SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): May 30, 2003
Berkshire Income Realty, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland 001-31659 32-0024337
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or organization) File Number) Identification No.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 523-7722
Not applicable
(Former Name or Former Address, if Changed Since Last Report)
Berkshire Income Realty, Inc. (the "Company") hereby amends it Current Report on
Form 8-K dated May 30, 2003, filed with the Securities and Exchange Commission
on June 16, 2003 to (i) amend Item 2 in its entirety and (ii) include Item 7 to
include required financial statements, pro forma financial information and
certain exhibits.
ITEM 2. ACQUISITION OF ASSETS
On May 30, 2003 Berkshire Income Realty - OP, L.P. (the "Operating
Partnership") and its wholly owned subsidiary BIR McNab Sub, L.L.C., a newly
formed Delaware limited liability company, acquired all of the outstanding
limited partner and general partner units of McNab KC3 Limited Partnership
("McNab"). The acquisition was a contribution of units from an affiliate of the
Company's advisory company "the Advisor" in exchange for the issuance by the
Operating Partnership of 5,000 common limited partner units valued at $10.00 per
unit. The transaction was approved by the Audit Committee of the Company's Board
of Directors on May 6, 2003.
McNab is the fee simple owner of a 276-unit multi-family apartment
community located in Pompano Beach, Florida that is referred to as Windward
Lakes Apartments (`Windward"). Prior to the acquisition, the then lender on this
property, which was an affiliate of the Company, engaged a third party appraisal
firm to determine the value of the property for purposes of determining the
total amount payable to the lender under the terms of its participating
mortgage. The third party appraisal firm valued the property at $19,000,000. The
Company's Audit Committee and the affiliates that owned all of the general and
limited partnership units in McNab agreed to accept this appraised value as the
value for the contribution by the affiliates of the McNab partnership units to
the Operating Partnership. The partnership units were contributed to the
Operating Partnership subject to certain debt collateralized by the units
totaling approximately $4,162,000 (the "Additional Loan"). Such amount included
principal, accrued and unpaid base interest and estimated participation interest
due under the terms of the Additional Loan. The property also had a first
mortgage lien collateralized by the real estate with a then current balance of
approximately $13,398,000, plus approximately $684,000 in accrued interest
rebates due to the lender. The lender on both the Additional Loan and the first
mortgage for McNab was an affiliate, Krupp Governemnt Income Trust ("GIT").
Simultaneously with the closing of the McNab transaction, the Company paid off
approximately $18,244,000 of the debts assumed through the transaction and all
of the GIT financing was satisfied in full.
As a result of the payoff of the GIT financing described above, the
Operating Partnership, which owns approximately 31% of GIT, is expected to
receive approximately $5,650,000 as a special distribution from GIT on or about
July 24, 2003.
Windward Lakes was constructed in 1992 and was 93.1% occupied at the time
of acquisition.
Financial statements for McNab KC3 Limited Partnership are presented in
Item 7.
1
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
At the time of filing of the Form 8-K disclosing the acquisition by the Company
of all of the partnership interests as set forth in Item 2 above, the financial
statements of the acquired entity were not available. The Company indicated that
it would file the necessary financial information within sixty days after the
initial filing date.
(a) Financial Statements under Rule 3-05 of Regulation S-X:
1. Report of Independent Accountants
2. Balance sheets of McNab KC3 Limited Partnership at March 31, 2003
(unaudited) and at December 31, 2002 and 2001.
3. Statements of Operations of McNab KC3 Limited Partnership for the
3 months ended March 31, 2003 (unaudited), and the years ended
December 31, 2002, 2001 and 2000.
4. Statements of Changes in Partners' Deficit for the three months
ended March 31, 2003 (unaudited) and the years ended December 31,
2002, 2001 and 2000.
5. Statements of Cash Flows for the three months ended March 31,
2003 (unaudited) and the years ended December 31, 2002, 2001 and
2000.
6. Notes to the Financial Statements of McNab KC3 Limited
Partnership
(b) Pro Forma Financial Information
1. Unaudited Pro Forma Combined Balance Sheets of the Berkshire
Income Realty Predecessor Group at March 31, 2003, December 31,
2002 and 2001.
2. Unaudited Pro Forma Combined Statements of Operations of the
Berkshire Income Realty Predecessor Group for the three months
ended March 31, 2003, and the years ended December 31, 2002, 2001
and 2000.
3. Notes to the Unaudited Pro Forma Combined Financial Statements of
the Berkshire Income Realty Predecessor Group.
(c) Exhibits
EXHIBIT NO.
*10.1Contribution and Sale Agreement, dated May 29, 2003, among George
Krupp, Douglas Krupp, Krupp GP, Inc., Berkshire Income Realty-OP, L.P.
and McNab Sub, L.L.C.
*Previously filed.
2
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Berkshire Income Realty, Inc.
/s/ David C. Quade
-----------------------------
Date: August 13, 2003 Name: David C. Quade
Title: President and Chief
Financial Officer
3
Report of Independent Auditors
To the Board of Directors and Stockholders of Berkshire Income Realty, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in partners' deficit, and cash flows present fairly, in all
material respects, the financial position of McNab KC3 Limited Partnership (the
"Partnership") at December 31, 2002 and December 31, 2001, and the results of
operations, changes in partners' deficit and cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 13, 2003
4
MCNAB KC3 LIMITED PARTNERSHIP
BALANCE SHEETS
(in thousands)
December 31,
March 31, ----------------------
2003 2002 2001
---------- ---------- ----------
(unaudited)
ASSETS
Multi-family apartment communities,
net of accumulated depreciation of
$6,852, $6,710 and $6,116,
respectively $ 9,090 $ 9,186 $ 9,277
Cash and cash equivalents 36 86 405
Cash restricted for tenant security
deposits 74 74 74
Replacement reserve escrow 127 116 216
Prepaid expenses and other assets 438 323 249
Deferred expenses, net of accumulated
amortization of $93, $91 and $82,
respectively 254 256 265
---------- ---------- ----------
Total assets $ 10,019 $ 10,041 $ 10,486
========== ========== ==========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Mortgage note payable - affiliate $ 13,310 $ 13,334 $ 13,427
Notes payable - affiliate 3,155 3,155 3,155
Due to affiliates 2,937 2,879 2,519
Accrued expenses and other liabilities 349 248 224
Tenant security deposits 70 73 59
---------- ---------- ----------
Total liabilities 19,821 19,689 19,384
Partners' deficit (9,082) (9,648) (8,898)
---------- ---------- ----------
Total liabilities and partners'
deficit $ 10,019 $ 10,041 $ 10,486
========== ========== ==========
The accompanying notes are an integral part of these
financial statements.
5
MCNAB KC3 LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(in thousands)
Three Months
Ended March 31, Year Ended December 31,
------------ ----------------------------------
2003 2002 2001 2000
------------ ---------- ---------- ----------
(Unaudited)
Revenue:
Rental $ 646 $ 2,649 $ 2,690 $ 2,630
Interest - 5 31 13
Utility reimbursements 5 29 6 -
Other 39 194 185 130
------------ ---------- ---------- ----------
Total revenue 690 2,877 2,912 2,773
Expenses:
Operating 141 602 572 497
Maintenance 49 203 298 163
Real estate taxes 112 443 388 382
General and administrative 18 65 49 52
Management fees 20 86 93 73
Depreciation 142 594 628 542
Interest 362 1,459 1,474 1,482
Participation interest - 175 545 -
------------ ---------- ---------- ----------
Total expenses 844 3,627 4,047 3,191
------------ ---------- ---------- ----------
Net loss $ (154) $ (750) $ (1,135) $ (418)
============ ========== ========== ==========
Allocation of net loss:
Limited Partners $ (152) $ (743) $ (1,123) $ (414)
============ ========== ========== ==========
General Partners $ (2) $ (7) $ (12) $ (4)
============ ========== ========== ==========
The accompanying notes are an integral part of these
financial statements
6
MCNAB KC3 LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(in thousands)
Limited General
Partners Partners Total
---------- ---------- ----------
Balance at December 31, 1999 $ (7,272) $ (73) $ (7,345)
Net loss (414) (4) (418)
---------- ---------- ----------
Balance at December 31, 2000 (7,686) (77) (7,763)
Net loss (1,123) (12) (1,135)
---------- ---------- ----------
Balance at December 31, 2001 (8,809) (89) (8,898)
Net loss (743) (7) (750)
---------- ---------- ----------
Balance at December 31, 2002 (9,552) (96) (9,648)
Net loss (unaudited) (152) (2) (154)
---------- ---------- ----------
Balance at March 31, 2003 (unaudited) $ (9,704) $ (98) $ (9,802)
========== ========== ==========
The accompanying notes are an integral part of these
financial statements
7
MCNAB KC3 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(in thousands)
Three
Months Year Ended December 31,
Ended March ----------------------------------
31, 2003 2002 2001 2000
------------ ---------- ---------- ----------
(unaudited)
Cash flows from operating
activities:
Net loss $ (154) $ (750) $ (1,135) $ (418)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Amortization of deferred
financing costs 2 9 9 9
Depreciation 142 594 628 542
Increase (decrease) in cash
attributable to changes
in assets and liabilities:
Tenant security deposits,
net (3) 14 (22) 8
Prepaid expenses and
other assets (115) (74) 8 (16)
Due to affiliates 58 360 730 190
Accrued expenses and
other liabilities 101 24 139 38
------------ ---------- ---------- ----------
Net cash provided by (used in)
operating activities 31 177 357 353
------------ ---------- ---------- ----------
Cash flows from investing
activities:
Capital improvements (46) (503) (115) (140)
Replacement reserve escrow (11) 100 (45) (7)
------------ ---------- ---------- ----------
Net cash used in investing
activities (57) (403) (160) (147)
------------ ---------- ---------- ----------
Cash flows from financing
activities:
Principal payments on mortgage
note payable (24) (93) (85) (78)
Notes payable - - - 147
------------ --------- ---------- ----------
Net cash provided by (used in)
financing activities (24) (93) (85) 69
------------ ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents (50) (319) 112 275
Cash and cash equivalents at
beginning of period 86 405 293 18
------------ ---------- ---------- ----------
Cash and cash equivalents at
end of period $ 36 $ 86 $ 405 $ 293
============ ========== ========== ==========
Supplemental disclosures:
Cash paid for interest $ 292 $ 1,171 $ 1,179 $ 1,186
============ ========== ========== ==========
Supplemental disclosure of
non-cash investing activities:
Capital improvements in
accrued expenses and other
liabilities $ 139 $ 56 $ 90 $ 113
============ ========== ========== ==========
The accompanying notes are an integral part of these
financial statements
8
MCNAB KC3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(In Thousands)
1. Organization and Basis of Presentation
McNab KC3 Limited Partnership (the "Partnership") was formed on February
20, 1990, by filing a Certificate of Limited Partnership in the Commonwealth of
Massachusetts. The Partnership will terminate on February 20, 2070, unless
earlier terminated upon the sale of the last of the Partnership's property or
the occurrence of certain other events as set forth in the Limited Partnership
Agreement. The Partnership issued its general partner interest to Krupp GP, Inc.
and all of its limited partner interests to George and Douglas Krupp.
The Partnership was formed primarily to acquire land and develop the
276-unit Windward Lakes multi-family apartment complex ("Windward") on such
13.76 acres of land and, upon completion of Windward, to operate, maintain and
eventually sell the property. Construction of Windward was completed in 1992.
During 1990, George and Douglas Krupp, the limited partners and Krupp GP,
Inc, the general partner obtained a $2,471 additional note (the "Additional
Note") and utilized the proceeds to make a capital contribution to the
Partnership. The Note was collateralized by a first lien security interest in
George and Douglas Krupp's limited partnership interests in the Partnership and
to all distributions of surplus cash, unrestricted cash and proceeds from a
liquidation, sale or refinancing of Windward Lakes or the partnership interests
to which the Borrowers are or become entitled. As a result of the nature of the
provisions of the Additional Note and pursuant to the provisions of SAB Topic
5-J, such debt has been reflected or "pushed down" in the financial statements
of the Partnership.
On May 29, 2003, Krupp GP, Inc. liquidated its assets by distributing its
general partner interest in the Partnership to the limited partners, George and
Douglas Krupp.
On May 30, 2003, George and Douglas Krupp transferred the general partner
interest in the Partnership to BIR-OP McNab Sub, L.L.C., a newly formed Delaware
limited liability company, whose sole member is Berkshire Income Realty - OP,
L.P. ("BIR-OP"), and transferred their limited partner interests to BIR-OP in
exchange for units of BIR-OP.
2. Significant Accounting Policies
Real Estate
Real estate assets are recorded at depreciated cost. Costs related to the
acquisition, development, rehabilitation and improvement of properties are
capitalized. Recurring capital improvements typically include: appliances,
carpeting and flooring, HVAC equipment, kitchen/bath cabinets, site improvements
and various exterior building improvements. Non-recurring upgrades include
kitchen/bath upgrades, new roofs, window replacements and the development of
on-site fitness, business and community centers.
Expenditures for ordinary maintenance and repairs are charged to operations
as incurred. Depreciation is computed on the straight-line basis over the
estimated useful lives of the assets, as follows:
Rental property 27.5 years
Improvements 5 to 25 years
Appliances, carpeting, and equipment 3 to 8 years
When property is sold, their costs and related depreciation are removed
from the accounts with the resulting gains or losses reflected in net income or
loss for the period.
Continued
9
MCNAB KC3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(in thousands)
2. Significant Accounting Policies (Continued)
Pursuant to Statement of Financial Accounting Standards Opinion No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, management
reviews its long-lived assets used in operations for impairment when there is an
event or change in circumstances that indicates an impairment in value. An asset
is considered impaired when the undiscounted future cash flows are not
sufficient to recover the assets carrying value. If such impairment is present,
an impairment loss is recognized based on the excess of the carrying amount of
the asset over its fair value. The Partnership records impairment losses and
reduces the carrying amounts of assets held for sale when the carrying amounts
exceed the estimated selling proceeds less the costs to sell. No such impairment
losses have been recognized to date.
Cash and cash equivalents
The Partnership invests its cash primarily in deposits and money market
funds with commercial banks. All short-term investments with maturities of three
months or less from the date of acquisition are included in cash and cash
equivalents. The cash investments are recorded at cost, which approximates
current market values. The Partnership has not experienced any losses to date on
its invested cash.
Cash Restricted for Tenant Security Deposits
Restricted cash represents security deposits held by the Partnership under
the terms of certain tenant lease agreements.
Replacement Reserve Escrow
Certain lenders require escrow accounts for capital improvements. The
escrows are funded from operating cash, as needed.
Deferred Expenses
Fees and costs incurred to obtain long-term financing have been deferred
and are being amortized over the terms of the related loans, on a method, which
approximates the effective interest method.
Partners' Profits and Losses
Partners' profits and losses are allocated in accordance with the terms of
the partnership agreement.
Rental Revenue
The Property is leased under terms of leases with terms of generally one
year or less. Rental revenue is recognized when earned. Recoveries from tenants
for utility expenses are recorded in the period the applicable costs are
incurred. Other income, which consists primarily of income from damages,
laundry, cable, phone, pool, fees for month to month tenants, relet fees and pet
fees, is recognized when earned.
Income Taxes
No provision for income taxes is necessary in the financial statements
since the statements are not directly subject to income tax. The tax effect of
its activities accrues to the individual partners of the entity.
Continued
10
MCNAB KC3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(in thousands)
2. Significant Accounting Policies (Continued)
Interim Unaudited Financial Statements
The accompanying interim balance sheet at March 31, 2003 and the related
statements of operations, statements of changes in partners' deficit and cash
flows for the three months ended March 31, 2003 are unaudited and in the opinion
of management, include all adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of results for the interim
period. The results of operations for the three month period ended March 31,
2003 are not necessarily indicative of the results to be expected for other
interim periods or the full fiscal year.
Recent Accounting Pronouncements
In May 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002, which rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, among others. As a result of the rescission of SFAS No.
4, gains or losses from extinguishment of debt are not necessarily considered
extraordinary. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002. The impact of adopting this statement will require the Partnership to
classify any losses from extinguishment of debt into continuing operations in
the accompanying statements of operations. Adoption of FAS 145 had no impact to
the Partnership's financial condition, results of operations or cash flows for
the periods presented.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and that an entity's commitment to an exit plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
This Statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The impact of adopting
this statement is not expected to be material to the Partnership's financial
condition, results of operations or cash flows.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others and Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to a guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure requirements of FIN 45 are effective
for the Partnership as of December 31, 2002, and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified after December 31, 2002. The
Partnership has reviewed the provisions of FIN 45 and believes that the impact
of the adoption will not be material to its financial position, results of
operations or cash flows.
Continued
11
MCNAB KC3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(in thousands)
2. Significant Accounting Policies (Continued)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, noncontrolling
interests, and results of operation of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. The provisions of this
interpretation became effective upon issuance. The impact of adopting this
statement is not expected to be material to the Partnership's financial
condition, results of operations or cash flows
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement is effective for contracts entered into or
modified after Partnership's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". FAS 150 was
issued as "Phase I" of the FASB's ongoing initiative to establish standards for
classification of financial instruments that have characteristics of
liabilities, equity, or both, and thus ultimately eliminating the "mezzanine"
section of the balance sheet for certain financial instruments. FAS 150 will be
effective for the Partnership commencing in the third quarter of 2003. The
provisions of FAS 150 are not expected to have a material impact on the
Partnership's financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, contingent assets and liabilities at the date of
financial statements and revenue and expenses during the reporting period. Such
estimates include the allowance for depreciation and the fair value of the
accrued participating note interest. Actual results could differ from those
estimates.
3. Multifamily Apartment Communities
The following summarizes the carrying value of the multifamily apartment
community (in thousands):
December 31,
March 31, ----------------------
2003 2002 2001
---------- ---------- ----------
(unaudited)
Land $ 3,519 $ 3,519 $ 3,519
Buildings, improvements and personal
property 12,423 12,377 11,874
---------- ---------- ----------
Multi-family apartment communities 15,942 15,896 15,393
Accumulated depreciation (6,852) (6,710) (6,116)
---------- ---------- ----------
Multi-family apartment communities, net $ 9,090 $ 9,186 $ 9,277
========== ========== ==========
The aggregate cost of the predecesor's multi-family apartment community for
federal income tax purposes was approximately $12,564 and the aggregate
accumulated depreciation was approximately $6,144 as of December 31, 2002.
Continued
12
MCNAB KC3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(in thousands)
4. Mortgage Note Payable - Affiliate and Notes Payable - Affiliate
The Partnership has financing from Krupp Government Income Trust ("GIT"),
an affiliate of the Partnership, in the form of a securitized insured first
mortgage (the "First Mortgage"). The First Mortgage requires equal monthly
payments of $105, consisting of principal and interest at the rate of 8.5% per
annum, based on a 40-year amortization. The outstanding balance of the First
Mortgage plus any accrued interest is due and payable on June 1, 2032. As of
March 31, 2003 and December 31, 2002 and 2001, the outstanding balance of the
First Mortgage was equal to $13,310, $13,334 and $13,427, respectively.
Combined aggregate principal maturities of the mortgage note payable during
the five years ended March 31, 2003 and thereafter are approximately as follows:
2003 $ 101
2004 110
2005 120
2006 131
2007 142
Thereafter 12,706
----------
$ 13,310
==========
The Partnership has a subordinated promissory note with GIT which provides
GIT with certain participation interests ("Participation Interests") in 50% of
the revenue stream and appreciation of Windward, payable from residual value, if
any, from a sale or refinancing of Windward. The Partnership has accounted for
the Participation Interests in accordance with the provisions of the AICPA's
Statement of Position 97-1, Accounting by Participating Mortgage Loan Borrowers.
The Partnership has estimated the fair value of the participating interest,
utilizing a discounted cash flow model, to be approximately $719 at December 31,
2002 and was recorded as accrued participating interest in the accompanying
balance sheet at December 31, 2002.
As described in Note 1, an Additional Note of $2,471, collateralized by a
first lien security interest in George and Douglas Krupp's limited partnership
interests in the Partnership, was issued by GIT and has been reflected in the
financial statements of the Partnership. The Additional Note requires semiannual
installments of interest equal to $93 based on a fixed interest rate of 7.5%.
The Additional Note and any accrued interest is due and payable upon the first
to occur of (i) the sale or refinancing of Windward; (ii) the maturity date of
the First Mortgage; or (iii) a prepayment of the First Mortgage.
In 1997, GIT issued the Partnership an interest rebate (the "Interest
Rebate") in which GIT refunded the Partnership the difference between the
original interest rate on the First Mortgage of 8.75% and the modified rate of
8.5%. The Interest Rebate equal to $684 is treated as a loan and is due upon
maturity of the First Mortgage or Additional Note, whichever is earlier.
Continued
13
MCNAB KC3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(in thousands)
5. Related Party Transactions
The Partnership pays property management fees to an affiliate for property
management services equal to 3% of gross income. The Partnership also reimburses
affiliates for certain expenses incurred in connection with the operation of the
property, including administrative expenses and salary reimbursements.
Amounts accrued or paid to affiliates at March 31, 2003 and December 31,
2002 and 2001 were as follows:
December 31,
March 31, ----------------------------------
2003 2002 2001 2000
------------ ---------- ---------- ----------
Property management fees $ 20 $ 86 $ 93 $ 73
Expense reimbursements - 2 - -
Salary reimbursements 60 267 262 215
------------ ---------- ---------- ----------
Charged to operations $ 80 $ 355 $ 355 $ 288
============ ========== ========== ==========
Expense reimbursements due to affiliates of $12, $7 and $12 are included in
accrued expenses and other liabilities at March 31, 2003 and December 31, 2002
and 2001, respectively.
Note payable-affiliate includes the Additional Note and Interest Rebate
(discussed in Note 4) payable to GIT and is equal to $3,155 at March 31, 2003
and December 31, 2002 and 2001.
Due to affiliates include development fees, accrued interest on the First
Mortgage and Additional Note (discussed in Note 4), and shared service fees,
equal to $2,937, $2,879 and $2,519 at March 31, 2003 and December 31, 2002 and
2001, respectively.
14
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED FINANCIAL STATEMENTS
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On May 6, 2003, the audit committee of Berkshire Income Realty, Inc. (the
"Company") board of directors approved the acquisition by the Operating
Partnership of the interests in McNab KC3 Limited Partnership ("McNab") from
affiliates of the Company. McNab is the fee simple owner of a 276-unit
multi-family apartment community located in Pompano Beach, Florida that is
referred to as Windward Lakes Apartments ("Windward"). The general and limited
partners of McNab are affiliates of the Company, namely George and Douglas Krupp
as the limited partners owning 99% and Krupp GP, Inc. is the general partner
owning 1%. Krupp GP, Inc is wholly owned by George and Douglas Krupp. Control of
both the Company and McNab rests with George and Douglas Krupp via their 100%
ownership interest in the common stock of the Company and their 100% ownership
interest in the general and limited partnership units of McNab. Therefore, the
acquisition or contribution of the general limited partnership units of McNab by
the Operating Partnership in exchange for the issuance by the Operating
Partnership of common limited partner units is considered a transfer of net
assets between entities under common control. The acquisiton was structured as a
contribution of units from an affiliate of the Company in exchange for the
issuance by the Operating Partnership of 5,000 common limited partner units
valued at $10.00 per unit.
Due to the affiliation of the ownership of the Company and McNab
(Windward), the acquisition of the interests in McNab has been accounted for as
a reorganization of entities under common control, requiring the Company to
retroactively restate the combined financial statements of the Berkshire Income
REalty Predecessor Group for the periods presented, which is similar to the
accounting for a pooling of interests.
The following unaudited pro forma financial statements give effect to the
acquisition by the Berkshire Income Realty Predecessor Group of McNab. The
Operating Partnership is the successor to the Berkshire Income Realty
Predecessor Group. The unaudited pro forma balance sheets as of March 31, 2003
and December 31, 2002 and 2001 present the financial position of the Berkshire
Income Realty Predecessor Group as if the acquisition of McNab, which occurred
subsequent to March 31, 2003, had occurred on March 31, 2003 and December 31,
2002 and 2001, respectively. The unaudited pro forma statements of operations
for the three months ended March 31, 2003 and the years ended December 31, 2002,
2001 and 2000, presents the results of operations of McNab as if the acquisition
of McNab had been completed as of January 1, 2000.
These unaudited pro forma financial statements do not represent the
Berkshire Income Realty Predecessor Group financial condition or results of
operations for any future date or period. Actual future results could be
materially different from these pro forma results. These unaudited pro forma
financial statements should be read in conjunction with the audited financial
statements of the Berkshire Income Realty Predecessor Group and the related
management's discussion and analysis of financial condition and results of
operations included in our Form 10-K for the year ended December 31, 2002, as
well as the unaudited financial statements and the related management's
discussion and analysis of financial condition and results of operations
included in the Quarterly Reports on Form 10-Q for the quarter ended March 31,
2003. In addition, in conjunction with these unaudited pro forma financial
statements, you should read the financial statements of McNab KC3 Limited
Partnership, contained elsewhere in this Form 8-K/A.
15
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED BALANCE SHEET
March 31, 2003
(unaudited, in thousands)
Berkshire
Income
Realty McNab
Predecessor Acquisition
Group (Note 2(a)) Proforma
---------- ---------- ----------
ASSETS
Multi-family apartment communities, net $ 84,169 $ 9,090 $ 93,259
Cash and cash equivalents 6,478 36 6,514
Cash restricted for tenant security deposits 777 74 851
Replacement reserve escrow 387 127 514
Prepaid expenses and other assets 2,408 438 2,846
Deferred expenses, net 984 254 1,238
---------- ---------- ----------
Total assets $ 95,203 $ 10,019 $ 105,222
========== ========== ==========
LIABILITIES AND OWNERS' DEFICIT
Liabilities:
Mortgage notes payable $ 105,475 $ 13,310 $ 118,785
Notes payable - 3,155 3,155
Due to affiliates - 2,937 2,937
Accrued expenses and other liabilities 1,206 349 1,555
Tenant security deposits 871 70 941
---------- ---------- ----------
Total liabilities 107,552 19,821 127,373
Minority interest - - -
Owners' deficit (12,349) (9,802) (22,151)
---------- ---------- ----------
Total liabilities and owners' deficit $ 95,203 10,019 105,222
========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
16
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED BALANCE SHEET
As of December 31, 2002
(unaudited, in thousands)
Berkshire
Income
Realty McNab
Predecessor Acquisition
Group (Note 2(a)) Proforma
---------- ---------- ----------
ASSETS
Multi-family apartment communities, net $ 85,157 $ 9,186 $ 94,343
Cash and cash equivalents 4,766 86 4,852
Cash restricted for tenant security deposits 776 74 850
Replacement reserve escrow 291 116 407
Prepaid expenses and other assets 3,410 323 3,733
Deferred expenses, net 1,032 256 1,288
---------- ---------- ----------
Total assets $ 95,432 $ 10,041 $ 105,473
========== ========== ==========
LIABILITIES AND OWNERS' DEFICIT
Liabilities:
Mortgage notes payable $ 105,828 13,334 $ 119,162
Notes payable - 3,155 3,155
Due to affiliates - 2,879 2,879
Accrued expenses and other liabilities 1,643 248 1,891
Tenant security deposits 839 73 912
---------- ---------- ----------
Total liabilities 108,310 19,689 127,999
Minority interest - - -
Owners' deficit (12,878) (9,648) (22,526)
---------- ---------- ----------
Total liabilities and owners' deficit $ 95,432 $ 10,041 $ 105,473
========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
17
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED BALANCE SHEET
As of December 31, 2001
(unaudited, in thousands)
Berkshire
Income
Realty McNab
Predecessor Acquisition
Group (Note 2(a)) Proforma
---------- ---------- ----------
ASSETS
Multi-family apartment communities, net $ 87,648 $ 9,277 $ 96,925
Cash and cash equivalents 3,990 405 4,395
Cash restricted for tenant security deposits 811 74 885
Replacement reserve escrow 5 216 221
Prepaid expenses and other assets 1,834 249 2,083
Due from affiliate 1,738 - 1,738
Deferred expenses, net 587 265 852
---------- ---------- ----------
Total assets $ 96,613 $ 10,486 $ 107,099
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
Liabilities:
Mortgage notes payable $ 76,799 $ 13,427 $ 90,226
Notes payable - 3,155 3,155
Due to affiliates - 2,519 2,519
Accrued expenses and other liabilities 1,041 224 1,265
Tenant security deposits 802 59 861
---------- ---------- ----------
Total liabilities 78,642 19,384 98,026
Minority interest 619 - 619
Owners' equity (deficit) 17,352 (8,898) 8,454
---------- ---------- ----------
Total liabilities and owners' equity
(deficit) $ 96,613 $ 10,486 $ 107,099
========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
18
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2003
(unaudited, in thousands)
Berkshire
Income
Realty McNab
Predecessor Acquisition
Group (Note 2(b)) Proforma
---------- ---------- ----------
Revenue:
Rental $ 5,962 $ 646 $ 6,608
Interest 32 - 32
Utility reimbursements 104 5 109
Other 205 39 244
---------- ---------- ----------
Total revenue 6,303 690 6,993
Expenses:
Operating 1,474 141 1,615
Maintenance 429 49 478
Real estate taxes 452 112 564
General and administrative 130 18 148
Management fees 412 20 432
Depreciation 1,311 142 1,453
Interest 1,566 362 1,928
---------- ---------- ----------
Total expenses 5,774 844 6,618
Minority interest - - -
---------- ---------- ----------
Net income (loss) $ 529 $ (154) $ 375
========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
19
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2002
(unaudited, in thousands)
Berkshire
Income
Realty McNab
Predecessor Acquisition
Group (Note 2(b)) Proforma
---------- ---------- ----------
Revenue:
Rental $ 23,699 $ 2,649 $ 26,348
Interest 370 5 375
Utility reimbursements 511 29 540
Other 903 194 1,097
---------- ---------- ----------
Total revenue 25,483 2,877 28,360
Expenses:
Operating 5,717 602 6,319
Maintenance 1,883 203 2,086
Real estate taxes 1,771 443 2,214
General and administrative 661 65 726
Management fees 1,703 86 1,789
Depreciation 5,284 594 5,878
Interest 4,988 1,459 6,447
Participating note interest - 175 175
---------- ---------- ----------
Total expenses 22,007 3,627 25,634
Income (loss) before minority interest 3,476 (750) 2,726
Minority interest (1,520) - (1,520)
---------- ---------- -----------
Net loss (income) $ 1,956 $ (750) $ 1,206
========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
20
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2001
(unaudited, in thousands)
Berkshire
Income
Realty McNab
Predecessor Acquisition
Group (Note 2(b)) Proforma
---------- ---------- ----------
Revenue:
Rental $ 23,056 $ 2,690 $ 25,746
Interest 533 31 564
Utility reimbursements 176 6 182
Other 1,111 185 1,296
---------- ---------- ----------
Total revenue 24,876 2,912 27,788
Expenses:
Operating 5,463 572 6,035
Maintenance 1,944 298 2,242
Real estate taxes 1,679 388 2,067
General and administrative 657 49 706
Management fees 1,288 93 1,381
Depreciation 4,751 628 5,379
Interest 5,682 1,474 7,156
Participating note interest 6,591 545 7,136
---------- ---------- ----------
Total expenses 28,055 4,047 32,102
Loss before minority interest (3,179) (1,135) (4,314)
Minority interest 228 - 228
---------- ---------- ----------
Net loss $ (2,951) $ (1,135) $ (4,086)
========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
21
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
(unaudited, in thousands)
Berkshire
Income
Realty McNab
Predecessor Acquisition
Group (Note 2(b)) Proforma
---------- ---------- ----------
Revenue:
Rental $ 21,869 $ 2,630 $ 24,499
Interest 601 13 614
Other 782 130 912
---------- ---------- ----------
Total revenue 23,252 2,773 26,025
Expenses:
Operating 5,469 497 5,966
Maintenance 1,797 163 1,960
Real estate taxes 1,674 382 2,056
General and administrative 714 52 766
Management fees 1,275 73 1,348
Depreciation 5,011 542 5,553
Interest 7,204 1,482 8,686
Participating note interest 1,013 - 1,013
---------- ---------- ----------
Total expenses 24,157 3,191 27,348
Loss before minority interest (905) (418) (1,323)
Minority interest 517 - 517
---------- ---------- ----------
Net loss $ (388) $ (418) $ (806)
========== ========== ==========
The accompanying notes are an integral
Part of these financial statements.
22
BERKSHIRE INCOME REALTY PREDECESSOR GROUP
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENT ADJUSTMENTS
The following pro forma adjustments summarize the adjustments made to the
March 31, 2003 and December 31, 2002 and 2001 Berkshire Income Realty
Predecessor Group Balance Sheets:
(a) The assets and liabilities for McNab have been reflected as if the
acquisition of McNab had occurred on March 31, 2003 and December 31, 2002
and 2001, respectively.
The following pro forma adjustments summarize the adjustments made to the
Statements of Operations of the Berkshire Income Realty Predecessor Group for
the three months ended March 31, 2003 and the years ended December 31, 2002,
2001 and 2000:
(b) The operations of McNab have been reflected as if the acquisition of McNab
had been completed as of January 1, 2000.
23