ITEM 1. BUSINESS
OVERVIEW
American Retirement Villas Properties II ("ARVP II") operates ten assisted living communities ("ALCs") in the state of California, nine of which we own and one of which we lease. On March 2, 1999, we obtained financing for the purchase of and, through a wholly owned subsidiary, purchased four previously leased ALCs for approximately $14.3 million. In our ALCs we house and provide personal care and support services to senior residents in facilities containing an aggregate of 923 units. For the twelve months ended December 31, 2000 and 1999, ARVP II's ALCs had a total average occupancy of approximately 89%.
ARVP II was founded in February 1988 as a California limited partnership to develop, finance, acquire, and operate senior housing, inclusive of ALCs. The general partner of ARVP II as of December 31, 2000 is ARV Assisted Living, Inc., ("ARVAL" or "General Partner"), which serves as Managing General Partner, Gary L. Davidson, John A. Booty, John S. Jason, and Tony Rota (collectively known as the "Special Limited Partners"). As of March 2001, Messrs. Davidson, Booty, Jason and Rota became limited partners of ARVPII.
On May 16, 1996, ARVAL tendered for the limited partnership units in ARVP II, at a net cash price of $720 per unit. Prior to the tender offer ARVAL owned 110 units. At the close of the tender offer on June 21, 1996, holders of approximately 15,524 units tendered their units representing approximately 44% of all outstanding units. On July 26, 1996, ARVAL initiated a second tender offer to purchase up to 3,715 additional limited partnership units at a net cash price of $720 per unit less second quarter distributions. At the close of the second tender offer on August 23, 1996, holders of approximately 2,164 units tendered their units representing approximately 6.2% of all units. During 1997, ARVAL acquired 525 additional limited partnership units at a net cash price of approximately $720 per unit. As of December 31, 2000, ARVAL owns 18,323 units or approximately 52.3% of the limited partnership units. As such, ARVAL has a controlling interest in the Partnership.
THE ASSISTED LIVING MARKET
Assisted Living. Assisted living is a stage in the elder care continuum, midway between home-based care for lower acuity residents and the more acute level of care provided by skilled nursing facilities and acute care hospitals. Assisted living represents a combination of housing, personalized support services, and health care designed to respond to the individual needs of the senior population who need help in activities of daily living, but do not need the medical care provided in a skilled nursing facility.
We believe our assisted living business benefits from significant trends affecting the long-term care industry. The first is an increase in the demand for elder care resulting from the continued aging of the U.S. population, with the average age of our residents falling within the fastest growing segment of the U.S. population. While increasing numbers of Americans are living longer and healthier lives, many gradually require increasing assistance with activities of daily living, and are not able to continue to age in place at home. The second trend is the effort to contain health care costs by the government, private insurers and managed care organizations by limiting lengths of stay, services, and reimbursement to patients in acute care hospitals and skilled nursing facilities. Assisted living offers a cost-effective, long-term care alternative while preserving a more independent lifestyle for seniors who do not need the broader array of medical services that acute care hospitals and skilled nursing facilities are required to provide. Other trends include increases in the financial net worth of the elderly population, the number of individuals living alone, and the number of women who work outside the home who are less able to care for their elderly relatives. We believe these trends will result in a growing demand for assisted living services and communities to fill the gap between aging at home and aging in more expensive skilled nursing facilities.
Aging Population. The primary consumers of long-term health care services are persons over the age of 65. This group represents one of the fastest growing segments of the population. According to U.S. Bureau of the Census data, the segment of the population over 65 years of age is currently 13% of the total population, or 35 million people. That number is projected to grow to 20% of the total population, or 70 million people, by the year 2030. Additionally, the number of people aged 85 and older, which comprises the largest percentage of residents at long-term care facilities, is currently 4.4 million and is projected to increase to 8.9 million by the year 2030.
We believe that growth in the assisted living industry is being driven by several factors. Advances in the medical and nutrition fields have increased life expectancy, resulting in larger numbers of elderly people. Greater numbers of women in the labor force have reduced the supply of caregivers. Historically, unpaid women (mostly daughters or daughters-in-law) represented a large portion of the caregivers for the non-institutionalized elderly. The population of individuals living alone has increased significantly since 1960, largely as a result of an aging population in which women outlive men by an average of 6.8 years, rising divorce rates, and an increase in the number of unmarried individuals.
Limitation on the Supply of Long-Term Care Facilities. The majority of states in the U.S. have enacted Certificate of Need or similar legislation, which generally limits the construction of skilled nursing facilities and the addition of beds or services in existing skilled nursing facilities. High construction costs, limitations on government reimbursement for the full cost of construction, and start-up expenses also constrain growth in the supply of such facilities. Such legislation benefits the assisted living industry by limiting the supply of skilled nursing beds for the elderly. Cost factors are placing pressure on skilled nursing facilities to shift their focus toward higher acuity care, which enables them to charge more. This contributes to a shortage of lower acuity care, increasing the pool of potential assisted living residents.
While Certificates of Need generally are not required for ALCs, except in a few states, most states do require assisted living providers to license their communities and comply with various regulations regarding building requirements and operating procedures and regulations. States typically impose additional requirements on ALCs over and above the standard congregate care requirements. Further, the limited pool of experienced assisted living staff and management, as well as the costs and start-up expenses to construct an ALC, provide an additional barrier to entry into the assisted living business.
Cost Containment Pressures of Health Reform. In response to rapidly rising health care costs, both government and private pay sources have adopted cost containment measures that encourage reduced lengths of stay in hospitals and skilled nursing facilities. The federal government has acted to curtail increases in health care costs under Medicare by limiting acute care hospital and skilled nursing facility reimbursement to pre-established fixed amounts. Private insurers have also begun to limit reimbursement for medical services in general to predetermined "reasonable" charges. Managed care organizations, such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs") are reducing hospitalization costs by negotiating discounted rates for hospital services and by monitoring and decreasing hospitalization. We anticipate that both HMOs and PPOs increasingly may direct patients away from higher cost nursing care facilities into less expensive ALCs.
These cost containment measures have produced a "push-down" effect. As the number of patients being "pushed down" from acute care hospitals to skilled nursing facilities increases, the demand for residential options such as ALCs to serve patients who historically have been served by skilled nursing facilities will also increase. In addition, skilled nursing facility operators are continuing to focus on improving occupancy and expanding services (and fees) to subacute patients requiring very high levels of nursing care. As the acuity level of skilled nursing facility patients rises, the supply of nursing facility beds will be filled by patients with higher acuity needs who pay higher fees. This will provide opportunities for assisted living communities to increase their occupancy and services to residents requiring lower levels of care than patients in skilled nursing facilities generally receive.
OUR ASSISTED LIVING SERVICES
We provide services and care that are designed to meet the individual needs of our residents. The services provided are designed to enhance both the physical and mental wellbeing of seniors in each of our ALCs by promoting their independence and dignity in a home-like setting. Our assisted living program includes the following:
- - Personalized Care Plan. The focus of our strategy is to meet the specific needs of each resident. We customize our services beginning with the admissions process when the ALC's management staff, the resident, the resident's family, and the resident's physician discuss the resident's needs and develop a "personalized" care plan. If recommended by the resident's physician, additional health care or medical services may be provided at the community by a third party home health care agency or other medical provider. The care plan is reviewed and modified on a regular basis.
- - Basic Service and Care Package. The basic service and care package at our ALCs generally includes:
- meals in a communal, "home-like" setting;
- housekeeping;
- linen and laundry service;
- social and recreational programs;
- utilities; and
- transportation in a van or minibus.
Other care services can be provided under the basic package based upon the individual's personalized health care plan. Our policy is to charge base rents that are competitive with similar ALCs in the local market.
- - Additional Services. Our assisted living services program offers additional levels of care beyond what is offered in the basic package. The level of care a resident receives is determined through an assessment of a resident's physical and mental health which is conducted by the community's assisted living director, with input from other staff members. The six-tiered rate structure is based on a point system. We assign points to the various care tasks required by the resident, based on the amount of staff time and expertise needed to accomplish the tasks. The point scale and pricing are part of the admissions agreement between the community, the resident and the resident's family. The community performs reassessments after the initial 30 days and periodically throughout the resident's stay to ensure that the level of care we provide corresponds to changes in a resident's condition. The types of services included in the assessment point calculation are:
- Medication management;
- Assistance with dressing and grooming;
- Assistance with showering;
- Assistance with continence;
- Escort services;
- Status checks related to a recent hospitalization, illness, history of falls;
- Help with psychosocial needs, such as memory deficit;
- Special nutritional needs and assistance with eating.
In addition to the above services, we provide other levels of assistance to residents at selected ALCs in order to meet individual needs, such as assistance with diabetic care and monitoring, catheter, colostomy and ileosotomy care, minor wound care needs and light to moderate transferring needs. Specially trained staff provide personalized care and specialized activity programs and medical directors oversee the medication regimens.
In addition to the base rent, we typically charge between $375 and $1,700 per month plus an additional charge for higher levels of assisted living services. Fee levels vary from community to community and we may charge additional fees for other specialized assisted living services. We expect that an increasing number of residents will use additional levels of services as they age in our ALCs. Our internal growth plan is focused on increasing revenue by continuing to improve our ability to provide residents with these services.
On a same community basis the average monthly revenue per occupied unit for both the basic service package and the assisted living services increased to $2,132 from $2,066 for the year ended December 31, 2000 and 1999, respectively. There can be no assurance that any ALC will be substantially occupied at assumed rates at any time. In addition, we may only be able to lease up our ALCs to full occupancy at rates below those assumed. If operating expenses increase, local market conditions may limit the extent to which we may increase rates. Because we must provide advance notice of rate increases, generally at least 30 days, increases may lag behind increases in operating expenses.
Wellness Program. We have implemented a Wellness Program for residents of our communities designed to identify and respond to changes in a resident's health or condition. Together with the resident and the resident's family and physician, as appropriate, we design a solution to fit that resident's particular needs. We monitor the physical and mental wellbeing of our residents, usually at meals and other activities, and informally as the staff performs services around the facility. Through the Wellness Program we work with:
- home health care agencies to provide services the community cannot provide;
- physical and occupational therapists to provide services to residents in need of such therapy; and
- long-term care pharmacies to facilitate cost-effective and reliable ordering and distribution of medications.
We arrange for these services to be provided to residents as needed in consultation with their physicians and families. At the present time, all our ALCs have a comprehensive Wellness Program.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
Our business, results of operations and financial condition are subject to many risks, including those set forth below. Certain statements contained in this report, including without limitation statements containing the words "believes," "anticipates," "expects," and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. We have made forward-looking statements in this report concerning, among other things, the impact of future acquisitions and developments, if any, and the level of future capital expenditures. These statements are only predictions, however; actual events or results may differ materially as a result of risks we face. These risks include, but are not limited to, those items discussed below. Certain of these factors are discussed in more detail elsewhere in this report, including without limitation under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Given these uncertainties, we caution readers not to place undue reliance on such forward-looking statements, which speak only as of the date of this report. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained here to reflect future events or developments.
We have experienced growth through the development and acquisition of ALCs and by acquiring property for the development of new ALCs. Certain risks are inherent with the execution of the development and acquisition of ALCs. These risks include, but are not limited to:
- our ability to access capital necessary for operations, acquisition and development;
- dependence on the availability of adequate capital;
- governmental regulation;
- competition; and
- risks common to the assisted living industry.
DEPENDENCE ON THE AVAILABILITY OF ADEQUATE CAPITAL
We depend heavily on our ability to obtain adequate capital to fund our acquisitions and development. Our estimated capital needs for acquisitions and development over the next 12 months are $0.9 million. As of December 31, 2000, we had $2.2 million in cash and cash equivalents. This means we have cash and cash equivalents to meet our estimated capital needs for acquisitions and development for the next 12 months. If, however our acquisition costs and development expenses exceed our projections, we may have to obtain significant additional financing. There is no assurance that we will be able to obtain the financing on a timely basis, if at all. If we are unable to obtain the required financing on a timely basis we may not be able to execute our business plan.
COMPETITION
The health care industry is highly competitive and we expect that the assisted living business, in particular, will become more competitive in the future. Sources of competition include:
- family members providing care at home;
- numerous local, regional and national providers of assisted living and long-term care whose facilities and services range from home-based health care to skilled nursing facilities; and
- acute care hospitals.
In addition, we believe that as assisted living receives increased attention among the public and insurance companies, new competitors focused on assisted living will enter the market, including hospitality companies expanding into the market. Some of our competitors operate on a not-for-profit basis or as charitable organizations, while others have, or are capable of obtaining, greater financial resources than those available to us.
We also expect to face increased competition for the acquisition and development of ALCs. Some of our present and potential competitors are significantly larger or have, or may obtain, greater financial resources than we have. These forces could limit our ability to attract residents, attract qualified personnel, expand our business, or increase the cost of future acquisitions, each of which could have a material adverse effect on our financial condition, results of operations and prospects.
GOVERNMENT REGULATION
Assisted Living. Health care is subject to extensive regulation and frequent regulatory change. Currently, no federal rules explicitly define or regulate assisted living. However, we are and will continue to be subject to varying degrees of regulation and licensing by health or social service agencies and other regulatory authorities in California and localities where we operate or intend to operate. Changes in, or the adoption of, such laws and regulations, or new interpretations of existing laws and regulations, could have a significant effect on methods and costs of doing business, and on reimbursement levels from governmental and other payers. In addition, the President and Congress have proposed in the past, and may propose in future, health care reforms that could impose additional regulations on us or limit the amounts that we may charge for our services. We cannot assess the ultimate timing and impact that any pending or future health care reform proposals may have on the assisted living, home health care, skilled nursing or health care industry in general. No assurance can be given that any such reform will not have a material adverse effect on the business, financial condition or our results of operations.
SSI Payments. A portion of our revenue comes from residents who receive SSI payments. Revenue from these residents is generally lower than the amounts we receive from our other residents and could be subject to payment delay. Approximately 3% of our residents are SSI residents. We cannot assure that our percentage of revenue received from SSI will not increase, or that the amounts paid by SSI programs will not be further limited. In addition, if we were to become a provider of services under the Medicaid program, we would be subject to Medicaid regulations designed to limit fraud and abuse. Violations of these regulations could result in civil and criminal penalties and exclusion from participation in the Medicaid program.
RISKS COMMON TO OUR ASSISTED LIVING OPERATIONS
Staffing and Labor Costs. We compete with other providers of assisted living and senior housing to attract and retain qualified personnel. We also rely on the available labor pool of employees, and unemployment rates are low in many areas where we operate. We make a genuine effort to remain competitive with other companies in our industry. Therefore, if it is necessary for us to increase pay and/or enhance benefits to maintain our competitive status in our industry, our labor costs could rise. We cannot provide assurance that if our labor costs do increase, they can be matched by corresponding increases in rental or assisted living revenue.
Obtaining Residents and Maintaining Rates. For the year ended December 31, 2000, our ALCs had an average combined occupancy rate of 89%. Occupancy may drop in our ALCs, primarily due to:
- changes in the health of residents;
- increased competition from other assisted living providers, particularly those offering newer ALCs;
- the reassessment of residents' physical and cognitive state and changes in management and staffing.
We cannot assure that, at any time, any ALC will be substantially occupied at assumed rents. In addition, we may only achieve lease-up and full occupancy at rental rates below those assumed. If operating expenses increase, local rental market conditions may limit the extent to which we may increase prices. The implementation of rate increases for residents of new acquisitions may lag behind increases in operating expenses. In addition, if we fail to generate sufficient revenue, we may be unable to meet minimum rent obligations under our long-term operating lease and to make interest and principal payments on our indebtedness.
General Real Estate Risks. The performance of our ALCs is influenced by factors affecting real estate investments, including the general economic climate. Other real estate risks include:
- an oversupply of, or a reduction in demand for, ALCs in a particular market;
- the attractiveness of properties to residents;
- zoning, rent control, environmental quality regulations or other regulatory restrictions;
- competition from other forms of housing;
- our ability to provide adequate maintenance and insurance;
- our ability to control operating costs, including maintenance, insurance premiums and real estate taxes.
Real estate investments are also affected by such factors as applicable laws, including tax laws, interest rates and the availability of financing. Real estate investments are relatively illiquid and, therefore, limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. If we fail to operate our ALCs effectively, it may have a material adverse effect on our business, financial condition and operating results.
Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of the removal or remediation of certain hazardous or toxic substances. These include, without limitation, asbestos-containing materials which could be located on, in or under such property. Such laws and regulations often impose liability whether or not the owner or operator knows of, or is responsible for, the presence of the hazardous or toxic substances. When we acquire land for development or existing facilities, we typically obtain environmental reports on the properties as part of our due diligence in order to lessen our risk of exposure. Nonetheless, the costs of any required remediation or removal of these substances could be substantial. The owner's liability is generally not limited under such laws and regulations and could exceed the value of the property and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Under these laws and regulations, an owner, operator, or any entity that arranges for the disposal of hazardous or toxic substances at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. When entering into leases with health care REITs and other landlords of facilities, we typically enter into environmental indemnity agreements in which we agree to indemnify the landlord against all risk of environmental liability, both during the term of the lease and beyond. In connection with the ownership or operation of our properties or those of our Affiliated Partnerships, we could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties.
Restrictions Imposed by Laws Benefiting Disabled Persons. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist that also may require us to modify existing and planned properties to allow disabled persons to access the properties. We believe that our properties are either substantially in compliance with present requirements or are exempt from them. However, if required changes cost more than anticipated, or must be made sooner than anticipated, we would incur additional costs. Further legislation may impose additional burdens or restrictions related to access by disabled persons, and the costs of compliance could be substantial.
Geographic Concentration. All of our ALCs are located in California. The market value of these ALCs and the income generated from properties could be negatively affected by changes in local and regional economic conditions, specific laws and the regulatory environment in California, and by acts of nature. We cannot provide assurance that such geographic concentration will not have an adverse impact on our business, financial condition, operating results and prospects.
Insurance. We believe that we maintain adequate insurance policies, based on the nature and risks of our business, historical experience and industry standards. Our business entails an inherent risk of liability. In recent years, we and other assisted living providers have become subject to an increasing number of lawsuits alleging negligence or related legal theories, which may involve large claims and significant legal costs. From time to time we are subject to such suits because of the nature of our business. We cannot assure that claims will not arise that exceed our insurance coverage or are not covered by it. A successful claim against us that is not covered by, or is in excess of our insurance, could have a material adverse effect on our financial condition, operating results or liquidity. Claims against us, regardless of their merit or eventual outcome, may also have a material adverse effect on our ability to attract residents or expand our business and would consume considerable management time. We must review our insurance policies annually and can provide no assurance that we will be able to continue to obtain liability insurance coverage in the future or that it will be available on acceptable terms.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth, as of December 31, 2000, the location, the date on which operations commenced, number of units, and our interest in our ALCs.
On March 2, 1999, we purchased our landlords' fee interests in the Retirement Inn of Burlingame, Retirement Inn of Campbell, Retirement Inn of Fremont and Retirement Inn of Sunnyvale.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On June 15, 1999, we, along with five other California limited partnerships of which ARVAL is the managing general partner, including American Retirement Villas Properties III, Casa Bonita Fullerton, Ltd., Collwood Knolls, L.P., and San Gabriel Retirement Villa, L.P. (collectively, the "ARV Partnerships") - filed an action in the Superior Court for the State of California, County of Orange, seeking a declaratory judgment and damages for breach of contract, promissory estoppel, fraud and negligent misrepresentation against PRN Mortgage Capital, L.L.C. and Red Mountain Funding, L.L.C. ("Defendants"). Defendants filed a counter-claim for amounts allegedly due under loan commitments between Defendants and the ARV Partnerships. In July 2000, the ARV Partnerships settled the dispute with the Defendants. We have received and recorded all amounts due as a result of the settlement. We do not believe the terms of the settlement are material to our operations. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS
No matters were submitted to Unitholders during the fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED UNITHOLDER MATTERS
There is no established public trading market for our securities. As noted in Item 1, ARVAL, our Managing General Partner, tendered for our limited partnership units in May 1996 and July 1996. During 1997, ARVAL acquired 525 additional units at a net cash price of approximately $720 per unit. As of March 20, 2001, ARVAL owned 18,323 limited Partnership units or approximately 52.3% of outstanding limited partner units.
As of March 20, 2000, there were approximately 1,728 Unit Holders of record owning 35,019.88 units. For the years ended December 31, 2000, 1999, and 1998, we made limited partner distributions of $2.12 per unit, $502.32 per unit, and $53.63 per unit, respectively. The return of capital for the years ended December 31, 2000, 1999, and 1998 was $2.12 per unit, $461.33 per unit, and $2.38 per unit, respectively. There were distributions of earnings for the years ended December 31, 2000, 1999, and 1998 of $0.00 per unit, $40.99 per unit, and $51.25 per unit, respectively.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of our last five fiscal years. Certain of this financial data has been derived from our audited financial statements included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" at Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY
On a long-term basis, our liquidity is sustained primarily from cash flow provided by operating activities. During 2000, net cash provided by operating activities was approximately $0.1 million compared to net cash provided by operating activities of approximately $3.7 million and $2.5 million for 1999 and 1998, respectively.
Given the age of the ALCs (ages range from 13 to 25 years with an average age of 21.5 years), our Managing General Partner has continued our refurbishment program put in place to repair, maintain and physically improve our ALCs. We expect to fund repairs and improvement primarily from our operating cash flow. As a result of the planned renovations, our Managing General Partner believes that distributions of cash flow from operations to the Partners will either be reduced or eliminated in the near term. Our General Partners expect that the cash to be generated from operations of our communities will be adequate to pay operating expenses, make necessary capital improvements and make required principal reductions of loans.
During 2000, net cash used in investing activities was $1.1 million compared to $16.1 million and $1.3 million for 1999 and 1998, respectively. The decrease from 1999 to 2000 was a primarily a result of the 1999 purchase of our landlords' interests in four previously leased assisted living communities and capital expenditures required to qualify for the refinancing. In addition, investing activities included property improvements and the purchase of furniture, fixtures and equipment.
During 2000, net cash provided by financing activities was $1.1 million compared to $13.5 million in 1999 and net cash used in financing activities of $2.1 million for 1998. The principal components for 2000 were:
- Refinancing of the 4 owned properties, as part of the $29.8 million proceeds from notes payable offset by
- principal repayments of $28.1 million for loans; and
- loan fees of $0.5 million.
Our General Partner's Board of Directors approved the refinancing of 8 owned ALCs in March 2000. Four of the refinancings were completed by December 31, 2000, the refinancing of the remaining four communities was completed or existing loans were extended to 2002 subsequent to the end of 2000. We choose to refinance to:
- take advantage of lower fixed interest rates available at the time; and
- extend maturities to 35 years
On June 28, 1999, we had previously obtained financing on the same eight owned communities in an aggregate principal amount of $39.2 million at a rate of interest of 9.15% with a maturity date of June 28, 2001 through a loan agreement with Banc One. As part of the loan requirements, we created a wholly-owned subsidiary Retirement Inns II, LLC as the special purpose entity. The loan was for 24 months and was secured by the various properties; in addition, our General Partner, was a guarantor on the loan for fraud, material misrepresentation and certain covenants. The $39.2 million of mortgage loans were due June 2001. As described in more detail in the preceding paragraph, four of the loans were refinanced at or prior to December 31, 2000 with 35-year loans at between 8.00% to 8.03% Subsequent to December 31, 2000 three additional loans have been refinanced and one loan's maturity has been extended to January 2002.
Due to a failed financing in 1998, in October 1998 we paid a lender approximately $1.3 million of fees for an interest rate lock and $0.1 million for loan commitment and other fees. The lender terminated the loan commitment and underlying interest rate lock in October 1998 due to adverse market conditions. The lender returned $0.3 million of the interest rate lock fees in January 1999 and $0.2 million in June 2000 as full and final settlement. We included the amounts paid and received in interest expense in the accompanying consolidated statements of operations for the years ended December 31, 2000, 1999 and 1998.
Our General Partner is not aware of any trends, other than national economic conditions, which have had or which may be reasonably expected to have a material favorable or unfavorable impact on revenues or income from our operations or sale of properties. Our General Partner believe that if the inflation rate increases, they will be able to recover subsequent increases in operating expenses from higher rental and assisted living rates. We have notes payable of approximately $41.2 million as of December 31, 2000.
CAPITAL RESOURCES
During 2000, we continued our refurbishment program in order to repair, maintain and physically improve the ten ALCs. These refurbishments were funded with cash flow from operations and cash on hand. We expect to continue the refurbishment program and expect that the funds for these improvements should be available from operations or cash on hand or other financing alternatives. Our estimated capital needs for acquisitions and development over the next 12 months are $0.9 million. Other than as disclosed above, there are no known material trends, favorable or unfavorable, in our capital resources, and there is no expected change in the mix of such resources.
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
The increase of $0.5 million, or 2.5% in assisted living community revenue is primarily attributable to:
- the increase in average rate per occupied unit to $2,132 for the year ended December 31, 2000 as compared with $2,066 for the year ended December 31, 1999, partially offset by;
- the decrease in assisted living penetration to 53.6% for the year ended December 31, 2000 compared with 56.8% for the year ended December 31, 1999.
The increase in assisted living operating expenses of $1.1 million, or 9.2% is primarily attributable to CPI resulting in:
- increased wages of staff ;
- increased payroll costs including incentive programs; insurance and worker's compensation; and
- normal operating expense increases.
The decrease in general and administrative costs of $0.4 million, or 36.3% is primarily attributable to:
- a reduction of administration fees paid to our managing general partner; and
- a reduction of expenses, that were previously allocated to G&A due to cost-cutting efforts.
The decrease in communities rent of $0.2 million, or 36.7% is primarily due to the purchase, during March 1999, of four previously leased communities.
The increase in depreciation and amortization of $0.5 million, or 27.5% is primarily attributable to:
- increase in amortization of loan fees related to the refinancing in June 1999 of the eight owned properties; and
- the purchase of four previously leased communities, in March of 1999.
The increase in property taxes of $0.1 million, or 16.6% is primarily due to higher property valuations.
The increase in advertising expenses or $0.2 million, or 66.1% is primarily due to more aggressive advertising due to increased competition in the Assisted Living market.
The increase in interest expense of $0.9 million, or 36.6% is primarily attributable to:
- the acquisition in March 1999 of four ALCs previously leased; and
- the refinancing in June 1999 of eight owned properties: partially offset by
- a recovery of $228,000 of interest rate lock and commitment fees incurred in connection with the failed refinancing of certain notes payable in 1998.
The extraordinary loss or $0.3 million is the result of the write off of loans fees due to the refinancing of four properties in December of 2000.
THE YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
The increase in assisted living community revenue of $1.3 million, or 7.1% is primarily attributable to:
- the increase in assisted living penetration to 56.8% for the year ended December 31, 1999 compared with 53.4% for the year ended December 31, 1998; and
- the increase in average rate per occupied unit to $2,066 for the year ended December 31, 1999 as compared with $1,921 the year ended December 31, 1998;
The increase in assisted living operating expenses of $0.8 million, or 6.5% is primarily attributable to:
- staffing requirements related to increased assisted living services provided;
- increased wages of staff; and
- normal operating expense increases.
The decrease in general and administrative costs of $0.1 million, or 10.2% is primarily due to cost-cutting efforts.
The decrease in communities rent of $0.6 million, or 52.6% is primarily due to the purchase, during March 1999, of four previously leased communities.
The increase in depreciation and amortization of $0.7 million, or 62.2% is primarily due to the four previously leased communities that now are owned which resulted in depreciation and amortization expense.
The increase in interest expense of $0.8 million, or 50.8% is primarily related to the loans for the purchase of the four previously leased communities, in March of 1999, and to the refinancing on June 28, 1999 of the eight owned properties partially offset by the loan fees charged to interest expense in 1998.
FUTURE CASH DISTRIBUTIONS
Our General Partner believes that our ability to make cash distributions to limited partners depends on factors such as (i) our ability to rent the available units and maintain high occupancies and rates; (ii) our ability to control both operating and administrative expenses; (iii) our ability to maintain adequate working capital; (iv) the absence of any losses from uninsured property damage or future litigation; (v) our ability to generate proceeds from the sales of properties and (vi) our ability to renew the final existing lease under favorable terms.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in the interest rates on our fixed rate notes payable. With respect to our fixed rate notes payable, changes in the interest rates affect the fair market value of the notes payable, but not our earnings or cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until the earlier of maturity and any required refinancing of such debt. We do not currently have any variable interest rate debt and, therefore, are not subject to interest rate risk associated with variable interest rate debt. Currently, we do not utilize interest rate swaps.
Less than 1% of our total assets and total contract revenues as of and for the periods ended December 31, 2000 and 1999 were denominated in currencies other than the U.S. Dollar; accordingly, we believe that we have no material exposure to foreign currency exchange risk. This materiality assessment is based on the assumption that the foreign currency exchange rates could change unfavorably by 10%. We have no foreign currency exchange contracts.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and the Report of Independent Auditors are listed at Item 14 and are included beginning on Page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. OUR DIRECTORS AND EXECUTIVE OFFICERS
As an entity, we have no directors or executive officers. Our sole and managing general partner is ARVAL. As managing general partner, ARVAL is responsible for all management decisions
SPECIAL LIMITED PARTNERS
JOHN A. BOOTY, age 62, one of ARVAL's founders, retired in September 1996 after serving as president since the date of ARVAL's inception in 1985. Since his retirement he has served as a consultant to ARVAL and most recently as a Director until September 1999. He also served as interim president of ARVAL from October 1997 to January 1998 and as interim chief executive officer from October 1997 to December 1997.
GARY L. DAVIDSON, age 66, an attorney and one of ARVAL's founders, previously practiced law in Orange County. During his professional career, he has been active in numerous business and professional sports ventures. In 1979, he co-founded the predecessor to ARVAL. In October 1997, Mr. Davidson resigned as Chief Executive Officer, Director and Chairman of the Board of ARVAL.
JOHN S. JASON, age 65, was associated with KPMG LLP for 6 years. In 1979, he co-founded the predecessor to ARVAL. In February 1993, Mr. Jason retired from his positions as a Director and as Executive Vice President of ARVAL.
TONY ROTA, age 72, is a licensed real estate broker, and has been active in real estate investments since 1958. In 1979, he co-founded the predecessor to ARVAL. In November 1992, Mr. Rota retired from his positions as a Director and as Vice President of ARVAL.
The following table sets forth certain information regarding the executive officers and directors of our General Partner
EXECUTIVE OFFICERS OF ARV ASSISTED LIVING, INC. ("ARVAL")
DOUGLAS M. PASQUALE, age 46, joined ARVAL as chief operating officer on June 1, 1998, and was named a Director in October 1998 and chairman in December of 1999. Prior to joining ARVAL, Mr. Pasquale was employed for 12 years by Richfield Hospitality Services, Inc., and Regal Hotels International-North America, a leading hotel ownership and hotel management company based in Englewood, Colorado. He served as its president and chief executive officer from 1996 to 1998 and as chief financial officer from 1994 to 1996.
ABDO H. KHOURY, age 51, was appointed senior vice president and chief financial officer of ARVAL on March 30, 1999. On January 1, 2001 Mr. Khoury was promoted to President and retained the position of chief financial officer of ARVAL. Previously he had served ARVAL as vice president, asset strategy and treasury, since January 1999, and as president of the Apartment Division since coming to ARVAL in May 1997. Mr. Khoury's prior background includes more than 25 years in accounting and real estate. He was a principal with Financial Performance Group in Newport Beach, CA, from 1991 to 1997.
DIRECTORS OF ARVAL
For a description of Mr. Pasquale, please see above.
MAURICE J. DEWALD, age 60, is chairman and chief executive officer of Verity Financial Group, Inc., a firm he founded in 1992. He currently is a director of Tenet Healthcare Corporation, Dai-Ichi Kangyo Bank of California and Monarch Funds.
DAVID P. COLLINS, age 63, has served ARVAL in several capacities since 1981. He is a past president of ARV Assisted Living International, Inc., a wholly-owned subsidiary of ARVAL. From 1985 to January 1998, Mr. Collins was a senior vice president of ARVAL, responsible for investor relations and for capital formation for ARVAL and affiliated entities. Mr. Collins currently serves as a director of ARVAL.
JOHN A. MOORE, age 39, is a Principal of Lazard Freres Real Estate Investors L.L.C. and its Chief Financial Officer. He joined Lazard in 1998 from World Financial Properties, where he has served as an Executive Vice President and Chief Financial Officer from 1996. Previously, he worked with Olympia and York as Senior Vice President, Finance. Mr. Moore joined Olympia and York in 1988.
JEFFREY D. KOBLENTZ, age 33, is a Vice President of Lazard Freres Real Estate Investors L.L.C. He joined Lazard in 1998 from Arthur Andersen LLP, where he was a Manager in the Real Estate Services Group. Mr. Koblentz joined Arthur Andersen in 1992.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
As an entity, we have no officers or directors. We are managed by our General Partner. We compensate our General Partner as set forth in the table below. Please note that during the fiscal year 2000 the Special Limited Partners were general partners of ARVP II and, as such, were entitled to compensation set forth below.
See also Footnote 3 of Notes to Financial Statements (Transactions with Affiliates).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the compensation earned by our General Partners, as set out under Item 11 above, no General Partner or Affiliate receives any direct or indirect compensation from us. Our General Partner receives a management fee of 5% of Gross Revenues (as defined in the ARVP II Partnership Agreement). Because these fees are payable without regard to whether particular ALCs are generating Cash Flow (as defined in the ARVP II Partnership Agreement) or otherwise benefiting us, a conflict of interest could arise in that it might be to the advantage of our General Partners that a community be retained or refinanced rather than sold. On the other hand, an affiliate of our General Partners may earn a real estate commission on sale of a property, creating an incentive to sell what might be a profitable property.
Our General Partner has authority to invest our funds in properties or entities in which it or any of its affiliates have an interest, provided we acquire a controlling interest. In any such investment, duplicate property management or other fees will not be permitted. Our General Partner or any of its affiliates may, however, purchase property in their own names and temporarily hold title to facilitate acquisition for us, provided that such property is purchased by us at cost (including acquisition, closing and carrying costs). Our General Partners will not commingle our funds with those of any other person or entity.
Conflicts of interest exist to the extent that ALCs owned or operated compete, or are in a position to compete for residents, general managers or key employees with ALCs owned or operated by our General Partners and affiliates in the same geographic area. Our General Partners seek to reduce any such conflicts by offering such persons their choice of residence or employment on comparable terms in any ALC.
Further conflicts may exist if and to the extent that other affiliated owners of ALCs seek to refinance or sell at the same time as us. Our General Partner seeks to reduce any such conflicts by making prospective purchasers aware of all ALCs available for sale.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
- Independent Auditors' Report;
- Balance Sheets - December 31, 2000 and 1999;
- Consolidated Statements of Operations - Years Ended December 31, 2000, 1999, and 1998;
- Consolidated Statements of Partners' Capital - Years Ended December 31, 2000, 1999 and 1998;
- Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999 and 1998;
- Notes to Financial Statements; and
- Financial Statement Schedule - Schedule III - Real Estate and Related Accumulated Depreciation and Amortization - December 31, 2000.
(b) Reports on Form 8-K. The Registrant did not file any 8-K reports during the last quarter of 2000.
(c) Exhibits
A. EXHIBITS
* Incorporated by reference to 10-Q for June 30, 1999 filed August 2, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN RETIREMENT VILLAS PROPERTIES II, A CALIFORNIA LIMITED PARTNERSHIP, BY THE FOLLOWING PERSONS ON OUR BEHALF.
ARV ASSISTED LIVING, INC.
By: /s/ DOUGLAS M. PASQUALE ----------------------------- Douglas M. Pasquale Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership)
Annual Report - Form 10-K
Financial Statements and Schedule
Items 8 and 14(a)
December 31, 2000, 1999 and 1998
(With Independent Auditors' Report Thereon)
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership)
Annual Report - Form 10-K
Items 8 and 14(a)
Index to Financial Statements and Schedule
All other schedules are omitted, as the required information is inapplicable or the information is presented in the financial statements or related notes.
INDEPENDENT AUDITORS' REPORT
ARV Assisted Living, Inc. as the General Partner of American Retirement Villas Properties II:
We have audited the consolidated financial statements of American Retirement Villas Properties II, a California limited partnership, and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Retirement Villas Properties II and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/KPMG LLP
Orange County, California March 5, 2001
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership)
Consolidated Balance Sheets December 31, 2000 and 1999 (In thousands, except units)
ASSETS
See accompanying notes to consolidated financial statements.
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership)
Consolidated Statements of Operations
Years ended December 31, 2000, 1999 and 1998
(In thousands, except amounts per unit)
See accompanying notes to consolidated financial statements.
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership)
Consolidated Statements of Partners' Capital (Deficit)
Years ended December 31, 2000, 1999 and 1998
(In thousands, except amounts per unit)
See accompanying notes to consolidated financial statements.
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership)
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(In thousands)
See accompanying notes to consolidated financial statements.
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited partnership)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
American Retirement Villas Properties II maintains records on the accrual method of accounting for financial reporting and Federal and state tax purposes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Partnership and its subsidiaries. Subsidiaries, which include limited partnerships and limited liability companies in which we have controlling interests, have been consolidated into the financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.
CARRYING VALUE OF REAL ESTATE
Property, furniture and equipment are stated at cost less accumulated depreciation which is charged to expense on a straight-line basis over the estimated useful lives of the assets as follows:
We review our long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, we estimate the future cash flows expected to result from using the assets and eventually disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based upon the asset's fair value.
USE OF ESTIMATES
In the preparation of our financial statements in conformity with generally accepted accounting principles, we have made estimates and assumptions that affect the following:
- reported amounts of assets and liabilities at the date of the financial statements;
- disclosure of contingent assets and liabilities at the date of the financial statements; and
- reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
IMPOUND ACCOUNTS
The U.S. Department of Housing and Urban Development ("HUD") finances certain of our properties. HUD holds our funds in impound accounts for payment of property taxes, insurance and future property improvements (replacement reserves) on these properties. We include these impound accounts in other assets.
LOAN FEES
We amortize loan fees using the interest method over the term of the notes payable and include them in other assets.
REVENUE RECOGNITION
Rent agreements with tenants are on a month-to-month basis. We apply advance deposits to the first month's rent. Revenue is recognized in the month earned for rent and assisted living services.
ADVERTISING COSTS
Except for yellow page advertising, which is expensed over the period benefited on a straight line basis, we expense all advertising costs as they are incurred.
INCOME TAXES
Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are generally not subject to income taxes. For tax purposes, any income or losses realized are those of the individual partners, not the Partnership.
We have not requested a ruling from the Internal Revenue Service to the effect that we will be treated as a partnership and not an association taxable as a corporation for Federal income tax purposes. We have received an opinion of counsel as to our tax status prior to the offering of limited partnership units, but such opinion is not binding upon the Internal Revenue Service.
Following are our assets and liabilities as determined in accordance with generally accepted accounting principles ("GAAP") and for Federal income tax reporting purposes at December 31 (in thousands):
Following are the differences between the financial statement and tax return income (in thousands):
(1) Unaudited
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
We based net income (loss) per limited partner unit on the weighted-average number of limited partner units outstanding of 35,020 in the years ended December 31, 2000, 1999 and 1998.
RECLASSIFICATIONS
We have reclassified certain prior period amounts to conform to the December 31, 2000 presentation.
(2) ORGANIZATION AND PARTNERSHIP AGREEMENT
We were formed on February 9, 1988 for the purpose of acquiring, developing and operating residential retirement communities. Our term is 59 years and may be dissolved earlier under certain circumstances. Limited Partner units (minimum of 2 units per investor for Individual Retirement Accounts, KEOGHs and pension plans and 5 units for all other investors) were offered for sale to the general public. A maximum number of 35,000 units were offered at $1,000 per unit and an additional 25 units were issued in lieu of commissions. We were initially capitalized by a $1,000 contribution from a Limited Partner and a $500 contribution from our General Partners. We reached our maximum capitalization in October 1989, representing a total capital
investment of $35,000,000. In June 1990, we repurchased and effectively retired 5 units for $4,600 (the balance of unreturned initial contributions) from a Limited Partner. Under the Partnership Agreement, the maximum liability of the Limited Partners is the amount of their capital contributions.
Our Managing General Partner is ARV Assisted Living, Inc. ("ARVAL"), a Delaware corporation, and the individual special limited partners are John A. Booty, John S. Jason, Gary L. Davidson and Tony Rota. Our General Partner is not required to make capital contributions to the Partnership.
Profits and losses for financial and income tax reporting purposes shall generally be allocated, other than cost recovery deductions (as defined in the Partnership Agreement), 0.01% to our General Partner, 0.99% to our Special Partners and 99.00% to the Limited Partners. Cost recovery deductions for each year are allocated ), 0.01% to our General Partner, 0.99% to our Special Limited Partners and 99.00% to the Limited Partners who are taxable investors.
Cash available for distribution from operations, which is determined at the sole discretion of our General Partner, is to be distributed), 0.01% to our General Partner, 0.99% to our Special Limited Partners and 99.00% to the Limited Partners.
Upon any sale, refinancing or other disposition of our real properties, distributions are to be made), 0.01% to our General Partner, 0.99% to our Special Limited Partners and 99.00% to the Limited Partners until the Limited Partners have received an amount equal to 100% of their capital contributions plus an amount ranging from 8% to 10% (depending upon the timing of the Limited Partner's investment) of their capital contributions per annum, cumulative but not compounded, from the date of each Partner's investment. The cumulative return is to be reduced, but not below zero, by the aggregate amount of prior distributions from all sources. Thereafter, distributions are to be 15% split between our General Partner and Special Limited Partners according to their partnership interests and 85% to the Limited Partners, except that after the sale of the properties, the proceeds of sale of any last remaining assets we own are to be distributed in accordance with positive capital account balances.
(3) TRANSACTIONS WITH AFFILIATES
Our properties are managed by ARVAL. For this service we pay a property management fee of 5% of gross revenues amounting to $1,056,000, $1,037,000, and $974,000, for the years ended December 31, 2000, 1999 and 1998, respectively. Additionally, we pay a Partnership management fee of 10% of cash flow before distribution, as defined in the Partnership Agreement, amounting to $246,000, $348,000, and $333,000, for the years ended December 31, 2000, 1999 and 1998, respectively. Payment of the Partnership management fee out of cash flow is subordinated to a quarterly noncumulative distribution from each property to the Limited Partners of an amount equal to an annualized return, per quarter, of 7.5% of Capital Contributions allocated to each property.
We reimburse ARVAL for certain expenses such as repairs and maintenance, supplies, and payroll and retirement benefit expenses they pay on our behalf. The total reimbursements to ARVAL are included in rental property operations, assisted living and general and administrative expenses in the accompanying statements of operations and amounted to $10.3 million, $9.4 million, and $7.1 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Prior to 1995, we paid our Managing General Partner an investment advisory fee for services rendered with respect to property acquisitions up to a maximum of 2% of the gross offering proceeds. In addition, our Managing General Partner was entitled to a development and processing fee of a maximum of 5.5% of gross offering proceeds allocated to a particular project. Investment advisory and development and processing fees were capitalized to properties to the extent that gross offering proceeds were allocated to the respective properties acquired.
Amounts payable to affiliates at December 31, 2000 and 1999 include expense reimbursements and accrued property management and partnership management fees.
(4) PROPERTIES
The following table sets forth, as of December 31, 2000, the location, the date on which operations commenced and number of units in the property.
(5) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS:
Covina Villa
In October 1988, we purchased Covina Villa, an existing assisted living community in Covina, California. In conjunction with the acquisition, we assumed a ground lease, expiring in 2037, covering the land on which the community is built. Pledged as collateral for the ground lease is a security interest in the community property and in all furniture, fixtures and equipment which we place in the community. Rent expense under the ground lease for 2000, 1999 and 1998 was $115,000, $115,000, and $116,000, respectively.
Retirement Inns of America
In April 1989, we acquired the operations of eight existing assisted living communities located throughout California from Retirement Inns of America, Inc. As part of the purchase agreement, we acquired certain assets and assumed certain liabilities relating to the operations of the communities. We purchased three of the communities and assumed a tenant's position under long-term operating leases for the other five communities. On March 2, 1999, we purchased our landlords' fee interests in four of the five operating leases. Rent expense under the operating leases for 2000, 1999, and 1998 was $241,400, $448,000, and $1,071,000, respectively.
Future minimum lease payments under all ground and community leases, which are treated as operating leases, are as follows (in thousands):
LITIGATION
On June 15, 1999, we, along with five other California limited partnerships of which ARVAL is the managing general partner, including American Retirement Villas Properties III, Casa Bonita Fullerton, Ltd., Collwood Knolls, L.P., and San Gabriel Retirement Villa, L.P. (collectively, the "ARV Partnerships") - filed an action in the Superior Court for the State of California, County of Orange, seeking a declaratory judgment and damages for breach of contract, promissory estoppel, fraud and negligent misrepresentation against PRN Mortgage Capital, L.L.C. and Red Mountain Funding, L.L.C. ("Defendants"). Defendants filed a counter-claim for amounts allegedly due under loan commitments between Defendants and the ARV Partnerships. In July 2000, the ARV Partnerships settled the dispute with the Defendants. We have received and recorded all amounts due as a result of the settlement. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity.
(6) NOTES PAYABLE
On June 28, 1999, we obtained financing on eight owned communities. As part of the loan requirements, we created a wholly owned subsidiary Retirement Inns II, LLC. The loan was for 24 months and is secured by the various properties; in addition, ARV Assisted Living, our managing general partner, is a guarantor on the loan for fraud, material misrepresentation and certain covenants. The $39.2 million of mortgage loans were due June 2001. At December 31, 2000 four of the loans were refinanced with 35-year, bearing interest between 8.00% and 8.03%. Subsequent to December 31, 2000 three additional loans have been refinanced with 35-year loans and one loan's maturity has been extended to January 2002.
At December 31, 2000 and 1999, notes payable included the following (in thousands):
The annual principal payments of the notes payable are as follows (in thousands):
Due to the failed financing in 1998, we paid a lender approximately $1.3 million of fees for an interest rate lock and $0.1 for loan commitment and other fees. The lender terminated the loan commitment and underlying interest rate lock in October 1998 due to adverse market conditions. The lender returned $0.3 million of the interest rate lock fees in January 1999 and $0.2 million in June 2000 as full and final settlement. We included the amounts paid and received in interest expense in the accompanying consolidated statements of operations for the years ended December 31, 2000, 1999, and 1998.
(7) EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, ARVAL established a savings plan (the "Savings Plan") that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees who are at least 21 years of age may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. ARVAL matches 25% of each employee's contributions up to a maximum of 6% of the employee's earnings. Employees are eligible to enroll at the first enrollment date following the start of their employment (July 1 or January 1). ARVAL matches employees' contributions beginning on the first enrollment date following one year of service or 1,000 hours of service. Our Savings Plan expense was $22,000, $22,000 and $20,000 (as a reimbursement to ARVAL) for the years ended December 31, 2000, 1999 and 1998.
(8) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, fees receivable and other amounts due from affiliates and accounts payable, accrued liabilities and accrued interest payable approximate fair value due to the short-term nature of these instruments.
NOTES PAYABLE
For notes payable with variable interest rates, fair value is the amount reported as payable in the financial statements. For notes payable with fixed rates of interest, fair value is estimated using the rates currently offered for bank borrowings with similar terms. As of December 31, 2000 there were no notes payable with variable interest rates. The fair market value of the fixed rate notes is approximately $41.2 million.
(9) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Schedule III
AMERICAN RETIREMENT VILLAS PROPERTIES II (A California Limited Partnership)
Real Estate and Related Accumulated Depreciation and Amortization
December 31, 2000 (In thousands)
(1) Aggregate cost for Federal income tax purposes is $35,018 as of December 31, 2000.
(2) Leasehold property and improvements are amortized over remaining terms of ground leases, which are shorter than the estimated useful lives.
Following is a summary of investment in properties for the years ended December 31, 2000, 1999 and 1998:
Following is a summary of accumulated depreciation and amortization of investment in properties for the years ended December 31, 2000, 1999, and 1998:
EXHIBIT INDEX
* Incorporated by reference