Note 2 - Investments in and Advances To Local Partnerships

12 Months Ended

Dec. 31, 2012

Notes

Note 2 - Investments in and Advances To Local Partnerships

Note 2.  Investments in and Advances to Local Partnerships

As of December 31, 2012 and 2011, the Partnership holds limited partnership interests in 4 and 5 Local Partnerships, respectively, located in two states and Puerto Rico, that own residential low income rental projects consisting of 262 and 335 apartment units, respectively.  The mortgage loans of these projects are payable to or insured by various governmental agencies.

The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage (between 95% and 99%). Distributions of surplus cash from operations from most of the Local Partnerships are restricted by the Local Partnerships’ Regulatory Agreements with the United States Department of Housing and Urban Development (“HUD”). These restrictions limit the distribution to a portion, generally less than 10%, of the initial invested capital. The excess surplus cash is deposited into a residual receipts reserve, of which the ultimate realization by the Partnership is uncertain as HUD frequently retains it upon sale or dissolution of the Local Partnership. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Partnerships’ partnership agreements. These agreements usually limit the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Partnership.

The individual investments are carried at cost plus the Partnership’s share of the Local Partnership’s profits less the Partnership’s share of the Local Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once its investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations. 

For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.

Two Local Partnerships, Santa Maria Limited Dividend Partnership Assoc. (“Santa Maria”) and Marina Del Rey Limited Dividend Partnership Assoc. (“Marina Del Rey”), have been marketing their properties for sale. On October 26, 2011, Santa Maria and Marina Del Rey each entered into separate purchase and sale contracts to sell their respective investment properties to a third party for a gross sales price of $2,600,000 and $2,750,000, respectively. After payment of closing costs and repayment of the notes payable encumbering the properties, the Partnership expects to receive approximately $330,000 and $500,000 from Santa Maria and Marina Del Rey, respectively, for advance repayments and distributions. The sales are expected to close during 2013. The Partnership has no investment balances remaining in these two Local Partnerships at December 31, 2012 and 2011.

At December 31, 2012 and 2011, the investment balance in the four and five Local Partnerships, respectively, had been reduced to zero.

In December 2012, the Partnership assigned its limited partnership interest in Vista Housing Associates (“Vista Housing”) to a third party, for approximately $22,000, which was recognized as gain on sale of interest in Local Partnership. The Partnership’s investment balance in Vista Housing was zero at the date of assignment and December 31, 2011.

In May 2011, the Partnership assigned its limited partnership interest in Village Apartments (“Village”) to an affiliate of the operating general partner of Village. The Partnership believed that Village’s liabilities exceeded the fair value of the property. In addition, Village faced foreclosure as the lender had issued an acceleration notice on Village’s mortgage. The Partnership did not receive any proceeds for the assignment. The Partnership’s investment balance in Village was zero at the date of assignment.

At times, advances are made to the Local Partnerships. Advances made by the Partnership to the individual Local Partnerships are considered part of the Partnership’s investment in the Local Partnerships. Advances to Local Partnerships for which the investment has been reduced to zero are charged to expense. During the years ended December 31, 2012 and 2011, the Partnership advanced approximately $47,000 and $69,000, respectively, to two Local Partnerships, Santa Maria and Marina Del Rey, for entity taxes. During the years ended December 31, 2012 and 2011, the Partnership recognized approximately $47,000 and $69,000 as expense for advances, respectively. While not obligated to make advances to any of the Local Partnerships, the Partnership may make future advances in order to protect its economic investment in the Local Partnerships.

Although the Partnership’s recorded value of its investments and its equity in losses/income and/or distributions from the Local Partnerships are individually not material to the overall financial position of the Partnership, the following are summaries of the unaudited condensed combined balance sheets of the aforementioned Local Partnerships as of December 31, 2012 and 2011 and the unaudited condensed combined results of operations for each of the two years in the period ended December 31, 2012.

The 2012 and 2011 amounts exclude the operations of Vista Housing for which the Partnership assigned its interest in December 2012 and the 2011 amounts also exclude Village Apartments for which the Partnership assigned its interest in May 2011:

Condensed Combined Balance Sheets of the Local Partnerships
(In thousands)
	December 31,
	2012	2011
	(unaudited)	(unaudited)
Assets
Land	$    356	$    356
Building and improvements	10,116	10,091
Accumulated depreciation	(8,889)	(8,699)
Other assets	842	598
Total assets	$  2,425	$  2,346
Liabilities and Partners’ Deficit:
Liabilities:
Mortgage notes payable	$  6,414	$  6,557
Other liabilities	461	344
Total liabilities	6,875	6,901
Partners' deficit	(4,450)	(4,555)
Total Liabilities and Partners' Deficit	$  2,425	$  2,346

Condensed Combined Results of Operations of the Local Partnerships (In thousands)
	Year Ended December 31, 2012	Year Ended December 31, 2011
	(unaudited)	(unaudited)
Rental and other income	$ 1,860	$ 1,821
Expenses:
Operating expenses	879	954
Financial expenses	684	704
Depreciation and amortization	190	192
Total expenses	1,753	1,850
Income (loss) from continuing operations	$   107	$   (29)

Real Estate and Accumulated Depreciation of Local Partnerships

The following is an unaudited summary of real estate, accumulated depreciation and encumbrances of the Local Partnerships (in thousands-unaudited):

Description	Encumbrances	Land	Buildings and Related Personal Property	Total(1)	Accumulated Depreciation (1)	Date of Construction
Alabama Properties Ltd. V	$  1,331	$   53	$ 2,258	$ 2,311	$ 1,746	1980-1981
Lakeside Apts. Ltd.	843	72	1,036	1,108	924	1980-1981
Santa Maria Ltd. Dividend Partnership Assoc.	2,111	107	3,604	3,711	3,373	1981-1982
Marina Del Rey Ltd. Dividend Partnership Assoc.	2,129	124	3,218	3,342	2,846	1981-1982
Totals	$  6,414	$  356	$ 10,116	$10,472	$ 8,889

 (1)  Reconciliation of real estate (unaudited)

	Year Ended December 31, 2012	Year Ended December 31, 2011
	(in thousands)
Balance at beginning of year	$ 10,447	$ 10,433
Improvements	25	18
Disposals of assets	--	(4)
Balance at end of year	$ 10,472	$ 10,447

       Reconciliation of accumulated depreciation (unaudited)

	Year Ended December 31, 2012	Year Ended December 31, 2011
	(in thousands)
Balance at beginning of year	$  8,699	$  8,512
Depreciation expense	190	191
Disposals of assets	--	(4)
Balance at end of year	$  8,889	$  8,699

In addition to being the General Partner of the Partnership, NAPICO or one of its affiliates is the local operating general partner for two of the Local Partnerships included above.

The current policy of the United States Department of Housing and Urban Development (“HUD”) is to not renew the Housing Assistance Payment (“HAP”) Contracts on a long-term basis on the existing terms.  In connection with renewals of the HAP Contracts under current law and policy, the amount of rental assistance payments under renewed HAP Contracts will be based on market rentals instead of above market rentals, which may be the case under existing HAP Contracts.  The payments under the renewed HAP Contracts may not be in an amount that would provide sufficient cash flow to permit owners of properties subject to HAP Contracts to meet the debt service requirements of existing loans insured by the Federal Housing Administration of HUD (“FHA”) unless such mortgage loans are restructured. In order to address the reduction in payments under HAP Contracts as a result of current policy, the Multi- family Assisted Housing Reform and Affordability Act of 1997 (“MAHRAA”) provides for the restructuring of mortgage loans insured by the FHA with respect to properties subject to the Section 8 program.  Under MAHRAA, an FHA-insured mortgage loan can be restructured into a first mortgage loan which will be amortized on a current basis and a low interest second mortgage loan payable to FHA which will only be payable on maturity of the first mortgage loan.  This restructuring results in a reduction in annual debt service payable to the owner of the FHA-insured mortgage loan and is expected to result in an insurance payment from FHA to the holder of the FHA-insured loan due to the reduction in the principal amount.  MAHRAA also phases out project-based subsidies on selected properties serving families not located in rental markets with limited supply, converting such subsidies to a tenant-based subsidy.

When the HAP Contracts are subject to renewal, there can be no assurance that the Local Partnerships in which the Partnership has an investment will be permitted to restructure their mortgage indebtedness under MAHRAA.  In addition, the economic impact on the Partnership of the combination of the reduced payments under the HAP Contracts and the restructuring of the existing FHA-insured mortgage loans under MAHRAA is uncertain.