Description of the Account's real estate related investments is hereby incorporated herein by reference to pages 21 to 41 of the Registrant's prospectus included in Form S-1 (as amended), File number 33-13375 to be filed April 3, 1997, which pages are filed herewith as Exhibit 99.2 to this report.
Financial Condition and Results of Operations For the Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 - Net assets decreased from $35,906,465 at December 31, 1995 to $33,545,476 at December 31, 1996. During this same time period, the accumulation unit value decreased from $.99 to $.98. The Account experienced net terminations amounting to $2,207,498 for the year ended December 31, 1996 compared to net sales of $2,291,255 for the year ended December 31, 1995. The net terminations for the year ended December 31, 1996 and the net sales for the year ended December 31, 1995, included approximately $2,000,000 and $24,700,000, respectively, for accumulation units purchased by IDS Life, which have been used to repay principal and accrued interest on the Account's revolving loan payable to IDS Life and to pay for contract surrenders, as discussed more fully below.
Northridge Mall continues to be adversely affected by the perception that it is an unsafe place to shop. This perception has resulted in declining sales and occupancy over a three-year period. Compounding the problem of declining sales are the high operating costs for tenants at the mall due to high real estate taxes. Occupancy has also been affected by tenant bankruptcies during 1993, 1994 and 1995. As of December 31, 1996, occupancy of the mall shops was approximately 77%, including temporary tenants under short term leases.
Kohl's Department Store, a successful tenant occupying approximately 66,000 square feet of space at Southridge Mall, approached N/S Associates regarding an expansion of its tenant space and a reduction in its overall leasing costs. During the third quarter of 1995, N/S Associates and Kohl's entered into an amendment of its lease. Pursuant to the lease amendment, the term of Kohl's lease has been extended from 2001 until 2015 and the tenant space has been increased by approximately 19,000 square feet to approximately 85,000 square feet, exclusive of storage space. Kohl's is required to pay annual base rent of $9.25 per square foot, as well as one-half of its pro rata share for real estate taxes and a fixed amount for common area maintenance expense. Kohl's is also obligated to pay as additional rent a percentage of its gross receipts in excess of a minimum amount of annual sales determined after the tenant has occupied the entire leased space. N/S Associates was responsible for paying the costs of asbestos removal for the tenant space. Kohl's was obligated to pay other costs associated with the leased space, including tenant improvements and lease buy-out and relocation costs. The lease amendment also contains an operating covenant pursuant to which Kohl's is obligated to operate its retail store at Southridge Mall until 2005, subject to earlier termination under certain circumstances. Although the lease amendment reduces Kohl's overall rent, the expansion of its space and the extension of its lease term is expected to help stabilize the shopping center on a long-term basis by ensuring Kohl's continued occupancy and contribution to customer. As of December 31, 1996, occupancy of the portion of Southridge Mall owned by N/S Associates was approximately 94%, including temporary tenants under short-term leases.
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.
Distributions from unconsolidated joint ventures increased for 1996 compared to 1995 primarily due to the Account's share of Monmouth Associates' distributions of $278,800. The increase was partially offset by decreased distributions from N/S Associates.
For the year ended December 31, 1995, the Account's recorded equity in earnings of its unconsolidated joint ventures (N/S Associates, Monmouth Associates and 1225 Connecticut) was $1,924,741, compared to $2,094,682 for the year ended December 31, 1994. The decrease in earnings was primarily the result of N/S Associates' reduced earnings as a result of lower rental income achieved at Northridge Mall due to lower occupancy and higher interest expense attributable to prepayment charges incurred in the first quarter of 1995 in connection with the repayment and refinancing of the mortgage loans on Northridge and Southridge Malls. The decrease was partially offset by the recognition in the first quarter of 1995 of income attributable to certain lease termination fees received by N/S Associates in the prior quarter. In addition, during 1995 Monmouth Associates wrote off the receivable balance of $3,576,000 primarily related to the accrued interest resulting from the difference between the accrual and pay rates recorded prior to April 1992, due to the uncertainty as to the collectibility of these amounts.
was attributable to lower sales, the slow lease up of renovated mall space, and the uncertainty of Macy's renewing their operating covenant. While Macy's has an obligation to operate a retail store at this location through the year 2005, their obligation to operate the store as a Macy's Department Store expired in 1995. The Macy's store continues to operate at the Monmouth Mall.
The decrease in the estimated value of the investment in the 1225 Connecticut office building in 1994 was primarily attributable to a reduction in the assumed long-term rental rate growth that could be achieved for the property in future years. The decrease in the estimated value for the investment in the Northridge Mall in 1994 was primarily attributable to a reduction in anticipated leasing activity and the expected rents to be achieved for the property. In general, in 1994, it was expected that the vacancy at Northridge Mall would lease up more slowly and the rents obtained would be lower than previously anticipated.
In March 1994, the Account obtained a revolving line of credit for up to $10 million from IDS Life to pay for contract surrenders and other obligations under the contracts. In June 1995, the revolving credit loan balance of $9,500,000 and accrued interest were repaid as discussed below.
IDS Life continues to purchase accumulation units in order to maintain the Account and its liquidity. IDS Life makes these payments so that no contract holder is disadvantaged because sales of new contracts have been discontinued. The initial payments for accumulation units that IDS Life made into the Account in 1995 were used to pay off the amount that the Account had borrowed under its revolving line of credit. IDS Life expects to continue to make additional payments into the Account for accumulation units as needed in order to fund all of the Account's obligations under the contracts such as paying death benefits and contract terminations. As of December 31, 1996, IDS Life had purchased approximately 24,969,872 accumulation units.
N/S Associates currently expects that it will incur approximately $5,312,000 in 1997 for tenant improvement, asbestos removal and other capital items at Northridge and Southridge Malls. Actual amounts expended in 1997 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 $2,236,000 for tenant improvements, asbestos removal and other capital projects in 1996.
For the Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994 -
At December 31, 1995, the Account had cash of approximately $587,000 as compared to approximately $205,000 at December 31, 1994. The Account financed a portion of the contract terminations during the third and fourth quarters of 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 the last three quarters.
The renovative is nearing completion with tenant improvement work for one of the larger tenants and retainage work remaining. The occupancy of mall shops and outparcel space at the shopping center as of December 31, 1995 was approximately 77 percent. However, the mall shops and outparcel space are approximately 86 percent leased, including leases whose terms will commence after renovation of the tenant space permits occupancy.
The Account has a loan outstanding in the principal amount of approximately $7,770,000 as of December 31, 1995, secured by its wholly-owned real estate investment, West Springfield Terrace Apartments. The loan has an original term of seven years and bears interest at a rate of 9.5 percent per annum. The loan requires monthly payments of principal and interest aggregating $824,000 per annum until November of 1996 when the remaining principal balance of approximately $7,704,000 and any accrued and unpaid interest will be due and payable. The current budget for capital expenditures during 1996 is approximately $207,000 for painting, carpet replacement and other capital costs.
unconsolidated joint ventures, N/S Associates and 1225 Connecticut and a wholly-owned property, West Springfield Terrace Apartments), mortgage loan and land sale-leaseback investments (through an unconsolidated joint venture, Monmouth Associates, and a participation in the loan for Riverpoint Center) and short-term investments represented 70.6 percent, 27.2 percent and 2.2 percent of total assets, respectively. At December 31, 1994, real property investments, mortgage loan and land sale-leaseback investments and short-term investments represented 72 percent, 27.3 percent and .7 percent of total assets, repsectively.
Independent Auditors' Report Combined Balance Sheets, December 31, 1996 and 1995 Combined Statements of Operations, years ended December 31, 1996, 1995 and 1994 Combined Statements of Partners' Capital Accounts, years ended December 31, 1996, 1995 and 1994 Combined Statements of Cash Flows, years ended December 31, 1996, 1995 and 1994 Notes to Combined Financial Statements Participation in Mortgage Loan on Real Estate and Interest Earned on Participation in Mortgage - Schedule III Combined Real Estate Owned and Rental Income - Schedule IV
IDS Life Account RE (the Account) is a segregated asset account of IDS Life Insurance Company (IDS Life) under Minnesota law. A registration statement under the Securities Act of 1933 relative to the deferred variable annuity contracts (the Contracts) issued by the Account became effective on August 6, 1987. Effective May 1, 1995, the Account discontinued new contract sales. Although additional purchase payments may be made into existing contracts, prior to making any additional purchase payment an existing contract owner should bear in mind that the Account intends to liquidate its real estate related investments over time. The assets of the Account are held for the exclusive benefit of contract owners and are not chargeable with liabilities arising out of any other business conducted by IDS Life.
Federal Income Taxes IDS Life is taxed as a life insurance company. The Account is treated as part of IDS Life for Federal income tax purposes. Under existing Federal income tax law, no income taxes are payable with respect to any income of the Account.
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, 1996, 1995 and 1994, the Account paid IDS Life a mortality and expense risk fee of $449,393, $482,896 and $502,607, 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 1996, 1995 or 1994.
IDS Life, on behalf of the Account, entered into a joint venture partnership called N/S Associates, which on April 4, 1988
The shopping center is being managed by an affiliate of the Investment Adviser under a management agreement. The affiliate of the Investment Adviser receives an annual fee equal to 3.75 percent of the gross receipts of the property plus reimbursement of certain direct expenses in connection with the property management.
contain approximately 1,297,000 square feet of gross leasable area, of which N/S Associates owns approximately 437,000 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 terms of Monmouth 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 interests in Monmouth Associates. The Account contributed approximately $10,000,000 to Monmouth Associates as its initial capital contribution. The Account has made additional capital contributions of approximately $685,000. The percentage interest of the Account in Monmouth Associates is 6.97 percent.
In connection with the investment, the Account paid to IDS Life and the Investment Adviser their respective portions of the acquisition and mortgage placement fee amounting to approximately $375,000.
Monmouth Associates entered into an agreement whereby the land underlying the mall is leased back to the Borrower/Lessee under a long-term ground lease. The long-term ground lease, which has a term of 75 years, provides for monthly base rent aggregating $1,170,000 annually with minimum payments of $650,000. The long-term ground lease also provides for contingent rent, payable quarterly out of the excess, if any, of substantially all of the gross receipts from the shopping center received by the Borrower/Lessee over certain base amounts, equal to the sum of (x) a specified annual amount (commencing in the fourth lease year at $390,000 per annum and increasing in the sixth lease year to $520,000 per annum), increased until paid at the "applicable rate" of interest payable under the first leasehold mortgage loan described below (such amount as so increased herein called the "rent shortfall amount"), plus (y) 15 percent of the balance of such excess gross receipts remaining after deducting the aggregate amount paid at such time of the rent shortfall amount under the long-term ground lease and the "interest shortfall amount" under the first leasehold mortgage loan as described below.
In addition, Monmouth Associates made a first leasehold participating mortgage loan in the original principal amount of $128,920,000 to the Borrower/Lessee which is secured by the leasehold real estate and the improvements thereon. The current loan amount is $127,670,000. The loan has a term of 15 years, which may be extended from time to time at the option of Monmouth Associates for up to an additional 20 years. The loan currently provides for monthly payments of base interest at a base rate of approximately 5.00 percent per annum for each loan year. The first leasehold mortgage also provides for quarterly payments of contingent interest, payable out of the excess, if any, of substantially all of the gross receipts from
the shopping center received by the Borrower/Lessee over certain base amounts, equal to the sum of (x) the difference between the amount of interest payable on the loan at the "applicable rate" and that payable at the base rate described above, increased until paid at the applicable rate (such amount as so increased herein called the "interest shortfall amount"), plus (y) 45 percent of the balance of such excess gross receipts remaining after deducting the aggregate amount paid at such time of the rent shortfall amount under the ground lease and the interest shortfall amount under the first leasehold mortgage loan. The "applicable rate" under the loan currently is 8.97 percent per annum for each loan year. In addition, upon a joint sale or refinancing of the land and improvements or at maturity of the leasehold mortgage loan, Monmouth Associates is entitled to receive certain participations in the proceeds from such sale or refinancing after payment of its investment in the land and/or repayment of the principal amount of the leasehold mortgage loan. For financial reporting purposes, Monmouth Associates discontinued the accrual of contingent interest on the leasehold mortgage loan in April 1992 as a result of uncertainty as to the collectibility of such contingent interest in light of the previous decrease in the estimated value of Monmouth Mall. In addition, for financial reporting purposes, no contingent rent was accrued under the ground lease for 1996, 1995 or 1994. In 1995, Monmouth Associates wrote off the receivable balance of $3,576,000 primarily related to the accrued interest resulting from the difference between the accrual and pay rates ("contingent interest") recorded prior to 1992, due to the uncertainty as to the collectibility of these amounts.
maturity when the entire principal amount and any accrued and unpaid interest will be due. The renovation loan will mature contemporaneously with the first leasehold mortgage loan in October 2003, subject to acceleration or extension of the loan by Monmouth Associates under certain circumstances.
In May 1990, IDS Life, on behalf of the Account, acquired an interest in a newly formed Delaware corporation, 1225 Investment Corporation (the Corporation) owned jointly with certain other persons described below. The Corporation acquired an office building located in Washington, D.C. known as 1225 Connecticut Avenue, N.W. (1225 Connecticut).
The office building, which was completed in 1968, is an eight-story reinforced concrete frame building containing 184,432 square feet of rentable office space, 18,498 square feet of rentable retail space, 6,416 square feet of below grade storage space and 100,024 square feet of subsurface parking space for over 300 automobiles.
The Corporation purchased 1225 Connecticut from the seller for a purchase price of approximately $54,125,000 (net of prorations and miscellaneous closing costs), consisting of $51,425,000 paid in cash and assumption of approximately $2,700,000 of mortgage indebtedness then encumbering the property. The Corporation paid approximately $2,130,000 for real estate brokerage commissions to an independent third party and certain closing costs. The Account contributed $9,000,000 for its interest in the Corporation. The Account has also paid acquisition fees amounting to $337,500.
requires monthly payments of interest only aggregating $488,600 per annum until maturity in February 2001 when the principal amount together with accrued interest will be due and payable. Under certain circumstances, the principal amount of the loan may be prepaid in whole (but not in part), subject to a prepayment premium. Pursuant to the deed of trust securing the mortgage loan, the Corporation is prohibited from modifying Ernst & Young's primary lease or from entering into certain other tenant leases without the lender's consent. Prior to selling the property or encumbering the property with any additional debt, the Corporation must obtain the consent of the lender, which may be arbitrarily withheld. However, subject to certain restrictions, the Corporation has a one-time right to transfer title to the property together with an assumption of the mortgage loan.
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. The property had previously been managed by JMB Properties Company, an affiliate of the Investment Adviser. In December 1994, JMB Properties Company sold substantially all of its assets to an unaffiliated third party, and certain management personnel of JMB Properties Company became management personnel of the third party. As a result of the sale, the successor to JMB Properties Company's assets became the property manager of the 1225 Connecticut office building on the same terms that existed prior to the sale.
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 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.
The borrower had notified 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.
The shopping center, completed in 1989, is located on approximately 17 acres and consists of approximately 200,800 square feet of gross leasable area.
portions of the acquisition fee amounting to $274,834. At the time of the acquisition it was anticipated that an additional amount of approximately $1,450,000 would be used by the Account to pay the cost of upgrading kitchens and bathrooms and certain other upgrades and capital improvements at the complex. The renovation project was subsequently increased to include replacing certain carpets in units as they were renovated and to increase the number of units that received certain upgrades. The renovation project was completed during 1992 at an aggregate cost of approximately $1,900,000. The Account paid IDS Life and the Investment Adviser their respective portions of the acquisition fee amounting to $18,000 in connection with the renovation project.
The apartment complex was being managed for a fee equal to 5.00 percent of the gross revenues from the property, plus reimbursement of certain direct expenses of the manager. The property had previously been managed by JMB Properties Company, an affiliate of the Investment Adviser, but since December 1994 has been managed on the same terms by an unaffiliated third party that purchased substantially all of JMB Properties Company's assets, as discussed in Note 4 in connection with the 1225 Connecticut office building.
Investments in real estate are stated at estimated fair 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, 1996, 1995 and 1994.
Fixed rental income is recorded when the obligation for the payment of rent is incurred according to the terms of the lease agreements.
1997 . . . . . . . . . . $ -- 1998 . . . . . . . . . . -- 1999 . . . . . . . . . . -- 2000 . . . . . . . . . . -- 2001 . . . . . . . . . . 7,000,000
The venture has determined that all leases relating to the two retail properties and the office building are properly classified as operating leases; therefore, rental income is reported when earned. Leases with tenants range in term from one to thirty-two years and provide for fixed minimum rent and partial to full reimbursement of operating costs. In addition, substantially all retail leases provide for additional rent based upon percentage of tenants' sale volumes over certain specified amounts.
Minimum lease payments to be received in the future under the above operating lease agreements, are as follows: 1997 . . . . . . . . . . $ 20,371,162 1998 . . . . . . . . . . 18,498,130 1999 . . . . . . . . . . 16,920,740 2000 . . . . . . . . . . 15,213,911 2001 . . . . . . . . . . 12,889,407 Thereafter . . . . . . . 57,575,215 ------------ $141,468,565
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.
N/S Associates has entered into a management agreement with Urban Retail Properties Company, (the "Retail Manager"). The Retail Manager is entitled to receive a fee of 3.75% of gross receipts from the operations of the Malls. Management fees earned by the Retail Manager are included in property operating expenses and aggregated approximately $1,132,000 and $1,174,000 for the periods ended December 31, 1996 and 1995, respectively.
Rents due and accrued at end of period Retail Properties: Northridge Mall, Milwaukee, WI $ 158,000 Southridge Mall, Greendale, WI $ 185,000 Office Building: 1225 Connecticut Ave., Washington, D.C. $ 92,000 -----------