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As Of Filer Filing For·On·As Docs:Size 4/14/04 Pruco Life of NJ Var Cont Re… Acc POS AM 4:278K |
Document/Exhibit Description Pages Size
1: POS AM Nj Rpa - 2004 HTML 338K
2: EX-23 Consent of Experts or Counsel -- HTML 8K
legalconsent-kirsch
3: EX-23 Consent of Experts or Counsel -- pwcconsent HTML 5K
4: EX-99 Schedule Iii - Real Estate Owned HTML 15K
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| As filed with the SEC on _________________. | Registration No. 33-20018 |
(Exact Name of Registrant)
c/o PRUCO LIFE INSURANCE
COMPANY OF NEW JERSEY
213 Washington Street
Newark, New Jersey 07102-2992
(800) 778-2255
(Address and telephone number of principal executive offices)
_________________
Thomas C. Castano
Assistant Secretary
Pruco
Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
(800) 778-2255
(Name,
address, and telephone number of agent for service)
Copy to:
Jeffrey C. Martin
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
_________________
CROSS REFERENCE SHEET
(as required by Form S-1)
S-1 Item Number and Caption Location
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Cover
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Cover; Summary; Risk Factors
4. Use of Proceeds..................................... Investment Policies; Current Real Estate-Related
Investments; Management's Discussion and Analysis of
Financial Condition and Results of Operations
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Distribution of the Contracts
9. Description of Securities to be Registered.......... Prospectus Cover; General Information about Pruco Life
Insurance Company of New Jersey, Pruco Life of New Jersey
Variable Contract Real Property Account, The Prudential
Variable Contract Real Property Partnership, and The Investment
Manager; The Real Property Account's Unavailability to
Certain Contracts; Valuation of Contract Owners'
Participating Interests; Charges; Restrictions on
Withdrawals; Restrictions on Contract Owners' Investment
in the Real Property Account
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information With Respect to the
Registrant.......................................... General Information about Pruco Life Insurance Company of
New Jersey, Pruco Life of New Jersey Variable Contract Real Property
Account, The Prudential Variable Contract Real Property
Partnership, and The Investment Manager; Investment
Policies; Current Real Estate-Related Investments;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Per Share Investment
Income and Capital Changes; Investment Restrictions;
Conflicts of Interest; Valuation of Contract Owners'
Participating Interests; Financial Statements; Litigation;
State Regulation; Federal Income Tax Considerations
12. Disclosure of Commission Position on Indemni-
fication for Securities Act Liabilities............. Not Applicable
PROSPECTUS May 1, 2004 PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
This prospectus is attached to two other types of prospectuses. The first describes either a variable annuity contract or a variable life insurance contract (collectively, the “Contract”) issued by Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey,” “us,” “we,” or “our”), a stock life insurance company that is an indirect, wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential”). The second prospectus describes several investment options available under that variable contract through The Prudential Series Fund, Inc. (the “Series Fund”). The Series Fund is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The Series Fund consists of separate investment portfolios that are mutual funds, each with a different investment policy and objective.
This prospectus describes the Pruco Life of New Jersey Variable Contract Real Property Account (the “Real Property Account”), an additional available investment option. Although it is not a mutual fund, in many ways it is like a mutual fund. Instead of holding a diversified portfolio of securities, such as stocks or bonds, it consists mainly of a portfolio of commercial and residential real properties.
Pruco Life of New Jersey determines the price of a “share” or, as we call it, a “participating interest” in this portfolio of properties, just as it does for the other investment options. It is based upon our best estimate of the fair market value of the properties and other assets held in this portfolio. The portion of your “Contract Fund” (the total amount invested under the Contract) that you allocate to this investment option will change daily in value, up or down, as the fair market value of these real properties and other assets change.
The risks of investing in real property are different from the risks of investing in mutual funds. See RISK FACTORS, page 10. Also, your ability to withdraw or transfer your investment in this option is not as freely available as it is for the other investment options. See RESTRICTIONS ON WITHDRAWALS, page 17.
The Securities and Exchange Commission (“SEC”) maintains a Web site (http://www.sec.gov) that contains material incorporated by reference and other information regarding registrants that file electronically with the SEC.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
Pruco Life Insurance Company of New Jersey
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PRPA-2 Ed 5-2004
PROSPECTUS CONTENTS
Page
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND SELECTED RATIOS...............................................................1
SUMMARY........................................................................................................................2
Investment of The Real Property Account Assets..............................................................................2
Investment Objectives.......................................................................................................2
Risk Factors................................................................................................................2
Charges.....................................................................................................................3
Availability to Pruco Life of New Jersey Contracts..........................................................................3
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY, PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY
ACCOUNT, THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP, AND THE INVESTMENT MANAGER................................3
Pruco Life Insurance Company of New Jersey..................................................................................3
Pruco Life of New Jersey Variable Contract Real Property Account............................................................4
The Prudential Variable Contract Real Property Partnership..................................................................4
The Investment Manager......................................................................................................5
INVESTMENT POLICIES............................................................................................................5
Overview....................................................................................................................5
Investment in Direct Ownership Interests in Real Estate.....................................................................5
Investments in Mortgage Loans...............................................................................................7
Investments in Sale-Leasebacks..............................................................................................8
General Investment and Operating Policies...................................................................................8
CURRENT REAL ESTATE-RELATED INVESTMENTS........................................................................................9
Properties.................................................................................................................10
RISK FACTORS..................................................................................................................10
Liquidity of Investments...................................................................................................11
General Risks of Real Property Investments.................................................................................11
Reliance on The Partners and The Investment Manager........................................................................12
INVESTMENT RESTRICTIONS.......................................................................................................13
DIVERSIFICATION REQUIREMENTS..................................................................................................13
CONFLICTS OF INTEREST.........................................................................................................13
THE REAL PROPERTY ACCOUNT'S UNAVAILABILITY TO CERTAIN CONTRACTS...............................................................15
VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS.........................................................................15
BORROWING BY THE PARTNERSHIP..................................................................................................17
CHARGES.......................................................................................................................17
RESTRICTIONS ON WITHDRAWALS...................................................................................................18
RESTRICTIONS ON CONTRACT OWNERS' INVESTMENT IN THE REAL PROPERTY ACCOUNT......................................................18
FEDERAL INCOME TAX CONSIDERATIONS.............................................................................................19
DISTRIBUTION OF THE CONTRACTS.................................................................................................19
STATE REGULATION..............................................................................................................19
ADDITIONAL INFORMATION........................................................................................................19
EXPERTS.......................................................................................................................19
LITIGATION....................................................................................................................20
REPORTS TO CONTRACT OWNERS....................................................................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................20
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................................................30
FINANCIAL STATEMENTS..........................................................................................................31
FINANCIAL STATEMENTS OF PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT
REAL PROPERTY ACCOUNT.........................................................................................................A1
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY
PARTNERSHIP...................................................................................................................B1
PER SHARE INVESTMENT INCOME, CAPITAL CHANGES AND SELECTED RATIOS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following information on per share investment income, capital changes and selected ratios has been provided for your
information.
This page should be read in conjunction with the financial statements and notes thereto of The Prudential Variable Contract
Real Property Partnership included in this prospectus.
01/01/2003 01/01/2002 01/01/2001 01/01/2000 01/01/1999
to to to to to
12/31/2003 12/31/2002 12/31/2001 12/31/2000 12/31/1999
Revenue from real estate and improvements $ 3.43 $ 3.22 $ 2.71 $ 2.32 $ 2.08
Equity in income of real estate partnership $ 0.07 $ 0.03 $ 0.08 $ 0.08 $ 0.01
Dividend income from real estate investment trusts $ 0.00* $ 0.00* $ 0.24 $ 0.18 $ 0.12
Interest on short-term investments $ 0.04 $ 0.06 $ 0.03 $ 0.13 $ 0.16
TOTAL INVESTMENT INCOME $ 3.54 $ 3.31 $ 3.06 $ 2.71 $ 2.37
Investment Management fee $ 0.33 $ 0.30 $ 0.30 $ 0.28 $ 0.26
Real Estate Taxes $ 0.34 $ 0.35 $ 0.30 $ 0.25 $ 0.25
Administrative expense $ 0.46 $ 0.41 $ 0.28 $ 0.25 $ 0.21
Operation expense $ 0.67 $ 0.64 $ 0.60 $ 0.44 $ 0.37
Interest expense $ 0.33 $ 0.24 $ 0.20 $ 0.07 $ 0.01
Minority interest in consolidated partnership $ 0.03 $ 0.04 $ 0.02 $ 0.00 * $ 0.00 *
TOTAL INVESTMENT EXPENSES $ 2.16 $ 1.98 $ 1.70 $ 1.29 $ 1.10
NET INVESTMENT INCOME $ 1.38 $ 1.33 $ 1.36 $ 1.42 $ 1.27
Net realized gain (loss) on real estate investments
sold
or converted $ 0.06 $ 0.05 ($ 0.02) $ 0.27 ($ 0.00) *
Change in unrealized gain (loss) on real estate ($ 0.81) ($ 1.07) ($ 0.26) $ 0.23 ($ 0.68)
investments
Minority interest in unrealized gain (loss) on $ 0.10 $ 0.02 $ 0.00 * $ 0.04 ($ 0.00) *
investments
Net unrealized gain (loss) on real estate investments ($ 0.91) ($ 1.09) ($ 0.26) $ 0.19 ($ 0.68)
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ($ 0.85) ($ 1.04) ($ 0.28) $ 0.46 ($ 0.68)
Net change in share value $ 0.55 $ 0.29 $ 1.08 $ 1.88 $ 0.59
Share value at beginning of period $ 24.11 $ 23.82 $ 22.74 $ 20.86 $ 20.27
Share value at end of period $ 24.66 $ 24.11 $ 23.82 $ 22.74 $ 20.86
Ratio of expenses to average net assets (1) 8.94% 8.34% 7.26% 6.07% 5.33%
Ratio of net investment income to average net assets 5.77% 5.59% 5.93% 6.49% 6.12%
(1)
Number of shares outstanding at
end of period (000's) 7,640 8,193 8,922 9,831 10,472
All per share calculations are based on weighted average shares outstanding.
Per share information presented herein is shown on a basis consistent with the financial statements as discussed in Note 2J on
page B10.
(1) Average net assets are calculated based on an average of ending monthly net assets.
*Per Share amount less than $0.01 (rounded)
This Summary provides a brief overview of the more significant aspects of the Real Property Account. We provide further detail in the subsequent sections of this prospectus.
The Real Property Account is a separate account of Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey”) created pursuant to New Jersey insurance law. Under that law, the assets of the Real Property Account are not chargeable with liabilities arising out of any other business of Pruco Life of New Jersey. Owners of certain variable life insurance and variable annuity contracts issued by Pruco Life of New Jersey may allocate a portion of their net premiums or purchase payments, or transfer a portion of their Contract Fund, to the Real Property Account. Values and benefits under the Contracts will thereafter reflect the investment experience of the Real Property Account. Contract owners, not Pruco Life of New Jersey, bear the risks and rewards of the investment performance of the Real Property Account to the extent of the Contract owner’s Contract Fund invested in the Real Property Account. This prospectus is attached to and should be read in conjunction with the prospectus for the Contract you selected.
The Real Property Account assets are invested primarily in income-producing real estate through The Prudential Variable Contract Real Property Partnership (the “Partnership”) which is a general partnership that was established by Prudential and two of its wholly-owned subsidiaries, Pruco Life Insurance Company (“Pruco Life”) and Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey”). See The Prudential Variable Contract Real Property Partnership, page 4. Currently Prudential serves as the investment manager of the Partnership. Prudential acts through Prudential Investment Management, Inc. See The Investment Manager, page 5. The Partnership invests at least 65% of its assets in direct ownership interests in:
1. income-producing real estate;
2. participating mortgage loans (mortgages providing for participation in the revenues generated by, or the appreciation
of, the underlying property, or both) originated for the Partnership; and
3. real property sale-leasebacks negotiated on behalf of the Partnership.
The large majority of these real estate investments will be in direct ownership interests in income producing real estate,
such as office buildings, shopping centers, apartments, industrial properties or hotels. The Partnership may also invest up
to 5% of its assets in direct ownership interests in agricultural land. Approximately 10% of the Partnership's assets will be
held in cash or invested in liquid instruments and securities. The remainder of the Partnership's assets may be invested in
other types of real estate related investments, including non-participating mortgage loans and real estate investment trusts.
Investment Objectives
The investment objectives of the Partnership are to:
1. preserve and protect the Partnership's capital;
2. compound income by reinvesting investment cash flow; and
3. over time, increase the income amount through appreciation in the value of permitted investments and, to a lesser
extent, through mortgage loans and sale-leaseback transactions.
There is no assurance that the Partnership’s objectives will be attained. See INVESTMENT POLICIES, page 5.
Investment in the Real Property Account, and thereby, participation in the investment experience of the Partnership, involves significant risks. See RISK FACTORS, page 10. These include the risk of fluctuating real estate values and the risk that the appraised or estimated values of the Partnership’s real property investments will not be realized upon their disposition. Many of the Partnership’s real estate investments will not be quickly convertible into cash. Therefore, the Real Property Account should be viewed as a long-term investment. See RESTRICTIONS ON WITHDRAWALS, page 17.
Pruco Life of New Jersey and the investment manager have taken steps to ensure that the Real Property Account and Partnership will be sufficiently liquid to satisfy all withdrawal or loan requests promptly (within seven days), see Liquidity of Investments, page 10. Prudential’s management of the Partnership is subject to certain conflicts of interest, including the possible acquisition of properties from Prudential Financial affiliates. See CONFLICTS OF INTEREST, page 12.
The Partnership pays a daily investment management fee which amounts to 1.25% per year of the average daily gross assets of the Partnership. The Partnership also compensates the investment manager for providing certain accounting and administrative services. See CHARGES, page 16. The portion of your Contract Fund allocated to the Real Property Account is subject to the same Contract charges as the portion of your Contract Fund allocated to The Prudential Series Fund, Inc. (the “Series Fund”). The Series Fund is the underlying funding vehicle for the other variable investment options available to Contract owners. You should read the Contract prospectus for a description of those charges.
The Real Property Account is currently available to purchasers of Pruco Life of New Jersey’s Variable Appreciable Life® Insurance Contracts, Variable Life Insurance Contracts, Discovery® Life Plus Contracts and Discovery® Plus Contracts. It is not available on Contracts that are purchased in connection with IRAs, Section 403(b) annuities, and other tax-qualified plans, that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) or to the prohibited transaction excise tax provisions of the Internal Revenue Code. See THE REAL PROPERTY ACCOUNT’S UNAVAILABILITY TO CERTAIN CONTRACTS, page 15. For example, a Variable Appreciable Life Contract owner who elects to invest part of his or her net premiums in the Pruco Life of New Jersey Variable Appreciable Account, a separate account of Pruco Life of New Jersey registered as a unit investment trust under the Investment Company Act of 1940, and part in the Real Property Account, will be subject to the same: (1) monthly sales charges; (2) risk charges; (3) administrative charges; (4) insurance charges; and (5) contingent deferred sales charges without regard to what portion is invested in the Pruco Life of New Jersey Variable Appreciable Account and what portion is invested in the Real Property Account. The Real Property Account has established different subaccounts, relating to the different types of variable Contracts that may participate in the Real Property Account. These subaccounts provide the mechanism and maintain the records whereby these different Contract charges are made.
This prospectus may only be offered in jurisdictions in which the offering is lawful. No person is authorized to make any representations in connection with this offering other than those contained in this prospectus.
| GENERAL | INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY, PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT, THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP, AND THE INVESTMENT MANAGER |
Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey”) is a stock life insurance company, organized in 1982 under the laws of the State of New Jersey. It is licensed to sell life insurance and annuities only in the States of New Jersey and New York. These Contracts are not offered in any state in which the necessary approvals have not yet been obtained.
Pruco Life of New Jersey is an indirect, wholly-owned subsidiary of The Prudential Insurance Company of America (“Prudential”), a New Jersey stock life insurance company that has been doing business since 1875. Prudential is an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”), a New Jersey insurance holding company. As Pruco Life of New Jersey’s ultimate parent, Prudential Financial exercises significant influence over the operations and capital structure of Pruco Life of New Jersey and Prudential. However, neither Prudential Financial, Prudential, nor any other related company has any legal responsibility to pay amounts that Pruco Life of New Jersey may owe under the contract or policy.
Pruco Life of New Jersey’s financial statements appear in the statement of additional information for the Contract prospectus, which is available upon request.
The Pruco Life of New Jersey Variable Contract Real Property Account (the “Real Property Account”), was established on October 30, 1987 under New Jersey law as a separate investment account. The Real Property Account meets the definition of a “separate account” under the federal securities laws. The Real Property Account holds assets that are separated from all of Pruco Life of New Jersey’s other assets. The Real Property Account is used only to support the variable benefits payable under the Contracts that are funded by the real estate investment option.
The Contract obligations to Contract owners and beneficiaries are general corporate obligations of Pruco Life of New Jersey. Pruco Life of New Jersey is also the legal owner of the Real Property Account assets. Pruco Life of New Jersey will maintain assets in the Real Property Account with a total market value at least equal to the amounts credited under the real estate option to all the Contracts participating in the Real Property Account. These assets may not be charged with liabilities which arise from any other business that Pruco Life of New Jersey conducts. In addition to these assets, the Real Property Account’s assets may include funds contributed by Pruco Life of New Jersey, and reflect any accumulations of the charges Pruco Life of New Jersey makes against the Real Property Account. See VALUATION OF CONTRACT OWNER’S PARTICIPATING INTERESTS, page 15.
Pruco Life of New Jersey will bear the risks and rewards of the Real Property Account’s investment experience to the extent of its investment in the Real Property Account. Pruco Life of New Jersey may withdraw or redeem its investment in the Real Property Account at any time. We will not make any such redemption if it will have a materially adverse impact on the Real Property Account. Accumulations of charges will be withdrawn on a regular basis.
Unlike the other separate accounts funding the Contracts, the Real Property Account is not registered with the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940 as an investment company. For state law purposes, the Real Property Account is treated as a part or division of Pruco Life of New Jersey. Contract owners have no voting rights with respect to the Real Property Account. The Real Property Account is under the control and management of Pruco Life of New Jersey. The Board of Directors and officers of Pruco Life of New Jersey are responsible for the management of the Real Property Account. No salaries of Pruco Life of New Jersey personnel are paid by the Real Property Account. Information regarding the directors and officers of Pruco Life of New Jersey is contained in the attached prospectus for the Contract. The financial statements of the Real Property Account begin on page A1.
The assets of the Real Property Account are invested in The Prudential Variable Contract Real Property Partnership (the “Partnership”). The Partnership, a general partnership organized under New Jersey law on April 29, 1988, was formed through an agreement among The Prudential Insurance Company of America, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey, to provide a means for assets allocated to the real estate investment option under certain variable life insurance and variable annuity contracts issued by the respective companies to be invested in a commingled pool. This was done to provide greater diversification of investments and lower transaction costs than would be possible if the assets were separately invested by each company. All amounts allocated to the Real Property Account are contributed by Pruco Life of New Jersey to the Partnership. Pruco Life of New Jersey’s general partnership interest in the Partnership is held in the Real Property Account.
The initial contributions to the Partnership were made on April 29, 1988. Prudential contributed $100,000 in cash to the Partnership; Pruco Life of New Jersey contributed $100,000 in cash to the Partnership; and Pruco Life contributed the real estate and other assets held in its real estate separate account, which had been actively investing in real estate for more than a year. Those assets had an estimated market value of $91,538,737 on that date. Each Partner is entitled to its respective proportionate share of all income, gains, and losses of the Partnership.
The Partnership assets are valued on each business day. The value of each Partner’s interest will fluctuate with the investment performance of the Partnership. In addition, the Partners’ interests are proportionately readjusted, at the current value, on each day when a Partner makes a contribution to, or withdrawal from, the Partnership. When you choose to allocate a portion of your net premiums or purchase payments, or transfer a portion of your Contract Fund, to the Real Property Account, Pruco Life of New Jersey will contribute that amount to the Partnership as a capital contribution. It will correspondingly increase the Real Property Account’s interest in the Partnership. Values and benefits under the Contract will thereafter vary with the performance of the Partnership’s investments. For more information on how the value of your interest in the Real Property Account and the value of the Partnership’s investments are calculated, see VALUATION OF CONTRACT OWNERS’ PARTICIPATING INTERESTS, page 15.
Contract owners have no voting rights with respect to the Partnership operations. The financial statements of the Partnership begin on page B1.
Currently, Prudential Investment Management, Inc. (“PIM”) acts as investment manager of the Partnership. PIM invests in and manages real estate equities and mortgages for the general account and separate accounts of Prudential Financial affiliates, and other third party accounts.
PIM, on behalf of the general account, and separate accounts of Prudential Financial affiliates, and other third party accounts, is one of the largest real estate investors in North America. PIM and Prudential Financial affiliates participate in real estate ventures through public and private partnerships. As of December 31, 2003, PIM managed $35.4 billion of net domestic real estate mortgages and equities of which $18.7 billion is in Prudential’s general account and $16.7 billion is in separate accounts and other third party accounts. Statement value for general account assets is recorded at depreciated cost and for assets in separate accounts and other third party accounts at market value. For a discussion of how the Partnership’s real estate-related investments are valued, see VALUATION OF CONTRACT OWNERS’ PARTICIPATING INTERESTS, page 15.
PIM has organized its real estate activities into separate business units within Prudential’s Global Asset Management Group. Prudential Real Estate Investors (PREI), a former division of Prudential, is the unit responsible for the investments of the Real Property Partnership. PREI’s investment staff is responsible for both general account and third party account real estate investment management activities.
PREI provides investment management services on a domestic basis and also acts as part of a global team providing these services to institutional investors worldwide. PREI is headquartered in Parsippany, New Jersey and has 4 field offices across the United States. As of December 31, 2003, PREI had under management approximately 37.0 million net rentable square feet of office real estate, 14.2 million net rentable square feet of industrial real estate, 11.6 million net rentable square feet of retail real estate, 4,792 hotel rooms, and 23,114 multifamily residential units.
Various divisions of Prudential Financial may provide PREI with services that may be required in connection with the Partnership’s investment management agreement. The mortgage operation currently manages and administers a portfolio of mortgage loans totaling approximately $38.2 billion.
PIM has entered into an administrative services agreement with Prudential, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey under which it pays the companies a fee for performing certain of PIM’s recordkeeping and other obligations under its investment management agreement with the Partnership.
The Partnership has an investment policy of investing at least 65% of its assets in direct ownership interests in income-producing real estate and participating mortgage loans. The largest portion of these real estate investments are direct ownership interests in income-producing real estate, such as office buildings, shopping centers, hotels, apartments, or industrial properties. Approximately 10% of the Partnership’s assets are generally held in cash or invested in liquid instruments and securities although the Partners reserve discretion to increase this amount to meet partnership liquidity requirements. The remainder of the Partnership’s assets are invested in other types of real estate-related investments, including real estate investment trusts.
Acquisition. The Partnership’s principal investment policy involves acquiring direct ownership interests in existing (including newly constructed) income-producing real estate, including office buildings, shopping centers, apartment buildings, industrial properties, and hotels. The Partnership may also invest up to 5% of its assets in direct ownership interests in agricultural land. Property acquisitions will generally be carried out by the real estate acquisition offices in PREI’s network of field offices located in Parsippany, New Jersey, Atlanta, Georgia, Chicago, Illinois and San Francisco, California. A field office or an affiliate of Prudential Financial supervises the management of properties in all of PIM’s accounts.
Proposals to acquire properties for the Partnership are usually originated by a field office. They are reviewed and approved by the Investment Management Committee of PREI. Depending upon the size of the acquisition and other factors, a proposed real estate investment may also be submitted for review to the Investment Committee of the Board of Directors of Prudential.
Although percentage limitations on the type and location of properties that may be acquired by the Partnership have not been established, the Partnership plans to diversify its investments through the type of property acquired and its geographic location. The Partnership’s investments will be maintained to meet the Internal Revenue Code diversification requirements. See General Investment and Operating Policies, page 8.
In order for the Partnership to meet its stated objectives, it will have to acquire properties that generate more cash than needed to pay its gross operating expenses. To do this, a substantial portion of the Partnership’s assets will be invested in properties with operating histories that include established rent and expense schedules. However, the Partnership may also acquire recently constructed properties that may be subject to agreements with sellers providing for certain minimum levels of income. Upon the expiration of or default under these agreements, there is no assurance that the Partnership will maintain the level of operating income necessary to produce the return it was previously experiencing. The Partnership may purchase real property from Prudential Financial or its affiliates under certain conditions. See CONFLICTS OF INTEREST, page 12.
The property acquired by the Partnership is usually real estate which is ready for use. Accordingly, the Partnership is not usually subject to the development or construction risks inherent in the purchase of unimproved real estate. From time to time, however, the Partnership may invest in a developmental real estate project that is consistent with the Partnership’s objectives. The Partnership will then be subject to those risks.
The Partnership will often own the entire fee interest in an acquired property, but it may also hold other direct ownership interests. These include, but are not limited to, partnership interests, limited liability company interests, leaseholds, and tenancies in common.
Property Management and Leasing Services. The Partnership usually retains a management company operating in the area of a property to perform local property management services. A field office or other affiliate of Prudential Financial will usually: (1) supervise and monitor the performance of the local management company; (2) determine and establish the required accounting information to be supplied; (3) periodically inspect the property; (4) review and approve property operating budgets; and (5) review actual operations to ensure compliance with budgets. In addition to day-to-day management of the property, the local management company will have responsibility for: (1) supervision of any on-site personnel; (2) negotiation of maintenance and service contracts; (3) major repair advice; (4) replacements and capital improvements; (5) the review of market conditions to recommend rent schedule changes; and (6) creation of marketing and advertising programs to obtain and maintain good occupancy rates by responsible tenants. The local management company fees will reduce the cash flow from the property to the Partnership.
The Partnership usually retains a leasing company to perform leasing services on any property with actual or projected vacancies. The leasing company will coordinate with the property management company to provide marketing and leasing services for the property. When the property management company is qualified to handle leasing, it may also be hired to provide leasing services. Leasing commissions and expenses will reduce the cash flow from the property to the Partnership.
PREI may, on behalf of the Partnership, hire a Prudential Financial affiliate to perform property management or leasing services. The affiliate’s services must be provided on terms competitive with unaffiliated entities performing similar services in the same geographic area. See CONFLICTS OF INTEREST, page 12.
Annually, the field office which oversees the management of each property owned by the Partnership will, together with the local property management firm, develop a business plan and budget for each property. It will consider, among other things, the projected rollover of individual leases, necessary capital expenditures and any expansion or modification of the use of the property. The approval of an officer of PREI is required. The field office will also periodically report the operating performance of the property to PREI.
Types of Mortgage Loans
The Partnership is authorized to invest in mortgage loans, including conventional mortgage loans that may pay fixed or variable rates of interest and mortgage loans that have a “participation” (as defined below). The Partnership will not make mortgage loans to Prudential Financial affiliates.
The Partnership intends to give mortgage loans on: (1) commercial properties (such as office buildings, shopping centers, hotels, industrial properties, and office showrooms); (2) agricultural properties; and (3) residential properties (such as garden apartment complexes and high-rise apartment buildings). These loans are usually secured by properties with income-producing potential based on historical or projected data. Usually, they are not personal obligations of the borrower and are not insured or guaranteed.
1. First Mortgage Loans. The Partnership will primarily make first mortgage loans secured by mortgages on existing income-producing property. These loans may provide for interest-only payments and a balloon payment at maturity.
2. Wraparound Mortgage Loans. The Partnership also may make wraparound mortgage loans on income-producing properties which are already mortgaged to unaffiliated entities. A wraparound mortgage loan is a mortgage with a principal amount equal to the outstanding balance of the prior existing mortgage plus the amount to be advanced by the lender under the wraparound mortgage loan, thereby providing the property owner with additional funds without disturbing the existing loan. The terms of wraparound mortgage loans made by the Partnership require the borrower to make all principal and interest payments on the underlying loan to the Partnership, which will then pay the holder of the prior loan. Because the existing first mortgage loan is preserved, the lien of the wraparound mortgage loan is junior to it. The Partnership will make wraparound mortgage loans only in states where local applicable foreclosure laws permit a lender, in the event of the borrower’s default, to obtain possession of the property which secures the loan.
3. Junior Mortgage Loans. The Partnership may also invest in other junior mortgage loans. Junior mortgage loans will be secured by mortgages which are subordinate to one or more prior liens on the real property. They will generally, but not in all cases, provide for repayment in full prior to the end of the amortization period of the senior mortgages. Recourse on such loans will include the real property encumbered by the Partnership’s mortgage and may also include other collateral or personal guarantees by the borrower.
The Partnership will generally make junior or wraparound mortgage loans only if the senior mortgage, when combined with the amount of the Partnership’s mortgage loan, would not exceed the maximum amount which the Partnership would be willing to commit to a first mortgage loan and only under such circumstances and on such property as to which the Partnership would otherwise make a first mortgage loan.
4. Participations. The Partnership may make mortgage loans which, in addition to charging a base rate of interest, will include provisions permitting the Partnership to participate (a “participation”) in the economic benefits of the underlying property. The Partnership would receive a percentage of: (1) the gross or net revenues from the property operations; and/or (2) the increase in the property value realized by the borrower, such as through sale or refinancing of the property. These arrangements may also grant the Partnership an option to acquire the property or an undivided interest in the property securing the loan. When the Partnership negotiates the right to receive additional interest in the form of a percentage of the gross revenues or otherwise, the fixed cash return to the Partnership from that investment will generally be less than would otherwise be the case. It is expected that the Partnership will be entitled to percentage participations when the gross or net revenues from the property operations exceed a certain base amount. This base amount may be adjusted if real estate taxes or similar charges are increased. The form and extent of the additional interest that the Partnership receives will vary with each transaction depending on: (1) the equity investment of the owner or developer of the property; (2) other financing or credit obtained by the owner or developer; (3) the fixed base interest rate on the mortgage loan by the Partnership; (4) any other security arrangement; (5) the cash flow and pro forma cash flow from the property; and (6) market conditions.
The Partnership intends to use this additional interest as a hedge against inflation. It assumes that as prices increase in the economy, the rental prices on properties, such as shopping centers or office buildings, will increase and there should be a corresponding increase in the property value. There is no assurance that additional interest or increased property values will be received. In that event, the Partnership will be entitled to receive only the fixed portion of its return.
Standards for Mortgage Loan Investments
In making mortgage loans, the investment manager will consider relevant real property and financial factors, including: (1) the location, condition, and use of the underlying property; (2) its operating history; (3) its future income-producing capacity; and (4) the quality, experience, and creditworthiness of the unaffiliated borrower.
Before the Partnership makes a mortgage loan, the investment manager analyzes the fair market value of the underlying real estate. In general, the amount of each mortgage loan made by the Partnership will not exceed, when added to the amount of any existing indebtedness, 80% of the estimated or appraised value of the property mortgaged.
Dealing With Outstanding Loans
The Partnership may sell its mortgage loans prior to maturity if it is deemed advisable by the investment manager and consistent with the Partnership’s investment objectives. The investment manager may also: (1) extend the maturity of any mortgage loan made by the Partnership; (2) consent to a sale of the property subject to a mortgage loan or finance the purchase of a property by making a new mortgage loan in connection with the sale of a property (either with or without requiring the repayment of the mortgage loan); (3) renegotiate the terms of a mortgage loan; and (4) otherwise deal with the mortgage loans of the Partnership.
A portion of the Partnership’s investments may consist of real property sale-leaseback transactions (“leasebacks”). In this type of transaction, the Partnership will purchase land and income-producing improvements on the land and simultaneously lease the land and improvements, generally to the seller, under a long-term lease. Leasebacks may be for very long periods and may provide for increasing payments from the lessee.
Under the terms of the leaseback, the tenant will operate, or provide for the operation of, the property and generally be responsible for the payment of all costs, including: (1) taxes; (2) mortgage debt service; (3) maintenance and repair of the improvements; and (4) insurance. In some cases, the Partnership may also grant the lessee an option to acquire the land and improvements from the Partnership after a period of years. The option exercise price would be based on the fair market value of the property, as encumbered by the lease, the increase in the gross revenues from the property or other objective criteria reflecting the increased value of the property.
In some leaseback transactions, the Partnership may only purchase the land under an income-producing building and lease the land to the building owner. In such cases, the Partnership may seek, in addition to base rents in its leasebacks, participations in the gross revenues from the building in a form such as a percentage of the gross revenues of the lessee above a base amount (which may be adjusted if real property taxes increase or for other events). The Partnership may invest in leasebacks which are subordinate to other interests in the land, buildings, and improvements, such as a first mortgage, other mortgage, or lien. In those situations, the Partnership’s leaseback interest will be subject to greater risks.
The Partnership will only acquire a property for a leaseback transaction if the purchase price is equal to not more than 100% of the estimated or appraised property value. The Partnership may dispose of its leasebacks when deemed advisable by the investment manager and consistent with the Partnership’s investment objectives.
The Partnership does not intend to invest in any direct ownership interests in properties, mortgage loans or leasebacks in order to make short-term profits from their sale, although in exceptional cases, the investment manager may decide to do so in the best interests of the Partnership. The Partnership may dispose of its investments whenever necessary to meet its cash requirements or when it is deemed to be desirable by the investment manager because of market conditions or otherwise. The Partnership will reinvest any proceeds from the disposition of assets (and any cash flow from operations) which are not necessary for the Partnership’s operations and which are not withdrawn by the Partners in order to make distributions to investors pursuant to the variable contracts issued by the Partners, or to Prudential to return its equity interests pursuant to this prospectus. The proceeds will be reinvested in investments consistent with the Partnership’s investment objectives and policies.
In making investments in properties, mortgage loans, leasebacks or other real estate investments, the Partnership will rely on the investment manager’s analysis of the investment and will not receive an independent appraisal prior to acquisition. The Partnership expects, however, that all the properties it owns, and most mortgage loans it holds, will be appraised or valued annually by an independent appraiser who is a member of a nationally recognized society of appraisers. Each appraisal will be maintained in the Partnership records for at least five years. It should be noted that appraised values are opinions and, as such, may not represent the true worth or realizable value of the property being appraised.
The Partnership usually purchases properties on an unleveraged basis. The properties acquired will typically be free and clear of mortgage debt immediately after their acquisition. The Partnership may, however, acquire properties subject to existing mortgage loans. In addition, the Partnership may mortgage or acquire properties partly with the proceeds of purchase money mortgage loans, up to 80% of the property value. Although this is not usually done, the Partnership may do so if the investment manager decides that it is consistent with its investment objectives. When the Partnership mortgages its properties, it bears the expense of mortgage payments. See BORROWING BY THE PARTNERSHIP, page 16.
The Partnership may also invest a portion of its assets in non-participating mortgage loans, real estate limited partnerships, limited liability companies, real estate investment trusts, and other vehicles whose underlying investment is in real estate.
The Partnership’s investments will be maintained in order to meet the diversification requirements set forth in regulations under the Internal Revenue Code (the “Code”) relating to the investments of variable life insurance and variable annuity separate accounts. In order to meet the diversification requirements under the regulations, the Partnership will meet the following test: (1) no more than 55% of the assets will be invested in any one investment; (2) no more than 70% of the assets will be invested in any two investments; (3) no more than 80% of the assets will be invested in any three investments; and (4) no more than 90% of the assets will be invested in any four investments. All interests in the same real property project are treated as a single investment. The Partnership must meet the above test within 30 days of the end of each calendar quarter. To comply with the diversification requirements of the State of Arizona, the Partnership will limit additional investments in any one parcel or related parcels to an amount not exceeding 10% of Partnership’s gross assets, as of the prior fiscal year end.
In managing the assets of the Partnership, the investment manager will use its discretion in determining whether to foreclose on defaulting borrowers or to evict defaulting tenants. The investment manager will decide which course of action is in the best interests of the Partnership in maintaining the value of the investment.
Property management services are usually required for the Partnership’s investments in properties which are owned and operated by the Partnership, but usually will not be needed for mortgage loans owned by the Partnership, except for mortgage servicing. It is possible, however, that these services will be necessary or desirable in exercising default remedies under a foreclosure on a mortgage loan. The investment manager may engage, on behalf of the Partnership, Prudential Financial affiliated or unaffiliated entities to provide these additional services to the Partnership. The investment manager may engage Prudential Financial affiliates to provide property management, property development services, loan servicing or other services if and only if the fees paid to an affiliate do not exceed the amount that would be paid to an independent party for similar services rendered in the same geographic area. See CONFLICTS OF INTEREST, page 12.
The investment manager will manage the Partnership so that the Real Property Account will not be subject to registration under the Investment Company Act of 1940. This requires monitoring the proportion of the Partnership’s assets to be placed in various investments.
The current principal real estate-related investments held by the Partnership are described below. Many of these investments were originated by, and previously held in, The Prudential Real Property Account of Pruco Life Insurance Company (the “Pruco Life Account”), a separate account established to fund the real estate investment option under variable contracts issued by Pruco Life. Prior to the formation of the Partnership, the Pruco Life Account followed the same investment policies as those followed by the Partnership. Pruco Life contributed the assets held in the Pruco Life Account to the Partnership as its initial capital contribution to the Partnership.
The Partnership owns the following properties as of December 31, 2003.
1. Office Properties
The Partnership owns office properties in Lisle and Oakbrook Terrace, Illinois; Brentwood, Tennessee; and Beaverton,
Oregon. Total square footage owned is approximately 465,000 of which 48% or 224,000 square feet are leased between 1 and
10 years.
2. Apartment Complexes
The Partnership owns apartment complexes in Atlanta, Georgia and Raleigh, North Carolina. There are a total of 490
apartment units available of which 92% or 451 units are leased. Leases range from month to month to one year. In
addition, on September 17, 1999, the Partnership invested in an apartment complex located in Jacksonville, Florida. This
joint venture investment has a total of 458 units available of which 415 units or 91% are occupied. Leases range from
month-to-month to one year. Also, on February 15, 2001, the Partnership invested in four apartment complexes located in
Gresham/Salem, Oregon. This joint venture investment has a total of 493 units available of which 445 units or 90% are
occupied. Leases range from month-to-month to one year.
3. Retail Property
The Partnership owns a shopping center in Roswell, Georgia. The property is located approximately 22 miles north of
downtown Atlanta on a 30-acre site. The square footage is approximately 314,000 of which 76% or 240,000 square feet is
leased between 1 and 20 years. On September 30, 1999 the Partnership invested in a retail portfolio located in the
Kansas City, Kansas and Missouri areas. This joint venture investment has approximately 488,000 of net rentable square
feet of which 83% or 404,000 square feet is leased between 1 and 20 years. On May 17, 2001, the Partnership invested in
a retail center located in Hampton, Virginia. This joint venture investment has approximately 175,000 of net rentable
square feet of which 100% is leased between 1 and 20 years. On November 27, 2002, the Partnership invested in a retail
center located in the Ocean City, Maryland. This joint venture investment has approximately 186,000 of net rentable
square feet of which 100% is leased between 1 and 30 years.
4. Industrial Properties
The Partnership owns a warehouse/distribution center in Aurora, Colorado. Total square footage owned is approximately
278,000 of which 70% or 194,000 square feet are leased between 1 and 10 years. The Partnership's Bolingbrook, Illinois
property, which had approximately 225,000 square feet, was sold on September 12, 2002.
5. Hotel Property
On December 10, 2003, the Partnership invested in a hotel located in the Portland, Oregon area. This joint venture
investment has approximately 161 rooms.
6. Investment in Real Estate Trust
The Partnership liquidated its entire investment in REIT shares during December 2001.
There are certain risk factors that you should consider before allocating a portion of your net premiums or purchase payments, or transferring a portion of your Contract Fund, to the Real Property Account. These include valuation risks, (see VALUATION OF CONTRACT OWNERS’ PARTICIPATING INTERESTS, page 15), certain conflicts of interest, (see CONFLICTS OF INTEREST, page 12), as well as the following risks:
Because the Real Property Account will, through the Partnership, invest primarily in real estate, its assets will not be as liquid as the investments generally made by separate accounts of life insurance companies funding variable life insurance and variable annuity contracts. The Partnership will, however, hold approximately 10% of its assets in cash and invested in liquid securities. The primary purposes for such investments are to meet the expenses involved in the operation of the Partnership and to allow it to have sufficient liquid assets to meet any requests for withdrawals from the Real Property Account. Such withdrawals would be made in order to meet requested or required payments under the Contracts. The Partnership may also borrow funds to meet liquidity needs. See BORROWING BY THE PARTNERSHIP, page 16.
We have taken steps to ensure that the Partnership will be liquid enough to meet all anticipated withdrawals by the Partners to meet the separate accounts’ liquidity requirements. It is possible that the Partnership may need to dispose of a real property or mortgage loan investment promptly in order to meet such withdrawal requests.
By participating in the Real Property Account and thereby in the investment performance of the Partnership, you will be subject to many of the risks of real property investments. These include:
1. Risks of Ownership of Real Properties. The Partnership will be 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. It may be adversely affected by general and local economic conditions, the supply of and demand for properties of the type in which the Partnership invests, zoning laws, and real property tax rates. Operation of property in which the Partnership invests will primarily involve rental of that property to tenants. The financial failure of a tenant resulting in the termination of their lease might cause a reduction in the cash flow to the Partnership. If a lease is terminated, there is no assurance that the Partnership will be able to find a new tenant for the property on terms as favorable to the Partnership as those from the prior tenant. Investments in hotels are subject to additional risk from the daily turnover and fluctuating occupancy rates of hotel rooms and the absence of long-term tenants.
The Partnership’s properties will also be subject to the risk of loss due to certain types of property damage (such as from nuclear power plant accidents and wars) which are either uninsurable or not economically insurable.
2. Risks of Mortgage Loan Investments. The Partnership’s mortgage loan investments will be subject to the risk of default by the borrowers. In this event the Partnership would have the added responsibility of foreclosing on or pursuing other remedies on the underlying properties to protect the value of its mortgage loans. A borrower’s ability to meet its mortgage loan payments will be dependent upon the risks generally inherent to the ownership of real property. Mortgage loans made by the Partnership will generally not be personal obligations of the borrowers. The Partnership will only rely on the value of the underlying property for its security. Mechanics’, materialmen’s, government, and other liens may have or obtain priority over the Partnership’s security interest in the property.
In addition, the Partnership’s mortgage loan investments will be subject to prepayment risks. If the terms of the mortgage loans permit, mortgagors may prepay the loans, thus possibly changing the Partnership’s return.
Junior mortgage loans (including wraparound mortgage loans) will be subject to greater risk than first mortgage loans, since they will be subordinate to liens of senior mortgagees. In the event a default occurs on a senior mortgage, the Partnership may be required to make payments or take other actions to cure the default (if it has the right to do so) in order to prevent foreclosure on the senior mortgage and possible loss of all or portions of the Partnership’s investment. “Due on sale” clauses included in some senior mortgages, accelerating the amount due under the senior mortgage in the case of sale of the property, may be applied to the sale of the property upon foreclosure by the Partnership of its junior mortgage loan.
The risk of lending on real estate increases as the proportion which the amount of the mortgage loan bears to the fair market value of the real estate increases. The Partnership usually does not make mortgage loans of over 80% of the estimated or appraised value of the property that secures the loan. There can be no assurance, that in the event of a default, the Partnership will realize an amount equal to the estimated or appraised value of the property on which a mortgage loan was made.
Mortgage loans made by the Partnership may be subject to state usury laws. These laws impose limits on interest charges and possible penalties for violation of those limits, including restitution of excess interest, unenforceability of debt, and treble damages. The Partnership does not intend to make mortgage loans at usurious rates of interest. Uncertainties in determining the legality of interest rates and other borrowing charges under some statutes could result in inadvertent violations, in which case the Partnership could incur the penalties mentioned above.
3. Risks with Participations. The Partnership may seek to invest in mortgage loans and leasebacks with participations, which will provide the Partnership with both fixed interest and additional interest based upon gross revenues, sale proceeds, and/or other variable amounts. If the interest income received by the Partnership is based, in part, on a percentage of the gross revenues or sale proceeds of the underlying property, the Partnership’s income will depend on the success in the leasing of the underlying property, the management and operation of such property by the borrower or lessee and upon the market value of the property upon ultimate disposition. If the Partnership negotiates a mortgage loan with a lower fixed interest rate and an additional percentage of the gross revenues or eventual sale proceeds of the underlying property, and the underlying property fails to generate increased revenues or to appreciate, the Partnership will have foregone a potentially greater fixed return without receiving the benefit of appreciation. State laws may limit participations. In the event of the borrower’s bankruptcy, it is possible that as a result of the Partnership’s interest in the gross revenues or sale proceeds, a court could treat the Partnership as a partner or joint venturer with the borrower, and the Partnership could lose the priority its security interest would have been given, or be liable for the borrower’s debts. The Partnership will structure its participations to avoid being characterized as a partner or joint venturer with the borrower.
4. Risks with Sale-Leaseback Transactions. Leaseback transactions typically involve the acquisition of land and improvements thereon and the leaseback of such land and improvements to the seller or another party. The value of the land and improvements will depend, in large part, on the performance and financial stability of the lessee and its tenants, if any. The tenants’ leases may have shorter terms than the leaseback. Therefore, the lessee’s future ability to meet payment obligations to the Partnership will depend on its ability to obtain renewals of such leases or new leases upon satisfactory terms and the ability of the tenants to meet their rental payments to the lessee.
PREI investigates the stability and creditworthiness of lessees in all commercial properties it may acquire, including leaseback transactions. However, a lessee in a leaseback transaction may have few, if any, assets. The Partnership will therefore rely for its security on the value of the land and improvements. When the Partnership’s leaseback interest is subordinate to other interests in the land or improvements, such as a first mortgage or other lien, the Partnership’s leaseback will be subject to greater risk. A default by a lessee or other premature termination of the leaseback may result in the Partnership being unable to recover its investment unless the property is sold or leased on favorable terms. The ability of the lessee to meet its obligations under the leaseback, and the value of a property, may be affected by a number of factors inherent in the ownership of real property which are described above. Furthermore, the long-term nature of a leaseback may, in the future, result in the Partnership receiving lower average annual rentals. However, this risk may be lessened if the Partnership obtains participations in connection with its leasebacks.
You do not have a vote in determining the policies of the Partnership or the Real Property Account. You also have no right or power to take part in the management of the Partnership or the Real Property Account. The investment manager alone, subject to the supervision of the Partners, will make all decisions with respect to the management of the Partnership, including the determination as to what properties to acquire, subject to the investment policies and restrictions. Although the Partners have the right to replace the investment manager, it should be noted that Prudential, Pruco Life, Pruco Life of New Jersey, and the investment manager are wholly-owned subsidiaries of Prudential Financial.
The Partnership will compete in the acquisition of its investments with many other individuals and entities engaged in real estate activities, including the investment manager and its affiliates. See CONFLICTS OF INTEREST, page 12. There may be intense competition in obtaining properties or mortgages in which the Partnership intends to invest. Competition may result in increased costs of suitable investments.
Since the Partnership will continuously look for new investments, you will not be able to evaluate the economic merit of many of the investments which may be acquired by the Partnership. You must depend upon the ability of the investment manager to select investments.
The Partnership has adopted certain restrictions relating to its investment activities. These restrictions may be changed, if the law permits, by the Partners. Pursuant to these restrictions, the Partnership will not:
1. Make any investments not related to real estate, other than liquid instruments and securities.
2 Engage in underwriting of securities issued by others.
3. Invest in securities issued by any investment company.
4. Sell securities short.
5. Purchase or sell oil, gas, or other mineral exploration or development programs.
6. Make loans to the Partners, any of their affiliates, or any investment program sponsored by such parties.
7. Enter into leaseback transactions in which the lessee is Prudential, Pruco Life, Pruco Life of New Jersey, their
affiliates, or any investment program sponsored by such parties.
8. Borrow more than 331/3% (pursuant to California state requirements) of the value of the assets of the Partnership
(based upon periodic valuations and appraisals). See VALUATION OF CONTRACT OWNERS' PARTICIPATING INTERESTS, page 15.
The Partnership’s investments are maintained so as to meet the diversification requirements set forth in Treasury Regulations issued pursuant to Section 817(h) of the Internal Revenue Code relating to the investments of variable life insurance and variable annuity separate accounts. Section 817(h) requires, among other things, that the partnership will have no more than 55% of the assets invested in any one investment, no more than 70% of the assets will be invested in any two investments, no more than 80% of the assets will be invested in any three investments, and no more than 90% of the assets will be invested in any four investments. To comply with requirements of the State of Arizona, the Partnership will limit additional investments in any one parcel or related parcels to an amount not exceeding 10% of the Partnership’s gross assets as of the prior fiscal year.
The investment manager, will be subject to various conflicts of interest in managing the Partnership. PIM invests in real estate equities and mortgages for the general account of Prudential Financial affiliates and for third parties, including through separate accounts established for the benefit of qualified pension and profit-sharing plans. PIM also manages, or advises in the management of, real estate equities and mortgages owned by other persons. In addition, affiliates of Prudential Financial are general partners in publicly offered limited partnerships that invest in real estate equities and mortgage loans. Prudential Financial and its affiliates may engage in business activities which will be competitive with the Partnership. Moreover, the Partnership may purchase properties from Prudential Financial or its affiliates.
The conflicts involved in managing the Partnership include:
1. Lack of Independent Negotiations between the Partnership and The Investment Manager. All agreements and arrangements relating to compensation between the Partnership and the investment manager, PIM or any affiliate of Prudential Financial will not be the result of arm’s-length negotiations.
2. Competition by the Partnership with Prudential Financial’s Affiliates for Acquisition and Disposition of Investments. Prudential Financial affiliates are involved in numerous real estate investment activities for their general account, their separate accounts, and other entities. They may involve investment policies comparable to the Partnership’s and may compete with the Partnership for the acquisition and disposition of investments. Moreover, additional accounts or affiliated entities may be formed in the future with investment objectives similar to those of the Partnership. In short, existing or future real estate investment accounts or entities managed or advised by Prudential Financial affiliates may have the same management as the Partnership and may be in competition with the Partnership regarding real property investments, mortgage loan investments, leasebacks, and the management and sale of such investments. Prudential Financial affiliates are not obligated to present to the Partnership any particular investment opportunity, regardless of whether the opportunity would be suitable for investment by the Partnership.
Prudential Financial affiliates have, however, adopted procedures to distinguish between equity investments available for the Partnership as opposed to the other programs and entities described above. If investment accounts or entities managed by Prudential Financial affiliates have investment objectives and policies similar to the Partnership and are in the market to acquire properties or make investments at the same time as the Partnership, the following procedures will be followed to resolve any conflict of interest. The Investment Allocation Procedure (“IAP”) has been established to provide a reasonable and fair procedure for allocating real estate investments among the several accounts managed by Prudential Real Estate Investors (“PREI”). The IAP is administered by an Allocation Committee composed of the Managing Directors, Portfolio Management. Allocation decisions are made by vote of the Allocation Committee, and are approved by the Chief Executive Officer of PREI (“CEO”). Sufficient information on each investment opportunity is distributed to all portfolio managers, who each indicate to the Allocation Committee their account’s interest in the opportunity. Based on such expressions of interest, the Allocation Committee allocates the investment opportunity to an account (and may also determine a back-up account or accounts to receive the allocation in the event the account, which is first allocated the opportunity, fails to pursue the investment for any reason) after giving appropriate consideration to the following factors and with the goal of providing each account a fair allotment of investment opportunities: (1) the investment opportunity’s conformity with an account’s investment criteria and objectives (including property type, size and location, diversification, anticipated returns, investment structure, etc.); (2) the amount of funds available for investment (in total and by property type) by an account; (3) the length of time such funds (in total and by property type) have been available for investment; (4) any limitations or restrictions upon the availability of funds for investment; (5) the absolute and relative (to amount of funds available) amount of funds invested and committed for the account; (6) whether funds available for investment are discretionary or non-discretionary, particularly in relation to the timing of the investment opportunity; (7) an account’s prior dealings or investments with the seller, developer, lender or other counterparty; and (8) other factors which the Allocation Committee feel should be considered in fairness to all accounts participating in the IAP.
If an account which has been allocated an investment opportunity does not proceed with the acquisition, and either (i) no back-up account has been determined by the Allocation Committee, or (ii) all accounts which were deemed back-up accounts do not proceed with the acquisition, the opportunity may be reallocated to another account by the Allocation Committee. If an investment opportunity is appropriate for more than one account, the Allocation Committee may (subject to the CEO’s approval) permit the sharing of the investment among accounts which permit such sharing. Such division of the investment opportunity may be accomplished by separating properties (in a multi-property investment), by co-investment, or otherwise.
3. Competition with the Partnership from Affiliates for the Time and Services of Common Officers, Directors, and Management Personnel. As noted above, PIM and Prudential Financial affiliates are involved in numerous real estate investment activities. Accordingly, many of the personnel of PIM and Prudential Financial affiliates who will be involved in performing services for the Partnership have competing demands on their time. Conflicts of interest may arise with respect to allocating time among such entities and the Partnership. The directors and officers of Prudential Financial and affiliates will determine how much time will be devoted to the Partnership affairs. Prudential Financial believes it has sufficient personnel to meet its responsibilities to all entities to which it is affiliated.
4. Competitive Properties. Some properties of affiliates may be competitive with Partnership properties. Among other things, the properties could be in competition with the Partnership’s properties for prospective tenants.
5. Lessee Position. It is possible that Prudential Financial or its affiliates may be a lessee in one or more of the properties owned by the Partnership. The terms of such a lease will be competitive with leases with non-affiliated third parties. The Partnership limits the amount of space that an affiliate of Prudential may rent in a property owned by the Partnership.
6. Use of Affiliates to Perform Additional Services for the Partnership. The Partnership may engage Prudential Financial affiliates to provide additional services to the Partnership, such as real estate brokerage, mortgage servicing, property management, leasing, property development, and other real estate-related services. The Partnership may utilize the services of such affiliates and pay their fees, as long as the fees paid to an affiliate do not exceed the amount that would be paid to an independent party for similar services rendered in the same geographic area.
7. Joint Ventures with Affiliates. The Partnership may enter into investments through joint ventures with Prudential Financial, its affiliates, or investment programs they sponsor. The Partnership may enter into such a joint venture investment with an affiliate only if the following conditions are met: (1) the affiliate must have investment objectives substantially identical to those of the Partnership; (2) there must be no duplicative property management fee, mortgage servicing fee or other fees; (3) the compensation payable to the sponsor of the affiliate must be no greater than that payable to the Partnership’s investment manager; (4) the Partnership must have a right of first refusal to buy if such affiliate wishes to sell the property held in the joint venture; and (5) the investment of the Partnership and the affiliate in the joint venture must be made on the same terms and conditions (although not the same percentage). In connection with such an investment, both affiliated parties would be required to approve any decision concerning the investment. Thus, an impasse may result in the event the affiliated joint venture partners disagree. However, in the event of a disagreement regarding a proposed sale or other disposition of the investment, the party not desiring to sell would have a right of first refusal to purchase the affiliated joint venture partner’s interest in the investment. If this happens, it is possible that in the future the joint venture partners would no longer be affiliated. In the event of a proposed sale initiated by the joint venture partner, the Partnership would also have a right of first refusal to purchase the joint venture partner’s interest in the investment. The exercise of a right of first refusal would be subject to the Partnership’s having the financial resources to effectuate such a purchase.
If the Partnership invests in joint venture partnerships which own properties, instead of investing directly in the properties themselves, they may be subject to risks not otherwise present. These risks include risks associated with the possible bankruptcy of the Partnership’s co-venturer or such co-venturer at any time having economic or business interests or goals which are inconsistent with those of the Partnership.
8. Purchase of Real Property From Prudential Financial or Affiliates. The Partnership may acquire properties owned by Prudential Financial or its affiliates, subject to compliance with special conditions designed to minimize the conflicts of interests. The Partnership may purchase property satisfying the Partnership’s investment objectives and policies from an affiliate only if: (1) the applicable insurance regulators approve the Partnership’s acquisition of real property from Prudential Financial or affiliates to the extent such approval is required under applicable insurance regulations; (2) the Partnership acquires the property at a price not greater than the appraised value, with the appraisal being conducted by a qualified, unaffiliated appraiser; (3) a qualified and independent real estate adviser (other than the appraiser) reviews the proposed acquisition and provides a letter of opinion that the transaction is fair to the Partnership; and (4) the affiliate has owned the property at least two years, the cost paid by the affiliate is established, and any increase in the proposed purchase price over the cost to the affiliate is, in the opinion of the independent real estate adviser, explicable by material factors (including the passage of time) that have increased the value of the property.
Pruco Life of New Jersey has determined that it is in the best interest of Contract owners participating in the Real Property Account to provide the Real Property Account with the flexibility to engage in transactions that may be prohibited if the Real Property Account accepts funds under Contracts subject to ERISA or the prohibited transaction excise tax provisions of the Internal Revenue Code. Accordingly, owners of Pruco Life of New Jersey Contracts that are purchased in connection with: (1) IRAs; (2) tax deferred annuities subject to Section 403(b) of the Code; (3) other employee benefit plans which are subject to ERISA; or (4) prohibited transaction excise tax provisions of the Code, may not select the Real Property Account as one of the investment options under their Contract. By not offering the Real Property Account as an investment option under such contracts, Pruco Life of New Jersey is able to comply with state insurance law requirements that policy loans be made available to Contract owners.
A Contract owner’s interest in the Real Property Account will initially be the amount they allocated to the Real Property Account. Thereafter, that value will change daily. The value of a Contract owner’s interest in the Real Property Account at the close of any day is equal to its amount at the close of the preceding day, multiplied by the “net investment factor” for that day arising from the Real Property Account’s participation in the Partnership, plus any additional amounts allocated to the Real Property Account by the Contract owner, and reduced by any withdrawals by the Contract owner from the Real Property Account and by the applicable Contract charges recorded in that Contract’s subaccount. Some of the charges will be made: (1) daily; (2) on the Contract’s monthly anniversary date; (3) at the end of each Contract year; and (4) upon withdrawal or annuitization. Periodically Pruco Life of New Jersey will withdraw from the Real Property Account an amount equal to the aggregate charges recorded in the subaccounts.
The “net investment factor” is calculated on each business day by dividing the value of the net assets of the Partnership at the end of that day (ignoring, for this purpose, changes resulting from new contributions to or withdrawals from the Partnership) by the value of the net assets of the Partnership at the end of the preceding business day. The value of the net assets of the Partnership at the end of any business day is equal to the sum of all cash held by the Partnership plus the aggregate value of the Partnership’s liquid securities and instruments, the individual real properties and the other real estate-related investments owned by the Partnership, determined in the manner described below, and an estimate of the accrued net operating income earned by the Partnership from properties and other real estate-related investments, reduced by the liabilities of the Partnership, including the daily investment management fee and certain other expenses attributable to the operation of the Partnership. See CHARGES, page 16.
The Partnership may invest in various liquid securities and instruments. These investments will generally be carried at their market value as determine by a valuation method which the Partners deem appropriate for the particular type of liquid security or instrument.
The value of the individual real properties and other real estate-related investments, including mortgages, acquired by the Partnership will be determined as follows. Each property or other real estate-related investment acquired by the Partnership will initially be valued at its purchase price. In acquiring a property or other real estate-related investment, PIM will not obtain an independent appraisal but will instead rely on its own analysis of the investment’s fair market value. Thereafter, all properties and most real estate-related investments will ordinarily be appraised by an independent appraiser at least annually. At least every three months, PIM will review each property or other real estate-related investments and adjust its valuation if it concludes there has been a change in the value of the property or other real estate-related investment since the last valuation. The revised value will remain in effect and will be used in each day’s calculation of the value of the Partnership’s assets until the next review or appraisal. It should be noted that appraisals are only estimates and do not necessarily reflect the realizable value of an investment.
The estimated amount of the net operating income of the Partnership from properties and other real estate-related investments will be based on estimates of revenues and expenses for each property and other real estate-related investments. Annually, PIM will prepare a month-by-month estimate of the revenues and expenses (“estimated net operating income”) for each property and other real estate-related investments owned by the Partnership. Each day PIM will add to the value of the assets, as determined above, a proportionate part of the estimated net operating income for the month. In effect, PIM will establish a daily accrued receivable of the estimated net operating income from each property and other real estate-related investments owned by the Partnership (the “daily accrued receivable”). On a monthly basis, the Partnership will receive a report of actual operating results for each property and other real estate-related investments (“actual net operating income”). Such actual net operating income will be recognized on the books of the Partnership and the amount of the then-outstanding daily accrued receivable will be correspondingly adjusted. In addition, as cash from a property or other real estate-related investment is actually received by the Partnership, receivables and other accounts will be appropriately adjusted. Periodically, but at least every three months, PIM will review its prospective estimates of net operating income in light of actual experience and make an adjustment to such estimates if circumstances indicate that such an adjustment is warranted. PIM follows this practice of accruing estimated net operating income from properties and other real estate-related investments because net operating income from such investments is generally received on an intermittent rather than daily basis, and the Partners believe it is more equitable to participating Contract owners if such net operating income is estimated and a proportionate amount is recognized daily. Because the daily accrual of estimated net operating income is based on estimates that may not turn out to reflect actual revenue and expenses, Contract owners will bear the risk that this practice will result in the undervaluing or overvaluing of the Partnership’s assets.
PIM may adjust the value of any asset held by the Partnership based on events that have increased or decreased the realizable value of a property or other real estate-related investment. For example, adjustments may be made for events indicating an impairment of a borrower’s or a lessee’s ability to pay any amounts due or events which affect the property values of the surrounding area. There can be no assurance that the factors for which an adjustment may be made will immediately come to the attention of PIM. Additionally, because the evaluation of such factors may be subjective, there can be no assurance that such adjustments will be timely made in all cases where the value of the Partnership’s investments may be affected. All adjustments made to the valuation of the Partnership’s investments, including adjustments to estimated net operating income, the daily accrued receivable, and adjustments to the valuation of properties and other real estate-related investments, will be on a prospective basis only.
The above method of valuation of the Partnership’s assets may be changed, without the consent of Contract owners, should the Partners determine that another method would more accurately reflect the value of the Partnership’s investments. Changes in the method of valuation could result in a change in the Contract Fund values which may have either an adverse or beneficial effect on Contract owners. Information concerning any material change in the valuation method will be given to all Contract owners in the annual report of the operations of the Real Property Account.
Although the above-described valuation methods have been adopted because the Partners believe they will provide a reasonable way to determine the fair market value of the Partnership’s investments, there may well be variations between the amount realizable upon disposition and the Partnership’s valuation of such assets. Contract owners may be either favorably or adversely affected if the valuation method results in either overvaluing or undervaluing the Partnership’s investments. If a Contract owner invests in the Real Property Account at a time in which the Partnership’s investments are overvalued, the Contract owner will be credited with less of an interest than if the value had been correctly stated. A Contract owner withdrawing from the Real Property Account during such time will receive more than he or she would if the value had been correctly stated, to the detriment of other Contract owners. The converse situation will exist if the Partnership’s assets are undervalued.
The Partnership may borrow for Partnership purposes, including to meet its liquidity requirements and the leveraging of currently-owned property to buy new property, subject to a maximum debt to value ratio of 331/3% (pursuant to California state requirements) based on the aggregate value of all Partnership assets. The Partnership will bear the cost of all such borrowings. The Real Property Account, and Contract owners participating in it, will bear a portion of any borrowing costs equal to their percentage interest in the Partnership. Moreover, although the Partnership will generally make unleveraged investments, it reserves the right to borrow up to 80% of the value of a property (with the value of a property determined as explained under VALUATION OF CONTRACT OWNERS’ PARTICIPATING INTERESTS, page 15). Increasing the Partnership’s assets through leveraged investments would increase the compensation paid to PIM since its investment management fee is a percentage of the Partnership’s gross assets. Any borrowing by the Partnership would increase the Partnership’s risk of loss. It could also inhibit the Partnership from achieving its investment objectives because the Partnership’s payments on any loans would have to be made regardless of the profitability of its investments.
Pursuant to the investment management agreement, the Partnership pays a daily investment management fee which is equal to an effective annual rate of 1.25% of the average daily gross assets of the Partnership. Certain other expenses and charges attributable to the operation of the Partnership are also charged against the Partnership. In acquiring an investment, the Partnership may incur various types of expenses paid to third parties, including but not limited to, brokerage fees, attorneys’ fees, architects’ fees, engineers’ fees, and accounting fees. After acquisition of an investment, the Partnership will incur recurring expenses for the preparation of annual reports, periodic appraisal costs, mortgage servicing fees, annual audit charges, accounting and legal fees, and various administrative expenses. These expenses will be charged against the Partnership’s assets. Some of these operating expenses represent reimbursement of the manager for the cost of providing certain services necessary to the operation of the Partnership, such as daily accounting services, preparation of annual reports, and various administrative services. The investment manager charges the Partnership mortgage loan servicing fees pursuant to the standards outlined in item 6 under CONFLICTS OF INTEREST, page 12. In addition to the various expenses charged against the Partnership’s assets, other expenses such as insurance costs, taxes, and property management fees will ordinarily be deducted from rental income, thereby reducing the gross income of the Partnership.
As explained earlier, charges to the Contracts will be recorded in the corresponding subaccounts of the Real Property Account. From time to time, Pruco Life of New Jersey will withdraw from the Real Property Account an amount equal to the aggregate amount of these charges. Aside from the charges to the Contracts, Pruco Life of New Jersey does not charge the Real Property Account for the expenses involved in the Real Property Account’s operation. The Real Property Account will, however, bear its proportionate share of the charges made to the Partnership as described above.
The Partnership is not a taxable entity under the provisions of the Internal Revenue Code. The income, gains, and losses of the Partnership are attributed, for federal income tax purposes, to the Partners in the Partnership. The earnings of the Real Property Account are, in turn, taxed as part of the operations of Pruco Life of New Jersey. Pruco Life of New Jersey is currently not charging the Real Property Account for company federal income taxes. Pruco Life of New Jersey may make such a charge in the future.
Under current laws Pruco Life of New Jersey may incur state and local taxes (in addition to premium taxes) in several states. At present, Pruco Life of New Jersey does not charge these taxes against the Contracts or the Real Property Account, but Pruco Life of New Jersey may decide to charge the Real Property Account for such taxes in the future.
Before allocating any portion of your net premium or purchase payments, or transferring any portion of your Contract Fund, to the Real Property Account, you should be aware that withdrawals from the Real Property Account may have greater restrictions than the other variable investment options available under the Contracts. Pruco Life of New Jersey reserves the right to restrict transfers into or out of the Real Property Account. Apart from the limitations on transfers out of the Real Property Account described below, Pruco Life of New Jersey will only restrict transfers out of the Real Property Account if there is insufficient cash available to meet Contract owners’ requests and prompt disposition of the Partnership’s investments to meet such requests could not be made on commercially reasonable terms.
Pruco Life of New Jersey will pay any death benefit, cash surrender value, withdrawal or loan proceeds within seven days after receipt at a Pruco Life of New Jersey Service Office of all the documents required for such a payment. Other than the death benefit, which is determined as of the date of death for life insurance products, the amount will be determined as of the date of receipt of the request.
The funds necessary to pay any death benefit, cash surrender value, withdrawal or loan proceeds funded by the Real Property Account will normally be obtained, first, from any cash flows into the Real Property Account on the day the funds are required. If, on the day the funds are required, cash flows into the Real Property Account are less than the amount of funds required, Pruco Life of New Jersey will seek to obtain such funds by withdrawing a portion of its interest in the Partnership. The Partnership will normally obtain funds to meet such a withdrawal request from its net operating income and from the liquid securities and instruments it holds. If the Partners determine that these sources are insufficient to meet anticipated withdrawals from the Partnership, the Partnership may use a line of credit or otherwise borrow up to 331/3% (pursuant to California state requirements) of the value of the Partnership’s assets. See BORROWING BY THE PARTNERSHIP, page 16. If the Partners determine that such a borrowing by the Partnership would not serve the best interests of Contract owners, Pruco Life of New Jersey may, in the event of a Contract loan or withdrawal, rather than take the amount of any loan or withdrawal request proportionately from all investment options under the Contract (including the Real Property Account), take any such loan or withdrawal first from the other investment options under the Contract.
Transfers from the Real Property Account to the other investment options available under the Contract are currently permitted only during the 30-day period beginning on the Contract anniversary. The maximum amount that may be transferred out of the Real Property Account each year is the greater of: (a) 50% of the amount invested in the Real Property Account or (b) $10,000. Such transfer requests received prior to the Contract anniversary will be effected on the Contract anniversary. Transfer requests received within the 30-day period beginning on the Contract anniversary will be effected as of the end of the valuation period in which a proper written request or authorized telephone request is received. The “valuation period” means the period of time from one determination of the value of the amount invested in the Real Property Account to the next. Such determinations are made when the value of the assets and liabilities of the Partnership is calculated, which is generally at 4:00 p.m. Eastern time on each day during which the New York Stock Exchange is open. Transfers into or out of the Real Property Account are also subject to the general limits under the Contracts.
As explained earlier, identification and acquisition of real estate investments meeting the Partnership’s investment objectives is a time-consuming process. Because the Real Property Account and the Partnership are managed so they will not become investment companies subject to the Investment Company Act of 1940, the portion of the Partnership’s assets that may be invested in securities, as opposed to non-securities real estate investments, is strictly limited. For these reasons, Pruco Life of New Jersey reserves the right to restrict or limit Contract owners’ allocation of funds to the Real Property Account. Any such restrictions are likely to take the form of restricting the timing, amount and/or frequency of transfers into the Real Property Account and/or precluding Contract owners who have not previously selected the Real Property Account from allocating a portion of their net premiums or purchase payments to the Real Property Account.
The federal income tax treatment of Contract benefits is described briefly in the attached prospectus for the particular Contract you selected. Pruco Life of New Jersey believes that the same principles will apply with respect to Contracts funded in whole or part by the Real Property Account. The Partnership’s conformity with the diversification standards for the investments of variable life insurance and variable annuity separate accounts is essential to ensure that treatment. See GENERAL INVESTMENT AND OPERATING POLICIES, page 8. Pruco Life of New Jersey urges you to consult a qualified tax adviser.
Under the Internal Revenue Code, the Partnership is not a taxable entity and any income, gains or losses of the Partnership are passed through to the Partners, including Pruco Life of New Jersey, with respect to the Real Property Account. The Real Property Account is not a separate taxpayer for purposes of the Internal Revenue Code. The earnings of the Real Property Account are taxed as part of the operations of Pruco Life of New Jersey. No charge is currently being made to the Real Property Account for company federal income taxes. We may make such a charge in the future, see CHARGES, page 16.
As explained in the attached prospectus for the Contracts, Pruco Securities Corporation, a wholly-owned subsidiary of Prudential Financial, acts as the principal underwriter of the Contracts. Consult that prospectus for information about commission scales and other facts relating to sale of the Contracts.
Pruco Life of New Jersey is subject to regulation and supervision by the Department of Insurance of the State of New Jersey, which periodically examines its operations and financial condition. It is also subject to the insurance laws and regulations of all jurisdictions in which it is authorized to do business.
Pruco Life of New Jersey is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business to determine solvency and compliance with local insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life of New Jersey is required to file with New Jersey and other jurisdictions a separate statement with respect to the operations of all its variable contract accounts, in a form promulgated by the National Association of Insurance Commissioners.
Pruco Life of New Jersey has filed a registration statement with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, relating to the offering described in this prospectus. This prospectus does not include all of the information set forth in the registration statement. Certain portions have been omitted pursuant to the rules and regulations of the SEC. All reports and information filed by Pruco Life of New Jersey can be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549, and at certain of its regional offices: Midwestern Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, IL 60604; Northeastern Regional Office SEC, 233 Broadway, New York, NY 10279, or by telephoning (800) SEC-0330.
The SEC maintains a Web site (http://www.sec.gov) that contains material incorporated by reference and other information regarding registrants that file electronically with the SEC.
Further information may also be obtained from Pruco Life of New Jersey. The address and telephone number are on the cover of this prospectus.
The financial statements of the Partnership as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, the financial statement schedules of the Partnership as of December 31, 2003 and the financial statements of the Real Property Account as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP’s principal business address is 1177 Avenue of the Americas, New York, New York 10036.
No litigation is pending, and no litigation is known to be contemplated by governmental authorities, that would have an adverse material effect upon the Real Property Account or the Partnership.
If you allocate a portion of your Contract Fund to the Real Property Account, Pruco Life of New Jersey will mail you an annual report containing audited financial statements for the Partnership and an annual statement showing the status of your Contract Fund and any other information that may be required by applicable regulation or law.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the assets of the Real Property Account (the “Account”) are invested in the Prudential Variable Contract Real Property Partnership (the “Partnership”). Correspondingly, the liquidity, capital resources and results of operations for the Real Property Account are contingent upon the Partnership. Therefore, all of management’s discussion of these items is at the Partnership level. The partners in the Partnership are The Prudential Insurance Company of America, Pruco Life Insurance Company, and Pruco Life Insurance Company of New Jersey (collectively, the “Partners”).
The following analysis of the liquidity and capital resources and results of operations of the Partnership should be read in conjunction with the Financial Statements and the related Notes to the Financial Statements included elsewhere herein.
As of December 31, 2003, the Partnership’s liquid assets consisting of cash and cash equivalents were $18.9 million, an increase of $0.3 million from $18.6 million at December 31, 2002. The change in the Partnership’s cash position was primarily due to an increase in net cash flows from operating and financing activities, property acquisitions and dispositions, and distributions to the Partners.
The Partnership’s investment policy allows up to 30% investment in cash and short-term obligations, although the Partnership generally holds approximately 10% of its assets in cash and short-term obligations. At December 31, 2003 and 2002, 8.02% and 8.1% of the Partnership’s total assets consisted of cash and short-term obligations, respectively.
In 1986, Prudential committed to fund up to $100 million to enable the Partnership to acquire real estate investments. Contributions to the Partnership under this commitment were utilized for property acquisitions, and could be returned to Prudential on an ongoing basis from the contract owners’ net contributions and other available cash. This commitment terminated on December 31, 2002. During the period that this commitment was in effect, Prudential funded $44 million.
The Partnership made $6.9 million in distributions to the Partners during 2003, and $16.1 million in distributions during 2002. Distributions may be made to the Partners during 2004 based upon the percentage of assets invested in short-term obligations, taking into consideration anticipated cash needs of the Partnership including potential property acquisitions, property dispositions and capital expenditures. Management anticipates that its current liquid assets and ongoing cash flow from operations will satisfy the Partnership’s needs over the next twelve months and the foreseeable future.
On December 10, 2003, the Partnership acquired a controlling interest in a 161-room hotel located in Portland, Oregon for $8.0 million. In April 2003, the Partnership also bought out its minority partner’s interest in a consolidated retail investment located in Hampton, VA for approximately $2.0 million.
During 2003, the Partnership spent approximately $5.4 million in capital expenditures on wholly owned and consolidated joint venture properties. Approximately $3.2 million of that amount was associated with the development of the retail center located in Ocean City, Maryland. The remaining $2.2 million balance was primarily associated with renovations and leasing related costs at the apartment complexes located in Jacksonville, Florida and Gresham/Salem, Oregon, the industrial building located in Aurora, Colorado, the office buildings located in Oakbrook Terrace, Illinois and Lisle, Illinois, and the retail center located in Roswell, Georgia. The Partnership also increased its investment in real estate partnerships by approximately $1.3 million in connection with the redevelopment and expansion of the retail centers located in Kansas City, Missouri.
On January 28, 2003, the Partnership sold the industrial property located in Salt Lake City, UT for $5.8 million. On April 23, 2003, the Partnership also sold one of the retail centers located in Kansas City, Missouri for $2.6 million.
The following is a brief year-to-date comparison of the Partnership’s results of operations for the periods ended December 31, 2003, 2002, and 2001.
The following table presents a year-to-date comparison of the Partnership’s sources of net investment income, and realized and unrealized gains or losses by investment type.
Twelve Months Ended December 31,
2003 2002
----------------- -----------------
Net Investment Income:
Office properties $2,039,750 $4,837,432
Apartment complexes 3,361,638 3,089,744
Retail property 6,638,838 3,612,435
Industrial properties 993,962 1,429,036
Other (including interest income,
investment mgt fee, etc.) (2,420,779) (2,380,810)
----------------- -----------------
Total Net Investment Income $10,613,409 $10,864,043
----------------- -----------------
Net Unrealized Gain (Loss) on
Real Estate Investments:
Office properties ($5,776,072) ($6,785,006)
Apartment complexes (141,845) (856,188)
Retail property (455,340) (808,736)
Industrial properties (560,168) 177,573
----------------- -----------------
Total Net Unrealized Gain (Loss) on Real (6,933,425) (8,911,195)
Estate Investments
----------------- -----------------
Net Realized Gain (Loss) on
Real Estate Investments:
Industrial properties 466,061 395,110
Real estate investment trust - (1,578)
----------------- -----------------
----------------- -----------------
Total Net Realized Gain (Loss) on Real
Estate Investments 466,061 393,532
----------------- -----------------
----------------- -----------------
Net Realized and Unrealized Gain (Loss) ($6,467,364) ($8,517,663)
on Real Estate Investments
----------------- -----------------
The Partnership’s net investment income for the twelve months ended December 31, 2003 was $10.6 million, a decrease of $0.3 million from $10.9 million when compared to the corresponding period in 2002. The decrease is primarily due to increased vacancy within the office portfolio and the loss of income resulting from the sales of the industrial properties in Bolingbrook, Illinois in September 2002 and Salt Lake City, Utah in January 2003. Offsetting these decreases is the $1.9 million lease termination fee received at the retail center located in Roswell, Georgia.
Equity in income of real estate partnership was $0.6 million for 2003, an increase of $0.3 million from $0.3 million in 2002. This increase is due to an increase in revenue associated with expansion of the existing grocery store anchor that was completed during the second quarter.
Interest on short-term investments decreased approximately $0.2 million or 38.1% for the twelve months ended December 31, 2003 due primarily to lower interest rates.
Interest expense increased $0.6 million, or 28.5%, in 2003 compared to 2002. This increase was primarily due to the Partnership’s assumption of a $7.4 million mortgage loan in conjunction with the acquisition of a controlling interest in a retail center located in Ocean City, Maryland in late 2002 and the financing of an $8.8 million note placed on the apartment investment located in Raleigh, North Carolina on June 27, 2003.
Minority interest expense decreased $0.1 million, or 37.0%, in 2003 compared to 2002. This decrease was primarily due to the Partnership’s buyout of its minority partner’s interest in the retail center located in Hampton, Virginia on April 15, 2003.
The Partnership experienced a net unrealized loss of $6.9 million for the twelve months ended December 31, 2003 compared to a net unrealized loss of $8.9 million during the corresponding period in 2002. The unrealized losses during the twelve months of 2003 were experienced in the office, industrial, retail, and apartment sectors. The office portfolio recorded an unrealized loss totaling $5.8 million primarily due to decreases in occupancy coupled with soft market conditions which have resulted in reductions in market rental rates and increased leasing costs. The industrial property in Aurora, Colorado experienced an unrealized loss of $0.6 million for the twelve months of 2003 due to decreases in market rental rates and capital expenditures at the property that were not reflected as an increase in market value. The retail sector experienced a net unrealized loss of $0.5 million primarily due to the lease termination at the Roswell, Georgia retail center and capital expenditures that were not reflected as an increase in market value at the retail center located in Kansas City, Kansas and Missouri. Offsetting these losses in the retail sector was the gain in value due to strengthening market fundamentals, renovation and re-leasing efforts, and the authorization of the preleased expansion at the center located in Ocean City, Maryland. The apartment sector also experienced an unrealized loss of $0.1 million due to the apartment portfolio located in Gresham/Salem, Oregon. The decrease is a result of projected increases in operating expenses.
OFFICE PORTFOLIO
Property Net Net Unrealized Unrealized Occupancy Occupancy
Investment Investment
Income Income Gain/(Loss) Gain/(Loss)
12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
Year To Date
Lisle, IL $709,818 $1,471,120 $(1,910,862) $(634,358) 47% 100%
Brentwood, TN 714,837 623,256 (515,685) (1,320,126) 79% 78%
Oakbrook Terrace, IL 102,262 1,167,132 (1,528,934) (3,335,782) 42% 27%
Beaverton, OR 930,822 1,134,257 (800,000) (89,123) 81% 100%
Brentwood, TN (417,989) 385,450 (1,020,591) (1,405,617) 0% 0%
Morristown, NJ - 56,217 - - Sold October 2000
-------------- --------------- --------------- ----------------
-------------- --------------- --------------- ----------------
$2,039,750 $4,837,432 $(5,776,072) $(6,785,006)
-------------- --------------- --------------- ----------------
Net investment income from property operations for the office sector decreased approximately $2.8 million, or 57.8%, for the twelve months ended December 31, 2003 when compared to the corresponding period in 2002 primarily due to increased vacancy and weak market fundamentals.
The five office properties owned by the Partnership experienced a net unrealized loss of approximately $5.8 million during the twelve months of 2003. The losses were primarily due to decreased occupancy, lower market rents, and increased lease up costs.
The five office properties owned by the Partnership experienced a net unrealized loss of approximately $6.8 million during the twelve months of 2002. The decrease in values was primarily due to a reduction in market rental rates, softening market conditions, and a decrease in occupancy due to various near-term lease expirations, and the move-out of the single tenant occupying all of the space at one of the buildings in Brentwood, Tennessee.
As of December 31, 2003 all vacant spaces were being marketed.
APARTMENT COMPLEXES
Property Net Net Unrealized Unrealized Occupancy Occupancy
Investment Investment
Income Income Gain/(Loss) Gain/(Loss)
12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
Year To Date
Atlanta, GA $819,908 $741,358 $(588,553) $(1,248,243) 91% 90%
Raleigh, NC 738,292 921,263 95,512 691,840 93% 88%
Jacksonville, FL 1,096,620 830,489 1,419,362 (208,115) 91% 90%
Gresham/Salem, OR 706,818 596,634 (1,068,166) (91,670) 90% 92%
-------------- --------------- --------------- ----------------
-------------- --------------- --------------- ----------------
$3,361,638 $3,089,744 $(141,845) $(856,188)
-------------- --------------- --------------- ----------------
Net investment income from property operations for the apartment sector was $3.4 million for the twelve months ended December 31, 2003, an increase of $0.3 million, or 8.8%, when compared to the corresponding period in 2002. The increases were mainly due to the effect of a reclassification, which took place in 2003, of 2002 repairs and maintenance expenses to building improvements for the apartment complex located in Gresham/Salem, Oregon and increased operational efficiencies and occupancy throughout the year at the apartment complex located in Jacksonville, Florida during 2003.
The apartment complexes owned by the Partnership experienced a net unrealized loss of $0.1 million for the twelve months ended December 31, 2003 compared to a net unrealized loss of $0.9 million for the twelve months ended December 31, 2002. The unrealized loss for 2003 was mainly attributable to the apartment complex located in Gresham/Salem, Oregon and the apartment complex located in Atlanta, Georgia due to an increase in projected operating expenses and capital expenditures, respectively. Offsetting this loss is the unrealized gain at the apartment complex located in Jacksonville, Florida due to market rent increases.
The apartment complexes owned by the Partnership experienced a net unrealized loss of $0.9 million for the twelve months ended December 31, 2002. These unrealized losses were due to softening market conditions, which have resulted in lower short-term occupancy and income projections, increased rental concessions, and increases in operating expense levels.
As of December 31, 2003, all available vacant units were being marketed.
RETAIL PROPERTIES
Property Net Net Unrealized Unrealized Occupancy Occupancy
Investment Investment
Income Income Gain/(Loss) Gain/(Loss)
12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
Year To Date
Roswell, GA $4,403,743 $2,773,770 $(1,571,423) $(1,738,842) 76% 93%
Kansas City, KA; MO 560,660 276,206 (934,885) (638,838) 83% 87%
Hampton, VA 1,077,627 757,239 570,136 917,041 100% 100%
Ocean City, MD* 596,808 81,426 1,480,832 13,065 100% 99%
-------------- --------------- --------------- ----------------
-------------- --------------- --------------- ----------------
$6,638,838 $3,888,641 $(455,340) $(1,447,574)
-------------- --------------- --------------- ----------------
*Center purchased in November 2002
Net investment income for the Partnership’s retail properties was approximately $6.6 million for the twelve months ended December 31, 2003, an increase of $2.8 million, or 70.7%, when compared to the corresponding period in 2002. This increase was primarily due to a $1.9 million lease termination fee received at the retail center located in Roswell, Georgia, and the Partnership’s acquisition of a controlling interest in a retail center located in Ocean City, Maryland in late 2002. Also on April 15, 2003 the Partnership acquired its joint venture partner’s membership interest in the retail center located in Hampton, Virginia, thus entitling the Partnership to all of the net investment income generated by the investment commencing on the buyout date and going forward.
The retail properties experienced a net unrealized loss of $0.5 million for the twelve months ended December 31, 2003. The Roswell, Georgia retail center had a decrease in value resulting from the lease termination as previously discussed. The Kansas City, Kansas and Missouri retail center experienced a net unrealized loss primarily due to capital expenditures, which were not reflected as an increase in market value. Offsetting these losses was the gain in value due to strengthening market fundamentals, renovation and re-leasing efforts, and the authorization of the pre-leased expansion at the center located in Ocean City, Maryland.
The retail properties experienced a net unrealized loss of $1.4 million for the twelve months ended December 31, 2002. This was primarily attributable to the center located in Roswell, Georgia due to increased risk that a major tenant would not renew its lease, coupled with a deterioration in the market position of the property and lower market rents. Also the Kansas City, Kansas and Missouri retail center experienced a net unrealized loss primarily due to capital expenditures that were not reflected as an increase in market value. Partially offsetting these losses, the retail center located in Hampton, VA experienced an unrealized gain due to the addition of 20,000 rentable square feet and an increase in occupancy.
As of December 31, 2003, all vacant spaces were being marketed.
INDUSTRIAL PROPERTIES
Net Net
Investment Investment Unrealized Unrealized
Income Income Gain/(Loss) Gain/(Loss) Occupancy Occupancy
Property 12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
---------------------------- -------------- --------------- --------------- ---------------- --------------- --------------
Year To Date
Aurora, CO $687,743 $709,270 $(560,168) $493,793 70% 75%
Bolingbrook, IL $(146) $241,623 $ - $395,110 Sold September 2002
Salt Lake City, UT $306,365 $478,143 $466,061 $(316,220) Sold January 2003
-------------- --------------- --------------- ----------------
-------------- --------------- --------------- ----------------
$993,962 $1,429,036 $(94,107) $572,683
-------------- --------------- --------------- ----------------
Net investment income from property operations for the industrial properties decreased from $1.4 million for the twelve months ended December 31, 2002 to $1.0 million for the corresponding period ended December 31, 2003. The majority of this decrease was due to the sale of the industrial property located in Bolingbrook, Illinois during the third quarter of 2002 and the sale of the industrial property located in Salt Lake City, Utah during the first quarter of 2003.
The Aurora, Colorado industrial property owned by the Partnership experienced a net unrealized loss of approximately $0.6 million for the twelve months ended December 31, 2003 compared to a net unrealized gain of approximately $0.5 million for the twelve months ended December 31, 2002. The unrealized loss experienced in 2003 is due to soft market conditions and capital expenditures at the property that were not reflected as an increase in market value.
The two industrial properties owned by the Partnership experienced a net unrealized gain of approximately $0.2 million for the twelve months ended December 31, 2002. The majority of the unrealized gain in 2002 was attributable to an increase in market rents. Offsetting this unrealized gain was the Salt Lake City, UT facility, which experienced a net unrealized loss due to capital expenditures at the property that were not reflected as an increase in market value and softening market conditions.
As of December 31, 2003, all vacant spaces were being marketed.
On January 28, 2003 the industrial property located in Salt Lake City, Utah was sold for a realized gain of $0.5 million.
On September 12, 2002 the industrial property located in Bolingbrook, Illinois was sold for a realized gain of $0.4 million.
Other net investment income decreased $0.04 million during the twelve months ended December 31, 2003 compared to the corresponding period in 2002. Other net investment income includes interest income from short-term investments, investment management fees, and portfolio level expenses.
The following table presents a year-to-date comparison of the Partnership’s sources of net investment income, and realized and unrealized gains or losses by investment type.
Twelve Months Ended December 31,
2002 2001
----------------- -----------------
Net Investment Income:
Office properties $4,837,432 $4,766,035
Apartment complexes 3,089,744 3,735,912
Retail property 3,612,435 2,950,333
Industrial properties 1,429,036 545,003
Equity in income of real estate 276,206 686,801
partnership
Dividend income from real
estate investment trust - 2,157,647
Other (including interest income,
investment mgt fee, etc.) (2,380,810) (2,491,425)
----------------- -----------------
Total Net Investment Income $10,864,043 $12,350,306
----------------- -----------------
Net Unrealized Loss on
Real Estate Investments:
Office properties ($6,785,006) ($777,380)
Apartment complexes (856,188) 415,417
Retail property (808,736) (94,504)
Industrial properties 177,573 (2,105,641)
Interest in real estate properties (638,838) 226,024
----------------- -----------------
Total Net Unrealized Loss on Real Estate (8,911,195) (2,336,084)
Investments
----------------- -----------------
Net Realized Gain (Loss) on
Real Estate Investments:
Industrial properties 395,110 -
Real estate investment trust (1,578) (211,665)
----------------- -----------------
393,532 (211,665)
----------------- -----------------
Net Realized and Unrealized Loss
----------------- -----------------
on Real Estate Investments ($8,517,663) ($2,547,749)
----------------- -----------------
The Partnership’s net investment income for the year ended December 31, 2002 was $10.9 million, a decrease of $1.5 million from $12.4 million when compared to the corresponding period in 2001. The Partnership’s liquidation of its investment in REIT stocks during the fourth quarter of 2001 resulted in no dividend income being received in 2002. Additionally, the occupancy at one of the Brentwood, TN properties had decreased to 0% in 2002 from 100% in 2001 due to the move-out of the single tenant.
Equity in income of real estate partnership was $0.3 million for the twelve months of 2002, a decrease of $0.4 million, or 59.8%, from $0.7 million in the corresponding period in 2001. This decrease is due to a decrease in revenue associated with expansion of the existing grocery store anchor that commenced during the fourth quarter of 2001. It is anticipated that upon completion, both occupancy and rental rates will increase.
Dividend income from real estate investment trusts decreased approximately $2.2 million, or 100.0%, during the twelve months of 2002 compared to the corresponding period in 2001. These decreases were due to the Partnership’s liquidation of its investment in REIT stocks during the fourth quarter of 2001.
Interest on short-term investments increased approximately $0.2 million or 53.6% for the year ended December 31, 2002 due primarily to higher average cash balance when compared to the corresponding period in 2001.
Administrative expense increased $0.8 million, or 32.8%, in the twelve months of 2002 compared to the corresponding period in 2001. These increases were primarily due to the Partnership’s acquisition of a portfolio of apartment complexes located in Gresham and Salem, OR in 2001, a retail center located in Hampton, Virginia in 2001, and a retail center located in Ocean City, Maryland in 2002.
Interest expense increased $0.2 million, or 12.0%, in the twelve months of 2002 compared to the corresponding period in 2001. This increase was primarily due to the Partnership’s assumption of a $9.0 million and a $10.3 million mortgage loan in conjunction with the acquisition of a controlling interest in a portfolio of apartment complexes located in Gresham and Salem, Oregon and a retail center located in Hampton, Virginia in 2001. There was also the additional assumption of a $7.4 million mortgage loan in conjunction with the acquisition of a controlling interest in a retail center located in Ocean City, Maryland in 2002.
The Partnership experienced a net unrealized loss of $8.9 million for the year ended December 31, 2002 compared to a net unrealized loss of $2.3 million during the corresponding period in 2001. The unrealized losses during 2002 were experienced in the office, apartment and retail sectors. The office properties recorded an unrealized loss of $6.8 million primarily due to the buildings located in Brentwood, Tennessee and Oakbrook Terrace, Illinois, where softening market conditions have resulted in reductions in market rental rates and increased leasing costs. In total, the apartment complexes in the portfolio experienced unrealized losses totaling $0.9 million for the twelve months of 2002. Weaker demand caused by higher rates of unemployment and a favorable interest rate environment for homebuyers has resulted in lower short-term occupancy and income projections. The retail sector also experienced a net unrealized loss of $0.8 million primarily due to uncertainty about a lease renewal by a major tenant.
Net investment income from property operations for the office sector increased approximately $0.1 million, or 1.5%, for the year ended December 31, 2002 when compared to the corresponding period in 2001.
The five office properties owned by the Partnership experienced a net unrealized loss of approximately $6.8 million during the twelve months of 2002. The Oakbrook Terrace, Illinois property experienced a net unrealized loss of approximately $3.3 million primarily due to softening market conditions and the lease expiration of a major tenant. One of the Brentwood, Tennessee properties experienced a net unrealized loss of approximately $1.4 million primarily due to the move-out of the single tenant at the property in July 2002. Though occupancy increased by 4%, the other Brentwood, Tennessee property experienced a net unrealized loss of approximately $1.3 million primarily due to softening market conditions. The Lisle, Illinois property experienced a net unrealized loss of approximately $0.6 million primarily due to impending tenant rollover and softening market conditions. The office property located in Beaverton, Oregon experienced an unrealized loss of approximately $0.1 million due to lower market rental rates and the near-term lease expiration of one of the tenants.
The five office properties owned by the Partnership experienced a net unrealized loss of approximately $0.8 million during the twelve months of 2001. One of the Brentwood, Tennessee properties experienced a net unrealized loss of approximately $0.7 million primarily due to the near-term expiration and expected move-out of the single tenant at the property in July 2002. The Beaverton, Oregon and the Lisle, Illinois office properties experienced a net unrealized loss of approximately $0.4 million and $0.2 million, respectively, primarily due to softening market conditions. Offsetting these unrealized losses was an unrealized gain of approximately $0.6 million at the office property located in Oakbrook Terrace, Illinois. This unrealized gain was attributable to the signing of two new leases, which brought the leased area from 55% to 79%.
Occupancy at one of the Brentwood, Tennessee office properties increased from 74% at December 31, 2001 to 78% at December 31, 2002. The other Brentwood, Tennessee office property decreased from 100% at December 31, 2001 to 0% at December 31, 2002. Occupancy at the Lisle, Illinois and Beaverton, Oregon office properties remained unchanged at 100% at December 31, 2001 and 2002. Occupancy at the Oakbrook Terrace, Illinois office decreased from 79% at December 31, 2001 to 27% at December 31, 2002. As of December 31, 2002 all vacant spaces were being marketed.
Net investment income from property operations for the apartment sector was $3.1 million for the year ended December 31, 2002, a decrease of $0.6 million, or 17.3%, when compared to the corresponding period in 2001. These decreases were primarily due to a decrease in average occupancy at the Atlanta, Georgia apartment complex. Average occupancy for the Atlanta, Georgia apartment complex was 90% and 83% for the years ended December 31, 2001 and 2002, respectively. Additionally, rental concessions were made with a goal attracting and retaining occupants, thus resulting in lower revenue at all the apartment complexes.
The apartment complexes owned by the Partnership experienced a net unrealized loss of $0.9 million for the year ended December 31, 2002 compared to a net unrealized gain of $0.4 million for the year ended December 31, 2001. Of the unrealized loss experienced in the twelve months of 2002, $1.3 million was experienced at the apartment complex located in Atlanta, Georgia. This unrealized loss was due to softening market conditions. The apartment complex located in Jacksonville, Florida experienced an unrealized loss of $0.2 million due to slightly higher expense estimates and softening market conditions. The apartment portfolio located in Gresham/Salem, Oregon, also experienced a net unrealized loss of $0.1 million primarily due to increases in operating expense levels and softening market conditions. Offsetting these losses, the apartment complex located in Raleigh, North Carolina experienced an unrealized gain of $0.7 million due to a reduced estimate of rent concessions and a reduction in certain operating expenses.
The apartment complexes owned by the Partnership experienced a net unrealized gain of $0.4 million for the twelve months ended December 31, 2001. The majority of the unrealized gain experienced in 2001 was primarily due to the Atlanta, Georgia apartment complex that experienced an increase in value of $0.9 million due to sub-metering of the apartments for water usage and lower real estate taxes than previously estimated. The apartment complex portfolio located in Gresham and Salem, Oregon also experienced an increase in value of $0.4 million due to the completion of capital improvements and a reduction of administrative expense estimates.
Offsetting these unrealized gains was the apartment complex located in Raleigh, North Carolina, which experienced a net unrealized loss of $0.5 million due to a decrease in occupancy. The apartment complex in Jacksonville, Florida also experienced a decrease in value of $0.4 million due to higher replacement reserve expenses, higher operating expense projections, and slightly lower market rent estimates.
Occupancy at the Atlanta, Georgia complex increased from 83% at December 31, 2001 to 90% at December 31, 2002. Occupancy at the Raleigh, North Carolina complex increased from 82% at December 31, 2001 to 88% at December 31, 2002. Occupancy at the apartment complex in Jacksonville, Florida increased from 88% at December 31, 2001 to 90% at December 31, 2002. Occupancy at the Gresham and Salem, Oregon apartment complexes decreased from 93% at December 31, 2001 to 92% at December 31, 2002. As of December 31, 2002, all available vacant units were being marketed.
Net investment income for the Partnership’s retail properties was approximately $3.6 million for the year ended December 31, 2002, and approximately $2.9 million for the year ended December 31, 2001. The increase in the year-to-date net investment income for the retail sector is primarily due to the May 2001 acquisition of the retail center located in Hampton, Virginia and the November 2002 acquisition of the retail center located in Ocean City, Maryland.
The retail properties experienced a net unrealized loss of $0.8 million for the year ended December 31, 2002 and a net unrealized loss of $0.1 million for the year ended December 31, 2001. The retail center located in Roswell, Georgia experienced a net unrealized loss of $1.7 million for the twelve months of 2002 due to the risk that a major tenant would not renew its lease, coupled with lower market rents. Partially offsetting this loss, the retail center located in Hampton, Virginia experienced an unrealized gain of $0.9 million due to the addition of 20,000 rentable square feet and an increase in occupancy.
The retail properties experienced a net unrealized loss of $0.1 million for the twelve months ended December 31, 2001. The retail center located in Roswell, Georgia experienced a loss of $0.6 million for 2001 due to increased capital expenditures and a slight drop in occupancy. Offsetting this unrealized loss was an unrealized gain of $0.5 million resulting from the market value appraisal received on the newly acquired retail center located in Hampton, Virginia.
Occupancy at the retail center in Hampton, Virginia remained unchanged at 100% at December 31, 2001 and 2002. Occupancy at the shopping center located in Roswell, Georgia increased from 92% at December 31, 2001 to 93% at December 31, 2002. Occupancy at the retail center in Ocean City, Maryland was 99% at December 31, 2002. As of December 31, 2002, all vacant spaces were being marketed.
Net investment income from property operations for the industrial properties increased from $0.5 million for year ended December 31, 2001 to $1.4 million for the corresponding period ended December 31, 2002. The majority of this increase was due to higher revenues at the properties located in Bolingbrook, Illinois and Salt Lake City, Utah. On September 12, 2002 the industrial property located in Bolingbrook, Illinois was sold for a realized gain of $0.4 million. Average occupancy for the Bolingbrook, Illinois industrial property was 24% and 79% for the year ended December 31, 2001 and nine months ended September 30, 2002, respectively.
The industrial properties owned by the Partnership experienced a net unrealized gain of approximately $0.2 million for the year ended December 31, 2002 compared to a net unrealized loss of approximately $2.1 million in 2001. The majority of the unrealized gain in 2002 was attributable to the Aurora, Colorado industrial property. This gain of approximately $0.5 million was due to an increase in market rents. Offsetting this unrealized gain was the Salt Lake City, Utah facility, which experienced a net unrealized loss of $0.3 million due to capital expenditures at the property that were not reflected as an increase in market value and softening market conditions.
The three industrial properties owned by the Partnership experienced a net unrealized loss of approximately $2.1 million for the twelve months ended December 31, 2001. The majority of the unrealized loss in 2001 was attributable to the Salt Lake City, Utah industrial property. This loss of approximately $1.3 million was due to a decrease in market rents. The Bolingbrook, Illinois facility experienced a loss of $0.9 million due to a decrease in rental rates and softening market conditions.
The occupancy at the Salt Lake City, Utah property remained unchanged at 77% at December 31, 2001 and 2002. The Aurora, Colorado property’s occupancy rate remained unchanged at 75% at December 31, 2001 and 2002. As of December 31, 2002, all vacant spaces were being marketed.
During the year ended December 31, 2002, income from the investment located in Kansas City, Kansas and Missouri amounted to $0.3 million, a decrease of 59.8% from $0.7 million at December 31, 2001. The decrease in the year-to-date equity in income of real estate partnership is due to a decrease in revenue associated with expansion of the existing grocery store anchor that commenced during the fourth quarter 2001. It is anticipated that upon completion, both occupancy and rental rates will increase.
The equity investment experienced a net unrealized loss of $0.6 million and a net unrealized gain of $0.2 million for the years ended December 31, 2002 and 2001, respectively. The unrealized loss of $0.6 million for the year ended December 31, 2002 was primarily due to renovations from the expansion of the existing grocery store anchor that have not been reflected yet in the market value of the property. The unrealized gain of $0.2 million for the twelve months ended December 31, 2001 was primarily due to the addition of a tenant that will provide a substantial amount of income to the center in rent and the addition of new space to house this tenant.
The retail portfolio located in Kansas City, Kansas and Missouri had an average occupancy of 90% at December 31, 2001, which decreased to 87% at December 31, 2002. As of December 31, 2002, all vacant spaces were being marketed.
The Partnership’s investment in REITS was liquidated at the end of the fourth quarter of 2001. During the twelve months ended December 31, 2001, the Partnership’s remaining investment in REITS recognized a realized loss of $0.2 million due to the sale of the Partnership’s remaining investment in REITs.
Other net investment income increased $0.1 million during the year of 2002 compared to the corresponding period in 2001. Other net investment income includes interest income from short-term investments, investment management fees, and expenses not related to property activities. The increase in 2002 is primarily due to an increase in interest income from short-term investments offset by a decrease in management fees due to the Partnership’s liquidation of its entire investment in REIT shares.
The Partnership’s leases with a majority of its commercial tenants provide for recoveries of expenses based upon the tenant’s proportionate share of, and/or increases in, real estate taxes and certain operating costs, which may reduce the Partnership’s exposure to increases in operating costs resulting from inflation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews critical estimates and assumptions. 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 Consolidated Financial Statements may change significantly.
The following sections discuss critical accounting policies applied in preparing our financial statements that are most dependent on the application of estimates and assumptions.
Real Estate Investments — The Partnership’s investments in real estate are initially valued at their purchase price. Thereafter, real estate investments are reported at their estimated market values based upon 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 Prudential Investment Management is responsible to assure that the valuation process provides objective and accurate market value estimates.
The purpose of an appraisal is to estimate the market value of real estate as of a specific date. Market value has been defined as the most probable price for which the appraised real estate will sell in a competitive market under all conditions requisite for a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self interest, and assuming that neither is under undue duress.
Real estate partnerships are valued at the Partnership’s equity in net assets as reflected in the Partnership’s financial statements with properties valued as described above.
As described above, the estimated market value of real estate and real estate related assets is determined through an appraisal process. These estimated market 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. Although the estimated market values represent subjective estimates, management believes these estimated market values are reasonable approximations of market prices and the aggregate value of investments in real estate is fairly presented as of December 31, 2003 and December 31, 2002.
The preparation of 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 reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Interest Rate Risk. The Partnership’s exposure to market rate risk for changes in interest rates relates to about 34.59% of its investment portfolio consisting primarily of short-term fixed rate commercial paper and fixed and variable interest rate debt. The Partnership does not use derivative financial instruments. By policy, the Partnership places its investments with high quality debt security issuers, limits the amount of credit exposure to any one issuer, limits duration by restricting the term, and holds investments to maturity except under rare circumstances.
The table below presents the amounts and related weighted interest rates of the Partnership’s cash equivalents and short-term investments at December 31, 2003:
Estimated Market Value
Maturity (in $ millions) Average
Interest Rate
------------------------ ------------------------ -------------------------------------
Cash equivalents 0-3 months $18.9 0.94%
The table below discloses the Partnership’s fixed rate debt as of December 31, 2003. All of the Partnership’s long-term debt bears interest at fixed rates and therefore the fair value of these instruments is affected by changes in market interest rates. On October 9, 2003 the Partnership refinanced its variable rate debt to a fixed rate of 4.34%. The following table presents principal cash flows (in thousands) based upon maturity dates of the debt obligations and the related weighted-average interest rates by expected maturity dates for the fixed rate debt.
Debt (in $ thousands), Estimated
including current portion 2004 2005 2006 2007 2008 Thereafter Total Fair Value
------------------------- ---- ---- ---- ---- ---- ---------- -----
Average Fixed Interest Rate 5.85% 5.83% 5.28% 5.26% 5.04% 6.75% 7.52%
Fixed Rate $719 $774 $8,479 $588 $26,091 $7,284 $43,935 $42,869
---------- ---------- ---------- ---------- ----------- ------------- ----------- ----------------
Total Mortgage Loans Payable $719 $774 $8,479 $588 $26,091 $7,284 $43,935 $42,869
The Partnership is exposed to market risk from tenants. While the Partnership has not experienced any significant credit losses, in the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in losses to the Partnership, which would adversely affect its operating results and liquidity.
Following are financial statements and independent auditor’s reports of the Real Property Account, as well as financial statements and independent auditor’s reports of the Partnership.
FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 2003 and 2002
2003 2002
_________ _________
ASSETS
Investment in The Prudential Variable Contract
Real Property Partnership .............................. $ 7,846,237 $ 8,854,905
_________ _________
Net Assets................................................. $ 7,846,237 $ 8,854,905
_________ _________
_________ _________
NET ASSETS, representing:
Equity of contract owners ................................. $ 5,852,959 $5,818,363
Equity of Pruco Life Insurance Company of New Jersey ...... 1,993,278 3,036,542
_________ _________
$ 7,846,237 $ 8,854,905
_________ _________
_________ _________
Units outstanding............................................. 3,519,859 4,041,055
_________ _________
_________ _________
Portfolio shares held......................................... 318,217 367,199
Portfolio net asset value per share........................... $ 24.66 $ 24.11
STATEMENTS OF OPERATIONS
For the years ended December 31, 2003, 2002 and 2001
2003 2002 2001
_________ _________ _________
INVESTMENT INCOME
Net investment income from Partnership operations............. $ 505,887 $ 489,257 $ 545,240
_________ _________ _________
EXPENSES
Charges to contract owners for assuming mortality risk and
expense risk and for administration........................ 33,146 33,639 34,149
_________ _________ _________
NET INVESTMENTS INCOME........................................ 472,741 455,618 511,091
_________ _________ _________
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net change in unrealized gain (loss) on investments in Partnership (328,761) (400,009) (99,669)
Realized gain (loss) on sale of investments in Partnership.... 22,215 17,722 (9,345)
_________ _________ _________
NET GAIN (LOSS) ON INVESTMENTS................................ (306,546) (382,287) (109,014)
_________ _________ _________
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................. $ 166,195 $ 73,331 $ 402,077
_________ _________ _________
_________ _________ _________
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 2003, 2002 and 2001
2003 2002 2001
_________ _________ _________
OPERATIONS
Net investment income......................................... $ 472,741 $ 455,618 $ 511,091
Net change in unrealized gain (loss) on investments in Partnership (328,761) (400,009) (99,669)
Net realized gain (loss) on sale of investments in Partnership 22,215 17,722 (9,345)
_________ _________ _________
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................................. 166,195 73,331 402,077
_________ _________ _________
CAPITAL TRANSACTIONS
Net withdrawals by contract owners ........................... (60,848) (139,939) (233,080)
Net contributions (withdrawals) by Pruco Life Insurance
Company of New Jersey...................................... (1,114,015) 173,578 (609,906)
_________ _________ _________
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS........................ (1,174,863) 33,639 (842,986)
_________ _________ _________
TOTAL INCREASE (DECREASE) IN NET ASSETS....................... (1,008,668) 106,970 (440,909)
NET ASSETS
Beginning of year.......................................... 8,854,905 8,747,935 9,188,844
_________ _________ _________
End of year................................................ $ 7,846,237 $ 8,854,905 $ 8,747,935
_________ _________ _________
_________ _________ _________
The accompanying notes are an integral part of these financial statements.
A-1 Real Property
NOTES TO THE FINANCIAL STATEMENTS OF
PRUCO LIFE OF NEW JERSEY VARIABLE CONTRACT REAL PROPERTY ACCOUNT
December 31, 2003
Note 1: General
Pruco Life of New Jersey Variable Contract Real Property Account ("Real Property Account") was established on October 30,
1987 by resolution of the Board of Directors of Pruco Life Insurance Company of New Jersey ("Pruco Life of New Jersey"), an
indirect wholly-owned subsidiary of The Prudential Insurance Company of America ("Prudential"), a wholly-owned subsidiary
of Prudential Financial, Inc. ("PFI") as a separate investment account pursuant to New Jersey law. The assets of the Real
Property Account are segregated from Pruco Life of New Jersey's other assets. The Real Property account is used to fund
benefits under certain variable life insurance and variable annuity contracts issued by Pruco Life of New Jersey. These
products are Appreciable Life ("VAL"), Variable Life ("VLI"), Discovery Plus ("SPVA"), and Discovery Life Plus ("SPVL").
The assets of the Real Property Account are invested in The Prudential Variable Contract Real Property Partnership (the
"Partnership"). The Partnership is organized under New Jersey law and is registered under the Securities Act of 1933. The
Partnership is the investment vehicle for assets allocated to the real estate investment option under certain variable life
insurance and annuity contracts. The Real Property Account, along with the Pruco Life Variable Contract Real Property
Account and The Prudential Variable Contract Real Property Account, are the sole investors in the Partnership. These
financial statements should be read in conjunction with the financial statements 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 and participating mortgage loans.
Note 2: Summary of Significant Accounting Policies
A. Basis of Accounting
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of the financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those
estimates.
B. Investment in Partnership Interest
The investment in the Partnership is based on the Real Property Account's proportionate interest of the Partnership's
market value. At December 31, 2003 and 2002 the Real Property Account's interest in the Partnership was 4.3% or 318,217
shares and 4.8% or 367,199 shares respectively.
C. Income Recognition
Net investment income and realized and unrealized gains and losses are recognized daily. Amounts are based upon the Real
Property Account's proportionate interest in the Partnership.
D. Equity of Pruco Life Insurance Company of New Jersey
Pruco Life of New Jersey maintains a position in the Real Property Account for property acquisitions and capital
expenditure funding needs. The position is also utilized for liquidity purposes including unit purchases and redemptions,
Partnership share transactions, and expense processing. The position does not have an effect on the contract owner's
account or the related unit value.
A-2 Real Property
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THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities - December 31, 2003 and 2002 B1
Consolidated Statements of Operations - Years Ended December 31, 2003, 2002 and 2001 B2
Consolidated Statements of Changes in Net Assets - Years Ended December 31, 2003, 2002 and 2001 B3
Consolidated Statements of Cash Flows - Years Ended December 31, 2003, 2002 and 2001 B4
Schedule of Investments - December 31, 2003 and 2002 B5
Notes to Consolidated Financial Statements B7
Report of Independent Accountants B13
INDEX - Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
Year Ended December 31,
___________________
2003 2002
________ ________
ASSETS
REAL ESTATE INVESTMENTS - At estimated market value:
Real estate and improvements (cost: 12/31/2003 - $223,943,870;
12/31/2002 - $215,592,277)............................................. $201,144,866 $196,631,183
Real estate partnership (cost: 12/31/2003 - $10,609,273;
12/31/2002 - $9,931,394)............................................... 8,721,319 8,978,324
Other real estate investments (cost: 12/31/2003 - $500,000;
12/31/2002 - $0)....................................................... 500,000 -
________ ________
Total real estate investments.......................................... 210,366,185 205,609,507
CASH AND CASH EQUIVALENTS.................................................... 18,901,814 18,591,149
OTHER ASSETS, NET............................................................ 6,359,853 5,519,457
________ ________
Total assets........................................................... $235,627,852 $229,720,113
________ ________
________ ________
LIABILITIES
MORTGAGE LOANS PAYABLE....................................................... 43,934,494 35,699,108
ACCOUNTS PAYABLE AND ACCRUED EXPENSES........................................ 2,998,752 3,092,098
DUE TO AFFILIATES............................................................ 1,017,932 907,503
OTHER LIABILITIES............................................................ 947,110 911,245
MINORITY INTEREST............................................................ 5,086,503 4,756,653
________ ________
Total liabilities...................................................... 53,984,791 45,366,607
________ ________
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY............................................................. 181,643,061 184,353,506
________ ________
Total liabilities and partners' equity................................. $235,627,852 $229,720,113
________ ________
________ ________
NUMBER OF SHARES OUTSTANDING AT END OF PERIOD................................ 7,366,835 7,644,848
________ ________
________ ________
SHARE VALUE AT END OF PERIOD................................................. $24.66 $24.11
________ ________
________ ________
The accompanying notes are an integral part of these consolidated financial statements.
B-1 Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
______________________________
2003 2002 2001
_______ _______ _______
INVESTMENT INCOME:
Revenue from real estate and improvements................... $26,217,891 $26,345,500 $24,339,631
Equity in income of real estate partnership................. 560,660 276,209 686,801
Dividend income............................................. - - 2,157,647
Interest on short-term investments.......................... 281,943 455,339 296,514
_______ _______ _______
Total investment income................................... 27,060,494 27,077,048 27,480,593
_______ _______ _______
INVESTMENT EXPENSES:
Operating................................................... 5,116,001 5,261,674 5,328,004
Investment management fee................................... 2,493,957 2,486,639 2,694,130
Real estate taxes........................................... 2,590,600 2,824,719 2,652,956
Administrative.............................................. 3,496,973 3,345,192 2,518,644
Interest expense............................................ 2,557,294 1,989,473 1,776,701
Minority interest........................................... 192,260 305,308 159,852
_______ _______ _______
Total investment expenses................................. 16,447,085 16,213,005 15,130,287
_______ _______ _______
NET INVESTMENT INCOME......................................... 10,613,409 10,864,043 12,350,306
_______ _______ _______
REALIZED AND UNREALIZED GAIN (LOSS) ON REAL ESTATE
INVESTMENTS:
Net proceeds from real estate investments sold.............. 5,689,488 6,282,075 53,417,000
Less: Cost of real estate investments sold.................. 6,620,263 9,101,381 50,300,836
Realization of prior years' unrealized
gain (loss) on real estate investments sold............... (1,396,836) (3,212,838) 3,327,829
_______ _______ _______
Net gain (loss) realized on real estate
investments sold.......................................... 466,061 393,532 (211,665)
_______ _______ _______
Change in unrealized gain (loss) on real estate investments. (6,169,630) (8,739,488) (2,311,404)
Less: Minority interest in unrealized gain (loss) on
real estate investments................................... 763,795 171,707 24,680
_______ _______ _______
Net unrealized gain (loss) on real estate investments....... (6,933,425) (8,911,195) (2,336,084)
_______ _______ _______
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON REAL ESTATE INVESTMENTS.................................. (6,467,364) (8,517,663) (2,547,749)
_______ _______ _______
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS............................................. $ 4,146,045 $ 2,346,380 $ 9,802,557
_______ _______ _______
_______ _______ _______
The accompanying notes are an integral part of these consolidated financial statements.
B-2 Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31,
_______________________________
2003 2002 2001
________ ________ ________
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income....................................... $ 10,613,409 $ 10,864,043 $ 12,350,306
Net gain (loss) realized on real estate investments sold.... 466,061 393,532 (211,665)
Net unrealized gain (loss) from real estate investments..... (6,933,425) (8,911,195) (2,336,084)
________ ________ ________
Increase (decrease) in net assets resulting from operations. 4,146,045 2,346,380 9,802,557
________ ________ ________
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM CAPITAL TRANSACTIONS:
Withdrawals by partners
(2003 -278,014; 2002 - 672,622; and
2001 - 758,443 shares, respectively)...................... (6,856,490) (16,143,510) (18,000,000)
________ ________ ________
Increase (decrease) in net assets
resulting from capital transactions................... (6,856,490) (16,143,510) (18,000,000)
________ ________ ________
INCREASE (DECREASE) IN NET ASSETS............................. (2,710,445) (13,797,130) (8,197,443)
NET ASSETS - Beginning of period.............................. 184,353,506 198,150,636 206,348,079
________ ________ ________
NET ASSETS - End of period.................................... $181,643,061 $184,353,506 $198,150,636
________ ________ ________
________ ________ ________
The accompanying notes are an integral part of these consolidated financial statements.
B-3 Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
_______________________________
2003 2002 2001
________ ________ ________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations.................... $ 4,146,045 $ 2,346,380 $ 9,802,557
Adjustments to reconcile net increase in net assets
to net cash from operating activities
Net realized and unrealized loss (gain) on
real estate investments................................. 6,467,364 8,517,663 2,547,749
Amortization of deferred financing costs.................. (523,586) (189,826) -
Distributions in excess of (less than) equity in income
of real estate partnership operations................... 648,193 (53,459) (686,801)
Minority interest in consolidated partnerships............ 192,260 305,308 159,852
Bad debt expense.......................................... 185,844 184,242 108,358
(Increase) decrease in:
Dividend receivable..................................... - 20,802 213,886
Other assets............................................ (502,655) (2,246,510) (449,444)
Increase (decrease) in:
Accounts payable and accrued expenses................... (93,346) (377,144) 951,424
Due to affiliates....................................... 110,429 11,369 8,700
Other liabilities....................................... 35,865 (61,165) 303,201
________ ________ ________
Net cash flows from (used in) operating activities.......... 10,666,413 8,457,660 12,959,482
________ ________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from real estate investments sold.............. 5,689,488 6,282,075 53,417,000
Acquisition of real estate investments...................... (8,008,729) (2,610,723) (14,582,383)
Additions to real estate and improvements................... (6,963,127) (2,629,708) (4,373,073)
Contributions to real estate partnerships................... (1,326,071) (2,851,395) (353,956)
Origination of other real estate investments................ (500,000) - -
Acquisition of real estate investment trust................. - - (18,403,928)
Sale of marketable securities, net.......................... - - 4,916,494
________ ________ ________
Net cash flows from (used in) investing activities.......... (11,108,439) (1,809,751) 20,620,154
________ ________ ________
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals by partners..................................... (6,856,490) (16,143,510) (18,000,000)
Principal payments on mortgage loans payable................ (514,614) (696,828) (437,588)
Proceeds from mortgage loans payable........................ 8,750,000 - -
Distributions to minority interest partners................. (868,559) (100,528) -
Contributions from minority interest partners............... 242,354 2,268,461 929,776
________ ________ ________
Net cash flows from (used in) financing activities.......... 752,691 (14,672,405) (17,507,812)
________ ________ ________
NET CHANGE IN CASH AND CASH
EQUIVALENTS................................................ 310,665 (8,024,496) 16,071,824
CASH AND CASH EQUIVALENTS - Beginning of period............... 18,591,149 26,615,645 10,543,821
________ ________ ________
CASH AND CASH EQUIVALENTS - End of period..................... $18,901,814 $18,591,149 $26,615,645
________ ________ ________
________ ________ ________
The accompanying notes are an integral part of these consolidated financial statements.
B-4 Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
CONSOLIDATED SCHEDULES OF REAL ESTATE INVESTMENTS
December 31, 2003 and 2002
Total Rentable
Square Feet December 31,
_______________________________
Unless 2003 2002
_______________ _______________
Otherwise Estimated Estimated
Indicated Market Market
Property Name Ownership City, State (Unaudited) Cost Value Cost Value
---------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENTS
OFFICES
750 Warrenville WO Lisle, IL 92,478 $ 23,023,835 $ 12,110,725 $ 22,857,236 $ 13,854,988
Oakbrook Terrace WO Oakbrook, IL 107,610 14,619,120 10,097,932 14,205,396 11,213,142
Summit @ Cornell Oaks WO Beaverton , OR 72,109 11,890,209 10,000,005 11,890,209 10,800,005
Westpark WO Nashville, TN 97,036 10,423,727 9,239,260 10,320,613 9,651,831
Financial Plaza WO Brentwood, TN 742,931 9,837,482 6,700,041 9,826,195 7,709,345
---------------------------------------------------------------------------------------------------------------------------------------
Offices % as of 12/31/03 27% 69,794,373 48,147,963 69,099,649 53,229,311
APARTMENTS
Brookwood Apartments WO Atlanta, GA 240 Units 15,781,263 17,000,000 15,715,772 17,523,063
Dunhill Trace Apartments WO Raleigh, NC 250 Units 16,010,326 17,665,000 15,943,836 17,502,998
Riverbend Apartments CJV Jacksonville, FL 458 Units 19,946,920 22,400,000 19,745,855 19,800,000
SIMA Apartments CJV Gresham/Salem, OR 493 Units 19,281,738 17,975,000 18,838,570 18,600,000
---------------------------------------------------------------------------------------------------------------------------------------
Apartments % as of 12/31/03 41% 71,020,247 75,040,000 70,244,033 73,426,061
RETAIL
King's Market WO Rosewell, GA 314,358 33,102,401 23,539,665 32,895,282 24,903,969
Hampton Towne Center WO Hampton, VA 174,540 18,013,068 20,000,000 16,446,909 19,300,000
White Marlin Mall CJV Ocean City, MD 186,016 13,198,649 15,900,000 10,012,138 10,012,138
Kansas City Portfolio EJV Kansas City, KS;MO 487,660 10,609,273 8,721,319 9,931,394 8,978,324
---------------------------------------------------------------------------------------------------------------------------------------
Retail % as of 12/31/03 38% 74,923,391 68,160,984 69,285,723 63,194,431
INDUSTRIAL
Smith Road WO Aurora, CO 277,930 10,806,403 10,508,509 10,294,784 10,557,058
Walsh Higgins WO Salt Lake City, UT 182,500 - - 6,599,482 5,202,646
---------------------------------------------------------------------------------------------------------------------------------------
Industrial % as of 12/31/03 6% 10,806,403 10,508,509 16,894,266 15,759,704
HOTEL
Portland Crown Plaza CJV Portland, OR 161 Rooms 8,008,729 8,008,729 - -
---------------------------------------------------------------------------------------------------------------------------------------
Hotel % as of 12/31/03 4% 8,008,729 8,008,729 - -
OTHER REAL ESTATE INVESTMENTS
Englar Lowes Loan NR Westminster, MD 500,000 500,000 - -
---------------------------------------------------------------------------------------------------------------------------------------
Other Real Estate Investments % as of 12/31/030% 500,000 500,000 - -
Total Real Estate Investments as a Percentage of
Net Assets as of 12/31/03 116% $235,053,143 $210,366,185 $225,523,671 $205,609,507
_____________________________ __________________________________________
_____________________________ __________________________________________
WO - Wholly Owned Investment
CJV - Consolidated Joint Venture
EJV - Joint Venture Investment accounted for under the equity method
NR - Note Receivable
B-5 Real Property
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY PARTNERSHIP
SCHEDULE OF INVESTMENTS
December 31, 2003 December 31, 2002
____________________ _____________________
Estimated Estimated
Face Amount Cost Market Value Cost Market Value
________ _______ _______ _______ _______
CASH AND CASH EQUIVALENTS-Percentage of Net Assets........ 10.4% 10.1%
Federal National Mortgage Assoc., 1.06%, February 4, 2004. $ 5,974,000 $ 5,967,907 $ 5,967,907 $ - $ -
Federal Home Loan Mortgage Corp., 0.88%, January 2, 2004.. 12,331,000 12,330,520 12,330,520 - -
Federal National Mortgage Assoc., 1.00%, January 02, 2003. 6,928,000 - - 6,927,615 6,927,615
Federal National Mortgage Assoc., 1.27%, January 17, 2003. 1,218,000 - - 1,217,055 1,217,055
Federal Home Loan Mortgage Corp., 1.27%, January 21, 2003. 3,461,000 - - 3,457,581 3,457,581
Federal National Mortgage Assoc., 1.27%, January 21, 2003. 1,288,000 - - 1,286,819 1,286,819
Federal National Mortgage Assoc., 1.22%, February 10, 2003 1,000,000 - - 998,611 998,611
Federal National Mortgage Assoc., 1.22%, February 13, 2003 2,070,000 - - 2,066,913 2,066,913
Federal Farm Credit Banks, 1.22%, February 14, 2003....... 1,870,000 - - 1,867,148 1,867,148
_______ _______ _______ _______
Total Cash Equivalents.................................... 18,298,427 18,298,427 17,821,742 17,821,742
Cash................................................... 603,387 603,387 769,407 769,407
_______ _______ _______ _______
Total Cash and Cash Equivalents........................ $18,901,814 $18,901,814 $18,591,149 $18,591,149
_______ _______ _______ _______
_______ _______ _______ _______
The accompanying notes are an integral part of these consolidated financial statements.
B-6 Real Property
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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 Pruco Life Insurance Company of New Jersey ("Pruco Life of New Jersey"), 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 Pruco Life of New Jersey's By-law Article V, which relates to indemnification of officers and directors, is incorporated by reference to Exhibit 1.A.(6)(c) to its Form S-6, Registration No. 333-85117, filed August 13, 1999 on behalf of the Pruco Life of New Jersey Variable Appreciable 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.
(a) Exhibits
(1A) Distribution Agreement between Pruco Securities Incorporated by reference to Pre-Effective Amendment No.
Corporation and Pruco Life Insurance Company of New Jersey 1 to Form S-6, Registration No. 2-81243, filed February
with respect to the Pruco Life of New Jersey Variable 17, 1983 on behalf of the Pruco Life of New Jersey
Insurance Account. Variable Insurance Account.
(1B) Distribution Agreement between Pruco Securities Incorporated by reference to Form S-6, Registration No.
Corporation and Pruco Life Insurance Company of New Jersey 2-89780, filed March 5, 1984, on behalf of the Pruco
with respect to the Pruco Life of New Jersey Variable Life of New Jersey Variable Appreciable Account.
Appreciable Account.
(1C) Distribution Agreement between Pruco Securities Incorporated by reference to Post-Effective Amendment No. 9
Corporation and Pruco Life Insurance Company of New Jersey to this Registration Statement, filed April 9, 1997 on behalf
with respect to the Pruco Life of New Jersey Single Premium of the Pruco Life of New Jersey Variable Contract Real
Variable Life Account and Pruco Life of New Jersey Single Property Account.
Premium Variable Annuity Account.
(3A) Articles of Incorporation of Pruco Life Insurance Incorporated by reference to Post-Effective Amendment No. 26
Company of New Jersey, as amended March 11, 1983. to Form S-6, Registration No. 2-89780, filed April 28, 1997
on behalf of the Pruco Life of New Jersey Variable Appreciable
Account.
(3B) Certificate of Amendment of the Articles of Incorporation Incorporated by reference to Post-Effective Amendment
of Pruco Life Insurance Company of New Jersey, No. 12 to this Registration Statement, filed April 16, 1999
February 12, 1998. on behalf of the Pruco Life of New Jersey Variable Contract
Real Property Account.
(3C) By-Laws of Pruco Life Insurance Company of New Jersey, Incorporated by reference to Form S-6, Registration No.
as amended August 4, 1999. 333-85117, filed August 13, 1999 on behalf of the Pruco
Life of New Jersey Variable Appreciable Account.
(3D) Resolution of the Board of Directors establishing Incorporated by reference to Post-Effective Amendment No. 9
the Pruco Life of New Jersey Variable Contract Real Property to this Registration Statement, filed April 9, 1997 on behalf
Account. of the Pruco Life of New Jersey Variable Contract Real Property Account.
(4A)Variable Life Insurance Contract. Incorporated by reference to Form N-8B-2, File No. 2-81243,
filed January 10, 1983 on behalf of the Pruco Life of New
Jersey Variable Insurance Account.
(4B)(i) Revised Variable Appreciable Life Insurance Incorporated by reference to Post-Effective Amendment No. 5
Contract with fixed death benefit. to Form S-6, Registration No. 2-89780, filed July 11, 1986
on behalf of the Pruco Life of New Jersey Variable
Appreciable Account.
(4B)(ii) Revised Variable Appreciable Life Insurance Incorporated by reference to Post-Effective Amendment No. 5
Contract with variable death benefit. to Form S-6, Registration No. 2-89780, filed July 11, 1986
on behalf of the Pruco Life of New Jersey Variable Appreciable Account.
(4C) Single Premium Variable Annuity Contract. Incorporated by reference to Post-Effective Amendment No. 9
to this Registration Statement, filed April 9, 1997 on behalf
of the Pruco Life of New Jersey Variable Contract Real Property Account.
(4D)Flexible Premium Variable Life Insurance Contract. Incorporated by reference to Post-Effective Amendment No. 9
to this Registration Statement, filed April 9, 1997 on behalf
of the Pruco Life of New Jersey Variable Contract Real Property Account.
(5) Opinion and Consent of Clifford E. Kirsch, Esq., as to the Filed herewith.
legality of the securities being registered.
(10A) Investment Management Agreement between Prudential Incorporated by reference to Post-Effective Amendment No. 16
Investment Management, Inc. and The Prudential Variable to Form S-1, Registration No. 33-20083-01, filed April 10, 2003
Contract Real Property Partnership. on behalf of The Prudential Variable Contract real Property
Account.
(10B) Administrative Service Agreement among PIM, Prudential Incorporated by reference to Form S-1, Registration No.
Insurance Company of America, Pruco Life Insurance Company, and 33-20083-01, filed April 14, 2004 on behalf of The Prudential
Pruco Life Insurance Company of New Jersey. Variable Contract Real Property Account.
(10C) Partnership Agreement of The Prudential Variable Incorporated by reference to Post-Effective Amendment No. 9
Contract Real Property Partnership. to this Registration Statement, filed April 9, 1997 on behalf
of the Pruco Life of New Jersey Variable Contract Real Property
Account.
(23A) Written consent of PricewaterhouseCoopers LLP, Filed herewith.
independent accountants.
(23B) Written consent of Clifford E. Kirsch, Esq. Incorporated by reference to Exhibit (5) hereto.
(24) Powers of Attorney:
(A) David R. Odenath, Jr., William J. Eckert, IV Incorporated by reference to Pre-Effective Amendment No.
1 to Form S-6, Registration No. 333-49334, filed
February 8, 2001 on behalf of the Pruco Life of New Jersey
Variable Appreciable Account.
(B) James J. Avery, Jr. Incorporated by reference to Post-Effective Amendment No. 10
to this Registration Statement, filed April 9, 1998
on behalf of the Pruco Life of New Jersey Variable Contract
Real Property Account.
(C) Ronald P. Joelson Incorporated by reference to Post-Effective Amendment No. 14
to this Registration Statement, filed April 10, 2001 on behalf of
the Pruco Life of New Jersey Variable Contract Real Property Account.
(D) Vivian L. Banta, Richard J. Carbone, Helen M. Galt Incorporated by reference to Post-Effective Amendment No. 5 to
Form S-6, Registration No. 333-85117, filed June 28, 2001 on
behalf of the Pruco Life of New Jersey Variable Appreciable Account.
(E) Andrew J. Mako Incorporated by reference to Post-Effective Amendment No. 27 to
Form N-4, Registration No. 333-99275, filed June 27, 2003 on
behalf of the Pruco Life of New Jersey Flexible Premium Variable
Annuity Account.
(b) Financial Statement Schedules:
Schedule III-Real Estate Owned by The Prudential Variable
Contract Real Property Partnership and independent Filed herewith.
accountant's report thereon.
Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that Section.
The undersigned Registrant hereby undertakes (a) to file any prospectuses required by Section 10(a) (3) of the Securities Act of 1933 as Post-Effective Amendments to this Registration Statement, (b) that for the purposes of determining any liability under the 1933 Act, each such Post-Effective Amendment may be deemed to be a new Registration Statement relating to the securities offered therein and the offering of such securities at that time may be deemed to be in the initial bona fide offering thereof, (c) to reflect in the prospectus any facts or events 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, (d) 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, (e) to remove from registration by means of a Post-Effective Amendment any of the securities being registered which remain unsold at such time as the offering of such securities may be terminated.
Pursuant to the requirements of the Securities Act of 1933, Pruco Life Insurance Company of New Jersey has duly caused this Post-Effective Amendment No. 17 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newark, State of New Jersey on the 8th day of April, 2004.
Pruco Life Insurance Company of New Jersey
In Respect of
Pruco Life of New Jersey
Variable Contract Real Property Account
By: /s/Pamela A. Schiz Pamela A. Schiz Vice President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 17 to the Registration Statement has been signed below by the following Directors and Officers of Pruco Life Insurance Company of New Jersey in the capacities indicated on this 8th day of April, 2004.
Signature and Title
/s/*____________________________
Vivian L. Banta
Chairperson and Director
/s/*____________________________
Andrew J. Mako
President and Director
/s/*____________________________
William J. Eckert, IV
Vice President and Chief Accounting Officer
/s/*____________________________
James J. Avery, Jr.
Director
/s/*____________________________ * By: /s/ Thomas C. Castano
Richard J. Carbone Thomas C. Castano
Director (Attorney-in-Fact)
/s/*____________________________
Helen M. Galt
Director
/s/*____________________________
Ronald P. Joelson
Director
/s/*____________________________
David R. Odenath, Jr.
Director
(a) (5) Opinion and Consent of Clifford E. Kirsch, Esq. As to the legality of the II-
securities being registered.
(23A) Written consent of PricewaterhouseCoopers LLP, independent accountants. II-
(b) Financial Statement Schedules:
Schedule III-Real Estate Owned by The Prudential Variable Contract Real Property II-
Partnership and independent accountant's report thereon.
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