HOUSING PARTNERSHIP INVESTMENTS LIMITED (A CALIFORNIA LIMITED PARTNERSHIP) INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENTS DECEMBER 31, 1999

Transcription

1 (A CALIFORNIA LIMITED PARTNERSHIP) INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENTS DECEMBER 31, 1999

2 (A CALIFORNIA LIMITED PARTNERSHIP) TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Balance Sheets, December 31, 1999 and Statements of Income, for the Years Ended December 31, 1999 and Statements of Partners' Equity, for the Years Ended December 31, 1999 and Statements of Cash Flows, for the Years Ended December 31, 1999 and Notes to Financial Statements 6-12

3 To the Partners of Housing Partnership Investments Limited (A California limited partnership) INDEPENDENT AUDITORS' REPORT We have audited the accompanying balance sheets of Housing Partnership Investments Limited as of December 31, 1999 and 1998, and the related statements of income, partners' equity and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. A substantial portion of the selected financial information for the local limited partnerships contained in Note 2 is based on financial statements which were audited by other auditors. Their reports have been furnished to us and our opinion, insofar as it relates to the amounts included for these limited partnerships, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Housing Partnership Investments Limited as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Los Angeles, California July 6,

4 BALANCE SHEETS ASSETS INVESTMENT IN LIMITED PARTNERSHIPS $ 274,722 $ 165,406 CASH AND CASH EQUIVALENTS 1,464,601 1,612,288 CASH DUE FROM ESCROW - 596,838 OTHER RECEIVABLES 78,810 84,960 DUE FROM AFFILIATE - 2,007 $ 1,818,133 $ 2,461,499 LIABILITIES AND PARTNERS' EQUITY LIABILITIES: Accounts payable $ 11,879 $ 4,067 Accrued liquidation fee 39,476 99,160 51, ,227 COMMITMENTS AND CONTINGENCIES (Notes 3 and 4) PARTNERS' EQUITY 1,766,778 2,358,272 $ 1,818,133 $ 2,461,499 The accompanying notes are an integral part of these financial statements. 2

5 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED REVENUE Interest income $ 74,703 $ 91,481 OPERATING EXPENSES: Liquidation fees - 59,684 Management fees 150, ,151 Legal and accounting 50,071 16,786 Other 32,307 37, , ,605 LOSS FROM OPERATIONS (157,675) (137,124) EQUITY IN INCOME OF LIMITED PARTNERSHIP 109,316 5,688 EQUITY IN GAIN ON SALES OF LIMITED PARTNERSHIPS - 587,875 NET INCOME (LOSS) $ (48,359) $ 456,439 NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ (85) $ 801 The accompanying notes are an integral part of these financial statements. 3

6 STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED General Limited Partners Partners Total PARTNER UNITS, December 31, PARTNERS' EQUITY Balance, January 1, 1998 $ 26,443 $ 2,617,895 $ 2,644,338 Net income for , , ,439 Distributions made in (742,505) (742,505) PARTNERS' EQUITY Balance, December 31, ,007 2,327,265 2,358,272 Net loss for 1999 (484) (47,875) (48,359) Distributions made in 1999 (5,968) (537,167) (543,135) PARTNERS' EQUITY Balance, December 31, 1999 $ 24,555 $ 1,742,223 $ 1,766,778 The accompanying notes are an integral part of these financial statements. 4

7 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (48,359) $ 456,439 Adjustments to reconcile net income (loss) to net cash used in operating activities: Equity in income and gain from Partnerships (109,316) (593,563) Decrease (increase) in other receivables 6,150 (6,149) Increase in accounts payable 7,812 3,945 Decrease in accrued liquidation fee (59,684) (22,816) Decrease (increase) in due from affiliate 2,007 (2,007) Net cash used in operating activities (201,390) (164,151) CASH FLOWS FROM INVESTING ACTIVITIES: Collection of sale proceeds 596, ,000 Costs of sale of Partnership interest - (8,963) Net cash provided by investing activities 596, ,037 CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners (543,135) (742,505) NET DECREASE IN CASH AND CASH EQUIVALENTS (147,687) (90,619) CASH AND CASH EQUIVALENTS, beginning of year 1,612,288 1,702,907 CASH AND CASH EQUIVALENTS, end of year $ 1,464,601 $ 1,612,288 SUPPLEMENTAL CASH FLOW INFORMATION NON CASH INVESTING ACTIVITY: Sale proceeds to be collected $ - $ 596,838 The accompanying notes are an integral part of these financial statements. 5

8 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Housing Partnership Investments Limited (the "Partnership") was formed under the California Limited Partnership Act on December 5, The Partnership was formed to invest in other limited partnerships which provide tax benefits through ownership of federal, state and local government assisted housing projects. The general partners are National Partnership Investments Corp. (the "Corporate General Partner" or "NAPICO") and Charles H. Boxenbaum. The Partnership issued 570 units of limited partner interests under a private placement. The general partners have a 1 percent interest in profits and losses of the Partnership and the limited partners have the remaining 99 percent interest in proportion to their respective investments. Prior to December 30, 1998, NAPICO was a wholly owned subsidiary of Casden Investment Corporation ( CIC ), which is wholly owned by Alan I. Casden. On December 30, 1998, Casden Properties Operating Partnership, L.P. (the Operating Partnership ), a majority owned subsidiary of Casden Properties Inc., a real estate investment trust organized by Alan I. Casden, purchased a 95.25% economic interest in NAPICO. The Partnership shall be dissolved only upon the expiration of 40 years (December 5, 2014) from the date of the formation of the Partnership or the occurrence of various other events as specified in the terms of the Partnership agreement. Upon total or partial liquidation of the Partnership and distribution of the proceeds, NAPICO will be entitled to a liquidation fee as stipulated in the Partnership agreement. The limited partners will have a priority return equal to their invested capital attributable to the project(s) or project interest(s) sold and shall have received an amount from the sale of the project(s) or project interest(s) sufficient to pay state and federal income taxes, if any, calculated at the maximum rate then in effect. The liquidation fees may accrue but shall not be paid until the limited partners have received distributions equal to 100 percent of their capital contributions. 4

9 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimates and Assumptions In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include bank certificates of deposit and money market mutual funds. The Partnership deposits its cash in accounts with various financial institutions. At times, the account balances are in excess of federal depository insurance limits. The Partnership has not experienced any losses in connection with these funds. Method Of Accounting For Investment In Limited Partnerships The investment in limited partnerships is accounted for under the equity method. Investment in limited partnership balances are not recorded in excess of their net realizable value. Acquisition and selection fees and other costs related to the acquisition of the projects have been capitalized to the investment account. Net Income (Loss) Per Limited Partner Unit Net income (loss) per limited partner unit was computed on the basis of the actual number of limited partner units outstanding during 1999 and 1998, which was

10 NOTE 2 - INVESTMENT IN LIMITED PARTNERSHIPS The Partnership has limited partnership interests in five limited partnerships at December 31, 1999 and Four of the limited partnerships own and operate multifamily residential rental projects and one limited partnership holds a wrap-around mortgage receivable for the sale of a multi-family residential rental project. The mortgage loans on these projects are insured by various governmental agencies. The Partnership, as a limited partner, is allocated between 75 percent and 99 percent of the profits and losses of the limited partnerships. Equity in losses of the limited partnerships are recognized in the financial statements until the limited partnership investment account is reduced to a zero balance. Losses incurred after the limited partnership investment account, including future commitments, is reduced to zero are not recognized. The cumulative amount of unrecognized losses from the limited partnerships was approximately $15,721,000 and $15,584,000, as of December 31, 1999 and 1998, respectively. Additional losses will not be recognized until the limited partnerships generate profits. These profits, if any, will first be offset against the cumulative unrecognized losses and will be reflected in income only when the unrecognized losses have been fully absorbed. Cash distributions from limited partnerships are accounted for as a return of capital until the investment balance is reduced to zero. Subsequent distributions received are recognized as income. The following is a summary of the investment in limited partnerships and reconciliation to the limited partnership s accounts: Investment balance, beginning of year $ 165,406 $ 159,718 Equity in income of limited partnerships 109,316 5,688 Investment balance, end of year $ 274,722 $ 165,406 The difference between the investment balance and the Partnership's equity as shown 6

11 NOTE 2 - INVESTMENT IN LIMITED PARTNERSHIPS (Continued) in the limited partnerships combined financial statements is due primarily to cumulative unrecognized losses of certain limited partnerships, costs capitalized to the investment account and cumulative distributions recognized as income. Effective December 31, 1998, Housing Associates of Worcester limited partnership ( Coes Pond Village ), was sold to affiliates of the project s general partner. The Partnership had a zero investment balance in Coes Pond Village prior to the sale. The sale resulted in a gain of $2,288,943 of which $596,838 was recognized by the Partnership in 1998 ($587,875, after deducting selling costs), and the remainder offset previously unrecognized losses. Proceeds from the sale of $596,838 were collected by the Partnership in An accrued liquidation fee totaling $59,684, payable to NAPICO, was paid in Selected financial information from the combined financial statements of the limited partnerships at December 31, 1999 and 1998 is as follows: Balance Sheets (in thousands) Wrap-around mortgage note receivable $ 5,358 $ 5,524 Land and buildings, net $ 9,021 $ 9,322 Total assets $ 18,129 $ 18,465 Mortgages payable $ 35,488 $ 35,809 Total liabilities $ 38,416 $ 38,811 Equity deficiency of Housing Partnership Investments Limited $(15,579) $(15,666) Equity deficiency of other partners $ (4,708) $ (4,680) 7

12 NOTE 2 - INVESTMENT IN LIMITED PARTNERSHIPS (Continued) Statements of Operations (in thousands) Total revenues $ 6,941 $ 8,562 Interest expense $ 1,172 $ 1,299 Depreciation and amortization $ 652 $ 847 Total expenses $ 6,882 $ 8,261 Net income $ 59 $ 301 NAPICO affiliates are general partners in one of the limited partnerships. Another affiliate receives a fee for managing the rental operations of this project. The following sets forth the significant operating data for this partnership: (in thousands) Total assets $ 5,892 $ 6,143 Total liabilities $ 24,384 $ 24,505 Equity deficiency of Housing Partnership Investments Limited $(13,740) $(13,642) Equity deficiency of other partners $ (4,752) $ (4,720) Total revenue $ 3,420 $ 3,389 Total expenses $ 3,550 $ 3,476 Net loss $ (130) $ (87) 8

13 NOTE 2 - INVESTMENT IN LIMITED PARTNERSHIPS (Continued) Under recently adopted law and policy, the United States Department of Housing and Urban Development ( HUD ) has determined not to renew the Housing Assistance Payment ( HAP ) Contracts on a long term basis on the existing terms. In connection with renewals of the HAP Contracts under such new law and policy, the amount of rental assistance payments under renewed HAP Contracts will be based on market rentals instead of above market rentals, which was generally the case under existing HAP Contracts. The payments under the renewed HAP Contracts are not expected to be in an amount that would provide sufficient cash flow to permit owners of properties subject to HAP Contracts to meet the debt service requirements of existing loans insured by the Federal Housing Administration of HUD ( FHA ) unless such mortgage loans are restructured. In order to address the reduction in payments under HAP Contracts as a result of this new policy, the Multi-family Assisted Housing Reform and Affordability Act of 1997 ( MAHRAA ), which was adopted in October 1997, provides for the restructuring of mortgage loans insured by the FHA with respect to properties subject to the Section 8 program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a first mortgage loan which will be amortized on a current basis and a low interest second mortgage loan payable to FHA which will only be payable on maturity of the first mortgage loan. This restructuring results in a reduction in annual debt service payable by the owner of the FHAinsured mortgage loan and is expected to result in an insurance payment from FHA to the holder of the FHA-insured loan due to the reduction in the principal amount. MAHRAA also phases out project-based subsidies on selected properties serving families not located in rental markets with limited supply, converting such subsidies to a tenant-based subsidy. On September 11, 1998, HUD issued interim regulations implementing MAHRAA and final regulations are expected to be issued in When the HAP Contracts are subject to renewal, there can be no assurance that the local limited partnerships in which the Partnership has an investment will be permitted to restructure their mortgage indebtedness under MAHRAA. In addition, the economic impact on the Partnership of the combination of the reduced payments under the HAP Contracts and the restructuring of the existing FHA-insured mortgage loans under MAHRAA is uncertain. As a result of the foregoing, the Partnership conducted an extensive review of disposition, refinancing or re-engineering alternatives for the properties in which the limited partnerships 9

14 NOTE 2 - INVESTMENT IN LIMITED PARTNERSHIPS (Continued) have invested and are subject to HUD mortgage and rental subsidy programs. Expenses in connection with this review by various third party professionals, including accounting, legal, valuation, structural and engineering costs amounted to $6,700 for the year ended December 31, 1998, and is included in other expenses. NOTE 3 - FEES AND EXPENSES DUE TO GENERAL PARTNER An annual management fee of.25 percent of the Partnership's invested assets is to be paid to NAPICO. The annual management fee may not exceed 50 percent of the Partnership's annual net cash flow, subject to the payment of an annual minimum amount which shall be 1 percent of gross offering proceeds. The annual management fee shall be paid subject only to the annual minimum amount and the 50 percent limitation referred to above. The Partnership reimburses NAPICO for certain expenses. The reimbursement to NAPICO was $22,011 and $27,046 in 1999 and 1998, respectively, and is included in operating expenses. See Note 2 for other related party transactions. NOTE 4 - CONTINGENCIES NAPICO is a plaintiff in various lawsuits and also has been named as defendant in other lawsuits arising from transactions in the ordinary course of business. In the opinion of management and NAPICO, the claims are not expected to result in any material liability to the Partnership. NOTE 5 - INCOME TAXES No provision has been made for income taxes in the accompanying financial statements since such taxes, if any, are the liability of the individual partners. The major differences in tax and financial income/loss result from the use of different bases and depreciation methods for the properties held by the limited partnerships. Differences in tax and financial reporting also arise as financial losses are not recognized for financial reporting purposes when the investment balance has been reduced to zero. 10