10-Q 1 d413911d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

    x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

    ¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-16467

 

 

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

 

 

California   33-0098488

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

400 South El Camino Real, Suite 1100  
San Mateo, California   94402-1708

(Address of principal

executive offices)

  (Zip Code)

(650) 343-9300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer    ¨    Accelerated Filer    ¨
Non-accelerated filer    ¨    Smaller reporting company    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

 

 


Table of Contents

INDEX

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

 

PART I    FINANCIAL INFORMATION    Page No.  

Item 1.

   Consolidated Financial Statements of Rancon Realty Fund V (Unaudited):   
       Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011      3   
       Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011      4   
       Consolidated Statement of Partners’ Equity for the nine months ended September 30, 2012      5   
       Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011      6   
       Notes to Consolidated Financial Statements      7-14   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      15-18   

Item 3.

   Qualitative and Quantitative Disclosures About Market Risk      18   

Item 4.

   Controls and Procedures      18   
PART II    OTHER INFORMATION   

Item 1.

   Legal Proceedings      19   

Item 1A.

   Risk Factors      19   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      19   

Item 3.

   Defaults Upon Senior Securities      19   

Item 4.

   Mine Safety Disclosures      19   

Item 5.

   Other Information      19   

Item 6.

   Exhibits      19   

SIGNATURES

     20   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Balance Sheets

(in thousands, except units outstanding)

(Unaudited)

 

     September 30,     December 31,  
     2012     2011  

Assets

    

Investments in real estate:

    

Rental properties

   $ 77,827      $ 78,666   

Accumulated depreciation

     (31,136     (29,775
  

 

 

   

 

 

 

Rental properties, net

     46,691        48,891   

Land held for development

     1,494        1,494   

Total investments in real estate

     48,185        50,385   

Cash and cash equivalents

     4,990        5,773   

Accounts receivable, net

     126        125   

Deferred costs, net of accumulated amortization of $2,115 and $1,938 as of September 30, 2012 and December 31, 2011, respectively

     2,329        1,917   

Prepaid expenses and other assets

     3,010        2,540   
  

 

 

   

 

 

 

Total assets

   $ 58,640      $ 60,740   
  

 

 

   

 

 

 

Liabilities and Partners’ Equity (Deficit)

    

Liabilities:

    

Notes payable

   $ 50,940      $ 51,721   

Accounts payable and other liabilities

     1,134        723   

Prepaid rent

     212        76   
  

 

 

   

 

 

 

Total liabilities

     52,286        52,520   
  

 

 

   

 

 

 

Commitments and contingent liabilities (Note 7)

    

Partners’ Equity (Deficit):

    

General Partner

     (2,381     (2,170

Limited partners, 83,898 limited partnership units outstanding as of September 30, 2012 and December 31, 2011

     8,735        10,390   
  

 

 

   

 

 

 

Total partners’ equity

     6,354        8,220   
  

 

 

   

 

 

 

Total liabilities and partners’ equity

   $ 58,640      $ 60,740   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Statements of Operations

(in thousands, except per unit amounts and units outstanding)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Operating revenue

        

Rental revenue and other

   $ 2,733      $ 2,876      $ 8,102      $ 8,731   

Tenant reimbursements

     235        205        557        485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     2,968        3,081        8,659        9,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Property operating expenses

     1,943        1,898        4,869        4,918   

Depreciation and amortization

     1,064        1,247        3,278        3,641   

General and administrative

     198        225        692        708   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,205        3,370        8,839        9,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (237     (289     (180     (51

Interest and other income

     23        —          23        9   

Interest expense (including amortization of loan fees)

     (728     (742     (2,195     (2,237
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before gain on sale of property

     (942     (1,031     (2,352     (2,279
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain on sale of property

     486        —          486        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (456   $ (1,031   $ (1,866   $ (2,279
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per limited partnership unit

   $ (4.60   $ (11.06   $ (19.73   $ (24.45
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Statement of Partners’ Equity

For the nine months ended September 30, 2012

(in thousands)

(Unaudited)

 

     General
Partner
    Limited
Partners
    Total  

Balance (deficit) at December 31, 2011

   $ (2,170   $ 10,390      $ 8,220   

Net loss

     (211     (1,655     (1,866
  

 

 

   

 

 

   

 

 

 

Balance (deficit) at September 30, 2012

   $ (2,381   $ 8,735      $ 6,354   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (1,866   $ (2,279

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Gain on sale of property

     (486     —     

Depreciation and amortization

     3,278        3,641   

Amortization of loan fees, included in interest expense

     60        61   

Changes in certain assets and liabilities:

    

Accounts receivable

     (1     (9

Deferred costs

     (872     (473

Prepaid expenses and other assets

     (470     (418

Accounts payable and other liabilities

     411        312   

Prepaid rent

     136        (13
  

 

 

   

 

 

 

Net cash provided by operating activities

     190        822   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to real estate investments

     (768     (832

Proceeds from sale of land

     576        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (192     (832
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Notes payable principal payments

     (781     (739
  

 

 

   

 

 

 

Net cash used in financing activities

     (781     (739
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (783     (749

Cash and cash equivalents at beginning of period

     5,773        6,335   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 4,990      $ 5,586   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 2,135      $ 2,177   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash operating activities:

    

Write-off of fully depreciated rental property assets

   $ 1,517      $ 2,549   
  

 

 

   

 

 

 

Write-off of fully amortized deferred costs

   $ 283      $ 784   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. ORGANIZATION

Rancon Realty Fund V, a California Limited Partnership (“the Partnership”), was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, developing, operating and disposing of real property. The Partnership was organized in 1985 and reached final funding in February 1989. The general partners of the Partnership are Daniel L. Stephenson and Rancon Financial Corporation (“RFC”), hereinafter collectively referred to as the General Partner. RFC is wholly owned by Daniel L. Stephenson. The Partnership has no employees.

As of September 30, 2012, there were 83,898 Units (“Units”) outstanding.

The Partnership commenced on May 8, 1985 and shall continue until December 31, 2015, unless previously terminated in accordance with the provisions of the Partnership Agreement.

Allocation of Net Income and Net Loss

Allocation of net income and net loss is made pursuant to the terms of the Partnership Agreement. Generally, net income and net losses from operations are allocated 90% to the limited partners and 10% to the General Partner; however, if the limited partners or the General Partner would have, as a result of an allocation of cumulative net losses, a deficit balance in their capital accounts, then net losses shall not be allocated to the limited partners or General Partner, as the case may be, so as to create a capital account deficit, but such losses shall be allocated to the limited partners or General Partner with positive capital account balances until the positive capital account balances of such other partners are reduced to zero. However, if deficits are the result of cumulative distributions in excess of earnings, losses will continue to be allocated to the General Partner. Capital accounts shall be determined after taking into account all other allocations and distributions for the fiscal year.

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 required 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 12% 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 accounts 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 deficits 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.

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 their absolute discretion that it is in the best interests of the Partnership; and (ii) all distributions are subject to the payment of Partnership expenses and maintenance of reasonable reserves for debt service, alterations and improvements, maintenance, replacement of furniture and fixtures, working capital and contingent liabilities.

All excess cash from operations shall be distributed 90% to the limited partners and 10 % 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% to the General Partner and 99% 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% to the General Partner and 99% 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% 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

 

7


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

 

twelve month period following the date upon which such Unit was purchased from the Partnership and following the admission of such limited partner (iii) third, 99% to the General Partner and 1% to the limited partners, until the General Partner has received an amount equal to 20% of all distributions of cash from sales or refinancing: (iv) the balance, 80% to the limited partners, pro rata in proportion to the number of Units held by each, and 20% to the General Partner.

Note 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements present the consolidated financial position of the Partnership and its subsidiaries as of September 30, 2012 and December 31, 2011, and the consolidated results of operations of the Partnership and its subsidiaries for the three and nine months ended September 30, 2012 and 2011, the consolidated statement of partners’ equity for the nine months ended September 30, 2012, and cash flows of the Partnership for the nine months ended September 30, 2012 and 2011. All significant intercompany transactions, receivables and payables have been eliminated in consolidation.

The accompanying interim financial statements are unaudited; however, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of the General Partner, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal accruals) necessary to present fairly the consolidated financial position of the Partnership as of September 30, 2012 and December 31, 2011, and the related consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011, the consolidated statement of partners’ equity for the nine months ended September 30, 2012 and the consolidated statement of cash flows for the nine months ended September 30, 2012 and 2011.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“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 reported 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 amounts cannot be recovered, in which case, the carrying value of the property is reduced to its estimated fair value to the extent the carrying value is greater than the undiscounted future cash flows excluding interest. Estimated fair value 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. 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.

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 improvements

Furniture and equipment

   5 to 7 years

Land Held for Development

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 is computed using estimated sales price, based upon market values for comparable properties and considers the cost to complete and the estimated fair value of the completed project. Land held for development is 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.

 

8


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

 

Fair Value of Investments

The guidance related to accounting for fair value measurements defines fair value and establishes a framework for measuring fair value in order to meet disclosure requirements for fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This hierarchy describes three levels of inputs that may be used to measure fair value.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1. Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market.

Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation using unobservable inputs. This category generally includes long-term derivative contracts, real estate and unconsolidated joint ventures.

Cash and Cash Equivalents

The Partnership considers short-term investments with an original maturity of ninety days or less at the time of investment to be cash and cash equivalents.

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 the leases. Actual amounts collected could be lower 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 and other recoverable operating expenses are recognized as revenue on an estimated basis during the current year. The Partnership develops a revised estimate of the amount recoverable from tenants based on updated expenses for the year and amounts to be recovered and records adjustments to income in the current year financial statement accounts. Any final changes in estimate based on lease-by-lease reconciliations and tenant negotiations and collection are recorded in the period those negotiations are settled.

Net (Loss) Income Per Limited Partnership Unit

Net (loss) income per Unit is calculated using the weighted average number of Units outstanding during the period and the limited partners’ allocable share of the net (loss) income.

 

9


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

 

Net income per Unit is as follows (in thousands, except for weighted average units and per unit amounts):

 

     For the three months ended     For the nine months ended  
     September 30, 2012     September 30, 2011     September 30, 2012     September 30, 2011  
     General
Partner
    Limited
Partners
    General
Partner
    Limited
Partners
    General
Partner
    Limited
Partners
    General
Partner
    Limited
Partners
 

(Loss) Income allocation:

                

Net loss

   $ (70   $ (386   $ (103   $ (928   $ (211   $ (1,655   $ (228   $ (2,051

Weighted average number of limited partnership units outstanding during each period

   

    83,898          83,898          83,898          83,898   

Basic and diluted loss per limited partnership unit

  

  $ (4.60     $ (11.06     $ (19.73     $ (24.45

The calculation of net (loss) income per Unit assumes that the income (loss) otherwise allocable to the limited partners is first used to fund distributions to the General Partner. As discussed in Note 1, because distributions of available cash have exceeded cumulative earnings and the General Partner has a deficit, the General Partner would restore that deficit in liquidation.

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 (loss) 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 property taxes and rental income and loss recognition.

Concentration Risk

No tenant represented more than 10% of rental revenue for the nine months ended September 30, 2012. One tenant, operating within the aerospace industry, represented 18% of rental revenue for the nine months ended September 30, 2011.

Reference to 2011 audited consolidated financial statements

These unaudited consolidated financial statements should be read in conjunction with the notes to audited consolidated financial statements included in the Partnership’s December 31, 2011 annual report on Form 10-K.

 

10


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 3. INVESTMENTS IN REAL ESTATE

Rental properties consist of the following (in thousands):

 

     September 30,     December 31,  
     2012     2011  

Land

   $ 6,854      $ 6,944   

Land and improvements

     1,536        1,536   

Buildings

     56,253        56,253   

Building and tenant improvements

     13,184        13,933   
  

 

 

   

 

 

 
     77,827        78,666   

Less: accumulated depreciation

     (31,136     (29,775
  

 

 

   

 

 

 

Total rental properties, net

   $ 46,691      $ 48,891   
  

 

 

   

 

 

 

As of September 30, 2012, the Partnership’s rental properties included nine office properties and four retail properties (see detailed listing of properties in Item 2. Properties).

In September 2012, the Partnership sold, in an all cash transaction, approximately 21,000 square feet of land adjacent to Hospitality Lane to the San Bernardino County Transportation Commission (SANBAG) for construction of an express bus service (SBX). The bus service will run along Hospitality Lane thru the Tri-City project. Land with a basis of $90,000 was sold for total consideration of $585,000. Costs related to the sale included $9,000 in sale fees. A gain on the sale of property of $486,000 was allocated to the affected properties on a prorata basis. In conjunction with the purchase of the land, SANBAG also received a temporary easement for approximately 27,000 square feet of land for six months starting in August 2012 to be used for construction staging with consideration of $3,500 per month.

Note 4. LAND HELD FOR DEVELOPMENT

Land held for development consists of the following (in thousands):

 

     September 30,      December 31,  
     2012      2011  

East Lake Restaurant Pad (includes approximately 0.3 acres of land with a cost basis of $166 as of September 30, 2012 and December 31, 2011)

   $ 451       $ 451   

Land held for development (approximately 4.1 acres of land as of September 30, 2012 and December 31, 2011)

     1,043         1,043   
  

 

 

    

 

 

 

Total land held for development

   $ 1,494       $ 1,494   
  

 

 

    

 

 

 

The book basis of the land held for development is shown net of an impairment provision of $820,000. The original cost of the land was $1,500,000 and subsequent improvements total $363,000.

 

11


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 5. NOTES PAYABLE

Notes payable consists of the following (in thousands):

 

     September 30,      December 31,  
     2012      2011  

Note payable #1 collateralized by first deeds of trust on seven properties. The note has a fixed interest rate of 5.46%, a maturity date of January 1, 2016 with a 30-year amortization requiring monthly principal and interest payments of $151.

   $ 23,913       $ 24,289   

Note payable #2 collateralized by first deeds of trust on four properties. The note has a fixed interest rate of 5.61%, a maturity date of May 1, 2016 with a 30-year amortization requiring monthly principal and interest payments of $173.

     27,027         27,432   
  

 

 

    

 

 

 

Total notes payable

   $ 50,940       $ 51,721   
  

 

 

    

 

 

 

Note payable #1 is collateralized by Bally’s Health Club, Carnegie Business Center II, Lakeside Tower, Outback Steakhouse, Pat & Oscars, Palm Court Retail III and One Carnegie Plaza and Note payable #2 is collateralized by Brier Corporate Center, One Parkside, Two Parkside and Two Carnegie Plaza.

The annual maturities on the Partnership’s notes payable as of September 30, 2012, are as follows (in thousands):

 

2012

   $ 178   

2013

     1,103   

2014

     1,165   

2015

     1,231   

2016

     47,263   
  

 

 

 

Total

   $ 50,940   
  

 

 

 

 

12


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6. RELATED PARTY TRANSACTIONS

Glenborough LLC earns fees from the Partnership as prescribed by the Property Management and Services Agreement (the “Agreement”). The Agreement is in effect until the earlier of December 31, 2015 or the completion of sale of all real property assets of the Partnership. The terms and conditions of the Agreement are to perform services for the following fees:

 

     Nine Months Ended  
     September 30,      September 30,  
     2012      2011  

(i) property management fees of 2.5% of gross rental revenue which were included in property operating expenses in the accompanying consolidated statements of operations

   $ 229,000       $ 272,000   

(ii) construction services fees which were capitalized and included in rental properties on the accompanying consolidated balance sheets

     32,000         49,000   

(iii) an asset and Partnership management fee which was included in general and administrative expenses in the accompanying consolidated statements of operations

     187,000         187,000   

(iv) leasing services fees which were included in deferred costs on the accompanying consolidated balance sheets

     330,000         159,000   

(v) a sales fee of 1% for all properties, which were included in net gain on sale of property

     6,000         —     

(vi) a financing services fee of 1% of the gross loan amount which would be included in deferred costs on the accompanying consolidated balance sheets

     —           —     

(viii) a development fee equal to 5% of the hard costs of the development project, excluding the cost of the land, which would be included in construction in progress and/or rental properties on the accompanying consolidated balance sheets, the development fee and the general contractor’s fee shall not exceed 11.5%, in the aggregate, of the hard costs of the development fee project

     —           —     

(viii) data processing fees which were included in property operating expenses in the accompanying consolidated statements of operations

     90,000         86,000   

(ix) engineering fees which were included in property operating expenses in the accompanying consolidated statements of operations

     29,000         28,000   

On October 1, 2010, Glenborough Holdings, LLC (Glenborough Holdings) transferred all of its interest in the Partnership to Glenborough Investors, LLC, which currently holds those units in its subsidiary, Glenborough Property Partners, LLC (“Glenborough Property Partners”). As part of the same transaction, Glenborough Holdings transferred its ownership of Glenborough LLC to Glenborough Investors, LLC, which currently holds the ownership interests in that entity in its subsidiary, Glenborough Service, LP, the parent of Glenborough Property Partners. As of September 30, 2012, Glenborough Property Partners, an affiliate of Glenborough LLC, held 11,565 or 13.78% of the Units.

 

13


Table of Contents

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Consolidated Financial Statements

(Unaudited)

 

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.

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 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, 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 amount of $102,000 at September 30, 2012 for sales that occurred 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.

 

14


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our December 31, 2011 audited consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K.

Background

In June 1985, our initial acquisition of property consisted of approximately 76.21 acres of partially developed and unimproved land located in San Bernardino, California. The property is part of a master-planned development of 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 us and Rancon Realty Fund IV (“Fund IV”), a partnership sponsored by the General Partner.

Overview

Tri-City Properties

As of September 30, 2012, our rental properties consist of nine office and four retail properties, aggregating approximately 752,000 rentable square feet, of which 709,000 square feet are office space, and 43,000 square feet are retail space.

 

Property

  

Type

   Square Footage  
One Carnegie Plaza    Two two-story office buildings      107,276   
Two Carnegie Plaza    Two-story office building      68,957   
Carnegie Business Center II    Two two-story office buildings      50,867   
Lakeside Tower    Six-story office building      112,716   
One Parkside    Four-story office building      70,068   
Bally’s Health Club (Bally’s)    Health club facility      25,000   
Outback Steakhouse (Outback)    Restaurant      6,500   
Palm Court Retail III    Retail      6,004   
Two Parkside    Three-story office building      82,039   
Pat & Oscars    Restaurant      5,100   
Three Carnegie    Two-story office building      83,698   
Brier Corporate Center    Three-story office building      104,501   
Three Parkside    Two-story office building      29,076   
     

 

 

 

Total

        751,802   
     

 

 

 

As of September 30, 2012, the weighted average occupancy of the thirteen properties was 69%.

Land

As of September 30, 2012, the Partnership owned approximately 4.4 acres of land. Although the current market environment is not conducive to office development, the market will continue to be monitored with the intent to position the land for future development.

Results of Operations

Comparison of the three and nine months ended September 30, 2012 to the three and nine months ended September 30, 2011

Revenue

Rental revenue and other decreased by $143,000, or 5%, and $629,000, or 7%, for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011, primarily due to a decline in occupancy at Brier Corporate Center. Occupancy for the nine months ended September 30, 2012 was 45%, compared to occupancy for the nine months ended September 30, 2011 of 84%. The downsize of a tenant at Brier Corporate Center on December 31, 2011 resulted in a reduction in rental revenue of $245,000 and $733,000 for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011. This reduction in rental revenue was partially offset by less significant increases in occupancy and rental rates at other properties.

Tenant reimbursements increased $30,000, or 15%, and $72,000, or 15%, for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011. The increase was primarily due to higher overtime HVAC billings and increased recovery billings resulting from higher budgeted expenses in 2012 compared to 2011, and fewer new base years.

 

15


Table of Contents

In September 2012, the Partnership sold, in an all cash transaction, approximately 21,000 square feet of land adjacent to Hospitality Lane to the San Bernardino County Transportation Commission (SANBAG) for construction of an express bus service (SBX). The bus service will run along Hospitality Lane thru the Tri-City project. Total consideration for the land was $585,000. Costs related to the sale included $9,000 in fees. A gain on the sale of property of $486,000 was allocated to the affected properties on a prorata basis. In conjunction with the purchase of the land, SANBAG also received a temporary easement for approximately 27,000 square feet of land for six months starting in August 2012 to be used for construction staging with consideration of $3,500 per month.

Other income was $23,000 in the three and nine months ended September 30, 2012 compared to $9,000 of other income for the nine month period ended September 30, 2011. This other income was comprised of $23,000 in cost reimbursements to offset some of the Partnership’s expenses associated with the SBX transaction.

Expenses

Property operating expenses increased $45,000, or 2%, and decreased $49,000, or 1%, for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011. The increase for the three months ended September 30, 2012 compared to the same period ended September 30, 2011 was due to increases in utility costs. The decrease for the nine months ended September 30, 2012 compared to the same period ended September 30, 2011 was due to lower overall repairs and maintenance, lower utility costs early in the year, and prior year property tax refunds resulting from tax appeals.

Depreciation and amortization decreased $183,000, or 15%, and $363,000, or 10%, for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011. The decrease was primarily due to assets being written off as of December 31, 2011, most notably at Brier Corporate Center.

General and administrative expenses decreased by $27,000, or 12%, and $16,000, or 2%, for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011. The decrease is primarily due to lower legal fees paid in conjunction with the SBX project.

Interest expense decreased by $14,000, or 2%, and $42,000, or 2% for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011. The decrease is due to lower principle balances.

Liquidity and Capital Resources

As of September 30, 2012, we had cash and cash equivalents of $4,990,000.

As of September 30, 2012, our liabilities include two notes payable with total borrowing of $50,940,000. These notes are collateralized by properties with an aggregate net carrying value of approximately $39,290,000. Note payable #1 matures in January 2016, requires monthly principal and interest payments of $151,000 and bears interest at a fixed rate of 5.46% and is collateralized by Bally’s Health Club, Carnegie Business Center II, Lakeside Tower, Outback Steakhouse, Pat & Oscars, Palm Court Retail III and One Carnegie Plaza. Note payable #2 matures in May 2016, requires monthly principal and interest payments of $173,000 and bears interest at a fixed rate of 5.61% and is collateralized by Brier Corporate Center, One Parkside, Two Parkside and Two Carnegie Plaza.

We are contingently liable for subordinated real estate commissions payable to the General Partner in the aggregate amount of $102,000 at September 30, 2011 for sales that transpired 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 conditions 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.

Cash flows

For the nine months ended September 30, 2012, cash provided by operating activities was $190,000, as compared to cash provided by operating activities of $822,000 for the same period in 2011. This decrease was primarily due to a decrease in revenues combined with changes in certain assets and liabilities, notably deferred costs. For the nine months ended September 30, 2012, cash used in investing activities was $192,000, as compared to cash used in investing activities of $832,000 for the same period in 2011, primarily due to the proceeds from the sale of land to SANBAG for the SBX bus line. For the nine months ended September 30, 2012, cash used for financing activities was $781,000, as compared to cash used for financing activities of $739,000 for the same period in 2011, related to the principal payments on notes payable.

Our expectation is that cash and cash equivalents as of September 30, 2012, together with cash from operations, sales and financing, will be adequate to meet our operating requirements on a short-term basis and for the reasonably foreseeable future. There can be no assurance that our results of operations will not fluctuate in the future and at times affect our ability to meet operating requirements.

Operationally, our primary source of funds consists of cash provided by rental activities. In September 2012, the Partnership sold approximately 21,000 square feet of land adjacent to Hospitality Lane to the San Bernardino County Transportation Commission (SANBAG) for construction of an express bus service (SBX). The bus service will run along Hospitality Lane thru the Tri-City project. Net cash provided to the Partnership from this transaction was $576,000, including a gain on the sale of land of $486,000. Cash generated from property sales is generally added to our cash reserves, pending use in leasing costs at the properties or distribution to the partners.

 

16


Table of Contents

Contractual Obligations

As of September 30, 2012, our contractual obligations are as follows (in thousands):

 

     Less than                       
     1 year      1 to 3 years      3 to 5 years      Total  

Collateralized mortgage loans

   $ 1,092       $ 2,375       $ 47,473       $ 50,940   

Interest on indebtedness

     2,794         5,399         1,123         9,316   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,886       $ 7,774       $ 48,596       $ 60,256   
  

 

 

    

 

 

    

 

 

    

 

 

 

We are unaware of any demands, commitments, events or uncertainties, which might affect capital resources in any material respect. In addition, we are not subject to any covenants pursuant to our collateralized debt that would constrain our ability to obtain additional capital.

Critical Accounting Policies

In the preparation of financial statements, we utilize certain critical accounting policies. There has been no change to our significant accounting policies included in the notes to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Inflation

Leases at the office properties typically provide for rent adjustment and pass-through of certain operating expenses during the term of the lease. 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-Q 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 our expectations, hopes, intentions, beliefs and strategies regarding the future. These forward looking statements include statements relating to:

 

 

Our belief that cash and cash generated by operations, sales and financing will be sufficient to meet our operating requirements in both the short and the long-term;

 

 

Our expectation that changes in market interest rates will not have a material impact on the performance or the fair value of our portfolio;

 

 

Our belief that certain claims and lawsuits which have arisen against us in the normal course of business will not have a material adverse effect on our financial position, cash flow or results of operations;

 

 

Our belief that properties are competitive within our market;

 

 

Our expectation to achieve certain occupancy levels;

 

 

Our estimation of market strength;

 

 

Our knowledge of any material environmental matters; and

 

 

Our expectation that lease provisions may permit us 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 us 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 creditworthiness of prospective tenants;

 

17


Table of Contents
 

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;

 

 

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); and

 

 

the unpredictability of both the frequency and final outcome of litigation.

The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011. We assume no obligation to update or supplement any forward looking-statement.

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 3. Qualitative and Quantitative Disclosures About Market Risk

Interest Rates

We are exposed to changes in interest rates obtainable on our borrowings. Our expectation is that changes in market interest rates will not have a material impact on the performance or fair value of our portfolio.

For debt obligations, the table below presents required principal payments and interest rates by expected maturity dates.

 

     Expected Maturity Date         
     2012      2013      2014      2015      2016      Total  
     (in thousands)  

Collateralized fixed rate debt at 5.46%

   $ 85       $ 530       $ 560       $ 591       $ 22,147       $ 23,913   

Collateralized fixed rate debt at 5.61%

   $ 93       $ 573       $ 605       $ 640       $ 25,116       $ 27,027   

As of September 30, 2012, we had cash and cash equivalents of $4,990,000.

 

Item 4. Controls and Procedures

The principal executive officer and principal financial officer of the General Partner have 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 quarterly 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 have not been any changes in the Partnership’s internal control over financial reporting that occurred during the Partnership’s fiscal quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

18


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. 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 have a material adverse effect on the Partnership’s financial position, cash flow or results of operations.

 

Item 1A. Risk Factors

There are no material changes to any of the risk factors as previously disclosed in Item 1A. to Part I of the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

Item 6.    Exhibits     
   31    Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(a) of the Exchange Act.
   32    Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This certification, required by Section 906 of the Sarbanes-Oxley Act of 2002, other than as required by Section 906, is not to be deemed “filed” with the Commission or subject to the rules and regulations promulgated by the Commission under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of said Act.
   101.INS    XBRL Instance Document.
   101.SCH    XBRL Taxonomy Extension Schema Document.
   101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
   101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
   101.LAB    XBRL Taxonomy Extension Labels Linkbase Document.
   101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

19


Table of Contents

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 V,

a California limited partnership

    By:  

Rancon Financial Corporation

a California corporation,

its General Partner

Date:   November 14, 2012   By:  

/s/ Daniel L. Stephenson

      Daniel L. Stephenson, President
Date:   November 14, 2012   By:  

/s/ Daniel L. Stephenson

      Daniel L. Stephenson, General Partner

 

20


Table of Contents

EXHIBIT INDEX

RANCON REALTY FUND V,

A CALIFORNIA LIMITED PARTNERSHIP

 

Exhibit 31    Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(a) of the Exchange Act.
Exhibit 32    Certification of Daniel L. Stephenson, Chief Executive Officer and Chief Financial Officer of the General Partner Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This certification, required by Section 906 of the Sarbanes-Oxley Act of 2002, other than as required by Section 906, is not to be deemed “filed” with the Commission or subject to the rules and regulations promulgated by the Commission under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of said Act.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

21