| UNITED STATES |
| SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
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| Form 10-Q |
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended March 31, 2013 |
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the transition period from __________ to __________ |
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| Commission file number 0-13810 |
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| REAL ESTATE ASSOCIATES LIMITED VII |
| (Exact name of registrant as specified in its charter) |
| California | 95-3290316 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
80 International Drive
Greenville, South Carolina 29615
(Address of principal executive offices)
(864) 239-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REAL ESTATE ASSOCIATES LIMITED VII
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
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| March 31, | December 31, |
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| 2013 | 2012 |
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| Assets |
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| Investments in and advances to Local Limited |
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| Partnerships | $ -- | $ -- |
| Cash and cash equivalents | 975 | 992 |
| Receivables – limited partners | 57 | 57 |
| Total assets | $ 1,032 | $ 1,049 |
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| Liabilities and Partners’ Deficit |
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| Liabilities: |
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| Notes payable, in default | $ 2,341 | $ 2,341 |
| Accrued interest payable, in default | 5,800 | 5,750 |
| Accounts payable and accrued expenses | 101 | 87 |
| Total liabilities | 8,242 | 8,178 |
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| Contingencies | -- | -- |
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| Partners' deficit: |
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| General partners | (397) | (396) |
| Limited partners | (6,813) | (6,733) |
| Total partners’ deficit | (7,210) | (7,129) |
| Total liabilities and partners' deficit | $ 1,032 | $ 1,049 |
See Accompanying Notes To Consolidated Financial Statements
REAL ESTATE ASSOCIATES LIMITED VII
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per interest data)
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| Three Months Ended | |
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| March 31, | |
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| 2013 | 2012 |
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| Revenues: | $ -- | $ -- |
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| Operating Expenses: |
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| Management fees - General Partner | 12 | 45 |
| General and administrative | -- | 5 |
| Legal and accounting | 19 | 25 |
| Interest | 50 | 141 |
| Total operating expenses | 81 | 216 |
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| Loss from partnership operations | (81) | (216) |
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| Gain on sale of interests in Local Limited |
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| Partnerships | -- | 3 |
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| Net loss | $ (81) | $ (213) |
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| Net loss allocated to general partners (1%) | $ (1) | $ (2) |
| Net loss allocated to limited partners (99%) | $ (80) | $ (211) |
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| Net loss per limited partnership interest | $ (5.27) | $(13.84) |
See Accompanying Notes To Consolidated Financial Statements
REAL ESTATE ASSOCIATES LIMITED VII
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands)
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| General | Limited |
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| Partners | Partners | Total |
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| Partners' deficit, December 31, 2012 | $ (396) | $ (6,733) | $ (7,129) |
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| Net loss for the three months |
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| ended March 31, 2013 | (1) | (80) | (81) |
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| Partners' deficit, March 31, 2013 | $ (397) | $ (6,813) | $ (7,210) |
See Accompanying Notes To Consolidated Financial Statements
REAL ESTATE ASSOCIATES LIMITED VII
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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| Three Months Ended | |
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| March 31, | |
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| 2013 | 2012 |
| Cash flows from operating activities: |
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| Net loss | $ (81) | $ (213) |
| Adjustments to reconcile net loss to net cash used |
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| in operating activities: |
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| Gain on sale of interests in Local Limited Partnerships | -- | (3) |
| Changes in accounts: |
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| Accrued interest payable | 50 | 141 |
| Accounts payable and accrued expenses | 14 | (2) |
| Net cash used in operating activities | (17) | (77) |
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| Cash flows provided by investing activities: |
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| Proceeds from sale of interests in Local Limited Partnerships | -- | 3 |
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| Net decrease in cash and cash equivalents | (17) | (74) |
| Cash and cash equivalents, beginning of period | 992 | 1,178 |
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| Cash and cash equivalents, end of period | $ 975 | $ 1,104 |
See Accompanying Notes To Consolidated Financial Statements
REAL ESTATE ASSOCIATES LIMITED VII
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GOING CONCERN
The accompanying unaudited consolidated financial statements have been prepared assuming Real Estate Associates Limited VII (the "Partnership” or “Registrant") will continue as a going concern. The Partnership continues to generate recurring operating losses. In addition, the Partnership is in default on notes payable and related accrued interest payable that matured between December 1999 and December 2004.
Two of the Partnership's three remaining investments involved purchases of partnership interests from partners who subsequently withdrew from the operating partnership. As of March 31, 2013, the Partnership is obligated for non-recourse notes payable of approximately $2,341,000 to the sellers of the partnership interests, bearing interest at 9.5 percent annually. Total outstanding accrued interest is approximately $5,800,000 at March 31, 2013. These obligations and the related interest are collateralized by the Partnership's investments in the local limited partnerships (the “Local Limited Partnerships”) and are payable only out of cash distributions from the Local Limited Partnerships, as defined in the notes. Unpaid interest was due at maturity of the notes. Both of the notes payable have matured and remain unpaid at March 31, 2013.
No payments were made on the notes payable during the three months ended March 31, 2013 or 2012. As discussed in “Note 4 – Notes Payable”, the Partnership has agreements with the non-recourse note holder for the two notes payable in which the note holder agreed to forebear taking any action under these notes in order to permit the Partnership to negotiate the sale of its limited partnership interests in these Local Limited Partnerships to the local general partner of the respective Local Limited Partnerships. Subsequent to March 31, 2013, the Partnership sold its interest in one of these Local Limited Partnerships to the local general partner of the Local Limited Partnership in exchange for the cancellation and extinguishment of two of the Partnership’s non-recourse notes payable of an aggregate of approximately $920,000 and associated accrued interest of approximately $2,419,000 as of March 31, 2013 (as discussed in “Note 4”). The other sale is expected to close during 2013.
As a result of the above, there is substantial doubt about the Partnership's ability to continue as a going concern. The unaudited consolidated financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of these uncertainties.
General
The information contained in the following notes to the unaudited consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements and related notes thereto contained in the Annual Report for the fiscal year ended December 31, 2012 prepared by the Partnership. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
In the opinion of the Partnership’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting primarily of normal recurring items) considered necessary for a fair presentation.
The consolidated balance sheet at December 31, 2012 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.
The general partners collectively share a one percent interest in profits and losses of the Partnership. The limited partners share the remaining 99 percent interest which is allocated in proportion to their respective individual investments. The general partners of the Partnership are National Partnership Investments, LLC ("NAPICO or “General Partner"), a California limited liability company, and National Partnership Investments Associates II, a California limited partnership. The General Partner is a subsidiary of Bethesda Holdings II, LLC, a privately held real estate asset management company (“Bethesda”).
At both March 31, 2013 and December 31, 2012, the Partnership had outstanding 15,185.5 limited partnership interests.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States.
The Partnership’s management evaluated subsequent events through the time this Quarterly Report on Form 10-Q was filed.
These consolidated financial statements include the accounts of Real Estate Associates Limited VII and Real Estate Associates IV (“REA IV”), a California general partnership in which the Partnership holds 99 percent of the general partner interest. Losses in excess of the minority investment that would otherwise be attributed to the minority interest are being allocated to the Partnership.
Method of Accounting for Investments in Local Limited Partnerships
The investments in Local Limited Partnerships are accounted for using the equity method.
Net Loss Per Limited Partnership Interest
Net loss per limited partnership interest was computed by dividing the limited partners’ share of net loss by the number of limited partnership interests outstanding at the beginning of the year. The number of limited partnership interests used was 15,185.5 and 15,249.5 for the three months ended March 31, 2013 and 2012, respectively.
Variable Interest Entities
The Partnership consolidates any variable interest entities in which the Partnership holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
In determining whether it is the primary beneficiary of a VIE, the Partnership considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of the Partnership’s investment; the obligation or likelihood for the Partnership or other investors to provide financial support; and the similarity with and significance to the business activities of the Partnership and the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
At March 31, 2013 and December 31, 2012, the Partnership holds variable interests in 3 VIEs for which the Partnership is not the primary beneficiary. The Partnership has concluded, based on its qualitative consideration of the partnership agreement, the partnership structure and the role of the general partner in each of the Local Limited Partnerships, that the general partner of each of the Local Limited Partnerships is the primary beneficiary of the respective Local Limited Partnership. In making this determination, the Partnership considered the following factors:
· the general partners conduct and manage the business of the Local Limited Partnerships;
· the general partners have the responsibility for and sole discretion over selecting a property management agent for the Local Limited Partnerships’ underlying real estate properties;
· the general partners are responsible for approving operating and capital budgets for the properties owned by the Local Limited Partnerships;
· the general partners are obligated to fund any recourse obligations of the Local Limited Partnerships;
· the general partners are authorized to borrow funds on behalf of the Local Limited Partnerships; and
· the Partnership, as a limited partner in each of the Local Limited Partnerships, does not have the ability to direct or otherwise significantly influence the activities of the Local Limited Partnerships that most significantly impact such entities’ economic performance.
The 3 VIEs consist of Local Limited Partnerships that are directly engaged in the ownership and management of 3 apartment properties with a total of 302 units. The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnership’s maximum exposure to loss as a result of its involvement with the unconsolidated VIEs is limited to the Partnership’s recorded investments in and receivables from these VIEs, which were zero at March 31, 2013 and December 31, 2012. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.
NOTE 3 - INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS
As of March 31, 2013 and December 31, 2012, the Partnership holds a limited partnership interest in 1 Local Limited Partnership and a general partner interest in REA IV which, in turn, holds limited partnership interests in 2 additional Local Limited Partnerships; therefore, the Partnership holds interests, either directly or indirectly through REA IV, in 3 Local Limited Partnerships. The other general partner of REA IV is NAPICO. The Local Limited Partnerships own residential low income rental projects consisting of 302 apartment units at March 31, 2013 and December 31, 2012. 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 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 percentage of 99%. 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 unaudited consolidated statements of operations. The Partnership did not receive any operating distributions from Local Limited Partnerships during the three months ended March 31, 2013 and 2012.
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 limited partnerships. Advances made to Local Limited Partnerships for which the investment has been reduced to zero are charged to expense. There were no advances made during the three months ended March 31, 2013 and 2012.
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.
The Partnership has no carrying value in investments in Local Limited Partnerships as of March 31, 2013 and December 31, 2012.
On February 2, 2012, Oakwood Park Apartments I and Oakwood Park Apartments II each sold their respective investment properties to the holder of the Local Limited Partnership’s non-recourse notes payable in exchange for (i) full satisfaction of non-recourse notes payable due to an affiliate of the purchaser and (ii) the sum of one dollar with respect to each property. The Partnership did not receive any proceeds from the sale. The Partnership had no investment balance remaining in either Oakwood Park Apartments I or Oakwood Park Apartments II at the date of the sale.
On March 9, 2012, Birch Manor I sold its investment property to the holder of the Local Limited Partnership’s non-recourse note payable in exchange for (i) full satisfaction of the Local Limited Partnership’s non-recourse note payable due to an affiliate of the purchaser and (ii) the sum of one dollar. The Partnership did not receive any proceeds from the sale. The Partnership had no investment balance remaining in Birch Manor I at the date of the sale.
On March 27, 2012, the Partnership assigned its limited partnership interest in Arkansas City and Oakview to a third party for a total of $3,000. This amount was recognized as gain on sale of interests in Local Limited Partnerships for the three months ended March 31, 2012, as the Partnership had no investment balance remaining in either Arkansas City or Oakview at the date of the assignment.
On May 6, 2013, the Partnership assigned its limited partnership interest in Bluewater Limited Dividend Housing Association (“Bluewater”) to an affiliate of the Local Operating General Partner for the cancellation of two non-recourse notes payable (as discussed in “Note 4”) by an affiliate of the Local Operating General Partner. The Partnership had no investment balance remaining in Bluewater at March 31, 2013 and December 31, 2012. In connection with the sale, the Partnership’s non-recourse notes payable of an aggregate of approximately $920,000 and associated accrued interest of approximately $2,419,000 as of March 31, 2013 were extinguished.
In August 2007, the mortgage lender for the mortgage encumbering Newton Apartments sent notice accelerating the debt. The Local Operating General Partner requested that the lender restructure or write down the debt. The Local Operating General Partner conducted mediation with the lender in June 2010. The mortgage lender was unwilling to write down or restructure the debt, but did agree to give the Local Operating General Partner additional time to complete a sale of the property.
The following are unaudited condensed combined estimated statements of operations for the three months ended March 31, 2013 and 2012 for the Local Limited Partnerships in which the Partnership has invested (2012 amounts exclude Oakwood Park Apartments I and Oakwood Park Apartments II, which sold February 2, 2012, Birch Manor Apartments I, which sold March 9, 2012, Arkansas City Apartments and Oakview Apartments, due to the assignment of the Partnership’s interests in the Local Limited Partnerships on March 27, 2012, Oak Hill Apartments, which sold April 11, 2012, Richards Park Apartments, which sold April 17, 2012, Yorkview Estates and Mount Union Apartments, which sold May 11, 2012, Birch Manor Apartments II, which sold May 16, 2012, Bellair Manor, which sold May 17, 2012, Jasper County Properties, Pachuta and Shubuta Properties, due to the assignment of the Partnership’s interests in the Local Limited Partnerships on May 23, 2012, Ivywood, which sold August 14, 2012 and Aristocrat Manor, due to the assignment of the Partnership’s interest in the Local Limited Partnership on October 29, 2012):
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| Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 |
| Revenues: |
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| Rental and other | $ 552 | $ 548 |
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| Expenses |
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| Depreciation and amortization | 121 | 100 |
| Interest | 50 | 54 |
| Operating | 351 | 364 |
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| 522 | 518 |
| Income from continuing operations | $ 30 | $ 30 |
Note 4 – NOTES PAYABLE
Two of the Partnership's three remaining investments involved purchases of partnership interests from partners who subsequently withdrew from the operating partnership. As of both March 31, 2013 and December 31, 2012, the Partnership is obligated for non-recourse notes payable of approximately $2,341,000 to the sellers of the partnership interests, bearing interest at 9.5 percent annually. The Partnership recognized interest expense of approximately $50,000 and $141,000 for the three months ended March 31, 2013 and 2012, respectively. Accrued interest is approximately $5,800,000 and $5,750,000 as of March 31, 2013 and December 31, 2012, respectively. These notes matured between December 1999 and December 2004. These obligations and related interest are collateralized by the Partnership's investments in the Local Limited Partnerships and are payable only out of cash distributions from the Local Limited Partnerships, as defined in the notes. Unpaid interest was due at maturity of the notes. Both of the notes payable have matured and remain unpaid at March 31, 2013.
In 2005, the Partnership entered into an agreement with the holder of the non-recourse notes payable collateralized by the Partnership’s investment in five Local Limited Partnerships with notes payable in which the note holder agreed to forebear taking any action under these notes pending the purchase by the note holder of a series of projects including the properties owned by ten of the Local Limited Partnerships. These ten Local Limited Partnerships sold their respective investment properties to the note holder during 2012. In connection with these sales, non-recourse notes payable of approximately $2,329,000 and associated accrued interest of approximately $6,036,000 were extinguished during the second and third quarters of 2012. The sales of Oakwood Park Apartments I, Oakwood Park Apartments II, Richards Park, Birch Manor I and Birch Manor II had no impact on the Partnership’s notes payable outstanding.
The holder of one non-recourse note payable extinguished the note payable of approximately $1,400,000 and associated accrued interest of approximately $3,837,000 during the fourth quarter of 2012 in connection with the Partnership’s sale of its limited Partnership interest in Aristocrat Manor to the local general partner of this Local Limited Partnership.
There were no principal or interest payments made on these notes during the three months ended March 31, 2013 or 2012. The Partnership has agreements with the non-recourse note holder for the remaining two notes payable in which the note holder agreed to forebear taking any action under these notes in order to permit the Partnership to negotiate the sale of its limited partnership interests in these Local Limited Partnerships to the local general partner of the respective Local Limited Partnerships. As discussed in “Note 3”, the holder of two non-recourse notes payable cancelled and extinguished the notes payable of an aggregate of approximately $920,000 and associated accrued interest of approximately $2,419,000 at March 31, 2013 in connection with the Partnership’s sale of its limited partnership interest in Bluewater to the local general partner of this Local Limited Partnership. The other sale is expected to close during 2013.
NOTE 5 – TRANSACTIONS WITH AFFILIATED PARTIES
Under the terms of the Restated Certificate and Agreement of Limited Partnership, the Partnership is obligated to NAPICO for an annual management fee equal to 0.5 percent of the original remaining invested assets of the remaining partnerships and is calculated at the beginning of each year. Invested assets are defined as the costs of acquiring project interests, including the proportionate amount of the mortgage loans related to the Partnership's interest in the capital accounts of the respective partnerships. The fee was approximately $12,000 and $45,000 for the three months ended March 31, 2013 and 2012, respectively.
An affiliate of the General Partner is the local general partner in one of the Partnership’s three remaining Local Limited Partnerships.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Accounting Standards Codification Topic 825, “Financial Instruments”, requires disclosure of fair value information about financial instruments whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. The notes payable and amounts due for partnership interests are collateralized by the Partnership’s investment in two Local Limited Partnerships and are payable only out of cash distributions from the Local Limited Partnerships. The operations generated by the Local Limited Partnerships, which account for the Partnership’s primary source of revenues, are subject to various government rules, regulations and restrictions which make it impracticable to estimate the fair value of the notes and related accrued interest payable. At March 31, 2013, the Partnership believes that the carrying amount of its other assets and liabilities reported on the consolidated balance sheet that require such disclosure approximated their fair value due to the short-term maturity of these instruments.
NOTE 7 - CONTINGENCIES
The General Partner is involved in various lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the General Partner, the claims will not result in any material liability to the Partnership.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Quarterly Report contains or may contain information that is forward-looking within the meaning of the federal securities laws. Actual results may differ materially from those described in these forward-looking statements and, in addition, will be affected by a variety of risks and factors, some of which are beyond the Partnership’s control, including, without limitation: financing risks, including the availability and cost of financing and the risk that the Partnership’s cash flows from operations may be insufficient to meet required payments of principal and interest; national and local economic conditions, including the pace of job growth and the level of unemployment; the terms of governmental regulations that affect the Partnership and its investment in Local Limited Partnerships and interpretations of those regulations; the competitive environment in which the Partnership operates; real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for residents in such markets; litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by the Local Limited Partnerships in which the Partnership has invested. Readers should carefully review the Partnership’s consolidated financial statements and the notes thereto, as well as the other documents the Partnership files from time to time with the Securities and Exchange Commission.
The General Partner monitors developments in the area of legal and regulatory compliance.
The Partnership's primary source of funds consists of the receipt of distributions from Local Limited Partnerships in which the Partnership has invested. It is not expected that any of the Local Limited Partnerships in which the Partnership has invested will generate cash flow from operations sufficient to provide for distributions to limited partners in any material amount. An infrequent source of funds is from the sale of a Local Limited Partnership property or the sale of the Partnership’s interest in a Local Limited Partnership. The General Partner has determined that its cash and cash equivalents are to be reserved to fund Partnership reserves and operating expenses.
As of March 31, 2013 and December 31, 2012, the Partnership had cash and cash equivalents of approximately $975,000 and $992,000, respectively. All of this cash is on deposit with a financial institution.
Two of the Partnership's three remaining investments involved purchases of partnership interests from partners who subsequently withdrew from the operating partnership. The Partnership is obligated for non-recourse notes payable of approximately $2,341,000 to the sellers of the partnership interests, bearing interest at 9.5 percent annually. Total outstanding accrued interest at March 31, 2013 was approximately $5,800,000. These obligations and the related interest are collateralized by the Partnership's investments in the Local Limited Partnerships and are payable only out of cash distributions from the Local Limited Partnerships, as defined in the notes. Accrued but unpaid interest was due at maturity of the notes. The Partnership has not repaid the notes payable and is in default under the remaining terms of the notes. However, the Partnership has agreements with the non-recourse note holder for the notes payable in which the note holder agreed to forebear taking any action under these notes in order to permit the Partnership to negotiate the sale of its limited partnership interests in these Local Limited Partnerships to the local general partner of the respective Local Limited Partnerships. Subsequent to March 31, 2013, the Partnership sold its interest in one of these Local Limited Partnerships to the local general partner of the Local Limited Partnership (as discussed below).
On February 2, 2012, Oakwood Park Apartments I and Oakwood Park Apartments II each sold their respective investment properties to the holder of the Local Limited Partnership’s non-recourse notes payable in exchange for (i) full satisfaction of non-recourse notes payable due to an affiliate of the purchaser and (ii) the sum of one dollar with respect to each property. The Partnership did not receive any proceeds from the sale. The Partnership had no investment balance remaining in either Oakwood Park Apartments I or Oakwood Park Apartments II at the date of the sale.
On March 9, 2012, Birch Manor I sold its investment property to the holder of the Local Limited Partnership’s non-recourse note payable in exchange for (i) full satisfaction of the Local Limited Partnership’s non-recourse note payable due to an affiliate of the purchaser and (ii) the sum of one dollar. The Partnership did not receive any proceeds from the sale. The Partnership had no investment balance remaining in Birch Manor I at the date of the sale.
On March 27, 2012, the Partnership assigned its limited partnership interest in Arkansas City and Oakview to a third party for a total of $3,000. This amount was recognized as gain on sale of interests in Local Limited Partnerships for the three months ended March 31, 2012, as the Partnership had no investment balance remaining in either Arkansas City or Oakview at the date of the assignment.
On May 6, 2013, the Partnership assigned its limited partnership interest in Bluewater Limited Dividend Housing Association (“Bluewater”) to an affiliate of the Local Operating General Partner for the cancellation of two non-recourse notes payable by an affiliate of the Local Operating General Partner. The Partnership had no investment balance remaining in Bluewater at March 31, 2013 and December 31, 2012. In connection with the sale, two of the Partnership’s non-recourse notes payable of an aggregate of approximately $920,000 and associated accrued interest of approximately $2,419,000 as of March 31, 2013 were extinguished.
In August 2007, the mortgage lender for the mortgage encumbering Newton Apartments sent notice accelerating the debt. The Local Operating General Partner requested that the lender restructure or write down the debt. The Local Operating General Partner conducted mediation with the lender in June 2010. The mortgage lender was unwilling to write down or restructure the debt, but did agree to give the Local Operating General Partner additional time to complete a sale of the property.
The unaudited consolidated financial statements have been prepared assuming the Partnership will continue as a going concern. The Partnership continues to generate recurring operating losses. In addition, the Partnership is in default on notes payable and related accrued interest payable that matured between December 1999 and December 2004. As a result, there is substantial doubt about the Partnership's ability to continue as a going concern. The unaudited consolidated financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome of these uncertainties.
At March 31, 2013 and December 31, 2012, the Partnership held an investment in one Local Limited Partnership and a general partner interest in REA IV which, in turn, held limited partnership interests in two additional Local Limited Partnerships; therefore, the Partnership held interests, either directly or indirectly through REA IV, in three Local Limited Partnerships. The other general partner of REA IV is NAPICO. The Local Limited Partnerships all own housing projects, most of which were substantially rented. 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 investment in the Local Limited Partnerships using the equity method. Thus, 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. However, since the Partnership is not legally liable for the obligations of the Local Limited Partnerships, or is not otherwise committed to provide additional support to them, 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. Subsequent distributions received are recognized as income in the consolidated 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 Limited Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Limited Partnerships.
There was no recognition of equity in losses from the Local Limited Partnerships for the three months ended March 31, 2013 and 2012, as the Partnership's investment in all Local Limited Partnerships had been reduced to zero prior to January 1, 2012.
The Partnership did not receive any operating distributions from Local Limited Partnerships during the three months ended March 31, 2013 and 2012.
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 limited partnerships. Advances made to Local Limited Partnerships for which the investment has been reduced to zero are charged to expense. There were no advances made during the three months ended March 31, 2013 and 2012.
Operating expenses, other than interest expense and management fees, consist of legal and accounting fees for services rendered to the Partnership and general and administrative expenses. Legal and accounting fees were approximately $19,000 and $25,000 for the three months ended March 31, 2013 and 2012, respectively. The decrease in legal and accounting fees during the three months ended March 31, 2012 is primarily due to decreases in costs associated with negotiating extensions of certain of the notes payable discussed above. General and administrative expenses were less than $1,000 and approximately $5,000 for the three months ended March 31, 2013 and 2012, respectively. The decrease in general and administrative expense is due to a decrease in costs associated with filing fees.
A recurring partnership expense is the annual management fee. The fee is payable to the General Partner of the Partnership and is calculated at 0.5 percent of the Partnership's original remaining invested assets and is calculated at the beginning of each year. The management fee is paid to the General Partner for its continuing management of Partnership affairs. Management fees were approximately $12,000 and $45,000 for the three months ended March 31, 2013 and 2012, respectively. The decrease in management fees is due to the sale of ten investment properties and the assignment of the Partnership’s interest in six Local Limited Partnerships during 2012.
The Partnership, as a limited partner in the Local Limited Partnerships in which it has invested, is subject to the risks incident to the management and ownership of improved real estate. The Partnership investments are also subject to adverse general economic conditions and, accordingly, the status of the national economy, including substantial unemployment, concurrent inflation and changing legislation, could increase vacancy levels, rental payment defaults and operating expenses, which in turn, could substantially increase the risk of operating losses for the projects.
Off-Balance Sheet Arrangements
The Partnership owns limited partnership interests in unconsolidated Local Limited Partnerships, in which the Partnership’s ownership percentage is 99%. However, based on the provisions of the relevant partnership agreements, the Partnership, as a limited partner, does not have control or a contractual relationship with the Local Limited Partnerships that would require or allow for consolidation under accounting principles generally accepted in the United States (see “Note 2 – Organization and Summary of Significant Accounting Policies” of the consolidated financial statements in “Item 1. Financial Statements”). There are no lines of credit, side agreements or any other derivative financial instruments between the Local Limited Partnerships and the Partnership. Accordingly the Partnership’s maximum risk of loss related to these unconsolidated Local Limited Partnerships is limited to the recorded investments in and receivables from the Local Limited Partnerships. See “Note 3 – Investments in and Advances to Local Limited Partnerships” of the consolidated financial statements in “Item 1. Financial Statements” for additional information about the Partnership’s investments in unconsolidated Local Limited Partnerships.
The Partnership consolidates any variable interest entities in which the Partnership holds a variable interest and is the primary beneficiary. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
In determining whether it is the primary beneficiary of a VIE, the Partnership considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of the Partnership’s investment; the obligation or likelihood for the Partnership or other investors to provide financial support; and the similarity with and significance to the business activities of the Partnership and the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
At March 31, 2013 and December 31, 2012, the Partnership holds variable interests in three VIEs for which the Partnership is not the primary beneficiary. The Partnership has concluded, based on its qualitative consideration of the partnership agreement, the partnership structure and the role of the general partner in each of the Local Limited Partnerships, that the general partner of each of the Local Limited Partnerships is the primary beneficiary of the respective Local Limited Partnership. In making this determination, the Partnership considered the following factors:
· the general partners conduct and manage the business of the Local Limited Partnerships;
· the general partners have the responsibility for and sole discretion over selecting a property management agent for the Local Limited Partnerships’ underlying real estate properties;
· the general partners are responsible for approving operating and capital budgets for the properties owned by the Local Limited Partnerships;
· the general partners are obligated to fund any recourse obligations of the Local Limited Partnerships;
· the general partners are authorized to borrow funds on behalf of the Local Limited Partnerships; and
· the Partnership, as a limited partner in each of the Local Limited Partnerships, does not have the ability to direct or otherwise significantly influence the activities of the Local Limited Partnerships that most significantly impact such entities’ economic performance.
The three VIEs consist of Local Limited Partnerships that are directly engaged in the ownership and management of three apartment properties with a total of 302 units. The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnership’s maximum exposure to loss as a result of its involvement with the unconsolidated VIEs is limited to the Partnership’s recorded investments in and receivables from these VIEs, which were zero at March 31, 2013 and December 31, 2012. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. Judgments and assessments of uncertainties are required in applying the Partnership’s accounting policies in many areas. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.
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 percentage of 99%. Distributions of surplus cash from operations from many 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 consolidated 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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures.
The Partnership’s management, with the participation of the Senior Managing Director and Director of Reporting of Bethesda, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Senior Managing Director and Director of Reporting of Bethesda, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective.
(b) Changes in Internal Control Over Financial Reporting.
There has been no change in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
See Exhibit Index.
The agreements included as exhibits to this Form 10-Q contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
Accordingly, such representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. The Partnership acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-Q not misleading. Additional information about the Partnership may be found elsewhere in this Form 10-Q and the Partnership’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| REAL ESTATE ASSOCIATES LIMITED VII |
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| By: National Partnership Investments, LLC |
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| General Partner |
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| Date: May 13, 2013 | By: /s/Brian Flaherty |
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| Brian Flaherty |
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| Senior Managing Director |
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| Date: May 13, 2013 | By: /s/Edward Schmidt |
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| Edward Schmidt |
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| Director of Reporting |
REAL ESTATE ASSOCIATES LIMITED VII
EXHIBIT INDEX
Exhibit Description of Exhibit
3 Restated Certificate and Agreement of Limited Partnership dated May 24, 1983 filed with the Securities and Exchange Commission Form S-11 No. 2-84816, which is hereby incorporated by reference.
10.1 Assignment and Assumption Agreement by and between Real Estate Associates IV, a California general partnership, Joel I. Ferguson, AMG-MGT, LLC, a Michigan limited liability company, and AMG-MGT, LLC and Bluewater Corporation, a Michigan corporation, dated May 6, 2013, incorporated by reference to the Partnership’s Current Report on Form 8-K dated May 6, 2013.
31.1 Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the equivalent of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 XBRL (Extensible Business Reporting Language). The following materials from Real Estate Associates Limited VII’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, formatted in XBRL: (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statement of changes in partners’ deficit, (iv) consolidated statements of cash flows, and (v) notes to consolidated financial statements (1)
(1) As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
Exhibit 31.1
CERTIFICATION
I, Brian Flaherty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Real Estate Associates Limited VII;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 13, 2013
/s/Brian Flaherty
Brian Flaherty
Senior Managing Director of National Partnership Investments, LLC, equivalent of the chief executive officer of the Partnership
Exhibit 31.2
CERTIFICATION
I, Edward Schmidt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Real Estate Associates Limited VII;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 13, 2013
/s/Edward Schmidt
Edward Schmidt
Director of Reporting of National Partnership Investments, LLC, equivalent of the chief financial officer of the Partnership
Exhibit 32.1
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Real Estate Associates Limited VII (the "Partnership"), for the quarterly period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Brian Flaherty, as the equivalent of the chief executive officer of the Partnership, and Edward Schmidt, as the equivalent of the chief financial officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.
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| /s/Brian Flaherty |
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| Name: Brian Flaherty |
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| Date: May 13, 2013 |
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| /s/Edward Schmidt |
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| Name: Edward Schmidt |
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| Date: May 13, 2013 |
This certification is furnished with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
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Note 3 - Investments in and Advances To Local Limited Partnerships: Schedule of Statement of Operations of Investment Partnerships (in thousands) (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
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Mar. 31, 2013
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Mar. 31, 2012
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| Details | ||
| Rental and other revenue | $ 552 | $ 548 |
| Depreciation and amortization expense | 121 | 100 |
| Interest expense | 50 | 54 |
| Operating expense | 351 | 364 |
| Income (loss) from continuing operations | $ 30 | $ 30 |
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Note 4 - Notes Payable
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3 Months Ended |
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Mar. 31, 2013
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| Notes | |
| Note 4 - Notes Payable | Note 4 – NOTES PAYABLE
Two of the Partnership's three remaining investments involved purchases of partnership interests from partners who subsequently withdrew from the operating partnership. As of both March 31, 2013 and December 31, 2012, the Partnership is obligated for non-recourse notes payable of approximately $2,341,000 to the sellers of the partnership interests, bearing interest at 9.5 percent annually. The Partnership recognized interest expense of approximately $50,000 and $141,000 for the three months ended March 31, 2013 and 2012, respectively. Accrued interest is approximately $5,800,000 and $5,750,000 as of March 31, 2013 and December 31, 2012, respectively. These notes matured between December 1999 and December 2004. These obligations and related interest are collateralized by the Partnership's investments in the Local Limited Partnerships and are payable only out of cash distributions from the Local Limited Partnerships, as defined in the notes. Unpaid interest was due at maturity of the notes. Both of the notes payable have matured and remain unpaid at March 31, 2013.
In 2005, the Partnership entered into an agreement with the holder of the non-recourse notes payable collateralized by the Partnership’s investment in five Local Limited Partnerships with notes payable in which the note holder agreed to forebear taking any action under these notes pending the purchase by the note holder of a series of projects including the properties owned by ten of the Local Limited Partnerships. These ten Local Limited Partnerships sold their respective investment properties to the note holder during 2012. In connection with these sales, non-recourse notes payable of approximately $2,329,000 and associated accrued interest of approximately $6,036,000 were extinguished during the second and third quarters of 2012. The sales of Oakwood Park Apartments I, Oakwood Park Apartments II, Richards Park, Birch Manor I and Birch Manor II had no impact on the Partnership’s notes payable outstanding.
The holder of one non-recourse note payable extinguished the note payable of approximately $1,400,000 and associated accrued interest of approximately $3,837,000 during the fourth quarter of 2012 in connection with the Partnership’s sale of its limited Partnership interest in Aristocrat Manor to the local general partner of this Local Limited Partnership.
There were no principal or interest payments made on these notes during the three months ended March 31, 2013 or 2012. The Partnership has agreements with the non-recourse note holder for the remaining two notes payable in which the note holder agreed to forebear taking any action under these notes in order to permit the Partnership to negotiate the sale of its limited partnership interests in these Local Limited Partnerships to the local general partner of the respective Local Limited Partnerships. As discussed in “Note 3”, the holder of two non-recourse notes payable cancelled and extinguished the notes payable of an aggregate of approximately $920,000 and associated accrued interest of approximately $2,419,000 at March 31, 2013 in connection with the Partnership’s sale of its limited partnership interest in Bluewater to the local general partner of this Local Limited Partnership. The other sale is expected to close during 2013. |