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. 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.
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 will pay for all operational expenses incurred on behalf of the Account. For the years ended December 31, 1994, 1993 and 1992, IDS Life was reimbursed $51,223, $83,122 and $65,290, respectively, for personnel related expenses incurred in the administration of the Account.
4. Investments in Unconsolidated Joint Venture Partnerships and Participation in Mortgage Loan
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.
N/S Associates acquired its interest in the shopping center in April 1988 for a purchase price of approximately $108,107,000, of which $89,653,000 was paid in cash at closing, subject to the existing mortgage loans with a then outstanding aggregate balance of approximately $18,454,000. The property was encumbered by two mortgage loans with outstanding principal balances at December 31,1994 of approximately $15,058,000 and $365,000, respectively. In addition to the purchase price, a reserve of $8,900,000 was established, all of which has been used to pay for certain capital improvements made at the shopping center. In February 1995, the two mortgage loans secured by the property were repaid with a portion of the proceeds from the refinancing of the Southridge Mall mortgage loan.
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 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. N/S Associates acquired its interest in the shopping center for a purchase price of approximately $115,401,000, of which $96,865,000 was paid in cash at closing. The property was encumbered by a first mortgage loan with an outstanding principal balance at December 31, 1994 of approximately $15,506,000. In addition to the purchase price, a reserve of approximately $7,250,000 was established for capital improvements, all of which has been spent as of December 31, 1994. In February 1995, the mortgage loan secured by the property was repaid with a portion of the proceeds from a new mortgage loan in the principal amount of $35,000,000. The new mortgage loan has a term of seven years, bears interest at 8.35 percent per annum and requires monthly payments of interest only prior to maturity. Proceeds from the new mortgage loan were also used to repay the two mortgage loans secured by Northridge Mall. The remaining net proceeds from the new loan are expected to be used to pay approximately $2,900,000 of tenant improvement and other capital costs expected to be incurred for Northridge and Southridge Malls.
The shopping center is being managed by an affiliate of the Investment Adviser under a management agreement. The affiliate of the Investment Adviser will receive 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.
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 expects to make 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. Summary of Real Estate Investment Made Through Monmouth Associates
At December 31, 1993, the outstanding balance of the mortgage loan encumbering the property was approximately $1,695,000. The mortgage loan bore interest at a rate of 6.50 percent per annum and required monthly payments of principal and interest aggregating approximately $426,300 per annum. In January 1994, the Corporation refinanced its mortgage loan with a first mortgage loan in the principal amount of $7,000,000 bearing interest 6.98 percent per annum. The new loan 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 now acts as property manager of the 1225 Connecticut office building on the same terms that existed prior to the sale.
The ten-year loan requires periodic payments of interest only and bears 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 provides 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 provides 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 will be used to offset, on a dollar-for-dollar basis, the amount of accrued interest payable. The loan is generally non-recourse to the borrower and its partners.
We have audited the combined financial statements of N/S Associates, Monmouth Associates and 1225 Investment Corporation, unconsolidated joint ventures of IDS Life Account RE (Note 1), as listed in the accompanying index. In connection with our audits of the combined financial statements, we also have audited the combined financial statement schedules as listed in the accompanying index. These combined financial statements and combined financial statement schedules are the responsibility of the Investment Adviser. Our responsibility is to express an opinion on these combined financial statements and combined financial statement schedules based on our audits.
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, at December 31, 1994 and 1993 and the results of their combined operations and combined cash flows for each of the years in the three year period ended December 31, 1994, 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, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared for the purpose of complying with Rule 3.09 of Regulation S-X of the Securities and Exchange Commission. The combined financial statements include the accounts of the unconsolidated joint ventures in which IDS Life Account RE of IDS Life Insurance Company owns an equity interest. The unconsolidated joint ventures are N/S Associates, Monmouth Associates and 1225 Investment Corporation.
The accompanying combined financial statements have been prepared on the accrual basis of accounting.
Fixed rental income is recorded when the obligation for the payment of rent is incurred according to the terms of the lease agreements. IDS LIFE ACCOUNT RE OF IDS LIFE INSURANCE COMPANY N/S Associates, Monmouth Associates and 1225 Investment Corporation Unconsolidated Joint Ventures of IDS Life Account RE
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments", requires entities with total assets exceeding $150 million at December 31, 1994 to disclose the SFAS 107 value of all financial assets and liabilities for which it is practicable to estimate. Value is defined in the Statement as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The ventures believe the carrying amount of its current assets and liabilities (excluding current portion of long-term debt) approximates SFAS 107 value due to the relatively short maturity of these instruments. There is no quoted market value available for any of the ventures' other instruments. Based upon estimates of current market rates for debt with similar terms, the ventures discounted the scheduled loan payments to maturity. Based upon this calculation, the ventures believe that the carrying value of the mortgage notes payable approximate market value.
10% mortgage note due October 1, 2012, secured by Northridge Mall; payable in monthly installments of principal and interest of $4,000, reference is made to Note 6 (a) 365,000 371,000
6.98% mortgage note, due February 1, 2001, secured by 1225 Connecticut Avenue; interest only, payable monthly 7,000,000 --
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 monthly base rent aggregating $780,000 per annum for the first two lease years, $1,040,000 per annum for the third lease year, and $650,000 per annum for each lease year thereafter.
NS Associates has entered into a management agreement with JMB 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 IDS LIFE ACCOUNT RE OF IDS LIFE INSURANCE COMPANY N/S Associates, Monmouth Associates and 1225 Investment Corporation Unconsolidated Joint Ventures of IDS Life Account RE
Manager are included in property operating expenses and aggregated approximately $1,266,000 and $1,186,000 for the periods ended December 31, 1994 and 1993, respectively.
On February 1, 1995, NS Associates refinanced the existing mortgage note on Southridge Mall. The new mortgage note is in the amount of $35,000,000 and was used to retire the existing mortgage notes at Southridge and Northridge Malls. The new mortgage note secured by Southridge Mall bears interest at 8.35% per annum and provides for interest only payments until maturity in 2002.
IDS LIFE ACCOUNT RE of IDS LIFE INSURANCE COMPANY Monmouth Associates Unconsolidated Joint Venture of IDS Life Account RE Participation in Mortgage Loan on Real Estate and Interest Earned on Participation in Mortgage
Balance at end of year..................... $ 119,154,000 $ 119,650,000 $ 119,650,000
Part 1 - Real Estate Owned at End of Year (C) Amount at Cost of Unrealized which carried Amount of improvements, Appreciation at close of encumbrances Initial Cost etc. (Depreciation) period (A)(B) Retail properties: Northridge Mall, Milwaukee, WI $ 15,423,000 $108,107,000 $ 13,618,000 $(56,725,000) $ 65,000,000 Southridge Mall, Greendale, WI $ 15,506,000 $115,401,000 $ 14,351,000 $ (6,252,000) $123,500,000 Office Building: 1225 Connecticut Ave., Washington, D.C. $ 7,000,000 $ 54,775,000 $ 6,298,000 $ (8,073,000) $ 53,000,000 Ground Lease: Monmouth Mall, Eatontown, NJ $ -- $ 13,000,000 $ -- $ -- $ 13,000,000 $ 37,929,000 $291,283,000 $ 34,267,000 $(71,050,000) $254,500,000
Paul F. Kolkman, 48: Director, IDS Life, since May 1984; Executive Vice President, IDS Life, since March 1994; Vice President, Finance, IDS Life from May 1984 to March 1994; Vice President, AEFC, since January 1987.
Peter A. Lefferts, 53: Director and Executive Vice President, Marketing since March 1994; Senior Vice President and Director, AEFC, since February 1986.
Melinda S. Urion, 41: Director and Controller, IDS Life, since September 1991; Executive Vice President since March 1994; Vice President and Treasurer from September 1991 to March 1994; Corporate Controller, AEFC, since April 1994; Vice President, AEFC, since September 1991; Chief Accounting Officer, AEFC, from July 1988 to September 1991.
Burton E. Glazov, 56, Director of JMB, was until December 1990 also Executive Vice President of JMB. Mr. Glazov has been associated with JMB since June 1971. He is member of the Bar of the State of Illinois and is a Certified Public Accountant. Stuart C. Nathan, 53, Executive Vice President and Director of JMB, is an officer and/or director of various JMB affiliates and a partner of the Associate Partnerships. Mr. Nathan has been associated with JMB since July 1972. He is also a director of Sportmart Inc., a retailer of sporting goods. He is member of the Bar of the State of Illinois.
Ira J. Schulman, 43, Executive Vice President of JMB, is an officer of various JMB affiliates and a partner of various Associate Partnerships. Mr. Schulman has been associated with JMB since February 1983. He holds a master's degree in business administration from the University of Pittsburgh.
IDS Life purchased the initial 200,000 units of the Account at $1.00 per unit. Such units held by IDS Life were redeemed in April 1990 at the then current accumulation unit value.
For the years ended December 31, 1994 and 1993, IDS Life was paid or reimbursed $502,607 and $549,250, respectively, for mortality and expense risk fee and $51,225 and $83,122, respectively, for personnel related expenses incurred in the administration of the Account.