Recorded net loss for the year ended December 31, 1996 was $153,491 compared to $2,378,521 for the year ended December 31, 1995.
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 also includes interest earned on short term investments. 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.
For the year ended December 31, 1996, the Account's recorded equity in earnings of its unconsolidated joint ventures (N/S Associates, Monmouth Associates and 1225 Connecticut) was $2,167,460, compared to $1,924,741 for the year ended December 31, 1995. However, after eliminating the effect of the recognition in the first quarter of 1995 of income attributable to certain lease termination fees received by N/S Associates, the equity in earnings of unconsolidated joint ventures showed an increase for 1996 of approximately 12.9 percent compared to the recorded equity in earnings for 1995. The increase is due primarily to (i) an increase in interest earned which is now currently being paid from Monmouth Associates, (ii) an increase in rental income at 1225 Connecticut due to the property being 100 percent leased, and (iii) lower interest expense from N/S Associates in 1996 as a result of 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 increase in earnings was partially offset by lower rental income achieved at Southridge and
To counter the negative perception of Northridge Mall, N/S Associates has 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 recent 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.
On September 30, 1996 the Account sold land and related improvements known as the West Springfield Terrace Apartments. The purchaser was not affiliated with the Account and the sale price was determined by arm's-length negotiations. The sale price for the land and improvements was $16,100,000 (before deducting selling costs) and was paid in cash at closing. A portion of the net sale proceeds was utilized to retire the first mortgage debt with an outstanding balance of $7,704,000.
Net assets decreased from $35,993,731 at December 31, 1994 to $35,906,465 at December 31, 1995. During this same time period, the accumulation unit value decreased from $1.05 to $.99. The Account experienced net sales amounting to $2,291,255 for the year ended December 31, 1995 compared to net terminations of $5,184,527 for the year ended December 31, 1994. The net sales for the year ended December 31, 1995 include approximately $24,700,000 for accumulation units purchased by IDS Life, which has 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.
Recorded net loss for the year ended December 31, 1995 was $2,378,521 compared to $946,390 for the year ended December 31, 1994.
In addition, the Account recorded rental income of $2,379,439 for the year ended December 31, 1995 from its wholly-owned real estate investment, West Springfield Terrace Apartments, compared to $2,235,867 for the year ended December 31, 1994, was primarily due to a modest increase in effective rental rates. Expenses related to the wholly-owned real estate investment totaled $1,756,139 for the year ended December 31, 1995 compared to $1,792,255 for the corresponding period in 1994.
For the year ended December 31, 1995, the Account recognized net unrealized depreciation of participation in mortgage loan of $27,817, and net unrealized appreciation on its investment in wholly-owned real estate property of $138,764 due to a reduction in estimated capital expenditures to be required in future years at the property, and net unrealized depreciation on its investment in unconsolidated joint ventures of approximately $4,000,000. Approximately $2,199,000, $1,748,000 and $53,000 of unrealized depreciation recognized by the Account was attributable to the Account's investments in N/S Associates (Northridge Mall and Southridge Mall), Monmouth Mall and 1225 Connecticut, respectively. The unrealized depreciation recognized was the result of reductions in the estimated value of each of the investments. The decrease in estimated value for the investment in Northridge Mall was attributed to poor sales, a number of tenant bankruptcies, lower occupancy and the leasing challenges it faces as discussed below. In addition, the decrease in estimated value for the investment in Southridge Mall was attributed to recent tenant bankruptcies and the amendment of Kohl's lease as discussed above. In addition, the trend of recent bankruptcies and general market conditions for retailers could have an adverse effect on both revenues and occupancy at both Northridge and Southridge Malls in the future. The decrease in estimated value for the investment in Monmouth Mall
Federated Department Stores converted the Abraham & Straus store at Monmouth Mall to a Stern's store in early 1995. Monmouth Associates may provide additional financing to the borrower/lessee to pay future costs necessary for a long-term solution to replace Abraham & Straus as a department store tenant at Monmouth Mall. The recognition of unrealized depreciation in 1994 for the Account's investment in Monmouth Mall primarily reflected the Account's estimated share of the financing expected to be needed in the future to pay these costs.
The Account paid asset management and mortality expense risk fees of $1,086,516 and $1,268,164 for the years ended December 31, 1995 and 1994, respectively. The decrease in fees is primarily due to the payment of the incentive asset management fees of $137,299 paid in 1994 to the Investment Adviser based upon the performance of the Account's real property investments relative to the FRC Property Index. No incentive asset management fee was payable in 1995.
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.
Through December 31, 1996, Monmouth Associates had funded approximately $24,615,000 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 approximately $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 renovation 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, 1996 was approximately 83 percent. However, the mall shops and outparcel space are approximately 86 percent leased. Leasing and occupancy at the shopping center have been adversely affected by tenant bankruptcies occurring in 1995.
The Account had a loan outstanding in the principal amount of approximately $7,770,000, prior to its payoff in September 1996 as a result of the sale, secured by its wholly-owned real estate investment, West Springfield Terrace Apartments. 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.
Northridge Mall as well as the mortgage loan previously secured by Southridge Mall. Remaining net proceeds from the refinancing have been and will be used to pay tenant improvement and other capital costs at Northridge and Southridge Malls.
At December 31, 1996, real property investments (through two unconsolidated joint ventures, N/S Associates and 1225 Connecticut), land sale-leaseback investment (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. At December 31, 1995, real property investments, mortgage loan and land sale-leaseback investments and short-term investments represented 70.6 percent, 27.2 percent and 2.2 percent of total assets, respectively.
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 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.
Effective May 1, 1995, new contract sales of the Account were discontinued. Additional purchase payments continue to be accepted for existing contracts in amounts specified in the Account's
prospectus, whether by means of the previously established bank authorizations or otherwise. Existing contracts also continue to be serviced and surrender requests will be honored.
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 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, 1995, IDS Life had purchased approximately 22,955,910 accumulation units.
By purchasing accumulation units, IDS Life has an ownership interest in the Account. Since IDS Life does not purchase a contract, it is not subject to surrender charges. However, IDS Life, as holder of accumulation units, participates in the increase or decrease in the value of the Account's investments just as other owners of accumulation units do. IDS Life may realize a gain or loss on its accumulation units when redeemed.
IDS Life currently expects to hold the accumulation units it purchases until the surrender of all outstanding contracts or until the Account's liquidity improves (through, for example, one or more sales of real estate related investments) thereby permitting the Account to satisfy its anticipated contract obligations. Because IDS Life may purchase a significant amount of accumulation units, IDS Life may be subject to certain conflicts of interest it would not otherwise have if it had not purchased such accumulation units, including, among other things, a conflict in approving periodic valuations of real estate investments made by the Investment Adviser.
Through December 31, 1995, Monmouth Associates had funded approximately $21,476,000 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 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, including one made in July 1995, 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, is currently expected to be approximately $28,500,000. 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 1996.
N/S Associates currently expects that it will incur approximately $4,369,000 in 1996 for tenant improvements, asbestos removal and other capital items at Northridge and Southridge Malls. Actual amounts expended in 1996 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 $1,967,000 for tenant improvements, asbestos removal and other capital projects in 1995.
N/S ASSOCIATES, MONMOUTH ASSOCIATES & 1225 INVESTMENT CORPORATION UNCONSOLIDATED JOINT VENTURES of IDS LIFE ACCOUNT RE
Schedules not Filed: All schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in financial statements or the related notes.
TheBoard of Directors of IDS Life Insurance Company and Contract Owners of IDS Life Account RE:
We have audited the financial statements of IDS Life Account RE as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the management of IDS Life Insurance Company. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
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, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 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.
The accompanying financial statements have been prepared on the accrual basis of accounting. Significant accounting policies followed by the Account are summarized below.
Consolidation and Unconsolidated Joint Ventures The Account's policy is to consolidate the underlying assets, liabilities and operations of property investments where 50 percent or greater ownership position is maintained. Investments in unconsolidated joint ventures with less than 50 percent ownership interest are accounted for on the equity method of accounting.
Investments in Real Property, Mortgage Loans and Land/Sale- Leasebacks The Account initially values real estate related investments at their cost (including acquisition or mortgage placement fees and other acquisition or placement expenses) unless circumstances otherwise indicate that a different value should be used. Subsequently, the value of these investments
will be periodically determined by JMB Annuity Advisers (the Investment Adviser). Procedures utilized to determine the estimated value include the following: (i) at the time of purchase and once every two years thereafter, each real property investment and each real property underlying a participating mortgage loan or land sale-leaseback investment will be appraised by an independent appraiser or an existing appraisal will be updated, (ii) various assumptions including, but not limited to, occupancy and rental rates, expense levels, net operating income, average capital costs and capitalization rates upon sale will be used in determining the discounted present value of an investment's estimated cash flow and its estimated sale proceeds or its asset value under a direct capitalization methodology, and (iii) for fixed interest rate mortgage loans and fixed rental rate land sale-leaseback investments, estimated values will be determined by comparison to current interest rates on U.S. Treasury debt as adjusted for a risk differential of the Account's investments. The relative weight to be given to a particular methodology or other relevant factors in determining the estimated asset value of a particular real property will depend upon an assessment of the existing and anticipated market conditions and property specific factors relevant to such real property. There is no assurance that the assumptions, estimates and methodologies used in valuing the Account's real estate related investments will in fact prove accurate or that such values would in fact be realized. Such estimates involve subjective judgments as the actual price of real estate can only be determined between independent third parties in sales transactions. In addition, any expenses that may be borne by the Account in connection with the disposition of a real estate related investment are not deducted in determining its estimated value.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect 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 period. Actual results could differ from those estimates.
The Account also pays IDS Life an asset management fee equal, on an annual basis, to 1.25 percent of the average daily asset value, as defined, of the Account. A portion of this fee, equal to 0.95 percent of the average daily asset value, is paid by IDS Life to the Investment Adviser. The total fee may be adjusted upward to a maximum of 1.50 percent depending upon the performance of the Account's real property investments as measured against the FRC Property Index. The performance-related portion of the fee is calculated and recorded on an annual basis when the FRC Property Index is released each year for the preceding calendar year. No performance fees were paid by the Account in 1996 for 1995 or in 1995 for 1994. The performance fee paid by the Account in 1994 for 1993 was $137,299. Any performance fee adjustment will be paid to the Investment Adviser. For the years ended December 31, 1996, 1995 and 1994, the Account paid total asset management fees of $561,742, $603,620 and $765,557, respectively.
The Account pays for all operational expenses incurred on its behalf. For the years ended December 31, 1996, 1995 and 1994, IDS Life was reimbursed $35,385, $56,102 and $51,223, respectively, for personnel-related expenses incurred in the administration of the Account.
acquired interests in two enclosed super regional shopping malls that are described below.
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
The Account, through Monmouth Associates, acquired an interest in the land underlying a shopping center in Eatontown, New Jersey known as Monmouth Mall. The mall is located on approximately 90 acres of land, of which Monmouth Associates owns approximately 88.5 acres, subject to the rights of one of the department store tenants to acquire the land underlying its store and the improvements thereon for nominal consideration. The remaining acres are owned by 2 department stores. Monmouth Associates acquired its interest in the land for a purchase price of approximately $13,000,000.
Monmouth Associates is obligated to make certain additional loans to the Borrower/Lessee under certain circumstances to finance the cost of 60 percent of tenant improvements or other ordinary capital expenditures. In addition, in May 1994, Monmouth Associates made a loan to finance the cost of a renovation of the shopping center, which commenced during the third quarter of 1994. The renovation consists of, among other things, the addition of a food court and cinema and the re-merchandising of approximately 300,000 square feet of gross leasable area. The renovation loan from Monmouth Associates bears interest at a fixed interest rate of 10.5 percent per annum. In addition, Monmouth Associates' participation in certain levels of sale or refinancing proceeds from the property will be increased until Monmouth Associates has received aggregate payments equal to an internal rate of return of 11 percent per annum on its investments in the land and/or the first leasehold mortgage loan. The maximum amount of the renovation loan is $29,100,000, and the cost of the renovation is currently estimated to be $27,800,000, including accrued and deferred interest of approximately $1,300,000. As of December 31, 1996, Monmouth Associates had funded approximately $24,615,000, using its cash reserves, cash flow and additional capital contributions made pro rata based upon the respective interests of the joint venture partners in Monmouth Associates. The renovation loan requires monthly payments of interest only until
In January 1994, the Corporation refinanced its mortgage loan with a first mortgage loan in the principal amount of $7,000,000 bearing interest at 6.98 percent per annum. The new loan
1225 Connecticut leases approximately 80 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, 1996, such tenant represented approximately 77 percent of total revenues.
Pursuant to a lease currently in effect, an unaffiliated third party leases and operates the entire parking garage (subject to certain parking rights provided for tenants of the property) until November 1997. The lease provides for a fixed rent payment of $485,000 a year, provided that the lessee shall pay the operating expenses of the parking garage and does not provide such lessee with an option to extend the term of the lease.
The ten-year loan required periodic payments of interest only and bore basic interest at the rate of 8.84 percent per annum in the first loan year, 8.75 percent per annum during the second loan year, increasing 0.50 percent per annum in the fourth and 0.25 percent per annum in the seventh loan year to a maximum
rate of 9.50 percent per annum, payable monthly in advance. The loan also provided for additional annual simple accrual of interest at the rate of 2.00 percent per annum payable upon prepayment or maturity. For financial reporting purposes, commencing in August of 1991, the Account suspended recognition of income related to the simple accrual interest receivable (deferred until maturity).The loan also provided for additional interest in an amount equal to a percentage of annual gross income from the underlying property (exclusive of tenant reimbursement of expenses) in excess of a base amount and, on sale or repayment of the loan, an amount equal to a percentage of the subsequent increase in the value of the underlying property in excess of a specified amount. Such amounts of additional interest payments made by the Borrower would have been used to offset, on a dollar-for-dollar basis, the amount of accrued interest payable. The loan was generally non-recourse to the Borrower and its partners.
The Account paid $15,222,278 for the apartment complex in cash at closing, excluding closing costs and prorations. In connection with the acquisition of the property, the Account paid a prepayment charge at closing of $92,221 to the lender that held the mortgage loan on the property. The Account also paid to IDS Life and the Investment Adviser their respective
Life expects to continue to make additional payments into the Account for accumulation units in order to maintain the Account and its liquidity. As of December 31, 1996, IDS Life's portion of the Contract Owners' Equity was $24,492,773, which represents 73% of total Contract Owners' Equity.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of N/S Associates, Monmouth Associates and 1225 Investment Corporation, as of December 31, 1996 and 1995 and the results of their combined operations and combined cash flows for each of the years in the three year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related combined financial statement schedules, when considered in relation to the basic combined financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
The accompanying combined financial statements have been prepared on the market value accrual basis of accounting.
Market values have been estimated by the Investment Adviser. Such market values involve subjective judgments and the actual values can only be determined by negotiations with independent third parties.
A description of the venture agreements are contained in Note 4 of Notes to Financial Statements of the Account for the year ended December 31, 1996. Such note is incorporated herein by reference.
On February 1, 1995, the Partnership refinanced the existing mortgage note on Southridge Mall in the amount of $35,000,000. Proceeds, net of transaction costs, were used to repay the existing mortgage notes at Southridge and Northridge Malls (including prepayment penalties of $155,000 and $240,000, respectively). The remaining proceeds which were reserved for future leasing costs, capital improvements and other related costs, have been expended.
In February 1997, the Investment Adviser authorized and paid a cash distribution to the partners aggregating $2,500,000. Each partner received its proportionate share based on its respective ownership percentage.
In February 1997, 1225 Investment Corporation paid a dividend of $1,250,000 ($22.67 per share) to the shareholders of record as of December 31, 1996.
In February 1997, the Investment Advisor authorized and paid a cash distribution to the partners aggregating $7,500,000. Each partner received its proportionate share based on its respective ownership percentage.
(A) The aggregate cost of real estate owned at December 31, 1996 for Federal Income tax purposes was approximately $466,855,400.
(C) - Reconciliation for depreciation is not applicable as real estate owned is stated at estimated market value.