As of September 30, 2011 and December 31, 2010, the Partnership holds limited partnership interests in 8 and 13 Local Limited Partnerships, respectively. In addition, the Partnership holds a majority-owned general partner interest in Real Estate Associates III (“REA III”) which, in turn, holds a limited partnership interest in one additional Local Limited Partnership. In total, therefore, the Partnership holds interests, either directly or indirectly through REA III, in 9 and 14 Local Limited Partnerships which owned, as of September 30, 2011 and December 31, 2010, residential low income rental projects consisting of 533 and 710 apartment units, respectively. Certain of the Local Limited Partnerships are encumbered by mortgage notes payable to or insured by various governmental agencies.

The Partnership, as a limited partner, does not have a contractual relationship with the Local Limited Partnerships or exercise control over the activities and operations, including refinancing or selling decisions, of the Local Limited Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investments in the Local Limited Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Limited Partnerships based upon its respective ownership percentages between 90% and 99%. The Partnership is also entitled to 99.9% of the profits and losses of REA III. REA III is entitled to a 99% interest in the Local Limited Partnership in which it has invested. Distributions of surplus cash from operations from most of the Local Limited Partnerships are restricted by the Local Limited 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 Limited Partnership. The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Limited Partnerships’ partnership agreements. These agreements usually limit the Partnership’s distributions to an amount substantially less than its ownership percentage in the Local Limited Partnership.

The individual investments are carried at cost plus the Partnership’s share of the Local Limited Partnership’s profits less the Partnership’s share of the Local Limited Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Limited 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 Limited Partnerships reaches zero. Distributions from the Local Limited 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 consolidated statements of operations. Operating distributions of approximately $60,000 and $4,000 were received from three and one Local Limited Partnerships during the nine months ended September 30, 2011 and 2010, respectively.

In August 2011, the Partnership assigned its limited partnership interest in Orocovix Limited Dividend Partnership to an affiliate of the Local Operating General Partner of the Local Limited Partnership for approximately $12,000. The proceeds received were recorded as a gain on sale of interest in Local Limited Partnership for the three and nine months ended September 30, 2011, as the Partnership’s investment balance in the Local Limited Partnership was zero at both September 30, 2011 and December 31, 2010.

In August 2011, the Partnership assigned its limited partnership interest in Valley Oaks Senior Housing Associates to an affiliate of the Local Operating General Partner of the Local Limited Partnership for $50,000. The proceeds received were recorded as a gain on sale of interest in Local Limited Partnership for the three and nine months ended September 30, 2011, as the Partnership’s investment balance in the Local Limited Partnership was zero at both September 30, 2011 and December 31, 2010.

In May 2011, the Partnership assigned its limited partnership interests in Grant-Ko Enterprises, New Bel-Mo and Sauk-Ko Enterprises to affiliates of the Local Operating General Partners of the Local Limited Partnerships for approximately $362,000. The proceeds received of approximately $339,000, net of Wisconsin withholding tax of approximately $23,000, were recorded as a gain on sale of interests in Local Limited Partnerships for the nine months ended September 30, 2011, as the Partnership’s investment balance in all three Local Limited Partnerships was zero at both September 30, 2011 and December 31, 2010.

In January 2010, the Local Operating General Partner of one of the Local Limited Partnerships, Cady Brook Apartments, sold its investment property to a third party for a gross sale price of $1,588,000. The Partnership received a distribution of approximately $131,000 during the nine months ended September 30, 2010, which was recognized as income on the consolidated statements of operations. The Partnership had no remaining investment balance in Cady Brook Apartments at September 30, 2011 or December 31, 2010.

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 Limited Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Limited Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.

As of September 30, 2011 and December 31, 2010, the investment balance in 8 of the 9 and 13 of the 14 Local Limited Partnerships, respectively, had been reduced to zero. The Partnership still has an investment balance in Park Place Limited Partnership.

At times, advances are made to the Local Limited Partnerships. Advances made by the Partnership to the individual Local Limited Partnerships are considered part of the Partnership’s investment in the Local Limited Partnership. Advances made to Local Limited Partnerships for which the investment has been reduced to zero are charged to expense. There were no advances from the Partnership to the Local Limited Partnerships during the nine months ended September 30, 2011 and 2010. During the three and nine months ended September 30, 2011, the Partnership received repayment of advances of approximately $37,000 from one Local Limited Partnership, Crockett Manor. The repayment of advances was recognized as income on the consolidated statements of operations. No advances were repaid by Local Limited Partnerships during the nine months ended September 30, 2010.

The following is a summary of the investments in Local Limited Partnerships for the nine months ended September 30, 2011 (in thousands):

Balance, beginning of period	$ 284
Equity in income of Local Limited Partnership	144
Amortization of acquisition costs	(7)

Balance, end of period	$ 421

The following are unaudited condensed combined estimated statements of operations for the three and nine months ended September 30, 2011 and 2010 of Local Limited Partnerships in which the Partnership has invested (in thousands):

The combined results of operations for the three and nine months ended September 30, 2011 and 2010 exclude the operations of Cady Brook Apartments, which was sold in January 2010, Grant-Ko Enterprises, New Bel-Mo and Sauk-Ko Enterprises, due to the assignment of the Partnership’s interest in these Local Limited Partnerships in May 2011, Villas de Orocovix and Valley Oaks, due to the assignment of the Partnership’s interest in these Local Limited Partnerships in August 2011, and Kentucky Manor, for which no financial information is available.

In addition to being the Corporate General Partner, NAPICO, or one of its affiliates, is the general partner for five of the Local Limited Partnerships.

On March 28, 2011, Marshall Plaza Apartments I and Marshall Plaza Apartments II entered into separate purchase and sale contracts with a third party to sell their investment properties for approximately $1,110,000 and $1,385,000, respectively. The sales are expected to close during 2011. After payment of closing costs and non-recourse notes payable due to an affiliate of the purchaser, the Partnership expects to receive proceeds of approximately $58,000 from the sale of Marshall Plaza Apartments I and approximately $72,000 from the sale of Marshall Plaza Apartments II. The Partnership’s investment balance in Marshall Plaza Apartments I and II was zero at September 30, 2011 and December 31, 2010.

On August 8, 2011, Cassady Village entered into an agreement of sale and purchase to sell its investment property to the holder of the Partnership’s non-recourse notes payable in exchange for (i) full satisfaction of the non-recourse notes payable (as discussed in “Note 3”) due to an affiliate of the purchaser, (ii) the assumption of the outstanding mortgage loan encumbering the property, and (iii) gross consideration of one dollar. The Partnership will not receive any proceeds from the sale of the property. The Partnership’s investment balance in this Local Limited Partnership was zero at September 30, 2011 and December 31, 2010.

On October 25, 2011, Oakwood Manor entered into a purchase and sale contract to sell its investment property to a third party for a gross sale price of $500,000. After payment of closing costs and the mortgage encumbering the property, the Partnership expects to receive a distribution of approximately $300,000 from the sale of Oakwood Manor. The Partnership had no investment balance remaining in Oakwood Manor as of September 30, 2011 and December 31, 2010.

On October 25, 2011, Crockett Manor entered into a purchase and sale contract to sell its investment property a third party for a sale price of $75,000 in excess of the balance of the mortgage encumbering the property. After payment of closing costs and the mortgage encumbering the property, the Partnership does not expect to receive any proceeds from the sale of Crockett Manor. The Partnership had no investment balance remaining in Crockett Manor as of September 30, 2011 and December 31, 2010.

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 not 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 rate 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 by 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 Limited Partnerships in which the Partnership has an investment will be permitted to restructure its 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.