-----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, Kl2aLWJt3bKPNmZCbGZPSZZIXMXtincY05qIKKgYbKWjccckI+zsQAYhHLOdNNcv gCfm308etZ01A63FzgVPJg== 0000711642-04-000242.txt : 20040816 0000711642-04-000242.hdr.sgml : 20040816 20040816084508 ACCESSION NUMBER: 0000711642-04-000242 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVIDSON INCOME REAL ESTATE LP CENTRAL INDEX KEY: 0000768598 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 621242144 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-14530 FILM NUMBER: 04976228 BUSINESS ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN INCOME REAL ESTATE LP DATE OF NAME CHANGE: 19910329 10QSB 1 dire.txt DIRE UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _________to _________ Commission file number 0-14530 DAVIDSON INCOME REAL ESTATE, L.P. (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 62-1242144 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, PO Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes X No ___ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DAVIDSON INCOME REAL ESTATE, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) June 30, 2004
Assets Cash and cash equivalents $ 276 Receivables and deposits 127 Restricted escrows 45 Other assets 326 Investment properties: Land $ 3,523 Buildings and related personal property 19,732 23,255 Less accumulated depreciation (12,899) 10,356 $ 11,130 Liabilities and Partners' Deficit Liabilities Accounts payable $ 97 Tenant security deposit liabilities 72 Accrued property taxes 200 Other liabilities 75 Due to affiliates (Note B) 1,278 Deficit in joint venture (Note C) 854 Mortgage notes payable 10,870 Partners' Deficit General partners $ (841) Limited partners (26,776 units issued and outstanding) (1,475) (2,316) $ 11,130 See Accompanying Notes to Consolidated Financial Statements
DAVIDSON INCOME REAL ESTATE, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per unit data)
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 Revenues: Rental income $ 710 $ 787 $ 1,430 $ 1,635 Other income 73 69 131 131 Casualty gains 2 81 390 81 Total revenues 785 937 1,951 1,847 Expenses: Operating 442 320 805 678 General and administrative 53 47 103 89 Depreciation 250 224 496 444 Interest 136 232 284 448 Property taxes 95 95 193 189 Loss on early extinguishment of debt -- 57 -- 57 Total expenses 976 975 1,881 1,905 (Loss) income before equity in (loss) income of joint venture (191) (38) 70 (58) Equity in (loss) income of joint venture (7) -- (16) 2 (Loss) income from continuing operations (198) (38) 54 (56) Loss from discontinued operations -- (120) -- (226) Gain on sale of discontinued operations -- 3,472 -- 3,472 Net (loss) income $ (198) $ 3,314 $ 54 $ 3,190 Net (loss) income allocated to general partners (3%) $ (6) $ 99 $ 2 $ 96 Net (loss) income allocated to limited partners (97%) (192) 3,215 52 3,094 $ (198) $ 3,314 $ 54 $ 3,190 Net (loss) income per limited partnership unit: (Loss) income from continuing operations $ (7.17) $ (1.38) $ 1.94 $ (2.03) Loss from discontinued operations -- (4.35) -- (8.19) Gain on sale of discontinued operations -- 125.78 -- 125.78 $ (7.17) $120.05 $ 1.94 $115.56 Distributions per limited partnership unit $ -- $128.36 $ -- $128.36 See Accompanying Notes to Consolidated Financial Statements
DAVIDSON INCOME REAL ESTATE, L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT (Unaudited) (in thousands, except unit data)
Limited Partnership General Limited Units Partners Partners Total Original capital contributions 26,776 $ 1 $26,776 $26,777 Partners' deficit at December 31, 2003 26,776 $ (843) $(1,527) $(2,370) Net income for the six months ended June 30, 2004 -- 2 52 54 Partners' deficit at June 30, 2004 26,776 $ (841) $(1,475) $(2,316) See Accompanying Notes to Consolidated Financial Statements
DAVIDSON INCOME REAL ESTATE, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended June 30, 2004 2003 Cash flows from operating activities: Net income $ 54 $ 3,190 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on sale of discontinued operations -- (3,472) Casualty gains (390) (81) Loss on early extinguishment of debt -- 73 Depreciation 496 523 Amortization of loan costs and discounts 18 31 Equity in loss (income) of joint venture 16 (2) Change in accounts: Receivables and deposits 260 (249) Other assets (81) (79) Accounts payable (55) (55) Tenant security deposit liabilities 1 (24) Accrued property taxes (103) (104) Other liabilities (31) (27) Due to affiliates (15) -- Net cash provided by (used in) operating activities 170 (276) Cash flows from investing activities: Net proceeds from sale of discontinued operations -- 5,735 Property improvements and replacements (546) (285) Net (deposits to) withdrawals from restricted escrows (15) 21 Insurance proceeds from casualties 329 126 Distributions from joint venture -- 24 Net cash (used in) provided by investing activities (232) 5,621 Cash flows from financing activities: Payments on mortgage notes payable (164) (92) Loan costs paid -- (95) Payment on advances from affiliates (83) (71) Repayments of mortgage notes payable -- (6,122) Proceeds from mortgage note payable -- 6,000 Distributions to partners -- (3,544) Net cash used in financing activities (247) (3,924) Net (decrease) increase in cash and cash equivalents (309) 1,421 Cash and cash equivalents at beginning of period 585 576 Cash and cash equivalents at end of period $ 276 $ 1,997 Supplemental disclosure of cash flow information: Cash paid for interest $ 246 $ 457 Supplemental disclosure of non-cash flow information: Property improvements and replacements in accounts payable $ 38 $ -- At December 31, 2003, accounts payable included approximately $405,000 of property improvements and replacements. See Accompanying Notes to Consolidated Financial Statements
DAVIDSON INCOME REAL ESTATE, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - Basis of Presentation The accompanying unaudited consolidated financial statements of Davidson Income Real Estate, L.P. (the "Partnership" or "Registrant") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Davidson Diversified Properties, Inc. (the "Managing General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. The Managing General Partner is a subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. Note B - Transactions with Affiliated Parties The Partnership has no employees and is dependent on the Managing General Partner and its affiliates for the management and administration of all Partnership activities. The Partnership Agreement provides for (i) payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. Affiliates of the Managing General Partner were entitled to receive 5% of gross receipts from all of the Partnership's properties as compensation for providing property management services. The Partnership paid to such affiliates approximately $76,000 and $92,000 for the six months ended June 30, 2004 and 2003, respectively, which is included in operating expenses and loss from discontinued operations. An affiliate of the Managing General Partner received reimbursements of accountable administrative expenses amounting to approximately $104,000 and $57,000 for the six months ended June 30, 2004 and 2003, respectively, which is included in general and administrative expenses and investment properties. Included in these amounts are fees related to construction management services provided by an affiliate of the Managing General Partner of approximately $44,000 and $4,000 for the six months ended June 30, 2004 and 2003, respectively. The construction management service fees are based on a percentage of current additions to investment properties. During the six months ended June 30, 2004 and 2003, the Partnership did not receive any advances from an affiliate of the Managing General Partner. During the six months ended June 30, 2004 and 2003, the Partnership repaid previous advances of approximately $105,000 and $73,000, including accrued interest of approximately $22,000 and $2,000, respectively. At June 30, 2004, the amount of outstanding advances and accrued interest was approximately $1,278,000 and is shown as due to affiliates on the accompanying consolidated balance sheet. Interest on advances is charged at prime plus 2%, or 6% at June 30, 2004, in accordance with the Partnership Agreement. During the six months ended June 30, 2004 and 2003, the Partnership recognized interest expense of approximately $33,000 and $2,000, respectively, relative to obligations due to affiliates. For acting as real estate broker in connection with the sale of North Springs Apartments, the Managing General Partner was paid a real estate commission of approximately $183,000 during the six months ended June 30, 2003. When the Partnership terminates, the Managing General Partner will have to return this commission if the limited partners do not receive their original invested capital plus a 12% per annum cumulative non-compounded return. The Partnership insures its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the Managing General Partner. During the six months ended June 30, 2004 and 2003, the Partnership was charged by AIMCO and its affiliates approximately $34,000 and $66,000, respectively, for insurance coverage and fees associated with policy claims administration. Note C - Investment in Joint Venture The Partnership owns a 17.5% interest in the Sterling Crest Joint Venture with Davidson Growth Plus, L.P., an affiliate of the Managing General Partner, which owns the remaining 82.5% of the joint venture. During the six months ended June 30, 2003, the Partnership received distributions of approximately $24,000 from operations of the joint venture. There were no such distributions received during the six months ended June 30, 2004. For the six months ended June 30, 2004, the Partnership recognized approximately $16,000 of equity in loss of the joint venture. For the six months ended June 30, 2003, the Partnership recognized approximately $2,000 of equity in income of the joint venture. At June 30, 2004, the Partnership had received distributions and recognized equity in losses of the joint venture in excess of its general partnership interest and has an investment deficiency of approximately $854,000. The following table represents the net (loss) income of the Sterling Crest Joint Venture for the six months ended June 30, 2004 and 2003 (in thousands): Six Months Ended June 30, 2004 2003 Total revenues $ 1,133 $ 1,200 Total expenses (1,225) (1,186) Net (loss) income $ (92) $ 14 Note D - Casualty Event In December 2002, Bexley House Apartments experienced a fire, causing damage to 32 units. Property damages totaled approximately $1,452,000 and reconstruction of the units was completed during 2003. During the six months ended June 30, 2003, the Partnership recorded a partial casualty gain of approximately $81,000. The gain was the result of the receipt of insurance proceeds of approximately $126,000 offset by the write off of approximately $45,000 of undepreciated fixed assets. In addition, the Partnership recognized revenue from lost rents of approximately $192,000 during the six months ended June 30, 2003. During the six months ended June 30, 2004, the Partnership recorded a casualty gain of approximately $390,000 due to the receipt of final insurance proceeds of approximately $393,000 and the write off of approximately $3,000 of remaining undepreciated fixed assets. Note E - Sale of Investment Property On April 15, 2003, the Partnership sold North Springs Apartments to a third party for a gross sales price of approximately $6,100,000. The net proceeds received by the Partnership were approximately $5,735,000 after payment of closing costs, including a commission paid to the Managing General Partner as permitted under the terms of the Partnership Agreement. The Partnership used approximately $1,779,000 of the net proceeds to repay the mortgages encumbering the property. As a result of the sale, the Partnership realized a gain of approximately $3,472,000 during the six months ended June 30, 2003. The property's operations, loss of approximately $226,000 for the six months ended June 30, 2003 are included in loss from discontinued operations on the accompanying consolidated statements of operations and include revenues of approximately $229,000. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $16,000 for the six months ended June 30, 2003 due to the write off of unamortized loan costs and mortgage discounts, which is also included in loss from discontinued operations. Note F - Refinancing of Mortgage Note Payable In June 2003, the Partnership refinanced the mortgages encumbering Covington Pointe Apartments. The refinancing replaced mortgage indebtedness of approximately $4,343,000 with a new mortgage of approximately $6,000,000. The new mortgage carries a stated interest rate of 3.81% compared to the 7.83% interest rate on the old mortgages. Payments of principal and interest of approximately $36,000 are due on the first day of each month commencing in August 2003 until July 2010 at which time a balloon payment in the amount of approximately $4,416,000 is due. Capitalized loan costs, which are included in other assets, incurred with the refinancing were approximately $95,000, and are being amortized over the life of the mortgage note payable. The Partnership wrote off unamortized loan costs of approximately $51,000 and mortgage discounts of approximately $6,000 resulting in a loss on early extinguishment of debt of approximately $57,000. Note G - Contingencies In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action purported to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) that are named as nominal defendants, challenging, among other things, the acquisition of interests in certain Managing General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities that were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs sought monetary damages and equitable relief, including judicial dissolution of the Partnership. In addition, during the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The Heller action was brought as a purported derivative action, and asserted claims for, among other things, breach of fiduciary duty, unfair competition, conversion, unjust enrichment, and judicial dissolution. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action. In general terms, the proposed settlement provides for certification for settlement purposes of a settlement class consisting of all limited partners in this Partnership and others (the "Partnerships") as of December 20, 2002, the dismissal with prejudice and release of claims in the Nuanes and Heller litigation, payment by AIMCO of $9.9 million (which shall be distributed to settlement class members after deduction of attorney fees and costs of class counsel and certain costs of settlement) and up to $1 million toward the cost of independent appraisals of the Partnerships' properties by a Court appointed appraiser. An affiliate of the Managing General Partner has also agreed to make at least one round of tender offers to purchase all of the partnership interests in the Partnerships within one year of final approval, if it is granted, and to provide partners with the independent appraisals at the time of these tenders. The proposed settlement also provided for the limitation of the allowable costs which the Managing General Partner or its affiliates will charge the Partnerships in connection with this litigation and imposes limits on the class counsel fees and costs in this litigation. On April 11, 2003, notice was distributed to limited partners providing the details of the proposed settlement. On June 13, 2003, the Court granted final approval of the settlement and entered judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector ("Objector") filed an appeal seeking to vacate and/or reverse the order approving the settlement and entering judgment thereto. On November 24, 2003, the Objector filed an application requesting the Court order AIMCO to withdraw settlement tender offers it had commenced, refrain from making further offers pending the appeal and auction any units tendered to third parties, contending that the offers did not conform with the terms of the Settlement. Counsel for the Objector (on behalf of another investor) had alternatively requested the Court take certain action purportedly to enforce the terms of the settlement agreement. On December 18, 2003, the Court heard oral argument on the motions and denied them both in their entirety. On January 28, 2004, Objector filed his opening brief in his pending appeal. On April 23, 2004, the Managing General Partner and its affiliates filed a response brief in support of the settlement and the judgment thereto. Plaintiffs have also filed a brief in support of the settlement. On June 4, 2004, Objector filed a reply to the briefs submitted by the Managing General Partner and Plaintiffs. No hearing has been scheduled in the matter. The Managing General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnership's overall operations. On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General Partner, was served with a complaint in the United States District Court, District of Columbia alleging that AIMCO Properties L.P. willfully violated the Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime for all hours worked in excess of forty per week. On March 5, 2004 Plaintiffs filed an amended complaint also naming NHP Management Company, which is also an affiliate of the Managing General Partner. The complaint is styled as a Collective Action under the FLSA and seeks to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties L.P. failed to compensate maintenance workers for time that they were required to be "on-call". Additionally, the complaint alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call". The defendants have filed an answer to the amended complaint denying the substantive allegations. Some discovery has taken place and settlement negotiations continue. Although the outcome of any litigation is uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome will have a material adverse effect on its financial condition or results of operations taken as a whole. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnership's financial condition or results of operations taken as a whole. The Partnership is unaware of any other pending or outstanding litigation matters involving it or its investment properties that are not of a routine nature arising in the ordinary course of business. As previously disclosed, the Central Regional Office of the United States Securities and Exchange Commission is conducting an investigation relating to certain matters. AIMCO believes the areas of investigation include AIMCO's miscalculated monthly net rental income figures in third quarter 2003, forecasted guidance, accounts payable, rent concessions, vendor rebates, and capitalization of expenses and payroll. AIMCO is cooperating fully. AIMCO does not believe that the ultimate outcome will have a material adverse effect on its consolidated financial condition or results of operations taken as a whole. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnership's consolidated financial condition or results of operations taken as a whole. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The matters discussed in this report contain certain forward-looking statements, including, without limitation, statements regarding future financial performance and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the terms of governmental regulations that affect the Registrant and interpretations of those regulations; the competitive environment in which the Registrant operates; financing risks, including the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; litigation, including costs associated with prosecuting and defending claims and any adverse outcomes, and possible environmental liabilities. Readers should carefully review the Partnership's financial statements and the notes thereto, as well as the risk factors described in the documents the Partnership files from time to time with the Securities and Exchange Commission. The Partnership's investment properties consist of three apartment complexes. The following table sets forth the average occupancy of the properties for the six months ended June 30, 2004 and 2003: Average Occupancy Property 2004 2003 Lakeside Apartments 94% 89% Charlotte, North Carolina (1) Bexley House Apartments 66% 49% Columbus, Ohio (2) Covington Pointe Apartments 83% 95% Dallas, Texas (3) (1) The Managing General Partner attributes the increase in occupancy at Lakeside Apartments to increased marketing efforts by management. (2) The Managing General Partner attributes the increase in occupancy at Bexley House Apartments to the completion of units that were destroyed by a fire in December 2002. (3) The Managing General Partner attributes the decrease in occupancy at Covington Pointe Apartments to the decline in the market conditions in the Dallas area and an increased effort to attract a more stable customer base. The Partnership's financial results are dependent upon a number of factors including the ability to attract and maintain tenants at the investment properties, interest rates on mortgage loans, costs incurred to operate the investment properties, general economic conditions and weather. As part of the ongoing business plan of the Partnership, the Managing General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expenses. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, the Managing General Partner may use rental concessions and rental rate reductions to offset softening market conditions, accordingly, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Further, a number of factors which are outside the control of the Partnership such as the local economic climate and weather can adversely or positively impact the Partnership's financial results. Results of Operations For the three months ended June 30, 2004, the Partnership had a net loss of approximately $198,000 compared to net income of approximately $3,314,000 for the three months ended June 30, 2003. For the six months ended June 30, 2004, the Partnership had net income of approximately $54,000 compared to net income of approximately $3,190,000 for the corresponding period in 2003. The decrease in net income for both periods is due to the gain on the sale of North Springs Apartments recognized in 2003. On April 15, 2003, the Partnership sold North Springs Apartments to a third party for a gross sales price of approximately $6,100,000. The net proceeds received by the Partnership were approximately $5,735,000 after payment of closing costs, including a commission paid to the Managing General Partner as permitted under the terms of the Partnership Agreement. The Partnership used approximately $1,779,000 of the net proceeds to repay the mortgages encumbering the property. As a result of the sale, the Partnership realized a gain of approximately $3,472,000 during the six months ended June 30, 2003. The property's operations, loss of approximately $226,000 for the six months ended June 30, 2003 are included in loss from discontinued operations on the accompanying consolidated statements of operations and include revenues of approximately $229,000. In addition, the Partnership recorded a loss on early extinguishment of debt of approximately $16,000 for the six months ended June 30, 2003 due to the write off of unamortized loan costs and mortgage discounts, which is also included in loss from discontinued operations. Excluding the gain on sale and loss from discontinued operations, the Partnership had a loss from continuing operations of approximately $198,000 for the three months ended June 30, 2004 and income from continuing operations of approximately $54,000 for the six months ended June 30, 2004. The Partnership had a loss from continuing operations of approximately $38,000 and $56,000 for the three and six months ended June 30, 2003, respectively. The increase in loss from continuing operations for the three months ended June 30, 2004 is due to a decrease in total revenues. The decrease in loss from continuing operations for the six months ended June 30, 2004 is due to an increase in total revenues and a decrease in total expenses. The decrease in total revenues for the three month period is due to decreases in rental income and casualty gain recognized. The increase in total revenues for the six month period is due to the casualty gain recognized during 2004 partially offset by a decrease in rental income. Rental income for both periods decreased due to decreases in occupancy at Covington Pointe Apartments, average rental rates at all of the investment properties and lost rents at Bexley House Apartments partially offset by an increase in occupancy at Bexley House and Lakeside Apartments and a decrease in bad debt expense at Bexley House and Lakeside Apartments. In December 2002, Bexley House Apartments experienced a fire, causing damage to 32 units. Property damages totaled approximately $1,452,000 and reconstruction of the units was completed during 2003. During the six months ended June 30, 2003, the Partnership recorded a partial casualty gain of approximately $81,000. The gain was the result of the receipt of insurance proceeds of approximately $126,000 offset by the write off of approximately $45,000 of undepreciated fixed assets. In addition, the Partnership recognized revenue from lost rents of approximately $192,000 during the six months ended June 30, 2003. During the six months ended June 30, 2004, the Partnership recorded a casualty gain of approximately $390,000 due to the receipt of final insurance proceeds of approximately $393,000 and the write off of approximately $3,000 of remaining undepreciated fixed assets. Although total expenses for the three months ended June 30, 2004 remained constant, increases in operating and depreciation expenses were offset by decreases in interest expense and loss on early extinguishment of debt, as discussed in Liquidity and Capital Resources. The decrease in total expenses for the six month period is due to decreases in interest expense and loss on early extinguishment of debt, partially offset by increases in operating and depreciation expense. Operating expense for both periods increased due to increases in property and maintenance expense. Property expense increased due to an increase in payroll and related benefits at all of the investment properties. Maintenance expense increased due to an increase in parts and supplies at Bexley House and Covington Point Apartments. Depreciation expense increased due to fixed assets placed into service over the past twelve months, primarily at Bexley House Apartments. Interest expense for both periods decreased due to a decrease in the interest rates on the mortgages at Covington Pointe and Lakeside Apartments as a result of the refinancing of the mortgages in June 2003 and November 2003, respectively. Included in general and administrative expense for the six months ended June 30, 2004 and 2003 are management reimbursements to the Managing General Partner as allowed under the Partnership Agreement. Also included in general and administrative expenses are costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement. The Partnership owns a 17.5% interest in Sterling Crest Joint Venture (the "Joint Venture"). The Partnership recognized equity in loss of the joint venture of approximately $16,000 for the six months ended June 30, 2004 compared to equity in income of the joint venture of approximately $2,000 for the six months ended June 30, 2003. Liquidity and Capital Resources At June 30, 2004, the Partnership had cash and cash equivalents of approximately $276,000 compared to approximately $1,997,000 at June 30, 2003. Cash and cash equivalents decreased approximately $309,000 since December 31, 2003 due to approximately $247,000 of cash used in financing activities and approximately $232,000 of cash used in investing activities partially offset by approximately $170,000 of cash provided by operating activities. Cash used in financing activities consisted of payments of principal made on the mortgages encumbering the Partnership's investment properties and a payment on advances from an affiliate of the Managing General Partner. Cash used in investing activities consisted of property improvements and replacements and net deposits to restricted escrows maintained by the mortgage lenders partially offset by insurance proceeds received from the casualty at Bexley House Apartments. The Partnership invests its working capital reserves in interest bearing accounts. In June 2003, the Partnership refinanced the mortgages encumbering Covington Pointe Apartments. The refinancing replaced mortgage indebtedness of approximately $4,343,000 with a new mortgage of approximately $6,000,000. The new mortgage carries a stated interest rate of 3.81% compared to the 7.83% interest rate on the old mortgages. Payments of principal and interest of approximately $36,000 are due on the first day of each month commencing in August 2003 until July 2010 at which time a balloon payment in the amount of approximately $4,416,000 is due. Capitalized loan costs, which are included in other assets, incurred with the refinancing were approximately $95,000, and are being amortized over the life of the mortgage note payable. The Partnership wrote off unamortized loan costs of approximately $51,000 and mortgage discounts of approximately $6,000 resulting in a loss on early extinguishment of debt of approximately $57,000. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the investment properties to adequately maintain the physical assets and other operating needs of the Partnership and to comply with Federal, state, and local legal and regulatory requirements. The Managing General Partner monitors developments in the area of legal and regulatory compliance. For example, the Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas. In light of these changes, the Partnership expects that it will incur higher expenses related to compliance, including increased legal and audit fees. Capital improvements planned for the Partnership's properties are detailed below. Lakeside Apartments During the six months ended June 30, 2004, the Partnership completed approximately $38,000 of capital improvements at Lakeside Apartments, consisting primarily of appliance and floor covering replacements. These improvements were funded from operating cash flow. The Partnership evaluates the capital improvement needs of the property during the year and currently expects to complete an additional $80,000 in capital improvements during the remainder of 2004. Additional capital improvements may be considered and will depend on the physical condition of the property as well as the anticipated cash flow generated by the property. Bexley House Apartments During the six months ended June 30, 2004, the Partnership completed approximately $53,000 of capital improvements at Bexley House Apartments, consisting primarily of HVAC and building improvements and appliance replacements. These improvements were funded from insurance proceeds and operating cash flow. The Partnership evaluates the capital improvement needs of the property during the year and currently expects to complete an additional $17,000 in capital improvements during the remainder of 2004. Additional capital improvements may be considered and will depend on the physical condition of the property as well as the anticipated cash flow generated by the property. Covington Pointe Apartments During the six months ended June 30, 2004, the Partnership completed approximately $88,000 of capital improvements at Covington Pointe Apartments, consisting primarily of roof replacements and appliance and floor covering replacements. These improvements were funded from operating cash flow. The Partnership evaluates the capital improvement needs of the property during the year and currently expects to complete an additional $11,000 in capital improvements during the remainder of 2004. Additional capital improvements may be considered and will depend on the physical condition of the property as well as the anticipated cash flow generated by the property. Additional capital expenditures will be incurred only if cash is available from operations or from Partnership reserves. To the extent that such budgeted capital improvements are completed, the Partnership's distributable cash flow, if any, may be adversely affected at least in the short term. The Partnership's assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Partnership. The mortgage indebtedness encumbering the Partnership's investment properties of approximately $10,870,000 is amortized over varying periods, with balloon payments of approximately $4,416,000 due in July 2010 for Covington Pointe Apartments and approximately $2,606,000 in September 2007 for Lakeside Apartments. The Managing General Partner has the option to extend the maturity of the mortgage encumbering Lakeside Apartments for an additional five years. The Managing General Partner will attempt to refinance and/or sell the properties prior to such maturity dates. If the properties cannot be refinanced or sold for a sufficient amount, the Partnership may risk losing such properties through foreclosure. The Partnership distributed the following amounts during the six months ended June 30, 2004 and 2003 (in thousands, except per unit data):
Six Months Ended Per Limited Six Months Ended Per Limited June 30, Partnership June 30, Partnership 2004 Unit 2003 Unit Sale (1) $ -- $ -- $3,544 $128.36
(1) Proceeds from the sale of North Springs Apartments in April 2003. The Partnership's cash available for distribution is reviewed on a monthly basis. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves, and the timing of debt maturities, refinancings and/or property sales. There can be no assurance, however, that the Partnership will generate sufficient funds from operations after required capital improvements to permit any distributions to its partners during the remainder of 2004 or subsequent periods. Other In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 12,298.50 limited partnership units (the "Units") in the Partnership representing 45.93% of the outstanding Units at June 30, 2004. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO, either through private purchases or tender offers. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 45.93% of the outstanding Units, AIMCO and its affiliates are in a position to influence all voting decisions with respect to the Partnership. Although the Managing General Partner owes fiduciary duties to the limited partners of the Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the Managing General Partner, as managing general partner, to the Partnership and its limited partners may come into conflict with the duties of the Managing General Partner to AIMCO, as it sole stockholder. Critical Accounting Policies and Estimates The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States which require the Partnership to make estimates and assumptions. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Impairment of Long-Lived Assets Investment properties are recorded at cost, less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, the Partnership will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Partnership would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Real property investments are subject to varying degrees of risk. Several factors may adversely affect the economic performance and value of the Partnership's investment properties. These factors include, but are not limited to, changes in the national, regional and local economic climate; local conditions, such as an oversupply of multifamily properties; competition from other available multifamily property owners and changes in market rental rates. Any adverse changes in these factors could cause impairment of the Partnership's assets. Revenue Recognition The Partnership generally leases apartment units for twelve-month terms or less. Rental income attributable to leases is recognized monthly as it is earned. The Partnership evaluates all accounts receivable from residents and establishes an allowance, after the application of security deposits, for accounts greater than 30 days past due on current tenants and all receivables due from former tenants. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Any concessions given at the inception of the lease are amortized over the life of the lease. ITEM 3. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. The Partnership's management, with the participation of the principal executive officer and principal financial officer of the Managing General Partner, 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 principal executive officer and principal financial officer of the Managing General Partner, 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) Internal Control Over Financial Reporting. There have not been any changes in the Partnership's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action purported to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) that are named as nominal defendants, challenging, among other things, the acquisition of interests in certain Managing General Partner entities by Insignia Financial Group, Inc. ("Insignia") and entities that were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs sought monetary damages and equitable relief, including judicial dissolution of the Partnership. In addition, during the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The Heller action was brought as a purported derivative action, and asserted claims for, among other things, breach of fiduciary duty, unfair competition, conversion, unjust enrichment, and judicial dissolution. On January 8, 2003, the parties filed a Stipulation of Settlement in proposed settlement of the Nuanes action and the Heller action. In general terms, the proposed settlement provides for certification for settlement purposes of a settlement class consisting of all limited partners in this Partnership and others (the "Partnerships") as of December 20, 2002, the dismissal with prejudice and release of claims in the Nuanes and Heller litigation, payment by AIMCO of $9.9 million (which shall be distributed to settlement class members after deduction of attorney fees and costs of class counsel and certain costs of settlement) and up to $1 million toward the cost of independent appraisals of the Partnerships' properties by a Court appointed appraiser. An affiliate of the Managing General Partner has also agreed to make at least one round of tender offers to purchase all of the partnership interests in the Partnerships within one year of final approval, if it is granted, and to provide partners with the independent appraisals at the time of these tenders. The proposed settlement also provided for the limitation of the allowable costs which the Managing General Partner or its affiliates will charge the Partnerships in connection with this litigation and imposes limits on the class counsel fees and costs in this litigation. On April 11, 2003, notice was distributed to limited partners providing the details of the proposed settlement. On June 13, 2003, the Court granted final approval of the settlement and entered judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector ("Objector") filed an appeal seeking to vacate and/or reverse the order approving the settlement and entering judgment thereto. On November 24, 2003, the Objector filed an application requesting the Court order AIMCO to withdraw settlement tender offers it had commenced, refrain from making further offers pending the appeal and auction any units tendered to third parties, contending that the offers did not conform with the terms of the Settlement. Counsel for the Objector (on behalf of another investor) had alternatively requested the Court take certain action purportedly to enforce the terms of the settlement agreement. On December 18, 2003, the Court heard oral argument on the motions and denied them both in their entirety. On January 28, 2004, Objector filed his opening brief in his pending appeal. On April 23, 2004, the Managing General Partner and its affiliates filed a response brief in support of the settlement and the judgment thereto. Plaintiffs have also filed a brief in support of the settlement. On June 4, 2004, Objector filed a reply to the briefs submitted by the Managing General Partner and Plaintiffs. No hearing has been scheduled in the matter. The Managing General Partner does not anticipate that any costs to the Partnership, whether legal or settlement costs, associated with these cases will be material to the Partnership's overall operations. On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General Partner, was served with a complaint in the United States District Court, District of Columbia alleging that AIMCO Properties L.P. willfully violated the Fair Labor Standards Act ("FLSA") by failing to pay maintenance workers overtime for all hours worked in excess of forty per week. On March 5, 2004 Plaintiffs filed an amended complaint also naming NHP Management Company, which is also an affiliate of the Managing General Partner. The complaint is styled as a Collective Action under the FLSA and seeks to certify state subclasses in California, Maryland, and the District of Columbia. Specifically, the plaintiffs contend that AIMCO Properties L.P. failed to compensate maintenance workers for time that they were required to be "on-call". Additionally, the complaint alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating maintenance workers for time that they worked in responding to a call while "on-call". The defendants have filed an answer to the amended complaint denying the substantive allegations. Some discovery has taken place and settlement negotiations continue. Although the outcome of any litigation is uncertain, AIMCO Properties, L.P. does not believe that the ultimate outcome will have a material adverse effect on its financial condition or results of operations taken as a whole. Similarly, the Managing General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnership's financial condition or results of operations taken as a whole. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: See Exhibit Index. b) Reports on Form 8-K: None filed during the quarter ended June 30, 2004. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAVIDSON INCOME REAL ESTATE, L.P. By: DAVIDSON DIVERSIFIED PROPERTIES, INC. Managing General Partner By: /s/Martha L. Long Martha L. Long Senior Vice President By: /s/Stephen B. Waters Stephen B. Waters Vice President Date: August 16, 2004 DAVIDSON INCOME REAL ESTATE, LP EXHIBIT INDEX Exhibit 3 Agreement of Limited Partnership is incorporated by reference to Exhibit A to the Prospectus of the Registrant dated July 26, 1985 as filed with the Commission pursuant to Rule 424(b) under the Act. 3A Amendment to Partnership Agreement dated October 1, 1985 is incorporated by reference to Exhibit 3A to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 4 Certificate of Limited Partnership dated April 29, 1985 is incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-11 dated May 7, 1985. 4A Certificate of Amendment to Certificate of Limited Partnership dated July 16, 1985 is incorporated by reference to Exhibit 4B in Amendment No. 1 to Registration Statement No. 2-97539, dated July 24, 1985. 10A Agent's Agreement dated July 1, 1985 between the Registrant and Harvey Freeman & Sons, Inc. is incorporated by reference to Exhibit 10B in Amendment No. 1 to Registration Statement No. 2-97539, dated July 24, 1985. 10B Agreement among Agents dated July 1, 1985 by and among Harvey Freeman & Sons, Inc., Harvey Freeman & Sons, Inc. of Arkansas, Harvey Freeman & Sons, Inc. of Florida, Harvey Freeman & Sons, Inc. of Georgia, Harvey Freeman & Sons, Inc. of Indiana, Harvey Freeman & Sons, Inc. of Kentucky, Harvey Freeman & Sons, Inc. of Mississippi, Harvey Freeman & Sons, Inc. of North Carolina, Harvey Freeman & Sons, Inc. of Ohio, and Harvey Freeman & Sons, Inc. of South Carolina, is incorporated by reference to Exhibit 10C in Amendment No. 1 to Registration Statement No. 2-97539, dated July 24, 1985. 10C Acquisition and Disposition Services Agreement dated July 1, 1985 between the Registrant and Criswell Freeman Company is incorporated by reference to Exhibit 10D in Amendment No. 1 to Registration Statement No. 2-97539 dated July 24, 1985. 10H Purchase Agreement for Lakeside Apartments dated April 4, 1986 between Lakeside Apartments Venture, a North Carolina general partnership and Tennessee Trust Company, a Tennessee corporation, is incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated May 20, 1986. 10I Assignment of Agreement dated May 16, 1986 between Tennessee Trust Company, a Tennessee corporation, and the Registrant is incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated May 20, 1986. 10L Contract for Sale of Real Estate for The Bexley House dated July 16, 1986 between Bexley House, Limited, an Ohio limited partnership and Tennessee Trust Company is incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated September 30, 1986. 10M Reinstatement and Amendment of Contract for Sale of Real Estate for The Bexley House dated September 4, 1986 between Bexley House, Limited, an Ohio limited partnership and Tennessee Trust Company, a Tennessee corporation, is incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated September 30, 1986. 10N Amendment to Reinstated and Amended for Sale of Real Estate for The Bexley House dated September 19, 1986 between Bexley House, Limited, an Ohio limited partnership and Tennessee Trust Company, a Tennessee corporation, is incorporated by reference to Exhibit 10(c) to the Registrant's Current Report on Form 8-K dated September 30, 1986. 10O Assignment of Contract for Sale of Real Estate dated September 30, 1986 between Tennessee Trust Company and the Registrant is incorporated by reference to Exhibit 10(d) to the Registrant's Current Report on Form 8-K dated September 30, 1986. 10P Limited Warranty Deed dated September 28, 1986 between Bexley House, Ltd., an Ohio limited partnership and the Registrant is incorporated by reference to Exhibit 10(e) to the Registrant's Current Report on Form 8-K dated September 30, 1986. 10Q Contract for Sale of Real Estate for Covington Pointe Apartments dated January 20, 1987 between F.G.M.C. Investment Corp., a Texas corporation Tennessee Trust Company, a Tennessee corporation, is incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated March 10, 1987. 10R Amendment to Contract for Purchase of Real Estate for Covington Pointe Apartments dated January 23, 1987 between F.G.M.C. Investment Corp., a Texas corporation Tennessee Trust Company, a Tennessee corporation, is incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated March 10, 1987. 10S Assignment of Contract for Purchase of Real Estate for Covington Pointe Apartments dated March 2, 1987 between Tennessee Trust Company and the Registrant is incorporated by reference to Exhibit 10(c) to the Registrant's Current Report on Form 8-K dated March 10, 1987. 10T Contract for Purchase of Real Estate for Phase I of Sterling Crest Apartments dated March 10, 1987 between Sterling Crest Development Partners, Ltd., a Georgia limited partnership, and Tennessee Trust Company, a Tennessee corporation, is incorporated by reference to Exhibit 10(d) to the Registrant's Current Report on Form 8-K dated March 10, 1987. 10Y Sterling Crest Joint Venture Agreement dated June 29, 1987 between the Registrant and Freeman Georgia Ventures, Inc. is incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated June 30, 1987. 10Z Assignment of Contract for Purchase of Real Estate for Phase I of Sterling Crest Apartments dated June 29, 1987 is incorporated by reference to Exhibit 10(c) to the Registrant's Current Report on Form 8-K dated June 30, 1987. 10AA Warranty Deed dated June 30, 1987 between Sterling Crest Development Partners, Ltd. and Sterling Crest Joint Venture, is incorporated by reference to Exhibit 10(d) to the Registrant's Current Report on Form 8-K dated June 30, 1987. 10DD Contract for Purchase of Real Estate for Phase II of Sterling Crest Apartments dated March 10, 1987 between Sterling Crest Development Partners, Ltd. and Tennessee Trust Company is incorporated by reference to Exhibit 10(a) to the Registrant's Report on Form 8 dated December 29, 1987. 10FF Assignment of Contract for Purchase of Real Estate and Tri-Party Agreement dated November 4, 1987 between Tennessee Trust Company and Sterling Crest Joint Venture relating to Sterling Crest Apartments, is incorporated by reference to Exhibit 10(c) to the Registrant's Report on Form 8 dated December 29, 1987. 10GG Amended and Restated Sterling Crest Joint Venture Joint Venture Agreement dated June 29, 1987 among the Registrant, Freeman Georgia Ventures, Inc., and Freeman Growth Plus, L.P., is incorporated by reference to Exhibit 10(d) to the Registrant's Report on Form 8 dated December 29, 1987. 10HH Memorandum of Understanding among SEC Realty Corp., Tennessee Properties, L.P., Freeman Mortgage Corporation, J. Richard Freeman, W. Criswell Freeman, and Jacques-Miller Properties, Inc. is incorporated by reference to Exhibit 10MM to the Registrant's Annual Report of Form 10-K for the fiscal year ended December 31, 1988. 10II Partnership Administration and Consultation Agreement among Freeman Properties, Inc., Freeman Diversified Properties, Inc., residual Equities Limited, and Jacques-Miller Properties, Inc. is incorporated by reference to Exhibit 10NN to the Registrant's Annual Report of Form 10-K for the fiscal year ended December 31, 1988. 10RR Multifamily Note dated December 15, 2000, between Davidson Income Real Estate, L.P., a Delaware limited partnership and Reilly Mortgage Group, Inc., a District of Columbia corporation, related to Bexley House Apartments 10SS Contracts related to the sale of North Springs Apartments is incorporated by reference to Exhibit 10SS to the Registrant's Current Report on Form 8-K dated April 25, 2003: (a) Purchase and Sale Contract between Davidson IRE Associates, L.P., as Seller and Capital City Holdings, L.L.C., as Purchaser, effective February 11, 2003. (b) First Amendment of Purchase and Sale Contract between Davidson IRE Associates, L.P., as Seller and Capital City Holdings, L.L.C., as Purchaser, effective March 13, 2003. (c) Reinstatement and Second Amendment of Purchase and Sale Contract between Davidson IRE Associates, L.P., as Seller and Capital City Holdings, L.L.C., as Purchaser, effective March 26, 2003. (d) Assignment and Assumption of Sales Contract effective April 15, 2003 between Capital City Holdings, L.L.C., as assignor and Wingservice Holdings, L.L.C., as assignee. 10TT Contracts related to refinancing of debt of Covington Pointe Apartments is incorporated by reference to Exhibit 10TT to the Registrant's Current Report on Form 8-K dated July 7, 2003: (a) Multifamily Note dated June 26, 2003 between AIMCO Covington Pointe, L.P., a Delaware limited partnership, and Keycorp Real Estate Capital Markets, Inc., an Ohio corporation. (b) Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated June 26, 2003 between AIMCO Covington Pointe, L.P., a Delaware limited partnership, and Keycorp Real Estate Capital Markets, Inc., an Ohio corporation. (c) Replacement Reserve and Security Agreement dated June 26, 2003 between AIMCO Covington Pointe, L.P., a Delaware limited partnership, and Keycorp Real Estate Capital Markets, Inc., an Ohio corporation. 10UU Contracts related to refinancing of debt of Lakeside Apartments is incorporated by reference to Exhibit 10UU to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003: (a) Multifamily Note dated November 3, 2003 between Davidson Income Real Estate, L.P., a Delaware limited partnership, and GMAC Commercial Mortgage Corporation, a California corporation. b) Guaranty dated November 3, 2003 by AIMCO Properties, L.P., a Delaware limited partnership, for the benefit of GMAC Commercial Mortgage Corporation, a California corporation. c) Multifamily Deed of Trust, Assignment of Rents and Security Agreement dated November 3, 2003 between Davidson Income Real Estates, L.P., a Delaware limited partnership, and GMAC Commercial Mortgage Corporation, a California corporation. d) Replacement Reserve and Security Agreement dated November 3, 2003 between Davidson Income Real Estates, L.P., a Delaware limited partnership, and GMAC Commercial Mortgage Corporation, a California corporation. 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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99A Agreement of Limited Partnership for Davidson IRE GP Limited Partnership between Davidson Diversified Properties, Inc. and Davidson Income Real Estate, L.P. entered into on September 15, 1993 is incorporated by reference to Exhibit 99A to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993. 99B Agreement of Limited Partnership for Davidson IRE Associates, L.P. between Davidson IRE GP Limited Partnership and Davidson Income Real Estate, L.P. is incorporated by reference to Exhibit 99B to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993. 99C Agreement of Limited Partnership for Bexley House L.P. between Davidson Income GP Limited Partnership and Davidson Income Real Estate, L.P. entered into on October 13, 1993 is incorporated by reference to Exhibit 99C to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. Exhibit 31.1 CERTIFICATION I, Martha L. Long, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Davidson Income Real Estate, L.P.; 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 small business issuer as of, and for, the periods presented in this report; 4. The small business issuer'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)) for the small business issuer 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 small business issuer, 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) Evaluated the effectiveness of the small business issuer'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 (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer'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 small business issuer'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 small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/Martha L. Long Martha L. Long Senior Vice President of Davidson Diversified Properties, Inc., equivalent of the chief executive officer of the Partnership Exhibit 31.2 CERTIFICATION I, Stephen B. Waters, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Davidson Income Real Estate, L.P.; 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 small business issuer as of, and for, the periods presented in this report; 4. The small business issuer'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)) for the small business issuer 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 small business issuer, 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) Evaluated the effectiveness of the small business issuer'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 (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer'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 small business issuer'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 small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/Stephen B. Waters Stephen B. Waters Vice President of Davidson Diversified Properties, Inc., 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-QSB of Davidson Income Real Estate, L.P. (the "Partnership"), for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Martha L. Long, as the equivalent of the chief executive officer of the Partnership, and Stephen B. Waters, 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. /s/Martha L. Long Name: Martha L. Long Date: August 16, 2004 /s/Stephen B. Waters Name: Stephen B. Waters Date: August 16, 2004 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. -----END PRIVACY-ENHANCED MESSAGE-----