-----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, Ft9K3YDnLwUhw15jB6DIsLmKBdSB4jlvExLrt0kbhLUk7SbazoK0tPCuiFwntgeG X1T1edf7IkN6X1qhX8+IDA== 0000832091-96-000011.txt : 19960813 0000832091-96-000011.hdr.sgml : 19960813 ACCESSION NUMBER: 0000832091-96-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP INSURED PLUS III LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000832091 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 043007489 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17691 FILM NUMBER: 96608613 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6174232233 MAIL ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THEx SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-17691 Krupp Insured Plus-III Limited Partnership Massachusetts 04 - 3007489 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (617) 423-2233 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP BALANCE SHEETS ASSETS
June 30, December 31, 1996 1995 Participating Insured Mortgages ("PIMs") (Note 2) $151,043,449 $151,465,652 Mortgage-Backed Securities and insured mortgages ("MBS")(Note 3) 34,185,042 36,693,963 Total mortgage investments 185,228,491 188,159,615 Cash and cash equivalents 4,511,531 3,433,885 Interest receivable and other assets 1,284,605 1,924,402 Prepaid acquisition expenses and fees, net of accumulated amortization of $6,681,531 and $6,091,012, respectively 5,649,532 6,240,051 Prepaid participation servicing fees, net of accumulated amortization of $2,270,498 and $2,084,200, respectively 1,816,034 2,002,332 Total assets $198,490,193 $201,760,285 LIABILITIES AND PARTNERS' EQUITY Liabilities $ 9,019 $ 14,756 Partners' equity (deficit) (Note 4): Limited Partners 198,448,621 200,575,459 (12,770,261 Limited Partner interests outstanding) General Partners (131,618) (102,556) Unrealized gain on MBS 164,171 1,272,626 Total Partners' equity 198,481,174 201,745,529 Total liabilities and Partners' equity $198,490,193 $201,760,285
The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Three Months For the Six Months
Ended June 30, Ended June 30, 1996 1995 1996 1995 Revenues: Interest income - PIMs: Base interest $2,916,924 $3,095,380 $5,837,998 $6,139,329 Participation interest - 435,077 - 435,077 Interest income - MBS 684,368 727,278 1,382,770 1,444,302 Interest income - other 55,176 53,329 102,346 100,333 Total revenues 3,656,468 4,311,064 7,323,114 8,119,041 Expenses: Asset management fee to an affiliate 345,779 352,879 693,281 703,117 Expense reimbursements to affiliates 38,912 50,142 85,897 100,916 Amortization of prepaid expenses and fees 388,408 405,609 776,817 811,219 General and administrative 22,534 49,588 60,666 79,823 Total expenses 795,633 858,218 1,616,661 1,695,075 Net income $2,860,835 $3,452,846 $5,706,453 $6,423,966 Allocation of net income (Note 4): Limited Partners $2,775,010 $3,349,261 $5,535,25 $6,231,247 Average net income per Limited Partner interest (12,770,261 Limited Partner interests outstanding) $ .21 $ .26 $ .43 $ .49 General Partners $ 85,825 $ 103,585 $ 171,194 $ 192,719
The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 1995 Operating activities: Net income $ 5,706,453 $ 6,423,966 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of prepaid expenses and fees 776,817 811,219 Changes in assets and liabilities: Decrease in interest receivable and other assets 639,797 118,939 Increase (decrease) in liabilities (5,737) 8,308 Net cash provided by operating activities 7,117,330 7,362,432 Investing activities: Principal collections on PIMs 422,203 447,829 Principal collections on MBS 1,400,466 855,780 Investment in MBS - (312,391) Net cash provided by investing activities 1,822,669 991,218 Financing activity: Distributions (7,862,353) (7,864,182) Net increase in cash and cash equivalents 1,077,646 489,468 Cash and cash equivalents, beginning of period 3,433,885 3,257,180 Cash and cash equivalents, end of period $ 4,511,531 $ 3,746,648
The accompanying notes are an integral part of the financial statements. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, in the opinion of the general partners, Krupp Plus Corporation and Mortgage Services Partners Limited Partnership, (collectively the "General Partners") of Krupp Insured Plus-III Limited Partnership (the "Partnership"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Financial Statements included in the Partnership's Form 10-K for the year ended December 31, 1995 for additional information relevant to significant accounting policies followed by the Partnership. In the opinion of the General Partners of the Partnership, the accompanying unaudited financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Partnership's financial position as of June 30, 1996, its results of operations for the three and six months ended June 30, 1996 and 1995, and its cash flows for the six months ended June 30, 1996 and 1995. The results of operations for the three and six months ended June 30, 1996 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. 2. PIMs During May 1996, the Partnership entered into an agreement with the borrower of the Sundance Apartments PIM that reduces the interest paid monthly by the borrower by 1% per annum and modifies the participation features. In addition, under the modified terms, the borrower may prepay the first mortgage loan without incurring any prepayment penalty and will not have to pay any additional interest accumulated prior to the modification date. Under the agreement, the Partnership will be entitled to 25% of the surplus cash generated by the operations of the property on an annual basis beginning with the surplus cash calculation for the year ended December 31, 1997. In the event of a sale or refinancing, the Partnership will be entitled to 25% of the net sale proceeds or, in the case of a refinancing, the greater of: (i) 25% of the net refinancing proceeds or (ii) a payment equal to 1% of the then- outstanding first mortgage loan balance. Net sale proceeds and net refinancing proceeds are net of certain amounts due the borrower or affiliates of the borrower. Upon the maturity or accelerated maturity of the PIM the Partnership will be entitled to 25% of the difference between the value of the property less: (i) the unpaid balance of the first mortgage loan and (ii) certain amounts due the borrower or affiliates of the borrower. At June 30, 1996, the Partnership s PIM portfolio has a fair value of approximately $150,011,000 and gross unrealized gains and losses of approximately $910,000 and $1,942,000, respectively. The PIM portfolio has maturities ranging from 1999 to 2032. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, Continued 3. MBS At June 30, 1996, the Partnership's MBS portfolio has an amortized cost of approximately $34,020,871 and gross unrealized gains and losses of approximately $514,404 and $350,233, respectively. The Partnership's MBS have maturities ranging from 2010 to 2035. 4. Changes in Partners' Equity A summary of changes in Partners' Equity for the six months ended June 30, 1996 is as follows:
Total Limited General Unrealized Partners' Partners Partners Gain Equity Balance at December 31, 1995 $200,575,459 $(102,556) $1,272,626 $201,745,529 Net income 5,535,259 171,194 - 5,706,453 Distributions (7,662,097) (200,256) - (7,862,353) Decrease in unrealized gain on MBS - - (1,108,455) (1,108,455) Balance at June 30, 1996 $198,448,621 $(131,618) $ 164,171 $198,481,174
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management s expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. Liquidity and Capital Resources The most significant demand on the Partnership's liquidity is quarterly distributions paid to investors of approximately $3.9 million. Funds used for investor distributions come from interest received on the PIMs, MBS, cash and cash equivalents net of operating expenses, and certain principal collections received on the PIMs and MBS. The Partnership funds a portion of the distribution from principal collections causing the capital resources of the Partnership to continually decrease. As the capital resources decrease, the total cash inflows to the Partnership will also decrease which will result in periodic downward adjustments to the quarterly distributions paid to investors. The General Partners periodically review the distribution rate to determine whether an adjustment to the distribution rate is necessary based on projected future cash flows. In general, the General Partners try to set a distribution rate that provides for level quarterly distributions of cash available for distribution. To the extent quarterly distributions differ from the cash available for distribution the General Partners may adjust the distribution rate or distribute funds through a special distribution. During May 1996, the Partnership entered into an agreement with the borrower of the Sundance Apartments PIM that reduces the monthly interest paid by the borrower by 1% per annum and modifies the participation features. The modification will reduce the monthly cash flow of the Partnership, but will not materially affect the Partnership s liquidity. During the second quarter, the borrower of the Friendly Hills PIM notified the Partnership of its intention to prepay that PIM in August 1996. In addition to the outstanding principal balance of approximately $11.3 million, the Partnership will receive a prepayment penalty of approximately $1,013,000 and all Shared Income and Minimum Additional interest due. The Partnership will use the proceeds from this prepayment to fund a special distribution of $.97 per Limited Partner interest during August 1996. Based on current projections, the General Partners believe the Partnership can maintain the current distribution rate for the foreseeable future following the prepayment of the Friendly Hills PIM and the subsequent special distribution to investors. For the first five years of the PIMs the borrowers are prohibited from prepaying. For the second five years, the borrower can prepay the loan incurring a prepayment penalty. The Partnership has the option of calling certain PIMs by accelerating their maturity if the loans are not prepaid by the tenth year after permanent funding. The Partnership will determine the merits of exercising the call option for each PIM as economic conditions warrant. Such factors as the condition of the asset, local market conditions, interest rates and available financing will have an impact on this decision. Assessment of Credit Risk The Partnership's investments in mortgages are guaranteed or insured by the Federal National Mortgage Association ( FNMA ), the Federal Home Loan Mortgage Corporation ( FHLMC ), the Government National Mortgage Association ( GNMA ) and the Department of Housing and Urban Development ( HUD ) and therefore the certainty of their cash flows and the risk of material loss of the amounts invested depends on the creditworthiness of these entities. FNMA is a federally chartered private corporation that guarantees obligations originated under its programs. FHLMC is a federally chartered corporation that guarantees obligations originated under its programs and is wholly-owned by the twelve Federal Home Loan Banks. These obligations are not guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA guarantees the full and timely payment of principal and basic interest on the securities it issues, which represent interests in pooled mortgages insured by HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by the full faith and credit of the U.S. Government. Distributable Cash Flow and Net Cash Proceeds from Capital Transactions Shown below is the calculation of Distributable Cash Flow and Net Cash Proceeds from Capital Transactions as defined in Section 17 of the Partnership Agreement and the source of cash distributions for the six months ended June 30, 1996 and the period from inception through June 30, 1996. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Distributable Cash Flow and Net Cash Proceeds from Capital Transactions should not be considered by the reader as a substitute to net income as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity.
(Amounts in thousands except per Unit amounts) Six Months Ended Inception to June 30, 1996 June 30, 1996 Distributable Cash Flow: Income for tax purposes $ 6,626 $103,721 Items not requiring or (not providing) the use of operating funds: Amortization of prepaid expenses, fees and organization costs 409 6,478 Acquisition expenses paid from offering proceeds charged to operations - 184 Shared appreciation income - (800) Gain on sale of MBS - (253) Total Distributable Cash Flow ("DCF") $ 7,035 $109,330 Limited Partners Share of DCF $ 6,824 $106,050 Limited Partners Share of DCF per Limited Partner interests ( Unit ) $ .53 8.30 (b) General Partners Share of DCF $ 211 $ 3,280 Net Proceeds from Capital Transactions: Principal collections and prepayments (including Shared Appreciation Income) on PIMs $ 422 $ 18,260 Principal collections and sales proceeds on MBS (including gain on sale) 1,400 61,944 Reinvestment of MBS and PIM principal collections - (41,960) Total Net Proceeds from Capital Transactions $ 1,822 $ 38,244 Cash available for distribution (DCF plus proceeds from Capital transactions) $ 8,857 $147,574 Distributions: Limited Partners $ 7,662 (a) $142,422 (a) Limited Partners Average per Unit $ .60 (a) $ 11.15 (a)(b) General Partners $ 211 (a) $ 3,280 (a) Total Distributions $ 7,873 $145,702
(a) Includes an estimate of the distribution to be paid in August 1996. (b) Limited Partners average per Unit return of capital as of August 1996 is $2.85 [$11.15 - $8.30]. Return of capital represents that portion of distribution which is not funded from DCF such as proceeds from the sale of assets and substantially all of the principal collections received from MBS and PIMs. Operations The following discussion relates to the operations of the Partnership during the three and six months ended June 30, 1996 and 1995 (Amounts in thousands):
For the Three Months For the Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Interest income on PIMs: Base interest $2,917 $3,095 $5,838 $6,139 Participation interest 393 435 552 435 Interest income on MBS 685 727 1,383 1,444 Other interest income 55 53 102 100 Partnership expenses (408) (452) (840) (883) Distributable Cash Flow 3,642 3,858 7,035 7,235 Decrease in accrued participation income (393) - (552) - Amortization of prepaid fees and expenses (389) (405) (777) (811) Net income $2,860 $3,453 $5,706 $6,424
Operations, Continued Net income decreased by approximately $593,000 and $718,000 for the three and six months ended June 30, 1996, respectively, as compared to the corresponding periods in 1995 due primarily to lower interest income on PIMs. Base interest income on PIMs decreased in 1996 as compared to 1995 due primarily to the interest rate reduction on the Royal Palm Apartments PIM in December 1995. Although participation interest income earned decreased $435,000 for the three and six months ended June 30, 1996 as compared to the three and six months ended June 30, 1995, participation interest income accrued for 1996 will improve as a result of the Friendly Hills Apartments PIM prepayment expected in August. KRUPP INSURED PLUS-III LIMITED PARTNERSHIP PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote Security Holders Response: None Item 5. Other information Response: None Item 6. Exhibits and Reports on Form 8-K Exhibits (10.1) Modification agreement dated May 23, 1996 by and between Sundance Associates II, Ltd. and Krupp Insured Plus-III Limited Partnership. Reports on Form 8-K Response: None SIGNATURE 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. Krupp Insured Plus-III Limited Partnership (Registrant) BY: /s/Robert A. Barrows Robert A. Barrows Treasurer and Chief Accounting Officer of Krupp Plus Corporation, a General Partner. DATE: July 25, 1996 EX-27 2
5 The schedule contains summary financial information extracted from the Balance Sheet and Statement of Income and is qualified in its entirety by reference to such financial statements 0000832091 KRUPP INSURED PLUS III LIMITED PARTNERSHIP 6-MOS DEC-31-1996 JUN-30-1996 4,511,531 185,228,491 1,284,605 0 0 7,465,566 0 0 198,490,193 9,019 0 0 0 198,317,003 164,171 198,490,193 0 7,323,114 0 0 1,616,661 0 0 5,706,453 0 5,706,453 0 0 0 5,706,453 0 0 Includes the following investments: Participating Insured Mortgages ("PIMs") $151,043,449 & Mortgage-Backed Securities ("MBS") $34,185,042 Includes the following prepaid acquisition fees & expenses of $5,649,532 net of accumulated amortization of $6,681,531 and prepaid participating servicing of $1,816,034 net of accumulated amortization of $2,270,498 Represents total equity of General Partners & Limited Partners of $(131,618) and $198,448,621 Represents interest income on investments in mortgages & cash Includes $776,817 of amortization related to prepaid fees & expenses Net income allocated $171,194 to the General Partners & $5,535,259 to the Limited Partners. Average net income per unit of Limited Partners interest is $.43 on 12,770,261 units outstanding.
EX-99 3 MODIFICATION AGREEMENT This Modification Agreement (the "Agreement") is made and entered into as of this ___ day of May, 1996 by and between Sundance Associates II, LTD ("Borrower") and Krupp Insured Plus - III Limited Partnership ("KIP"). W I T N E S S E T H: WHEREAS, the Borrower has obtained from Krupp Mortgage Corporation, now known as Berkshire Mortgage Finance Corporation (the "First Mortgagee"), a loan in the original amount of Seven Million Four Hundred Thousand Dollars ($7,400,000) (the "First Mortgage Loan"). WHEREAS, the First Mortgage Loan was made with respect to Sundance Village Apartments, Phase II (the "Project") located in Miami, Florida upon certain real property more particularly described in Exhibit A attached hereto and the terms of the following First Mortgage Loan documents: A. The First Mortgage Loan is evidenced by a certain Mortgage Note (the "First Mortgage Note") dated July 26, 1989 from the Borrower to the First Mortgagee in the original principal sum of $7,400,000; and B. The repayment of the indebtedness evidenced by the First Mortgage Note is secured by, among other things, (a) a Mortgage dated July 26, 1989 and recorded in the Official Records Book of Dade County, Florida in Book 14194, Page 1906 (the "First Mortgage"); and (b) a Regulatory Agreement dated July 26, 1989 and recorded in the Official Records Book of Dade County, Florida in Book 14194, Page 1918 (the "Regulatory Agreement"). (The First Mortgage Note, First Mortgage and the Regulatory Agreement are collectively referred to as the "First Mortgage Loan Documents".) WHEREAS, the First Mortgage Loan is coinsured by the First Mortgagee and the Secretary of Housing and Urban Development ("HUD"), as of July 26, 1989 ("HUD Endorsement"), under Section 221(d) (4) pursuant to Section 244 of the National Housing Act. Accordingly, the First Mortgage Loan is subject to the regulations and requirements of HUD. WHEREAS, the First Mortgagee obtained the funding for the First Mortgage Loan through the sale to KIP of a Government National Mortgage Association Mortgaged Backed Security (the "GNMA MBS") as evidenced by the GNMA Purchase Agreement dated July 26, 1989. The interest rates on the First Mortgage Loan and the GNMA MBS were below prevailing rates for comparable loans and securities, and the lower interest rates inured to the benefit of the Borrower. KIP was unwilling to acquire the GNMA MBS unless the Borrower agreed to pay additional interest to KIP through a participation arrangement. WHEREAS, the Borrower agreed to pay additional interest to KIP pursuant to a subordinated promissory note (the "Subordinated Note") made by the Borrower in favor of KIP which is secured by a subordinated multifamily mortgage (the "Subordinated Mortgage") dated July 26, 1989 and recorded in the Official Records Book of Dade County, Florida in Book 14196, Page 2627 (collectively, the Subordinated Loan Documents"). Modification Agreement May 19, 1996 A:\051996.WPD 1 WHEREAS, the Project has experienced financial difficulties and Borrower has requested assistance from KIP in regards to the Borrower's obligations under the First Mortgage Loan Documents and the Subordinated Loan Documents. WHEREAS, the Borrower and KIP have agreed to modify the Subordinated Note in certain respects based on KIP's willingness to provide the financial assistance described herein. The Borrower and KIP have reached an agreement to the terms and conditions of which agreement are set forth below. WHEREAS, the Borrower and KIP have agreed to modify the Subordinated Note in certain respects to clarify the intent of the parties as to the manner in which certain participation payments are to be calculated and made by Borrower to KIP under this Modification Agreement. The Borrower and KIP have reached an agreement to the terms and conditions of which agreement are set forth below. NOW, THEREFORE, in consideration of the foregoing and one dollar and other good and valuable consideration in hand paid, the receipt and sufficiency of which is hereby acknowledged, intending to be legally bound, Borrower and KIP hereby agree as follows: I. KIP Funding. Borrower shall continue to make full monthly debt service payments in accordance with the First Mortgage Note. Upon receipt of the full monthly payment then due, commencing with the payment due June 1, 1996 and continuing until the principal balance of the First Mortgage Loan is paid in full, KIP agrees to rebate to the Borrower an amount equal to 1/12 of 1% per annum of the then-outstanding principal balance. II. Waiver of Prepayment Penalties. The First Mortgage Note stipulates that the Borrower must pay a penalty to exercise its right to prepay the debt evidenced by the First Mortgage Note under specified conditions: a penalty equal to 9% of the original principal amount for a prepayment that occurs during the sixth, seventh, eighth or ninth year from the HUD Endorsement (July 26, 1994 through July 25, 1998) and a penalty equal to 1% of the original principal amount for a prepayment that occurs during the tenth year from the HUD Endorsement (July 26, 1998 through July 25, 1999). Under the GNMA Purchase Agreement, any prepayment penalties imposed under the First Mortgage Note are for the benefit of KIP. KIP hereby waives its right to collect a prepayment penalty if the Borrower exercises its right to prepay the First Mortgage Loan in full prior to July 25, 1999 as a result of a Sale of the Project or a Refinancing of the Project. III. Substitution of Shared Participation for Additional Interest. Section 1, Payment of Additional Interest, appearing on pages two, three, four and five of the Subordinated Note, is hereby deleted in its entirety. The following is substituted in lieu thereof: 1. Payment of Shared Participation. The Borrower covenants and agrees to pay KIP "Shared Participation" which shall mean and include "Shared Cash Participation" and "Shared Appreciation Participation". A. "Shared Cash Participation" shall mean twenty-five percent (25%) of all Surplus Cash generated by the Project, as that term is defined in the Regulatory Agreement. Shared Cash Participation shall be deemed earned by KIP in years in which the Project generates Surplus Cash as calculated Modification Agreement May 19, 1996 A:\051996.WPD 2 under the Regulatory Agreement definition of Surplus Cash. Such Shared Cash Participation shall be deemed earned beginning with the calculation for the fiscal year ending December 31, 1997 and for each fiscal year thereafter until the entire principal balance of the First Mortgage Loan has been paid. All Shared Cash Participation is due and payable to KIP within 120 days of the end of the fiscal year in which there is Surplus Cash and Surplus Cash may only be distributed at the end of a fiscal year. B. "Shared Appreciation Participation" shall mean the following. (i) In the event of a Sale of the Project, Borrower shall pay KIP twenty-five percent ( 25%) of the "Net Sale Proceeds." Net Sale Proceeds shall mean all consideration paid in connection with a Sale of the Project or a beneficial interest in the Project or the Borrower whether direct or indirect less (a) prorations and selling expenses, including reasonable independent third party brokers' commissions, title searches, survey costs, recording costs, escrowed charges, transfer taxes and reasonable attorneys' fees incurred by the Borrower in connection with the Sale; (b) the unpaid principal balance of the First Mortgage Loan and all accrued and unpaid interest thereon; (c) accrued and unpaid management fees due the Borrower or any Affiliate of the Borrower as described more fully in Sections IV and V of this Modification Agreement; and (d) accrued and unpaid operating advances due the Borrower or any Affiliate of the Borrower as described more fully in Sections IV and V of this Modification Agreement. All Shared Appreciation Participation under this Section III, Paragraph B(i) shall be due and payable to KIP on the date of the Sale of the Project. (ii) In the event of a Refinancing of the Project, Borrower shall pay KIP either twenty-five percent ( 25%) of the "Net Refinancing Proceeds" or a payment equal to 1% of the then-outstanding First Mortgage Loan principal balance at the time of the Refinancing, whichever is greater. A Refinancing of the Project shall mean the payment in full of the First Mortgage Loan prior to the Maturity Date under the First Mortgage Loan Documents from the proceeds of a loan or loans secured by the Property or loans secured by a pledge of any beneficial interest in the Project or the Borrower. Net Refinancing Proceeds shall mean the difference between the new debt placed on the Project as a result of such a Refinancing less (a) the unpaid principal balance of the First Mortgage Loan and all accrued and unpaid interest thereon; (b) usual and reasonable costs to obtain the new debt; and (c) accrued and unpaid management fees due the Borrower or any Affiliate of the Borrower as described more fully in Sections IV and V of this Modification Agreement; and (d) accrued and unpaid operating advances due the Borrower or any Affiliate of the Borrower as described more fully in Sections IV and V of this Modification Agreement. All Shared Appreciation Participation under this Section III, Paragraph B(ii) shall be due and payable to KIP on the date of the Modification Agreement May 19, 1996 A:\051996.WPD 3 Refinancing of the Project. (iii) On the Maturity Date of the First Mortgage Loan under the First Mortgage Loan Documents or the Accelerated Maturity Date under the Subordinated Loan Documents, Borrower shall pay KIP twenty-five percent ( 25%) of the difference resulting from the "Value" of the Project less (a) the unpaid principal balance of the First Mortgage Loan; (b) accrued and unpaid management fees due the Borrower or any Affiliate of the Borrower as described more fully in Sections IV and V of this Modification Agreement; and (c) accrued and unpaid operating advances due the Borrower or any Affiliate of the Borrower as described more fully in Sections IV and V of this Modification Agreement. "Value" shall be determined by an appraisal of the Project, prepared at least sixty (60) days prior to the Maturity Date or the Accelerated Maturity Date. The appraisal shall be prepared by a qualified M.A.I. appraiser selected by the Maker from a list of three M.A.I. appraisers selected by the Holder. The determination of appraised value shall be based, in part, upon the assumption that the rental income from or with respect to the Project is based on the then prevailing market rates for comparable rental space in the same vicinity of the Project even if the actual rent then being paid by lessees is more or less. The appraisal shall specify: (a) The Value of the Project assuming the First Mortgage Loan may be assumed by a purchaser of the Project without financing charge or expenses imposed by the Holder of the First Mortgage in connection with such assumption (other than fees permitted by the Secretary of HUD for approving a transfer of physical assets); and (b) the Value of the Project assuming the First Mortgage Loan may not be assumed. The Value established under (a) above may be utilized only if the Holder has not elected to direct the First Mortgagee to declare the principal sum owing with respect to the First Mortgage Loan to be due and payable. In the event the Maker does not agree with the appraisal, the Maker must notify the Holder within three (3) business days after receipt thereof, and it may arrange for another appraisal of the Project by a qualified M.A.I. appraiser, which appraisal must be completed within thirty (30) days of receipt of the first appraisal. In the event the Holder does not agree with the appraisal which is obtained by the Maker, and the Holder and the Maker are unable to agree upon the Value, the Holder must notify the Maker within three (3) business cays after the receipt thereof, and the Holder may arrange for another appraisal of the Project by a qualified M.A.I. appraiser to be selected jointly by the two appraisers who made the prior appraisals, which appraisals must be completed within thirty (30) days. The Value established pursuant to this third appraisal shall be binding upon the Maker and the Holder. Modification Agreement May 19, 1996 A:\051996.WPD 4 The cost of all appraisals shall be borne by the Maker. Any such Shared Appreciation Participation earned under this Section II, Paragraph B(iii) shall be payable to KIP on the earlier of the Accelerated Maturity Date or the Maturity Date. C. Notwithstanding the foregoing, in the event of a default by the Borrower under the Subordinated Loan Documents, and upon KIP's election, in its sole discretion, to accelerate all amounts owing under this Agreement, KIP shall obtain the appraisal described in Section III, Paragraph B(iii) above within one hundred twenty (120) days after KIP's election to accelerate and the Shared Appreciation Participation, if any, owing to KIP as a result of such appraisal shall be due and payable within ten (10) days after a copy of the completed appraisal is delivered to Borrower. D. Notwithstanding the provisions contained in this Section III of this Modification Agreement for the payments of Shared Participation, on (i) the date of the Sale of the Project; (ii) the date of a Refinancing of the Project; or (iii) the Maturity Date under the First Mortgage Loan Documents or the Accelerated Maturity Date under the Subordinated Loan Documents, the Borrower expressly understands and agrees to pay to KIP all Shared Participation which has accrued, but has not been paid, and, if the Secretary of HUD or his successors or assigns is no longer the coinsurer of the First Mortgage Note, the principal and accrued interest thereunder. IV. Affiliate Advances, Loans and Unpaid Management Fees. Due to the Project's financial difficulties, the Borrower, through various affiliates, has advanced funds for operations. As of the Project's December 31, 1995 Audited Financial Statements, the Borrower is carrying a total of $624,095 in liabilities due to affiliates, including Eurodevelopment Corporation ("EDC"), the Borrower's general partner; CASCH, S.A., an affiliate of the Borrower's general partner; and Sundance Associates I, LTD, the ownership entity of the companion phase of the Project (together collectively, "Affiliates"). These liabilities are comprised of the following. A. Advances made by Borrower after First Mortgage Loan closing: Loan Payable to EDC $20,000 Payable for Payroll Share to EDC $23 Loan Payable to Sundance Associates I 35,000 Payable for Payroll Share to Sundance Associates I 21,971 B. Accrued and Unpaid Management Fees: Payable for Management Fees to EDC 146,084 C. Advances made by Borrower affiliate after First Mortgage Loan closing (see Exhibit B): 1991 through 1995 Payable for Advances from CASCH, S.A. 120,766 D. Advances made by Borrower affiliate prior to First Mortgage Loan closing (see Exhibit B): 1989 Loan and accrued Interest thereon to CASCH, S.A. 182,400 1989 Payable for Advances from CASCH, S.A. 98,278 Should the Project fail to generate sufficient funds to meet all the Project's operating expenses and its First Mortgage Loan debt service, and it is necessary for the Borrower or its Affiliates to advance funds in addition to the amounts listed immediately above in this Section IV, Modification Agreement May 19, 1996 A:\051996.WPD 5 Paragraphs A, B and C, Borrower is required to notify KIP as to the purpose, the amount, and the source of each such advance of additional funds. V. Repayment of Affiliate Advances, Loans and Unpaid Management Fees. Borrower agrees to abide by the following. A. Prior to the payment in full of the First Mortgage Loan, any reduction in liabilities due an Affiliate shall be limited to reimbursements for liabilities listed above in Section IV as they made be adjusted in amount from time to time for previous reductions or subsequent increases. Such liabilities may be repaid out of funds generated by the Project in excess of First Mortgage Loan debt service payments and Project expenses in any fiscal year in which such funds are available. KIP acknowledges that the repayment of these specified liabilities may be made prior to any calculation of Surplus Cash. B. In the event of a Sale of the Project, Refinancing of the Project, or on the Maturity Date under the First Mortgage Loan Documents or the Accelerated Maturity Date under the Subordinated Loan Documents, any reimbursement of outstanding liabilities due the Borrower or any Affiliate used in the determination of (a) Net Sale Proceeds under Paragraph III, Section 1 B (i), (b) Net Refinancing Proceeds under Section III, Paragraph 1 B (ii), or (c) the calculation specified in Section III, Paragraph 1 B (iii) of this Modification Agreement shall be limited to those liabilities listed in Section IV of this Modification Agreement. VI. Other Deletions and Substitutions. A. References to "Additional Interest" in Sections 3, 4 and 5 of the Subordinated Note shall be deleted. "Shared Participation" as it is defined in Section III of this Modification Agreement shall be inserted. B. Reference to net proceeds of a Sale of the Project in Section 4 B (iii) of the Subordinated Note shall take the meaning expressed in this Modification Agreement in Section III, Paragraph B (i). C. Reference to net proceeds of a refinancing in Section 4 B (iv) of the Subordinated Note shall take the meaning expressed in this Modification Agreement in Section III, Paragraph B (ii). D. The last two full sentences in Section 4 B of the Subordinated Note shall be deleted in their entirety. E. Sections 4 D and 4 E of the Subordinated Note shall be deleted in their entirety. VII. Notice Requirements. A. All notices and other communications required or permitted under this Modification Agreement shall be in writing and, if mailed by prepaid United States first-class, certified mail, return receipt requested, at any time other than a general discontinuance of postal service due to strike, lockout or otherwise, shall be deemed to be received on the earlier of the date shown on the return receipt or three (3) business days after the post- Modification Agreement May 19, 1996 A:\051996.WPD 6 marked day thereof. In addition, notices hereunder may be delivered by hand or by overnight courier, in which event the notice shall be deemed effective when delivered. All notices and other communications under this Modification Agreement shall be given to the parties hereto at the following addresses: If to the Borrower: Sundance Associates II, LTD 3162 Commodore Plaza, No. 2 Coconut Grove, Florida 33133 Attention: Mr. Jose Camprubi If to KIP: Berkshire Mortgage Finance Corporation Harbor Plaza 470 Atlantic Avenue Boston, Massachusetts 02210 Attention: Ms. Peggy DeMuth with a copy to: Powell, Goldstein, Frazer & Murphy Suite 600 1001 Pennsylvania Avenue, NW Washington, D.C. 20004 Attention: George L. Daves, Esquire B. Any party hereto may change the address to which notices shall be directed under this Section V by giving ten (10) days written notice of such change to the other parties. VIII. Loan Documents Not Impaired. Except as expressly set forth herein with respect to the Subordinated Note, the agreements set forth herein are not intended to affect or alter the obligations of Borrower under the First Mortgage Loan Documents or the Subordinated Loan Documents and this Modification Agreement shall not be construed as a novation, renegotiation or release under any of these documents. IX. Representations of Borrower. Borrower hereby acknowledges and confirms with KIP that: A. Borrower has no offsets, counterclaims or defenses with respect to the obligations under the First Mortgage Loan Documents or the Subordinated Loan Documents and to the extent that Borrower has any offsets, counterclaims or defenses with respect to the obligations thereunder, Borrower hereby waives and releases such offsets, counterclaims and defenses. B. Borrower ratifies and affirms all obligations under the First Mortgage Loan Documents and Subordinated Loan Documents. C. Except for the matters expressly set forth herein, Borrower hereby releases and forever discharges KIP and all its directors, officers, employees, administrators, agents, subsidiaries, affiliates, appraisers, Modification Agreement May 19, 1996 A:\051996.WPD 7 inspectors, accountants, attorneys, successors and assigns from any and all present existing causes of action, demands, claims, debts, accounts, liabilities, costs, expenses, contract, promises, agreements, and damages whatsoever (hereinafter referred to individually and collectively as the "Claims") which relate to the First Mortgage Loan Documents and the Subordinated Loan Documents and also including without limitation any and all Claims arising out of or relating to the exercise by KIP of any rights pursuant thereto. X. Representation of KIP. KIP hereby acknowledges that all payment obligations identified in this Modification Agreement, First Mortgage Loan Documents and the Subordinated Loan Documents are nonrecourse. XI. Binding Effect. The terms and provisions of this Modification Agreement shall be binding upon the parties hereto and their heirs, successors and assigns. XII. Governing Law. This Modification Agreement shall be construed under the laws of the state in which the Project is located and if any provisions of this Modification Agreement are held by a court of competent jurisdiction to be illegal, invalid or unenforceable, then such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceablility of the other provisions of this Modification Agreement. IN WITNESS WHEREOF, the undersigned parties have caused this instrument to be executed as the of day, month and year first written above. KIP: Krupp Insured Plus - III Limited Partnership, a Massachusetts limited partnership By: Krupp Plus Corporation, a general partner By: Ronald Halpern Its: Senior Vice President Borrower: Sundance Associates II, LTD, a Florida limited partnership By: Eurodevelopment Corporation, a Florida corporation, a general partner By: Jose Camprubi Its: President Modification Agreement May 19, 1996 A:\051996.WPD 8 -----END PRIVACY-ENHANCED MESSAGE-----