Post-Effective Amendment of a Registration Statement
Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: POS AM Prudential Real Property Account HTML 524K
3: EX-16.A23A Auditor Consent HTML 12K
4: EX-16.A24 Powers of Attorney HTML 21K
2: EX-16.A5 Legal Consent HTML 15K
10: R1 Document And Entity Information HTML 42K
11: R2 Statements of Net Assets HTML 35K
12: R3 Statements of Operations HTML 31K
13: R4 Statements of Changes in Net Assets HTML 47K
14: R5 General HTML 20K
15: R6 Summary of Significant Accounting Policies HTML 23K
16: R7 Taxes HTML 17K
17: R8 Net Contributions (Withdrawals) by Contract Owners HTML 70K
18: R9 Partnership Distributions HTML 15K
19: R10 Unit Activity HTML 31K
20: R11 Financial Highlights HTML 54K
21: R12 Related Party Transactions HTML 16K
22: R13 Fair Value Measurements HTML 21K
23: R14 Summary of Significant Accounting Policies HTML 29K
(Policies)
24: R15 Net Contributions (Withdrawals) by Contract Owners HTML 70K
(Tables)
25: R16 Unit Activity (Tables) HTML 31K
26: R17 Financial Highlights (Tables) HTML 47K
27: R18 General (Narrative) (Details) HTML 14K
28: R19 Summary of Significant Accounting Policies HTML 17K
(Narrative) (Details)
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(Details)
30: R21 Partnership Distributions (Narrative) (Details) HTML 17K
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(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: [X]
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,""accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [X] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Emerging
growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
Explanatory Note: This post-effective amendment is filed to add a supplement to the prospectus dated May 1, 2020. The supplement is in addition to and does not delete or supersede the prospectus dated May 1, 2020 in the amendment declared effective on April 8, 2020.
PART
I
INFORMATION REQUIRED IN PROSPECTUS
Information about The Prudential Variable Contract Real Property Account
Attached hereto are Financial Statements of The Prudential Variable Contract Real Property Account and Financial Statements of The Prudential Variable Contract Real
Property Partnership. As previously communicated to contract owners, the Account and Partnership were liquidated as an investment option for contract owners on February 22, 2022.
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
A-5
Management’s Discussion and Analysis of Financial Condition and Results of Operations
A-5
Property Markets
A-9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
A-9
Directors, Executive Officers and Corporate Governance
A-10
Code of Ethics
A-11
Executive
Compensation
A-11
Certain Relationships and Related Transactions, and Director Independence
A-11
Principal Accounting Fees and Services
A-11
Financial Statements and Supplementary Data
A-12
Financial Statements of The Prudential Variable Contract Real Property Account
B-1
Financial Statements of The Prudential Variable
Contract Real Property Partnership
C-1
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Risk Factors
This "Risk Factors" section provides a summary of some of the significant risks. Many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effect of others.
Such a combination could materially increase the severity of the impact of these risks on our businesses, results of operations, financial condition and liquidity. Throughout this section “we”, “our”, and "Company" refer to The Prudential Insurance Company of America.
Market fluctuations and general economic, market and political conditions may adversely affect our business and profitability.
Our business and our results of operations may be materially adversely affected by conditions in the global financial markets and by economic conditions generally.
Even under relatively favorable market conditions, our insurance and annuity products, as well as our investment returns and our access to and cost of financing, are sensitive to fixed income, equity, real estate and other market fluctuations and general economic,
market and political conditions. These fluctuations and conditions could adversely affect our results of operations, financial position and liquidity, including in the following respects:
•The profitability of many of our insurance and annuity products depends in part on the value of the separate accounts supporting these products, which can fluctuate substantially depending on the foregoing conditions.
•A change in market conditions, such as high inflation and high interest rates, could cause a change in consumer sentiment and behavior adversely affecting sales and persistency of our savings and protection products. Conversely, low inflation and low interest rates could cause persistency of these products to vary from that anticipated and adversely affect profitability (as further described below). Similarly, changing economic conditions
and unfavorable public perception of financial institutions can influence customer behavior, including increasing claims or surrenders in certain product lines.
Adverse capital market conditions could significantly affect our ability to meet liquidity needs, our access to capital and our cost of capital, including capital that may be required by the Company's subsidiaries. Under such conditions, we may seek additional debt or equity capital but may be unable to obtain it.
Adverse capital market conditions could affect the availability and cost of borrowed funds and could impact our ability to refinance existing borrowings, thereby ultimately impacting our profitability and ability to support or grow our
businesses. We need liquidity to pay our operating expenses, interest and maturities on our debt and dividends on our capital stock. The principal sources of our liquidity are insurance premiums, annuity considerations, cash flow from our investment portfolio, and fees from separate account assets.
In the normal course of business, The Prudential Variable Real Property Partnership (the "Partnership") enters into loan agreements with certain lenders to finance its real estate investment transactions. Unfavorable economic conditions could increase related borrowing costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Partnership. There is no guarantee that the Partnership’s borrowing arrangements or ability to obtain leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Partnership. Further, these loan
agreements contain, among other conditions, events of default and various covenants and representations. In the normal course of business, the Partnership may be in the process of renegotiating terms for loans outstanding that have passed their maturity dates. At December 31, 2021, the Partnership had no outstanding matured loans.
A decline in market value of the Partnership’s assets may also have particular adverse consequences in instances where the Partnership borrowed money based on the fair value of specific assets. A decrease in market value of these assets may result in the lender requiring the Partnership to post additional collateral or otherwise repay these loans.
In the event the Partnership’s current investment obligations are not refinanced or extended when they become due and/or the Partnership is required to repay
such borrowings and obligations, management anticipates that the repayment of these obligations will be provided by operating cash flow, new debt refinancing, and/or real estate investment sales.
The companies offering the variable life insurance and variable annuity contracts and the Partnership are heavily regulated and changes in regulation may adversely affect our results of operations and financial condition.
Our business is subject to comprehensive regulation and supervision. The purpose of this regulation is primarily to protect our customers and not necessarily our shareholders or debt holders. Many of the laws and regulations to which we are subject, are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our
operations. The financial market dislocations we have experienced have produced, and are expected to continue to produce, extensive changes in existing laws and regulations, and regulatory frameworks, applicable to our business.
A-2
Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, and thereby have a material adverse effect on our financial condition or results of operations.
Changes in accounting requirements could negatively impact our reported results of operations and our reported financial position.
Accounting
standards are continuously evolving and subject to change. For example, ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the Financial Accounting Standards Board (“FASB”) on August 15, 2018 and is expected to have a significant impact on our financial statements. While the effect on the financial statements of this accounting standard are under assessment, changes to the manner in which we account for insurance products, or other changes in accounting standards, could have a material effect on our reported results of operations and financial condition. Further, changes in accounting standards may impose special demands on issuers in areas such as corporate governance, internal controls
and disclosure, and may result in substantial conversion costs to implement.
Changes in U.S. federal income tax law or in the income tax laws of other jurisdictions in the U.S. in which we operate could make some of our products less attractive to consumers and also increase our tax costs.
The President, Congress, as well as state and local governments, may continue from time to time legislation that could increase the amount of corporate taxes we pay, thereby reducing earnings.
U.S. federal tax law generally permits tax deferral on the inside build-up of investment value of certain retirement savings, annuities and life insurance products until there is a contract distribution and, in general, excludes from taxation the death benefit paid under
a life insurance contract. The Tax Cuts and Jobs Act of 2017 (the “Tax Act of 2017”) did not change these rules, though it is possible that some individuals with overall lower effective tax rates could be less attracted to the tax deferral aspect of the Company’s products. The general reduction in individual tax rates and elimination of certain individual deductions may also impact the Company depending on whether current and potential customers have more or less after-tax income to save for retirement and manage their mortality and longevity risk through the purchase of the Company’s products. Congress from time to time
may enact other changes to the tax law that could make our products less attractive to consumers, including legislation that would modify the tax favored treatment of retirement savings, life insurance and annuities products.
The products we sell have different tax characteristics and in some cases generate tax deductions and credits for the Company. Changes in either the U.S. or foreign tax laws may negatively impact the deductions and credits available to the Company, including the ability of the Company to claim foreign tax credits with respect to taxes withheld on our investments supporting separate account products. These changes would increase the
Company’s actual tax expense and reduce its consolidated net income. The profitability of certain products is significantly dependent on these characteristics and our ability to continue to generate taxable income, which is taken into consideration when pricing products and is a component of our capital management strategies. Accordingly, changes in tax law, our ability to generate taxable income, or other factors impacting the availability or value of the tax characteristics generated by our products, could impact product pricing and returns or require us to reduce our sales of these products or implement other actions that could be disruptive to our businesses.
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, could harm our business.
We
depend heavily on our telecommunication, information technology and other operational systems and on the integrity and timeliness of data we use to run our businesses and service our customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control. Further, we face the risk of operational and technology failures by others, including clearing agents, exchanges and other financial intermediaries and of vendors and parties to which we outsource the provision of services or business operations. If these parties do not perform as anticipated, we may experience operational difficulties, increased costs and other adverse effects on our business. These risks are heightened by our offering of increasingly complex products, such as those that feature automatic rebalancing or re-allocation strategies, and by our employment of complex investment, trading and hedging programs.
Despite
our implementation of a variety of security measures, our information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering or other security breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to customers, or in the misappropriation of our intellectual property or proprietary information. Many financial services institutions and companies engaged in data processing have reported security breaches and service disruptions related to their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, often through the introduction of computer
viruses or malware, denial -of-service attacks and other means.
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Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches and disruptions of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber attacks can originate from a wide variety of sources, including third-parties outside of the Company such as persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments, as well as external service providers. Those parties may
also attempt to fraudulently induce employees, customers or other users of the Company’s systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. In addition, while we have certain standards for all vendors that provide us services, our vendors, and in turn, their own service providers, may become subject to a security breach, including as a result of their failure to perform in accordance with contractual arrangements.
Security breaches or other technological failures may also result in regulatory inquiries, regulatory proceedings, regulatory and litigation costs, and reputational damage. We may incur reimbursement and other expenses, including the costs of litigation and litigation settlements and additional compliance costs. We may also incur considerable expenses in enhancing and
upgrading computer systems and systems security following such a failure.
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, result in a violation of applicable privacy and other laws, subject us to substantial regulatory sanctions and other claims, lead to a loss of customers and revenues, or financial loss to our customers and otherwise adversely affect our business.
The occurrence of natural or man-made disasters could adversely affect our operations, results of operations and financial condition.
The occurrence of natural disasters, including hurricanes,
floods, earthquakes, tsunamis, tornadoes, fires, explosions, pandemic disease and man-made disasters, including acts of terrorism and military actions, could adversely affect our operations, results of operations or financial condition, including in the following respects:
•Catastrophic loss of life due to natural or man-made disasters could cause us to pay benefits at higher levels and/or materially earlier than anticipated and could lead to unexpected changes in persistency rates.
•A man-made or natural disaster, such as an earthquake in Japan, could result in disruptions in our operations, losses in our investment portfolio or the failure of our counterparties to perform, or cause significant volatility in global financial markets.
•A terrorist attack affecting
financial institutions in the U.S. or elsewhere could negatively impact the financial services industry in general and our business operations, investment portfolio and profitability in particular.
•Pandemic disease, such as those caused by the novel coronavirus ("COVID-19"), could have a severe adverse effect on, global, national and local economies, Prudential Financial’s business, the business of the Partnership, as well as the Partnership’s tenants. The potential impact of such a pandemic on Prudential Financial’s and the Partnership’s results of operations and financial position is variable, and would depend on numerous factors, including the effectiveness of vaccines and the rate of contagion, the regions of the world most affected and the effectiveness of treatment for the infected population.In addition to the potential consequences listed
above, these same factors may cause prospective tenants of the Partnership to delay their leasing decisions or choose to lease less space.
The above risks are more pronounced in respect of geographic areas, including major metropolitan centers, where we have concentrations of customers, including under group and individual life insurance, concentrations of employees or significant operations, and in respect of countries and regions in which we operate subject to a greater potential threat of military action or conflict. Ultimate losses would depend on the rates of mortality and morbidity among various segments of the insured population, the collectability of reinsurance, the possible macroeconomic effects on our asset portfolio, the effect on lapses and surrenders of existing policies, as well as sales of new policies and other variables.
There can be no assurance that our business
continuation plans and insurance coverages would be effective in mitigating any negative effects on our operations or profitability in the event of a terrorist attack or other disaster.
Finally, climate change may increase the frequency and severity of weather related disasters and pandemics. In addition, climate change regulation may affect the prospects of companies and other entities whose securities we hold, or our willingness to continue to hold their securities. It may also impact other counterparties, including reinsurers, and affect the value of investments, including real estate investments we hold or manage for others. We cannot predict the long-term impacts on us from climate change or related regulation.
A-4
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Prudential Variable Contract Real Property Account (“Real Property Account”) was closed to new investment on February 22, 2021. Owners of the contracts may have held participating account value in the Real Property Account during the reporting period. Contract values varied with the performance of the Real Property Account’s investments through the Partnership. Participating interests in the Real Property Account are not traded in any public market; therefore, a discussion
of market information is not relevant.
As of December 31, 2021, 17,651 contract owners of record held investments in the Real Property Account.
On March 31, 2021, the Company, after obtaining regulatory approvals, filed with the Securities and Exchange Commission ("SEC") their notice of liquidation to liquidate the Real Property Account, and along with Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey to liquidate the Partnership on February 22, 2022 (the "liquidation date"). Preexisting automatic program instructions continued
to allocate to the Real Property Account until April 26, 2021. From this date to the liquidation date, any allocation to the Real Property Account automatically redirected to the AST Cohen & Steers Realty Portfolio. Contract owners were given the option to voluntarily re-allocate to an available investment option other than the AST Cohen & Steers Realty Portfolio.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent developments
Effective
February 22, 2021, the Real Property Account closed to new investments. On March 31, 2021, the Company, after obtaining regulatory approvals, filed with the SEC their notice of liquidation to liquidate the Real Property Account, and along with Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey to liquidate the Partnership on February 22, 2022.
The following discussion and analysis of the liquidity and capital resources and results of operations of the Partnership should be read in conjunction with the audited financial statements of the Real Property Account and the audited consolidated financial statements of the Partnership and the related Notes included in this filing.
(a) Liquidity and Capital Resources
As of December 31, 2021, the Partnership’s net assets in liquidation consisted of the last remaining asset, a storage property in Miami, FL which is being held at a liquidation value of $26.0 million.Cash and cash equivalents as well as Other Assets consisted of proceeds from the sale of 9 properties: the retail properties in Hampton, VA, Westminster, MD, Roswell, GA, and Norcross, GA along with the apartment properties in Charlotte, NC, Seattle, WA #1 and #2, Maplewood, NJ, and Chicago, IL.The proceeds from these sales and cash at the property level totals $178.1 million.The
$204.1 million in total assets is partially offset by $1.9 million in liabilities for remaining potential expenses.
(b) Results of Operations
In light of the adoption of Liquidation Basis of Accounting as of April 1, 2021, the results of operations for the current period are not comparable to the prior year periods. Due to the adoption of the Plan of Dissolution, we no longer consider this to be a key performance measure.
Net investment income overview
The Partnership’s net investment income attributable to the General Partners’ controlling interest for the year ended December
31, 2020 was approximately $4.9 million, a decrease of approximately $1.2 million from the prior year. The decrease in net investment income attributable to the General Partners’ controlling interest was primarily due to a decrease of $0.9 million in the retail sector’s net investment income from the prior year, and a $0.3 million increase in other expenses from prior year.
Valuation overview
The Partnership recorded net recognized and unrealized losses attributable to the General Partners’ controlling interest of approximately $34.5 million for the year ended December 31, 2020, an increase in net recognized and unrealized losses of $34.5 million from the prior year. The increase in net recognized and unrealized losses is primarily due to the increase in recognized losses on retail properties of $15.6 million from prior year,
higher valuation decreases in the retail sector of $9.6 million from the prior year, higher net valuation decreases in the apartment sector of $6.2 million from the prior year, higher net valuation decreases in the storage sector of $5.7 million from prior year, partially offset by a higher recognized gain in the apartment sector of $2.6 million from the prior year.
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The following table presents a comparison of the Partnership’s sources of net investment income (loss) attributable to the General Partners’ controlling interest and net recognized and unrealized gains (losses) attributable to the General Partners’ controlling interest for the years ended December 31, 2020 and 2019.
Other (including interest income, investment management fees, etc.)
(4,039,976)
(3,760,645)
Total Net Investment Income
$
4,890,029
$
6,084,052
Net
Recognized Gain (Loss) on Real Estate Investments:
Apartments properties
2,579,162
—
Retail properties
(15,553,066)
—
Net
Recognized Gain (Loss) on Real Estate Investments
$
(12,973,904)
$
—
Net Unrealized Appreciation (Depreciation) on Real Estate Investments:
Apartment properties
$
(1,543,551)
$
4,631,844
Retail
properties
(16,791,627)
(7,142,597)
Storage properties
(3,210,810)
2,484,692
Net Unrealized Appreciation (Depreciation) on Real Estate Investments
(21,545,988)
(26,061)
Net
Recognized and Unrealized Gain (Loss) on Real Estate Investments
$
(34,519,892)
$
(26,061)
Increase/(Decrease) in Net Assets
$
(29,629,863)
$
6,057,991
APARTMENT PROPERTIES
Year
Ended December 31,
Net Investment Income/(Loss) 2020
Net Investment Income/(Loss) 2019
Recognized/Unrealized Gain/(Loss) 2020
Recognized/Unrealized Gain/(Loss) 2019
Occupancy 2020
Occupancy 2019
Property
Austin,
TX
$
1,218,010
$
1,093,741
$
2,579,162
$
1,777,139
SOLD
93
%
Charlotte, NC
375,846
466,899
2,915,556
116,486
91
%
94
%
Seattle,
WA #1
584,424
736,655
(235,584)
1,153,571
90
%
95
%
Seattle, WA #2
1,074,208
1,051,121
(139,453)
670,869
88
%
98
%
Maplewood,
NJ
314,637
353,097
(3,710,674)
(121,519)
78
%
88
%
Chicago, IL (1)
43,551
(11,834)
(373,396)
1,035,298
88
%
53
%
$
3,610,676
$
3,689,679
$
1,035,611
$
4,631,844
(1) Increase
in YOY Occupancy % due to the asset completing development and now in lease up
Net investment income/(loss)
Net investment income attributable to the General Partners’ controlling interest for the Partnership’s apartment properties was approximately $3.6 million for the year ended December 31, 2020, which represents a decrease of approximately $0.1 million from the prior year.
Recognized and unrealized gain/(loss)
The apartment properties owned by the Partnership produced a net recognized and unrealized gain attributable to the General Partners’ controlling interest of approximately $1.0 million for the year ended December 31, 2020 compared with a net unrealized gain attributable to the General
Partners’ controlling interest of approximately $4.6 million from the prior year.The net recognized and unrealized gain attributable to the General Partners’ controlling interest for the year ended December 31, 2020 was primarily due to attractive pricing on the sales of the Austin, TX property in December 2020 and the Charlotte, NC property (sold in January 2021) due to strong growth prospects in these markets and attractive debt availability.Partially offsetting these recognized gains were unrealized losses at the Maplewood, NJ property, as rents and vacancy have been impacted by COVID-19.
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RETAIL
PROPERTIES
Year Ended December 31,
Net Investment Income/(Loss) 2020
Net Investment Income/(Loss) 2019
Recognized/Unrealized Gain/(Loss) 2020
Recognized/Unrealized Gain/(Loss) 2019
Occupancy 2020
Occupancy 2019
Property
Hampton,
VA
$
445,355
$
661,351
$
(7,544,662)
$
(2,742,444)
50
%
48
%
Ocean City, MD
951,866
1,173,021
(15,317,619)
(470,956)
SOLD
96
%
Westminster,
MD
1,375,069
1,358,662
(4,100,240)
(3,502,311)
96
%
96
%
Roswell, GA
1,312,676
1,274,214
(646,725)
48,423
100
%
100
%
North
Fort Myers, FL
5,400
529,405
(235,447)
(1,231,530)
SOLD
88
%
Norcross, GA
765,059
794,316
(4,500,000)
756,221
100
%
100
%
$
4,855,425
$
5,790,969
$
(32,344,693)
$
(7,142,597)
Net
investment income/(loss)
Net investment income attributable to the General Partners’ controlling interest for the Partnership’s retail properties was approximately $4.9 million for the year ended December 31, 2020, which represents a decrease of approximately $0.9 million from the prior year.Approximately $0.5 million of the decrease is due to the sale of the North Fort Meyers, FL property in the first quarter of 2020, as well as lower rental revenues at the Hampton, VA and Ocean City, MD properties due to vacancies and store closings due to the COVID-19 pandemic
Recognized and unrealized gain/(loss)
The retail properties owned by the Partnership produced a net recognized and unrealized loss attributable to the General Partners’ controlling
interest of approximately $32.3 million for the year ended December 31, 2020, compared with a net unrealized loss attributable to the General Partners’ controlling interest of approximately $7.1 million from the prior year.The net recognized and unrealized loss attributable to the General Partners’ controlling interest for the year ended December 31, 2020 was most notable at the Ocean City, MD property, as elevated rollover and credit concerns increased the perceived risk of the asset, which was sold in December 2020.In addition, the Hampton, VA, Norcross, GA and Westminster, MD properties, experienced valuation decreases as the sector struggled with the perceived risk from the COVID-19 challenges.
STORAGE
PROPERTIES
Net Investment Income/(Loss) 2020
Net Investment Income/(Loss) 2019
Recognized/Unrealized Gain/(Loss) 2020
Recognized/Unrealized Gain/(Loss) 2019
Occupancy 2020
Occupancy 2019
Property
Miami,
FL
$
463,904
$
364,049
$
(3,210,810)
$
2,484,692
91%
94%
Net investment income/(loss)
Net investment income attributable
to the General Partners’ controlling interest related to the Partnership’s storage property was $0.5 million for the year ended December 31, 2020, compared to $0.4 million for the year ended December 31, 2019.This property was acquired vacant in August 2017 and has been in lease-up since that time.
Recognized and Unrealized gain/(loss)
The storage property owned by the Partnership produced a net unrealized loss attributable to the General Partners’ controlling interest of approximately $3.2 million for the year ended December 31, 2020, compared to a net unrealized gain of $2.5 million for the year ended December
31, 2019.This property experienced a valuation decline largely due to additional supply impacting rental rates.
Other
Other net investment expense mainly includes investment management fees, other portfolio level expenses and interest income.Other net investment expense attributable to the General Partners’ controlling interest was approximately $4.04 million for the year ended December 31, 2020, which represents an increase of approximately $0.3 million from the prior year.The increase in other net investment expense is primarily due to a decrease of $0.3 million in interest income.
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Critical
Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management reviews critical estimates and assumptions on an ongoing basis. If management determines, as a result of its consideration of facts and circumstances, that modifications in assumptions and estimates are appropriate, results of operations and financial position as reported in the audited financial statements of the Real Property Account and the consolidated financial statements of the Partnership may change significantly.
The following sections discuss the critical accounting policies applied in preparing the financial statements of the Real Property Account and the consolidated financial statements of the Partnership that are most dependent on the application of estimates and assumptions.
Valuation of Investments
Under the liquidation basis of accounting,the Partnership accrues costs and income that it expects to incur and earn through the completion of its liquidation, including the estimated amount of cash the Partnership expects to collect through the disposal of its assets and the estimated costs to dispose of its assets, to the extent it has a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation on the Consolidated Statement of Net Assets in Liquidation.
The liquidation values of the Company’s investments in real estate are presented on an undiscounted
basis. Subsequent to April 1, 2021, all changes in the estimated liquidation value of the investments in real estate are reflected as a change to the Partnership’s net assets in liquidation. As of December 31, 2021, the Partnership estimated the liquidation value of its investments in real estate based on an internal valuation methodology using the sales comparison approach.
Under the Going Concern Basis, real estate investments are carried at fair value. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property,
including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above and below market leases, in-place leases, and tenant relationships at the time of acquisition.
In general, fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of PGIM, Inc. (“PGIM”) is responsible for assuring that the valuation process providesindependent and reasonable property fair value estimates. PGIM is an indirectly owned subsidiary of Prudential Financial. An unaffiliated third
party has been appointed by PGIM to assist the Chief Real Estate Appraiser in maintaining and monitoring the independence and the accuracy of the appraisal process. The fair value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. In accordance with FASB authoritative guidance on fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic
obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them to determine the approximate value for the type of real estate in the market.
Other Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements of the Real Property Account and the consolidated
financial statements of the Partnership and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
A-8
Property Markets
Storage:Occupancy and rent levels are improving rapidly, boosting growth in income. The outlook for the sector remains positive, due to the strong housing market and robust consumption, and construction activity continues to ease. The nature of storage with
its very low expenses and high payout ratio further support investment performance in a rising cost environment.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
A-9
Directors, Executive Officers and Corporate Governance
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
THOMAS
J. BALTIMORE, JR.- Director. Chair, Investment Committee; Member, Executive Committee; Member, Risk Committee; Member, Compensation Committee. Mr. Baltimore is Chairman, President and Chief Executive Officer of Park Hotels & Resorts, Inc., and a director of The American Express Company and Park Hotels & Resorts Inc. Age 58.
GILBERT F. CASELLAS - Director. Chair, Corporate Governance and Business Ethics Committee; Member, Executive Committee; Member, Risk Committee. Mr. Casellas is the former Chairman of OMNITRU. Age 69.
ROBERT M. FALZON - Director. Mr. Falzon is Vice Chair of Prudential Financial, Inc. and The Prudential Insurance Company of America. Age 62.
MARTINA
HUND-MEJEAN - Director. Chair, Audit Committee; Member, Executive Committee; Member, Risk Committee. Ms. Hund-Mejean is the former Chief Financial Officer of MasterCard Worldwide, and a director of the Colgate-Palmolive Company and Shell plc. Age 61.
WENDY E. JONES - Director. Member, Audit Committee. Ms. Jones is the former Senior Vice President of Global Operations, eBay, Inc. Age 56.
KARL J. KRAPEK - Director. Member, Compensation Committee. Mr. Krapek is the former President and Chief Operating Officer, United Technologies Corporation, and a director of Northrop Grumman Corporation and American Virtual Cloud Technologies, Inc. Age 73.
PETER R. LIGHTE -
Director. Member, Investment Committee; Member, Corporate Governance and Business Ethics Committee. Mr. Lighte is the former Vice Chairman, J.P. Morgan Corporate Bank, China, and the founding Chairman of J.P. Morgan Chase Bank, China. Age 73.
CHARLES F. LOWREY- Director. Member, Executive Committee. Mr. Lowrey is the Chairman, President and Chief Executive Officer of Prudential Financial, Inc. and The Prudential Insurance Company of America. Age 63.
GEORGE PAZ - Director. Member, Audit Committee; Member, Finance & Dividends Committee. Mr. Paz is the former Chairman and Chief Executive Officer of Express Scripts Holding Company, and a director of Honeywell International Inc. Age 66.
SANDRA
PIANALTO- Director. Member, Corporate Governance and Business Ethics Committee; Member, Finance & Dividends Committee. Ms. Pianalto is the former President and Chief Executive Officer of the Federal Reserve Bank of Cleveland, and a director of Eaton Corporation plc and The J.M. Smucker Company. Age 67.
CHRISTINE A. POON - Director. Chair, Finance & Dividends Committee; Chair, Executive Committee; Member, Investment Committee; Member, Risk Committee. Ms. Poon is the Executive-In-Residence at the Max M. Fisher College of Business at The Ohio State University, and a director of Regeneron Pharmaceuticals and The Sherwin-Williams Company. Age 69.
DOUGLAS A. SCOVANNER -
Director. Chair, Risk Committee; Member, Executive Committee; Member, Audit Committee. Mr. Scovanner is the Founder and Managing Member of Comprehensive Financial Strategies, LLC. Age 66.
MICHAEL A. TODMAN - Director. Chair, Compensation Committee; Member, Executive Committee; Member, Finance & Dividends Committee; Member, Risk Committee. Mr. Todman is the former Vice Chairman of the Whirlpool Corporation, and a director of Brown-Forman Corporation, Carrier Global Corporation and Mondelez International, Inc. Age 64.
A-10
THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA
EXECUTIVE OFFICERS **
LUCIEN A. ALZIARI- Executive Vice President and Chief Human Resources Officer, Prudential. Age 62.
ROBERT M. FALZON - Vice Chairman, Prudential. Age 62.
STACEY GOODMAN - Executive Vice President and Chief Information Officer, Prudential. Age 59.
ANN M. KAPPLER - Executive Vice President and General Counsel, Prudential. Age 63.
CHARLES F. LOWREY - Chairman, President and Chief Executive Officer, Prudential.
Age 63.
TIMOTHY L. SCHMIDT - Senior Vice President and Chief Investment Officer, Prudential. Age 63.
NICHOLAS C. SILITCH - Senior Vice President and Chief Risk Officer, Prudential. Age 60.
SCOTT G. SLEYSTER - Executive Vice President and Head of International Businesses, Prudential. Age 61.
ANDREW F. SULLIVAN- Executive Vice President and Head of U.S. Businesses, Prudential. Age 51.
KENNETH Y. TANJI - Executive Vice President and Chief Financial Officer, Prudential. Age 55.
CANDACE J. WOODS-
Senior Vice President and Chief Actuary, Prudential. Age 61.
** Principal Officers of The Prudential Insurance Company of America hold comparable positions with Prudential Financial, Inc.
Code of Ethics
We have adopted Prudential Financial’s code of business conduct and ethics, known as “Making the Right Choices,” which applies to our Chief Executive Officer, Chief Financial Officer and our Principal Accounting Officer, as well as to our directors and all other employees. Making the Right Choices is posted on Prudential Financial’s website
at www.investor.prudential.com.
In addition, we have adopted Prudential Financial’s Corporate Governance Guidelines, which we refer to herein as the “Corporate Governance Principles and Practices.” Prudential Financial’s Corporate Governance Principles and Practices are available free of charge at www.investor.prudential.com.
Executive Compensation
The Real Property
Account does not pay any fees, compensation or reimbursement to any Director or Officer of the Registrant.
Certain Relationships and Related Transactions, and Director Independence
See Related Party Transactions in Note 10 of Notes to the Consolidated Financial Statements of the Partnership.
The Registrant is a separate investment account of The Prudential Insurance Company of America ("Prudential"), which is a wholly-owned subsidiary of Prudential Financial. All Directors and Executive Officers of the
Registrant are employees and officers of Prudential.
Principal Accounting Fees and Services
The Audit Committee of the Board of Directors of Prudential Financial has appointed PricewaterhouseCoopers, LLP as the independent registered public accounting firm of Prudential Financial and certain of its domestic and international subsidiaries, including the Registrant. The Audit Committee has established a policy requiring its pre-approval of all audit and permissible non-audit services provided by the independent auditor. Fees related to such services are hereby incorporated
by reference to the section entitled Item 2 - Ratification of the Appointment of Independent Auditors in Prudential Financial's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 10, 2022, to be filed by Prudential Financial with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 2021.
The
Prudential Variable Contract Real Property Account
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of The Prudential Variable Contract Real Property Account (the "Account") as of December 31, 2020, and the related statements of operations and of changes in net assets for each of the two years in the period endedDecember 31, 2020 and for the period from January 1, 2021 to March
31, 2021, and audited the statement of net assets in liquidation as of December 31, 2021, and the related statement changes in net assets in liquidation for the period from April 1, 2021 to December 31, 2021,including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Account as of December 31, 2020, and the results of its operations and changes in its net assets for each of the two years in the period endedDecember 31, 2020 and for the period from January
1, 2021 to March 31, 2021, its net assets in liquidation as of December 31, 2021 and the changes in its net assets in liquidation for the period from April 1, 2021 to December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.
Basis of Accounting
As discussed in Notes 1 and 2 to the financial statements, on March 31, 2021, The Prudential Insurance Company of America filed with the SEC their notice of liquidation to liquidate the Account, and, along with Pruco Life Insurance Company and Pruco Life Insurance
Company of New Jersey, to liquidate the Prudential Variable Contract Real Property Partnership. The Account determined liquidation is imminent. As a result, the Account changed its basis of accounting on April 1, 2021from the going concern basis to a liquidation basis.
Basis for Opinion
These financial statements are the responsibility of The Prudential Insurance Company of America’s management. Our responsibility is to express an opinion on the Account’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Account in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the going concern basis and liquidation basis financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. We determined there are no critical audit matters.
The
Prudential Variable Contract Real Property Account (the “Real Property Account” or the “Registrant”) was established on November 20, 1986 by resolution of the Board of Directors of The Prudential Insurance Company of America (“Prudential” or the “Company”), as a separate investment account pursuant to New Jersey law and is registered with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended. Prudential is a wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). The assets of the Real Property Account are segregated from Prudential’s other assets. The Real Property Account is used to fund benefits under certain variable life insurance and variable annuity contracts issued by Prudential.
These products are Variable Appreciable Life (“PVAL”, “PVAL $100,000+ Face Value,” and “CVAL”), Discovery Plus (“PDISCO+”), and Variable Investment Plan (“VIP”).
The assets of the Real Property Account are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). The Partnership is the investment vehicle for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts. The Real Property Account, along with Pruco Life Variable Contract Real Property Account and Pruco Life of New Jersey Variable Contract
Real Property Account, are the sole investors in the Partnership. The General Partners of the Partnership are Prudential, Pruco Life Insurance Company (“Pruco Life”), a wholly-owned subsidiary of Prudential, and Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey”), a wholly-owned subsidiary of Pruco Life. These financial statements should be read in conjunction with the accompanying audited consolidated financial statements of the Partnership.
The Partnership has a policy of investing at least i65%
of its assets in direct ownership interests in income-producing real estate and participating mortgage loans.
COVID-19 - Since the first quarter of 2020, the novel coronavirus (“COVID-19”) has resulted in extreme stress and disruption in the global economy and financial markets. While the markets have rebounded, the pandemic has adversely impacted, and may continue to adversely impact, the financial performance of the Partnership in which the Real Property Account invests. Due to the highly uncertain nature of these conditions, it is not possible to estimate the ultimate impacts at this time.
Effective February 22, 2021, the
Real Property Account closed to new investments. On March 31, 2021, Prudential, after obtaining regulatory approvals, filed with the SEC their notice of liquidation to liquidate the Real Property Account, and along with Pruco Life and Pruco Life of New Jersey to liquidate the Partnership on February 22, 2022 (the “liquidation date”). This filing with the SEC is considered Post-Effective Amendment to Form S-1 filing. Any contract owner allocation to the Real Property Account as of the liquidation date was transferred to the AST Cohen & Steers Realty Portfolio. Contract owners were given the option to voluntarily re-allocate to an available
investment option other than the AST Cohen & Steers Realty Portfolio.
Note 2: iSummary of Significant Accounting Policies
A. iBasis
of Accounting
The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of
America (“U.S. GAAP”).
Liquidation Basis of Accounting
As a result of the filing of the Plan of Liquidation by Prudential, it was determined that liquidation was imminent and the Real Property Account’s basis of accounting transitioned effective April 1, 2021 from the going concern basis of accounting (“Going Concern Basis) to liquidation basis of accounting (“Liquidation Basis of Accounting”) in accordance with U.S. GAAP. Liquidation Basis of Accounting requires the Real Property Account’s assets
to be measured at the estimated amounts of consideration the Real Property Account expects to collect in settling or disposing of its assets, and liabilities are to be measured at the estimated amounts at which the liabilities are expected to be settled. Actual costs and income, such as charges for mortality and expense risk and administrative expenses, may differ from amounts reflected in the financial statements because of the inherent uncertainty in estimating future events. Charges for mortality and expense risk and administrative expenses are used by Prudential to purchase additional investments in its account resulting in no impact to its net assets.
Upon the adoption of the Liquidation Basis of Accounting, the Partnership recorded adjustments to its net assets in liquidation related to the General Partners’ Controlling Interest, effective April 1, 2021, in the amount
of $(7,679,447). These adjustments are allocated to the Real Property Account based on its proportionate interest in the Partnership and are reflected in the Real Property Account’s net assets in liquidation as of April 1, 2021.
Going Concern Basis
All financial results and disclosures through March 31, 2021, prior to adopting the Liquidation Basis of Accounting, are presented based on a Going Concern Basis, which contemplates the realization of assets and liabilities in the normal course of business.
B-5
NOTES TO THE FINANCIAL STATEMENTS OF
THE
PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
Note 2: Summary of Significant Accounting Policies (continued)
The Real Property Account has evaluated subsequent events through the date these financial statements were issued, and no other adjustment or disclosure is required in the financial statements.
iUse
of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures at the date of the financial statements and the reported amounts of increases and decreases in net assets resulting from operations during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to the valuation of the investment in the Partnership. Fair value is used to approximate the net realizable value of the investment in the Partnership at liquidation basis of accounting. See Note 9 for more information.
B. iInvestment
in Partnership Interest
The investment in the Partnership is based on the Real Property Account’s proportionate interest of the Partnership’s fair value. At both December 31, 2021 and 2020, the Real Property Account’s share of the general partners' controlling interest of the Partnership was ii42.5/%
or ii1,838,524/
shares.
C. iIncome Recognition
Liquidation Basis of Accounting
Under the Liquidation Basis of Accounting, the Real Property Account has accrued all revenue and expenses that it expects to incur through the completion of its liquidation to the extent it has a reasonable basis of estimation. Subsequent to April 1, 2021, the Real Property Account’s estimated revenue and expenses did not differ
from the actual results.
Going Concern Basis
Net investment income or loss and recognized gains and losses are allocated based upon the average daily net assets for the investment in the Partnership. Amounts are based on the Real Property Account’s proportionate interest in the Partnership. All changes in fair value are recorded as net change in unrealized appreciation (depreciation) on investments in the Statements of Operations.
D. iEquity
of The Prudential Insurance Company of America
Prudential maintains a position in the Real Property Account for liquidity purposes, including unit purchases and redemptions, Partnership share transactions, and expense processing. The position does not affect contract owners’ accounts or the related unit values.
There were iiino//
cash transactions at the Real Property Account level for the years ended December 31, 2021, 2020, and 2019 as all of the transactions are settled by Prudential on behalf of the Real Property Account through a redemption or an issuance of units. Therefore, no statement of cash flows is presented for the years ended December 31, 2021, 2020, and 2019.
Note 3: iTaxes
Prudential
is taxed as a “life insurance company”, as defined by the Internal Revenue Code. The results of operations of the Real Property Account form a part of Prudential Financial’s consolidated federal tax return. Under current federal, state and local law, no federal, state or local income taxes are payable by the Real Property Account. As such, no provision for the tax liability has been recorded in these financial statements. Prudential management will review periodically the status of the policy in the event of changes in the tax law.
Note 4: iNet
Contributions (Withdrawals) by Contract Owners
Prudential sells a number of variable annuity and variable life insurance products. These products have unique combinations of features and fees that are charged against the contract owner’s account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns.
Liquidation Basis of Accounting
The
Real Property Account’s management determined that presentation of financial highlights is not relevant and useful in understanding the liquidation basis financial statements. As a result, the Real Property Account elected to exclude the presentation of financial highlights for the period April 1, 2021 to December 31, 2021.
Going Concern Basis
i
In the table below, the contract
owner units and net assets, the investment income ratio and the ranges of lowest to highest unit values, expense ratios and total returns are presented for the products offered by Prudential and funded through the Real Property Account. Only product designs within the Real Property Account that had contract owner units outstanding during the respective periods were considered when determining the ranges, which exclude Prudential’s position in the Real Property Account.
The table may not reflect the minimum and maximum contract charges as contract owners may not have selected all available and applicable products offered by Prudential as disclosed in Note
1.
B-8
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
(1)These
amounts represent the contract owners' proportionate share of net investment income from the underlying Partnership divided by the contract owners' average daily net assets of the Real Property Account. These ratios exclude those expenses, such as mortality and expense risk and administrative expenses that result in direct reductions in the unit values.
(2)These amounts represent the annualized contract expenses of the Real Property Account (except for the period ended March 31, 2021 which is not annualized), consisting primarily of mortality and expense risk
and administrative charges, for each period indicated. These ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying Partnership are excluded.
(3)These amounts represent the total return for the periods indicated, including changes in the value of the underlying Partnership, and reflect deductions for all items included in the expense ratio. The total return does not include any expense assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented.
Prudential
also maintains a position in the Real Property Account to provide for property acquisitions and capital expenditure funding needs. The table below reflects information for assets held by Prudential. Charges for mortality and expense risk and administrative expenses are used by Prudential to purchase additional investments in its account resulting in no impact to its net assets.
Mortality and expense risk charges are determined daily using an effective annual rate of i1.2%, i0.9%,
i0.6% and i1.2% for PDISCO+, PVAL, PVAL $100,000 + Face
Value and VIP, respectively (for PDISCO+, the i1.2% includes a i0.20% administrative
charge). CVAL used the same fees and charges as the PVAL $100,000 + Face Value. Mortality risk is the risk that life insurance contract owners may not live as long as estimated or annuitants may live longer than estimated, and expense risk is the risk that the cost of issuing and administering the contracts may exceed related charges by Prudential. The mortality risk and expense risk charges are assessed through a reduction in unit values.
B. Cost of Insurance and Other Related Charges
Contract owner contributions are subject to certain deductions prior to being invested in the Real Property Account. The deductions
for PVAL and PVAL $100,000 + Face Value are (1) taxes attributable to premiums; and (2) transaction costs which are deducted from each premium payment to cover premium collection and processing costs. Contracts are subject to charges on each basic premium for assuming a guaranteed minimum death benefit risk. This charge compensates Prudential for the risk that an insured may die at a time when the death benefit exceeds the benefit that would have been payable in the absence of a minimum guarantee. These charges are assessed through the redemption of units.
B-9
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY ACCOUNT
A deferred sales charge is imposed upon the withdrawals of certain purchase payments to compensate Prudential for sales and other marketing expenses for PDISCO+ and VIP. The amount of any deferred sales charge will depend on the amount withdrawn and the number of contract years that have elapsed since the contract owner or annuitant made the purchase payments deemed to be withdrawn. As the amount of time that has elapsed since a given purchase payment
made increases, the deferred sales charge applicable to that purchase payment generally decreases. No deferred sales charge is made against the withdrawal of investment income. No sales charge is imposed upon death benefit payments or upon transfers made between subaccounts. This deferred sales charge is assessed through the redemption of units.
D. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the cash surrender value for PVAL and PVAL $100,000 + Face Value. A charge equal to the lesser of $ii15/
or ii2/%
will be made in connection with each partial withdrawal of the cash surrender value of a contract. This charge is assessed through the redemption of units.
E. Annual Maintenance Charge
An annual maintenance charge, applicable to PDISCO+ and VIP, of $ii30/
will be deducted if and only if the contract account value is less than $ii10,000/
on a contract anniversary or at the time a full withdrawal is affected, including a withdrawal to affect an annuity. The charge is made by reducing accumulation units credited to a contract owner’s account.
Note 8: iRelated
Party Transactions
The Real Property Account has transactions and relationships with Prudential and other affiliates. Due to these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.
Prudential Financial and its affiliates perform various services on behalf of the Partnership in which the Real Property Account invests and may receive fees for the services performed. These services include, among other things, shareholder communications, postage, transfer agency and various other record keeping and customer service functions.
Note 9: iFair
Value Measurements
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Real Property Account values its investment in the Partnership at fair value, which reflects the Real Property Account's proportionate interest in the net asset value of the Partnership, in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurement.
As a result of adopting the Liquidation Basis of Accounting, as discussed in the Partnership’s notes to the consolidated financial statements, the real estate assets were recorded at their estimated liquidation value, which represents the estimated gross amounts of cash that the Partnership will collect on disposal
of assets as it carries out its liquidation plan.
Specific for the Partnership’s real estate assets under the Going Concern Basis, the properties owned by the Partnership are illiquid and their fair value is based on estimates from property appraisal reports prepared by independent real estate appraisers as discussed in the notes to the Partnership’s audited consolidated financial statements. The purpose of an appraisal is to estimate the fair value of real estate as of a specific date. The estimate of fair value of real estate is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor;
and (3) value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximate value for the type of real estate in the market.
The following is a summary of the investment strategy, risks, and redemption provisions of the Partnership:
The Partnership has a policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate, such as office buildings, shopping centers, hotels, apartments or industrial properties, and participating mortgage loans. The Partnership is subject to the risks inherent in the ownership of real property such as fluctuations in occupancy rates and operating expenses and variations in rental schedules. The Partnership properties are also subject to
the risk of loss due to certain types of damage, which are either uninsurable or not economically insurable. The Partnership enters into loan agreements with certain lenders to finance its real estate investment transactions. Unfavorable economic conditions could increase related borrowing costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Partnership. Refer to the Partnership’s audited consolidated financial statements for other related risks.
B-10
NOTES TO THE FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
The Partnership allows for withdrawal of cash, in any amount up to a partner’s value of the Partnership. Ordinarily payment of the amount requested will be made on the day following the request. The Partnership reserves the right to defer such payments for a period of up to six months if the partners or the investment manager determine that there is insufficient cash available and prompt disposition of investments held by the Partnership cannot be made on commercially reasonable terms.
The Real Property Account had no unfunded capital commitments as of December 31, 2021.
B-11
Report
of Independent Registered Public Accounting Firm
To The Prudential Insurance Company of America, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey (collectively, the “General Partners”) and Boards of Directors of the General Partners of the Prudential Variable Contract Real Property Partnership
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilitiesof The Prudential Variable Contract
Real Property Partnership and its subsidiaries (the “Partnership”) as of December 31, 2020, and the related consolidated statements of operations, of changes in net assets and of cash flows for each of the two years in the period ended December 31, 2020and for the period fromJanuary 1, 2021toMarch 31, 2021,and audited the consolidated statement of net assets in liquidation, including the consolidated schedule of investments in liquidation,
as of December 31, 2021, and the related consolidated statement of changes in net assets in liquidation for the period from April 1, 2021 to December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnershipas of December 31, 2020, the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020and for the period from January 1, 2021toMarch 31, 2021,its net assets in liquidation as ofDecember 31, 2021, and the changes initsnet assets in liquidation for the period fromApril 1, 2021 to December 31, 2021in conformity with accounting principles generally accepted in the United States of America applied on the bases described below.
Basis of Accounting
As
discussed inNotes 2 and 3 to the consolidated financial statements, on March 31, 2021, theGeneral Partnersof the Partnership filed with the SEC their notice of liquidation to liquidate the Partnership, and the Partnership determined liquidation is imminent. As a result, the Partnership changed its basis of accounting on April 1, 2021 from the going concern basis to a liquidation basis.
Basis for Opinion
These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidatedfinancial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
C-1
Critical
Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated going concern basis and liquidation basis financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. We determined there are no critical audit matters.
On April 29, 1988, The Prudential Variable Contract Real Property Partnership (the “Partnership”), a general partnership organized under New Jersey law, was formed through an agreement among The Prudential Insurance Company of America (“Prudential”), a wholly-owned subsidiary of Prudential Financial, Inc. ("Prudential Financial"), Pruco Life Insurance Company (“Pruco Life”), a wholly-owned subsidiary of Prudential, and Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey”), a wholly-owned subsidiary of Pruco Life. The Partnership was established as a means by which assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts
issued by the respective companies could be invested in a commingled pool. The partners in the Partnership are Prudential, Pruco Life and Pruco Life of New Jersey (collectively, the “General Partners”), which own 42.5%, 53.0%, and 4.5%, respectively. The General Partners may make additional daily cash withdrawals from the Partnership in accordance with the provisions of the Partnership Agreement.
The Partnership’s policy is to invest at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans.
The net asset value per share of the Partnership’s shares is determined daily, consistent with the Partnership Agreement. On each day during which the New York Stock Exchange is open for business, the net asset value of the Partnership is estimated using the estimated fair value of its assets reduced by any liabilities
of the Partnership. The periodic adjustments to property values and other adjustments to previous estimates are made on a prospective basis. There can be no assurance that all such adjustments to estimates will be made timely.
Shares of the Partnership are held by The Prudential Variable Contract Real Property Account, Pruco Life Variable Contract Real Property Account and Pruco Life of New Jersey Variable Contract Real Property Account (the “Real Property Accounts”) and may be purchased and sold at the then current net asset value of the Partnership’s net assets. The net asset value per share is calculated by dividing the net asset value of the Partnership
as determined above by the number of shares outstanding. A contract owner participates in the Partnership through interests in the Real Property Accounts.
PGIM Real Estate, is the real estate advisory unit of PGIM, Inc. (“PGIM”), which is an indirectly-owned subsidiary of Prudential Financial. PGIM, through PGIM Real Estate, provides investment advisory services to the Partnership’s partners pursuant to the terms of the Investment Management Agreement as described in Note 9.
Effective
February 22, 2021, the Real Property Account closed to new investments. On March 31, 2021, the General Partners, after obtaining regulatory approvals, filed with the SEC their notice of liquidation to liquidate the Real Property Account and the Partnership on or about February 22, 2022 (the “liquidation date”). This filing with the SEC is considered Post-Effective Amendment to Form S-1 filing. Any contract owner allocation to the Real Property Account as of the liquidation date was transferred to the AST Cohen & Steers Realty Portfolio. Contract owners were given the option to voluntarily reallocate to an available investment option
other than the AST Cohen & Steers Realty Portfolio.
Note 3: Summary of Significant Accounting Policies
A.Basis of Presentation
Liquidation Basis of Accounting
As a result of the filing of the Plan of Liquidation by the General Partners, it was determined that liquidation was imminent and the Partnership's basis of accounting transitioned effective April 1, 2021 from the going concern basis of accounting ("Going Concern Basis") to liquidation basis of accounting ("Liquidation Basis of Accounting")
in accordance with U.S. GAAP. Liquidation Basis of Accounting requires the Partnership’s assets to be measured at the estimated amounts of consideration the Partnership expects to collect in settling or disposing of its assets and liabilities are to be measured at the estimated amounts at which the liabilities are expected to be settled. Actual costs and income may differ from amounts reflected in the financial statements because of the inherent uncertainty in estimating future events. Differences may be material. See Note 2, “Plan of Liquidation” and Note 7, “Accrued and estimated liquidation costs” for further discussion. Actual costs incurred but unpaid as of December 31, 2021 are included in accounts payable and accrued expenses, due to affiliates and other liabilities on the Consolidated Statement of Net Assets
in Liquidation.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Note 3: Summary of Significant Accounting Policies (continued)
The Partnership's management determined that presentation of financial highlights is not relevant and useful in understanding the liquidation-basis financial statements. As
a result, the Partnership elected to exclude the presentation of financial highlights for the period April 1, 2021 to December 31, 2021.
Going Concern Basis of Accounting
All financial results and disclosures through March 31, 2021, prior to adopting the Liquidation Basis of Accounting, are presented based on a Going-Concern Basis, which contemplates the realization of assets and liabilities in the normal course of business. As a result, the Consolidated Statements of Operations, the Consolidated Statements of Changes in Net Assets, and the Consolidated Statements of Cash Flows for the period January 1, 2021 through
March 31, 2021 and the years ended December 31, 2020 and 2019 are presented on a Going-Concern Basis.
The consolidated financial statements include wholly-owned entities and those real estate joint ventures in which the Partnership has a controlling interest. All significant intercompany balances and transactions have been eliminated upon consolidation. The Partnership evaluated subsequent events through March 31, 2022, the date these consolidated financial statements were issued.
B.Management’s Use of Estimates in the Consolidated Financial Statements - The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
C.Real Estate Investments
Liquidation Basis of Accounting
The Partnership accrues costs and income that it expects to incur and earn through the completion of its liquidation, including the estimated amount of cash the Partnership expects to collect through the disposal of its assets and the estimated costs to dispose of its assets, to the extent it has a reasonable basis for estimation.
These amounts are classified as Accrued Disposition Costs on the Consolidated Statement of Net Assets in Liquidation.
The liquidation values of the Company’s investments in real estate are presented on an undiscounted basis. Subsequent to April 1, 2021, all changes in the estimated liquidation value of the investments in real estate are reflected as a change to the Partnership’s net assets in liquidation. As of December 31, 2021, the Partnership estimated the liquidation value of its investments in real estate based on an internal valuation methodology using the sales comparison approach.
Going Concern Basis
Real
estate investments are carried at fair value. Properties owned are initially recorded at the purchase price plus closing costs. Development costs and major renovations are capitalized as a component of cost, and routine maintenance and repairs are charged to expense as incurred. Real estate costs include the cost of acquired property, including all the tangible and intangible assets. Tangible assets include the value of all land, building and tenant improvements at the time of acquisition. Intangible assets include the value of any above and below market leases, in-place leases and tenant relationships at the time of acquisition.
In general, fair value estimates are based upon property appraisal reports prepared by independent real estate appraisers (members of the Appraisal Institute or an equivalent organization) within a reasonable amount of time following acquisition of the real
estate and no less frequently than annually thereafter. The Chief Real Estate Appraiser of PGIM is responsible for assuring that the valuation process provides independent and reasonable property fair value estimates.An unaffiliated third party appraisal management firm has been appointed by PGIM to assist the Chief Real Estate Appraiser in maintaining and monitoring the independence and the accuracy of the appraisal process. The fair value of real estate investments does not reflect the transaction sale costs, which may be incurred upon disposition of the real estate investments.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT
REAL PROPERTY PARTNERSHIP
Note 3: Summary of Significant Accounting Policies (continued)
The purpose of an appraisal is to estimate the fair value of real estate as of a specific date.In accordance with FASB authoritative guidance on fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment.The
three approaches are: (1) Cost Approach - current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) Income Approach - discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) Market Approach - value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the independent appraiser uses one or a combination of them, to come up with the approximate value for the type of real estate in the market. Key inputs and assumptions include rental income and expense amounts, related rental income and expense growth rates, discount rates and capitalization rates.
In general, the inputs used in the appraisal process are unobservable, therefore, unless indicated otherwise, real estate
investments are classified as Level 3 (see Note 5 for detail) under the FASB authoritative guidance for fair value measurements.
As described above, the estimated fair value of real estate and real estate related assets is generally determined through an appraisal process.These estimated fair values may vary significantly from the prices at which the real estate investments would sell, since market prices of real estate investments can only be determined by negotiation between a willing buyer and seller. These variances could be material to the consolidated financial statements.Although the estimated fair values represent subjective estimates, management believes these estimated fair values are reasonable approximations of market prices and the aggregate estimated value of investments
in real estate is fairly presented as of December 31, 2020.
D.Other Assets - Other assets includes both cash for operating and capital expenditures maintained by consolidated joint ventures, tenant security deposits by both the wholly-owned and consolidated joint ventures, restricted cash for wholly-owned and consolidated joint ventures reserved for future payments of investment level debt, real estate taxes and insurance premiums, as well as tenant receivables maintained by wholly-owned and consolidated joint ventures. As of December 31, 2021 and 2020, cash held by joint ventures was $0.5 million and $2.7 million, respectively and restricted
cash held by both wholly owned and consolidated joint ventures was $0.1 million and $2.6 million, respectively.The balances for tenant security deposits held by wholly-owned and consolidated joint ventures were $0.3 million and $0.3 million, as of December 31, 2021 and 2020, respectively. The balances for tenant receivables held by wholly-owned and consolidated joint ventures were $0.2 million and $0.8 million, respectively, for the same periods, which is shown net of allowance for uncollectible accounts of $0.1 million and $0.3 million, respectively, for the same periods.
The Partnership held $0.1 million and $0.2 million as of December 31, 2021 and 2020,
respectively, in escrow accounts for property taxes, insurance and various other property related matters as required by certain creditors related to outstanding mortgage loans payable collateralized by certain real estate investments.These amounts are recorded within other assets on the consolidated statements of assets and liabilities
E.Investment Level Debt - Investment level debt includes mortgage loans payable on wholly-owned properties and consolidated partnerships and is stated at the principal amount, net of unamortized discount, and unamortized deferred financing costs, of the obligations outstanding. At times, the Partnership may assume debt in connection with the purchase of real estate.
F.Revenue
and Expense Recognition
Liquidation Basis of Accounting
Under the Liquidation Basis of Accounting, the Partnership has accrued all revenue and expenses that it expects to incur through the completion of its liquidation to the extent it has a reasonable basis of estimation. Subsequent to April 1, 2021, the Partnership adjusted the estimated revenue and expenses to reflect actual revenue and expenditures as shown on the Consolidated Statement of Changes in Net Assets in Liquidation.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL
VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Note 3: Summary of Significant Accounting Policies (continued)
Going Concern Basis
Revenue from real estate is recognized when earned in accordance with the terms of the respective leases. Operating expenses are recognized as incurred. Revenue from certain real estate investments is net of all or a portion of related real estate expenses, as lease arrangements vary as to responsibility for payment of these expenses between tenants
and the Partnership. Since real estate investments are stated at estimated fair value, net investment income is not reduced by depreciation or amortization expense. Interest expenses are accrued periodically based on the contractual interest rates and terms of the loans. Interest expenses are included in net investment income in the consolidated statements of operations.
G.Recognized and Unrealized Gains and Losses
Liquidation Basis of Accounting
The Partnership accrued costs and income that it expects to incur and earn through the completion of its liquidation, including the estimated amount of cash the Partnership expects to collect through the disposal of its
assets and the estimated costs to dispose of its assets, to the extent it has a reasonable basis for estimation. Subsequent to April 1, 2021, the Partnership adjusted the estimated costs to reflect actual expenditures as shown on the Consolidated Statement of Changes in Net Assets in Liquidation.
GoingConcernBasis
Purchases and sales of investments are accounted for on a settlement date basis as of the date on which the transactions close. Realized gains and losses on sales of investments in real estate are recorded when the transaction meets the definition of a contract,
criteria are met for the sale of one or more distinct assets, and control is transferred.The Partnership recognizes a realized gain to the extent that the sales price exceeds the cost of the investment being sold. A realized loss is recognized when the cost exceeds the sales price of the investment being sold.Unrealized appreciation and (depreciation) on investments are recorded as a result of changes in fair value.
H.Income Taxes - The Partnership is not a taxable entity under the provisions of the Internal Revenue Code. The income and capital gains and losses of the Partnership are attributed, for federal income tax purposes, to the General Partners in the Partnership. The Partnership may be subject to state and local taxes in jurisdictions in which it
operates.
I.Cash and Cash Equivalents - Cash and cash equivalents are comprised of all short-term investments and investments in money market funds with a maximum maturity of three months from the date of acquisition. In the normal course of business, the Partnership maintains cash and cash equivalents in financial institutions which at times may exceed federally insured limits. The Partnership is subject to credit risk to the extent any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf. The Partnership monitors the financial condition of such financial institutions to minimize credit risk exposure.
Note
4: Net Assets in Liquidation
The Partnership adopted Liquidation Basis of Accounting effective April 1, 2021. The following is a reconciliation of March 31, 2021 Net Assets under the going concern basis of accounting to net assets in liquidation under the Liquidation Basis of Accounting as of April 1, 2021.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP
Accrued and estimated liquidation costs (See Note 7)
(7,762,907)
Increase
due to adjustment of assets and liabilities
83,460
Decrease in noncontrolling interest liability
(1,313,487)
Adjustment to reflect the change to the liquidation basis of accounting
(8,992,934)
Estimated value of net assets in liquidation as of April 1, 2021
$
187,039,135
Subsequent
to April 1, 2021, the Partnership sold eight of the remaining nine assets. These disposals consisted of four residential and four retail assets and generated $176 million of proceeds to the fund. Also, the Partnership secured a buyer for the lone remaining asset, Little Havana, a storage facility located in Miami, Florida for $26 million. This generated an increase in value of $9 million, net of closing costs, and has been recognized in the "Change in liquidation value of real estate properties after closing costs" on the Consolidated Statement of Changes in Net Assets in Liquidation.
Note 5: Fair Value Measurements
As a result of adopting the Liquidation
Basis of Accounting, as discussed above in Note 3 “Summary of Significant Accounting Policies”, real estate assets were recorded at their estimated liquidation value, which represents the estimated gross amounts of cash that the Partnership will collect on disposal of assets as it carries out its liquidation plan.
Specific for the Partnership’s real estate assets under the Going Concern Basis, FASB authoritative guidance on fair value measurements and disclosures establishes a fair value measurement framework, provides a single definition of fair value and requires expanded disclosure summarizing fair value measurements. This guidance provides a three-level hierarchy based on the inputs used in the valuation process. The levels in the fair value hierarchy within which the fair value measurements fall are determined based on the lowest level input that is significant to the fair
value measurement. The levels of the fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the entity for identical assets or liabilities. These generally provide the most reliable evidence and should be used to measure fair value whenever available.
Level 2 – Fair value is based on inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data.
Level 3 – Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the entity’s own assumptions about how
market participants would price the asset or liability.
During the year ended December 31, 2020, there were no transfers between Level 1, Level 2 and Level 3.
Please refer to Note 3C for discussion of valuation methodology.
The table below summarizes the assets measured at fair value on a recurring basis and their respective levels in the fair value hierarchy.
The table below provides a reconciliation of the beginning and ending balances for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020.
(in 000’s)
Fair value measurements using significant unobservable inputs
Fair Value of Financial Instruments Carried at Cost:
The Partnership is required to disclose the fair value of certain financial instruments that are not reported at fair value. These financial instruments include cash and cash equivalents, accounts payable, accrued expenses and mortgages. The carrying amount of cash and cash equivalents, accounts payable and accrued expenses approximate their fair value due to the instruments’ short-term nature. As of December 31, 2020, the Partnership’s mortgages on wholly-owned properties and consolidated
joint ventures partnerships have an estimated fair value of approximately $62.3 million and a carrying value (amortized cost) of $62.3 million. The estimated fair value is based on the amount at which the Partnership would pay to transfer the debt at the reporting date taking into consideration the effect of nonperformance risk, including the Partnership’s own credit risk. The fair value of debt is determined using the discounted cash flow method, which applies certain key assumptions including the contractual terms of the agreement, market interest rates, interest spreads, credit risk, liquidity and other factors. Different assumptions or changes in future market conditions could significantly affect the estimated fair value. Certain significant inputs used in determining the fair value of investment level debt are unobservable, therefore, are considered as Level 3 under the fair value hierarchy.
Quantitative Information
Regarding Level 3 Assets:
Liquidation Basis
As of April 1, 2021, the Partnership’s investments in real estate were adjusted to their estimated net realizable value, or liquidation value, to reflect the change to the Liquidation Basis of Accounting. Refer to Note 3C for more details.
Going Concern Basis
The table below represents quantitative information about the significant unobservable inputs used in the fair value measurement of Level 3 assets. Significant changes in any of those inputs in isolation would result in a significant change in the fair value measurement.
*The market value approach represents assets/liabilities in which estimated fair value represent subjective estimates by management based on the investment's specific facts and circumstances. For example, development assets and recent acquisitions may heavily weight investment cost and take into consideration development profit, while pending sales may heavily weight negotiated sales prices in the related fair value estimates for assets.
See Note 3C for further details on valuation methodology.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
As of December 31, 2021, there is no longer any investment level debt at the Partnership.
Note 7: Accrued and estimated liquidation costs
The below table represents the estimated expenses expected to be incurred in connection with the Partnership's adoption of Liquidation Basis of Accounting. Refer to Note 4.
Selling
Costs
$
6,193,745
Fund Level Expenses
516,055
Management Fees
1,053,107
Total Estimated Expenses
$
7,762,907
Note
8: Commitments and Contingencies
The Partnership is subject to various legal proceedings and claims arising in the ordinary course of business. These matters are generally covered by insurance. In the opinion of the Partnership’s management, the outcome of such matters will not have a significant effect on the financial position and results of operations of the Partnership.
As of December 31, 2021 and December 31, 2020, respectively, the Partnership did not have any unfunded debt obligations related to real estate and improvements. Additionally, the Partnership has no equity commitments to fund properties under development.
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NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
Pursuant to an investment management agreement, PGIM charges the Partnership a daily investment management fee at an annual rate of 1.25% of the average daily gross asset valuation of the Partnership. Effective February 22, 2021, the calculation of daily investment management fee was revised at an annual rate of 1.25% of the average daily gross asset value excluding cash.
For
the going concern period of January 1, 2021 through March 31, 2021, the management fees incurred by the Partnership was $0.6 million. For the liquidation basis period of April 1, 2021 through December 31, 2021 the management fees incurred by the Partnership was $0.9 million. For the years ended December 31, 2020 and 2019, the management fees incurred by the Partnership were $3.4 million and $3.5 million, respectively.
On January 31, 2022, the Partnership sold the last remaining asset Little Havana, which generated $25.1 million of net proceeds. On February 22, 2022 (the “liquidation date”) the Real Property Account made its final distribution of $196.7 million to investors. Given the last remaining asset was sold and the final distribution was made, effective February 22, 2022, the Real Property Account was fully liquidated and closed.
C-17
PART
II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Item of Expense
Estimated Expense
Registration fees
$0.00
Federal
taxes
$12,500 per $1 million of premium payments
State taxes
$25,000 per $1 million of premium payments
Printing Costs
$40,000*
Legal Costs
N/A
Accounting Costs
$10,000*
* Estimated Expense
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant, in connection with certain affiliates, maintains various insurance coverages under which the underwriter and certain affiliated persons may be insured against liability, which may be incurred in such capacity, subject to the terms, conditions, and exclusions of the insurance policies.
New Jersey, being the state of organization of The Prudential Insurance Company of America ("Prudential"), permits entities organized under its jurisdiction to indemnify directors and officers with certain limitations. The relevant provisions of New Jersey law permitting indemnification can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
Article VII, Section 1, which relates to indemnification of officers and directors, is incorporated by reference to Exhibit Item 16.(a)(3B) on Form S-1, Registration No. 333-158228, filed March 27, 2009 on behalf of The Prudential Variable Contract Real Property Account.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements of The Prudential Variable Contract Real Property Account and the consolidated Financial Statements of The Prudential Variable Contract Real Property Partnership.
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)To include any prospectus required by Section 10 (a)(3) of the Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and
(iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from
registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:The undersigned registrantundertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities
to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
II-4
(6)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, this registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the State of New Jersey, on the 31st day of March, 2022.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities indicated on this 31st day of March, 2022.