 11,766
Accounts payable and accrued expenses 713 356 1,034
Interest payable 67 -- 44
--------- -------- --------
Total liabilities 18,036 12,113 12,844
--------- -------- --------
Commitments and contingent liabilities (see Note 8)
Partners' equity (deficit):
General partners (891) (891) (891)
Limited partners, 79,846 limited partnership
units outstanding at December 31, 1996,
December 31, 1995 and October 31, 1995 35,550 37,060 37,368
--------- -------- --------
Total partners' equity 34,659 36,169 36,477
--------- -------- --------
Total liabilities and partners' equity $ 52,695 $ 48,282 $ 49,321
========= ======== ========
The accompanying notes are an integral part of these financial statements
Page 25 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Operations
For the year ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31, 1995 and 1994
(in thousands, except per unit amounts and units outstanding)
For the For the two For the For the
year ended months ended year ended year ended
December 31, December 31, October 31, October 31,
1996 1995 1995 1994
---------- --------- ---------- ---------
Revenues:
Rental income $ 5,149 $ 768 $ 5,784 $ 5,465
Interest and other income 65 16 153 188
--------- -------- --------- ---------
Total revenues 5,214 784 5,937 5,653
--------- -------- --------- ---------
Expenses:
Operating, including $54 and $278
paid to Sponsor for the years ended
October 31, 1995 and 1994, respectively 2,642 411 2,683 2,397
Depreciation and amortization 1,449 207 1,547 1,504
Interest expense 792 139 753 720
Provision for impairment of real
estate investments -- -- 12,224 --
Expenses associated with undeveloped land 571 124 768 884
Administrative, including $345 and $840 paid
to Sponsor in 1995 and 1994, respectively 1,270 211 1,379 811
--------- -------- --------- --------
Total expenses 6,724 1,092 19,354 6,316
--------- -------- --------- --------
Net loss $ (1,510) $ (308) $ (13,417) $ (663)
========= ======== ========= ========
Net loss per limited partnership unit $ (18.91) $ (3.86) $ (168.03) $ (8.30)
======== ======= ========= =======
Weighted average number of limited partnership
units outstanding during each period used
to compute net loss per limited partnership unit 79,846 79,846 79,850 79,901
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements
Page 26 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Equity (Deficit)
For the year ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31, 1995 and 1994
(in thousands)
General Limited
Partners Partners Total
-------- -------- --------
Balance at October 31, 1993 $ (891) $ 51,484 $ 50,593
Retirement of Limited Partnership Units -- (24) (24)
Net loss -- (663) (663)
------- -------- --------
Balance at October 31, 1994 (891) 50,797 49,906
Retirement of Limited Partnership Units -- (12) (12)
Net loss -- (13,417) (13,417)
------- -------- --------
Balance at October 31, 1995 (891) 37,368 36,477
Net loss -- (308) (308)
------- -------- --------
Balance at December 31, 1995 (891) 37,060 36,169
Net loss -- (1,510) (1,510)
------- -------- --------
Balance at December 31, 1996 $ (891) $ 35,550 $ 34,659
======= ======== ========
The accompanying notes are an integral part of these financial statements
Page 27 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
For the year ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31, 1995 and 1994
(in thousands)
For the For the two For the For the
year ended months ended year ended year ended
Dec. 31, 1996 Dec. 31, 1995 Oct. 31, 1995 Oct. 31, 1994
------------- ------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (1,510) $ (308) $ (13,417) $ (663)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,449 207 1,496 1,417
Amortization of loan fees,
included in interest expense 68 15 51 87
Provision for impairment of real estate investments -- -- 12,224 --
Changes in certain assets and liabilities:
Deferred fees (596) (6) (13) (140)
Accounts and interest receivable (180) 6 (6) 1,143
Prepaid expenses and other assets 155 268 32 (37)
Accounts payable and accrued expenses 357 (678) 349 266
Interest payable 67 (44) 22 --
Payable to Sponsor -- -- (8) (73)
----------- -------- --------- -------
Net cash provided by (used for)
operating activities (190) (540) 730 2,000
----------- -------- --------- -------
Cash flows from investing activities:
Collection on note receivable -- -- 720 --
Net proceeds from sale of real estate 248 -- -- --
Additions to real estate and property
development costs (7,166) (353) (2,538) (1,537)
----------- -------- --------- -------
Net cash used for investing activities (6,918) (353) (1,818) (1,537)
----------- -------- --------- -------
Cash flows from financing activities:
Net loan proceeds 5,492 -- 3,083 --
Reduction (addition) of restricted cash, net 824 287 (1,213) --
Payment of loan fees (211) (23) (224) (77)
Notes payable principal payments (196) (9) (178) (100)
Retirement of Limited Partnership Units -- -- (12) (24)
Other liabilities -- -- 11 (22)
----------- -------- --------- -------
Net cash provided by (used for) financing activities 5,909 255 1,467 (223)
----------- -------- --------- -------
(continued)
Page 28 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows (continued)
For the year ended December 31, 1996, the two months ended
December 31, 1995, and the years ended October 31, 1995 and 1994
(in thousands)
For the For the two For the For the
year ended months ended year ended year ended
Dec. 31, 1996 Dec. 31, 1995 Oct. 31, 1995 Oct. 31, 1994
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,199) (638) 379 240
Cash and cash equivalents at beginning of period 1,296 1,934 1,555 1,315
----------- ---------- --------- -------
Cash and cash equivalents at end of period $ 97 $ 1,296 $ 1,934 $ 1,555
=========== ========== ========= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,254 $ 176 $ 861 $ 616
=========== ========== ========= =======
Interest capitalized $ 597 $ 28 $ 130 $ --
=========== ========== ========= =======
Supplemental disclosure of non-cash refinancing activity:
New financing $ 11,273 $ -- $ -- $ --
Original financing paid-off in escrow (5,586) -- -- --
Increase in other assets and loan fees paid (195) -- -- --
----------- ---------- --------- -------
Net loan proceeds $ 5,492 $ -- $ -- $ --
=========== ========== ========= =======
The accompanying notes are an integral part of these financial statements
Page 29 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Rancon Realty Fund IV, a California Limited Partnership, ("the Partnership"),
was organized in accordance with the provisions of the California Uniform
Limited Partnership Act for the purpose of acquiring, developing and operating
real property. The General Partners of the Partnership are Daniel L. Stephenson
and Rancon Financial Corporation, ("RFC") hereinafter referred to as the
Sponsor. RFC is wholly-owned by Daniel L. Stephenson. The Partnership reached
final funding in July, 1987. 79,846 Partnership units were outstanding at
December 31, 1996 and 1995.
Allocation of profits, losses and cash distributions from operations and cash
distributions from sale or financing are made pursuant to the terms of the
Partnership Agreement. Generally, net income and distributions from operations
are allocated 90% to the limited partners and 10% to the general partners. Net
losses from operations are allocated 99% to the limited partners and 1% to the
general partners until such time as a partner's account is reduced to zero.
Additional losses will be allocated entirely to those partners with positive
account balances until such balances are reduced to zero.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that the market
has flattened and is no longer falling in terms of sales prices. While prices
have not increased significantly, the Southern California real estate market
appears to be improving. Management continues to evaluate the real estate
markets in which the Partnership's assets are located in an effort to determine
the optimal time to dispose of them and realize their maximum value.
General Partners and Management Matters
Effective January 1, 1994, the Partnership contracted with RFC to perform or
contract on the Partnership's behalf for financial, accounting, data processing,
marketing, legal, investor relations, asset and development management and
consulting services for the Partnership. These services were provided by RFC
subject to the provisions of the Partnership Agreement.
In December 1994, RFC entered into an agreement with Glenborough Inland Realty
Corporation ("Glenborough") whereby RFC sold to Glenborough the contract to
perform the rights and responsibilities under RFC's agreement with the
Partnership and other related Partnerships (collectively, "the Rancon
Partnerships") to perform or contract on the Partnership's behalf for financial,
accounting, data processing, marketing, legal, investor relations, asset and
development management and consulting services for the Partnership for a period
of ten years or to the liquidation of the Partnership, whichever comes first.
According to the contract, the Partnership will pay Glenborough for its services
as follows: (i) a specified asset administration fee of $993,000 per year, which
is fixed for five years subject to reduction in the year following the sale of
assets; (ii) sales fees of 2% for improved properties and 4% for land; (iii) a
refinancing fee of 1% and (iv) a management fee of 5% of gross rental receipts.
As part of this agreement, Glenborough will perform certain responsibilities for
the General Partner of the Rancon
Page 30 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Partnerships and RFC agreed to cooperate with Glenborough, should Glenborough
attempt to obtain a majority vote of the limited partners to substitute itself
as the Sponsor for the Rancon Partnerships. This agreement became effective
January 1, 1995. Glenborough is not an affiliate of RFC or the Partnership.
As a result of this agreement, RFC terminated several of its employees between
December 31, 1994 and February 28, 1995. Also as a result of this agreement,
certain of the officers of RFC resigned from their positions effective February
28, 1995, March 31, 1995 and July 1, 1995.
Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles under the presumption that the Partnership will continue
as a going concern.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
Risks and Uncertainties - The Partnership's ability to (i) achieve positive cash
flow from operations, (ii) meet its debt obligations, (iii) provide
distributions either from operations or the ultimate disposition of the
Partnership's properties or (iv) continue as a going concern, may be impacted by
changes in interest rates, property values, geographic economic conditions, or
the entry of other competitors into the market. The accompanying financial
statements do not provide for adjustments with regard to these uncertainties.
Investments in Real Estate - In March, 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." The Partnership adopted SFAS 121 in the fourth quarter of fiscal
year 1995. SFAS 121 requires that an evaluation of an individual property for
possible impairment be performed whenever events or changes in circumstances
indicate that an impairment may have occurred and that long-lived assets to be
disposed of be carried at the lower of carrying amount or fair value. The
specific accounting policies for assets to be held and used and those to be
disposed of are described in more detail below.
Rental Property - Rental properties including the related land, are stated at
cost unless events or circumstances indicate that cost cannot be recovered in
which case carrying value is reduced to estimated fair value. Estimated fair
value: (i) is based upon the Partnership's plans for the continued operations of
each property; (ii) is computed using estimated sales price, as determined by
prevailing market values for comparable properties and/or the use of
capitalization rates multiplied by annualized rental income based upon the age,
construction and use of the building, and (iii) does not purport, for a specific
property, to represent the current sales price that the Partnership could obtain
from third parties for such property. The fulfillment of the Partnership's plans
related to each of its properties is dependent upon, among other things, the
presence of economic conditions which will enable the Partnership to continue to
hold and operate the properties prior to their eventual sale. Due to
uncertainties inherent in the valuation process
Page 31 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
and in the economy, it is reasonably possible that the actual results of
operating and disposing of the Partnership's properties could be materially
different than current expectations.
Depreciation is provided using the straight line method over the useful lives of
the respective assets.
Land Held for Development and Construction in Progress - Land held for
development and construction in progress is stated at cost unless events or
circumstances indicate that cost cannot be recovered in which case the carrying
value is reduced to estimated fair value. Estimated fair value: (i) is based on
the Partnership's plans for the development of each property; (ii) is computed
using estimated sales price, based upon market values for comparable properties;
(iii) considers the cost to complete and the estimated fair value of the
completed project; and (iv) does not purport, for a specific property, to
represent the current sales price that the Partnership could obtain from third
parties for such property. The fulfillment of the Partnership's plans related to
each of its properties is dependent upon, among other things, the presence of
economic conditions which will enable the Partnership to either hold the
properties for eventual sale or obtain financing to further develop the
properties.
Land Held for Sale - Land held for sale is stated at the lower of cost or
estimated fair value. During fiscal year ended October 31, 1995, the Partnership
wrote down the carrying value of the land held for sale based upon independent
appraisals obtained in 1995. Appraisals are estimates of fair value based upon
assumptions about the property and the market in which it is located. Due to the
uncertainties inherent in the appraisal process, these valuations do not purport
to be the price at which a sale transaction involving these properties can or
will take place.
Cash and Cash Equivalents - The Partnership considers certificates of deposit
and money market funds with original maturities of less than ninety days to be
cash equivalents.
Deferred Financing Costs and Other Fees - Deferred loan fees are amortized on a
straight-line basis over the life of the related loan and deferred lease
commissions are amortized over the initial fixed term of the related lease
agreement.
Rental Income - Rental income is recognized as earned over the life of the
respective leases.
Net Loss Per Limited Partnership Unit - Net loss per limited partnership unit is
calculated using the weighted average number of limited partnership units
outstanding during the period and the Limited Partners' allocable share of the
net loss.
Income Taxes - No provision for income taxes is included in the accompanying
financial statements, as the Partnership's results of operations are allocated
to the partners for inclusion in their respective income tax returns. Net loss
and partners' equity (deficit) for financial reporting purposes will differ from
the Partnership income tax return because of different accounting methods used
for certain items, including depreciation expense, provisions for impairment of
investments in real estate, capitalization of development period interest and
income and loss recognition.
Page 32 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Consolidation - In order to satisfy certain lender requirements for the
Partnership's 1996 loan secured by Service Retail Center, Promotional Retail
Center and Carnegie Business Center (see Note 6), Rancon Realty Fund IV Tri-City
Limited Partnership, a Delaware limited partnership ("RRF IV Tri-City") was
formed in April, 1996. The three properties securing the loan were contributed
to RRF IV Tri-City by the Partnership. The limited partner of RRF IV Tri-City is
the Partnership and the general partner is Rancon Realty Fund IV, Inc., a
corporation wholly owned by the Partnership. Since the Partnership indirectly
owns 100% of RRF IV Tri-City, the financial statements of RRF IV Tri-City have
been consolidated with those of the Partnership. All intercompany transactions
have been eliminated in consolidation.
Reclassifications - Certain 1995 and 1994 balances have been reclassified to
conform with the current year presentation.
Note 2. RELATED PARTY TRANSACTIONS
Payable to Sponsor - As a result of the agreement between RFC and Glenborough
(see Note 1), RFC terminated certain employees who were previously responsible
for performing the administrative, legal and development services for the
Partnership. Upon termination, certain employee costs including severance
benefits were allocated to the various Rancon partnerships. Such costs allocated
to the Partnership aggregated $200,000 and are included in administrative costs
for the year ended October 31, 1995.
Reimbursable Expenses and Management Fees to Sponsor - Through December 31,
1994, the Partnership had an agreement with the Sponsor for property management
services. The agreement provided for a management fee equal to 5% of gross
rentals collected while managing the properties. Fees incurred under this
agreement totaled $54,000 and $278,000 for the years ended October 31, 1995 and
1994, respectively. Effective January 1, 1995 the Partnership contracted with
Glenborough to provide these services to the Partnership (see Note 1).
The Partnership paid $4,000 and $25,000 in program management fees to the
Sponsor during the years ended October 31, 1995 and 1994, respectively. The
Sponsor received this fee for its management and administration of unimproved or
non-income producing properties. As a result of the agreement with Glenborough,
effective January 1, 1995 this fee was no longer payable.
The Partnership Agreement also provides for the reimbursement of actual costs
incurred by the Sponsor in providing certain administrative, legal and
development services necessary for the prudent operation of the Partnership.
Reimbursable costs incurred by the Partnership totaled $341,000 and $815,000 for
the years ended October 31, 1995 and 1994, of which the Partnership capitalized
$43,000 and $274,000 in fiscal years 1995 and 1994, respectively.Effective
January 1, 1995, such services are being provided by Glenborough.
Page 33 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Note 3. NOTES RECEIVABLE
Included in notes receivable at December 31, 1996, the Partnership had a
$405,000 note receivable secured by a deed of trust on the TGI Friday's property
(which the Partnership sold in December, 1990). The note bore interest at 10%
per annum and matured on December 31, 2000.
On February 28, 1997, the Partnership purchased the property known as TGI
Friday's in San Bernardino, California for $1,750,000. The Partnership paid
$1,345,000 in cash and the $405,000 note receivable was retired at the time of
this acquisition.
In 1996, the Partnership reached a $120,000 settlement with a former tenant. The
Partnership received cash of $40,000 and an $80,000 note receivable which has
been fully reserved. The note bears interest at ten percent per annum and
requires monthly principal and interest payments of $4,805 commencing January 1,
1998 until the note matures on June 1, 1999.
Note 4. INVESTMENTS IN REAL ESTATE
Rental property components are as follows (in thousands):
December 31, December 31, October 31,
1996 1995 1995
----------- ------------ ----------
Land $ 4,976 $ 4,226 $ 4,226
Buildings 37,378 30,954 30,921
Leasehold and other improvements 8,817 7,385 7,377
----------- ----------- ----------
51,171 42,565 42,524
Less: accumulated depreciation (13,077) (11,799) (11,609)
----------- ----------- ----------
Total rental property, net $ 38,094 $ 30,766 $ 30,915
=========== =========== ==========
The Partnership's rental property includes projects at the Tri-City Corporate
Centre in San Bernardino, California and Shadowridge Woodbend Apartments in
Vista, California. In the second quarter of 1996, construction was completed on
the IRC project, an 81,000 square foot office building, and the tenant commenced
a 13-year lease. Upon completion of IRC, the Partnership reclassified $8,599,000
of construction in progress to rental property.
Land held for development consists of the following (in thousands):
December 31, December 31, October 31,
1996 1995 1995
---------- --------- ---------
26.0 acres in 1996 and 27.2 acres
in 1995 at Tri-City Corporate
Centre, San Bernardino, CA $ 2,975 $ 4,648 $ 4,643
24.8 acres in Lake Elsinore, CA 1,936 1,935 1,935
11.29 acres in 1995, in Temecula, CA -- 2,505 2,485
---------- ---------- ----------
Total land held for development $ 4,911 $ 9,088 $ 9,063
========== ========== ==========
Page 34 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
In 1996, the Partnership reclassed $1,874,000 (after 1996 additions) from land
held for development (Circuit City project in Tri-City) to construction in
progress. Construction is expected to be completed by April 1, 1997. The
Partnership also reclassed $3,483,000 (after 1996 additions) from land held for
development (11.29 acres in Temecula, CA) to land held for sale.
The above land held for development remains unencumbered at December 31, 1996.
Land held for sale consists of the following (in thousands):
December 31, December 31, October 31,
1996 1995 1995
--------- ---------- -----------
17.14 acres in Perris, CA $ 1,386 $ 1,386 $ 1,384
11.29 acres and 1.11 acres
in Temecula, CA in 1996
and 1995, respectively 3,483 246 246
--------- ---------- -----------
Total land held for sale $ 4,869 $ 1,632 $ 1,630
========= ========== ===========
The 1.11 acres of land in Temecula, California was sold on March 26, 1996 for
$275,000 which after commissions and other fees, approximated cost. The
Partnership currently has 3.16 acres under contract to sell to a mini storage
operator for $607,000, pending satisfactory completion of due diligence.
Negotiations are currently underway to sell another two lots totaling 1.56
acres.
The Partnership does not intend to develop the remaining sites held for sale.
The proceeds generated from the future sale would be used to reduce the
Partnership's existing debt or to increase reserves.
The above land remains unencumbered at December 31, 1996.
During the year ended October 31, 1995, the Partnership recorded the following
provisions to reduce the carrying value of investments in real estate (in
thousands):
Land held for development:
San Bernardino, CA $ 6,158
Lake Elsinore, CA 4,042
Land held for sale:
Perris, CA 2,024
----------
Total provision for impairment of
real estate investments $ 12,224
==========
Prior to 1995, the Partnership's business strategy was to hold its properties
for future development and operations. Conclusions about the carrying value of
the Partnership's properties were based upon this strategy. In 1995, the
Partnership modified this strategy to focus on eventual disposition of its
assets at the optimal time and sales price, however, development opportunities
will be pursued for certain sites. The
Page 35 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Partnership revalued certain of its assets based on the business strategy for
the assets. Due to the uncertainties inherent in the valuation process, the
carrying values do not purport to be the price at which a sale transaction
involving these properties can or will take place.
Approximately 23 acres of the Tri-City Corporate Centre land owned by the
Partnership was part of a landfill operated by the City of San Bernardino ("the
City") from approximately 1950 to 1960. There are no records of which the
Partnership is aware disclosing that hazardous wastes exist at the landfill. The
Partnership's landfill monitoring program currently meets or exceeds all
regulatory requirements. The Partnership is currently working with the Santa Ana
Region of the California Regional Water Quality Control Board and the City to
determine the need and responsibility for any further testing. There is no
current requirement to ultimately clean up the site, however, no assurance can
be made that circumstances will not arise which could impact the Partnership's
responsibility related to the property.
Construction in progress of $2,184,000 at December 31, 1996 primarily represents
development costs incurred on the Circuit City site in Tri-City. The
construction in progress of $2,931,000 at December 31, 1995 and $2,646,000 at
October 31, 1995 represented development costs incurred on the 81,000 square
foot build-to-suit office building for Inland Regional Center which was
completed and reclassed to rental property in 1996.
Note 5. RESTRICTED CASH
Restricted cash of $102,000 at December 31, 1996 is comprised of two
certificates of deposit ("CD"). The first is a $100,000 CD which is held as
collateral for subdivision improvement bonds related to the 11.29 acres of land
held for development in Temecula, California. The other is a $2,000 CD pledged
as security to a utility district for construction of a sewer crossing.
Note 6. NOTES PAYABLE
Notes payable as of the stated balance sheet dates was as follows (in
thousands):
December 31, December 31, October 31,
1996 1995 1995
----------- ---------- ---------
Note payable, secured by first deed
of trust on Service Retail Center,
Promotional Retail Center and
Carnegie Business Center I. The
loan, which matures May 1, 2006, is
a 10-year, 8.744% fixed rate loan
with a 25-year amortization and
requires $53 in principal and
interest payments due monthly. $6,457 $ -- $ --
Permanent construction loan secured
by the IRC building. Interest
accrues at a fixed rate of 8.75%
per annum. Monthly payments of $21
of principal and interest are due
until the loan matures on April 23,
2001. 2,488 -- --
Page 36 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
Note payable, secured by first deed
of trust on the Shadowridge
Woodbend Apartments. Interest
accrues at a fixed rate of 7.95%
per annum. Monthly installments of
$48 of principal and interest are
due until the loan matures on April
15, 1998. $ 5,960 $ 6,063 $ 6,079
Permanent loan, converted from a
construction loan secured by a
first deed of trust on Phase I of
the Promotional Retail Center.
Interest accrued at a fixed rate of
8.75% with monthly installments of
principal and interest of $22. The
unpaid principal and interest was
due on May 3, 1999, but was paid
off in April, 1996. -- 2,650 2,658
Construction loan secured by a
portion of Phase II of the
Promotional Retail Center. Interest
accrued at a variable rate and was
payable monthly upon full
utilization of the $98 interest
reserve portion of the $1,000 loan.
The unpaid principal and accrued
interest was due on February 15,
1996, but was extended until April,
1996 and then paid off. -- 649 629
Note payable secured by first deed
of trust on the One Vanderbilt
building. Interest accrues at a
fixed rate of 9%. Monthly
installments of $20 are payable
which include principal and
interest amortized over 25 years.
The unpaid principal and interest
is due on January 1, 2005. 2,351 2,380 2,385
Note payable secured by Carnegie
Business Center I and Service
Retail Center. Interest was payable
monthly at the Imperial Bank Prime
Rate plus 2%. The unpaid principal
and interest was due on May 15,
1997, but was paid off in April,
1996. -- 15 15
--------- ---------- ---------
Total notes payable $ 17,256 $ 11,757 $ 11,766
========= ========== =========
Page 37 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
The annual maturities of notes payable subsequent to December 31, 1996 are as
follows (in thousands):
1997 $ 254
1998 6,005
1999 171
2000 186
2001 2,498
Thereafter 8,142
------------
Total $ 17,256
============
Note 7. LEASES
The Partnership's rental properties are leased under operating leases that
expire at various dates through January, 2018. In addition to monthly base
rents, several of the leases provide for additional rents based upon a
percentage of sales levels attained by the tenants; however, no contingent
rentals were realized during the years ended December 31, 1996, October 31, 1995
and 1994. Future minimum rents on non-cancelable operating leases as of December
31, 1996 are as follows (in thousands):
1997 $ 4,696
1998 4,076
1999 4,073
2000 3,889
2001 3,667
Thereafter 23,410
-----------
Total $ 43,811
===========
Note 8. COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership is contingently liable for subordinated real estate commissions
payable to the Sponsor in the amount of $643,000 at December 31, 1996 for sales
that transpired in previous years. The subordinated real estate commissions are
payable only after the Limited Partners have received distributions equal to
their original invested capital plus a cumulative non-compounded return of six
percent per annum on their adjusted invested capital.
Note 9. TAXABLE INCOME
The Partnership's tax returns, the qualification of the Partnership as a
partnership for federal income tax purposes, and the amount of income or loss
are subject to examination by federal and state taxing
Page 38 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
authorities. If such examinations result in changes to the Partnership's taxable
income or loss, the tax liability of the partners could change accordingly.
The Partnership's tax returns are filed on a calendar year basis. As such, the
following reconciliation has been prepared using tax amounts estimated on a
calendar year basis.
The following is a reconciliation for the years ended December 31, 1996 and
October 31, 1995 and 1994 of the net loss for financial reporting purposes to
the estimated taxable income (loss) determined in accordance with accounting
practices used in preparation of federal income tax returns (in thousands).
December 31, October 31, October 31,
1996 1995 1994
----------- ----------- ----------
Net loss per financial statements $ (1,510) $ (13,417) $ (663)
Financial reporting depreciation
in excess of tax reporting
depreciation 191 599 578
Provision for impairment of
investments in real estate -- 12,224 --
Operating expenses recognized in a
different period for financial
reporting than for income tax
reporting, net (692) (271) --
Property taxes capitalized for tax 465 476 --
----------- ----------- --------
Estimated net loss for federal
income tax purposes $ (1,546) $ (389) $ (85)
=========== ========== ========
Page 39 of 62
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996, October 31, 1995 and 1994
The following is a reconciliation as of December 31, 1996 and October 31, 1995
of partner's capital for financial reporting purposes to estimated partners'
capital for federal income tax purposes (in thousands).
1996 1995
---------- --------
Partners' equity per financial statements $ 34,659 $ 36,477
Cumulative provision for impairment of
investments in real estate 14,274 14,274
Financial reporting depreciation in excess
of tax reporting depreciation 4,386 4,195
Operating expenses recognized in a
different period for financial reporting
than for income tax reporting, net (692) (271)
Property taxes capitalized for tax 941 476
Other, net