Description of the Account's real estate related investments is hereby incorporated herein by reference to pages 18 to 35 of the Registrant's prospectus included in Form S-1 (as amended), File number 33-13375 to be filed April 3, 1998, which pages are filed herewith as Exhibit 99.2 to this report.
Net assets decreased from $33,545,476 at December 31, 1996 to $28,340,115 at December 31, 1997. During this same time period, the accumulation unit value increased from $.98 to $1.04. The Account experienced net terminations amounting to $6,923,566 for the year ended December 31, 1997 compared to net terminations of $2,207,498 for the year ended December 31, 1996. IDS Life did not purchase or sell accumulation units for the year ended December 31, 1997. For the year ended December 31, 1996, IDS Life purchased $2,000,000 accumulation units, as discussed more fully below.
Interest income for the year ended December 31, 1997, represents income earned on the Account's investment in short-term securities. Interest income increased to $467,504 from $385,026 for the year ended December 31, 1997 compared to the year ended December 31, 1996. The increase for the year ended December 31, 1997, is due primarily to an increase in the average short-term investment balance throughout 1997 compared to the same period in 1996. This increase was due primarily to cash received as a result of (i) the payoff of the Riverpoint mortgage loan receivable in December 1996 and (ii) the sale of the West Springfield apartments in September 1996. Short-term investments decreased towards the end of 1997 due primarily to net Account terminations, as discussed above. Interest income for the year ended December 31, 1996 primarily represents interest income earned on the Account's investment in the participation in a mortgage loan (Riverpoint Shopping Center). Interest income in 1996 also includes interest earned on short term investments. The borrower of the ten year non-recourse participating first mortgage loan on the Riverpoint Shopping Center had notified the Lenders (IDS Life Account RE, JMB Mortgage Partners-III and JMB Mortgage Partners IV, jointly the "Lenders"), that it was experiencing financial difficulties and approached the Lenders regarding a loan modification. During the third quarter of 1996, the Lenders and Borrowers finalized a loan modification whereby they reached an agreement to defer payment of a portion of the scheduled debt service from September 15, 1995 to July 15, 1996. In conjunction with the loan modification agreement, the scheduled maturity date of the loan was accelerated to December 31, 1997. Finally, the Lenders agreed to accept at certain dates through June 30, 1997 repayment of the loan at specified amounts. On December 24, 1996, the borrower repaid the lenders $27,400,000 (of which the Account's share was approximately $2,800,000) in full satisfaction of the loan as agreed upon.
To counter the negative perception of Northridge Mall, N/S Associates implemented certain capital improvements and operational programs to improve the shopping center's safety and appearance, as well as instituted certain marketing efforts to enhance its image. Certain positive sales trends appear to indicate a modest improvement; however, elimination of the negative perception is expected to take some time. In addition N/S Associates is seeking to increase occupancy at the shopping center by aggressively marketing space for new and renewal tenants through leasing incentives, as well as continuing to cooperate with existing tenants who need short-term rent reductions in order to retain occupancy of their space. Part of the leasing strategy includes targeting certain well-recognized retailers as a group that would become tenants at the shopping center. It is expected that the draw of this group of tenants would help the shopping center gain leasing momentum and aid in future leasing efforts.
For the year ended December 31, 1997, the Account recognized net unrealized depreciation on its investment in unconsolidated joint ventures of $169,246 primarily a result of a net decrease in the value of N/S Associates (comprised of a decrease in value of Northridge Mall off set by a slight increase in value at Southridge Mall). In addition, Monmouth Associates and 1225 Investment Corporation had a slight decrease in value due to a reduction of its current assets.
The Account paid asset management and mortality expense risk fees of $783,731 and $1,011,135 for the years ended December 31, 1997 and 1996, respectively.
For the Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995-
For the year ended December 31, 1996, the Account recognized net unrealized depreciation of participation in mortgage loan of $147,608 as a result of lower effective rents achieved from the mortgage property upon releasing. The Account recognized net realized depreciation on its investment in wholly-owned real estate property of $2,146,691 primarily as a result of the sale of the West Springfield Terrace apartments, as discussed below. In addition, the Account recognized net unrealized depreciation on its investment in unconsolidated joint ventures of $1,206,750 primarily a result of (i) a decrease in the current assets of Monmouth Associates, which partially resulted from a $4,000,000 cash distribution paid in 1996 in which the Account's share was $278,800, (ii) a decrease in the estimated value of N/S Associates (Northridge Mall and Southridge Mall); and (iii) a decrease in the value of 1225 Connecticut. These decreases were a result of valuations of the properties which indicated the properties fair market values. In addition, the lower values at Northridge and Southridge can be attributable to the factors discussed above. Also, the decrease in value at 1225 Connecticut is partially due to 80% of the building being leased to one tenant. This increased the property's risk factor.
The liquidity requirements of the Account have generally been met by funds provided from the Account's short-term investments, cash distributions from unconsolidated joint ventures, operating cash flow, interest income, proceeds from sales of contracts and purchases of accumulation units by IDS Life, as discussed below. The primary uses of funds currently are expected to be for property operating expenses, asset management and mortality and expense risk fees and payments for contract terminations.
Through December 31, 1997, Monmouth Associates funded approximately $25,905,000 of the renovation loan for Monmouth Mall. Fundings of principal on the loan have been made from cash reserves held by Monmouth Associates, cash flow from interest and ground rent payments received from the borrower/lessee and capital contributions made to Monmouth Associates by its partners pro rata based upon their respective interests. The aggregate amount of capital contributions to finance the loan, is approximately $9,830,000. The Account's share of these capital contributions is approximately $685,000. The aggregate amount of the renovation loan, including accrued and deferred interest of approximately $1,300,000, is currently expected to be no greater than $29,100,000. Remaining fundings for the renovation loan are expected to be made from cash flow and funds currently held by Monmouth Associates. Monmouth Associates may also be required to make certain additional loans to pay a portion of the costs of certain tenant improvements or other ordinary capital expenditures. In addition, Monmouth Associates may provide additional financing to the borrower/lessee in order to pay costs to be incurred in connection with the replacement of a department store tenant at Monmouth Mall. However, it is not currently expected that this would occur during 1997.
The loan had an original term of seven years and bore interest at a rate of 9.5 percent per annum. The loan required monthly payments of principal and interest aggregating $824,000 per annum until November 1996 when the remaining principal balance was due.
N/S Associates currently expects that it will incur approximately $1,710,000 in 1998 for tenant improvement, asbestos removal and other capital items at Northridge and Southridge Malls. Actual amounts expended in 1998 may vary depending on a number of factors, including actual leasing activity, results of property operations, liquidity considerations and market conditions over the course of the year. N/S Associates undertakes asbestos removal from time to time at portions of the Northridge and Southridge Malls as tenant spaces are vacated and prior to occupancy by new tenants. The cost of tenant improvements, asbestos removal and other capital items generally will be provided out of cash flows from the properties. N/S Associates expended approximately $1,629,000 for tenant improvements, asbestos removal and other capital projects in 1997.
At December 31, 1997, real property investments (through two unconsolidated joint ventures, N/S Associates and 1225 Connecticut), one land sale-leaseback investment (Monmouth Associates), and short-term investments represented 50.9 percent, 30.3 percent and 18.5 percent of total assets, respectively. At December 31, 1996, real property investments, mortgage loan and land sale-leaseback investments and short-term investments represented 42.4 percent, 26.9 percent and 30.7 percent of total assets, respectively.
For the Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 At December 31, 1996, the Account had cash of approximately $103,000 as compared to approximately $587,000 at December 31, 1995. The Account financed a portion of the contract terminations during 1996 and 1995 through additional investments made by IDS Life Insurance Company (IDS Life). The Account had experienced net contract terminations in 14 consecutive quarters with net sales (including accumulation units purchased by IDS Life) in six of the last seven quarters.
The liquidity requirements of the Account have generally been met by funds provided from the Account's short-term investments, cash distributions from unconsolidated joint ventures, operating cash flow, interest income, proceeds from the sale of West Springfield Terrace apartments, the Loan repayment from Riverpoint Shopping Center, proceeds from sales of contracts, and borrowings under the line of credit from IDS Life and purchases of accumulation units by IDS Life discussed below. The primary uses of funds currently are expected to be for property operating expenses, asset management and mortality and expense risk fees and payments for contract terminations.
Since the Account has experienced substantial net contract terminations over the past several years, the Account does not intend to acquire additional real estate related investments. Further, the Account intends to liquidate the real estate related investments that it currently holds when it becomes advantageous or necessary to do so. To the extent funds of the Account are not used to pay obligations of the Account, including those under existing contracts, or the redemptions of accumulation units purchased by IDS Life, such funds will be invested in short-term debt instruments and possibly intermediate-term bonds with maturities of up to five years.
At December 31, 1996, real property investments (through two unconsolidated joint ventures, N/S Associates and 1225 Connecticut) and mortgage loan and land sale-leaseback investments (through an unconsolidated joint venture, Monmouth Associates) and short-term investments represented 42.4 percent, 26.9 percent and 30.7 percent of total assets, respectively.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDS Life Account RE at December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Security transactions are accounted for on the date securities are purchased or sold. Interest income, including amortization of premium and discount, is accrued daily.
The Account pays a mortality and expense risk fee to IDS Life which is accrued daily and is equal, on an annual basis, to 1.00 percent of the average daily asset value, as defined, of the Account. The mortality risk is IDS Life's guarantee to make retirement payments according to the terms of the Contract, no matter how long annuitants live. The expense risk portion of the fee is paid to IDS Life for its guarantee that the various fees paid by the Account to IDS Life will not be increased in the future. For the years ended December 31, 1997, 1996 and 1995, the Account paid IDS Life a mortality and expense risk fee of $348,325, $449,393 and $482,896, respectively.
IDS Life receives from the Account an acquisition and mortgage placement fee equal to 3.75 percent of the total cash to be paid or advanced by the Account (net of any borrowings in the case of real property investments) in connection with each real property investment, mortgage loan or land sale-leaseback investment made by the Account. A portion of this fee, equal to 3.50 percent, is paid to the Investment Adviser in consideration for its services in connection with the acquisition or placement of real estate related investments of the Account. No acquisition and mortgage placement fees were paid in 1997, 1996 or 1995.
The Account also pays custodian fees to American Express Trust Company, an affiliate of American Express Financial Corporation (AEFC).
4. Investments in Unconsolidated Joint Venture Partnerships and Participation in Mortgage Loan Joint Venture Partnership - N/S Associates
The terms of N/S Associates' partnership agreement provide that its annual net cash flows and net sales or refinancing proceeds generally will be distributed among all of the partners in accordance with their respective percentage ownership interests in N/S Associates. The Account contributed approximately $12,008,000 to N/S Associates as its capital contribution. The percentage interest of the Account in N/S Associates is 5.92 percent. In connection with the purchase of the shopping malls, the Account paid to IDS Life and the Investment Adviser their respective portions of the acquisition fee amounting to approximately $450,000.
The Account, through N/S Associates, owns an interest in an existing enclosed super regional shopping center in Greendale, Wisconsin, known as Southridge Mall. The mall shops and five adjacent department stores comprising the shopping center contain approximately 1,297,000 square feet of gross leasable area, of which N/S Associates owns approximately 449,000 square feet, including the space leased to one of the department stores. The remaining 860,000 square feet of gross leasable area are occupied by four other department stores, three of which own their own stores and a portion of the parking area. The fourth department store leases its space from an unaffiliated third party.
The property is being managed under an agreement pursuant to which the manager is obligated to manage 1225 Connecticut, collect all of the receipts from operations and, to the extent available from such receipts, pay all of the expenses of 1225 Connecticut. The manager is paid a fee equal to 2.5 percent of the gross revenues of 1225 Connecticut, plus reimbursement for certain direct expenses of the manager. 1225 Connecticut leases approximately 87 percent of the available space of the property to one tenant under leases, all with terms of 12 years. For the year ended December 31, 1997, such tenant represented approximately 74 percent of total revenues.
Account's share of net investment income from Unconsolidated Joint Ventures $ 2,277,775 $ 2,167,460
Total net investment income of Unconsolidated Joint Ventures $27,218,000 $ 27,455,000
In August 1989, IDS Life, on behalf of the Account, participated in the initial funding of a non-recourse participation first mortgage loan in the principal amount of $26,000,000. The Account's share of the initial funding was $2,666,660 or 10.26 percent of this loan. The remaining portion of the loan was funded by affiliates of the Investment Adviser (herein, the Account and said affiliates are collectively called the Lenders). The Loan was secured by a first mortgage on a shopping center known as Riverpoint Center in Chicago, Illinois. The shopping center, completed in 1989, is located on approximately 17 acres and consists of approximately 200,800 square feet of gross leasable area. The shopping center was owned by a partnership (the Borrower) whose general partners were not affiliated with any of the Lenders. In connection with the loan, the Account paid to the Investment Adviser a mortgage placement fee amounting to approximately $108,000, less $37,500 in loan origination fees paid to the Investment Adviser by the Borrower, for a net fee paid of approximately $70,500 paid by the Account.
Additional amounts aggregating approximately $2,040,000 (of which the Account's share was approximately $209,000) had been funded since the Initial Funding. The Borrower did not qualify for any additional fundings above the $28,040,000 which had been funded to date, and no additional fundings were made by the Lenders.
The apartment complex, which was completed in 1978, consists of 17 separate three and four-story buildings of wood frame with brick veneer construction containing 52 one-bedroom units, 22 one-bedroom and den units, 118 two-bedroom units, 22 two-bedroom and den units, and 30 three-bedroom units. The complex contains a swimming pool, tennis court, clubhouse and approximately 380 parking spaces.
In November 1989, the Account obtained a loan from an institutional lender in the principal amount of $8,000,000 secured by a first mortgage on the property. The loan was repaid in September 1996 as a result of the sale of this property, as discussed below. The loan had a term of seven years and bore interest at a rate of 9.50 percent per annum. The loan required monthly payments of interest only during the first three loan years and thereafter was amortizable over a 27-year schedule through monthly payments of principal and interest aggregating $824,400 per annum until November 1996, when the remaining principal balance and any accrued and unpaid interest was due and payable.
Part 1 - Participation in Mortgage Part 2 - Interest Earned on Loan on Real Estate at Close of Year Participation in Mortgage
Schedule IV IDS LIFE ACCOUNT RE of IDS LIFE INSURANCE COMPANY
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 combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Investment Adviser, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Investments in real estate are stated at estimated market value. A description of the valuation process is contained in Note 2 of Notes to Financial Statements of the Account. Such note is incorporated herein by reference.
No provision for State or Federal income taxes has been made for N/S Associates or Monmouth Associates as the liability for such taxes, if any, is expected to be that of the venture partners rather than the venture. 1225 Investment Corporation has elected and qualifies to be treated as a real estate investment trust for Federal income tax purposes. The Corporation had no Federal income tax liabilities for taxable years ended December 31, 1997, 1996 and 1995.
Contingent rent (based on sales by property tenants) from the retail investments included in rental income is $748,000, $578,000 and $1,058,000 in 1997, 1996 and 1995, respectively.
Monmouth Associates entered into an agreement whereby the land underlying the Monmouth shopping center is leased under a long-term ground lease. The long-term ground lease, which has a term of 75 years, provides for accrual of annual base rent of $1,170,000 with minimum payments of $650,000 per annum. However, in April 1992, Monmouth Associates put these loans on non-accural, based on the uncertainty as to the collectibility of such contingent interest.
(B) - Reconciliation for depreciation is not applicable as real estate owned is stated at estimated market value.