-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HSLjqJ0mPqnsd+z7i0wSWIfKa5/Ia6UUfJUFn2cQyTz0mheTWorUuLmYgaPcld7C gfP+tZJVjg0LbTlfmtR0xA== 0000950148-01-501526.txt : 20010815 0000950148-01-501526.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950148-01-501526 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REAL ESTATE ASSOCIATES LTD VII CENTRAL INDEX KEY: 0000722648 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 953290316 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13810 FILM NUMBER: 1708082 BUSINESS ADDRESS: STREET 1: 9090 WILSHIRE BLVD STE 201 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 BUSINESS PHONE: 3102782191 MAIL ADDRESS: STREET 1: 9090 WILSHIRE BLVD STREET 2: STE 201 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 10-Q 1 v74991e10-q.txt FORM 10-Q PERIOD ENDED JUNE 30, 2001 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended JUNE 30, 2001 Commission File Number 0-13810 REAL ESTATE ASSOCIATES LIMITED VII (A California Limited Partnership) I.R.S. Employer Identification No. 95-3290316 9090 WILSHIRE BLVD., SUITE 201 BEVERLY HILLS, CALIF. 90211 Registrant's Telephone Number, Including Area Code (310) 278-2191 Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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. Yes [X] No [ ] 2 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets, June 30, 2001 and December 31, 2000 ......... 1 Statements of Operations, Six and Three Months Ended June 30, 2001 and 2000 ..... 2 Statement of Partners' Deficiency, Six Months Ended June 30, 2001 ........................ 3 Statements of Cash Flows, Six Months Ended June 30, 2001 and 2000 ............... 4 Notes to Financial Statements ............................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation .................... 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........................................ 15 Item 6. Exhibits and Reports on Form 8-K ......................... 15 Signatures ........................................................ 16
3 REAL ESTATE ASSOCIATES LIMITED VII (a California limited partnership) BALANCE SHEETS JUNE 30, 2001 AND DECEMBER 31, 2000 ASSETS
2001 (Unaudited) 2000 ------------ ------------ INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 157,774 $ 149,626 CASH 849,812 205,538 ------------ ------------ TOTAL ASSETS $ 1,007,586 $ 355,164 ============ ============ LIABILITIES AND PARTNERS' DEFICIENCY LIABILITIES: Notes payable (Notes 3 and 6) $ 17,424,501 $ 17,424,501 Accrued interest payable (Notes 3 and 6) 25,936,577 25,147,770 Accrued fees and expenses due general partner (Note 4) 4,275,788 5,506,492 Accounts payable and other liabilities 35,988 78,272 ------------ ------------ 47,672,854 48,157,035 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 4 and 5) PARTNERS' DEFICIENCY: General partners (789,783) (801,149) Limited partners (45,875,485) (47,000,722) ------------ ------------ (46,665,268) (47,801,871) ------------ ------------ TOTAL LIABILITIES AND PARTNERS' DEFICIENCY $ 1,007,586 $ 355,164 ============ ============
The accompanying notes are an integral part of these financial statements. 1 4 REAL ESTATE ASSOCIATES LIMITED VII (a California limited partnership) STATEMENTS OF OPERATIONS SIX AND THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited)
Six months Three months Six months Three months ended ended ended ended June 30, 2001 June 30, 2001 June 30, 2000 March 31, 2000 ----------- ----------- ----------- --------- REVENUE: Interest income $ 6,702 $ 3,290 $ 1,594 $ 584 ----------- ----------- ----------- --------- OPERATING EXPENSES: Interest (Note 3) 826,302 413,151 818,615 409,308 Management fees - general partner (Note 4) 250,931 125,886 250,344 125,299 General and administrative (Note 4) 36,670 8,661 54,850 36,030 Legal and accounting 53,945 26,476 60,714 35,926 ----------- ----------- ----------- --------- 1,167,848 574,174 1,184,523 606,563 ----------- ----------- ----------- --------- LOSS FROM OPERATIONS (1,161,146) (570,884) (1,182,929) (605,979) GAIN ON SALE OF PARTNERSHIP INTEREST (Note 2) 2,184,373 2,184,373 DISTRIBUTIONS FROM LIMITED PARTNERSHIP RECOGNIZED AS INCOME (Note 2) 105,653 105,653 124,064 124,064 EQUITY IN INCOME (LOSS) OF LIMITED PARTNERSHIPS AND AMORTIZATION OF ADDITIONAL BASIS AND ACQUISITION COSTS (Note 2) 7,723 41,428 (20,000) (10,000) ----------- ----------- ----------- --------- NET INCOME (LOSS) $ 1,136,603 $ 1,760,570 $(1,078,865) $(491,915) =========== =========== =========== ========= NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST $ 54 $ 84 $ (51) $ (23) =========== =========== =========== =========
The accompanying notes are an integral part of these financial statements. 2 5 REAL ESTATE ASSOCIATES LIMITED VII (a California limited partnership) STATEMENT OF PARTNERS' DEFICIENCY FOR THE SIX MONTHS ENDED JUNE 30, 2001 (Unaudited)
General Limited Partners Partners Total --------- ------------ ------------ PARTNERSHIP INTERESTS 20,802 ============ DEFICIENCY January 1, 2001 $(801,149) $(47,000,722) $(47,801,871) Net income for the six months ended June 30, 2001 11,366 1,125,237 1,136,603 --------- ------------ ------------ DEFICIENCY June 30, 2001 $(789,783) $(45,875,485) $(46,665,268) ========= ============ ============
The accompanying notes are an integral part of these financial statements. 3 6 REAL ESTATE ASSOCIATES LIMITED VII (a California limited partnership) STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited)
2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,136,603 $(1,078,865) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Gain on sale of partnership interest (2,184,373) Equity in (income) loss of limited partnerships (7,723) 20,000 Increase in accrued interest payable 788,807 818,615 (Decrease) increase in accrued fees and expenses due general partner (1,230,704) 250,344 Increase (decrease) in accounts payable and other liabilities (42,284) 4,633 ----------- ----------- Net cash (used in) provided by operating activities (1,539,674) 14,727 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital contribution to limited partnerships (425) Sale proceeds 2,184,373 -- ----------- ----------- Net cash provided by investing activities 2,183,948 -- ----------- ----------- NET INCREASE IN CASH 644,274 14,727 CASH, BEGINNING OF PERIOD 205,538 96,379 ----------- ----------- CASH, END OF PERIOD $ 849,812 $ 111,106 =========== ===========
The accompanying notes are an integral part of these financial statements. 4 7 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The information contained in the following notes to the financial statements is condensed from that which would appear in the annual financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the Annual Report for the year ended December 31, 2000 prepared by Real Estate Associates Limited VII (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, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals), necessary to present fairly the financial position of he Partnership at June 30, 2001, and the results of operations and changes in cash flows for the six and three months then ended. The general partners have a 1 percent interest in profits and losses of the Partnership. The limited partners have the remaining 99 percent interest which is allocated in proportion to their respective individual investments. National Partnership Investments Corp. (NAPICO) is the managing general partner of the Partnership. Casden Properties Inc. owns a 95.25% economic interest in NAPICO, with the balance owned by Casden Investment Corporation ("CIC"). CIC, which is wholly owned by Alan I. Casden, owns 95% of the voting common stock of NAPICO. BASIS OF PRESENTATION The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. 5 8 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USES OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS The investment in limited partnerships is accounted for on the equity method. Acquisition, selection and other costs related to the acquisition of the projects were capitalized as part of the investment account and are being amortized on a straight line basis over the estimated lines of the underlying assets, which is generally 30 years. 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 during the year. The number of limited partnership interests was 20,802 for the periods presented. CASH The Partnership has its cash on deposit primarily with high credit quality financial institutions. Such cash is in excess of the FDIC insurance limit. INCOME TAXES No provision has been made for income taxes in the accompanying financial statements since such taxes, if any, are the liability of the individual partners. 6 9 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS The Partnership reviews long-lived assets to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the assets, the Partnership recognizes an impairment loss. NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS The Partnership holds limited partnership interests in 20 limited partnerships as of June 30, 2001, after selling its interest in one limited partnership in April 2001. In addition, the Partnership holds a general partner interest in Real Estate Associates IV ("REA IV"), which in turn, holds limited partner interest in 15 additional limited partnerships. NAPICO is also a general partner in REA IV. In total, therefore the Partnership holds interests, either directly or indirectly through REAL VII, in 35 limited partnerships, located in 9 different states which own residential low income rental projects consisting of 3,259 apartment units. The mortgage loans of these projects are payable to or insured by various governmental agencies. The Partnership, as a limited partner, is entitled to between 98 percent and 99 percent of the profits and losses in the limited partnerships it has invested in directly. The Partnership is also entitled to 99 percent of the profits and losses of REA IV. REA IV holds a 99 percent interest in each of the limited partnerships in which it has invested. Equity in losses of limited partnerships is recognized in the financial statements until the limited partnership investment account is reduced to a zero balance. Losses incurred after the limited partnership investment account is reduced to zero are not recognized. The cumulative amount of the unrecognized equity in losses of certain limited partnerships was in the aggregate approximately $10,743,000 and $10,427,000 as of June 30, 2001 and December 31, 2000, respectively. Distributions from the limited partnerships are accounted for as a return of capital until the investment balance is reduced to zero. Subsequent distributions received are recognized as income. 7 10 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2001 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) In April 2001, the Partnership sold its interest in the Pebbleshire limited partnership and realized a gain of $2,184,372. The gain is equal to the net proceeds received because the Partnership had no investment balance related to this limited partnership. The following is a summary of the investment in limited partnerships for the six months ended June 30, 2001: Balance, beginning of period $149,626 Equity in income of limited partnerships 7,723 Capital contribution 425 -------- Balance, end of period $157,774 ========
The following are unaudited combined estimated statements of operations for the six and three months ended June 30, 2001 and 2000 for the limited partnerships in which the Partnership has investments:
Six months Three months Six months Three months ended ended ended ended June 30, 2001 June 30, 2001 June 30, 2000 June 30, 2000 ------------ ----------- ----------- ----------- REVENUES: Rental and other $ 10,038,000 $ 5,019,000 $ 9,814,000 $ 4,907,000 ------------ ----------- ----------- ----------- EXPENSES: Depreciation 1,600,000 800,000 1,696,000 848,000 Interest 972,000 486,000 764,000 382,000 Operating 7,774,000 3,887,000 7,530,000 3,765,000 ------------ ----------- ----------- ----------- 10,346,000 5,173,000 9,990,000 4,995,000 ------------ ----------- ----------- ----------- Net loss $ (308,000) $ (154,000) $ (176,000) $ (88,000) ============ =========== =========== ===========
NAPICO, or one of its affiliates, is the general partner and property management agent for certain of the limited partnerships included above. The Local Partnerships pay the affiliate 8 11 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2001 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) property management fees in the amount of 5 percent of their gross rental revenues and data processing fees. The amounts paid were approximately $4,115 for the six months ended June 30, 2001. Under recent adopted law and policy, the United States Department of Housing and Urban Development ("HUD") has determined not to 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 such new 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 this new policy, the Multi-family Assisted Housing Reform and Affordability Act of 1997 ("MAHRAA"), which was adopted in October 1997, 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 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. 9 12 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2001 NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED) On December 30, 1998, the Partnership sold its limited partnership interests in 11 local limited partnerships to subsidiaries of Casden Properties Inc. The sale resulted in cash proceeds to the Partnership of $400,000 which was collected in 1999. In March 1999, the Partnership made cash distributions of $272,500 to the limited partners and $2,750 to the general partners, primarily using proceeds from the sale of the partnership interests. NOTE 3 - NOTES PAYABLE Certain of the Partnership's investments involved purchases of partnership interests from partners who subsequently withdrew from the operating partnership. The Partnership is obligated on non-recourse notes payable of $17,424,501, bearing interest at 9.5 to 10 percent, to the sellers of the Partnership interests. The notes have principal maturity dates ranging from August 1999 to January 2002 or upon sale or refinancing of the underlying partnership properties. These obligations are collateralized by the Partnership's investments in the investee partnerships and are payable out of cash distributions from the investee partnerships, as defined in the notes. Unpaid interest is due at maturity of the notes. Maturity dates on the notes and related accrued interest payable are as follows:
Accrued Years Ending December 31, Notes Interest ------------------------- ----------- ----------- 2001 $15,834,000 $23,447,970 2002 1,590,501 2,488,607 ----------- ----------- $17,424,501 $25,936,577 =========== ===========
Notes and related accrued interest payable, aggregating $39,281,970 became payable prior to June 30, 2001. Due to the Partnership's lack of cash and partners' deficiency, there is substantial doubt about its ability to satisfy these obligations, which would result in the possible foreclosure of the investments in the local limited partnerships. As a result, there is substantial doubt about the Partnership's ability to continue as a going concern. 10 13 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2001 NOTE 3 - NOTES PAYABLE (CONTINUED) In February 2000, the Partnership entered into an agreement with a lender related to a note in the amount $2,200,000 plus accrued interest of $3,248,072 as of June 30, 2001 that became payable in December 1999. Subject to certain conditions, the lender agreed to cancel the note and accrued interest and release from escrow a payment of $100,000 to the Partnership in exchange for the Partnership surrendering its interest in the Edgewood Terrace limited partnership. Upon satisfaction of all conditions, the Partnership will recognize a gain on this transaction of approximately $5,550,000 as it has a zero investment balance in this limited partnership. Management is in process of attempting to negotiate extensions of the maturity dates on the other past due notes payable. NOTE 4 - ACCRUED FEES AND EXPENSES DUE GENERAL PARTNER 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 .5 percent of the invested assets of the partnerships. Invested assets is defined as the costs of acquiring project interests, including the proportionate amount of the mortgage loans related to the Partnership's interests in the capital accounts of the respective partnerships. The fee was $250,931 and $250,344 for the six months ended June 30, 2001 and 2000, respectively. The Partnership reimburses NAPICO for certain expenses. The expense incurred to NAPICO was approximately $18,365 and $7,400 for the six months ended June 30, 2001 and 2000, respectively, and is included in administrative expenses. NOTE 5 - CONTINGENCIES On August 27, 1998, two investors holding an aggregate of eight units of limited partnership interests in Real Estate Associates Limited III (an affiliated partnership in which NAPICO is the managing general partner) and two investors holding an aggregate of five units of limited partnership interest in Real Estate Associates Limited VI (another affiliated partnership in which NAPICO is the managing general partner) commenced an action in the United States District Court for the Central District of California against the Partnership, NAPICO and certain other affiliated entities. The complaint alleges that the defendants breached their 11 14 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2001 NOTE 5 - CONTINGENCIES (CONTINUED) fiduciary duty to the limited partners of certain NAPICO managed partnerships and made materially false and misleading statements in the consent solicitation statements sent to the limited partners of such partnerships relating to approval of the transfer of partnership interests in limited partnerships, owning certain of the properties, to Casden Properties Inc., which was organized by an affiliate of NAPICO. The plaintiffs seek equitable relief, as well as compensatory damages and litigation related costs. On August 4, 1999, one investor holding one unit of limited partnership interest in Housing Programs Limited (another affiliated partnership in which NAPICO is the managing general partner) commenced a virtually identical action in the United States District Court for the Central District of California against the Partnership, NAPICO and certain other affiliated entities. NAPICO, the managing general partner of such partnerships, and the other defendants believe that the plaintiffs' claims are without merit and are contesting the actions vigorously. The managing general partner of the Partnership is a plaintiff in various lawsuits and has also been named a defendant in other lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the corporate general partner, the claims will not result in any material liability to the Partnership. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments, when it is practicable to estimate that value. The notes payable are collateralized by the Partnership's investments in investee limited partnerships and are payable only out of cash distributions from the investee partnerships. The operations generated by the investee 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 payable and related accrued interest and amounts due general partner. The carrying amounts of other assets and liabilities reported on the balance sheets that require such disclosure approximate fair value due to their short-term maturity. 12 15 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary sources of funds include interest income earned from investing available cash and distributions from 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 sufficient to provide for distributions to limited partners in any material amount. RESULTS OF OPERATIONS Partnership revenues consist primarily of interest income earned on certificates of deposit and other temporary investment of funds not required for investment in local partnerships. Operating expenses consist primarily of recurring general and administrative expenses and professional fees for services rendered to the Partnership. In addition, an annual Partnership management fee in an amount equal to .5 percent of invested assets is payable to the corporate general partner. The Partnership accounts for its investments in the local limited partnerships on the equity method, thereby adjusting its investment balance by its proportionate share of the income or loss of the local limited partnerships. Losses incurred after the limited partnership account is reduced to zero are not recognized. Distributions received from limited partnerships are recognized as return of capital until the investment balance has been reduced to zero or to a negative amount equal to future capital contributions required. Subsequent distributions received are recognized as income. Except for certificates of deposit and money market funds, the Partnership's investments are entirely interests in other limited and general partnerships owning government assisted projects. Available cash is invested in money market funds and certificates of deposit which provide interest income as reflected in the statement of operations. These temporary investments can be easily converted to cash to meet obligations as they arise. 13 16 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) Under recently adopted law and policy, the United States Department of Housing and Urban Development ("HUD") has determined not to 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 such new 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 this new policy, the Multi-family Assisted Housing Reform and Affordability Act of 1997 ("MAHRAA"), which was adopted in October 1997, 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 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. 14 17 REAL ESTATE ASSOCIATES LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) Notes and related accrued interest payable, aggregating $39,281,970 became payable prior to June 30, 2001. Due to the Partnership's lack of cash and partners' deficiency, there is substantial doubt about its ability to satisfy these obligations, which would result in the possible foreclosure of the investments in the local limited partnerships. As a result, there is substantial doubt about the Partnership's ability to continue as a going concern. In February 2000, the Partnership entered into an agreement with a lender related to a note in the amount $2,200,000 plus accrued interest of $3,248,072 as of June 30, 2001 that became payable in December 1999. Subject to certain conditions, the lender agreed to cancel the note and accrued interest and release from escrow a payment of $100,000 to the Partnership in exchange for the Partnership surrendering its interest in the Edgewood Terrace limited partnership. Upon satisfaction of all conditions, the Partnership will recognize a gain on this transaction of approximately $5,550,000 as it has a zero investment balance in this limited partnership. Management is in process of attempting to negotiate extensions of the maturity dates on the other past due notes payable. In April 2001, the Partnership sold its interest in the Pebbleshire limited partnership and realized a gain of $2,184,372. The gain is equal to the net proceeds received because the Partnership had no investment balance related to this limited partnership. On December 30, 1998, the Partnership sold its limited partnership interests in 11 local limited partnerships to the Operating Partnership. The sale resulted in cash proceeds to the Partnership of $400,000, which was collected in 1999. In March 1999, the Partnership made cash distributions of $272,000 to the limited partners and $2,750 to the general partners, primarily using proceeds from the sale of the partnership interests. 15 18 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) JUNE 30, 2001 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 27, 1998, two investors holding an aggregate of eight units of limited partnership interests in Real Estate Associates Limited III (an affiliated partnership in which NAPICO is the managing general partner) and two investors holding an aggregate of five units of limited partnership interest in Real Estate Associates Limited VI (another affiliated partnership in which NAPICO is the managing general partner) commenced an action in the United States District Court for the Central District of California against the Partnership, NAPICO and certain other affiliated entities. The complaint alleges that the defendants breached their fiduciary duty to the limited partners of certain NAPICO managed partnerships and made materially false and misleading statements in the consent solicitation statements sent to the limited partners of such partnerships relating to approval of the transfer of partnership interests in limited partnerships, owning certain of the properties, to Casden Properties Inc., which was organized by an affiliate of NAPICO. The plaintiffs seek equitable relief, as well as compensatory damages and litigation related costs. On August 4, 1999, one investor holding one unit of limited partnership interest in Housing Programs Limited (another affiliated partnership in which NAPICO is the managing general partner) commenced a virtually identical action in the United States District Court for the Central District of California against the Partnership, NAPICO and certain other affiliated entities. NAPICO, the managing general partner of such partnerships, and the other defendants believe that the plaintiffs' claims are without merit and are contesting the actions vigorously. The Partnership's managing general partner is involved in various lawsuits. None of these are related to REAL VII. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) No exhibits are required per the provision of Item 7 of regulation S-K and no reports on Form 8-K were filed during the quarter ended June 30, 2001. 16 19 REAL ESTATE ASSOCIATES LIMITED VII (A CALIFORNIA LIMITED PARTNERSHIP) JUNE 30, 2001 SIGNATURES 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. REAL ESTATE ASSOCIATES LIMITED VII (a California limited partnership) By: National Partnership Investments Corp., General Partner /s/Bruce Nelson ------------------------------------- Bruce Nelson President Date: August 14, 2001 ------------------------------------- /s/Brian H. Shuman ------------------------------------- Brian H. Shuman Chief Financial Officer Date: August 14, 2001 ------------------------------------- 17 -----END PRIVACY-ENHANCED MESSAGE-----