As of December 31, 2006, the Partnership’s liquid assets, consisting of cash and cash equivalents, were approximately $33.4 million, a decrease of approximately $12.1 million from $45.5 million at December 31, 2005. The decrease was primarily due to an additional funding for a preferred equity investment in a private real estate investment trust, or “REIT”, the acquisition of a retail property and a distribution to the Partners, as discussed below. Partially offsetting the decrease were proceeds received in connection with a loan payoff, as described below, and the cash flows from the Partnership’s operating activities of $11.9 million. Sources of liquidity included net cash flow from property operations, sales, financings and interest from short-term investments. The Partnership uses cash for its real estate investment activities and for its distributions to its partners. As of December 31, 2006, approximately 12.3% of the Partnership’s total assets consisted of cash and cash equivalents.
The Partnership made distributions to its Partners totaling $6.0 million during 2006.
The Partnership issued a Leasehold Mortgage Loan to a borrower in January 2004 in connection with the redevelopment of a retail center in Westminster, Maryland. The loan was paid in full by the borrower in March 2006, resulting in proceeds of approximately $4.3 million.
The following is a comparison of the Partnership’s results of operations for the periods ended December 31, 2006 and 2005.
The following table presents a comparison of the Partnership’s sources of net investment income, and realized and unrealized gains or losses by investment type for the years ended December 31, 2006 and 2005.
The Oakbrook Terrace, Illinois office property was sold on June 8, 2005 but certain post-closing adjustments were recognized in the year ended December 31, 2006.
Net Investment Income for the year ended December 31, 2005 reflects a partial period rent abatement that was provided to the tenant as part of the lease.
The office properties owned by the Partnership recorded an aggregate net unrealized gain of approximately $2.5 million during the year ended December 31, 2006, compared to an aggregate net realized and unrealized gain of $4.5 million for the prior year. The net unrealized gain of $2.5 million for the year ended December 31, 2006 was primarily due to strengthening market fundamentals and investor demand in the office sector in Beaverton, Oregon as well as improving market conditions at the office properties in Brentwood, Tennessee. Partially offsetting these unrealized gains was a net unrealized loss of approximately $0.6 million at the office property in Lisle, Illinois due to continued soft market conditions, which resulted in a decrease in market rental rates.
The Salem, Oregon, Gresham, Oregon and Jacksonville, Florida apartment properties were sold on March 10, 2005, August 10, 2005 and November 30, 2005, respectively, but certain post-closing adjustments were recognized in the year ended December 31, 2006.
Net investment income (loss) for the year ended December 31, 2006 reflects partial period results for the three out of four Kansas City, Kansas and Kansas City, Missouri retail properties that were sold on May 15, 2006. Occupancy for the year ended December 31, 2006 reflects remaining retail property in Kansas City, Kansas.
Classified as Other Real Estate Investment (mortgage paid in full September 13, 2004).
The hotel property owned by the Partnership recorded a net unrealized gain of $3.8 million for the year ended December 31, 2006, compared to a net unrealized gain of $1.0 million for the prior year. The net unrealized gain for the year ended December 31, 2006 reflects the continued strengthening of market and property fundamentals and investor demand.
The Blue Springs, Missouri land property was sold on November 28, 2005, but certain post-closing adjustments were recognized during the year ended December 31, 2006, which resulted in a slight decrease to net investment income. The same land property also recorded a slight realized loss during the year ended December 31, 2006, which reflects a post-closing adjustment to the $0.6 million gain recognized during the fourth quarter of 2005 when the land was sold.
Real Estate Investments - Real estate investments are shown at estimated market value in accordance with the terms of the Partnership’s contracts. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property, including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above and below market leases, in-place leases, and tenant relationships at the time of acquisition. Market value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of Prudential Investment Management, Inc., or “PIM”, which is an indirectly owned subsidiary of Prudential Financial, Inc., is responsible for assuring that the valuation process provides independent and reasonable property market value estimates. American Appraisal Associates, or the “Appraisal Management Firm”, an entity not affiliated with PIM, has been appointed by PIM to assist the Chief Real Estate Appraiser in maintaining and monitoring the independence and the accuracy of the appraisal process. Unless a property is currently held for sale, the market value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.
Unconsolidated real estate partnerships are valued at the Partnership’s equity in net assets as reflected in the partnership’s financial statements with properties valued as described above. Under the equity method, the investment is initially recorded at the original investment amount, plus or minus additional amounts invested or distributed, and is subsequently adjusted for the Partnership’s share of undistributed earnings or losses, including unrealized appreciation and depreciation, from the underlying entity.