Item 1. Business
Rancon Realty Fund IV, a California Limited Partnership (“the Partnership”), was organized in accordance with the provisions of the California Uniform Limited Partnership Act for the purpose of acquiring, developing, operating and selling real property. The Partnership was organized in 1984 and reached final funding in July 1987. The general partners of the Partnership are Daniel L. Stephenson (“DLS”) and Rancon Financial Corporation (“RFC”), hereinafter collectively referred to as the “General Partner”. RFC is wholly owned by DLS. The Partnership has no employees.
The Partnership’s initial acquisition of property during 1984 and 1985 consisted of approximately 76.56 acres of partially developed and unimproved land located in San Bernardino, California. The property is part of a master-planned development of approximately 153 acres known as Tri-City (“Tri-City”) and is zoned for mixed commercial, office, hotel, transportation-related, and light industrial uses and all of the parcels thereof are separately owned by the Partnership and Rancon Realty Fund V (“Fund V”), a limited partnership sponsored by the General Partner of the Partnership. As of December 31, 2006, the Partnership has eleven properties consisting of four office buildings and seven retail buildings. The Partnership’s properties are more fully described in Item 2.
In April 1996, the Partnership formed RRF IV Tri-City Limited Partnership, a Delaware limited partnership (“RRF IV Tri-City”). The limited partner of RRF IV Tri-City is the Partnership and the General Partner is RRF IV, Inc. (“RRF IV, Inc.”), a corporation wholly owned by the Partnership. Since the Partnership owns 100% of RRF IV, Inc. and indirectly owns 100% of RRF IV Tri-City, the Partnership considers all assets owned by RRF IV, Inc. and RRF IV Tri-City to be owned by the Partnership.
In November 2005, in connection with a refinancing, the Partnership formed Rancon Realty Fund IV Subsidiary LLC, a Delaware limited liability company (“RRF IV SUB”) which is wholly owned by the Partnership. The new entity was formed to satisfy certain lender requirements for a note obtained in the fourth quarter of 2005. The note is collateralized by eight properties (as discussed in Item 2) which have been contributed to RRF IV SUB by the Partnership.
In 2004, 2005 and 2006, a total of 1,285, 2,062 and 1,052 units of limited partnership interest (“Units”) were redeemed at average per unit prices of $437, $529 and $670, respectively. As of December 31, 2006, there were 65,840 Units outstanding.
The Partnership commenced on April 3, 1984 and shall continue until December 31, 2015, unless terminated earlier in accordance with the provisions of the Partnership Agreement.
Competition Within The Market
The Partnership competes in the leasing of its properties primarily with other available properties in the local real estate market. Other than Fund V, management is not aware of any specific competitors of the Partnership’s properties doing business on a significant scale in the local market. Management believes that characteristics influencing the competitiveness of a real estate project include the geographic location of the property, the professionalism of the property manager, the maintenance and appearance of the property and rental rates, in addition to external factors such as general economic circumstances, trends, and the existence of new competing properties in the vicinity. Additional competitive factors with respect to commercial and industrial properties include the ease of access to the property, the adequacy of related facilities, such as parking, and the ability to provide rent concessions and tenant improvements commensurate with local market conditions. Although management believes the Partnership’s properties are competitive with comparable properties as to those factors within the Partnership’s control, over-building and other external factors could adversely affect the ability of the Partnership to attract and retain tenants. The marketability of the properties may also be affected (either positively or negatively) by these factors as well as by changes in general or local economic conditions, including prevailing interest rates. Depending on market and economic conditions, the Partnership may be required to retain ownership of its properties for periods longer than anticipated, or may need to sell earlier than anticipated or refinance a property, at a time or under terms and conditions that are less advantageous than would be the case if unfavorable economic or market conditions did not exist.
Working Capital
The Partnership’s practice is to maintain cash reserves for normal repairs, replacements, working capital and other contingencies.
Other Factors
Approximately 14.7 acres of the Tri-City land owned by the Partnership was part of a 27-acre landfill operated by the City of San Bernardino (“the City”) from approximately 1950 to 1960. This landfill incorporates two land parcels and part of a third parcel. In 1996, the Santa Ana Regional Water Quality Control Board (“SARWQCB”), with regulatory jurisdiction over the closure and monitoring of landfills, determined that the City was primarily responsible for the landfill. Therefore, the City and the Partnership entered into a Limited Access Easement Agreement, giving the City access to the site for development, implementation and financial responsibility for a plan for the remediation of the landfill. It was determined that the City was to improve the landfill cover system (The Waterman Landfill Cover Improvement Plans, April 2002), perform groundwater monitoring and install a permanent gas extraction system (Landfill Gas Collection System). Under the Limited Access Easement Agreement with the Partnership, methane
monitoring is handled directly by the City. The City’s installation of the cover improvement system began in October 2004 and the system was completed in the third quarter of 2005. A plan was submitted by the City to the County of San Bernardino (“the County”) for review and approval for the gas extraction system. In the last quarter of 2005, the plan was approved and a pilot system to test the viability of the gas extraction system was installed. A permanent carbon system is in the process of being installed by the City, which was approved by the County and the SARWQCB. The installation of the system is completed; however, the final approval of its operation is pending. Future development of this site remains uncertain. No assurance can be made that circumstances will not arise which could impact the Partnership’s responsibility related to the land.
Item 1A.
Item 1A. Risk Factors
Market Fluctuations in Rental Rates and Occupancy Could Adversely Affect Our Operations
As leases turn over, our ability to re-lease the space to existing or new tenants at rates equal to or greater than those realized historically may be impacted by, among other things, the economic conditions of the market in which a property is located, the availability of competing space (including sublease space offered by tenants who have vacated space in competing buildings prior to the expiration of their lease term), and the level of improvements which may be required at the property. We cannot be assured that the rental rates we obtain in the future will be equal to or greater than those obtained under existing contractual commitments. If we cannot lease all or substantially all of the expiring space at our properties promptly, or if the rental rates are significantly lower than expected, then the results of operations and financial condition could be negatively impacted.
Tenants’ Defaults Could Adversely Affect Our Operations
Our ability to manage our assets is subject to federal bankruptcy laws and state laws that limit creditors’ rights and remedies available to real property owners to collect delinquent rents. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that tenant. We also cannot be sure that we would receive rent in the proceeding sufficient to cover our expenses with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply, which in some instances may restrict the amount and recoverability of our claims against the tenant. A tenant’s defaulting on their obligations to us could adversely affect our results of operations and financial condition.
Potential Liability Due to Environmental Matters
Under federal, state and local laws relating to protection of the environment (“Environmental Laws”) a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of petroleum products or other hazardous or toxic substances on the property. These owners may be required to investigate and clean-up the contamination on the property as well as the contamination which has migrated from the property. Environmental Laws typically impose liability and clean-up responsibility without regard to whether the owner or operator knew of, or was responsible for, the presence of the contamination. This liability may be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. In addition, the owner or operator of a property may be subject to claims by third parties based on personal injury, property damage and/or other costs, including investigation and clean-up costs, resulting from environmental contamination. Environmental Laws may also impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated. These restrictions may require expenditures. Under the Environmental Laws, any person who arranges for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of investigation or clean-up of those substances at the disposal or treatment facility, whether or not the facility is or ever was owned or operated by that person.
Our tenants generally are required by their leases to operate in compliance with all applicable Environmental Laws, and to indemnify us against any environmental liability arising from their activities on the properties. However, we could be subject to strict liability by virtue of our ownership interest in the properties. Also, tenants may not satisfy their indemnification obligations under the leases. We are also subject to the risk that:
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any environmental assessments of our properties may not have revealed all potential environmental liabilities,
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any prior owner or prior or current operator of these properties may have created an environmental condition not known to us, or
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an environmental condition may otherwise exist as to any one or more of these properties.
Any one of these conditions could have an adverse effect on our results of operations and financial condition. Moreover, future environmental laws, ordinances or regulations may have an adverse effect on our results of operations and financial condition. Also, the current environmental condition of those properties may be affected by tenants and occupants of the properties, by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to us.
We are not aware of any current liabilities related to environmental matters that are material to us. However, the foregoing risk factor is provided because such risks are inherent to real estate ownership.
Environmental Liabilities May Adversely Affect Operating Costs and Ability to Borrow
The obligation to pay for the cost of complying with existing Environmental Laws as well as the cost of complying with future legislation may affect our operating costs. In addition, the presence of petroleum products or other hazardous or toxic substances at any of our properties, or the failure to remediate those properties properly, may adversely affect our ability to borrow by using those properties as collateral. The cost of defending against claims of liability and the cost of complying with Environmental Laws, including investigation or clean-up of contaminated property, could materially adversely affect our results of operations and financial condition.
General Risks of Ownership of Real Estate
We are subject to risks generally incidental to the ownership of real estate. These risks include:
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changes in general economic or local conditions;
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changes in supply of or demand for similar or competing properties in an area;
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changes in interest rates and availability of financing which may render the sale or financing of a property difficult or unattractive;
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changes in tax, real estate and zoning laws; and
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the creation of mechanics’ liens or similar encumbrances placed on the property by a lessee or other parties without our knowledge and consent.
Should any of these events occur, our results of operations and financial condition could be adversely affected.
Uninsured Losses May Adversely Affect Operations
We, or in certain instances, tenants of our properties, carry property and liability insurance policy insuring the properties. This coverage has policy specifications and insured limits customarily carried for similar properties. However, certain types of losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Further, certain properties are located in areas that are subject to earthquake activity and floods. Should a property sustain damage as a result of an earthquake or flood, we may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Additionally, we have elected to obtain insurance coverage for “certified acts of terrorism” as defined in the Terrorism Risk Insurance Act of 2002; however, our policies of insurance may not provide coverage for other acts of terrorism. Any losses from such other acts of terrorism might be uninsured. Should an uninsured loss occur, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. This could have an adverse effect on our results of operations and financial condition.
Illiquidity of Real Estate May Limit Our Ability to Vary Our Portfolio
Real estate investments are relatively illiquid and, therefore, will tend to limit our ability to vary our portfolio quickly in response to changes in economic or other conditions.
Potential Liability Under the Americans With Disabilities Act
All of our properties are required to be in compliance with the Americans With Disabilities Act. The Americans With Disabilities Act generally requires that places of public accommodation be made accessible to people with disabilities to the extent readily achievable. Compliance with the Americans With Disabilities Act requirements could require removal of access barriers. Non-compliance could result in imposition of fines by the federal government, an award of damages to private litigants and/or a court order to remove access barriers. Because of the limited history of the Americans With Disabilities Act, the impact of its application to our properties, including the extent and timing of required renovations, is uncertain. Pursuant to lease agreements with tenants in certain of the “single-tenant” properties, the tenants are obligated to comply with the Americans With Disabilities Act provisions. If our costs are greater than anticipated or tenants are unable to meet their obligations, our results of operations and financial condition could be adversely affected.
Risks of Litigation
Certain claims and lawsuits have arisen against us in our normal course of business. We believe that such claims and lawsuits will not have a material adverse effect on our financial position, cash flow or results of operations.
Item 1B.
Item 1B. Unresolved SEC Staff Comments
None.
Item 2.
Item 2. Properties
During 1984 and 1985, the Partnership acquired a total of 76.56 acres of partially developed land in Tri-City for an aggregate purchase price of $9,917,000. In 1985, Fund V acquired the remaining 76.21 acres within Tri-City.
Tri-City is located at the northeastern quadrant of the intersection of Interstate 10 (San Bernardino Freeway) and Waterman Avenue in the southernmost part of the City of San Bernardino, and is in the heart of the Inland Empire, the most densely populated area of San Bernardino and Riverside Counties.
The Inland Empire is generally broken down into two major markets, Inland Empire East and Inland Empire West. Tri-City is located within the Inland Empire East market, which consists of approximately 13.4 million square feet of office space. According to a fourth quarter 2006 market view report from an independent broker, accelerated growth in the Inland Empire in the past 2 decades has resulted in an increase in the economic traffic and created a major distribution point out of the Inland Empire. Investment firms and capital markets are viewing the Inland Empire as a market of its own with great expectation and good investment returns. The study showed an overall vacancy rate of approximately 8.75% within the Inland Empire East Market as of December 31, 2006.
As of December 31, 2006, the Partnership owned eleven rental properties, 1.6 acres of land under construction, and approximately 14.7 acres of unimproved land. The Partnership’s plan is to develop more properties on the remaining acres of land to generate more operating income for the Partnership in this fast-growing market.
Properties
The Partnership’s improved properties in Tri-City are as follows:
The four office properties totaling approximately 332,000 square feet are 93% occupied, and the seven retail properties totaling approximately 154,000 square feet are 99% occupied as of December 31, 2006.
As of December 31, 2006, there were nine tenants occupying substantial portions of leased rental space. These nine tenants, in the aggregate, occupied approximately 343,000 square feet of the 486,000 total rentable square feet at Tri-City and accounted for approximately 70% of the rental income of the Partnership in 2006.
Occupancy rates for the Partnership’s properties for each of the five years ended December 31, 2006 were as follows:
The annual effective rents per square foot for each of the five years ended December 31, 2006 were as follows:
Annual effective rent is calculated by dividing the aggregate of annualized December 2006 monthly rental income for each tenant by the total square feet occupied at the property.
The Partnership’s properties are owned by the Partnership subject to the following first deeds of trust as of December 31, 2006:
The note payable is collateralized by Circuit City, Mimi’s Cafe, Palm Court Retail #1 and #2, Promotional Retail Center, Service Retail Center, TGI Friday’s and One Vanderbilt. This note provides for a one-time loan assumption and release provisions for individual assets.
The line of credit is scheduled to mature on April 15, 2007. The Partnership is in the process of extending the maturity date of the line of credit for an additional three years for the availability of draws, if necessary, for the construction of North River Place (see below for discussion). As of December 31, 2006, no amount under the line of credit was outstanding.
Land
As of December 31, 2006, the Partnership owned approximately 1.6 acres of land under construction, and approximately 14.7 acres of unimproved land.
During 2006, the Partnership began developing North River Place, a three-story multi-tenant 72,000 square-foot office building on an approximate 1.6 acres land parcel. The total cost to complete the project is approximately $8,900,000. The project is expected to be substantially completed in the second quarter of 2007.
Approximately 14.7 acres of the Tri-City land owned by the Partnership was part of a 27-acre landfill operated by the City of San Bernardino (“the City”) from approximately 1950 to 1960. This landfill incorporates two land parcels and part of a third parcel. In 1996, the Santa Ana Regional Water Quality Control Board (“SARWQCB”), with regulatory jurisdiction over the closure and monitoring of landfills, determined that the City was primarily responsible for the landfill. Therefore, the City and the Partnership entered into a Limited Access Easement Agreement, giving the City access to the site for development, implementation and financial responsibility for a plan for the remediation of the landfill. It was determined that the City was to improve the landfill cover system (The Waterman Landfill Cover Improvement Plans, April 2002), perform groundwater monitoring and install a permanent gas extraction system (Landfill Gas Collection System). Under the Limited Access Easement Agreement with the Partnership, methane monitoring is handled directly by the City. The City’s installation of the cover improvement system began in October 2004 and the system was completed in the third quarter of 2005. A plan was submitted by the City to the County of San Bernardino (“the County”) for review and approval for the gas extraction system. In the last quarter of 2005, the plan was approved and a pilot system to test the viability of the gas extraction system was installed. A permanent carbon system is in the process of being installed by the City, which was approved by the County and the SARWQCB. The installation of the system is completed; however, the final approval of its operation is pending. Future development of this site remains uncertain. No assurance can be made that circumstances will not arise which could impact the Partnership’s responsibility related to the land.
Item 3.
Item 3. Legal Proceedings
Certain claims and lawsuits have arisen against the Partnership in its normal course of business. The Partnership believes that such claims and lawsuits will not in the future have a material adverse effect on the Partnership’s financial position, cash flow or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5.
Item 5. Market for Partnership’s Common Equity and Related Stockholder Matters
Market Information
There is no established trading market for the units of limited partnership interest (“Units”) issued by the Partnership.
Holders
As of December 31, 2006, there were 7,612 holders of Units.
Distributions
Distributions are paid from either Cash From Operations or Cash From Sales or Refinancing (as such terms are defined in the Partnership Agreement).
Cash From Operations includes all cash receipts from operations in the ordinary course of business (except for the sale, refinancing, exchange or other disposition of real property in the ordinary course of business) after deducting payments for operating expenses. All distributions of Cash From Operations are paid in the ratio of 90% to the limited partners and 10% to the General Partner.
Cash From Sales or Refinancing is the net cash realized by the Partnership from the sale, disposition or refinancing of any property after redemption of applicable mortgage debt and all expenses related to the transaction, together with interest on any notes taken back by the Partnership upon the sale of a property. Distributions of Cash From Sales or Refinancing are generally allocated as follows: (i) first, 1 percent to the General Partner and 99 percent to the limited partners until the limited partners have received an amount equal to their capital contributions, plus a 12 percent return on their unreturned capital contributions (less prior distributions of Cash from Operations); (ii) second, to limited partners who purchased their units of limited partnership interest prior to April 1, 1985, to the extent they receive an additional return (depending on the date on which they purchased the units) on their unreturned capital of either 9 percent, 6 percent or 3 percent (calculated through October 31, 1985); and (iii) third, 20 percent to the General Partner and 80 percent to the limited partners. A more detailed statement of these distribution policies is set forth in the Partnership Agreement.
In 2006, the Partnership distributed from operations $1,623,000 to the limited partners and $180,000 to the General Partner.
In 2005, the Partnership distributed from operations $1,420,000 to the limited partners and accrued distributions of $157,000 for the General Partner. The accrued distribution was paid to the General Partner in January 2006.
In 2004, the Partnership distributed from operations $1,227,000 to the limited partners and $184,000 to the General Partner, of which $113,000 was accrued and paid to the General Partner in January 2005.
Item 6.
Item 6. Selected Financial Data
The following is selected financial data for each of the five years ended December 31, 2006 (in thousands, except per unit of limited partnership interest (“Units”) data):
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our results of operations, liquidity and capital resources, and financial condition should be read in conjunction with the selected financial data in Item 6 and the consolidated financial statements, including the notes thereto, included in Item 15 of Part IV.
Background
The Partnership’s initial acquisition of property during 1984 and 1985 consisted of approximately 76.56 acres of partially developed and unimproved land located in San Bernardino, California. The property is part of a master-planned development of approximately 153 acres known as Tri-City Corporate Centre (“Tri-City”) and is zoned for mixed commercial, office, hotel, transportation-related, and light industrial uses and all of the parcels thereof are separately owned by the Partnership and Rancon Realty Fund V (“Fund V”), a limited partnership sponsored by the General Partner of the Partnership. As of December 31, 2006, the Partnership has eleven properties which consisted of four office buildings and seven retail buildings.
Overview
Construction
During 2006, the Partnership began developing North River Place, a three-story multi-tenant 72,000 square-foot office building on an approximate 1.6 acre land parcel. The total cost to complete the project is approximately $8,900,000. The project is expected to be substantially completed in the second quarter of 2007.
Unit redemption
During 2006, a total of 1,052 Units were redeemed at an average price of $670. As of December 31, 2006, there were 65,840 Units outstanding.
Results Of Operations
Comparison of the year ended December 31, 2006 to the year ended December 31, 2005
Revenue
Operating revenue for the year ended December 31, 2006 increased $1,952,000, or 26%, compared to the year ended December 31, 2005, primarily due to increases in occupancy at Vanderbilt Plaza and Carnegie Business Center I, partially offset by a decrease in occupancy at Service Retail Center. In addition, Vanderbilt Plaza commenced operations in February 2005.
Expenses
Operating expenses increased $493,000, or 18%, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to increases in occupancy at Vanderbilt Plaza and Carnegie Business Center I, partially offset by a decrease in occupancy at Service Retail Center, as well as an increase in earthquake insurance premiums. In addition, Vanderbilt Plaza commenced operations in February 2005.
Depreciation and amortization increased $692,000, or 38%, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to depreciation on one new building, additional tenant improvements, and amortization of additional lease commissions.
General and administrative expenses decreased $96,000, or 9%, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to one-time additional investor service and refinancing expenses in 2005, partially offset by increases in audit and tax fees and state taxes.
Non-operating income / expenses
Interest and other income increased $138,000, or 1,062%, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to an increase in the investment of proceeds of the refinancing completed in the fourth quarter of 2005.
Interest expense increased $767,000, or 123%, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to an increase in borrowings and cessation of the capitalization of interest for the Vanderbilt Plaza development, which commenced operations in February 2005, partially offset by the capitalization of interest for the North River Place development, which commenced construction in September 2006.
Income from discontinued operations of $2,164,000 in 2005 reflected the net operating income and gain from sale in June 2005 of the property leased to Office Max.
Comparison of the year ended December 31, 2005 to the year ended December 31, 2004
Revenue
Operating revenue for the year ended December 31, 2005 increased $876,000, or 13%, compared to the year ended December 31, 2004, primarily due to an increase in occupancy at Vanderbilt Plaza, which commenced operation in February 2005, partially offset by a decrease in occupancy at Carnegie Business Center I.
Expenses
Operating expenses increased $243,000, or 10%, for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to the commencement of operations at Vanderbilt Plaza in February 2005, partially offset by a reduction in the property management fees from 5% in 2004 to 3% in 2005.
Depreciation and amortization increased $355,000, or 24%, for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to depreciation commencing at Vanderbilt Plaza and amortization of additional lease commissions.
Expenses associated with undeveloped land decreased $69,000, or 34%, for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to a decrease in expenses related to Vanderbilt Plaza. The expenses are classified under property operating expenses after construction was completed.
General and administrative expenses decreased $220,000, or 18%, for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to a reduction in asset and Partnership management fees in 2005, partially offset by one-time additional investor service and refinancing expenses in 2005.
Non-operating income / expenses
The gain on sale of land held for development of $1,347,000 during 2004 resulted from the sale of two lots known as Brier Business Center I and Brier Plaza in April 2004.
Interest expense increased $178,000, or 40%, for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to an increase in line of credit balance during the year, an increase in interest rates, as well as the write-off of loan fees of approximately $64,000, partially offset by a decrease in interest and loan expenses capitalized at Vanderbilt Plaza during construction.
Income from discontinued operations of $2,164,000 and $183,000 for the years ended December 31, 2005 and 2004, respectively, reflected the sale of the property leased to Office Max in June 2005, as well as the net operating income from the sold property in 2005 and 2004, respectively (as discussed below).
Liquidity and Capital Resources
As of December 31, 2006, the Partnership had cash and cash equivalents of $1,584,000, and a short-term investment of $5,075,000. The investment is a certificate of deposit with an investment period of 181 days. Interest income is recognized when earned.
The Partnership’s primary liability at December 31, 2006 is a note payable of approximately $23,773,000, collateralized by properties with an aggregate net carrying value of approximately $15,873,000. The note has a 10-year term with a 30-year amortization requiring monthly principal and interest payments of approximately $136,000, bears a fixed interest rate of 5.46%, and has a maturity date of January 1, 2016. The note is collateralized by Circuit City, Mimi’s Cafe, Palm Court Retail #1 and #2, Promotional Retail Center, Service Retail Center, TGI Friday’s and One Vanderbilt. This note also provides for a one-time loan assumption and release provisions for individual assets.
The Partnership has a line of credit, which is collateralized by Inland Regional Center, and has a total availability of approximately $5 million, monthly interest-only payments, a maturity date of April 15, 2007, and bears variable interest at the Prime Rate (8.25% as of December 31, 2006). The Partnership is in the process of extending the term of the line of credit for an additional three years for the availability of draws, if necessary, for the construction costs of North River Place. As of December 31, 2006, no amount under the line of credit was outstanding.
On June 3, 2005, the Partnership sold a property leased to Office Max for a price of $4,350,000 and generated net proceeds of approximately $4,097,000 and a gain on sale of approximately $2,075,000.
The Partnership is contingently liable for subordinated real estate commissions payable to the General Partner in the aggregate amount of $643,000 as of December 31, 2006, for sales that were completed in previous years. The subordinated real estate commissions are payable only after the limited partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 12% per annum on their adjusted invested capital. Since the circumstances under which these commissions would be payable are not currently met, the liability has not been recognized in the accompanying consolidated financial statements. However, the amount will be recorded when and if it becomes payable.
Operationally, the Partnership’s primary source of funds consists of cash provided by its rental activities. Other sources of funds may include permanent financing, draws on the line of credit, proceeds from property sales and interest income on money market funds and short-term investments. Cash generated from property sales is generally added to the Partnership’s cash reserves, pending use in the development of properties or distribution to the partners.
Contractual Obligations
At December 31, 2006, we had contractual obligations as follows (in thousands):
(1)
During 2006, the Partnership began developing North River Place, a three-story multi-tenant 72,000 square-foot office building on an approximately 1.6 acres land parcel. The total cost to complete the project is approximately $8,900,000. The project is expected to be substantially completed in the second quarter of 2007.
Management expects that the Partnership’s cash and cash equivalents as of December 31, 2006, together with cash from operations, sales and financing, will be sufficient to finance the Partnership’s and the properties’ continued operations and development plans on a short-term basis and for the reasonably foreseeable future. There can be no assurance that the Partnership’s results of operations will not fluctuate in the future and at times affect its ability to meet its operating requirements.
The Partnership knows of no demands, commitments, events or uncertainties, which might affect its capital resources in any material respect. In addition, the Partnership is not subject to any covenants pursuant to its secured debt that would constrain its ability to obtain additional capital.
Operating Activities
During the year ended December 31, 2006, the Partnership’s cash provided by operating activities totaled $2,905,000.
The $46,000 increase in accounts receivable during 2006 was primarily due to an increase in accruals in interest income related to the short-term investment and tenant percentage rent.
The $484,000 increase in deferred costs during 2006 was primarily due to increases in lease commissions paid for new leases at Vanderbilt Plaza and the renewal of leases at Carnegie Business Center I, Palm Court Retail 2 and TGI Friday’s. The Partnership paid to Glenborough LLC, a related party, leasing service fees of approximately $245,000 in 2006.
The $488,000 increase in prepaid expenses and other assets during 2006 was primarily due to an increase in straight line rent receivables and earthquake insurance premiums paid, partially offset by the amortization of prepaid insurance.
The $197,000 decrease in accounts payable and other liabilities during 2006 was primarily due to distributions to the General Partner and the redemption of Partnership Units which were accrued in 2005, partially offset by increases in accruals in audit and tax preparation fees and investor service expenses.
The $40,000 increase in prepaid rents at December 31, 2006 was due to the receipt of January 2007 rents in December 2006, in excess of the January 2006 rents received in December 2005.
Investing Activities
During the year ended December 31, 2006, the Partnership’s cash used for investing activities totaled $8,387,000; which consisted of $5,075,000 used for the purchase of short-term investments and $3,312,000 in additions to real estate investments ($2,119,000 for building and tenant improvements at Vanderbilt Plaza, Carnegie Business Center I, TGI Friday’s and One Vanderbilt and $1,193,000 for construction costs at North River Place).
Financing Activities
During the year ended December 31, 2006, the Partnership’s cash used for financing activities totaled $2,953,000, which consisted of $327,000 for principal payments on a note payable, $28,000 annual loan fee for the line of credit, $727,000 for redemption of Units, $1,623,000 for payment of distributions to the limited partners, and $337,000 for payment of distributions to the General Partner, of which $157,000 was accrued in 2005, partially offset by a refund of $89,000 from loan application fees.
Cash Flows
During 2006, cash provided by operating activities was $2,905,000, as compared to cash provided by operating activities of $1,641,000 for the same period in 2005. The change was primarily due to an increase in rental income resulting from increases in occupancy at Vanderbilt Plaza, Carnegie Business Center I and Service Retail Center, a decrease in deferred costs, partially offset by increases in prepaid expenses and other assets, as well as accounts payable and other liabilities. During 2006, cash used for investing activities was $8,387,000, as compared to cash used for investing activities of $140,000 for the same period in 2005. The changes were primarily due to cash used for the purchase of the short-term investments and a decrease in proceeds from the sale of real estate, partially offset by a decrease in construction costs at Vanderbilt Plaza, which was completed in February 2005, and an increase in construction costs at North River Place, which started in late September 2006. During 2006, cash used for financing activities was $2,953,000, as compared to cash provided by financing activities of $7,817,000 for the same period in 2005. The change was primarily due to decreases in borrowings from a refinancing and draws on the line of credit and increases in principal payments on the note payable, and distributions to limited partners and the General Partner, partially offset by a decrease in redemptions of Units and the refund of the loan application fee.
During 2005, cash provided by operating activities was $1,641,000, as compared to cash provided by operating activities of $2,531,000 for the same period in 2004. The change was primarily due to cash paid for lease commissions, offset by an increase in rental income from Vanderbilt Plaza. Vanderbilt Plaza commenced operation in February 2005. Cash used for investing activities was $140,000, as compared to cash used for investing activities of $8,573,000 for the same period in 2004. The change was primarily due to a decrease in construction costs at Vanderbilt Plaza, which was completed in February 2005, offset by higher proceeds from a property sale, which was leased to Office Max, compared to the land sales in 2004. Cash provided by financing activities was $7,817,000, as compared to cash provided by financing activities of $3,431,000 for the same period in 2004. The change was primarily due to an increase in borrowings from a new note payable, partially offset by decreases in payoff of the existing borrowings, and the line of credit draws, and increases in redemption of Units, as well as distributions to limited partners.
Critical Accounting Policies
Revenue recognized on a straight-line basis
The Partnership recognizes rental revenue on a straight-line basis over the term of its leases. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Partnership has previously recognized as revenue. The reimbursements from tenants for real estate taxes are recognized as revenue in the period the expenses are incurred. Other recoverable operating expenses are recognized as revenue on an estimated basis, and the differences between estimated and actual amounts are recognized as revenue in the subsequent year when the amounts are collected. However, where actual expenses are significantly different from estimates, the Partnership will accrue the differences in the same period.
Carrying value of rental properties and land held for development
The Partnership’s rental properties, including the related land, are stated at depreciated cost unless events or circumstances indicate that such amount cannot be recovered, in which case, the carrying value of the property is reduced to its estimated fair value. Estimated fair value is based upon (i) the Partnership’s plans for the continued operations of each property, and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates
multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership’s properties could be materially different than current expectations.
Land held for development is stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case, the carrying value is reduced to estimated fair value. Estimated fair value: (i) is based on the Partnership’s plans for the development of each property; (ii) is computed using estimated sales price, based upon market values for comparable properties; and (iii) considers the cost to complete and the estimated fair value of the completed project. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to either hold the properties for eventual sale or obtain financing to further develop the properties.
The pre-development costs for a new project are capitalized and include survey fees and consulting fees. Interest, property taxes and insurance related to the new project are capitalized during periods when activities that are necessary to get the project ready for its intended use are in progress. The capitalization ends when the construction is substantially completed and the project is ready for its intended use.
The actual value of the Partnership’s portfolio of properties and land held for development could be different from their carrying amounts.
Recently issued Accounting Literature
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 “Consideration of the Effects of Prior Year Period Misstatements in Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which becomes effective for fiscal years ending after November 15, 2006. SAB 108 provides guidance on the consideration of the effects of prior period misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 provides for the quantification of the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. If a misstatement is material to the current year financial statements, the prior year financial statements should also be corrected, even though such revision was, and continues to be, immaterial to the prior year financial statements. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction should be made in the current period filings. The adoption of SAB 108 did not have any impact on the financial statements.
Inflation
Leases at the office properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. Substantially all of the leases at the industrial properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. We anticipate that these provisions may permit us to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce our exposure to the adverse effects of inflation.
Forward Looking Statements; Factors That May Affect Operating Results
This Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Partnership’s expectations, hopes, intentions, beliefs and strategies regarding the future. These forward looking statements include statements relating to:
•
The Partnership’s expectation to make annual or more frequent cash distributions to partners;
•
The Partnership’s belief that its cash and cash generated by its operations, sales and financing will be sufficient to meet its operating requirements in both the short and the long-term;
•
The Partnership’s expectation that changes in market interest rates will not have a material impact on the performance or the fair value of its portfolio;
•
The Partnership’s belief that certain claims and lawsuits which have arisen against it in the normal course of business will not have a material adverse effect on its financial position, cash flow or results of operations;
•
The Partnership’s knowledge of any material environmental matters or issues relating to the landfill property; and
•
The Partnership’s expectation that lease provisions may permit the Partnership to increase rental rates or other charges to tenants in response to rising prices, and therefore serve to reduce exposure to the adverse effects of inflation.
All forward-looking statements included in this document are based on information available to the Partnership on the date hereof. Because these forward looking statements involve risk and uncertainty, there are important factors that could cause our actual results to differ materially from those stated or implied in the forward-looking statements. Those important factors include:
•
market fluctuations in rental rates and occupancy;
•
reduced demand for rental space;
•
availability and credit worthiness of prospective tenants;
•
defaults or non-renewal of leases by customers;
•
differing interpretations of lease provisions regarding recovery of expenses;
•
increased operating costs;
•
changes in interest rates and availability of financing that may render the sale or financing of a property difficult or unattractive;
•
the Partnership’s failure to obtain necessary outside financing;
•
risks and uncertainties affecting property development and construction (including construction delays, cost overruns, our inability to obtain necessary permits and public opposition to these activities);
•
the unpredictability of both the frequency and final outcome of litigation; and
•
the inability of the Partnership to develop all or any portion of the former landfill site, due to environmental, legal or economic impediments.
Risks of Litigation
Certain claims and lawsuits have arisen against us in our normal course of business. We believe that such claims and lawsuits will not have a material adverse effect on our financial position, cash flow or results of operations. See Item 1A for further discussion.
Item 7A.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Interest Rates
The Partnership’s primary market risk exposure is to changes in interest rates obtainable on its secured borrowings. The Partnership expects that changes in market interest rates will not have a material impact on the performance or fair value of its portfolio.
For debt obligations, the table below presents principal cash flows by expected maturity dates of a note payable with a fixed interest rate of 5.46%.
As of December 31, 2006, the Partnership had cash equivalents of $1,584,000 invested in an interest-bearing money market account and $5,075,000 in short-term investments. Declines in interest rates over time would reduce Partnership interest income. The Partnership does not own any derivative instruments.
Item 8.
Item 8. Financial Statements and Supplementary Data
For information with respect to this item, see Financial Statements and Financial Statement Schedule as included in Item 15.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
The principal executive officer and principal financial officer of the General Partner has evaluated the disclosure controls and procedures of the Partnership as of the end of the period covered by this quarterly report. As used herein, the term “disclosure controls and procedures” has the meaning given to the term by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and includes the controls and other procedures of the Partnership that are designed to ensure that information required to be disclosed by the Partnership in the reports that it files with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon his evaluation, the principal executive officer and principal financial officer of the General Partner has concluded that the Partnership’s disclosure controls and procedures were effective such that the information required to be disclosed by the Partnership in this annual report is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms applicable to the preparation of this report and is accumulated and communicated to the General Partner’s management, including the General Partner’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
There has been no change in the Partnership’s internal controls over financial reporting (as defined in Rule 13a-15(f)) that occurred during the year ended December 31, 2006, that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal controls over financial reporting.
Item 9B.
Item 9B. Other information
None.
Part III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Daniel L. Stephenson and Rancon Financial Corporation (“RFC”) are the general partners of the Partnership. The executive officer and director of RFC is Daniel L. Stephenson who is Director, President, Chief Executive Officer and Chief Financial Officer.
Mr. Stephenson founded RFC (formerly known as Rancon Corporation) in 1971 for the purpose of establishing a commercial, industrial and residential property syndication, development and brokerage concern. Mr. Stephenson has, from inception, held the position of Director. In addition, Mr. Stephenson was President and Chief Executive Officer of RFC from 1971 to 1986, from August 1991 to September 1992, and from March 31, 1995 to present. Mr. Stephenson is Chairman of the Board of PacWest Group, Inc., a real estate firm which acquired a portfolio of assets from the Resolution Trust Corporation.
Item 11.
Item 11. Executive Compensation
The Partnership has no executive officers. For information relating to fees, compensation, reimbursement and distributions paid to related parties, reference is made to Item 13 below.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
Security Ownership of Management
* Less than 1 percent
Changes in Control
The limited partners have no right, power or authority to act for or bind the Partnership. However, the limited partners generally have the power to vote upon the following matters affecting the basic structure of the Partnership, passage of each of which requires the approval of limited partners holding a majority of the outstanding Units: (i) amendment of the Partnership Agreement; (ii) termination and dissolution of the Partnership; (iii) sale, exchange or pledge of all or substantially all of the assets of the Partnership; (iv) removal of the General Partner or any successor General Partner; (v) election of a new General Partner or General Partner upon the removal, redemption, death, insanity, insolvency, bankruptcy or dissolution of the General Partner or any successor General Partner; and (vi) extension of the term of the Partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions, Director Independence
During the year ended December 31, 2006, the Partnership did not incur any expenses or costs reimbursable to RFC, Mr. Stephenson or any other related person of the Partnership, other than fees paid to Glenborough LLC, which holds 6.96% of the units. See Note 6 to the consolidated financial statements for a description of such fees.
Item 14.
Item 14. Principal Accountant Fees and Services
The Partnership was billed $11,000, $20,250 and $71,000 in 2006, 2005 and 2004, respectively for audit services rendered by the former accountants, $85,000 and $80,000 in 2006 and 2005, respectively for audit services rendered by the principal accountant. The Partnership was not billed for any other services by the accountants during such periods.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of the report:
(1) Financial Statements:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Partners’ Equity for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2006 and Notes thereto
(3) Exhibits:
(3.1) Second Amended and Restated Certificate and Agreement of Limited Partnership of the Partnership (included as Exhibit B to the Prospectus dated December 29, 1986, as amended on January 5, 1987, filed pursuant to Rule 424(b), file number 2-90327), is incorporated herein by reference.
(3.2) First Amendment to the Second Amended and Restated Agreement and Certificate of Limited Partnership of the Partnership, dated March 11, 1991 (included as Exhibit 3.2 to 10-K dated October 31, 1992, File number 0-14207), is incorporated herein by reference.
(3.3) Limited Partnership Agreement of RRF IV Tri-City Limited Partnership, a Delaware limited partnership of which Rancon Realty Fund IV, a California Limited Partnership is the limited partner (filed as Exhibit 3.3 to the Partnership’s annual report on Form 10-K for the year ended December 31, 1996), is incorporated herein by reference.
(10.1) First Amendment to the Second Amended Management, Administration and Consulting Agreement and amendment thereto for services rendered by Glenborough Corporation, dated August 31, 1998 (filed as Exhibit 10.1 to the Partnership’s annual report on Form 10-K for the year ended December 31, 1998), is incorporated herein by reference.
(10.2) Promissory note in the amount of $6,400,000, dated April 19, 1996, secured by Deeds of Trust on three of the Partnership’s Properties (filed as Exhibit 10.6 to the Partnership’s annual report on Form 10-K for the year ended December 31, 1996), is incorporated herein by reference.
(10.3) Agreement for Acquisition of Management Interests, dated December 20, 1994 (filed as Exhibit 10.3 to the Partnership’s quarterly report on Form 10-Q for the quarter ended September 30, 2003) is incorporated herein by reference.
(10.4) Property Management and Services Agreement dated July 30, 2004 (filed as Exhibit 10.4 to the Partnership’s quarterly report on Form 10-Q for the period ended September 30, 2004) incorporated herein by reference.
(10.5) Promissory note in the amount of $24,100,000, dated November 15, 2005 secured by Deeds of Trust on eight of the Partnership’s Properties (announcement was filed to the Partnership’s report on Form 8-K on December 7, 2005).
(31) Section 302 Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of General Partnership.
(32) Section 906 Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of General Partnership.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RANCON REALTY FUND IV,
a California limited partnership
By:
Rancon Financial Corporation
a California corporation,
its General Partner
Date: April 6, 2007
By:
/s/ Daniel L. Stephenson
Daniel L. Stephenson, President
Date: April 6, 2007
By:
/s/ Daniel L. Stephenson
Daniel L. Stephenson,
General Partner
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To The General Partner
Rancon Realty Fund IV, a California Limited Partnership
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Rancon Realty Fund IV, a California Limited Partnership (the “Partnership”) and its subsidiaries at December 31, 2006 and 2005 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule as of and for the years ended December 31, 2006 and 2005, listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 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
San Francisco, CA
April 6, 2007
Report of Former Independent Registered Public Accounting Firm
The General Partner
RANCON REALTY FUND IV, a California Limited Partnership:
We have audited the accompanying consolidated statements of operations, partners’ equity, and cash flows of RANCON REALTY FUND IV, a California Limited Partnership, and subsidiaries for the year ended December 31, 2004. In connection with our audit of the consolidated financial statements, we have also audited the 2004 information in the accompanying financial statement schedule listed in the accompanying index to the financial statements and schedule. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of RANCON REALTY FUND IV, a California Limited Partnership, and subsidiaries for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 2004 information in the accompanying financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
San Francisco, California
March 23, 2005, except for
the last paragraph of note 3 which is
as of March 28, 2006
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP, and SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and 2005
(in thousands, except units outstanding)
The accompanying notes are an integral part of these consolidated financial statements
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP, and SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 2006, 2005 and 2004
(in thousands, except per unit amounts and units outstanding)
The accompanying notes are an integral part of these consolidated financial statements
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP, and SUBSIDIARIES
Consolidated Statements of Partners’ Equity
For the years ended December 31, 2006, 2005 and 2004
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP, and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP, and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2006, 2005 and 2004
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Note 1. ORGANIZATION
Rancon Realty Fund IV, a California Limited Partnership, (“the Partnership”), was organized in accordance with the provisions of the California Uniform Limited Partnership Act for the purpose of acquiring, developing, operating and disposing of real property. The Partnership was organized in 1984 and reached final funding in July 1987. The general partners of the Partnership are Daniel L. Stephenson and Rancon Financial Corporation (“RFC”), hereinafter collectively referred to as the Sponsor or the General Partner. RFC is wholly-owned by Daniel L. Stephenson. The Partnership has no employees.
The Partnership’s initial acquisition of property between December 1984 and August 1985 consisted of approximately 76.56 acres (unaudited) of partially developed and unimproved land located in San Bernardino, California. The property is part of a master-planned development of 153 acres (unaudited) known as Tri-City (“Tri-City”) and is zoned for mixed commercial, office, hotel, transportation-related, and light industrial uses and all of the parcels thereof are separately owned by the Partnership and Rancon Realty Fund V (“Fund V”), a limited partnership sponsored by the General Partner of the Partnership. As of December 31, 2006, the Partnership has eleven properties which consisted of four office buildings and seven retail buildings.
In April 1996, the Partnership formed RRF IV Tri-City Limited Partnership, a Delaware limited partnership (“RRF IV Tri-City”). The limited partner of RRF IV Tri-City is the Partnership and the general partner is RRF IV, Inc. (“RRF IV, Inc.”), a corporation wholly-owned by the Partnership. Since the Partnership owns 100% of RRF IV, Inc. and indirectly owns 100% of RRF IV Tri-City, the Partnership considers all assets owned by RRF IV, Inc. and RRF IV Tri-City to be owned by the Partnership.
In November 2005, in connection with a refinancing, the Partnership formed Rancon Realty Fund IV Subsidiary LLC, a Delaware limited liability company (“RRF IV SUB”) which is wholly owned and consolidated by the Partnership. The new entity was formed to satisfy certain lender requirements for a note obtained in the fourth quarter of 2005. The note is collateralized by eight properties (as discussed in Note 5) which have been contributed to RRF IV SUB by the Partnership.
In 2004, 2005 and 2006, a total of 1,285, 2,062 and 1,052 units of limited partnership interest (“Units”) were redeemed at average prices of $437, $529 and $670, respectively. As of December 31, 2006, there were 65,840 Units outstanding.
The partnership commenced on April 3, 1984 and shall continue until December 31, 2015, unless previously terminated in accordance with the provisions of the Partnership Agreement.
Any references to the number of buildings, square footage, customers and occupancy stated in the financial statement footnotes are unaudited.
Allocation of Net Income and Net Loss
Allocations of net income and net losses are made pursuant to the terms of the Partnership Agreement. Generally, net income from operations is allocated 90% to the limited partners and 10% to the General Partner. Net losses from operations are allocated 99% to the limited partners and 1% to the General Partner until such time as a partner’s capital account is reduced to zero. Additional losses will be allocated entirely to those partners with positive capital account balances until such balances are reduced to zero.
Net income other than net income from operations shall be allocated as follows: (i) first, to the partners who have a deficit balance in their capital account, provided that, in no event, shall the General Partner be allocated more than 5% of the net income other than net income from operations until the earlier of sale or disposition of substantially all of the assets or the distribution of cash (other than cash from operations) equal to the Unitholder’s original invested capital; (ii) second, to the limited partners in proportion to and to the extent of the amounts to increase their capital accounts to an amount equal to the sum of the adjusted invested capital of their units plus an additional cumulative non-compounded 6% return per annum (plus additional amounts depending on the date Units were purchased); (iii) third, to the partners in the minimum amount required to first equalize their capital account in proportion to the number of units owned, and then, to bring the sum of the balances of the capital accounts of the limited partners and the General Partner into the ratio of 4 to 1; and (iv) the balance, if any, 80% to the limited partners and 20% to the General Partner. In no event shall the General Partner be allocated less than 1% of the net income other than net income from operations for any period.
Net losses other than net losses from operations are allocated 99% to the limited partners and 1% to the General Partner. Such net losses will be allocated among limited partners as necessary to equalize their capital accounts in proportion to their Units, and thereafter will be allocated in proportion to their Units.
The terms of the Partnership Agreement call for the General Partner to restore any deficit that may exist in its capital account after allocation of gains and losses from the sale of the final property owned by the Partnership, but prior to any liquidating distributions being made to the partners.
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Distribution of Cash
The Partnership shall make annual or more frequent distributions of substantially all cash available to be distributed to partners as determined by the General Partner, subject to the following: (i) distributions may be restricted or suspended for limited periods when the General Partner determines in its absolute discretion that it is in the best interest of the Partnership; and (ii) all distributions are subject to the payment of partnership expenses and maintenance of reasonable reserves for debt service, alterations, improvements, maintenance, replacement of furniture and fixtures, working capital and contingent liabilities.
All excess cash from operations shall be distributed 90 percent to the limited partners and 10 percent to the General Partner.
All cash from sales or refinancing and any other cash determined by the General Partner to be available for distribution other than cash from operations shall be distributed in the following order of priority: (i) first, 1 percent to the General Partner and 99 percent to the limited partners in proportion to the outstanding positive amounts of Adjusted Invested Capital (as defined in the Partnership Agreement) for each of their Units until Adjusted Invested Capital (as defined in the Partnership Agreement) for each Unit is reduced to zero; (ii) second, 1 percent to the General Partner and 99 percent to the limited partners until each of the limited partners has received an amount which, including cash from operations previously distributed to the limited partners equals a 12 percent annual cumulative non-compounded return on the Adjusted Invested Capital (as defined in the Partnership Agreement) of their Units plus such limited partners’ Limited Incremental Preferential Return (as defined in the Partnership Agreement), if any, with respect to each such Unit, on the Adjusted Investment Capital (as defined in the Partnership Agreement) of such Units for the twelve month period following the date upon which such Unit was purchased from the Partnership and following the admission of such limited partner; (for limited partners admitted to the Partnership before March 31, 1985, there are additional cumulative non-compounded returns of 9 percent, 6 percent, or 3 percent depending on purchase date, through October 31, 1985) (iii) third, 99 percent to the General Partner and 1 percent to the limited partners, until the General Partner has received an amount equal to 20 percent of all distributions of cash from sales or refinancing: (iv) the balance, 80 percent to the limited partners, pro rata in proportion to the number of Units held by each, and 20 percent to the General Partner.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Consolidation
The accompanying consolidated financial statements present the consolidated financial position of the Partnership and its wholly-owned subsidiaries as of December 31, 2006 and 2005, the consolidated statements of operations of the Partnership and its wholly-owned subsidiaries for the years ended December 31, 2006, 2005 and 2004, the consolidated statements of partners’ equity of the Partnership and its wholly-owned subsidiaries for the years ended December 31, 2006, 2005 and 2004, and the consolidated statements of cash flows of the Partnership and its wholly-owned subsidiaries for the years ended December 31, 2006, 2005 and 2004. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ from those estimates.
Rental Properties
Rental properties, including the related land, are stated at depreciated cost unless events or circumstances indicate that such amount cannot be recovered, in which case, the carrying value of the property is reduced to its estimated fair value. Estimated fair value: (i) is based upon the Partnership’s plans for the continued operations of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates applied to annualized net operating income based upon the age, construction and use of the building. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership’s properties could be materially different than current expectations. Rental properties are reviewed for impairment whenever there is a triggering event and at least annually.
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Depreciation is provided using the straight-line method over the useful lives of the respective assets. The useful lives are as follows:
Building and improvements
5 to 40 years
Tenant improvements
Lesser of the initial term of the related lease, or the estimated useful life of the asset
Furniture and equipment
5 to 7 years
Construction in Progress and Land Held for Development
Construction in progress and land held for development are stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case, the carrying value is reduced to estimated fair value. Estimated fair value: (i) is based on the Partnership’s plans for the development of each property; (ii) is computed using estimated sales price, based upon market values for comparable properties; and (iii) considers the cost to complete and the estimated fair value of the completed project. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to either hold the properties for eventual sale or obtain financing for further development. Construction in progress and land held for development are reviewed for impairment whenever there is a triggering event and at least annually.
The pre-development costs for a new project are capitalized and include survey fees and consulting fees. Interest, property taxes and insurance related to the new project are capitalized during periods when activities that are necessary to get the project ready for its intended use are in progress. The capitalization ends when the construction is substantially completed and the project is ready for its intended use.
Cash and Cash Equivalents
The Partnership considers money market funds and certificates of deposit with original maturities of less than ninety days when purchased to be cash equivalents.
Short-term Investments
The Partnership considers certificates of deposit with original maturities of more than three months and less than one year when purchased to be short-term investments. The short-term investments are held to maturity and recorded at cost on the consolidated balance sheets. This certificate of deposit has an interest rate of 2.50% and a maturity date of January 27, 2007. Interest income is recognized when earned.
Deferred Costs
Deferred loan fees are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the life of the related loan. Deferred lease commissions are capitalized and amortized on a straight-line basis over the initial fixed term of the related lease agreements.
Revenues
The Partnership recognizes rental revenue on a straight-line basis over the term of its leases. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Partnership has previously recognized as revenue. For tenants with percentage rent, the Partnership recognizes revenue when the tenants’ specified sales targets have been met. The reimbursements from tenants for real estate taxes are recognized as revenue in the period the expenses are incurred. Other recoverable operating expenses are recognized as revenue on an estimated basis, and the differences between estimated and actual amounts are recognized as revenue in the subsequent year when the amounts are collected. However, where actual expenses are significantly different from estimates, the Partnership will accrue the differences in the same period.
Sales of Real Estate
The Partnership recognizes sales of real estate when a contract is in place, a closing has taken place, the buyer’s investment is adequate to demonstrate a commitment to pay for the property and the Partnership does not have a substantial continuing involvement in the property. Each property is considered a separately identifiable component of the Partnership and is reported in discontinued operations when the operations and cash flows of the Property have been (or will be) eliminated from the ongoing operations of the Partnership as a result of the disposal transaction and the Property will not have any significant continuing involvement in the operations of the Partnership after the disposal transaction.
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Net Income Per Limited Partnership Unit
Net income per limited partnership unit is calculated using the weighted average number of limited partnership units outstanding during the period and the limited partners’ allocable share of the net income.
Income per limited partnership unit is as follows (in thousands, except for weighted average shares and per share amounts):
Income Taxes
No provision for income taxes is included in the accompanying consolidated financial statements as the Partnership’s results of operations are allocated to the partners for inclusion in their respective income tax returns. Net income and partners’ equity (deficit) for financial reporting purposes will differ from the Partnership’s income tax return because of different accounting methods used for certain items, including depreciation expense, provisions for impairment of investments in real estate, capitalization of development period interest and rental income and loss recognition.
Concentration Risk
Two tenants (Inland Regional Center and University of Phoenix) represented 29% of operating revenue for the year ended December 31, 2006, and one tenant (Inland Regional Center) represented 19% and 22% of operating revenue for years ended December 31, 2005 and 2004, respectively.
Recently issued Accounting Literature
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 “Consideration of the Effects of Prior Year Period Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which becomes effective for fiscal years ending after November 15, 2006. SAB 108 provides guidance on the consideration of the effects of prior period misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 provides for the quantification of the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. If a misstatement is material to the current year financial statements, the prior year financial statements should also be corrected, even though such revision was, and continues to be, immaterial to the prior year financial statements. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction should be made in the current period filings. The adoption of SAB 108 did not have any impact on the financial statements.
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Note 3. INVESTMENTS IN REAL ESTATE AND DISCONTINUED OPERATIONS
Rental properties consisted of the following at December 31, 2006 and 2005 (in thousands):
As of December 31, 2006, the Partnership’s rental properties included four office properties and seven retail properties.
During the year ended December 31, 2006, fully depreciated building and tenant improvements of $347,000 were removed from the balances of such accounts.
On June 3, 2005, the Partnership sold a property leased to Office Max for a price of $4,350,000 and generated net proceeds of approximately $4,097,000 and a gain on sale of approximately $2,075,000. The proceeds were added to the Partnership’s cash reserves.
In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long Lived Assets”, net income and gain or loss on sales of real estate for properties sold or classified as held for sale are reflected in the consolidated statements of operations as “Discontinued operations” for all periods presented.
Below is a summary of the results of operations of property leased to Office Max (dollars in thousands):
Note 4. CONSTRUCTION IN PROGRESS AND LAND HELD FOR DEVELOPMENT
Construction in progress consisted of the following at December 31, 2006 and 2005 (in thousands):
During the third quarter of 2006, the land, pre-development costs and construction costs of North River Place were reclassed from land held for development to construction in progress. The Partnership began developing North River Place, a three-story multi-tenant 72,000 square-foot office building on an approximate 1.6 acre land parcel. The total cost to complete the project is approximately $8,900,000. The project is expected to be substantially completed in the second quarter of 2007.
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Land held for development consisted of the following at December 31, 2006 and 2005 (in thousands):
As of December 31, 2006, the Partnership owned approximately 14.7 acres of undeveloped land which is part of a landfill-monitoring program managed by the City of San Bernardino (as discussed in Note 7).
Note 5. NOTE PAYABLE AND LINE OF CREDIT
Note payable and line of credit as of December 31, 2006 and 2005 were as follows (in thousands):
The note payable is collateralized by Circuit City, Mimi’s Cafe, Palm Court Retail #1 and #2, Promotional Retail Center, Service Retail Center, TGI Friday’s and One Vanderbilt. This note provides for a one-time loan assumption and release provisions for individual assets.
The Partnership has a line of credit, which is collateralized by Inland Regional Center, has a total availability of approximately $5 million, monthly interest-only payments, a maturity date of April 15, 2007, and bears variable interest at the Prime Rate (8.25% and 7.25% as of December 31, 2006 and 2005, respectively). As of December 31, 2006, no amount under the line of credit was outstanding.
The annual maturities of the Partnership’s note payable subsequent to December 31, 2006 are as follows (in thousands):
Note 6. RELATED PARTY TRANSACTIONS
In May 2006, the Partnership extended the current Property Management and Services Agreement with Glenborough through December 31, 2008. On November 29, 2006, due to the merger of Glenborough and a third party, a new entity, Glenborough LLC was formed and the Partnership Property Management and Service Agreement was transferred from Glenborough to Glenborough LLC. All other terms and conditions remained unchanged. The Partnership engaged Glenborough LLC to perform services for the following fees: (i) a property management fee of 3% of gross rental revenue which was included in property operating expenses in the statements of operations ($271,000, $223,000 and $352,000 in 2006, 2005 and 2004, respectively); (ii) a construction services fee which was included in rental properties on the balance sheet ($10,000 and $91,000 in 2006 and 2005, respectively); (iii) an asset and Partnership management fee which was included in general and administrative expenses in the statements of operations ($300,000, $300,000 and $663,000 in 2006, 2005 and 2004, respectively); (iv) a leasing services fee which was included in the deferred costs on the balance sheets ($245,000 and $341,000 in 2006 and 2005, respectively); (v) a sales fee of 2% for improved properties which was included in the gain on sale of real estate in the consolidated statements of operations ($87,000 in 2005) and a sales fee of 4% for unimproved properties ($77,000 in 2004); (vi) a financing services fee of 1% of the gross loan amount which was included in the deferred costs on the balance sheet ($241,000 in 2005); and (vii) a development fee equal to 5% of the hard costs of the development project which was included in the construction in progress and / or rental properties on the balance sheet, excluding the cost of the land, and the development fee and the general contractor’s fee shall not exceed 11.5%, in the aggregate, of the hard costs of the development project ($223,000 and $51,000 in 2006 and 2005, respectively).
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
As of December 31, 2006, Glenborough Fund XV LLC, an affiliate of Glenborough LLC, held 4,582 or 6.96% of the units of limited partnership interest purchased from unaffiliated third parties.
Note 7. COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
The Partnership follows a policy of monitoring its properties for the presence of hazardous or toxic substances. The Partnership is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Partnership’s business, assets or results of operations. There can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Partnership’s consolidated results of operations and cash flows.
Approximately 14.7 acres of the Tri-City land owned by the Partnership was part of a 27-acre landfill operated by the City of San Bernardino (“the City”) from approximately 1950 to 1960. This landfill incorporates two land parcels and part of a third parcel. In 1996, the Santa Ana Regional Water Quality Control Board (“SARWQCB”), with regulatory jurisdiction over the closure and monitoring of landfills, determined that the City was primarily responsible for the landfill. Therefore, the City and the Partnership entered into a Limited Access Easement Agreement, giving the City access to the site for development, implementation and financial responsibility for a plan for the remediation of the landfill. It was determined that the City was to improve the landfill cover system-The Waterman Landfill Cover Improvement Plans, April 2002, perform groundwater monitoring and install a permanent gas extraction system (Landfill Gas Collection System). Under the Limited Access Easement Agreement with the Partnership, methane monitoring is handled directly by the City. The City’s installation of the cover improvement system began in October 2004 and the system was completed in the third quarter of 2005. A plan was submitted by the City to the County of San Bernardino (“the County”) for review and approval for the gas extraction system. In the last quarter of 2005, the plan was approved and a pilot system to test the viability of the gas extraction system was installed. A permanent carbon system is in the process of being installed by the City, the County and the SARWQCB. The installation of the system is completed; however, the final approval of its operation is pending. Future development of this site remains uncertain. No assurance can be made that circumstances will not arise which could impact the Partnership’s responsibility related to the land.
General Uninsured Losses
The Partnership carries property and liability insurance with respect to the properties. This coverage has policy specification and insured limits customarily carried for similar properties. However, certain types of losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Should the properties sustain damage as a result of an earthquake or flood, the Partnership may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Additionally, the Partnership has elected to obtain insurance coverage for “certified acts of terrorism” as defined in the Terrorism Risk Insurance Act of 2003; however, our policies of insurance may not provide coverage for other acts of terrorism. Any losses from such other acts of terrorism might be uninsured. Should an uninsured loss occur, the Partnership could lose some or all of its capital investment, cash flow and anticipated profits related to the properties.
Other Matters
The Partnership is contingently liable for subordinated real estate commissions payable to the General Partner in the aggregate amount of $643,000 at December 31, 2006, for sales that were completed in previous years. The subordinated real estate commissions are payable only after the Limited Partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 12% per annum on their adjusted invested capital. Since the circumstances under which these commissions would be payable are not met currently, the liability has not been recognized in the accompanying consolidated financial statements; however, the amount will be recorded when and if it becomes payable.
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Note 8. LEASES
The Partnership’s rental properties are leased under non-cancelable operating leases that expire at various dates through January 2020. In addition to monthly base rents, several of the leases provide for additional rents based upon a percentage of sales levels attained by the tenants. Future minimum rents under non-cancelable operating leases as of December 31, 2006 are as follows (in thousands):
In addition to minimum rental payments, certain tenants pay reimbursements for their pro rata share of specified operating expenses, which were included in operating revenue in the Consolidated Statements of Operations and amounted to $1,104,000, $996,000 and $993,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Note 9. TAXABLE INCOME (LOSS)
The Partnership’s tax returns, the qualification of the Partnership as a partnership for federal income tax purposes, and the amount of reported income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to the Partnership’s taxable income or loss, the tax liability of the partners could change accordingly.
The following is a reconciliation for the years ended December 31, 2006, 2005 and 2004 of the net income (loss) for financial reporting purposes to the estimated taxable income (loss) determined in accordance with accounting practices used in preparation of federal income tax returns (in thousands):
The following is a reconciliation of partners’ equity for financial reporting purposes to estimated partners’ capital for federal income tax purposes as of December 31, 2006 and 2005 (in thousands):
* Unaudited
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
Note 10. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following represents an unaudited summary of quarterly results of operations for the years ended December 31, 2006 and 2005 (in thousands, except for per unit amounts and units outstanding):
* The sum of the quarterly per unit amounts may not total to the year to date per unit amounts due to changes in outstanding partnership units and rounding.
(1)
Property operating expenses are higher during the third quarter of 2006 primarily due to an increase in earthquake insurance as well as an increase in utility costs as a result of higher utility rates. The increase in earthquake insurance also impacted property operating expenses during the fourth quarter of 2006.
RANCON REALTY FUND IV
A California Limited Partnership, and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005 and 2004
* The sum of the quarterly per unit amounts may not total to the year to date per unit amounts due to changes in outstanding partnership units and rounding.
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP, AND SUBSIDIARIES
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2006
(in thousands)
(a) The aggregate cost of land and buildings for federal income tax purposes is $66,508,617 (unaudited).
(b) IRC is collateral for the debt of line of credit in the amount of $0.
(c) One Vanderbilt, Service Retail Center, Promo Retail, TGI Friday’s, Circuit City, Mimi Café, Palm Court Retail #1 and #2 are collateral for debt in the aggregate amount of $23,733 million.
(continued)
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP, AND SUBSIDIARIES
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Reconciliation of gross amount at which real estate was carried for the years ended December 31, 2006, 2005 and 2004:
See accompanying independent registered public accounting firms’ reports.
EXHIBIT INDEX