ITEM 1. BUSINESS
Property Capital Trust (the "Trust") is an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts pursuant to a Declaration of Trust dated June 9, 1969, as amended. The Trust has qualified and has elected to be taxed as a real estate investment trust ("REIT") under Sections 856-860 of the Internal Revenue Code since 1969. It intends to continue to qualify as a REIT.
The Trust currently operates under a business plan which provides for the orderly disposition of the Trust's investments (the "Business Plan"). The Business Plan contemplates the disposition of Owned Properties and Structured Transactions on a property-by-property basis, although the Trust will consider bulk sales and other opportunities that may arise which expedite the disposition process. At the Trust's Annual Meeting of Shareholders held on December 15, 1995, the Trust's shareholders ratified the Business Plan and approved certain amendments to the Trust's Declaration of Trust necessary for its implementation. The Trust has utilized, and currently intends to continue to utilize, net proceeds from the sale of its properties to retire debt and/or make distributions to shareholders to the extent such funds are not needed by the Trust for its operations.
The progress made by the Trust in implementing the Business Plan has been greater than initially anticipated. Immediately prior to the implementation of the Business Plan, the Trust owned 27 investments. During fiscal 1996, 13 properties were sold or otherwise disposed of. The proceeds from these sales and approximately $5,000,000 in cash received by the Trust from sales made at the end of fiscal 1995, were used to retire all of the Trust's 10% and 9 3/4% Convertible Subordinated Debentures ($31,671,000 principal amount), to prepay $3,000,000 of the first mortgage loan on the Trust's Loehmanns Fashion Island property in Aventura, Florida, and to pay special dividends aggregating $2.75 per share ($25,403,000). Since the end of fiscal 1996, the Trust has disposed of two additional properties.
In implementing the Business Plan, the Trustees have followed two different approaches with respect to the disposition process, one relating to the Structured Transactions (land leasebacks and/or mortgage loans) and the other relating to the Owned Properties. With respect to the Structured Transactions, the Trust has commenced discussions with many of its lessees/mortgagors regarding repurchasing or repaying the Trust's investments. Since management is intent on realizing full value for the Structured Transactions, negotiations with some of these logical purchasers are likely to extend over a considerable period of time. With respect to the disposition of Owned Properties, the Trust has used brokers to handle most sales. The Trust bases its decision as to timing of sales on such factors as the physical condition, occupancy and cash flow status of each property and prevailing market conditions. Once a decision to sell an Owned Property is made, the process of broker selection, marketing, contract negotiations and closing normally takes between six and nine months.
No properties have been, and it is not expected that any properties will be, sold to persons deemed to be affiliates of the Trust. Each offer to purchase Trust assets must be acted upon by the Board of Trustees, which Board is currently comprised of seven Trustees, five of whom are unaffiliated with the Trust. Effective as of the Trust's 1996 Annual Meeting of Shareholders, it is expected that the Board of Trustees will be reduced to six Trustees, four of whom will be unaffiliated with the Trust.
Although no assurances can be given as to the time required to sell all of the Trust's investments or the amount of net proceeds that will be realized from the sale thereof, management estimated, on August 23, 1996, that the bulk of the Trust's remaining investments will be sold by the end of fiscal 1998 and that the amount of future distributions its shareholders will receive from the disposition of the Trust's investments will be approximately $9.25 per share. When added to the $2.75 per share of disposition proceeds previously distributed, this results in an increase in management's estimate of total distributions to approximately $12.00 per share from the approximately $10.00 per share set forth in the Trust's 1995 Proxy Statement. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Special Note on Forward-Looking Statements."
Distributions to shareholders will be made periodically at such times and upon such terms as determined by the Trustees. Following the sale of all of the Trust's investments and satisfaction by the Trust, through payment or establishment of reserves, of all of its liabilities and obligations, the Trust will distribute to its shareholders the balance of available proceeds. The Trustees may from time to time fix a date in respect of any distribution for the determination of the persons to be treated as shareholders of record entitled to receive such distributions. Shareholders will be advised at the time of any such distribution as to the details of the mechanics of the distribution and the means by which shares will be canceled once all of the Trust's assets have been distributed.
Before the final distributions of the Trust's remaining assets to the shareholders, the Common Shares will continue to be transferable and the Trust's shareholders will continue to have such rights as applicable law confers upon shareholders. It is the intention of the Trustees to maintain the listing of the Common Shares on the American Stock Exchange until such time as the American Stock Exchange causes the Common Shares to be delisted. Once either all of the Trust's assets have been sold and the net proceeds are distributed to the Trust's
ITEM 1. BUSINESS (continued)
shareholders, the legal formalities of terminating the Trust will be completed in accordance with the terms of the Declaration of Trust and with Massachusetts' laws.
REAL ESTATE INVESTMENTS
The Trust's real estate portfolio is comprised primarily of equity investments in office buildings, shopping centers, apartment complexes and hotels located throughout the United States. The Trust's investments were either made directly (including through wholly owned subsidiaries) or through limited partnerships (classified as and referred to herein as "Investment Partnerships") in which the Trust or its subsidiary is general partner and other institutional investors are the limited partners.
Investments in land leasebacks and/or mortgage loans are classified as Structured Transactions. Investments representing ownership of improved income producing properties are classified as Owned Properties. Owned Properties involve operation and management responsibility with property management delegated to independent contractors. Owned Properties which have been approved for sale by the Trustees (and, if applicable, the limited partners of an Investment Partnership) and are being marketed for sale are classified as Assets Held for Sale. For financial reporting purposes, the Trust categorizes its investments into four groups, Owned Properties held directly by the Trust (which includes investments held by wholly owned subsidiaries), Structured Transactions held directly by the Trust, Assets Held for Sale directly by the Trust (which currently consist of Owned Properties) and interests in Investment Partnerships (which currently hold Owned Properties and Assets Held for Sale).
At July 31, 1996, the portfolio of real estate investments included four Owned Properties, consisting of three held directly by the Trust, or wholly owned subsidiaries and one held by an Investment Partnership, seven Structured Transactions held directly by the Trust and three Assets Held for Sale, one of which is classified as an Asset Held for Sale directly by the Trust (previously classified as an Owned Property held directly by the Trust) and two of which are classified as Assets Held for Sale in Investment Partnerships (previously classified as Owned Properties held in Investment Partnerships). Subsequent to the end of fiscal 1996 the two Assets Held for Sale in Investment Partnerships were sold.
For a description of the Trust's individual investments and developments relating to such investments during the year, see Item 2, Item 7, Note 2 of the Notes to Consolidated Financial Statements of the Trust and Schedule III, Schedule IV and Exhibit A included in Item 14 hereof.
COMPETITION, REGULATION AND OTHER FACTORS
The success of the Trust depends, among other factors, upon general economic conditions and trends, including real estate and population trends, interest rates, government regulations and legislation, income tax laws and zoning laws. The success of the Business Plan depends on the Trust's ability to sell investments at prices that reflect the underlying value of such investments. The Trust does not consider its real estate business to be seasonal in nature.
The Trust's real estate investments are located in markets in which they face significant competition for the revenues they generate. The Trust's investments, particularly the office buildings and hotels, are located in markets which have a substantial supply of available space, resulting in significant competition on the basis of price and amenities. The Trust's real estate investments also compete with other properties that are being offered for sale. The market for Owned Properties is competitive and the interest of potential buyers can be impacted by various factors including property performance, physical condition, neighborhood characteristics and trends, interest rates, price and general economic conditions. The Trust has typically sold its Structured Transactions to its lessees either in conjunction with a project refinancing or sale. In addition to the factors noted above, such sales are also dependent on the willingness of the lessee to consummate such a transaction.
TENANTS
Spaces in the Owned Properties are leased to 1,033 tenants including 56 retail tenants, 59 office tenants and 921 apartment tenants. The lease terms range from tenancies-at-will to 20 years.
PROPERTY MANAGEMENT
All Owned Properties are managed by professional property management firms that are independent of the Trust and report directly to the Trust's management. Property management fees range from 2.25% to 5% of annual gross receipts from the operations of the properties and each property management agreement may be terminated upon 30 days' notice.
ITEM 1. BUSINESS (continued)
INSURANCE
The Owned Properties and Assets Held for Sale, which include properties that are owned directly by the Trust (or its subsidiaries) and by the Investment Partnerships, have commercial general liability coverage with limits of $76,000,000 per occurrence and $89,000,000 in the aggregate except for PCA Southwest Associates Limited Partnership which is subject to a $77,000,000 aggregate limit. This coverage protects the Trust and, where applicable, the Investment Partnerships against liability claims as well as the costs of defense. Property insurance on the Owned Properties and Assets Held for Sale is maintained on a replacement value basis covering both the cost of direct physical damage and the loss of rental income, subject to a limit of $50,000,000 at any one location except Loehmann's Fashion Island, which is subject to a $20,000,000 limit, and the apartments located in Houston, which are subject to a $24,816,600 limit. Separate flood and earthquake insurance is provided with an annual aggregate limit of $10,000,000 for each peril, with the exception of the Houston apartments which are subject to a $17,500,000 limit, with a $1,000,000 per occurrence deductible (for flood coverage only). Liability and property insurance for Structured Transactions is carried by the Trust's lessees/mortgagors.
At the end of fiscal 1996, two Investment Partnerships, Property Capital Midwest Associates, L.P. ("Midwest") and PCA Canyon View Associates Limited Partnership ("Canyon View"), each held, as its only investment, an Asset Held for Sale which was sold subsequent to the end of fiscal 1996. Additionally, at July 31, 1996, PCA Southwest Associates Limited Partnership ("Southwest") held, as its only investment, an Owned Property. The Trust, as general partner, is liable for all obligations of and claims made against Midwest and Canyon View beyond the net worth of such partnerships and, in the case of claims covered by the Investment Partnership's liability insurance, the amount of such insurance. The Trust has sought to obviate such liability with respect to Southwest by transferring its general partnership interest to a limited partnership of which a wholly owned subsidiary of the Trust is the general partner and the Trust is the limited partner.
THE ADVISOR; INTERNALIZATION OF MANAGEMENT
Effective August 1, 1992, the Trust internalized the investment and day-to-day administrative services previously performed by its former investment advisor, Property Capital Advisors, Inc. (the "Advisor"), under its advisory contract with the Trust (the "Advisory Contract") which expired on July 31, 1992 and was not renewed. No consideration was paid to the Advisor in connection with the expiration and non-renewal of the Advisory Contract. For additional information relating to the Advisory Contract and the internalization of management, see Note 6 of the Notes to Consolidated Financial Statements of the Trust.
GOVERNMENT REGULATIONS
A number of jurisdictions have laws and regulations relating to the ownership of real estate, such as local building and similar codes. From time to time, capital expenditures at Owned Properties may be required to comply with changes in these laws. When Canyon View took title to its Phase II investment in August 1995, it voluntarily commenced a program to correct certain construction deficiencies and make repairs to the exterior siding at a cost of $1,050,000. This property was sold by the Investment Partnership subsequent to the end of fiscal 1996.
Under various Federal, state, and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released on, under or in its property. The costs of such removal or remediation can be substantial. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous or toxic substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's ability to sell or lease such real estate or to borrow using such property as collateral. Management is not aware of any material violation of applicable environmental requirements with respect to any of its real estate investments, nor does it contemplate having to make any material expenditures in order to comply with any current environmental laws or regulations.
CUSTOMERS
As of July 31, 1996, the Trust's most significant relationship with any single third-party owner of real estate was with the National Corporation for Housing Partnerships ("NHP") which, through affiliates, is the lessee/mortgagor in two of the Trust's apartment investments. The Trust's investments consist of a $5,400,000 land leaseback in Sandpiper Cove apartments and investments totaling $9,770,000 in Elm Creek apartments (a $2,230,000 land leaseback and a $7,540,000 leasehold mortgage loan). These investments accounted for approximately 14% of the Trust's real estate portfolio as of July 31, 1996 and approximately 7% of the Trust's total revenues from its real estate portfolio during fiscal 1996. Neither NHP nor any other lessee or borrower is affiliated with the Trust or its Trustees.
ITEM 1. BUSINESS (continued)
ANTICIPATED CAPITAL EXPENDITURES
In accordance with the Business Plan, no new acquisitions of property will be made. The Owned Properties will continue to be managed
to maximize performance and values. For fiscal 1997 the aggregate amount of anticipated capital expenditures at Owned Properties held directly by the Trust and Assets Held for Sale directly by the Trust is $4,050,000, primarily for tenant improvements and leasing commissions. The funds necessary for capital expenditures are anticipated to be available from cash flow provided by operations and proceeds from the sale of properties.
Additionally, the Trust's share of anticipated tenant improvements, leasing commissions and other capital expenditures at Owned Properties and Assets Held for Sale in Investment Partnerships is approximately $100,000. These funds are anticipated to be available from the Investment Partnerships' cash flows.
BORROWINGS
At July 31, 1996, the Trust had $36,889,000 of debt outstanding as follows:
PRINCIPAL AMOUNT INTEREST RATE MATURITY
Mortgage Notes Payable Loehmann's Fashion Island $ 18,732,000 7.97%{(1)} July 1998 One Park West 9,727,000 9.50% June 2000 Park Place 8,430,000 5.65% May 2008 ------------ $ 36,889,000 ============
{(1)} Rate is fixed until December 1996; see below for further information.
For additional information, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Note 3 of the Notes to Consolidated Financial Statements of the Trust.
ITEM 2.

ITEM 2. PROPERTIES
The Trust's Real Estate Investments (net of accumulated depreciation) consist of the following:
JULY 31, 1996 1995 1994
Owned Properties held directly by the Trust $ 56,810,000 $ 83,985,000 $105,295,000 Structured Transactions held directly by the Trust Land leasebacks 14,180,000 17,140,000 17,140,000 Mortgage loans 14,020,000 15,431,000 15,441,000 Investment Partnerships* 9,600,000 48,299,000 51,998,000 ---------- ----------- ----------- 94,610,000 164,855,000 189,874,000 Allowance for possible investment losses (4,636,000) (14,077,000) (17,413,000) ---------- ---------- ---------- 89,974,000 150,778,000 172,461,000 Asset Held for Sale directly by the Trust 16,938,000 10,185,000 - ---------- ---------- ----------- $106,912,000 $160,963,000 $172,461,000 ============ ============ ============
* Includes, Canyon View II and Plaza West Retail Center, which were classified as Assets Held for Sale in Investment Partnerships in fiscal 1996, and which were both sold subsequent to July 31, 1996.
ITEM 2. PROPERTIES (continued)
Many of the investments in the portfolio are subject to first mortgage financing, which aggregated $111,420,000 as of July 31, 1996. Included in this amount is $27,162,000 of debt on two of the Owned Properties held directly by the Trust, $9,727,000 of debt on the Asset Held for Sale directly by the Trust and $10,314,000 of debt on an Owned Property held in an Investment Partnership. The balance represents mortgage debt on Structured Transactions which is not presented as a liability in the Trust's financial statements because the obligation to pay such debt is that of the Trust's lessees/mortgagors. All of this indebtedness, with the exception of $12,000,000 of debt
on Loehmann's Fashion Island, is non-recourse to the Trust. For additional information, see Note 3 of the Notes to Consolidated Financial Statements of the Trust and Schedule III and Exhibit A included in Item 14 hereof.
As of July 31, 1996, the Trust's Real Estate Investments (net of accumulated depreciation and before the allowance for possible investment losses) were diversified by type of property as follows:
NUMBER OF INVESTMENT % OF TYPE OF PROPERTY PROPERTIES AMOUNT TOTAL
Shopping Centers{(1)} 4 $47,127,000 42% Office Buildings 3 37,591,000 34 Apartments{(2)} 5 18,514,000 17 Hotels 2 8,316,000 7 -- -------------- -- 14 $ 111,548,000 100% == ============== ====
As of July 31, 1996, the Trust's Real Estate Investments (net of accumulated depreciation and before the allowance for possible investment losses) were diversified by geographic region as follows:
NUMBER OF INVESTMENT % OF GEOGRAPHIC REGION PROPERTIES AMOUNT TOTAL
Midwest{(1)} 6 $45,395,000 41% South 3 42,865,000 38 East 1 16,938,000 15 West{(2)} 4 6,350,000 6 -- ------------- --- 14 $ 111,548,000 100% == ============= ===
{(1)} Includes Plaza West Retail Center which was sold subsequent to year-end. {(2)} Includes Canyon View II which was sold subsequent to year-end.
ITEM 2. PROPERTIES (continued)
The following is a schedule of the 14 properties in which the Trust has investments at July 31, 1996.
INVESTMENTS HELD DIRECTLY BY THE TRUST
ITEM 2. PROPERTIES (continued)
INVESTMENTS HELD IN INVESTMENT PARTNERSHIPS
{(1)} Net rent {(2)} Average occupancy for fiscal 1996 {(3)} Sold subsequent to July 31, 1996
OWNED PROPERTIES HELD DIRECTLY BY THE TRUST
The carrying value of the three Owned Properties held directly by the Trust totals $56,810,000 (51% of Real Estate Investments before the allowance for possible investment losses). Two of the properties are office buildings located in suburban markets and the third property is a retail center located in Aventura, Florida. Each property accounts for more than 5% of either Real Estate Investments (before the allowance for possible investment losses) or total revenues and is described below.
CITIBANK OFFICE PLAZA - SCHAUMBURG, ILLINOIS
Citibank Office Plaza - Schaumburg is a 105,400 square foot, five story, multi- tenant office building, built in 1978. The property is located in suburban Chicago, Illinois, and is not encumbered by mortgage financing. At July 31, 1996, the property was 78% leased. Two tenants each occupy more than 10% of the building with spaces aggregating 30,490 square feet and 11,909 square feet and lease expiration dates of October 31, 2001 (with an early termination option of October 31, 1998) and December 31, 2003 (with an early termination option at December 31, 1999), respectively.
PARK PLACE - CLAYTON, MISSOURI
Park Place is a 72,000 square foot, five story, multi-tenant office building with a parking garage, built in 1984. The property is located in suburban St. Louis, Missouri. At July 31, 1996, the property was 100% leased and was encumbered by a mortgage securing an $8,430,000 Industrial Revenue Bond issue with an average interest rate of 5.65%, due in May 2008. Three tenants each occupy more than 10% of the building with spaces aggregating 14,455 square feet, 12,836 square feet and 9,934 square feet, and lease expiration dates of March 31, 2001, May 31, 2000 and October 31, 1997, respectively.
LOEHMANN'S FASHION ISLAND - AVENTURA, FLORIDA
Loehmann's Fashion Island is a 282,000 square foot open mall specialty shopping center located in Aventura, Dade County, Florida, which underwent a major redevelopment that was substantially completed in fiscal 1994. The property is owned by a partnership whose partners are wholly owned subsidiaries of the Trust. At July 31, 1996, the property was 90% leased and was encumbered by an $18,732,000 mortgage, which is due in July 1998. The loan bears interest at the lender's floating prime rate plus 1/4%. The borrower, however, has
ITEM 2. PROPERTIES (continued)
the option, at no cost to it, to fix the rate from time to time at 2.25% over comparable term LIBOR or U.S. Treasury rates, for a specified number of times. The borrower made such an election as to the then outstanding principal balance in July 1995, and through December 1996 the interest rate is fixed at 7.97%. Two tenants each occupy more than 10% of the shopping center with spaces aggregating 47,813 square feet and 47,220 square feet and lease expirations of May 31, 2013 and May 30, 2013, respectively.
For additional information on the Trust's Owned Properties held directly by the Trust see Item 7, Note 2 of the Notes to Consolidated Financial Statements of the Trust and Schedule III of Item 14.
STRUCTURED TRANSACTIONS HELD DIRECTLY BY THE TRUST
The carrying value of the seven properties classified as Structured Transactions held directly by the Trust totals $28,200,000 (25% of Real Estate Investments before the allowance for possible investment losses at July 31, 1996). Three of the Structured Transactions held directly by the Trust each account for more than 5% of either Real Estate Investments (before the allowance for possible investment losses) or total revenues and are described below.
ELM CREEK APARTMENTS - ELMHURST, ILLINOIS
Elm Creek apartments is a 372 unit luxury apartment complex built in 1988, located in suburban Chicago, Illinois. At July 31, 1996, the property was 99% leased. The Trust's total investment in this property is $9,770,000 and is comprised of a $2,230,000 land leaseback and a $7,540,000 leasehold mortgage loan. The land lease, including renewal options, expires in December 2063 and provides for annual fixed rent of $223,000, payable monthly and overage rent of 40% of increases in revenues (as defined) of the property over specified amounts. In fiscal 1996, the Trust earned overage rent (rent in excess of the annual fixed payment) of $90,100. The lessee has the right to sell the land and improvements to a third party at any time (subject to the Trust's leasehold mortgage being repaid in full at that time). If the lessee so elects, the purchase price for the land shall be determined at that time pursuant to a previously agreed upon formula based on the sales price of the project, but not less than $2,230,000. The Trust's leasehold mortgage bears interest at the rate of 10% per annum and matures in November 2018. No amortization payments are required under this loan prior to maturity. The Trust's investments in this property are subordinated to a third party first mortgage loan of $20,921,000 bearing interest at 9.5% and due in 1997.
CITY CENTRE HOLIDAY INN - CHICAGO, ILLINOIS
City Centre Holiday Inn, located in downtown Chicago, is a 500 room hotel built in 1976. In fiscal 1996, the average occupancy was 72%. The Trust holds a $2,000,000 land leaseback interest in this property. The land lease, including renewal options, expires in December 2052 and provides for fixed monthly rent payments of $220,000 per annum. In addition, the Trust is entitled to receive overage rent annually equal to 1% of gross receipts (as defined) and 15% of gross room revenues (as defined) over specified amounts. In fiscal 1996, the overage rent earned by the Trust from this investment was $1,613,000. In September 1996, the lessee exercised an option to repurchase the Trust's land investment in January 1997 for approximately $20,000,000. The Trust's investment is subordinated to a third party first mortgage loan of $9,689,000 bearing interest at 9.13% and due in 1997.
CINCINNATI MARRIOTT INN - CINCINNATI, OHIO
Cincinnati Marriott Inn is a 350 room hotel built in 1968. In fiscal 1996, the average occupancy was 68%. The Trust holds a $2,000,000 land leaseback interest in this property and two leasehold mortgage loans totaling $4,316,000. The land lease, including renewal options, expires in December 2058 and provides for fixed annual rental of $240,000, payable monthly. The primary leasehold mortgage of $3,716,000 bears interest at the rate of 5.65% per annum, with amortization commencing May 1, 1999 and maturing March 2014. Additionally, during fiscal 1996, the Trust funded a $600,000 junior leasehold mortgage loan to finance the cost of certain capital improvements. The loan bears interest at 8% per annum, with amortization commencing May 1, 1999 and maturing March 2014. The Trust's investments in this property are subordinated to a third party first mortgage loan of $10,373,000 bearing interest at 9.75% and due in 1999.
No other Structured Transaction held directly by the Trust constitutes 5% or more of the Trust's Real Estate Investments (before the allowance for possible investment losses) or represents more than 5% of total revenues. For additional information on the Structured Transactions held directly by the Trust see Item 7, Note 2 of the Notes to Consolidated Financial Statements of the Trust and Schedules III and IV of Item 14.
ITEM 2. PROPERTIES (continued)
INVESTMENT PARTNERSHIPS
The Trust's three Investment Partnerships hold one Owned Property and two Assets Held for Sale. The Trust's equity investments in these three Investment Partnerships total $9,600,000 (9% of Real Estate Investments before the allowance for possible investment losses). The
Trust's most significant partnership investment accounted for more than 5% of either Real Estate Investments (before allowance for possible investment losses) or total revenues, and is discussed below.
PROPERTY CAPITAL MIDWEST ASSOCIATES, L.P.
In the beginning of fiscal 1996, Midwest (in which the Trust has an interest of 53.3%) owned three office properties, which were sold during the year, and a 98,000 square foot shopping center building built in 1988, which is classified as an Asset Held for Sale at July 31, 1996. Subsequent to the end of fiscal 1996, the shopping center was sold. All properties in this partnership were located in Overland Park, Kansas, a suburb of Kansas City, Missouri, and were owned free and clear of mortgage debt. At July 31, 1996, the Trust's equity investment in this partnership was $6,656,000. The shopping center was 100% leased at July 31, 1996. Two tenants occupy 10% or more of the 98,000 square feet of rentable space with spaces aggregating 20,784 square feet and 13,105 square feet with lease expiration dates of January 10, 2001 and February 28, 2001, respectively. For further information see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
For further information on all of the Investment Partnerships, see Item 7, Note 2 of the Notes to Consolidated Financial Statements of the Trust and Exhibit A.
ASSET HELD FOR SALE DIRECTLY BY THE TRUST
The Trust has one property classified as an Asset Held for Sale directly by the Trust at July 31, 1996, One Park West (15% of Real Estate Investments before the allowance for possible investment losses), which is discussed below.
ONE PARK WEST - CHEVY CHASE, MARYLAND
One Park West is a 136,000 square foot, five story, multi-tenant office building with underground parking, built in 1980. The property is located in suburban Washington, D.C. At July 31, 1996, the property was classified as an Asset Held for Sale directly by the Trust and was under contract to be sold. Subsequent to the end of fiscal 1996, the sales contract was terminated. At July 31, 1996, the property was 99% leased and was encumbered by a $9,727,000 first mortgage which bears interest at 9.5%, due June 2000. Four tenants each occupy more than 10% of the building, with spaces of 34,883 square feet, 22,925 square feet, 15,901 square feet and 14,400 square feet, and with lease expiration dates of December 31, 1996 (this tenant is not renewing its lease), October 31, 2000, September 30, 1996 (this tenant is not renewing its lease) and March 31, 1998 (the last with an early termination option at March 31, 1997), respectively.
The Owned Properties held directly by the Trust, Structured Transactions held directly by the Trust, Assets Held for Sale directly by the Trust and Investment Partnerships described above, constitute 88% of the Trust's Real Estate Investments before the allowance for possible investment losses and 75% of the Trust's revenues from real estate.
ITEM 3.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Trust's security holders during the last quarter of its fiscal year ended July 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE TRUST
There is no family relationship among any of the officers listed above, nor are there any arrangements or understandings between any such officers and any other person pursuant to which he or she was selected as an officer. Each officer will hold office until the next Annual Meeting of Trustees or until his or her successor has been elected and has qualified.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE TRUST'S COMMON SHARES AND RELATED SECURITY HOLDER MATTERS
(a) Price Range of Common Shares
The Trust's Common Shares are traded on the American Stock Exchange ("ASE") - symbol PCT. The high and low prices on theASE for each quarter during the past two fiscal years and dividends declared for such quarters are shown below.
FISCAL 1996 DIVIDENDS QUARTER HIGH LOW DECLARED
First $ 8 7/16 $ 7 15/16 $ .12 Second 9 8 3/16 .12 Third 11 1/8 8 1/2 .12 Fourth 10 7/8 7 1/2 2.87* ------ $ 3.23 ======
FISCAL 1995 DIVIDENDS QUARTER HIGH LOW DECLARED
First $ 6 1/2 $ 5 5/8$ .09 Second 6 1/4 5 5/8 .10 Third 6 3/4 6 .10 Fourth 8 1/4 6 5/8 .12 ------ $ .41 ====== *Special dividends totaling $2.75 were paid during the quarter representing proceeds from dispositions of certain of the Trust's investments.
(B) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
APPROXIMATE NUMBER OF HOLDERS TITLE OF CLASS AS OF SEPTEMBER 30, 1996 - --------------------------------------------------------------------------- Common Shares 5,000
(C) DIVIDENDS DECLARED ON COMMON SHARES
Cash dividends have usually been at least 100% of income before gain on sale of real estate investments and extraordinary items.The Trust typically pays a dividend approximately 55 days following the end of each fiscal quarter. To maintain its status as a REIT,the Trust is required each year to distribute to its shareholders at least 95% of its taxable income (excluding net capital gains and aftercertain other adjustments). In addition, the Trust will be subject to a 4% nondeductible excise tax on the amount, if any, by whichcertain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income for the calendaryear, 95% of its capital gain income for the calendar year, and any amount of such income that was not distributed in prior years.The Trust did not incur any such excise tax liability with respect to calendar 1995 or 1994.
Pursuant to the Business Plan, during fiscal 1996, the Trust declared special dividends from the proceeds of its disposition ofinvestments. The Trust expects that it will continue to distribute substantially all of its net proceeds from sales of investments toshareholders unless needed to retire debt or otherwise satisfy the Trust's cash requirements. It is the current intention of the Trusteesto distribute proceeds from dispositions as special dividends at the same time as the quarterly dividend. However, the Trustees maychoose to make an additional dividend from time to time rather than wait for a quarterly dividend payment.
ITEM 5. MARKET FOR THE TRUST'S COMMON SHARES AND RELATED SECURITY HOLDER MATTERS (continued)
Listed below is the income tax classification for dividends paid during fiscal year ended July 31, 1996.
*Special Dividends paid pursuant to the Trust's Business Plan.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
* Restated for change in accounting method to the equity method for Investment Partnerships. The change did not affect net income(loss) or shareholders' equity. See Note 1 of the Notes to Consolidated Financial Statements of the Trust which describes the Trust'sprevious method of accounting and the reasons for the change.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Trust has reviewed its short-term and long-term liquidity needs in view of its Business Plan and the adequacy of cash provided by operating activities and other liquidity sources to meet these needs. The Trust's principal short-term liquidity needs are to fund normal operating expenses, debt service requirements and capital expenditures for Owned Properties (including Assets Held for Sale) and the minimum dividend distributions required to maintain the Trust's REIT status under the Internal Revenue Code. The Trust expects to fund these short-term liquidity needs from cash flows provided by operating activities and the proceeds of sales of investments and, if needed, available borrowings under its existing demand line of credit. The Trust expects to fund its long-term liquidity requirements for scheduled debt maturities from property sales and, if needed, its existing demand line of credit. In accordance with the Business Plan, the Trust will not make any new acquisitions. Proceeds from the sales of the Trust's investments will be used to retire debt and make dividend distributions to the Trust's shareholders or otherwise satisfy the Trust's cash needs.
The Trust's debt to equity ratio was .52x at July 31, 1996, .77x at July 31, 1995 and .89x at July 31, 1994. The Trust's debt at July 31, 1996 was $36,889,000, composed solely of mortgage notes payable, as compared to $71,816,000 at July 31, 1995 and $81,479,000 at July 31, 1994. The decrease in the Trust's debt in fiscal 1996 was primarily due to the retirement (primarily at par) of all of the Trust's 10% and 9 3/4% Convertible Subordinated Debentures, ($29,125,000 and $2,546,000 aggregate principal amounts, respectively) and a $3,000,000 prepayment of the first mortgage loan secured by Loehmann's Fashion Island.
The Trust's mortgage notes payable of $36,889,000 at July 31, 1996 were comprised of three mortgages, two on the Trust's Owned Properties held directly by the Trust and one on the Asset Held for Sale directly by the Trust.
With respect to one of the Trust's Owned Properties, Park Place, the Trust acquired its lessee's interest in this office building located in Clayton, Missouri, in January 1991, subject to an $8,600,000 non-recourse mortgage loan. In November 1993, the Trust refinanced the first mortgage, resulting in a reduction in the annual effective interest rate from 8.25% to 5.65%. Interest is payable semi-annually. The mortgage balance was $8,430,000 at July 31, 1996 and amortizes $85,000 annually in May through 2003, and $430,000 annually thereafter through May 2007. The then remaining balance of $6,115,000 matures in May 2008.
With respect to the second Owned Property held directly by the Trust, Loehmann's Fashion Island, the first mortgage on Loehmann's Fashion Island shopping center was refinanced on June 30, 1994 with an initial advance of $18,000,000. The loan commitment was for $30,000,000, with additional advances to be made through June 1996 based upon property performance. There were subsequent advances aggregating $6,000,000 and periodic amortization payments including a $3,000,000 payment made during fiscal 1996. The first mortgage loan had a balance at July 31, 1996 of $18,732,000 ($12,000,000 of which is recourse to the Trust), matures in July 1998 and bears interest at the lender's prime rate plus 1/4%, with the Trust having the option to fix the interest rate from time to time at 2.25% above comparable term LIBOR or U.S. Treasury notes for a specified number of times. This option may be exercised at no cost or additional liability to the Trust. In July 1995, the Trust fixed the interest rate on the total outstanding borrowings at 7.97% (2.25% over comparable term U.S. Treasury notes) until December 1996.
The Asset Held for Sale directly by the Trust which is encumbered by a first mortgage is One Park West. In March 1993, the Trust acquired its lessee's interest in this office building located in Chevy Chase, Maryland, subject to a non-recourse mortgage loan which had a balance of $9,727,000 at July 31, 1996. The loan carries an annual interest rate of 9.5%, requires monthly payments of principal and interest and matures in June 2000.
The Trust has a $10,000,000 revolving line of credit from a major New England bank. Borrowings under the line are repayable on demand by the lender. At July 31, 1996 there were no outstanding borrowings under the line. Interest is at the bank's prime rate, (8.25% at July 31, 1996).
For additional information regarding the Trust's indebtedness, see Note 3 of the Notes to Consolidated Financial Statements of the Trust.
FUNDS FROM OPERATIONS
Funds from Operations is considered by the REIT industry to be an appropriate measure of performance of an equity REIT. Funds from Operations is calculated by the Trust consistent with the National Association of Real Estate Investment Trusts' definition: Funds from Operations equals net income, excluding gains (losses) from debt restructurings and sales of properties and nonrecurring items, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Funds from Operations should be considered in conjunction with net income (loss) as presented in the Trust's audited financial statements. Funds from Operations does not represent cash provided by operating activities in accordance with generally accepted accounting principles and should not be considered as a substitute for net income as a measure of results of operations or for cash provided by operating activities as a measure
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
of liquidity. In connection with the Business Plan, the Trust is disposing of all of its assets. As a result, the Trust's Funds from Operations and Net income will decline as assets are sold and the net proceeds are distributed to shareholders. Funds from Operations was calculated by the Trust as follows:
YEARS ENDED JULY 31, ------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- Income before gain on sale of Real Estate Investments and Extraordinary Item $ 293,000 $ 2,016,000 $ 1,579,000
Depreciation on Owned Properties held directly by the Trust 4,008,000 4,192,000 3,538,000
Trust's share of depreciation on unconsolidated Investment Partnerships 473,000 2,086,000 1,445,000
Nonrecurring item 3,000,000{(1)} (404,000){(2)} - --------- --------- ---------
Funds from operations $ 7,774,000 $ 7,890,000 $ 6,562,000 =========== =========== ===========
{(1)}Nonrecurring expense resulting from a write-down of Loehmann's Fashion Island. {(2)}Nonrecurring income resulting from the settlement of a bankruptcy claim filed by the Trust against a former tenant atLoehmann's Fashion Island.
Management believes that with its cash provided by operating activities retained after dividend distributions, the proceeds from sales of investments and, if necessary, borrowings under the existing bank line, it will be able to meet its cash requirements for anticipated capital expenditures on the Owned Properties held directly by the Trust and Assets Held for Sale directly by the Trust. The Trust currently expects that these cash requirements will total approximately $4,050,000 during fiscal 1997.
REVIEW OF REAL ESTATE INVESTMENTS
At July 31, 1996, the Trust's principal asset is its $106,912,000 portfolio of real estate investments, which, except as noted below, is carried at cost, net of accumulated depreciation and the allowance for possible investment losses, and includes Assets Held for Sale (which are carried at the lower of cost or net realizable value). At July 31, 1996, the portfolio consisted of investments in 14 properties, two of which were sold subsequent to the end of the year, comprised of investments in five apartment complexes, three office buildings, four shopping centers and two hotels. Set forth below is a discussion of significant changes in the portfolio during the year.
APARTMENTS
At July 31, 1996, the Trust's real estate investments include five apartment investments, consisting of three Structured Transactions held directly by the Trust, one Owned Property held in an Investment Partnership and one Asset Held for Sale in an Investment Partnership (which was sold subsequent to the end of fiscal 1996). During fiscal 1996 six apartment investments were sold or otherwise disposed of.
Southwest, an Investment Partnership in which the Trust, through a wholly owned subsidiary, owns a 45.45% general partner interest, sold three properties during fiscal 1996. On September 29, 1995, the Investment Partnership sold the 714 unit Chimney Rock apartments, at a gain of $1,000 to the Trust. At July 31, 1995, this property was reclassified to an Asset Held for Sale and was written down to its net realizable value. The Trust's share of the write-down ($54,000) was charged against the Trust's previously established allowance for possible investment losses. On June 21, 1996, this Investment Partnership sold the St. Charles and Boardwalk apartments at a gain to the Trust of $50,000. At January 31, 1996, these properties had been reclassified to Assets Held for Sale and the Trust's investment was written down by $710,000 to the properties' estimated net realizable value.
Southwest's remaining investment is the Telegraph Hill apartments. The Partnership was in default under the terms of the first mortgage on Phase B, 259 units of this 1,180 unit complex, due to nonpayment of principal and interest. The Partnership was unable to restructure this $2,487,000 mortgage loan on terms satisfactory to it, and therefore did not oppose the foreclosure by the first mortgagee
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
in December 1995. The Trust incurred a loss of $307,000 on this investment which was charged against the Trust's allowance for possible investment losses. The remaining 921 units were 100% leased at July 31, 1996 as compared to 98% leased at July 31, 1995 and 81% at July 31, 1994.
At July 31, 1995, the Trust had a $3,277,000 investment in Canyon View, an Investment Partnership that held Structured Transactions in Phases I and II of the Canyon View apartments in San Ramon, California. The Trust has a 23.81% general partner interest in this Investment Partnership. The Investment Partnership's investments in Phase I (a Structured Transaction held in an Investment Partnership) were subordinate to a $12,000,000 first mortgage which had a scheduled maturity of August 1, 1993, but was extended to August 1, 1994 in anticipation of a proposed sale. Both phases were also subject to non- subordinated land leases held by a third party. In August 1994, when it became apparent that a sale was unlikely to occur, the first mortgagee initiated court proceedings for the appointment of a receiver for Phase I and foreclosure of its mortgage. Shortly thereafter the Investment Partnership initiated court proceedings for the appointment of a receiver for Phase II and foreclosure of its loans on Phases I and II. In December 1994, the Investment Partnership filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Extensive negotiations then ensued with the Investment Partnership's lessee and the first mortgagee of Phase I. In August 1995, the litigation was settled with the Investment Partnership receiving $300,000 from the first mortgagee for permitting it to foreclose on Phase I and the Investment Partnership taking title to Phase II and receiving the proceeds from two letters of credit aggregating $1,750,000. As a result, the Trust incurred a $1,538,000 loss on these transactions resulting from a $533,000 write-off of the Canyon View Phase I investment and a $1,005,000 write-down of the Canyon View Phase II investment. These losses had been previously provided for in the Trust's allowance for possible investment losses. The Investment Partnership undertook a $1,050,000 capital expenditure program during fiscal 1996 to correct structural deficiencies, construction deviations and damaged siding at Phase II.
At July 31, 1996, Canyon View Phase II was reclassified to an Asset Held for Sale; no further write-down was recorded. Subsequent to the end of the fiscal year, on August 30, 1996, the Partnership sold the complex and the Trust realized a gain of approximately $800,000.
Additionally, during fiscal 1996, the Trust sold the land underlying the Bluffs II apartments for $2,150,000. The Trust's investment in this Structured Transaction was $825,000 resulting in a gain to the Trust of $1,320,000 after closing costs. For the year ended July 31, 1995, the Trust earned $215,000 on this investment. Also, during fiscal 1996, the Trust sold the land underlying the Yorkshire apartments for $460,000 resulting in a gain of $310,000, after closing costs, on its $135,000 investment. For the year ended July 31, 1995, the Trust earned $42,000 on this investment.
The Trust's remaining apartment investments are all Structured Transactions. They are all current with respect to payments due the Trust at September 30, 1996, although there are ongoing disputes with respect to the amount of percentage rent due from certain investments.
OFFICE BUILDINGS
At July 31, 1996, the Trust had three office building investments consisting of two Owned Properties held directly by the Trust and one Asset Held for Sale directly by the Trust (previously classified as an Owned Property held directly by the Trust). During fiscal 1996 the Trust sold four office properties.
At July 31, 1996, One Park West, located in Chevy Chase, Maryland, and previously classified as an Owned Property held directly by the Trust, was reclassified to an Asset Held for Sale directly by the Trust and was written down to its estimated net realizable value of $16,938,000. The resulting loss of $1,519,000 was charged against the Trust's previously established allowance for possible investment losses. On July 31, 1996, the property was under contract to be sold. Subsequent to the end of the fiscal year, the sales contract was terminated. The property is subject to a $9,727,000 first mortgage loan and was 99% leased at July 31, 1996 versus 98% at July 31, 1995 and 100% at July 31, 1994.
During the third quarter of fiscal 1996 the Trust sold three office properties, Financial Plaza, a cluster of four buildings, College Hills 3 and College Hills 8, all of which were held by Midwest, one of the Trust's Investment Partnerships in which the Trust holds a 53.3% general partner interest. The Trust realized a gain from these sales of $443,000, primarily from the sale of College Hills 8. The properties had been written down previously by $2,575,000 (the Trust's share) to their estimated net realizable values when they were classified as Assets Held for Sale in an Investment Partnership.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
During the second quarter of fiscal 1996, Citibank Office Plaza - Oak Brook was sold at a gain to the Trust of $470,000. At July 31, 1995 this investment was reclassified to an Asset Held for Sale directly by the Trust and was written down by $971,000 to its then expected net realizable value.
SHOPPING CENTERS
At July 31, 1996, the Trust had four shopping center investments comprised of one Owned Property held directly by the Trust, two Structured Transactions held directly by the Trust and one Asset Held for Sale in an Investment Partnership (previously classified as an Owned Property held in an Investment Partnership). During the year the Trust sold one shopping center investment.
Loehmann's Fashion Island in Aventura, Florida, an Owned Property held directly by the Trust, is the Trust's largest investment. Its redevelopment, which included the expansion and renovation of two existing anchor tenant spaces (Loehmann's and AMC Theatres), the demolition of an existing building to permit construction of a new 47,813 square foot Publix market and new facades, walkways, signage, landscaping and tenant improvements for the entire center, was substantially completed during fiscal 1994. As previously reported, management has been disappointed with the leasing performance of this center. An independent appraisal was ordered and based upon its analysis at July 31, 1996, the Trust wrote down its investment in the property by $5,612,000 to $36,157,000, $3,000,000 of which was charged to operations and $2,612,000 was charged to the Trust's allowance for possible investment losses. The property was 90% leased at July 31, 1996, 1995 and 1994.
The Trust's other retail Owned Property, Plaza West Retail Center, was in Overland Park, Kansas, and was held in an Investment Partnership, Midwest. The property was held free and clear of debt. At July 31, 1995, the Investment Partnership reclassified the center to an Asset Held for Sale and wrote the property down to its estimated net realizable value. The Trust's share of the write-down was $991,000, which was charged against the Trust's previously established allowance for possible investment losses. The Trust's equity investment in this property was $6,656,000 at July 31, 1996. The property was 100% leased at July 31, 1996 and 1995, as compared to 93% leased at July 31, 1994. Subsequent to the end of the fiscal year, this property was sold.
During the first quarter of fiscal 1996, the Investment Partnership which owned the land under Crossroads Mall in Boulder, Colorado, sold its investment back to its lessee. The Trust realized a gain of $3,500,000 on its $2,000,000 investment.
The remaining two shopping center investments, both of which are Structured Transactions, are current with respect to their payments due to the Trust at September 30, 1996.
HOTELS
At July 31, 1996, the Trust had two hotel investments, both of which are Structured Transactions held directly by the Trust. During fiscal 1996, the Trust sold two hotel investments.
The Trust's most significant hotel investment is in City Centre Holiday Inn, located in Chicago Illinois. Subsequent to the end of fiscal 1996, the lessee exercised its option to repurchase the Trust's $2,000,000 land investment for a price which is not yet final but is anticipated to be approximately $20,000,000. The finalization of the price is dependent on the completion of audits of the hotel's operations for 1993, 1994 and 1995. At the time of exercise of the option, the lessee delivered a non-refundable $200,000 deposit to the Trust. The closing is scheduled for January 1997. Consummation of the transaction remains subject to numerous conditions to closing. During fiscal 1996, the Trust earned $1,833,000 on this investment. The average occupancy of the hotel was 72% for the year ended July 31, 1996 as compared to 67% and 71% for the years ending July 31, 1995 and 1994.
During the third quarter, the Trust, as previously agreed, funded a $600,000 junior leasehold mortgage loan to its lessee of the Cincinnati Marriott Inn to make certain capital improvements. The loan bears interest at 8.0% per annum with amortization commencing May 1, 1999 and maturing March 1, 2014. This increased the Trust's investment in the Cincinnati Marriott Inn to $6,316,000.
During the fourth quarter of fiscal 1996, the first mortgage investment in the Lisle Hilton Inn, which was held by an Investment Partnership, was prepaid at par. No gain or loss was realized on this prepayment. The Trust's share of the proceeds was $8,942,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
During the second quarter of fiscal 1996, the Trust sold to its lessee/mortgagor the Trust's $4,000,000 Structured Transaction investments in Grosvenor Airport Inn, a 206 room hotel in South San Francisco, California, for $2,500,000. The loss of $1,500,000 on the sale had been fully provided for in the Trust's allowance for possible investment losses. For the year ended July 31, 1995 the Trust earned $200,000 on this investment.
ALLOWANCE FOR POSSIBLE INVESTMENT LOSSES
The Trust's $4,636,000 allowance for possible investment losses at July 31, 1996 was based upon management's estimate of net realizable value of each investment. To the extent the estimated net realizable value of any investment is less than its carrying value, an allowance for possible investment losses for such investment was established. In estimating net realizable value, consideration was given to many factors, such as the pace of dispositions as anticipated in the Business Plan, income to be earned from the investment, the cost to operate the property to the anticipated time of sale, the anticipated selling price the property would bring at such time, the cost of improving the property to the condition contemplated in determining the selling price, the cost of disposing of the property and prevailing economic conditions, including availability of credit. In the opinion of both the Trustees and management, this allowance adequately reflects the extent of the estimated impairment that existed at July 31, 1996 in the net realizable value of each of the assets in the portfolio.
RESULTS OF OPERATIONS - 1996 VS. 1995
The Trust is in the process of disposing of all of its investments in connection with the Business Plan. As a result, the Trust anticipates that its revenues, funds from operations and net income will continue to decrease as investments are sold.
REVENUES
Rents from Owned Properties held directly by the Trust (base rent plus expense reimbursements) decreased 20%, primarily due to the Trust's sales of Citibank Office Plaza - Oak Brook office building in January 1996 and 6110 Executive Boulevard office building in January 1995, and the receipt by the Trust in the first quarter of the prior year of $404,000 of nonrecurring revenues related to the settlement of a bankruptcy claim filed by the Trust against a former tenant at Loehmann's Fashion Island.
There was no significant change in base income from Structured Transactions held directly by the Trust (land rent
There was no significant change in base income from Structured Transactions held directly by the Trust (land rent and mortgage interest) for the year ended July 31, 1996, as compared to the prior year.
Overage income from Structured Transactions held directly by the Trust increased 24% for the year ended July 31, 1996, as compared to the prior year, primarily due to increased overage income from the Sandpiper Cove and City Centre Holiday Inn investments.
The Trust's share of income from unconsolidated Investment Partnerships increased 79% for the year ended July 31, 1996, as compared to the prior year, primarily due to the increased net income recorded by the Trust from Midwest. This resulted primarily from the cessation of depreciation on the Partnership's properties when they were reclassified to Assets Held for Sale and written down to their estimated net realizable value. The increase is also due to improved performance of certain properties in the Southwest portfolio. Additionally, as previously reported, Canyon View settled pending litigation and the Partnership received certain income in fiscal 1996 which had not been previously accrued. These increases were offset by the loss of revenues due to the sales of the Lisle Hilton Inn investment and the St. Charles and Boardwalk apartments in the fourth quarter of fiscal 1996, Financial Plaza, College Hills 3 and College Hills 8 in the third quarter of fiscal 1996, the Crossroads Mall investment and the Chimney Rock apartments in the first quarter of fiscal 1996 and the Braes Hill apartments in the third quarter of fiscal 1995.
Advisory fee income increased 18% for the year ended July 31, 1996, as compared to the prior year, primarily due to the increase in operating distributions paid by the Trust's Investment Partnerships.
Interest income was earned by the Trust in the amount of $486,000 for the year ended July 31, 1996 as compared to $108,000 in the prior year. The increased interest income in fiscal 1996 is primarily from the short-term investment of sales proceeds prior to their use for the retirement of debentures or payment of special dividends.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
EXPENSES
Expenses on Owned properties held directly by the Trust decreased 18% for the year ended July 31, 1996, as compared to the prior year, primarily due to the sale of Citibank Office Plaza - Oak Brook in January 1996 and the sale of 6110 Executive Boulevard in January 1995.
Interest expense decreased 31% for the year ended July 31, 1996 as compared to the prior year primarily due to the retirement of all of the Trust's remaining outstanding 10% and 9 3/4% Convertible Subordinated Debentures during fiscal 1996 and the sale of 6110 Executive Boulevard in January 1995, which was encumbered by a first mortgage, partially offset by an increase in interest expense related to Loehmann's Fashion Island.
Depreciation expense decreased 4% for the year ended July 31, 1996 as compared to the prior year, primarily due to the elimination of depreciation on Citibank Office Plaza - Oak Brook upon its reclassification to an Asset Held for Sale directly by the Trust in July 1995 and the sale of 6110 Executive Boulevard in January 1995, offset in part by the write-off in the second quarter of fiscal 1996 of certain tenant improvements at Citibank Office Plaza - Schaumburg related to a tenant's bankruptcy and the write-off of certain tenant improvements at Loehmann's Fashion Island related to the early termination of certain space leases.
General and administrative expenses increased 65% for the year ended July 31, 1996, as compared to the prior year, primarily due to the accrual of severance arrangements for the Trust's employees in conjunction with the implementation of the Business Plan.
During the fourth quarter of fiscal 1996, the Trust wrote down its investment in Loehmann's Fashion Island by $5,612,000, of which $3,000,000 was charged to operations and $2,612,000 was charged to the Trust's previously established allowance for possible investment losses.
Professional fees increased 31% for the year ended July 31, 1996, due to the legal fees associated with the Trust's adoption of its Business Plan. Trustee fees did not change significantly in fiscal 1996 from fiscal 1995.
GAIN ON SALE OF REAL ESTATE INVESTMENTS
Net income for the year ended July 31, 1996 included a gain on sale of real estate investments of $6,094,000 ($0.67 per share) consisting of a gain of $1,320,000 ($.15 per share) from the sale of the land underlying Bluffs II, a gain of $50,000 ($.01 per share) from the sale of St. Charles and Boardwalk apartments, a gain of $443,000 ($.05 per share) from the sales of certain properties held in Midwest, primarily College Hills 8, a gain of $470,000 ($.05 per share) from the sale of the Citibank Office Plaza - Oak Brook, a gain of $310,000 ($.03 per share) gain from the sale of the land underlying Yorkshire apartments, a gain of $3,500,000 ($.38 per share) from the sale of the land underlying Crossroads Mall, and a gain of $1,000 from the sale of Chimney Rock apartments. In the prior year net income included a a gain on the sale of real estate investments of $3,209,000 consisting of a gain of $3,099,000 ($.34 per share) from the sale of 6110 Executive Boulevard and a gain of $110,000 ($.01 per share) from the sale of Braes Hill apartments.
EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT
During fiscal 1996, the Trust retired all of its 10% Convertible Subordinated Debentures ($29,125,000 principal amount), and 9 3/4% Convertible Subordinated Debentures ($2,546,000 principal amount). Due to the early retirement of these Convertible Subordinated Debentures the Trust incurred an extraordinary loss on the extinguishment of debt from the write-off of capitalized issuance costs in the amount of $473,000 ($.05 per share).
DIVIDENDS
Dividends declared for fiscal 1996 were $3.23 per share versus $.41 per share for fiscal 1995. Included in the 1996 dividends were special dividends of $1.75 per share paid on June 24, 1996 and $1.00 per share paid on July 26, 1996. These two dividends represented the first distributions to shareholders from the proceeds from the sale of investments under the Business Plan.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS - 1995 VS. 1994
REVENUES
Rents from Owned Properties held directly by the Trust (base rent plus expense reimbursement) increased 12% in fiscal 1995 from fiscal 1994 primarily due to an increase in rental revenues from the redeveloped Loehmann's Fashion Island and $404,000 of nonrecurring revenues related to the settlement of a bankruptcy claim filed by the Trust against a former tenant at Loehmann's Fashion Island. Additionally, the increase was attributable to increased occupancy at One Park West. This increase was offset in part by a decrease in rental revenue due to the sale of Eagle apartments (March 1994). Rents from Owned Properties held directly by the Trust included rents from the Citibank Office Plaza - Oak Brook which was reclassified to an Asset Held for Sale directly by the Trust at July 31, 1995.
Base income from Structured Transactions held directly by the Trust (land rent and/or mortgage interest) decreased 12% in fiscal 1995 from fiscal 1994, primarily due to the conversion of 6110 Executive Boulevard and One Park West to Owned Properties held directly by the Trust, the sale of the land underlying the Village Oaks apartments (March 1994), the prepayment of the loan on and sale of the land underlying the Brown County Inn (January 1994) and the prepayment of the mortgage loan investment in Rapids Mall (June 1994). This decrease was offset in part by an increase in base income from the restructured Cincinnati Marriott Inn investment (April 1994).
Overage income decreased 3% in fiscal 1995 from fiscal 1994 primarily due to the sale of the Village Oaks and Brown County Inn investments. These decreases were offset in part by the receipt of increased overage income in fiscal 1995 from two apartment investments and one hotel investment.
The Trust's share of income from unconsolidated Investment Partnerships decreased 18% in fiscal 1995 from fiscal 1994 primarily due to depreciation expense recorded by the Trust from PCA Southwest Associates Limited Partnership, the Partnership which owned, at July 31, 1995, 2,848 apartment units in Texas. The apartments were converted to Owned Properties in March 1994 and since that date the Trust's share of income from this Investment Partnership is reported net of depreciation expense. Previously, when the apartments were held as Structured Transactions held in an Investment Partnership, the Partnership incurred no depreciation expense. The decrease in income from Investment Partnerships was also due to the cessation of rent and interest payments from the sublessee/mortgagor of the Canyon View apartment investments and the associated legal and professional fees incurred during negotiations.
EXPENSES
Expenses on Owned Properties held directly by the Trust decreased by 1% in fiscal 1995 from fiscal 1994 primarily due to the sale of Eagle apartments (March 1994), offset in part by an increase in operating expenses at the redeveloped Loehmann's Fashion Island. Expenses on Owned Properties held directly by the Trust included expenses from Citibank Office Plaza - Oak Brook which was reclassified to an Asset Held for Sale directly by the Trust at July 31, 1995.
Interest expense decreased by 1% in fiscal 1995 from fiscal 1994 primarily due to the sale of Eagle apartments, which was encumbered by a mortgage loan, the refinancing of Park Place at a lower interest rate and the repurchase of 10% Convertible Subordinated Debentures. These decreases were offset in part by the expensing of interest related to Loehmann's Fashion Island (which had been capitalized during construction).
Depreciation expense increased 18% in fiscal 1995 from fiscal 1994 primarily due to the increase in depreciation on Loehmann's Fashion Island (portions of the redeveloped center were in service for the entire fiscal 1995 as compared to only a part of the prior year) and an increase in depreciation of the office buildings due to capital expenditures made in conjunction with the lease-up of these properties. These increases were offset in part by the elimination of depreciation on Eagle apartments which was sold.
General and administrative expenses increased 5% in fiscal 1995 as compared to fiscal 1994 primarily due to the accrual of expenses related to employee severance plans associated with the Business Plan.
Trustee fees decreased 15% in fiscal 1995 due to the reduction in the size of the Board of Trustees from nine Trustees to seven Trustees.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GAIN (LOSS) ON REAL ESTATE INVESTMENTS
The Trust sold two investments in fiscal 1995 resulting in a gain on real estate investments of $3,209,000 ($.35 per share). The Trust's 6110 Executive Boulevard office building was sold for $16,380,000, resulting in a gain of $3,099,000. Southwest, an Investment Partnership, sold its investment in Braes Hill apartments at a gain, of which the Trust's share was $110,000.
EXTRAORDINARY GAIN FROM EXTINGUISHMENT OF DEBT
The Trust purchased $1,698,000 of its 10% Convertible Subordinated Debentures at less than the Trust's carrying value, producing an extraordinary gain of $88,000 ($.01 per share).
DIVIDENDS
Dividends declared for fiscal 1995 were $.41 per share versus $.30 per share for fiscal 1994. The Trust paid dividends approximately 55 days following the end of each fiscal quarter.
INFLATIONARY AND ECONOMIC FACTORS
The effect of inflation upon the Trust's operations and real estate investments has varied. For several years prior to fiscal 1995 rental rates did not increase by the rate of inflation as extremely competitive market conditions existed at most of the Trust's properties. The Trust believes that many of the real estate markets in which the Trust operates have improved. Though not applicable to all properties in the Trust's portfolio, rental rates at many of these properties in fiscal 1996 have increased by the rate of or in excess of inflation. Although operating expenses are generally impacted by inflation, increases in operating expenses in the past year caused by inflation have not been material.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in Item 1 "Business" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Trust, including the sales proceeds payable to the Trust for its properties, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, adverse changes in the real estate market in the regions of the country in which the Trust owns properties or has investments, and other factors noted in this report.
ITEM 8.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Trust are included under Item 14 of this Annual Report.
ITEM 9.

ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished pursuant to this item with respect to Trustees of the Trust is set forth under the caption "Election of Trustees" in the Trust's proxy statement (the "Proxy Statement") to be furnished to shareholders in connection with the solicitation of proxies by the Trust's Board of Trustees for use at the 1996 Annual Meeting of Shareholders to be held on December 17, 1996 and is incorporated herein by reference. The information with respect to Executive Officers is set forth, pursuant to General Instruction G of Form 10-K, under Part I of this Report.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is set forth under the caption "Executive Compensation" in the Proxy Statement, other than information set forth under the subcaptions "Compensation Committee's Report on Compensation" and "Performance Graphs", and is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is set forth under the captions "Voting Securities and Principal Shareholders" and "Election of Trustees" in the Proxy Statement, and is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item is set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement, and is incorporated herein by reference.
(ITEM 14(A)) INDEX TO EXHIBITS
(ITEM 14(A)) INDEX TO EXHIBITS (continued)
PART IV
ITEM 14.

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements listed in the accompanying index to financial statements on Page 29 are filed as part of this Annual Report.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES The consolidated financial statement schedules listed in the accompanying index to financial statements on Page 29 are filed as part of this Annual Report.
3. EXHIBITS The exhibits listed in the accompanying index to exhibits on Pages 24 and 25 are filed as part of the Annual Report.
(B) REPORTS ON FORM 8-K
Current Report dated August 27, 1996 attaching the Trust's press release dated August 23, 1996. Current Report dated October 8, 1996 attaching the Trust's press release dated October 8, 1996. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Trust has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PROPERTY CAPITAL TRUST (Registrant)
By /S/ ROBERT M. MELZER Robert M. Melzer OCTOBER 29, 1996 President and Chief Executive Officer Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Trust and in the capacities and on the dates indicated:
ANNUAL REPORT ON FORM 10-K ITEM 8 AND ITEM 14(A) (1), (2) AND (D)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES,
FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PROPERTY CAPITAL TRUST Boston, Massachusetts Year Ended July 31, 1996
PROPERTY CAPITAL MIDWEST ASSOCIATES, L.P. Boston, Massachusetts Year Ended December 31, 1995
PCA CROSSROADS ASSOCIATES, LTD. Boston, Massachusetts Year Ended December 31, 1995 ITEM 14(A)(1),AND (2) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT AUDITORS
The Trustees and Shareholders Property Capital Trust
We have audited the accompanying consolidated balance sheets of Property Capital Trust (a real estate investment trust) as of July 31, 1996 and 1995, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended July 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Property Capital Trust at July 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts August 23, 1996 Property Capital Trust CONSOLIDATED BALANCE SHEET
Property Capital Trust CONSOLIDATED STATEMENT OF INCOME
Property Capital Trust CONSOLIDATED STATEMENT OF CASH FLOWS
Property Capital Trust CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
See accompanying notes
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS PLAN
On June 14, 1995, the Trustees adopted a business plan which provides for the orderly disposition of the Trust's investments (the "Business Plan"). The Trustees anticipate that the Business Plan will involve dispositions of Owned Properties and Structured Transactions on a property-by-property basis, although the Trust will consider bulk sales and other opportunities that may arise which expedite the disposition process. At the Trust's Annual Meeting of Shareholders held on December 15, 1995, the Trust's shareholders ratified the Business Plan and approved certain amendments to the Trust's Declaration of Trust necessary for its implementation.
To the extent the Trust receives net proceeds from sales of its properties, the Trust intends to utilize such net proceeds to retire debt and/or make distributions to shareholders. No assurances can be given as to the time required to carry out the plan (although the Trustees anticipated in June 1995 that the plan would be fully implemented within three to five years) or the prices at which the properties can be sold. To date the Business Plan is proceeding more rapidly and generating higher sales prices than initially anticipated. Immediately prior to the implementation of the Business Plan, the Trust owned 27 investments. During fiscal 1996, thirteen properties have been sold or otherwise disposed of and the proceeds have been used to retire $31,671,000 principal amount of the Trust's 10% and 9 3/4% Convertible Subordinated Debentures and to prepay $3,000,000 of the first mortgage loan on the Trust's Loehmann's Fashion Island property in Aventura, Florida. In addition, the Trust paid special dividends aggregating $2.75 per share ($25,403,000).
CONSOLIDATION
The consolidated financial statements of the Trust include the accounts of its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
FEDERAL INCOME TAXES
The Trust has qualified and has elected to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code. The Trust intends to continue to qualify as a real estate investment trust. Accordingly, no provision has been made for Federal income taxes in the consolidated financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Trust considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents.
INVESTMENT PARTNERSHIPS
Certain of the Trust's investments have been made through partnerships or a participation agreement in which the Trust or one of its subsidiaries is the general partner or lead lender and other institutional investors are limited partners or participants ("Investment Partnerships"). During the third quarter of fiscal 1994, the Trust changed its method of accounting for its Investment Partnerships to the equity method and prior period financial statements were restated to reflect the change as if it had occurred at the beginning of the period. Previously, the Trust consolidated its share of the Investment Partnerships' results of operations and related assets and liabilities. Although the change in accounting did not affect the Trust's net income (loss) or shareholders' equity, the change was, and continues to be, to a preferable method based upon generally accepted accounting principles and is more consistent with current accounting practices in the real estate industry.
VALUATION OF REAL ESTATE INVESTMENTS
Real estate investments (except for Assets Held for Sale) are carried at cost, net of accumulated depreciation and less an allowance for possible investment losses. When the Trust acquires a property from its lessee/mortgagor it records the acquired property improvements at the lesser of cost or net realizable value at the time of acquisition. The Trust's allowance for possible investment losses is based upon management's estimate of the net realizable value of each investment and to the extent this is less than the carrying value of an investment, an allowance for possible investment losses is established. In determining estimated net realizable value, consideration is given to many factors, such as income to be earned from the investment, the cost to hold the property to the hypothetical time of sale, the selling price a property would bring at such time, the cost of improving the property to the condition contemplated in determining the selling price, the cost of disposing of the property and prevailing economic conditions including availability of credit. Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Depreciation and amortization have been calculated under the straight-line method, based upon the estimated useful lives of the assets. Properties and property improvements are depreciated over 25 to 39 years. Leasing commissions and tenant improvements are amortized under the straight-line method over the terms of the related leases. Expenditures for maintenance, repairs and betterments which do not materially prolong the normal useful life of an asset are charged to operations as incurred.
ASSETS HELD FOR SALE
The Trust defines an "Asset Held for Sale" as an asset that has been approved for sale by the Trustees and, if applicable, the Investment Partnership and either is being marketed for sale or is soon to be marketed by a broker who has already been selected by the Trust. Assets Held for Sale are written down to the lower of cost or net realizable value and, in the case of investments held directly by the Trust, are classified separately on the balance sheet. Depreciation is not recorded on these assets. The revenues and expenses of an Asset Held for Sale are not reclassified, and continue to be recorded as they were prior to the reclassification.
MORTGAGE LOANS
The Trust accounts for its mortgage loans under the provisions of FASB Statement No. 114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN," as amended by FASB Statement 118. The statement requires impairment losses to be recorded, when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The statement requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient at the loan's observable market price or the fair value of the collateral if collateral dependent.
STOCK OPTION ACCOUNTING POLICY DISCLOSURE
The Trust accounts for its stock compensation arrangements under the provisions of APB 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and intends to continue to do so.
REVENUE RECOGNITION
For financial reporting purposes, the Owned Properties held directly by the Trust and the Investment Partnerships are accounted for on a one-month lag. Certain space leases at the Owned Properties held directly by the Trust provide for free rent periods and stepped minimum rents which are accounted for on a straight-line basis over the terms of the leases. Rental income recognized under the straight-line method was greater (less) than rent received or receivable by the Trust for financial reporting purposes by ($119,255), $280,000 and ($32,000) for the years ended July 31, 1996, 1995 and 1994, respectively.
NET INCOME PER SHARE
Net income per share is calculated by dividing net income by the weighted average Common Shares outstanding during the year. Net income per share on a quarterly basis may not total to the annual net income per share due to rounding.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain items in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) NEW ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", which requires impairment losses to be recorded on long-lived assets used in operations where indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Trust will adopt Statement 121 in the first quarter of fiscal 1997. Based on current circumstances, including implementing the Business Plan and the available loss reserve, the financial statement impact of adoption of Statement 121 is not anticipated to adversely impact the Trust's financial statements.
NOTE 2. REAL ESTATE INVESTMENTS
The Trust's real estate investments consist primarily of equity investments in completed, income-producing properties located throughout the United States. Investments consisting of land leasebacks and/or mortgage loans are classified as Structured Transactions. Operating properties are classified as Owned Properties. Certain properties are classified as Assets Held for Sale (see Note 1). Investments made through partnerships or participation agreements in which the Trust or its subsidiary is the general partner or lead lender and other institutional investors are the limited partners or participating lenders are classified as Investment Partnerships. As of July 31, 1996, the Trust had seven Structured Transactions held directly by the Trust, three Owned Properties held directly by the Trust and one Asset Held for Sale directly by the Trust. The Trust had investments in three Investment Partnerships, one of which only held an Owned Property and two of which each only held an Asset Held for Sale.
The Trust's Real Estate Investments (net of accumulated depreciation) are as follows: JULY 31, 1996 1995
Owned Properties held directly by the Trust $56,810,000 $83,985,000
Structured Transactions held directly by the Trust Land leasebacks 14,180,000 17,140,000 Mortgage loans 14,020,000 15,431,000
Investment Partnerships* 9,600,000 48,299,000
94,610,000 164,855,000
Allowance for possible investment losses (4,636,000) (14,077,000)
89,974,000 150,778,000
Asset Held for Sale directly by the Trust 16,938,000 10,185,000
$ 106,912,000 $ 160,963,000
*Inclusive of Assets Held for Sale in Investment Partnerships.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
The Trust's Real Estate Investments (net of accumulated depreciation), including Assets Held for Sale and before allowance for possible investment losses, are diversified by type of property as follows:
JULY 31, -------------------------------- 1996 1995 - ------------------------------------------------------------------------------ OWNED PROPERTIES HELD DIRECTLY BY THE TRUST Shopping centers $ 36,157,000 $ 43,603,000 Office buildings 20,653,000 40,382,000 Apartments - - Hotels - - --------------- ------------ 56,810,000 83,985,000 --------------- ------------
STRUCTURED TRANSACTIONS HELD DIRECTLY BY THE TRUST Shopping centers 4,314,000 4,325,000 Office buildings - - Apartments 15,570,000 16,530,000 Hotels 8,316,000 11,716,000 --------------- ------------ 28,200,000 32,571,000 --------------- ------------
INVESTMENT PARTNERSHIPS Shopping centers {(1)} 6,656,000 8,552,000 Office buildings - 18,611,000 Apartments {(1)} 2,944,000 12,155,000 Hotels - 8,981,000 --------------- ------------ 9,600,000 48,299,000 --------------- ------------
ASSET HELD FOR SALE DIRECTLY BY THE TRUST Office buildings 16,938,000 10,185,000 --------------- ------------ Total Real Estate Investments $ 111,548,000 $ 175,040,000 =============== =============
REAL ESTATE INVESTMENTS BY TYPE OF PROPERTY Shopping centers $ 47,127,000 $ 56,480,000 Office buildings 37,591,000 69,178,000 Apartments 18,514,000 28,685,000 Hotels 8,316,000 20,697,000 --------------- ------------ Total Real Estate Investments $ 111,548,000 $ 175,040,000 =============== ============= NUMBER OF PROPERTIES 14 27 == ==
{(1)} Inclusive of Assets Held for Sale in Investment Partnerships as of July 31, 1996.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
The Trust's Real Estate Investments (net of accumulated depreciation), including Assets Held for Sale and before allowance for possible investment losses, are diversified as of July 31, 1996, by geographic region as follows:
NUMBER OF INVESTMENT % OF GEOGRAPHIC REGION PROPERTIES AMOUNT TOTAL - ------------------------------------------------------------------------------
Midwest 6 $ 45,395,000 41% South 3 42,865,000 38 East 1 16,938,000 15 West 4 6,350,000 6 --- ------------- -- 14 $ 111,548,000 100% === ============= ====
OWNED PROPERTIES HELD DIRECTLY BY THE TRUST
Owned Properties held directly by the Trust (which include those held in wholly owned subsidiaries) include land, buildings, tenant improvements, and other. Tenant improvements represent the cost of constructing or finishing tenant space under the terms of a lease for that space. Material disbursements that constitute new assets or improvements to existing assets that extend their useful lives and/or substantially increase their value are capitalized.
Assets included as Owned Properties held directly by the Trust are as follows:
JULY 31, ---------------------------------- 1996 1995 - ------------------------------------------------------------------------------ Land $ 13,985,000 $ 17,485,000 Buildings 44,881,000 65,700,000 Tenant improvements 8,893,000 9,206,000 Other 1,983,000 2,116,000 ------------ ------------ 69,742,000 94,507,000 Accumulated depreciation (12,932,000) (10,522,000) ------------ ----------- Owned Properties held directly by the Trust $ 56,810,000 $ 83,985,000 ============= ============
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
The operating results of Owned Properties held directly by the Trust are reflected in the consolidated statement of income as Rents from Owned Properties held directly by the Trust and Expenses on Owned Properties held directly by the Trust. Rents from Owned Properties held directly by the Trust represent base rents and expense reimbursements from tenants. Expenses on Owned Properties held directly by the Trust are as follows:
YEARS ENDED JULY 31, -------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------- Repairs and maintenance $ 1,819,000 $ 2,175,000 $ 2,272,000 Real estate taxes 1,295,000 1,333,000 1,585,000 Utilities 1,002,000 1,336,000 1,322,000 General and administrative 836,000 1,209,000 1,072,000 Management fees 448,000 570,000 487,000 Insurance 169,000 199,000 177,000 --------- ---------- ---------- Expenses on Owned Properties held directly by the Trust $ 5,569,000 $ 6,822,000 $ 6,915,000 =========== =========== ===========
During the quarter ended July 31, 1996, the Trust wrote down its investment in Loehmann's Fashion Island, a shopping center in Aventura, Florida, by $5,612,000 to $36,157,000. $3,000,000 of the write-down was charged to earnings and the balance was charged to the Trust's allowance for possible investment losses.
During fiscal 1995, the Trust sold the 6110 Executive Boulevard office building to an unrelated party for $16,380,000, resulting in a gain of approximately $3,099,000. Effective February 1, 1994, a wholly owned subsidiary of the Trust acquired the equity interest of its lessee in 6110 Executive Boulevard, an office building in Rockville, Maryland, subject to a non-recourse first mortgage loan of $6,478,000. During the quarter ended January 31,1994, the Trust wrote down its investment in 6110 Executive Boulevard by $2,000,000. This write-down was charged against the Trust's allowance for possible investment losses.
During fiscal 1994, the Trust sold Eagle apartments to an unrelated third party for approximately $12,570,000, resulting in a loss of $90,000.
ASSETS HELD FOR SALE
At July 31, 1996, the Trust had one Asset Held for Sale directly by the Trust, One Park West office building. This investment, which had a net book value of $18,457,000, had previously been classified as an Owned Property held directly by the Trust. At July 31, 1996, the Trust wrote down its investment in this property by $1,519,000 to $16,938,000. This loss was charged against the Trust's previously established allowance for possible investment losses. In addition, during fiscal 1996, the Trust sold the Citibank Office Plaza - Oak Brook building to an unrelated third party for $11,380,000, resulting in a gain of approximately $470,000. In fiscal 1995, this investment, which had a net book value of $11,156,000, had previously been classified as an Owned Property held directly by the Trust. During the quarter ended July 31, 1995, the Trust wrote down its investment in this property by $971,000 to $10,185,000. This loss was charged against the Trust's previously established allowance for possible investment losses.
During fiscal 1996 and 1995, the Investment Partnerships reclassified certain of their real estate investments to Assets Held for Sale and wrote down these assets to estimated net realizable value, which the Trust then charged its share against its allowance for possible investment losses.
STRUCTURED TRANSACTIONS HELD DIRECTLY BY THE TRUST
Land leasebacks consist of land purchased under income-producing properties and leased back under long-term net lease arrangements. These leases, which are classified as operating leases, have remaining initial terms of 21 to 68 years, with a weighted average term of 56 years. The leases require fixed monthly base rental payments to the Trust and generally also provide for overage rental payments, which are typically computed as a percentage of property gross receipts in excess of base amounts. Base rental income contractually due under land leasebacks existing at July 31, 1996 is approximately $1,376,000 per year for the next five years.
Certain land leasebacks contain options whereby the lessees may repurchase the land at prices typically based on fair market value, but not less than the Trust's cost, or may cause the land and improvements to be sold to third parties. When a property is sold to a third party, the Trust typically receives the greater of a percentage of total sales proceeds of the property or its cost. During the next five years, repurchase or similar options covering $2,750,000 of land leasebacks become exercisable.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
The mortgage loan investments are generally long-term loans that require fixed monthly base interest payments and, when not payable on a self-amortizing basis, require principal payments at maturity. Mortgage loans are generally owned in conjunction with land leaseback transactions and are subordinate to and have cross-default provisions with the land leasebacks. The loans allow for prepayment prior to maturity, and during the next five years all loans may be prepaid.
Because the mortgage loans were made and continue to be held in conjunction with land leaseback transactions and these loans were not originally structured to be considered separately from the land leaseback transactions, it is not practicable to estimate the fair values of these mortgage loans. A determination of the fair values of these mortgage loans as a separate component would be too subjective and as such would not result in a meaningful estimate.
During fiscal 1996, the Trust disposed of three Structured Transactions held directly by the Trust. The Trust's $825,000 Bluffs II land investment was purchased by the Trust's lessee for $2,150,000, resulting in a gain to the Trust of $1,320,000 after closing costs. The Trust's $135,000 Yorkshire land investment was purchased by an unrelated third party for $460,000, resulting in a gain to the Trust of $310,000 after closing costs. The Trust's $2,000,000 Grosvenor Airport Inn land investment was purchased by the Trust's lessee for $2,000,000 and the Trust's related $2,000,000 mortgage loan was prepaid for $500,000, with the resulting loss of $1,500,000 being charged against the Trust's allowance for possible investment losses.
In addition, during fiscal 1996, as provided for in the March 1994 restructuring of the Trust's Cincinnati Marriott Inn investments, the Trust loaned an additional $600,000 to its lessee, secured by a junior leasehold mortgage, to make certain approved capital improvements to the hotel. The loan bears interest at 8.0% per annum, with amortization commencing May 1, 1999 and matures on March 1, 2014.
During fiscal 1994 the Trust disposed of three Structured Transactions held directly by the Trust. The Trust's $1,000,000 Village Oaks apartments investment was purchased by the Trust's lessee for $3,500,000. The Trust's Brown County Inn $500,000 land investment was purchased by the Trust's lessee for $600,000 and the Trust's related $973,000 leasehold mortgage was prepaid at par. The Trust's $500,000 Rapids Mall mortgage loan was prepaid for $350,000, with the resulting loss of $150,000 being charged against the Trust's allowance for possible investment losses.
INVESTMENTS IN UNCONSOLIDATED INVESTMENT PARTNERSHIPS
As of July 31, 1996 the Trust or its subsidiary had investments in three unconsolidated Investment Partnerships and, as of July 31, 1995 and 1994, the Trust or its subsidiary had investments in five unconsolidated Investment Partnerships. These investments are accounted for on the equity method. The Investment Partnerships provide for the allocation of profits and losses and cash distributions in proportion to ownership as shown below:
% OWNED BY THE TRUST JULY 31, --------------------------------- INVESTMENT PARTNERSHIPS 1996 1995 - ----------------------------------------------------------------------------- Property Capital Midwest Associates, L.P. 53.30% 53.30% PCA Southwest Associates Limited Partnership 45.45% 45.45% PCA Canyon View Associates Limited Partnership 23.81% 23.81% Lisle Hilton Inn Loan Participation - 41.67% PCA Crossroads Associates, Ltd. - 25.00%
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
Condensed combined financial statements of the unconsolidated Investment Partnerships are as follows:
Investment Partnerships CONDENSED COMBINED BALANCE SHEET
JULY 31, -------------------------------- 1996 1995 - ------------------------------------------------------------------------------ ASSETS Current assets $ 2,711,000 $ 2,686,000 Owned Properties 12,682,000 37,258,000 Assets Held for Sale 18,210,000 55,549,000 Mortgage loans - 34,675,000 Land leasebacks - 9,084,000 Other assets 23,000 72,000 ------------ ------------- $ 33,626,000 $ 139,324,000 ============ =============
LIABILITIES AND CAPITAL Current liabilities $ 1,077,000 $ 3,330,000 Other liabilities - 462,000 Mortgage notes payable 10,314,000 25,420,000
Trust's share of combined capital 9,600,000 48,299,000
Limited partners' share of combined capital 12,635,000 61,813,000 ----------- ------------ $ 33,626,000 $ 139,324,000 ============ =============
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
Investment Partnerships CONDENSED COMBINED STATEMENT OF INCOME
YEARS ENDED JULY 31, --------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- REVENUES Rents from Owned Properties $ 19,483,000 $ 21,042,000 $ 10,968,000 Structured Transactions Base income 2,261,000 2,664,000 4,225,000 Overage income 183,000 644,000 339,000 Other income 219,000 68,000 33,000 ---------- ---------- ----------- 22,146,000 24,418,000 15,565,000 ---------- ---------- -----------
EXPENSES Owned Properties expenses 10,933,000 12,651,000 5,538,000 Depreciation 1,190,000 4,144,000 2,787,000 Interest 1,707,000 1,915,000 732,000 Other 987,000 1,440,000 794,000 --------- ----------- ---------- 14,817,000 20,150,000 9,851,000 ---------- ----------- ----------
INCOME BEFORE GAIN (LOSS) ON REAL ESTATE INVESTMENTS 7,329,000 4,268,000 5,714,000
GAIN (LOSS) ON REAL ESTATE INVESTMENTS Gain on sale of real estate investments 14,944,000 242,000 - Write-down of real estate investments (11,051,000) (4,454,000) - ------------ ---------- --------- NET INCOME $11,222,000 $ 56,000 $5,714,000 =========== ========== ==========
INCOME BEFORE GAIN (LOSS) ON REAL ESTATE INVESTMENTS Trust's share of income before gain (loss) on real estate investments $ 3,326,000 $ 1,858,000 $2,264,000 Limited Partners' share of income before gain (loss) on real estate investments 4,003,000 2,410,000 3,450,000
GAIN (LOSS) ON REAL ESTATE INVESTMENTS Trust's share of gain on sale of real estate investments 3,994,000 110,000 - Limited Partners' share of gain on sale of real estate investments 10,950,000 132,000 - Trust's share of write-down of real estate investments (previously recorded by the Trust) (3,810,000) (2,365,000) - Limited Partners' share of write-down of real estate investments (7,241,000) (2,089,000) - ------------ ---------- ---------
NET INCOME $ 11,222,000 $ 56,000 $5,714,000 ============ ========== ==========
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
The Trust's equity in unconsolidated Investment Partnerships is as follows:
JULY 31, --------------------------------- 1996 1995 - ------------------------------------------------------------------------------ Property Capital Midwest Associates, L.P. $ 6,656,000 $25,140,000 PCA Southwest Associates Limited Partnership 1,308,000 8,878,000 PCA Canyon View Associates Limited Partnership 1,636,000 3,277,000 Lisle Hilton Inn Loan Participation - 8,981,000 PCA Crossroads Associates, Ltd. - 2,023,000 ----------- ----------- $ 9,600,000 $48,299,000 =========== ===========
The Trust's share of net income (loss) (including gain on sales) from unconsolidated Investment Partnerships is as follows:
YEARS ENDED JULY 31, ---------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- Property Capital Midwest Associates, L.P. {(1)} $ 2,277,000 $ 987,000 $ 950,000 PCA Southwest Associates Limited Partnership {(2)} 721,000 101,000 209,000 PCA Canyon View Associates Limited Partnership{(3)} 153,000 (145,000) 195,000 Lisle Hilton Inn Loan Participation 566,000 660,000 617,000 PCA Crossroads Associates, Ltd. 3,603,000 365,000 293,000 --------- ---------- --------- $ 7,320,000 $ 1,968,000 $ 2,264,000 =========== =========== ============
{(1)}Net of the Trust's share of depreciation of $21,000, $1,373,000 and $1,213,000 for years ended July 31, 1996, 1995 and 1994, respectively.
{(2)}Net of the Trust's share of depreciation of $372,000, $713,000 and $232,000 for the years ended July 31, 1996, 1995and 1994, respectively. These properties converted from Structured Transactions to Owned Properties on March 1994.
{(3)}Net of the Trust's share of depreciation of $80,000 for the year ended July 31, 1996. This property converted from a Structured Transaction to an Owned Property in August 1995.
Cash distributions received by the Trust from the unconsolidated Investment Partnerships are as follows:
YEARS ENDED JULY 31, ---------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- Property Capital Midwest Associates, L.P. $ 19,506,000 $ 1,195,000 $ 1,054,000 PCA Southwest Associates Limited Partnership 7,274,000 1,046,000 - PCA Canyon View Associates Limited Partnership 256,000 - 232,000 Lisle Hilton Inn Loan Participation 9,547,000 703,000 610,000 PCA Crossroads Associates, Ltd. 5,626,000 358,000 298,000 ------------ ------- --------- $ 42,209,000 $ 3,302,000 $2,194,000 ============ =========== ==========
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
The Trust's Investment Partnerships reclassified certain of their real estate investments to Assets Held for Sale and wrote down these assets to estimated net realizable value aggregating $2,970,000 during fiscal 1996 and $2,365,000 during fiscal 1995. In addition, during fiscal 1996, PCA Southwest Associates Limited Partnership and PCA Canyon View Associates Limited Partnership each wrote off an investment resulting in a loss to the Trust of $307,000 and $533,000, respectively. The Trust then charged these losses against its allowance for possible investment losses as follows:
JULY 31, ------------------------------------- 1996 1995 - ------------------------------------------------------------------------------ Property Capital Midwest Associates, L.P. $ 1,255,000 $ 2,311,000 PCA Southwest Associates Limited Partnership 1,017,000 54,000 PCA Canyon View Associates Limited Partnership 1,538,000 - ---------- ----------- $ 3,810,000 $ 2,365,000 =========== ===========
The Structured Transactions held by Investment Partnerships were similar to those held directly by the Trust. The land leaseback leases required fixed monthly base rental payments to the Investment Partnerships and also provided for overage rental payments.
The mortgage loans held by Investment Partnerships were generally long-term loans that required fixed monthly base interest payments and, when not payable on a self-amortizing basis, required principal payments at maturity. Except for the Lisle Hilton Inn loan participation, mortgage loans were owned in conjunction with land leaseback transactions and were subordinate to and had cross-default provisions with the land leasebacks. The Lisle Hilton Inn loan participation, although not owned in conjunction with a land leaseback transaction, also required overage interest payments similar to the land leasebacks.
During fiscal 1996, certain of the Trust's Investment Partnerships disposed of three Structured Transactions. PCA Crossroads Associates, Ltd. ("Crossroads"), an Investment Partnership which owned the land underlying the Crossroads Mall in Boulder, Colorado, sold the land to its lessee, resulting in a gain to the Trust of $3,500,000 on its investment of $2,000,000. The Trust had a 25.0% general partner interest in Crossroads. The first mortgage held by the Lisle Hilton Inn loan participation ("Lisle"), secured by the Lisle Hilton Inn located in Lisle, Illinois, was prepaid at par. The Trust had a 41.67% interest in Lisle and received $8,942,000 from the prepayment. PCA Canyon View Associates Limited Partnership ("Canyon View"), an Investment Partnership which held Structured Transactions in Phases I and II of the Canyon View apartments in San Ramon, California settled certain litigation. As a result, the Investment Partnership received $300,000 from the first mortgagee of Phase I for permitting it to foreclose on Phase I and the Investment Partnership took title to Phase II and received the proceeds from two letters of credit aggregating $1,750,000. At that time, the Trust wrote down its investment in this partnership by $1,538,000. This write-down was charged against the Trust's allowance for possible investment losses. At July 31, 1996, Phase II was reclassified from an Owned Property to an Asset Held for Sale. The Trust has a 23.81% general partner interest in Canyon View.
During fiscal 1996, two Investment Partnerships sold six Assets Held for Sale, three of which were classified as Assets Held for Sale at July 31, 1995 and three were reclassified to Assets Held for Sale during fiscal 1996. In addition, one Investment Partnership permitted an Owned Property to be foreclosed by the first mortgagee. PCA Southwest Associates Limited Partnership ("Southwest"), an Investment Partnership which owned 2,848 apartments in Houston, Texas at July 31, 1995, sold the Chimney Rock complex to an unrelated party resulting in a gain to the Trust of $1,000. St. Charles and Boardwalk investments were reclassified during fiscal 1996 to Assets Held for Sale resulting in a write-down by the Trust of $710,000. This write-down was charged against the Trust's previously established allowance for possible investment losses. These investments were sold in June 1996 to an unrelated third party resulting in a gain to the Trust of $50,000. Southwest also disposed of its Telegraph Hill - Phase B investment (259 units) by allowing the first mortgage lender to foreclose on the property and, as a result, the Trust wrote off its net investment in this property. The $307,000 write-off was charged against the Trust's allowance for possible investment losses. The Trust, through a wholly owned subsidiary, has a 45.45% general partner interest in Southwest.
Property Capital Midwest Associates, L.P. ("Midwest"), an Investment Partnership which owned four investments in Overland Park, Kansas, reclassified its investment in College Hills 3 to an Asset Held for Sale in fiscal 1996. In addition, Midwest's Financial Plaza investment, which was previously reclassified to an Asset Held for Sale, was further written down by the Trust by $1,255,000. Financial Plaza, College Hills 3 and College Hills 8 were sold to unrelated third parties and the net sales prices of these properties resulted in a gain to the Trust aggregating $443,000. The Trust has a 53.3% general partner interest in Midwest.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. REAL ESTATE INVESTMENTS (continued)
During fiscal 1995, Southwest sold the Braes Hill project to an unrelated party resulting in a gain to the Trust of $110,000. At July 31, 1995, Southwest reclassified its investment in the Chimney Rock apartments to Assets Held for Sale resulting in a write-down by the Trust of $54,000, which was charged against the Trust's previously established allowance for possible investment losses. The Trust's investment in Southwest had a net book value of $8,932,000 prior to the Chimney Rock property write-down. At July 31, 1995, Midwest reclassified its investments in Financial Plaza, Plaza West Retail Center and College Hills 8 to Assets Held for Sales, resulting in a write-down by the Trust of $2,311,000. The Trust's investment in Midwest had a net book value of $27,451,000 prior to the Financial Plaza, College Hills 8 and Plaza West Retail Center's write-downs. The Trust's share of the write-down was charged against the Trust's previously established allowance for possible investment losses.
On March 31, 1994, Southwest acquired for $427,000 its lessee's interest in five properties subject to first mortgages aggregating $25,989,000. During the quarter ended July 31, 1994, the Trust wrote down its investment in this partnership by $566,000. This write-down was charged against the Trust's allowance for possible investment losses.
NOTE 3. INDEBTEDNESS
The Trust has available a total of $10,000,000 under a revolving line of credit from a major New England bank. Borrowings under the line of credit are repayable on demand by the lender. At July 31, 1996 there were no outstanding borrowings under the line. Interest is at the bank's prime rate (8.25% at July 31, 1996).
A majority of the real estate investments are subject to long-term first mortgage financing which aggregated $111,420,000 at July 31, 1996 and $182,686,000 at July 31, 1995. At July 31, 1996, long-term first mortgage financing consisted of $27,162,000 of debt on Owned Properties held directly by the Trust, $9,727,000 of debt on the Asset Held for Sale directly by the Trust and $10,314,000 of debt on Owned Properties held in Investment Partnerships. The balance of $64,217,000 represents debt on Structured Transactions which is not reflected on the Trust's balance sheet because the obligation to pay such debt is that of the Trust's lessees/mortgagors.
At July 31, 1996 two of the Trust's Owned Properties held directly by the Trust and an Asset Held for Sale directly by the Trust were encumbered by first mortgages aggregating $36,889,000 and at July 31, 1995, three of the Trust's Owned Properties held directly by the Trust were encumbered by first mortgages aggregating $40,145,000.
PRINCIPAL BALANCE JULY 31, INTEREST 1996 1995 RATE MATURITY
Loehmann's Fashion Island $18,732,000 $ 21,732,000 7.97%* July 1998 One Park West 9,727,000 9,898,000 9.50% June 2000 Park Place 8,430,000 8,515,000 5.65% May 2008 ----------- ------------- $ 36,889,000 $ 40,145,000 ============ =============
* Rate is fixed until December 1996; see below for further information.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INDEBTEDNESS (continued)
The book value of real estate pledged as collateral for these loans was approximately $64,296,000. Scheduled principal payments on these loans at July 31, 1996 are as follows:
YEAR ENDING JULY 31,
1997 $ 273,000 1998 19,023,000 1999 312,000 2000 9,191,000 2001 85,000 2002 and thereafter 8,005,000 ------------ Total $ 36,889,000 ============
With respect to an Owned Property held directly by the Trust, Loehmann's Fashion Island, the first mortgage on this property was refinanced on June 30, 1994 with an initial advance of $18,000,000. The loan commitment was for $30,000,000, with additional advances to be made through June 1996 based upon property performance. There were subsequent advances aggregating $6,000,000 and periodic amortization payments including a $3,000,000 payment made during fiscal 1996. The first mortgage loan had a balance at July 31, 1996 of $18,732,000 ($12,000,000 of which is recourse to the Trust), matures in July 1998 and bears interest at the lender's prime rate plus 1/4% with the Trust having the option to fix the interest rate from time to time at 2.25% above comparable term LIBOR or U.S. Treasury notes for a specified number of times. This option may be exercised at no cost or additional liability to the Trust. In July 1995, the Trust fixed the interest rate on the total outstanding borrowings at 7.97% (2.25% over comparable term U.S. Treasury notes) until December 1996.
In November 1993, the Trust refinanced the $8,600,000 first mortgage on the Park Place office building located in Clayton, Missouri, resulting in a reduction in the annual effective interest rate from 8.25% to 5.65%. Interest is payable semi-annually. The mortgage balance was $8,430,000 at July 31, 1996 and amortizes $85,000 annually in May through 2003, and $430,000 annually thereafter through May 2007. The then remaining balance of $6,115,000 matures in May 2008.
The Trust issued $40,000,000 of 9 3/4% Convertible Subordinated Debentures in May 1983, maturing May 15, 2008, and $40,000,000 of 10% Convertible Subordinated Debentures in December 1984, maturing December 15, 2009. As of July 31, 1995, $2,546,000 and $29,125,000 of the 9 3/4% and 10% Debentures, respectively, were outstanding. During fiscal 1996, all of the Trust's outstanding Debentures were retired.
For the years ended July 31, 1996, 1995 and 1994, cash paid for interest on all of the Trust's debt was $5,044,000, $6,818,000, and $6,961,000 respectively, net of capitalized interest of $0, $0, and $858,000, respectively.
The fair value of the Trust's mortgage notes payable at July 31, 1996 is $36,992,000. The fair value was estimated using discounted cash flow analyses on the mortgage notes. The mortgage notes payable are assumed to be held to maturity.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RENTS UNDER OPERATING LEASES
All space leases at the Owned Properties held directly by the Trust are classified as operating leases. Minimum future base rents to be received from leases in effect at July 31, 1996 are as follows:
YEAR ENDING JULY 31,
1997 $ 8,805,000 1998 7,676,000 1999 6,912,000 2000 6,254,000 2001 5,112,000 2002 and thereafter 4,990,000 ------------ Total $ 39,749,000 ============
The minimum future base rents do not include contingent rentals, such as tenant reimbursements which are received under certain leases based upon property operating costs, or percentage rents which are based on the level of a tenant's sales.
NOTE 5. RENTAL EXPENSE
In July 1996, the Trust moved its offices to 101 Federal Street, Boston, Massachusetts and entered into a lease that expires on August 31, 1998. In July 1996, the Trust's prior space lease was terminated by the landlord. Rental expense under the Trust's previous lease was $152,000, $132,000 and $128,000 in fiscal years 1996, 1995 and 1994, respectively. Future minimum rental payments will be $103,000 per year for fiscal years 1997 and 1998.
NOTE 6. ADVISORY SERVICES
Effective August 1, 1992 the Trust entered into an agreement with PCA Institutional Advisors ("PCAIA") pursuant to which the Trust assumed responsibility for rendering services under advisory agreements (the "Advisory Agreements") between PCAIA and the five Investment Partnerships.
The Trust receives annually the first $150,000 of amounts payable pursuant to the Advisory Agreements as compensation for providing such services, which amount generally corresponds to the additional expenses incurred by the Trust in performance of such tasks, plus 50% of additional amounts payable pursuant to the Advisory Agreements, which additional amounts aggregated $235,000, $175,000 and $140,000 in fiscal 1996, 1995 and 1994, respectively. PCAIA receives the remaining 50% of such payments in excess of $150,000. Excluded from the foregoing arrangement was the termination fee provided for in the PCA Crossroads Associates, Ltd. ("Crossroads") advisory agreement, which fee was paid in fiscal 1996 solely to PCAIA.
Commencing on August 1, 1997, the Trust may terminate the foregoing agreement and thereafter receive 100% of all payments under the Advisory Agreements by paying PCAIA three times PCAIA's share of the average of the annual payments, (the "Buy-Out Amount") that it received under such sharing arrangement during the two prior fiscal years, calculated without reference to payments attributable to properties sold or otherwise disposed of during such fiscal years. The Buy-Out Amount is payable to PCAIA in three annual installments, in arrears, with interest accruing on the unpaid principal amount of such payment at the prime rate of the Trust's primary bank lender. The Buy-Out Amount is reduced in the event that properties are sold or otherwise disposed of during the three years over which such amount is payable.
NOTE 7. RELATED PARTY TRANSACTIONS
During fiscal 1996, 1995 and 1994, the Trust incurred legal fees in the amount of $262,000, $224,000 and $346,000, respectively (exclusive of additional amounts paid by the Trust's lessees and borrowers, if any), from the law firm of Paul, Weiss, Rifkind, Wharton & Garrison, of which Walter F. Leinhardt, Secretary and Trustee of the Trust, is a partner. Not included in the above amount is the Trust's share of legal fees incurred by the Investment Partnerships in the amount of $66,000, $17,000, and $46,000 for fiscal 1996, 1995 and 1994, respectively.
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. ANTICIPATED CAPITAL EXPENDITURES
Amounts aggregating approximately $4,050,000 may be required during fiscal 1997 for capital expenditures on the Trust's Owned Properties held directly by the Trust and Assets Held for Sale directly by the Trust. Additionally, the Trust's share of capital expenditures which may be required by the Investment Partnerships during fiscal 1997 is approximately $100,000.
NOTE 9. SHAREHOLDERS' EQUITY
1992 EMPLOYEE STOCK OPTION PLAN
The Property Capital Trust 1992 Employee Stock Option Plan (the "Plan") for key employees of the Trust and its subsidiaries is a plan under which options for 400,000 shares may be granted to purchase Common Shares for a purchase price equal to, at a minimum, the fair market value of the shares on the date of grant, subject to certain adjustments. The Compensation Committee of the Board of Trustees administers the Plan and is responsible for selecting the individuals eligible to receive options and for determining the number of options to be granted to such individuals and the purchase price of the shares. Under the plan 20% of the options become exercisable on each anniversary of the date of grant and all options vest once the option price declines below $2.00 per share. The options are subject to termination under certain circumstances. Changes in options outstanding during the period were as follows:
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. SHAREHOLDERS EQUITY (continued)
1994 STOCK OPTION PLAN FOR NON-EMPLOYEE TRUSTEES
The Property Capital Trust 1994 Stock Option Plan for Non-Employee Trustees, approved by the shareholders of the Trust in November 1994, is a plan under which options for 100,000 shares may be granted to purchase Common Shares for a purchase price equal to the fair market value of such Common Shares at the time the option is granted, subject to certain adjustments.
Each non-employee Trustee receives automatically upon election or re-election as a Trustee at an Annual Meeting of Shareholders an option to purchase 4,000 Common Shares. The option vests on the day immediately preceding the Annual Meeting of Shareholders next succeeding the date of grant of such option.
Options granted on November 30, 1994 @ $6.125* and outstanding at July 31, 1995 24,000 Options granted on December 15, 1995 @ $8.563* 24,000
Options outstanding July 31, 1996 48,000
Options exercisable July 31, 1996 24,000
* Subsequent to the end of fiscal 1996 the option price was reduced as a result of distributions made in excess of funds from operations as provided for in the Plan.
AMENDED AND RESTATED DEFERRED STOCK PLAN FOR NON-EMPLOYEE TRUSTEES
In November 1994, the Amended and Restated Deferred Stock Plan for Non-Employee Trustees was approved by the shareholders of the Trust. If a Trustee elects to defer payment of Trustee fees, share units are allocated to such Trustee's account based upon the closing price for the Common Shares on the date the fees would have been earned. Share units are also allocated to reflect dividends that would have been paid on such share units. Payments to a Trustee are made upon death, disability or ceasing to serve as a Trustee. There are 250,000 Common Shares available under this Plan. This plan replaced a previous plan the shares of which were transferred to this plan on November 30, 1994.
In fiscal 1994, the Trust entered into a Trust Agreement with BayBank, a Massachusetts corporation, whereby BayBank agreed to hold the Common Shares (and dividends thereon) that are issued under the Deferred Stock Plan (an arrangement commonly known as a "Rabbi Trust"). In fiscal 1996, the Rabbi Trust was funded with Common Shares that had been deferred under the Plan. Under current accounting rules, assets of a Rabbi Trust must be accounted for as if they are assets of the Trust.
Share units transferred November 30, 1994 118,385 Share units issued fiscal 1995 30,983 Share units exercised fiscal 1995 (20,296) Share units outstanding July 31, 1995 129,072 Share units issued fiscal 1996 20,922 Share units exercised fiscal 1996 (14,903) Share units outstanding prior to transfer to Rabbi Trust 135,091 Share units issued in Property Capital Trust Common Shares and transferred to the Rabbi Trust (135,080)
Share units outstanding July 31, 1996 11
Common Shares issued and transferred to the Rabbi Trust 135,080 Dividends reinvested in Common Shares 49,559
Common Shares issued and outstanding in the Rabbi Trust July 31, 1996 184,639
Property Capital Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. SHAREHOLDERS EQUITY (continued)
SHAREHOLDER RIGHTS PLAN
On September 28, 1990 (the "Declaration Date"), the Trustees adopted a Shareholder Rights Plan (the "Plan") and, in connection therewith, declared a dividend distribution of one right for each of the Trust's outstanding Common Shares to shareholders of record at the close of business on October 12, 1990. Each right entitles the holder thereof, upon the occurrence of certain events making such rights exercisable, to exercise the right to buy one Common Share at a purchase price of $27.00. The rights become exercisable (i) 10 business days following the announcement that a person or group of persons has acquired or obtained the right to acquire 9.8% or more of the Common Shares (with certain exceptions for persons who were shareholders on the Declaration Date) or (ii) upon the closing of a tender offer resulting in ownership of 9.8% or more of the Common Shares (any person acquiring in excess of 9.8% of the Common Shares being an "Acquiror"). On the twenty-first business day after the acquisition of 9.8% or more of the Common Shares by an Acquiror, or upon the closing of a tender offer for 9.8% or more of the Common Shares by an Acquiror, each right will entitle its holder to purchase, at the right's exercise price, that number of Common Shares having a market value at that time of twice the right's exercise price. Each right will also become exercisable to purchase Common Shares at a 50% discount in the event that an Acquiror engages in self- dealing transactions with the Trust. If, at any time after the rights become exercisable, the Trust is involved in a merger or other business combination in which the Trust is not the surviving entity, each right will entitle its holder to purchase, at the right's exercise price, that number of shares of the acquiring company's common stock having a market value at that time of twice the right's exercise price. The rights will expire on the earlier of (i) September 28, 2000 or (ii) their redemption by the Trustees at any time prior to the date that they become exercisable, as described above, at a price of $.01 per right.
NOTE 10. DIVIDENDS
The Trust typically pays a dividend approximately 55 days following each fiscal quarter, normally equal to at least 100% of income before gains (losses) on real estate investments. In addition, in July 1996, the Trust paid an additional dividend to distribute proceeds from dispositions. It is the current intention of the Trustees to distribute proceeds from dispositions as special dividends at the same time as the quarterly dividend. However, the Trustees may choose to make an additional dividend from time to time rather than wait for a quarterly dividend payment date.
YEARS ENDED JULY 31, 1996 1995 1994
Quarterly dividends declared $.48 $.41 $.30 Special dividends declared 2.75 - - Total dividends declared $3.23 $.41 $.30
On August 23, 1996, the Trustees declared a dividend of $.12 per share, payable on September 24, 1996 to shareholders of record on September 13, 1996, which dividend is included in the above table.
In order to qualify as a real estate investment trust, Property Capital Trust must distribute substantially all of its taxable income to shareholders not later than twelve months following the end of its fiscal year. Property Capital Trust CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
{(1)} Includes $3,000,000 write-down of Loehmann's Fashion Island.
Property Capital Trust SCHEDULE II
ALLOWANCE FOR POSSIBLE INVESTMENT LOSSES YEARS ENDED JULY 31, 1996 1995 1994
Balance at beginning of year $ 14,077,000 $ 17,413,000 $ 20,129,000 Additions during year - - - Property write-downs (9,441,000) (3,336,000) (2,716,000)
Balance at end of year $ 4,636,000 $ 14,077,000 $ 17,413,000
Allowance as a % of Real Estate Investments (before allowance for possible investment losses and Asset Held for Sale directly by the Trust) 4.9% 8.5% 9.2%
The allowance for possible investment losses represents the excess of the carrying value of individual real estate investments over their estimated net realizable value. Based upon a review and evaluation of each real estate investment in the Trust's portfolio, management believes the allowance was adequate as of each date presented.
Property Capital Trust SCHEDULE III JULY 31, 1996 (dollars in thousands)
LAND LEASEBACKS HELD DIRECTLY BY THE TRUST
Property Capital Trust SCHEDULE III (CONTINUED) JULY 31, 1996 (dollars in thousands)
OWNED PROPERTIES HELD DIRECTLY BY THE TRUST
For information on Owned Properties Held in Investment Partnerships see Exhibit A
ASSET HELD FOR SALE DIRECTLY BY THE TRUST
For Information on Assets Held for Sale in Investment Partnerships see Exhibit A
(TABLE CONT'D)
EXPENSES ON OWNED PROPERTIES HELD DIRECTLY DEPRECIATION BY THE TRUST EXPENSE Y/E 7/31/96 Y/E 7/31/96 [C] [C]
$ 680 $ 450 1,048 990 - ----------- --------
1,728 1,440 - ----------- --------
2,394 2,046 - ----------- --------
$ 4,122(l) $ 3,486(m) - ----------- -------- - ----------- --------
Property Capital Trust NOTES TO SCHEDULE III
(a)This amount represents the cost of each land investment and the amount at which each investment is carried on the balance sheet atJuly 31, 1996. There are no differences between the cost of each land investment for financial reporting purposes and the cost of eachland investment for federal income tax purposes, except as follows:
NAME OF PROPERTY BOOK BASIS TAX BASIS
Cincinnati Marriott Inn $2,000,000 $1,419,000 Park Place 3,000,000 767,000 Loehmann's Fashion Island 9,706,000 5,535,000 Citibank Office Plaza - Schaumburg 1,275,000 531,000
(b)The Trust also holds a leasehold mortgage on this property (see Schedule IV).
(c)The base land rent rate was renegotiated, effective April 1, 1993, from a base payment rate of 10% to a base payment rate of6.3% until March 31, 1996, and 7.4% thereafter.
(d)The base land rent rate was renegotiated, effective April 1, 1993, from a base payment rate of 10% to a base payment rate of 8.5%until March 31, 1996, and 10% thereafter.
(e)Changes in the Trust's investment in land leasebacks held directly by the Trust are summarized below (dollars in thousands).
YEARS ENDED JULY 31, ------------------------------- 1996 1995 1994 - --------------------------------------- ------------------------------- Balance at beginning of year $ 17,140 $ 17,140 $ 21,140 Sales (2,960) - ( 1,500) Conversions to Owned Properties held directly by the Trust - - (2,500) -------- -------- -------- Balance at end of year $ 14,180 $ 17,140 $ 17,140 -------- -------- -------- -------- -------- --------
(f)This total does not include base income of $107,000 earned in fiscal 1996 from investments disposed of during the year.
(g)This total does not include overage income of $150,000 earned in fiscal 1996 from investments disposed of during the year.
(h)The Trust acquired the equity interests in these properties from its lessees. The date of the acquisition reflects the date on which theTrust converted its land leaseback investment to an Owned Property held directly by the Trust.
(i)Many leases provide for stepped minimum rents. Certain of these have been accounted for on a straight line basis. Rents receivableincludes rents accrued but not yet due in the amount of $605,000, $508,000, and $183,000 for Citibank Office Plaza - Schaumburg,Loehmann's Fashion Island and One Park West, respectively.
Property Capital Trust NOTES TO SCHEDULE III (continued)
(j) Changes in the Trust's investment in Owned Properties held directly by the Trust are summarized below (dollars in thousands).
YEARS ENDED JULY 31, ---------------------------------- 1996 1995 1994 - -------------------------------------- ----------------------------------
Balance at beginning of year $ 94,507 $ 116,354 $ 109,372 Acquisitions and additions 902 5,551 15,490 Sales to third parties - (12,465) (14,008) Conversions from mortgage loans held directly by the Trust - - 3,000 Conversions from land leasebacks held directly by the Trust - - 2,500 Investments written down (5,612) - - Property reclassified to Assets Held for Sale directly by the Trust (20,055) (14,933) - -------- -------- -------- Balance at end of year $ 69,742 $ 94,507 $ 116,354 -------- -------- -------- -------- -------- --------
(k)This total does not include rental income earned in fiscal 1996 of $3,280,000 from One Park West which was reclassified to Asset Held for Sale directly by the Trust at July 31, 1996.
(l)This total does not include operating expenses incurred in fiscal 1996 of $1,059,000 from One Park West which was reclassified toAsset Held for Sale directly by the Trust at July 31, 1996.
(m)This total does not include depreciation expense in fiscal 1996 of $522,000 from One Park West which was reclassified to Asset Heldfor Sale directly by the Trust at July 31, 1996.
(n)Changes in the Trust's investment in Assets Held for Sale directly by the Trust is summarized below (dollars in thousands).
YEARS ENDED JULY 31, ------------------------------- 1996 1995 - ---------------------------------------- -------------------------------
Balance at beginning of year $ 10,185 $ - Additions 173 - Sale to third party (10,358) - Property reclassified from Owned Property held directly by the Trust 20,055 14,933 Investment written down (1,519) (971) Write-off of accumulated depreciation (1,598) (3,777) -------- ---------
Balance at end of year $ 16,938 $ 10,185 -------- ---------
(o)This total does not include rental income earned in fiscal 1996 of $922,000 from Citibank Office Plaza - Oak Brook which was disposed of during the year.
(p)This total does not include operating expenses incurred in fiscal 1996 of $388,000 from Citibank Office Plaza - Oak Brook which was disposed of during the year.
Property Capital Trust SCHEDULE IV JULY 31, 1996 (dollars in thousands)
MORTGAGE LOANS HELD DIRECTLY BY THE TRUST
(h)This total does not include interest income of $74,000 earned in fiscal 1996 from the loan on Grosvenor Airport Inn which was prepaid during the year.
(THIS PAGE INTENTIONALLY LEFT BLANK)
Property Capital Trust EXHIBIT A JULY 31, 1996 (dollars in thousands)
OWNED PROPERTIES HELD IN INVESTMENT PARTNERSHIPS
Investment
Property Capital Trust EXHIBIT A (CONTINUED) JULY 31, 1996 (dollars in thousands)
ASSETS HELD FOR SALE IN INVESTMENT PARTNERSHIPS
Investment
SHOPPING CENTERS
APARTMENTS
Property Capital Trust NOTES TO EXHIBIT A
(a)The Partnerships acquired the equity interests in these properties from their lessees. The date of the acquisition reflects the date onwhich each Partnership converted its land leaseback/mortgage loan investment to an Owned Property held in an InvestmentPartnership.
(b)This investment is held by PCA Southwest Associates Limited Partnership, a partnership in which an affiliate of the Trust is the solegeneral partner with a 45.45% interest and other institutional investors are the limited partners.
(c)Telegraph Hill apartment complex, held by PCA Southwest Associates Limited Partnership, is encumbered by third party seniorindebtedness as follows.
Principal Interest BALANCE RATE MATURITY
(d)Changes in Owned Properties held in Investment Partnerships are summarized below (dollars in thousands).
YEARS ENDED JULY 31, 1996 1995
Properties reclassified to Assets Held for Sale in
Property Capital Trust NOTES TO EXHIBIT A (CONTINUED)
(f)This total does not include expenses other than depreciation incurred in fiscal 1996 of $3,594,000 from PCA SouthwestAssociates Limited Partnership's Telegraph B, Chimney Rock, Boardwalk and St. Charles apartment investments which weredisposed of during the year. Also disposed of during fiscal 1996 were Property Capital Midwest Associates, L.P.'s CollegeHills 3, College Hills 8 and Financial Plaza office building investments and their related expenses other than depreciation of$2,420,000 is not included in this total. Also not included in this total is $2,328,000 from Assets Held for Sale in Investment Partnerships; see Exhibit A.
(g)This total does not include depreciation expense in fiscal 1996 of $367,000 from PCA Southwest Associates LimitedPartnership's Telegraph B, Chimney Rock, Boardwalk and St. Charles apartment investments which were disposed of during the year.Also disposed of during fiscal 1996 were Property Capital Midwest Associates, L.P.'s, College Hills 3, College Hills 8 andFinancial Plaza office building investments and their related depreciation expense of $38,000 is not included in this total. Alsonot included in this total is $335,000 from Assets Held for Sale in Investment Partnerships; see Exhibit A.
(h)This investment is held by Property Capital Midwest Associates, L.P., a partnership in which the Trust is the sole general partner witha 53.3% interest and other institutional investors are the limited partners.
(i)This investment is held by PCA Canyon View Associates Limited Partnership, a partnership in which the Trust participates as thesole general partner with a 23.81% interest and other institutional investors are the limited partners.
(j)Changes in Assets Held for Sale in Investment Partnerships are summarized below (dollars in thousands).
YEARS ENDED JULY 31, 1996 1995
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Year Ended December 31, 1995
PROPERTY CAPITAL MIDWEST ASSOCIATES, L.P. Boston, Massachusetts
REPORT OF INDEPENDENT AUDITORS
To the Partners Property Capital Midwest Associates, L.P.
We have audited the accompanying balance sheets of Property Capital Midwest Associates, L.P. as of December 31, 1995 and 1994, and the related statements of operations, cash flows and partners' equity for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Property Capital Midwest Associates, L.P. at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts February, 23, 1996, except for Note 6, as to which the date is October 7, 1996
Property Capital Midwest Associates, L.P. BALANCE SHEET
DECEMBER 31,
ASSETS Real estate investments:
Partners' Equity
See accompanying notes Property Capital Midwest Associates, L.P. STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 1993
REVENUES
PROPERTY EXPENSES
PARTNERSHIP EXPENSES
See accompanying notes
Property Capital Midwest Associates, L.P. STATEMENT OF CASH FLOWS
LIABILITIES AND PARTNERS' EQUITY Liabilities
Partners' Equity Contributed Capital - 8,000,000 Undistributed net income 63,243 97,302
Total Partners' Equity 63,243 8,097,302
$ 88,515 $ 8,128,638
See accompanying notes
PCA Crossroads Associates, Ltd. STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1995 1994
REVENUES
PARTNERSHIP EXPENSES
See accompanying notes PCA Crossroads Associates, Ltd. STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 1993
CASH FLOW FROM OPERATING ACTIVITIES
CASH FLOW FROM INVESTING ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES
See accompanying notes PCA Crossroads Associates, Ltd. STATEMENT OF CHANGES IN PARTNERS' EQUITY
DISTRIBUTIONS Proceeds in
FOR THE YEAR ENDED DECEMBER 31, 1995 Property Capital Trust,
FOR THE YEAR ENDED DECEMBER 31, 1994 Property Capital Trust,
FOR THE YEAR ENDED DECEMBER 31, 1993 Property Capital Trust,
See accompanying notes
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PCA Crossroads Associates, Ltd. (the "Partnership") was organized on January 19, 1983 as a Colorado limited partnership. Property Capital Trust is the sole general partner (the "General Partner") of the Partnership and ten institutional investors are limited partners.
REAL ESTATE INVESTMENTS
Real estate investments are carried at cost at December 31, 1994. The investment was sold in October 1995.
CASH AND CASH EQUIVALENTS
For purposes of the Statement of Cash Flows, the Partnership considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Partnership is not subject to Federal or state income taxes and, accordingly, no provisions have been made for such taxes in the financial statements.
NOTE 2. REAL ESTATE INVESTMENTS
The Partnership was formed to invest in the Crossroads Mall Shopping Center in Boulder, Colorado. The investment was originally structured as an $8,000,000 land leaseback and a $32,000,000 first leasehold mortgage loan which was repaid in 1986. On October 19, 1995 the Partnership sold its $8,000,000 land investment for a gross sales price of $23,236,500 to the Partnership's lessee. After closing costs the Partnership realized a gain of $14,000,420 on an historical cost basis.
NOTE 3. MANAGEMENT AGREEMENT
Services related to investment matters and day-to-day administration have been provided to the Partnership under a contract, dated January 26, 1983, with PCA Institutional Advisors (the "Advisor"). The contract had an initial term of five years and is extended automatically on a year-to-year basis unless terminated by the Partnership or the Advisor. The contract provides for a base advisory fee equal to 8% of the Partnership's cash flow (as defined) and for a disposition fee equal to 8% of the gain from the sale of the Partnership's interest. Pursuant to the agreement the Advisor was paid a disposition fee of $1,214,636 in connection with the sale.
Effective August 1, 1992, Property Capital Trust, the General Partner of the Partnership, assumed responsibility for managing the affairs of the Partnership pursuant to a subcontract and option agreement with PCA Institutional Advisors. This change was approved by the Partners.
NOTE 4. DISTRIBUTIONS
The Partnership makes monthly cash distributions to its partners equal to approximately 100% of available cash flow from investments. For the years ended December 31, 1995, 1994 and 1993 the partnership distributed $1,215,319, $1,342,904 and $1,210,196 respectively. On October 24, 1995 the Partnership distributed $21,968,316 from the sale of its land investment.
NOTE 5. SUBSEQUENT EVENT
Subsequent to the end of the year the Partnership received additional overage income from its former lessee. The following is an accounting of the activity in the Partnership from January 1, 1996 through the final distribution of the remaining Partnership assets in the amount of $96,049.20 on April 26, 1996. The Partnership has been terminated and all assets have now been distributed.
Cash Balance at December 31, 1995$ 88,515
Overage income 41,124 Short-term interest income1,183 Less: Management fee (8,352) Administrative expenses (1,149) December 31, 1995 payables (25,272)
Cash balance for final distribution96,049
Distribution to Partners (96,049)
Ending Cash $ -
PCA Crossroads Associates, Ltd. NOTES TO FINANCIAL STATEMENTS (continued)
EXHIBIT 21 List of Subsidiaries July 31, 1996
PCT Office Company
PCT Shopping Center Company
PCT Biscayne Center, Inc.
PCT Clayton, Inc.
East Ridge Apartment Company, Inc.
Friendship Avenue Office Company, Inc.
Chicago Hotel Company, Inc.
Cincinnati Hotel Company, Inc.
Houston Southwest Apartments, Inc.
EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-51839 and Form S-8 No. 33-56667) pertaining to the Property Capital Trust 1992 Employee Stock Option Plan and the Registration Statement (Form S-8 No. 33-56665) pertaining to the Property Capital Trust 1994 Stock Option Plan for Non-Employee Trustees and the Property Capital Trust Amended and Restated Deferred Stock Plan for Non-Employee Trustees of Property Capital Trust of our report dated August 23, 1996, with respect to the consolidated financial statements and schedules of Property Capital Trust and of our report dated February 23, 1996 except for Note 6, as to which the date is October 7, 1996, with respect to the financial statements and schedule of Property Capital Midwest Associates, L.P. and of our report dated February 23, 1996, except for Note 6 as to which the date is April 26, 1996 with respect to the financial statements of PCA Crossroads Associates, Ltd. included in the Annual Report (Form 10-K) of Property Capital Trust for the year ended July 31, 1996.
ERNST & YOUNG LLP
Boston, Massachusetts October 25, 1996