As filed with the Securities and Exchange Commission on June 4, 1997
Registration No. 333-24111
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
PRE-EFFECTIVE AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 6
(Exact names of registrants as specified in governing instruments)
3158 Redhill Avenue, Suite 120
Costa Mesa, California 92626-3416
(714) 662-5565
(Address of principal executive offices)
DAVID N. SHAFER, ESQ.
WNC & ASSOCIATES, INC.
3158 Redhill Avenue, Suite 120
Costa Mesa, California 92626-3416
(714) 662-5565
(Name and address of agent for service)
Copy to:
PAUL G. DANNHAUSER, ESQ.
Derenthal & Dannhauser
455 Market Street, Suite 1600
San Francisco, California 94105
(415) 243-8070
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. x
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Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
Registration Item Location in Prospectus
1. Forepart of Registration Front Cover Page
Statement and Outside
Front Cover Page of
Prospectus
2. Inside Front and Outside Cover Pages
Back Cover Pages of
Prospectus
3. Summary Information, Summary of the Offering;
Risk Factors and Ratio Risk Factors
of Earnings to Fixed
Charges
4. Determination of Offering Inapplicable
Price
5. Dilution Inapplicable
6. Selling Security Holders None
7. Plan of Distribution Cover Pages; Terms of the Offering
and Plan of Distribution; Estimated
Use of Proceeds; Management
Compensation; Summary of the
Offering
8. Use of Proceeds Estimated Use of Proceeds;
Management Compensation; Investment
Objectives and Policies; Summary of
Certain Provisions of the
Partnership Agreement
9. Selected Financial Data Inapplicable
10. Management's Discussion Management's Discussion and
and Analysis of Financial Analysis of Financial
Condition and Results of Condition
Operations
11. General Information as to Cover Page; Summary of the
Registrants Offering; Management; Summary of
Certain Provisions of the
Partnership Agreement
12. Policy with Respect to Investment Objectives and
Certain Activities Policies; Reports
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13. Investment Policies of Investment Objectives and
Registrants Policies
14. Description of Real Estate Inapplicable
15. Operating Data Inapplicable
16. Tax Treatment of Registrants Federal Income Tax Considerations;
and Their Security Holders The Low Income Housing Credit
17. Market Price of and Inapplicable
Dividends on the Registrants'
Common Equity and
Related Stockholder Matters
18. Description of Registrants' Terms of the Offering and Plan of
Securities Distribution; Summary of Certain
Provisions of the Partnership
Agreement; Transferability of
Units; Who Should Invest; Risk
Factors
19. Legal Proceedings None
20. Security Ownership of Management; Financial Statements
Certain Beneficial Owners
and Management
21. Directors and Executive Management
Officers
22. Executive Compensation Management Compensation; Estimated
Use of Proceeds
23. Certain Relationships and Management; Conflicts of Interest;
Related Transactions Investment Objectives and Policies
24. Selection, Management Management; Investment Objectives
and Custody of Registrants' and Policies; Management Compensa-
Investments tion; Conflicts of Interest
25. Policies with Respect Conflicts of Interest; Investment
to Certain Transactions Objectives and Policies
26. Limitations of Liability Fiduciary Responsibility; Terms of
the Offering and Plan of
Distribution
27. Financial Statements and Financial Statements
28. Interests of Named Experts None
and Counsel
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29. Disclosure of Commission Fiduciary Responsibility; Terms of
Position on Indemnification the Offering and Plan of
for Securities Act Liabilities Distribution
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SUBJECT TO COMPLETION
DATED MAY __, 1997
WNC HOUSING TAX CREDIT FUND VI, L.P.,
SERIES 5 and SERIES 6
A Minimum of $1,400,000 in Units of Limited Partnership Interest ("Units")
(Issuable in Series)
$1,000 Per Unit; Minimum Investment - 5 Units ($5,000)
WNC Housing Tax Credit Fund VI, L.P., Series 5 and Series 6 ("Fund") will
use the proceeds from this offering to invest in other limited partnerships or
in limited liability companies ("Local Limited Partnerships") which own
apartment complexes built or rehabilitated for persons with low incomes
("Apartment Complexes"). Federal tax law encourages investments in qualifying
low-income properties by providing tax credits to investors in Apartment
Complexes ("Low Income Housing Credits"). The Fund will pass through to its
investors 99% of the Low Income Housing Credits to which it is entitled, and the
investors can apply them to reduce their own Federal income tax liabilities.
Investors may also receive tax losses that they can use to offset certain types
of taxable income which they may have from other sources. When the Apartment
Complexes are sold, the Fund will distribute any net proceeds which it receives.
Approximately 75.5% of the Fund's capital will be invested in Local Limited
Partnerships, and approximately 14.5% will be used to pay fees to, or expenses
of, WNC & Associates, Inc. ("Fund Manager") and its affiliated companies
("Affiliates").
An investment in the Fund will involve significant risks (see "Risk Factors"
on page 23), including the following:
- - The rules relating to Low Income Housing Credits are complicated and the
usage of Low Income Housing Credits can be limited.
- - The only material benefit from the investment may be Low Income Housing
Credits which may mean that a material portion of each Low Income Housing
Credit may represent a return of the money originally invested in the Fund
if there are insufficient funds from the sale of the Apartment Complexes to
return investor capital.
- - There are limits on the transferability of the Units, and it is unlikely
that a market for Units will develop. (See "Transferability of Units.")
- - All management decisions will be made solely by the Fund Manager.
- - The Apartment Complexes will be subject to mortgage indebtedness. If a
Local Limited Partnership does not make its mortgage payments, the lender
could foreclose on the Apartment Complex, which would result in a loss of
the Apartment Complex, a portion of the Low Income Housing Credits, and a
portion of the investor's investment.
- - To the extent the Fund does not raise much capital, there will be limited
diversity of Apartment Complexes.
- - The Fund Manager will receive significant benefits regardless of how well
the Fund performs.
Price to Selling Commissions and
Public (1) Dealer-Manager Fee (2) Proceeds to Fund (3)
- --------------------------------------------------------------------------------
Per Unit (4).....$ 1,000 $ 90 $ 910
Total Minimum (5).....1,400,000 126,000 1,274,000
Total Maximum (5)....50,000,000 4,500,000 45,500,000
(1) The Units are being offered, in two series ("Series"), by WNC Capital
Corporation ("Dealer- Manager"), which in turn is offering the Units through
other broker-dealers who are members of the National Association of Securities
Dealers, Inc. ("Soliciting Dealers"). The Units are being offered on a "best
efforts" basis, which means that no one is guaranteeing that any specified
amount of capital will be raised. (Footnotes continued on page 2)
The date of this Prospectus is __________, 1997
WNC Housing Tax Credit Fund VI, L.P., Series 5 and Series 6 are not mutual
funds or any other type of investment companies within the meaning of the
Investment Company Act of 1940 and are not subject to regulation thereunder.
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<PAGE>
(Footnotes from cover page)
(2) The Dealer-Manager will receive up to 9% of the purchase price of each Unit
sold and may then reallow to Soliciting Dealers as retail selling commissions up
to 7% of the purchase price of each Unit sold. For information concerning
compensation payable by the Fund for sales of Units and indemnification
arrangements, see "Terms of the Offering and Plan of Distribution." As is also
discussed in that section of this Prospectus, selling commissions may be reduced
for purchases of 100 Units ($100,000) or more by any "Purchaser" and "Designated
Investors" may purchase Units with a reduced or no selling commission. For the
purposes of this table, it has been assumed that the maximum selling commissions
will be paid.
(3) Before deducting expenses of the offering of Units ("Offering") in addition
to the retail selling commissions and Dealer-Manager Fee. As discussed below
under "Estimated Use of Proceeds," "Management Compensation" and "Terms of the
Offering and Plan of Distribution," these additional expenses, in an amount
which is estimated to range between $56,000 if only $1,400,000 is raised and
$2,000,000 if all of the Units are sold, will include accountable and
nonaccountable expense reimbursements.
(4) Regardless of the Series in which Units are purchased the purchase price is
payable in cash at the time of subscription except in the case of subscriptions
for 10 Units ($10,000) or more in any one Series, which may be paid 50% in cash
upon subscription and 50% by a promissory note payable, together with interest,
in a single installment on (i) January 31, 1999, if the investor subscribes
between the date hereof and June 30, 1998, (ii) June 30, 1999, if the investor
subscribes between July 1, 1998 and December 31, 1998, or (iii) the later of the
date of subscription or January 31, 2000, if the investor subscribes after
December 31, 1998.
(5) The Fund has registered with the Securities and Exchange Commission a total
of 50,000 Units for sale to the public. Units will be offered in two Series;
each Series will consist of 25,000 Units. The Offering of Series 5 commenced on
the date of this Prospectus; the Offering of Series 6 will commence on a date to
be identified in a supplement hereto. Unless a minimum of $1,400,000 in cash is
received by the Fund with respect to a Series within one year from the
commencement of such Series, no Units in such Series will be sold. Money
received from investors will be deposited in an escrow account with National
Bank of Southern California, and, if the required minimum amount of cash is not
received, will be returned within 30 days, together with interest. See "Terms of
the Offering and Plan of Distribution."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO
THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY
OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY FLOW FROM AN
INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
2
<PAGE>
TABLE OF CONTENTS
SUMMARY OF THE OFFERING..................................................... 10
Risk Factors............................................................ 10
Who Should Invest; Limitations on Use of Credits and Losses............. 11
Estimated Use of Proceeds............................................... 12
Management Compensation................................................. 12
Conflicts of Interest................................................... 14
Fiduciary Responsibility................................................ 15
Investment Objectives and Policies...................................... 15
Investment Protection Policies.......................................... 16
The Low Income Housing Tax Credit....................................... 17
Management.............................................................. 18
Prior Performance Summary............................................... 19
Federal Income Tax Considerations....................................... 19
Profits and Losses for Tax Purposes, Tax Credits and Cash Distributions. 19
Summary of Certain Provisions of the Partnership Agreement.............. 20
Transferability of Units................................................ 21
Terms of the Offering and Plan of Distribution.......................... 21
Glossary................................................................ 22
Financial Statements.................................................... 23
RISK FACTORS................................................................ 23
Risks Related to Tax Credits............................................ 23
Uncertainties as to Availability of Low Income Housing Credits......... 23
Possible Recapture of Low Income Housing Credits....................... 24
Limitations on Sales of Apartment Complexes............................ 24
Limitations on Use of Tax Credits...................................... 24
Availability and Recapture of Historic Tax Credits..................... 25
Investment Risks........................................................ 25
Risks of Government-Subsidized Housing Projects........................ 25
Keen Competition for Investments....................................... 27
Risks of Apartment Complexes Without Financing or Operating
Subsidies.......................................................... 27
Risks of Low-Income Housing............................................ 28
Risk of Unspecified Investments........................................ 28
Risks Associated with Use of Leverage.................................. 28
Risks of Limited Diversification....................................... 29
Lack of Fund Control; Reliance on Local General Partners............... 30
Net Worth of Local General Partners.................................... 30
Risks of Real Estate Ownership......................................... 30
Risks of Purchase of Properties Under Construction..................... 30
Risks of "Two-Tier" Investment Structure............................... 31
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Risks of Investments Prior to the Sale of Units........................ 31
Risks of Loss of Loans Made to Local Limited Partnerships.............. 31
Risks of Joint Investments............................................. 32
Possibility of Uninsured Losses........................................ 32
Possible Loss on Dissolution and Termination........................... 32
Other Tax Risks......................................................... 33
No Opinion of Counsel as to Certain Matters............................ 33
No Ruling as to Tax Status of the Local Limited Partnerships........... 34
Limitation on Losses from Passive Activities........................... 34
Applicability of At Risk Rules......................................... 35
Tax Liability on Sale of Apartment Complex............................. 35
Alternative Minimum Tax Liability...................................... 35
Possibility of Audit................................................... 36
Possibility of Challenge to Tax Allocations of the Series and the Local
Limited Partnerships............................................... 36
Possible Tax Liabilities in Later Years................................ 36
Possibility of Challenge to Tax Treatment of Certain Expenditures...... 37
Changes in Tax Law Which Might Affect the Value of Tax Credits......... 37
Possible Administrative or Judicial Interpretations of the Law......... 37
State Income Tax Risks................................................. 38
Fund-Related Risks...................................................... 38
Lack of Liquidity of Investment........................................ 38
Lack of Unitholder Control; Reliance on Fund Manager................... 38
Risks Related to Exercise of Unitholder Voting Rights...................38
Limitations on Fund Manager's Liability.................................39
Issuance of Units in Series.............................................39
Obligations for Capital Contributions...................................39
Risks of Unitholder Liability...........................................40
Absence of Regulation...................................................40
Possible Delays in Obtaining Financial Data.............................40
Lack of Operating History...............................................40
WHO SHOULD INVEST;
LIMITATIONS ON USE OF CREDITS AND LOSSES.....................................41
All Investors............................................................41
Individual Investors.....................................................42
Corporate and Other Entity Investors.....................................43
Minimum State Suitability Requirements...................................45
Alabama, Arizona, Arkansas, Indiana, Kansas, Kentucky, Michigan,
Mississippi, Missouri, Nebraska, New Hampshire, New Mexico, North
Carolina, North Dakota, Oklahoma, Oregon, Tennessee, Texas,
Vermont, Virginia and Wisconsin Requirements........................45
Alaska, Colorado, Connecticut, Delaware, District of Columbia, Florida,
Georgia, Hawaii, Idaho, Illinois, Louisiana, Maryland, Montana,
4
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Nevada, New Jersey, Rhode Island, South Carolina, Utah, West
Virginia and Wyoming................................................46
California and Washington Requirements..................................46
Iowa, Massachusetts, Minnesota and South Dakota Requirements............46
Maine Requirements......................................................46
Ohio Requirements.......................................................46
Pennsylvania Requirements...............................................46
ESTIMATED USE OF PROCEEDS....................................................47
Deferred Installments....................................................49
Business Development Plan...............................................50
Prepayments and Temporary Investments...................................51
Policies as to Pledges of Promissory Notes..............................52
MANAGEMENT COMPENSATION..................................................... 52
CONFLICTS OF INTEREST....................................................... 59
Receipt of Fees and Other Compensation by the Fund Manager and its
Affiliates............................................................. 59
Other Business Activities of the Fund Manager and its Affiliates........ 60
Competition with the Fund Manager and its Affiliates with Respect to the
Purchase or Ownership of Properties.................................... 60
Other Transactions with Developers, Local General Partners, Lenders and
Joint Venturers........................................................ 61
Representation in Tax Audit Proceedings................................. 62
Distribution of Units................................................... 62
Joint Investments....................................................... 62
Resolution of Conflicts of Interest..................................... 62
Lack of Separate Representation......................................... 63
Organizational Diagram.................................................. 63
FIDUCIARY RESPONSIBILITY.................................................... 64
INVESTMENT OBJECTIVES AND POLICIES.......................................... 66
Principal Investment Objectives......................................... 66
Investment Policies..................................................... 69
Investment Criteria.................................................... 69
Eligibility for Low Income Housing Credits............................. 71
Historic Tax Credits................................................... 71
Types of Properties.................................................... 72
Location of Properties................................................. 72
Number of Investments.................................................. 72
Timing of Investments.................................................. 73
Payment for Investments................................................ 74
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The Local General Partners.............................................. 75
Financial Condition and Experience of Local General Partners........... 75
Compensation of Local General Partners................................. 76
Withdrawal of Local General Partners................................... 76
Terms of the Local Limited Partnership Agreements....................... 76
Development Obligation................................................. 76
Operating Guarantees................................................... 77
Protection Against Reduction or Loss of Tax Credits.................... 77
Rights of Limited Partner.............................................. 78
Role of SLP Affiliate.................................................. 78
Interests in Profits, Losses and Distributions......................... 79
Joint Investments....................................................... 79
Use of Leverage......................................................... 80
Sale or Other Disposition of Investments................................ 81
Reserves................................................................ 83
Other Policies.......................................................... 83
THE LOW INCOME HOUSING CREDIT............................................... 84
Summary................................................................. 84
Maximum Amount of Credit................................................ 88
Qualified Properties.................................................... 90
Credits Subject to State Allocation..................................... 93
Utilization of the Low Income Housing Credit............................ 96
Recapture of Low Income Housing Credits................................. 97
State Low Income Housing Credits........................................100
OTHER GOVERNMENT ASSISTANCE PROGRAMS........................................100
RD Financing and Rural Rental Assistance Programs.......................100
HOME Program............................................................102
State and Local Bond Programs...........................................103
HUD Section 8 Rental Assistance Programs................................105
MANAGEMENT..................................................................106
The Fund Manager........................................................106
Statement of Purpose...................................................110
Syndicated Partnerships................................................111
Change in Management....................................................112
WNC Capital Corporation.................................................113
PRIOR PERFORMANCE SUMMARY...................................................114
Public Programs Sponsored...............................................115
Private Programs Sponsored..............................................118
Additional Information..................................................121
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FEDERAL INCOME TAX CONSIDERATIONS...........................................121
Introduction............................................................121
Summary.................................................................122
Opinion of Counsel.....................................................122
Classification as a Partnership........................................122
Tax Treatment of Unitholders...........................................122
Historic Tax Credits and Recapture.....................................123
Fund Allocations.......................................................123
Fund Deductions........................................................123
Sale of Apartment Complexes............................................124
Treatment of Debt......................................................124
Transfers of Units.....................................................124
Liquidation............................................................124
Section 754 Election...................................................124
Other Considerations...................................................124
Opinion of Counsel......................................................125
Classification as a Partnership.........................................127
Investment in Local Limited Partnerships................................129
Tax Treatment of Unitholders............................................130
Limitations on Losses and Credits from Passive Activities...............132
A. General Limitations................................................132
B. Exception for Low Income Housing Credits and Historic Tax Credits..134
1. Individuals...............................................134
2. Other Investors...........................................137
Historic Tax Credit.....................................................138
Historic Tax Credit Recapture...........................................139
General Business Tax Credit Limitations.................................140
Tax Basis for the Units.................................................141
Application of At Risk Limitations......................................142
Fund Allocations........................................................143
Allocations Prior to Admission..........................................146
Basis of Local Limited Partnerships in Their Apartment Complexes........147
Depreciation............................................................148
Deductibility of Fees...................................................149
A. Development Fees and Acquisition Fees..............................149
B. Management Fees....................................................149
Organization and Offering Expenses......................................150
Start-Up Expenditures...................................................150
Sales or Exchanges of Local Limited Partnership Property; Depreciation
Recapture..............................................................151
Tax Liabilities in Later Years..........................................152
Treatment of Mortgage Loans.............................................152
Sales or Exchanges of Units and Local Limited Partnership Interests;
Transfers by Gift or at Death..........................................154
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Dissolution and Liquidation of a Series or Local Limited Partnership....155
Elections...............................................................155
Transferability - Termination of a Series...............................155
Profit Motive...........................................................156
Other Important Tax Considerations......................................156
A. Tax Rates..........................................................157
B. Alternative Minimum Tax............................................159
C. Deduction of Investment Interest...................................160
Tax Returns and Tax Information.........................................161
A. Audit and Assessment Procedure.....................................161
B. Imposition of Penalties............................................162
Document and Information Return Penalties..........................162
Accuracy-Related and Fraud Penalties...............................162
Tax Shelter Registration................................................163
Changes in Tax Law......................................................164
STATE AND LOCAL TAX CONSIDERATIONS..........................................164
PROFITS AND LOSSES FOR TAX PURPOSES,
TAX CREDITS AND CASH DISTRIBUTIONS..........................................165
Cash Available for Distribution.........................................165
Sale or Refinancing Proceeds............................................166
Allocations of Profits and Losses for Tax Purposes and Tax Credits......167
Determination of Distributions and Allocations Among Unitholders........169
SUMMARY OF CERTAIN PROVISIONS OF THE
PARTNERSHIP AGREEMENT.......................................................170
Default by Unitholder in Payment of the Deferred Capital Contribution...170
Liability of Unitholders to Third Parties...............................171
Dissolution and Liquidation.............................................171
Removal of Fund Manager.................................................172
Voting Rights...........................................................172
Meetings................................................................173
Books and Records.......................................................173
TRANSFERABILITY OF UNITS....................................................174
Transfer of Units by or to California Residents.........................176
REPORTS.....................................................................176
TERMS OF THE OFFERING AND PLAN OF DISTRIBUTION..............................177
Issuance of Units in Series.............................................177
Underwriting Arrangements...............................................178
Volume Discounts........................................................179
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Purchases by Affiliates and Designated Investors........................180
How To Subscribe........................................................182
Escrow Arrangements.....................................................183
SALES MATERIAL..............................................................184
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION......................................................184
LEGAL MATTERS...............................................................186
EXPERTS.....................................................................186
FURTHER INFORMATION.........................................................186
GLOSSARY....................................................................187
Financial Statements.......................................................FS-i
Exhibit A - Prior Performance Tables....................................... A-1
Exhibit B - Partnership Agreement.......................................... B-1
Exhibit C - Investor Form.................................................. C-1
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SUMMARY OF THE OFFERING
THIS SUMMARY OUTLINES THE MAIN POINTS OF THE OFFERING BUT DOES NOT REPLACE A
FULL AND CAREFUL READING OF THIS PROSPECTUS AND IS QUALIFIED BY THE REMAINDER OF
THE PROSPECTUS. ALL PROSPECTIVE INVESTORS SHOULD READ THIS PROSPECTUS IN ITS
ENTIRETY. REFERENCE IS MADE TO THE "GLOSSARY" APPEARING AT THE END OF THE
PROSPECTUS FOR A DEFINITION OF TERMS.
Risk Factors
An investment in the Fund will involve certain risks. The "Risk Factors"
section of this Prospectus contains a detailed discussion of the most important
risks, organized into "Risks Related to Tax Credits" (the risks arising from the
laws applicable to Tax Credits as they apply to each Series' investments),
"Investment Risks" (the risks of the types of investments in real estate which
each Series will make), "Other Tax Risks" (the risks relating to tax laws other
than those applicable to Tax Credits as they apply to each Series and its
investments) and "Fund-Related Risks" (the risks related to investment in a
limited partnership and to the provisions of the agreement of limited
partnership ("Partnership Agreement") of the Fund). Please refer to those
sections of the Prospectus for a discussion of:
- Risks Related to Tax Credits:
* The laws and rules authorizing and administering the Low Income Housing
Credits are extremely complicated. The failure to comply with these rules for
the 15-year period after Low Income Housing Credits are first taken would result
in the loss of future Low Income Housing Credits and the fractional recapture of
Low Income Housing Credits already taken.
* Generally, individual investors are limited in their ability to use Tax
Credits. (See "Who Should Invest; Limitations on Use of Credits and Losses"
below.)
* The Local Limited Partnerships may be unable to sell the Apartment
Complexes; accordingly, there may be no cash to distribute and the only benefit
from the investment may be Tax Credits. If so, a material portion of the Tax
Credits may represent a return of the money originally invested in the Fund.
- Investment Risks:
* Except as set forth in a supplement to this Prospectus, Apartment
Complexes suitable for investment have not yet been located and each Series will
10
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be competing with other prospective purchasers for such properties. Unless more
than the minimum proceeds for a Series are raised, the Series' portfolio may be
subject to limited diversification.
* Each Apartment Complex will be subject to substantial mortgage
indebtedness. If a Local Limited Partnership failed to timely pay its mortgage
it could lose its Apartment Complex in foreclosure; foreclosure would result in
a loss of future Low Income Housing Credits (if the foreclosure occurred during
the first 10 years) and the Series' investment in the Apartment Complex, and in
a fractional recapture of previously taken Tax Credits (if the foreclosure
occurred during the first 15 years).
* As a limited partner or non-managing member of the Local Limited
Partnerships, each Series will have very limited rights with respect to
management of the Local Limited Partnerships, and will rely totally on the
general partners or managing members of the Local Limited Partnerships for
management of the Local Limited Partnerships.
- Other Tax Risks:
* The Internal Revenue Service ("IRS") may audit a Series or a Local Limited
Partnership and challenge the tax treatment of various tax items; if the IRS
challenge is successful, the amount of Tax Credits allocated to the investors
could be reduced.
- Fund-Related Risks:
* There is no trading market for the Units and it is unlikely that any
market will develop. Accordingly, investors may not be able to sell their Units
promptly and should consider their Units to be a long-term investment.
* Risks of reliance on the Fund Manager, which will exercise all management
rights of each Series without the participation or control of the investors.
Who Should Invest; Limitations on Use of Credits and Losses
Individuals should only invest in the Fund if they expect to have Federal
income tax liabilities against which the Tax Credits can be applied. In most
cases, the amount of Tax Credits that can be used by an individual in any one
year is limited to the tax liability due on the investor's last $25,000 of
taxable income. For example, an investor in the 36% Federal tax bracket may be
able to use up to a maximum annual amount of $9,000 in Tax Credits ($25,000 x
36% = $9,000). Individuals should also recognize the following:
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- Tax Credits cannot be used to reduce the Federal alternative minimum tax.
- Generally, the ability to use the passive tax losses that the Fund will
generate is limited to reducing passive taxable income (not wages, salaries,
dividends and interest).
An investment in Units cannot be made by an IRA, Keogh or other retirement
plan.
Closely held and personal service corporations are subject to other limits
on the use of Tax Credits. With regard to other corporations, generally there
are no special limitations on the ability to utilize Tax Credits or passive tax
losses, except that Tax Credits cannot be used to reduce corporate alternative
minimum tax and the general limitations on business tax credits are applicable.
The section of the Prospectus entitled "Who Should Invest; Limitations on
Use of Credits and Losses" contains a detailed explanation of these limitations
for each category of investor, including the rules applicable to investors other
than individuals (including closely-held and widely-held corporations and other
entities). Prospective investors are urged to read the portions of that section
applicable to them very carefully, together with the sections of the Prospectus
entitled "Federal Income Tax Considerations - Limitations on Losses and Credits
from Passive Activities," "- General Business Tax Credit Limitations," and "-
Other Important Tax Considerations - Alternative Minimum Tax."
Estimated Use of Proceeds
Of the capital raised by the Fund, approximately 75.5% will actually be
invested in Local Limited Partnerships, 3% will be held in working capital
Reserves (i.e., amounts set aside for contingencies related to the investments
in Apartment Complexes and to pay administrative expenses, to the extent other
funds are not available to do so), and the rest will go to pay fees and expenses
to the Fund Manager, its Affiliates and others. See "Estimated Use of Proceeds"
for a precise breakdown of the Fund's estimate as to the use of the capital it
raises.
Management Compensation
The Fund Manager will manage the business of each Series, and the Fund will
pay the Fund Manager and its Affiliates compensation for various management
services. The section of this Prospectus entitled "Management Compensation"
details the exact terms of each item of compensation payable to these companies
by the Fund, of which the following are the most significant:
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- The Dealer-Manager will receive a Dealer-Manager Fee of up to 2% of the
capital raised by the Fund and selling commissions of up to 7% of the capital
raised, substantially all of which is expected to be reallowed to non-affiliated
Soliciting Dealers.
- Of the capital raised by the Fund, up to 7% will be paid to the Fund
Manager as Acquisition Fees. The Dealer-Manager will receive a 1% Nonaccountable
Expense Reimbursement and the Fund Manager and its Affiliates will be reimbursed
for the actual amount of other "Organizational and Offering Expenses" (i.e.,
expenses in connection with the formation of each Series and the sale of the
Units) and any "Acquisition Expenses" (i.e., expenses related to the selection
and acquisition of Local Limited Partnership Interests) incurred by them on
behalf of the Fund.
- The Fund Manager will be entitled to receive from each Series an Asset
Management Fee each year in an amount not to exceed 0.2% of the "Invested
Assets" of the Fund in government-subsidized Local Limited Partnerships (i.e.,
the sum of the equity invested by the Series in such Local Limited Partnerships
plus its pro rata share of the mortgage debt encumbering their Apartment
Complexes).
- The Fund Manager will receive from each Series 1% of the Tax Credits and of
any cash distributions from on-going operations made by the Series. After the
investors in the Series have received distributions of "Sale or Refinancing
Proceeds" (i.e., generally, the net proceeds that the Series receives from the
liquidation of its investments, after payment of related expenses) equal to the
purchase price of their Units and an amount equal to the portion of the "Return
on Investment" not previously received, the Fund Manager may receive a
Subordinated Disposition Fee equal to 1% of the sales price of Apartment
Complexes and the Fund Manager will receive 10% of any additional Sale or
Refinancing Proceeds. The Return on Investment (any cash portion of which is
payable only after all current and accrued Series' fees and expenses) is paid
from both cash distributions and Tax Credits and is equal to 12% of "unreturned
capital" (i.e., the capital contribution originally paid for a Unit, less
distributions of Sale or Refinancing Proceeds) each year through 2008 and 6% of
unreturned capital each year thereafter. The amount of the Return on Investment
for Series 6 may be different and, if so, will be identified in a supplement to
this Prospectus prior to commencement of the offering of Units in such Series.
There are a number of other, smaller items of compensation and expense
reimbursement that the Fund Manager and its Affiliates may receive during the
operations of the Fund. See "Management Compensation."
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Conflicts of Interest
The Fund Manager and its Affiliates will have conflicts of interest in the
organization and management of the Fund. The "Conflicts of Interest" section of
the Prospectus contains a discussion of the most important conflicts. Please
refer to that section of the Prospectus for a discussion of:
* The compensation to be paid to the Fund Manager and its Affiliates is not
the result of arm's-length negotiations, and will be determined by the manner in
which Series' investments are purchased, managed and sold. The result of this
conflict could be that a Series may make investments which are less desirable to
the investors but more desirable to the Fund Manager and its Affiliates, or that
a Series may retain an investment, thereby incurring management fees to the Fund
Manager at a time when a sale of the investment could generate distributions to
its investors.
* Conflicts may arise in that the Fund Manager and its Affiliates must
allocate their time and energies between the activities of each Series and the
other activities of the Fund Manager and its Affiliates. Although not
anticipated, this could result in the inability of the Fund Manager and its
Affiliates to fully discharge their duties to each Series.
* The Fund Manager and its Affiliates have interests that are inconsistent
with those of the investors in the Fund ("Unitholders") in some respects and are
permitted to engage in activities that may be in conflict with those of the
Fund, without providing the benefits of such activities to the Fund. This could
result in the purchase by an Affiliate of an investment which is otherwise
suitable for purchase by a Series.
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Fiduciary Responsibility
The Fund Manager will act as a fiduciary to each Series. However, as
discussed in the section of this Prospectus entitled "Fiduciary Responsibility,"
each Series will be obligated to provide certain indemnities to the Fund Manager
and certain Affiliates thereof, provided the actions of the person to be
indemnified did not constitute negligence or misconduct and were the result of a
course of conduct which the Fund Manager, in good faith, determined was in the
best interests of the Series. As a result of these and other provisions in the
Partnership Agreement, a Unitholder may have a more limited right of action than
he would otherwise have had in the absence of such provisions.
Investment Objectives and Policies
The Fund's principal investment objective is to acquire interests in
Apartment Complexes which will entitle investors to Low Income Housing Credits
over a period of 10 to 12 years. All of the Apartment Complexes will be expected
to qualify for Low Income Housing Credits. In certain instances, some Apartment
Complexes may qualify for Historic Tax Credits in addition to, or instead of,
Low Income Housing Credits. See "Federal Income Tax Considerations - Historic
Tax Credit" for a discussion of Historic Tax Credits. The Fund will also try to
invest in Apartment Complexes that will maintain their value, so as to permit
the return of the Fund's invested capital at the end of the Fund.
Each Series will invest in Local Limited Partnerships owning Apartment
Complexes that have been, or are to be, built or rehabilitated by developers
that have no affiliation with the Fund Manager or its Affiliates. Generally, the
developer of the Apartment Complex or an affiliated company will be the general
partner (the "Local General Partner") of the Local Limited Partnership. A Series
will make its investment by contributing capital to the Local Limited
Partnership and becoming the majority (usually 99%) limited partner or
non-managing member in the Local Limited Partnership. An Affiliate of the Fund
Manager (the "SLP Affiliate") may also become a limited partner or non-managing
member in the Local Limited Partnership. Each Series will seek to invest in a
geographically-diversified portfolio of properties located in small cities and
suburban communities or in some cases in larger urban areas with a demonstrated
demand for affordable rental housing. The Fund Manager anticipates that certain
of the properties will be rented to senior citizens only, and the balance of the
properties will be rented to senior citizens, families and others, in all
instances only to those satisfying the income limitations. None of the Apartment
Complexes have been selected yet.
Usually a Local Limited Partnership will borrow between 60% and 90% of the
acquisition and development cost of the Apartment Complex. Most of the Local
Limited Partnership's funds will go to pay construction or rehabilitation costs,
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part will be used to establish working capital reserves and part will go to
pay development fees (that is, profits) to the Local General Partner, unless the
Local General Partner is the Fund Manager or one of its Affiliates, in which
event no such development fees will be paid. Many of the Local Limited
Partnerships will benefit from traditional government subsidy programs such as
mortgage financing or rental assistance, but some may not. Those that do not
will depend entirely on their rental income to cover their expenses of
operation, including their mortgage payments. If a Local Limited Partnership
cannot make its mortgage payments, the lender may foreclose, which would cause a
"recapture" of a portion of the Tax Credits generated by its Apartment Complex.
It is hard to tell now exactly when or whether a Series will be able to
realize any sale proceeds from an Apartment Complex. The "recapture" rules for
Low Income Housing Credits effectively prohibit the sale of an Apartment Complex
before the end of the fifteenth year after Low Income Housing Credits begin to
be taken (even though Low Income Housing Credits only last for 10 years).
Government subsidy programs also limit sale or refinancing opportunities, and
sometimes buildings like the Apartment Complexes are hard to sell. The Fund
Manager will try to liquidate each Series' investments after the fifteenth year
of the Series' term, but when that liquidation will take place (and for how
much) is impossible to predict.
See "Investment Objectives and Policies."
Investment Protection Policies
Each Series will try to protect its and its Unitholders' investments in a
number of ways. See "Investment Objectives and Policies" for a further
discussion of these policies.
Staged Pay-In. Each Series will invest its capital in each Local Limited
Partnership in stages over a period of from one to two years, with each capital
payment due when certain conditions regarding construction or rental of
apartments to qualified tenants are satisfied. In this way the Series will try
to put as little capital at risk as possible in the stages of an Apartment
Complex's life cycle that are most uncertain.
Development Obligations. In the case of a new construction or rehabilitation
property, the Local General Partners will agree to complete the Apartment
Complex in a timely manner, and to provide all funds needed through completion
of construction or rehabilitation, after applying mortgage loan proceeds and the
Series' capital contribution.
Tax Credit "Adjuster". In the event the Tax Credits actually allocated to a
Series are less than the agreed to amount, the Local Limited Partnership
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Agreement will provide for a reduction in the Series' capital contribution
to the Local Limited Partnership (to the extent the entire contribution has not
been paid) or a payment by the Local General Partner to the Series.
Operating Deficit Guarantees. Each Local Limited Partnership typically will
impose obligations on the Local General Partners to provide funds to defray any
operating deficits for a minimum of four years following completion of
construction or rehabilitation.
Voting Rights. The Series, as the sole or principal limited partner or non-
managing member of each Local Limited Partnership, will have the right to
approve or disapprove the sale of the Apartment Complexes.
Repurchase of Local Limited Partnership Interest. Generally, the Local
General Partners will be obligated to repurchase the Series' Local Limited
Partnership Interest if the Local Limited Partnership fails to: (i) receive an
allocation of Tax Credits in the year in which the Apartment Complex is placed
in service; (ii) cause the Apartment Complex to be placed in service in a timely
manner; (iii) obtain permanent mortgage loan financing; or (iv) remain eligible
for Tax Credits during the period when the Series is required to make its
capital contributions.
Notwithstanding the preceding there can be no guarantee that these policies
will protect the investment of a Series or its Unitholders. Most of these
policies are dependent on the financial strength of the Local General Partners
and the liquidity of their net worth. See "Risk Factors - Investment Risks - Net
Worth of Local General Partners." If any Local General Partner fails to meet his
obligations, the remedy of a Series might be limited to removing the Local
General Partner as general partner of the Local Limited Partnership.
The Low Income Housing Tax Credit
When the United States Congress passed the Tax Reform Act of 1986, it
created Section 42 of the Federal tax code. Section 42 awards valuable Low
Income Housing Credits to investors in low-income housing. Congress mandated the
use of such Tax Credits to attract private capital to help build and preserve
the United States' supply of privately-owned, affordable rental housing.
Low Income Housing Credits represent the continuation of the Federal policy
of legislating tax benefits for investors in affordable housing that spans more
than two decades. Under Code Section 42, Congress has given taxpayers an
alternative to paying Federal income taxes: taxpayers can invest in low-income
housing to receive Tax Credits which will reduce their taxes each year for 10 to
12 years. These Tax Credits have become an integral element of the nation's
affordable housing programs.
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The Federal tax code authorizes investors in partnerships such as the Series
to receive the benefit of Low Income Housing Credits when they invest in
low-income housing in order to encourage investments of the type the Series will
make. The laws authorizing Low Income Housing Credits and the rules the IRS has
adopted to administer these Tax Credits are extremely complicated.
The most important of the rules define the types of Apartment Complexes that
qualify for Low Income Housing Credits, the manner in which the Low Income
Housing Credits are to be allocated among Apartment Complexes whose owners apply
for them, the kinds of tenants that must live in the Apartment Complexes, the
rents that can be charged to those tenants and the costs of construction or
rehabilitation of the Apartment Complexes that can generate Low Income Housing
Credits. These rules are described in the section of this Prospectus entitled
"The Low Income Housing Credit." Each Series will have to follow all of these
rules for its investors to get the Low Income Housing Credits. Management of the
Fund is experienced in working with these rules, and will do their best to
follow them. However, no one is guaranteeing that it will be possible to comply
with all of the rules.
Other rules govern the ability of taxpayers to claim Tax Credits. For
example, individuals who have no net passive income can only use Tax Credits to
shelter up to the equivalent of $25,000 of active or portfolio income with
deductions from rental real estate activities in which they actively participate
and with Tax Credits. See "Summary of the Offering - Who Should Invest;
Limitations on Use of Credits and Losses" above and "Federal Income Tax
Considerations" below. The rules for the Low Income Housing Credits include a
concept called "recapture" that applies when the rules are not adhered to during
the entire 15-year period after such tax credits start to be taken. "Recapture"
means that an investor who previously took Low Income Housing Credits has to pay
additional taxes equal to a portion of the Low Income Housing Credits generated
by the non-complying Apartment Complex. Therefore the failure of the owner of an
Apartment Complex to follow the rules (which may be beyond the control of the
Fund Manager) could result both in a loss of future Low Income Housing Credits
and in a "recapture" of some of the Low Income Housing Credits already taken.
See "The Low Income Housing Credit."
Management
The Fund Manager is WNC & Associates, Inc. The Fund Manager's address is
3158 Redhill Avenue, Suite 120, Costa Mesa, California 92626 (telephone: (714)
662-5565). See "Management" for a description of the people associated with the
Fund Manager who will be responsible for the management of the business of each
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Series. The financial statements of the Fund Manager are contained in this
Prospectus or in a supplement hereto under "Financial Statements."
Prior Performance Summary
Since its formation, the Fund Manager and its Affiliates have raised equity
from more than 11,800 investors to acquire interests in more than 500 properties
consisting of more than 19,000 apartment units located in 37 states and one
territory, and representing more than $826,000,000 in aggregate acquisition
costs. The sections of this Prospectus entitled "Prior Performance Summary" and
"Management" contain discussions as of December 31, 1996 of all of the prior
real estate investment programs in which the Fund Manager and its Affiliates
have been involved. The Prior Performance Tables included as Exhibit A to this
Prospectus contain certain statistical data regarding the performance of the
more recent of these prior investment programs.
Federal Income Tax Considerations
The section of this Prospectus entitled "Federal Income Tax Considerations"
contains a discussion of numerous Federal income tax issues pertinent to the
Fund. It also contains a description of the legal opinions as to Federal income
tax matters that the Fund will receive.
Profits and Losses for Tax Purposes, Tax Credits and Cash Distributions
Under the Partnership Agreement, 99% of a Series' Tax Credits will be
allocated to its Unitholders and 1% to the Fund Manager. A Series' Cash
Available for Distribution (which generally means the difference between the
Series' cash receipts from the on-going operations of its investments and the
related expenses), if any, will be distributable 99% to its Unitholders and 1%
to the Fund Manager. A Series' Sale or Refinancing Proceeds (which generally
means the net proceeds that the Series receives from the liquidation of its
investments, after the payment of the related expenses) will be distributable
entirely to its Unitholders until they have received a return of their
investment in the Series and their Return on Investment, to the extent not
already provided by Tax Credits and any distributions of Cash Available for
Distribution; the balance will be used to return to the Fund Manager its
investment in the Series and to pay the Subordinated Disposition Fees to the
Fund Manager or its Affiliate, and then distributed 90% to the Unitholders and
10% to the Fund Manager.
Investors should note that the use of the term "Return on Investment" is not
intended to suggest that there is any guarantee or assurance that this return
will be provided to investors. It means only that if proceeds are available
after payment of all current and accrued fees and expenses, they will be
distributed to Unitholders
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before distributions to the Fund Manager. All distributions from operations or
Sale or Refinancing Proceeds are contingent upon the results of a Series'
investments and cannot be assured.
The section of this Prospectus entitled "Profits and Losses for Tax
Purposes, Tax Credits and Cash Distributions" contains further detail regarding
the provisions of the Partnership Agreement relating to tax allocation and
distribution policies. For a description of the expected allocation and
distribution policies of the Local Limited Partnerships, see "Investment
Objectives and Policies - Terms of the Local Limited Partnership Agreements."
Summary of Certain Provisions of the Partnership Agreement
The Partnership Agreement that will govern the relationship between the
Unitholders and the Fund Manager in a Series is a complex legal document, the
full text of which is included as Exhibit B to this Prospectus. Portions of the
Partnership Agreement are summarized in the section of this Prospectus entitled
"Summary of Certain Provisions of the Partnership Agreement." Certain other
portions of the Partnership Agreement are also summarized under "Transferability
of Units" and "Reports."
Investors should particularly be aware of the following terms of the
Partnership Agreement:
- The Partnership Agreement gives investors owning more than 50% of the
Units in a Series the right to take the following actions with respect to the
Series:
* amend the Partnership Agreement
* remove the Fund Manager with or without cause and elect its
replacement,
* approve or disapprove the sale of all or substantially all of the
assets of the Series other than in connection with a dissolution of
the Series, and
* approve the dissolution of the Series.
In order to bring a matter to a vote of investors in a Series, investors in the
Series owning at least 10% of the Units issued by the Series must request it.
Investors who vote against any such actions will nonetheless be bound by
decisions made by the majority-in-interest of their fellow investors.
- Each Series will be organized and treated as a separate California limited
partnership.
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- The Fund Manager believes that a "Roll-Up" of a Series would be
inappropriate due to adverse tax consequences which could result therefrom.
Accordingly, and as required by the law of certain states, the Partnership
Agreement imposes strict limitations on the ability of a Series to participate
in a "Roll-Up." A "Roll-Up" is a transaction involving the acquisition, merger,
conversion or consolidation of a Series and the issuance of securities of
another entity (the "Roll-Up Entity"). Section 10.3 of the Partnership
Agreement, among other things, provides that a Series may not participate in a
Roll-Up if the Unitholders' voting rights or access to records with respect to
the Roll-Up Entity would be less than their voting rights or access to records
with respect to the Series. Section 10.3 also provides that Unitholders who
dissent with respect to the Roll-Up must have the choice of (i) accepting the
securities of the Roll-Up Entity, or (ii) either remaining as Unitholders, or
receiving cash in an amount equal to their pro rata share of the appraised value
of the net assets of the Series.
- No investor will have any control over the business of his Series or any
right to act therefor. The rights of the investors to affect the policies or
conduct of business of their Series will be limited to the right to vote on the
matters described above in this "Summary of Certain Provisions of the
Partnership Agreement."
- The books and records of each Series must be kept at the principal office
of each Series (3158 Redhill Avenue, Suite 120, Costa Mesa, California) and be
available for examination by any investor or his representative at any and all
reasonable times. Any investor in a Series or his representative is entitled to
receive a copy of the list of names and addresses of all investors in the
Series.
Transferability of Units
The Units in a Series will be transferable, provided that the transfer would
not result in adverse tax consequences to the Series. In no event may a transfer
be made to a foreign person or a tax-exempt entity. There will be no market for
the Units, and no one can say whether an investor who wishes to sell his Units
will be able to find someone to purchase them or whether the price will be
acceptable to the seller.
Terms of the Offering and Plan of Distribution
The Fund is offering its Units in two Series on an all-or-none minimum,
best-efforts maximum basis, which means that no one is guaranteeing that any
specified amount of capital will be raised, but that no Units in a Series will
be sold unless at least $1,400,000 in such Series is raised from the sale of
Units. As much as $25,000,000 in Units may be sold by each Series. Each Series
will consist of a maximum of 25,000 Units. The Fund Manager will decide in its
discretion when Series 5 will be terminated and Series 6 will begin. See "Terms
of the Offering and
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Plan of Distribution." The Capital Contributions from the different Series will
be invested in different Local Limited Partnership Interests and, therefore,
Unitholders in different Series might receive different yields on their
investments and be subject to different investment risks.
When an investor subscribes to buy Units in a Series, his money will be
placed in an escrow account until $1,400,000 in cash from such Series is raised
by the Series (which could take up to one year). During that time, interest will
be earned at savings account rates. The interest will be paid to the investor
when the closing which admits him to the Series as a Unitholder takes place.
After $1,400,000 in cash is raised in a Series, the Series will hold
closings and admit subscribers to such Series as Unitholders every month or so
until the Fund Manager decides to conclude the Series. The last Series will
terminate not later than two years from the date of this Prospectus (subject to
requalification of the Units after one year in certain states).
The minimum purchase in a Series is five Units ($5,000), except that
employees of the Fund Manager and its Affiliates, and/or investors in real
estate syndications previously sponsored by the Fund Manager may purchase a
minimum of two Units ($2,000). After an investor has purchased the required
minimum number of Units in either Series, he may make investments in increments
of $1,000 in the same or subsequent Series. Although the purchase price of
$1,000 per Unit must generally be paid in full in cash at the time an investor
subscribes for his Units, an investor who purchases 10 Units ($10,000) or more
in any one Series may elect to use an installment payment method whereunder his
subscription need be accompanied by a check for only $500 per Unit, with the
$500 balance of the purchase price of each Unit payable in accordance with the
terms of a Promissory Note in a single installment on (i) January 31, 1999, if
the investor subscribes between the date hereof and June 30, 1998, (ii) June 30,
1999, if the investor subscribes between July 1, 1998 and December 31, 1998, or
(iii) the later of the date of subscription or January 31, 2000, if the investor
subscribes after December 31, 1998. Each Promissory Note will be a full recourse
obligation of the investor and will bear interest at a fixed rate equal to the
one-year Treasury Bill rate, such rate to be determined quarterly.
See "Terms of the Offering and Plan of Distribution."
Glossary
See the section of this Prospectus entitled "Glossary" and Article 1 of the
Partnership Agreement for definitions of capitalized terms used in this
Prospectus.
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Financial Statements
The financial statements of the Fund Manager and the balance sheet of Series
5 are included herein under "Financial Statements." Inasmuch as Series 6
currently has no assets or liabilities and has had no operations, the Fund
Manager is of the opinion that the balance sheet of Series 6 is not material to
investors in Series 5. Accordingly, that balance sheet is not included in this
Prospectus. The balance sheet of Series 6 will be included in the supplement to
this Prospectus which discloses the commencement of the offering of Series 6.
RISK FACTORS
The purchase of the Units offered hereby involves a number of significant
risk factors. Some of the factors that prospective purchasers should consider
are:
Risks Related to Tax Credits
THIS SECTION AND THE SECTION ENTITLED "THE LOW INCOME HOUSING CREDIT"
SHOULD BE READ CAREFULLY AND UNDERSTOOD BY EACH INVESTOR TO DETERMINE WHETHER AN
INVESTMENT IN THE FUND IS SUITABLE FOR HIM.
Uncertainties as to Availability of Low Income Housing Credits. Each Series
intends to claim Low Income Housing Credits for the Low Income Units (those
residential units intended for rental to low-income tenants) in each Apartment
Complex in which it acquires an interest. The Apartment Complex, however, may
not be eligible for such credits, or the available credits may be substantially
reduced with respect to the Apartment Complex, if any of a number of
requirements set forth in Code Section 42 is not met. See "The Low Income
Housing Credit."
At the time a Series acquires a Local Limited Partnership Interest, it is
possible that the Apartment Complex will not yet have received an allocation of
Credit Authority (the amount of Low Income Housing Credits which a state may
allocate in a given year) from the state in which the Apartment Complex is
located or have rented its residential units so as to ascertain whether it will
meet the other requirements of Code Section 42, in which case the Series will be
relying only upon guarantees and representations of the Local General Partners
and opinions of counsel in these respects.
Even if an Apartment Complex is eligible for Low Income Housing Credits,
there are certain factual determinations to be made in connection with the
calculation of the amount of credits which are not and will not be the subject
of an opinion of counsel and which could be challenged by the IRS. See "The Low
Income Housing Credit." Any such challenge, if successful, could result in a
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decrease in the amount and/or a delay in the timing of the Low Income
Housing Credits from those which would otherwise be anticipated. Further, a
delay in the completion of an Apartment Complex may deprive the Unitholders of
anticipated Low Income Housing Credits.
Possible Recapture of Low Income Housing Credits. Any Low Income Housing
Credits allocated to a Unitholder with respect to an Apartment Complex are
subject to recapture (with interest) to the extent that the Low Income Units
therein or any portion thereof cease to satisfy the requirements of Code Section
42 and to otherwise qualify for Low Income Housing Credits at any time during
the 15-year Initial Compliance Period. Recapture (with interest) of Low Income
Housing Credits may also occur if a Local Limited Partnership disposes of its
interest in an Apartment Complex (including a disposition as a result of
foreclosure of a mortgage loan encumbering the Apartment Complex), or if the
Series disposes of its interest in a Local Limited Partnership.
See "The Low Income Housing Credit - Recapture of Low Income Housing
Credits." As discussed therein, there can be no assurance that events will not
occur resulting in the recapture of all or a portion of a Series' Low Income
Housing Credits.
Limitations on Sales of Apartment Complexes. Any Apartment Complex receiving
an allocation of Credit Authority must execute an Extended Low Income Housing
Commitment with the state allocating the Credit Authority. The Extended Low
Income Housing Commitment will require that the Low Income Units within the
Apartment Complex be rented as low-income housing for the Low Income Use Period.
Accordingly, on any sale of an Apartment Complex during the Low Income Use
Period, the purchaser would have to agree to continue to the low-income use of
the Apartment Complex, thereby reducing the potential market, and possibly the
sales price, for the property. Furthermore, the sale of an Apartment Complex may
be subject to other restrictions. See "Risks of Government- Subsidized Housing
Projects" below in this section and "Investment Objectives and Policies."
Accordingly, there can be no assurance that a Local Limited Partnership will be
able to sell its Apartment Complex, or, if it does so, that any significant
amount of Sale or Refinancing Proceeds will be distributed to the Unitholders.
As a result, a material portion of the Low Income Housing Credits may represent
a return of the money originally invested in the Series.
Limitations on Use of Tax Credits. The ability of an individual or other
non-corporate Unitholder to reduce his tax liability attributable to income from
nonpassive sources is subject to certain ordering rules and overall limitations
on the amount of Tax Credits which may be utilized in any year. Certain
corporate Unitholders are subject to similar and other limitations. See the
material under the captions "The Low Income Housing Credit" and "Federal Income
Tax Considerations - Limitations on Losses and Credits from Passive Activities."
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Further, any portion of a Tax Credit which is allowed to a Unitholder pursuant
to the passive activity rules is aggregated with all of his other business
credits and is then subject to the general limitation on all business credits.
Such limitation provides that credits can be used to offset a taxpayer's tax
liability in any year only to the extent of $25,000 plus 75% of his tax
liability in excess of $25,000, except that business credits may not be used to
offset any alternative minimum tax. See "Federal Income Tax Considerations -
General Business Tax Credit Limitations" and "- Other Important Tax
Considerations - Alternative Minimum Tax."
Availability and Recapture of Historic Tax Credits. In order for an
Apartment Complex to be eligible for Historic Tax Credits, it must meet certain
statutory requirements and be certified by the Department of the Interior. There
can be no assurance that certification will be forthcoming. Even if an Apartment
Complex receives certification, the IRS may challenge the inclusion of certain
amounts in the calculation of qualified expenditures, thereby reducing the
amount of the available Historic Tax Credits. See "Federal Income Tax
Considerations - Historic Tax Credit."
If Historic Tax Credits have been claimed with respect to an Apartment
Complex, the sale of the Apartment Complex by the Local Limited Partnership
during the first five years of operation (or the sale by the Series of the Local
Limited Partnership Interest or the sale by a Unitholder of his Units) will
result in recapture of the previously claimed Historic Tax Credits. See "Federal
Income Tax Considerations - Historic Tax Credit Recapture."
Investment Risks
Risks of Government-Subsidized Housing Projects. The Fund Manager expects
that each Series will invest a substantial portion of its Net Proceeds in Local
Limited Partnerships which own Apartment Complexes which, in addition to Tax
Credits, receive other government financing or operating subsidies. See
"Investment Objectives and Policies - Investment Policies." The following are
risks associated with various programs that provide some such subsidies:
- Difficulties in Obtaining Tenants for the Apartment Complexes. Governmental
regulations with regard to the eligibility of tenants for such Apartment
Complexes may make it more difficult to rent the apartments in the Apartment
Complexes.
- Difficulties in Obtaining Rent Increases. In many cases rents in such
Apartment Complexes can only be increased with the prior approval of the
governmental agency which is providing the subsidies.
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- Limitations on Cash Distributions. Applicable statutes and regulations
generally would limit the amount of cash that may be distributed to owners of
such Apartment Complexes to amounts that are less than the amounts that could be
earned by the owners of conventional apartment properties that receive no
government subsidies, and thus limit the ability of the Local Limited
Partnerships to make cash distributions.
- Limitations on Sale or Refinancing of the Apartment Complexes. Regulations
of applicable governmental agencies and the terms of the agreements between the
agencies and the Local Limited Partnerships may limit the ability of a Local
Limited Partnership to sell its Apartment Complex or refinance its mortgage loan
without the prior approval of the agencies, which approval may be withheld in
the discretion of the agency. These approvals, even if given, may be subject to
various conditions. In addition, any sale, refinancing or prepayment may result
in the assessment of a prepayment penalty.
- Limitations on Transfers of Interests in Local Limited Partnerships.
Regulations relating to apartment complexes receiving some types of government
subsidies require that the governmental agency approve the sale of more than 50%
of the interests in any limited partnership or limited liability company owning
such a project, which approval may be withheld in the discretion of the agency.
Accordingly, the transfer of a Local Limited Partnership Interest by a Series
should be subject to prior governmental approval.
- Limitations on Removal of Local General Partners. Regulations relating to
apartment complexes receiving some types of government subsidies may prohibit
the removal of a Local General Partner except "for cause," such as the violation
of the rules of the government agency. In addition, government approval may be
required in connection with the admission of a successor local general partner
or manager in such a limited partnership or limited liability company if and
when required upon the death or other disability of a Local General Partner.
- Limitations on Subsidy Payments. Certain government subsidy payments may be
fixed and subject to annual appropriations. Should the rental revenues of the
apartment complex, when combined with the maximum committed subsidy, be
insufficient to meet property obligations, including debt service, or should
Congress or the state legislature, as the case may be, fail to appropriate the
necessary subsidy, unless a "workout" arrangement could be negotiated with the
mortgage lender, the mortgage loan on the property could be foreclosed.
- Possible Changes in Applicable Regulations. There can be no assurance that
legislation may not be enacted in the future, as it has been in the past, which
purports to substantially and adversely revise provisions of outstanding
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mortgage loans made or insured by RD, HUD or other government agencies,
including mortgage loans to the Local Limited Partnerships.
See "Other Government Assistance Programs."
Keen Competition for Investments. Each Series will compete with many other
real estate investment partnerships, limited liability companies and other
entities engaged in real estate investment activities, possibly including the
other Series and other Affiliates of the Fund Manager (see "Conflicts of
Interest"), for Apartment Complexes which are expected to generate for their
owners Tax Credits.
The availability of such investments is limited in that there is a maximum
Credit Authority for each state (see "The Low Income Housing Credit - Credits
Subject to State Allocation") and as a result of other factors, and competition
for desirable investments of such type may be particularly keen, with resulting
increases in the purchase prices paid for such investments. In this connection,
it should be noted that a state must allocate its Credit Authority by giving
preference to applicants with the lowest percentage of costs attributable to
intermediaries, such as syndicators, and must also give preference to applicants
serving the lowest income tenants and applicants obligated to serve qualified
tenants for the longest periods. Further, an allocating agency must use good
faith efforts to allocate no more Credit Authority to an applicant than is
necessary for its project's financial feasibility and viability, and may reduce
the applicable percentage and/or the qualified basis (and thus the amount of the
Low Income Housing Credits) below the amounts for which the applicant would
otherwise be eligible, if the agency believes that the full amounts are not
necessary in light of other sources of assistance that are available to the
applicant.
In the recent past, heightened demand for a smaller supply of Local Limited
Partnership Interests has increased the purchase prices thereof. Further
increases in the purchase prices of Local Limited Partnership Interests would
reduce the return to investors and hamper the Fund's ability to satisfy its
principal investment objective.
Risks of Apartment Complexes Without Financing or Operating Subsidies. A
Series may invest a portion of its Net Proceeds in Local Limited Partnerships
which own Apartment Complexes which do not receive government financing or
operating subsidies. Those Apartment Complexes will not have the benefit of
below-market- interest-rate financing or operating subsidies which often are
important to the feasibility of low-income housing projects, and will have to
rely solely on rents to pay expenses. However, in order for an Apartment Complex
to be eligible for Low Income Housing Credits, the Low Income Units in the
Apartment Complex must meet the requirements of Code Section 42, which include a
restriction on the rent which may be charged to tenants. See "The Low Income
Housing Credit."
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Accordingly, if operating expenses of a Local Limited Partnership increase
(which is likely to occur, especially if the Apartment Complex is financed at a
variable interest rate), there can be no assurance that the Local Limited
Partnership would be able to increase rents in an amount sufficient to offset
such increased operating expenses without jeopardizing its eligibility for Low
Income Housing Credits, or otherwise.
Risks of Low-Income Housing. There are factors particular to low-income
housing affecting the need for repairs and improvements, and the Local Limited
Partnerships in which a Series invests may have to expend more funds to protect
and repair the Apartment Complexes than would be the case if they were operated
as market-rate rather than low-income housing. In addition, most of the
Apartment Complexes will be located in rural areas or small towns or (in certain
instances) in areas of low-income where, even in the absence of governmental
restrictions on cash distributions, the rents that may be charged to prospective
tenants are lower than those that might be obtained in more affluent urban
areas. These factors, and the additional factor that at the time of a sale the
Apartment Complex will have a history of having been operated as a low-income
property, will affect the time and price at which an Apartment Complex can be
sold.
Risk of Unspecified Investments. As of the date of this Prospectus, except
as otherwise set forth in a supplement hereto, none of the Apartment Complexes
in which the Series will invest have been identified. Accordingly, investors
will not have the opportunity to evaluate for themselves the Apartment Complexes
or the terms of the Series' investments therein except as such information may
be included in a supplement to this Prospectus. See "Investment Objectives and
Policies Investment Policies - Timing of Investments." There can be no assurance
that any Apartment Complexes in which a Series may invest will actually meet the
Fund's investment objectives or that an investor who acquires his Units later in
the Offering period at the same price as one who purchased earlier may not have
more information available concerning specific Apartment Complexes than the
earlier purchaser.
Risks Associated with Use of Leverage. Each Local Limited Partnership will
leverage a Series' investment therein by incurring mortgage debt. See
"Investment Objectives and Policies - Use of Leverage." Such borrowing may have
either fixed or variable interest rates and may be repayable in a
self-amortizing series of substantially equal installments or in a series of
installments with a "balloon" final payment before or after the expiration of
the Initial Compliance Period or the Extended Use Period. As a result of the use
of leverage, a relatively slight decrease in the rental revenues of an Apartment
Complex may materially and adversely affect the cash flow from that property and
the Local Limited Partnership's ability to meet its debt service requirements.
In addition, the use of variable rate loans to finance Apartment Complexes would
create the risk that debt service could rise substantially
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during periods of high interest rates. Should any Local Limited Partnership's
revenues be insufficient to service its debt and pay taxes and other operating
costs, and/or should government subsidies which had been relied upon for the
payment thereof cease to be available (see "Risks of Government - Subsidized
Housing Projects" above in this section), such Local Limited Partnership and the
Series would be required to utilize working capital, seek additional funds, or
suffer a foreclosure of the subject property. There can be no assurance that
additional funds will be available to any Local Limited Partnership or the
Series, if needed, or, if available, will be on terms acceptable to the Series.
As indicated below under "Investment Objectives and Policies," a portion of
the Net Proceeds may be invested in Local Limited Partnerships owning Apartment
Complexes which have in place "conventional" financing, i.e., financing not
provided with government subsidy. Recently, lenders that have traditionally
provided conventional financing for real estate construction and acquisition
have reportedly decreased their exposure to such loans. To the extent that such
a situation exists, there may be fewer conventionally-financed investments that
are suitable for the Series. In addition, it is possible that such a situation
would adversely affect a Local Limited Partnership in which a Series had made an
investment, for instance if the Local Limited Partnership found that it was
unable to obtain permanent financing to refinance a short-term construction
loan. High interest rates or other factors related to its Apartment Complex or
the national and local economies may also affect the availability and
desirability of financing or refinancing which may be sought by a Local Limited
Partnership. Shortages of mortgage funds may adversely affect the ability of a
Local Limited Partnership to sell its Apartment Complex or require a Local
Limited Partnership to incur credit risks in connection with purchase money
mortgages accepted by such partnership from purchasers.
Risks of Limited Diversification. The ability of a Series to obtain
geographic and other diversification of its investments will be dependent upon
the number of Units sold in such Series. To the extent that less than all of the
Units in any Series are sold, and especially if only the minimum number of Units
in any Series is sold, the Series will invest in fewer Local Limited
Partnerships than would otherwise be the case. Limited diversification means
that any single Apartment Complex experiencing poor operating performance,
impairment of value or recapture of Tax Credits would have an increased impact
upon the Series as a whole. The risks of limited diversification will also exist
to the extent that any Series (i) invests in a few Local Limited Partnerships
owning large Apartment Complexes rather than a greater number of Local Limited
Partnerships owning smaller Apartment Complexes, or (ii) invests in Local
Limited Partnerships which have the same or affiliated Local General Partner, or
which own Apartment Complexes located in the same area.
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Lack of Fund Control; Reliance on Local General Partners. The success of
each Series will, to a large extent, depend on the quality of the management of
the Local Limited Partnerships by the Local General Partners, who will have the
authority to make all management decisions relating to the operation of the
Apartment Complexes by the management organizations they may employ. As a
limited partner or non-managing member in a Local Limited Partnership, each
Series will have very limited rights with respect to management of the Local
Limited Partnership and, accordingly, will not be able to exercise any control
with respect to its business decisions and operations.
Net Worth of Local General Partners. Each Local General Partner will be
required to demonstrate a net worth which is in an amount deemed appropriate by
the Fund Manager. However, there is no minimum standard which all Local General
Partners will be required to satisfy. Further, the assets of the Local General
Partners are likely to consist primarily of real estate holdings and other
assets the fair market values of which would be difficult to estimate and which
could not be readily liquidated to satisfy the financial guarantees and
commitments which they are expected to make to a Series. See "Investment
Objectives and Policies Investment Policies." Moreover, these assets may also be
subject to the claims of other creditors, including other partnerships with
which the Local General Partners are involved. Thus, there is a risk that the
Local General Partners would be unable to perform their obligations to the
Series. It is not anticipated that any escrow accounts or other security
arrangements will be established to ensure performance of their obligations. If
any of the Local General Partners fail to meet their obligations, the cost of
litigation to enforce these obligations may be high, and the remedy of the
Series may be limited to removing the Local General Partner as general partner
of the Local Limited Partnership.
Risks of Real Estate Ownership. Any investment in real estate is subject to
risks inherent in fluctuating general and local economic conditions which can
adversely affect the investor's ability to realize a profit or even to recover
his invested capital. Among these are the job market, the availability and cost
of mortgage financing, monetary inflation, government tax, environmental, land
use and zoning policies, the supply of and demand for similar properties,
neighborhood conditions, the availability and cost of energy and water and other
such factors over which the investor will have no control and which can lead to
significant declines in real estate values of the type recently experienced with
respect to certain types of properties in many areas of the United States.
Risks of Purchase of Properties Under Construction. Some or all of the
Apartment Complexes may be under construction at the time a Series makes its
investment therein. In general, investment in Apartment Complexes under
construction will involve more risk than the purchase of completed properties
because of dependency upon the Local General Partners to fulfill more extensive
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obligations, including completion of construction. The Local General Partners'
ability to carry out such obligations may be affected by conditions beyond their
control. Furthermore, the investment decision in respect of an Apartment Complex
upon which improvements are to be constructed or completed will be made with
reference to projections of rental income and expenses of the property upon
completion of construction. Whether the property will operate at such projected
income and expense levels cannot be known in most cases until after completion
and at least a year of actual operation after sustaining occupancy is achieved.
Risks of "Two-Tier" Investment Structure. As is the case for most real
estate partnerships designed to provide investors with Tax Credits, each Series
will invest in Apartment Complexes through the Local Limited Partnerships. See
"Investment Objectives and Policies." This "two-tier" structure may result in
higher expenses than is the case for "single-tier" partnerships, such as those
which are not formed to generate Tax Credits. These expenses may include costs
for professional services, such as attorneys and accountants who provide advice
and consultation to the Local Limited Partnerships.
Risks of Investments Prior to the Sale of Units. As noted in "Investment
Objectives and Policies - Investment Policies," a Series may make or commit to
investments in Apartment Complexes at a time prior to the commencement or
completion of its Offering, and may borrow funds from the Fund Manager or its
Affiliates, or others, for such purposes. Such investments or commitments would
be made in anticipation of the receipt of the proceeds of the Series. It is
possible that the Series ultimately will not receive sufficient proceeds to meet
all of its obligations with respect to such investments or commitments. Failure
to satisfy such obligations may result in the dilution or termination of a Local
Limited Partnership Interest without return of the amounts theretofore paid or a
suit by the Local General Partners to require performance of such obligations.
To the extent Tax Credits had been claimed prior to the termination of a Local
Limited Partnership Interest, such termination could result in recapture of all
or a portion of such Tax Credits. See "The Low Income Housing Credit - Recapture
of Low Income Housing Credits."
Risks of Loss of Loans Made to Local Limited Partnerships. In connection
with a Series' determination to invest in a Local Limited Partnership, the
Series may make a loan to the Local Limited Partnership prior to the acquisition
by the Series of an interest therein. See "Investment Objectives and Policies -
Investment Policies." If the Series is unable or chooses not to invest in the
Local Limited Partnership, the Local Limited Partnership might not repay the
loan, in which event the amount of Net Proceeds available for investment in
Local Limited Partnership Interests would be reduced.
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Risks of Joint Investments. A Series may invest in Local Limited
Partnerships jointly with the other Series or other limited partnerships if the
conditions set forth under "Investment Objectives and Policies - Joint
Investments" are met. There is a potential risk that a Series may not acquire a
controlling interest in a joint investment or that, if an equal interest is
acquired by the Series and another partnership, there may be an impasse on
decisions.
Possibility of Uninsured Losses. There are certain types of losses
(generally either of a catastrophic nature, such as earthquakes, floods and wars
or relating to hazardous materials or environmental matters), which are either
uninsurable or not economically insurable. Should such a loss be experienced by
an Apartment Complex in which a Series has invested, the Series could lose both
its invested capital and anticipated profits in such property. Moreover, a
portion of previously generated Tax Credits could be recaptured and future Tax
Credits lost if the Apartment Complex is not restored by reconstruction or
replacement within a reasonable period of time; and, even if the casualty is an
insured loss, it may be impossible or impractical to rebuild a destroyed
property. See "The Low Income Housing Credit - Recapture of Low Income Housing
Credits." Liability claims could also materially and adversely affect a Local
Limited Partnership such that resulting judgments exceed available insurance
proceeds. The cost of liability and casualty insurance has substantially
increased in recent years and certain types of insurance have become more
difficult to obtain or require substantial deductible amounts.
Possible Loss on Dissolution and Termination. Upon the dissolution or
termination of a Series, the proceeds realized from the liquidation of assets,
the amount, if any, of which would be subject to the foregoing investment risks,
will be distributed to the Unitholders only after the satisfaction of claims of
the Series' creditors. Accordingly, the ability of an investor to recover all or
any portion of his investment under such circumstances will depend on the amount
of funds so realized and claims to be satisfied therefrom.
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Other Tax Risks
In addition to those pertaining specifically to Tax Credits, there are
numerous Federal income tax aspects and certain Federal income tax risks
associated with the ownership of Units and the operations of the Fund and the
Local Limited Partnerships. The Fund does not intend to request rulings on any
income tax matters from the IRS. Rather, the Partnership will rely on certain
opinions of Derenthal & Dannhauser, counsel to the Fund, the Fund Manager and
their Affiliates ("Counsel"), and of counsel to the Local Limited Partnerships.
Unlike a ruling from the IRS, an opinion of counsel has no binding effect or
official status of any kind, and no assurance can be given that the conclusions
reached in any such opinion will not be contested by the IRS or, if contested,
will not be sustained by a court. The income tax issues as to which counsel has
rendered or will render opinions, and the issues as to which counsel has not
rendered and will not render opinions, are discussed in "Federal Income Tax
Considerations" and "The Low Income Housing Credit."
These additional Federal income tax aspects and risks associated with the
ownership of Units and the operations of the Fund and the Local Limited
Partnerships include, but are not limited to, the following:
No Opinion of Counsel as to Certain Matters. Prospective investors should
note that no legal opinion has been obtained, and it is not anticipated that an
opinion will be obtained, regarding determinations, the correctness of which
depends in significant part on future factual circumstances, regarding matters
peculiar to certain investors or regarding matters in which opinions are not
customarily obtained. The more significant of such determinations and matters
include:
- - the allocation of basis among various components of a property, particularly
as between buildings, the cost of which is depreciable, and the underlying
land, the cost of which is not depreciable; a successful challenge by the
IRS to the amount of basis allocated to buildings would decrease
depreciation attributable to the property;
- - the characterization of various expenses and payments made to or by a Series
or a Local Limited Partnership (for example, the extent to which such
payments represent deductible fees or interest); a successful challenge by
the IRS to the characterization of an expense as deductible would require
that such expense be capitalized and recovered, if at all, upon liquidation;
- - the portion of the cost of any Apartment Complex that qualifies for Tax
Credits (but see the discussion of so-called "adjuster" provisions in
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"Investment Objectives and Policies - Investment Policies"); a successful
challenge by the IRS would reduce the amount of such credits;
- - the application to any specific Unitholder of the limitation on the
availability of passive activity losses and credits; Unitholders must
determine for themselves the extent to which their passive income and the
"$25,000 deduction equivalent" are available to them to claim Tax Credits
and Losses for Tax Purposes;
- - the classification of a Series or any Local Limited Partnership as a dealer
in interests in Local Limited Partnerships or Apartment Complexes,
respectively; a dealer generally may not claim depreciation deductions; and
- - the application of the alternative minimum tax to, or the calculation
thereof by, any Unitholder; if a Unitholder is subject to the alternative
minimum tax, tax benefits from an investment in the Fund could be reduced.
There can be no assurance, therefore, that some of the deductions to be
claimed by a Series, or the allocation of its items of Profits and Losses for
Tax Purposes and Tax Credits, will not be challenged by the IRS and that such
challenge will not be sustained by the courts. Such challenge, if successful,
could have a detrimental effect on the ability of the Series to realize its
investment objectives.
No Ruling as to Tax Status of the Local Limited Partnerships. Counsel has
rendered its opinion that each Series will be classified as a partnership and
not as an association taxable as a corporation for Federal income tax purposes.
The Fund Manager intends to secure an opinion of Counsel or counsel to each
Local Limited Partnership in which each Series invests that such Local Limited
Partnership will be classified as a partnership for Federal income tax purposes.
For Local Limited Partnerships formed prior to January 1, 1997, such opinions
are likely to be subject to various conditions. See "Federal Income Tax
Considerations - Classification as a Partnership." Material adverse tax
consequences to the Unitholders, particularly an inability of a Series to pass
through to its investors all or part of the anticipated Tax Credits, would
result from the classification of a Local Limited Partnership as an association
taxable as a corporation. See "Federal Income Tax Considerations Classification
as a Partnership."
Limitation on Losses from Passive Activities. The Tax Reform Act of 1986
("1986 Act") imposed substantial restrictions on the ability of investors in
real estate to offset losses or deductions from such investments against income
from other sources. It is anticipated that these "passive activity" rules
generally will restrict the ability of an individual or other non-corporate
Unitholder to shelter his income from other sources with any Losses for Tax
Purposes allocated to him with respect to his Units.
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Prior to investment in Apartment Complexes, a Series will not be entitled to
Tax Credits. In addition, any income from interim investments generally would be
treated as portfolio income that cannot be sheltered with losses from passive
sources. See "Investment Objectives and Policies" and "Federal Income Tax
Considerations."
Applicability of At Risk Rules. The "at risk" rules of the Code generally
limit the deduction by a partner of partnership losses incurred with respect to
real property to the amount of cash the partner has invested in the partnership.
Under special rules which apply to an activity involving the holding of real
estate, a taxpayer also will be considered "at risk" with respect to "qualified
nonrecourse financing," and a significant portion of the financing to be
utilized to purchase the Apartment Complexes is expected to consist of such
"qualified nonrecourse financing." However, there can be no assurance that the
"at risk" rules will not have a material impact on the Unitholders until all of
the Local Limited Partnerships are identified and the financing for the
Apartment Complexes is in place. See "Federal Income Tax Considerations -
Application of At Risk Limitations" and "The Low Income Housing Credit."
Tax Liability on Sale of Apartment Complex. If a Local Limited Partnership
sells an Apartment Complex, or if a Series sells a Local Limited Partnership
Interest, the Unitholders of the Series will be required to recognize their
allocable share of taxable gain therefrom, measured by the difference between
the sale proceeds (including the amount of indebtedness to which the Apartment
Complex was subject, or the Series' allocable share of such indebtedness, as the
case may be) and the adjusted basis in the Apartment Complex. In some cases the
amount of tax payable by a Unitholder may exceed cash distributions from his
Series. See "Federal Income Tax Considerations - Sales or Exchanges of Local
Limited Partnership Property; Depreciation Recapture" and " - Treatment of
Mortgage Loans."
Alternative Minimum Tax Liability. The 1986 Act reduced the regular tax
rates and substantially broadened the application of the alternative minimum
tax, and the Omnibus Budget Reconciliation Act of 1993 ("1993 Act") increased
the alternative minimum tax rate for individuals to 26% and 28%, depending on
the level of alternative minimum taxable income. As a result, it is possible
that a significant number of potential investors will be subject to the
alternative minimum tax. Accordingly, each investor should consult his own tax
adviser as to the effect an investment in the Fund will have on his alternative
minimum tax liability. The Tax Credits expected to be derived from an investment
in the Fund may not be utilized to reduce alternative minimum tax liability. See
"Federal Income Tax Considerations - Other Important Tax Considerations -
Alternative Minimum Tax."
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Possibility of Audit. The IRS has the ability to audit limited partnerships
and limited liability companies at the entity level with regard to issues
affecting such an entity. Prospective investors should note that an audit of the
tax information returns of a Series also could result in an audit of the returns
of the Unitholders of the Series, and that such an examination could result in
adjustments both to items that are related to the Local Limited Partnership and
the Series and to unrelated items. Unitholders could then be required to file
amended tax returns and pay additional tax plus interest and penalties. A
contest by the Series of any material adverse determination by the IRS relating
to the tax aspects of the Series might result in the incurrence of substantial
legal fees by the Series. See "Federal Income Tax Considerations - Tax Returns
and Tax Information."
Each Series must register under the tax shelter registration provisions.
Under those provisions, the IRS will assign a registration number to each
Series, which number must be recorded on the tax return of a Unitholder in such
Series. Failure to include the registration number on a Unitholder's tax return
will subject the Unitholder to a penalty unless that failure is due to
reasonable cause. Similarly, the Local Limited Partnerships may be required to
register as tax shelters. It is uncertain whether registration as a tax shelter
increases materially the risk of IRS audit. Registration does not imply that the
IRS has reviewed, examined or approved the investment or the claimed benefits of
the investment. See "Federal Income Tax Considerations - Tax Shelter
Registration."
Possibility of Challenge to Tax Allocations of the Series and the Local
Limited Partnerships. The IRS might challenge the allocations made by a Series
(i) between its Unitholders and the Fund Manager, (ii) among its Unitholders, or
(iii) between the Series and a Local General Partner, of income, gains,
deductions, losses and Tax Credits as not having substantial economic effect and
not being in accordance with each partner's interest in a Series or in the Local
Limited Partnership, as the case may be. If any allocations were challenged, a
greater share of the income or gain or a lesser share of the losses or Tax
Credits might be allocated to the Unitholders, which would increase the tax
liability or reduce the tax benefits to them associated with an investment in
the Series. See "Profits and Losses for Tax Purposes, Tax Credits and Cash
Distributions" and "Federal Income Tax Considerations - Fund Allocations."
Possible Tax Liabilities in Later Years. After a period of years following
commencement of operations by a Local Limited Partnership, the Local Limited
Partnership may generate Profits for Tax Purposes rather than Losses for Tax
Purposes. A Unitholder's share of such Profits for Tax Purposes generally would
constitute passive income and would be taxable at regular rates unless the
Unitholder had unused "suspended" passive losses from his Series or other
investments or current passive losses from other investments. See "Federal
Income Tax Considerations - Limitations on Losses and Credits from Passive
Activities."
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In such circumstances it would be unlikely that the Unitholder would receive a
cash distribution from his Series with which to pay any tax liability resulting
from the allocation of Profits for Tax Purposes.
Possibility of Challenge to Tax Treatment of Certain Expenditures. The IRS
may contend that certain fees and payments which a Series or a Local Limited
Partnership expects to capitalize or deduct should in fact be deductible over a
longer period of time or in a later year, are excessive and may not be
capitalized or deducted in full, should be capitalized and not deducted, or
should be treated as nondeductible and noncapitalizable distributions or
syndication fees and thus not as part of basis for computing Tax Credits. If the
IRS were successful in any such contention, the anticipated Tax Credits and
Losses for Tax Purposes would be reduced, perhaps substantially. See "Federal
Income Tax Considerations - Basis of Local Limited Partnerships in Their
Apartment Complexes," " - Depreciation," "- Deductibility of Fees," "-
Organization and Offering Expenses" and "- Start-Up Expenditures."
Changes in Tax Law Which Might Affect the Value of Tax Credits. Although all
Low Income Housing Credits are allocated to an Apartment Complex at commencement
of the 10-year credit period, there can be no assurance that future legislation
may not adversely affect an investment in the Fund. For example, legislation
affecting tax liability of an investor could reduce or eliminate the value of
his Tax Credits. In this regard, prior to enactment of the 1986 Act, the
principal tax benefit of an investment in a limited partnership developing,
owning and/or operating low income housing was the losses generated thereby,
which generally could be used to reduce an investor's income from all sources on
a dollar-for-dollar basis, and such investments were made in reliance on the
availability of such tax benefits. Because deduction of such losses was severely
curtailed by the 1986 Act, it is unlikely that the "pre-enactment" limited
partnerships (including certain partnerships sponsored by WNC & Associates,
Inc.) will provide their investors with all of the tax benefits expected at the
commencement of their respective syndications.
Possible Administrative or Judicial Interpretations of the Law. Many of the
provisions of the 1986 Act and subsequent tax legislation related to investments
in real estate have not been interpreted by the IRS in regulations, rulings or
public announcements, or by the courts. These provisions may be interpreted or
clarified by the IRS or the courts so as to have an adverse effect on the Fund
or the Local Limited Partnerships. The rules dealing with Federal income
taxation are constantly under review by the IRS, resulting in revisions of its
regulations and revised interpretations of established concepts. Revisions in
Federal tax regulations and interpretations could reduce or eliminate tax
benefits associated with an investment in the Fund.
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State Income Tax Risks. A Unitholder may be required to file income tax
returns and be subject to tax in each state or local taxing jurisdiction in
which his Series or any Local Limited Partnership invested in by such Series
owns an Apartment Complex or has business activities, or in which the Unitholder
is resident. Corporate Unitholders may be required to pay state franchise taxes.
The tax treatment of particular items under state or local income tax laws may
vary materially from the Federal income tax treatment of such items.
Nonetheless, many of the risks to which an investment in the Fund is subject
under Federal income tax law may also obtain under state or local income tax
law. A Series may be required to withhold state taxes from distributions to
Unitholders in some instances. The additional cost incurred in having to prepare
various state and local tax returns, as well as the additional state and local
taxes which may be payable, should be considered by prospective investors in
deciding whether to make an investment in the Fund. This Prospectus makes no
attempt to summarize the state and local tax consequences to an investor in any
state or locality. Accordingly, prospective investors are urged to consult their
tax advisers in this regard.
Fund-Related Risks
Lack of Liquidity of Investment. It is not intended nor anticipated that a
public market will develop for the purchase and sale of Units because of
substantial restrictions on transferability imposed in the Partnership Agreement
and as a result of tax and securities laws. See "Transferability of Units."
Accordingly, Unitholders may not be able to liquidate their investments promptly
or at a reasonable price prior to the end of their Series' term, and Units
should be considered as a long-term investment.
Lack of Unitholder Control; Reliance on Fund Manager. All decisions
concerning the management of a Series, including selection of the Apartment
Complexes in which the Series will invest and whether or when to terminate its
Offering, will be made by the Fund Manager. Unitholders have no right or power
to take part in the management of the Series. Accordingly, no person should
purchase Units unless he is willing to entrust all aspects of the management of
the Series to the Fund Manager.
Risks Related to Exercise of Unitholder Voting Rights. The Partnership
Agreement grants the Unitholders owning more than 50% of the Units in a Series
the right to remove the Fund Manager of the Series and elect a replacement, to
amend the Series' Partnership Agreement and to terminate the Series. Such voting
rights will make it possible for a majority-in-interest of the Unitholders to
cause any such changes to their Series, even if Unitholders owning 49% of the
Units oppose such action. See "Summary of Certain Provisions of the Partnership
Agreement Voting Rights."
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Limitations on Fund Manager's Liability. Under California law, the Fund
Manager is accountable to the Unitholders of each Series as a fiduciary and,
consequently, is required to exercise good faith and loyalty in handling the
affairs of each Series. However, the Partnership Agreement provides that the
Fund Manager and its Affiliates will not be liable to a Series or its
Unitholders for its acts and omissions performed or omitted in good faith and in
a manner which the Fund Manager reasonably believes to be within the scope of
its authority and in the best interest of the Series, provided such conduct did
not constitute negligence or misconduct. Therefore, Unitholders may have a more
limited right of action against the Fund Manager and its Affiliates than would
otherwise be the case absent such provisions in the Partnership Agreement. See
"Fiduciary Responsibility."
Issuance of Units in Series. The Partnership Agreement provides that each
Series will be a separate partnership under California law investing in its own
Local Limited Partnership Interests. Therefore, Unitholders in one Series may
receive different yields on their investments and may be subject to different
risks with respect to their Series' Local Limited Partnership Interests than
Unitholders in the other Series. The Fund Manager will decide in its discretion
when Series 5 will be terminated and Series 6 will begin.
Obligations for Capital Contributions. Each investor who subscribes for 10
or more Units may elect to pay one-half of the purchase price of his Units upon
subscription and the balance pursuant to a Promissory Note. See "Estimated Use
of Proceeds - Deferred Installments." In the event that a Unitholder who has
elected to utilize such installment payment arrangement defaults on his
obligation to pay the deferred installment and interest thereon when due, or any
other Event of Default, as defined in the Promissory Note, occurs he will face
serious consequences, which may include acceleration of his Promissory Note,
loss of right to Tax Credits and recapture of previously utilized Tax Credits
and foreclosure and sale of his Units. Late payments will also be subject to the
payment of late charges. See "Summary of Certain Provisions of the Partnership
Agreement." In addition to such Unitholder's liability for the balance due under
the Promissory Note, he may also be liable to his Series or other holder of his
Promissory Note, as applicable, for any expenses incurred in enforcing the
Series' or other holder's rights.
If any Unitholder should fail to make any payment required under his
Promissory Note when due and if his Units cannot be promptly resold pursuant to
the provisions of the Partnership Agreement, the Series may be without
sufficient funds to meet its obligations with respect to its Local Limited
Partnership Interests. This could result in the dilution or termination of a
Local Limited Partnership Interest with resulting recapture of
previously-claimed Tax Credits and loss of expected future Tax Credits
pertaining to such Local Limited Partnership Interests or legal actions by the
Local General Partners to require performance of such
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obligations and/or to recover their damages and costs, thereby adversely
affecting the Series and the non-defaulting Unitholders.
Risks of Unitholder Liability. If a Unitholder is deemed to be taking part
in the control of the business of his Series, he would lose his limited
liability, which would mean that the debts and other obligations of the Series
could be satisfied out of his personal assets to the extent that assets of the
Series were inadequate to discharge its obligations. The California Revised
Limited Partnership Act under which each Series is organized differs from the
Uniform Limited Partnership Act as in effect in many states in that it
specifically permits Unitholders to exercise the voting rights provided in the
Partnership Agreement without being deemed to be taking part in the control of
the business of their Series. With respect to operations of the Series in states
other than California, however, there is uncertainty as to whether the exercise
of these rights (and possibly their mere existence) could be deemed to be taking
part in the control of the Series' business and, as a result, cause the
Unitholders' loss of limited liability.
In addition, even if the Unitholders retain their limited liability, it is
possible that a Series itself could be deemed to be taking part in control of
the business of one or more Local Limited Partnerships because of the voting
rights which it will have under the Local Limited Partnership Agreements, and as
a result, obligations of such Local Limited Partnership could be satisfied out
of the assets of the Series to the extent that assets of such Local Limited
Partnership were inadequate to discharge its obligations.
Absence of Regulation. Neither Series is a real estate investment trust nor
an investment company, and the management and investment practices of the Series
will not be supervised or regulated by any Federal or state authority.
Possible Delays in Obtaining Financial Data. There cannot be any assurance
that the Local General Partners will comply with provisions in the respective
Local Limited Partnership Agreements requiring the Local Limited Partnerships to
retain independent public accountants and to report tax data and financial
information in a timely manner. Should the Local General Partners fail to so
comply a Series might be unable to provide in a timely manner to its Unitholders
its Federal income tax information, financial statements and other reports as
described herein (see "Reports").
Lack of Operating History. The Fund has no operating history. No assurance
can be given that the Fund's operations will be successful or that the Fund will
meet its stated investment objectives.
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WHO SHOULD INVEST;
LIMITATIONS ON USE OF CREDITS AND LOSSES
All Investors
Each investor in the Fund must be of sufficient financial means to apprise
himself of, and assume the risks inherent in, the purchase of Units, including
the illiquidity of the investment, and must evaluate whether such investment is
suitable for him based upon his investment objectives, financial situation and
needs. An investor should only invest in the Fund if he (i) reasonably expects
to have Federal tax liabilities which can be offset by Tax Credits, and (ii) has
adequate financial means to bear the lack of liquidity and the economic risks
associated with long-term investments in real estate.
The Code imposes an alternative minimum tax on all taxpayers to the extent
the alternative minimum tax exceeds their regularly-computed tax. Tax Credits
cannot be used to reduce alternative minimum tax liability. Further, even in a
situation where a taxpayer does not have alternative minimum tax liability
(because his regularly-computed tax exceeds his alternative minimum tax), Tax
Credits cannot be used to reduce his tax liability to an amount less than his
alternative minimum tax liability. See "Federal Income Tax Considerations -
Other Important Tax Considerations - Alternative Minimum Tax." Accordingly,
investors are urged to consult their tax advisers to determine whether the
alternative minimum tax may limit their ability to benefit from the use of Tax
Credits.
An investment in Units is not suitable for tax-exempt entities, including
pension or profit-sharing plans, Keogh plans and Individual Retirement Accounts.
Accordingly, SUCH ENTITIES WILL NOT BE PERMITTED TO INVEST IN THE FUND.
A transferee of Units will be required to meet the same suitability
standards as had been imposed upon the transferror Unitholder, or such more
restrictive standards, if any, as may arise under applicable state securities
laws.
In the agreement to be executed by each Soliciting Dealer, the Soliciting
Dealer will agree to make reasonable inquiry of prospective investors concerning
the suitability of such an investment for such persons and to maintain records
of such suitability determinations. Each Soliciting Dealer is required to make
every reasonable effort to assure that an investment in Units is suitable and
appropriate for a potential investor, based on information provided by the
potential investor as to his financial situation and investment objectives.
In order to purchase Units, an investor must, at a minimum, satisfy the
suitability standards applicable to residents of the jurisdiction in which the
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<PAGE>
investor is resident. See "Who Should Invest; Limitations on Use of Credits
and Losses Minimum State Suitability Requirements" below. In the case of sales
to fiduciary accounts, the minimum suitability standards must be met by the
beneficiary, the fiduciary account, or by the donor or grantor who directly or
indirectly supplies the funds to purchase the Units if the donor or grantor is
one of the fiduciaries.
Individual Investors
The principal benefits to be derived from an investment in the Fund are Low
Income Housing Credits and, possibly, Historic Tax Credits. The extent to which
a prospective investor can utilize these tax benefits will determine whether or
not he is a suitable investor.
With respect to natural persons, Federal tax law imposes limitations on the
utilization of "passive activity" credits and "general business" credits, each
of which category generally includes Tax Credits. The Fund is expected to
generate Tax Credits over a period of 10 to 12 years. Accordingly, as more fully
discussed elsewhere in this Prospectus, an investment in the Fund will not be
suitable for a prospective investor unless he expects that, for the next 12
years, he will be able to utilize the Tax Credits under the passive activity
rules and the general business credits rules, and the alternative minimum tax
rules referred to above.
The passive activity rules do not impose an adjusted gross income limitation
on taxpayers seeking to utilize Low Income Housing Credits, provided such
credits are derived from properties (such as those in which the Fund will
invest) that are placed in service after December 31, 1989. Nonetheless,
prospective investors who do not otherwise materially participate in rental real
estate activities should note that Low Income Housing Credits generally may only
be used to offset income tax liability on a maximum of $25,000 of a
non-corporate taxpayer's active or portfolio income for each taxable year.
Additionally, there are further limits on the ability of natural persons to
utilize Historic Tax Credits. Specifically, a natural person may utilize
Historic Tax Credits in the manner described above but only to the extent his
adjusted gross income does not exceed $200,000; the ability of a natural person
to utilize Historic Tax Credits is phased out if his adjusted gross is between
$200,000 and $250,000, and is eliminated if his adjusted gross income exceeds
$250,000. Further, a prospective investor who is a natural person and who does
not otherwise materially participate in rental real estate activities should
note that Losses for Tax Purposes will be allowable only to the extent that such
an investor has sufficient passive income to offset such Losses. For further
information regarding the principal limitations that will apply to the
utilization for Federal income tax purposes of the Tax Credits and Losses for
Tax Purposes anticipated to be generated by an investment in the Units, see the
entire discussion under "Federal Income Tax Considerations - Limitations on
Losses and Credits from Passive Activities" and "- General Business Tax Credit
Limitations."
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Corporate and Other Entity Investors
A trust other than a grantor trust should consider an investment only if it
expects to have during the next 12 years sufficient unsheltered passive income
to utilize the Tax Credits and Losses for Tax Purposes anticipated from its
investment in the Units. A grantor trust should consider an investment only if
each of its grantors meets the investment criteria applicable to it.
Prospective corporate investors should note that special rules apply to
determine whether a corporation will be able to utilize the tax benefits
anticipated from an investment in the Units. Accordingly, investment in the Fund
is suitable for a corporation if, at a minimum, it meets the following
requirements: (a) in the case of a corporation other than a corporation subject
to Subchapter S of the Code (a "C Corporation") that is neither closely-held nor
a personal service corporation, such corporation expects to have during the next
12 years sufficient taxable income from all sources to utilize the Tax Credits
and Losses for Tax Purposes anticipated from its investment in the Units; (b) in
the case of a C Corporation that is closely-held, but is not a personal service
corporation, such corporation expects to have during the next 12 years
sufficient unsheltered passive income and/or to have sufficient other taxable
income, determined without regard to portfolio income and any passive income or
loss, to utilize the Tax Credits and Losses for Tax Purposes anticipated from
its investment in the Units; and (c) in the case of a C Corporation that is a
personal service corporation, such corporation expects to have during the next
12 years sufficient unsheltered passive income to utilize the Tax Credits and
Losses for Tax Purposes anticipated from its investment in the Units. For this
purpose, the term "personal service corporation" includes corporations the
principal activity of which is the performance of services in the fields of
health, law, engineering, architecture, accounting, actuarial science,
performing arts or consulting. A closely-held corporation is a corporation that
at any time during the last half of its relevant taxable year is more than 50%
owned, by value, directly or indirectly by five or fewer shareholders. See
"Federal Income Tax Considerations - Limitations on Losses and Credits from
Passive Activities."
A corporation that is subject to Subchapter S of the Code (an "S
Corporation") should consider an investment only if each of its shareholders
holding a material interest therein meets the criteria applicable to
non-corporate investors. A partnership should consider an investment only if
each of its partners holding a material interest therein meets the investment
criteria applicable to it.
In determining the suitability of an investment in the Fund, an entity
investor should also consider the effect of such an investment on its financial
reports.
The actual effect on an entity investor's net income for financial reporting
purposes will depend upon the results of Series' operations and the method of
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accounting adopted by the investor respecting its investment in the Series. The
Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board
has been examining the methods of accounting used by entities investing in
low-income housing through limited partnerships. In general, as of the date
hereof, the EITF has determined that the permissible methods used to account for
such investments include the modified cost method, the equity method, the
effective yield method and the full consolidation method.
Under the modified cost method, an entity investor initially capitalizes the
cost of its investment in the limited partnership, and subsequently amortizes
the difference between the carrying cost and the aggregate estimated residual
value of the limited partnership's property portfolio over the Tax Credit period
of such portfolio. The estimated residual value of a property is its estimated
residual value at the end of the last period in which Tax Credits are allocated
to the investor and will not reflect anticipated inflation.
Under the equity method, an entity investor initially capitalizes the cost
of its investment in the limited partnership, and subsequently reduces (but not
below zero) or increases the carrying value by the investor's allocable share of
losses or income, respectively, from the limited partnership.
Under the effective yield method, an entity investor initially capitalizes
the cost of its investment in the limited partnership, and subsequently
amortizes the cost to provide a constant effective yield over the period that
the Tax Credits are allocated to the investor. The effective yield is the
internal rate of return on the investment, based on the cost of the investment
and the Tax Credits allocated to the investor. Any expected residual value of
the investment is to be excluded from the effective yield calculation.
Under the full consolidation method, the low-income housing properties
themselves, and the results of operations therefrom (rather than the investment
in the limited partnership) are included in the entity investor's financial
statements.
Regardless of the method selected, the EITF has not changed the requirement
that an investment be reviewed periodically to determine impairment of value.
With the exception of the effective yield method, the method of accounting
to be used by an entity investor in a low-income housing program generally is
not elective but rather is determined by the level of the entity's investment in
the limited partnership and/or the ability of the investor to control the
limited partnership. The effective yield method may be elected if (a) the tax
credits allocable to the investor are guaranteed by a creditworthy entity, (b)
the investor's yield based solely on the cash flows from the guaranteed tax
credits is positive, and (c) the investor is a
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limited partner for legal and tax purposes and the investor's liability is
limited to its capital investment.
If the investor is unable to or does not elect to use the effective yield
method, the appropriate method will be (i) the modified cost method, if the
investor's interest in the limited partnership is so minor as to give the
investor virtually no influence over partnership operating and financial
policies; (ii) the equity method, if the investor owns less than 50% of the
limited partnership and has no significant control over partnership policies; or
(iii) the full consolidation method, if the investor owns 50% or more of the
limited partnership unless the investor has no significant control over
partnership policies, in which event the equity method is to be used. To date,
the EITF has provided no "bright-line" ownership test for use in determining
when an investor's interest is so minor as to give the investor "virtually no
influence over partnership operating and financial policies." The staff of the
Securities and Exchange Commission, however, understands that accounting
practice generally has viewed investments of more than 3% to 5% to be more than
minor.
It is anticipated that entity investors in a Series will use either the
modified cost method or the equity method. As indicated above, under the equity
method (but not under the modified cost method) an investor will actually report
its share of Series' losses or income. In this regard, for financial reporting
purposes each Series is expected to use the equity method, which will result in
recognition by the Series of its share of losses or income from the limited
partnerships in which it invests.
Minimum State Suitability Requirements
The Units may be offered and sold only in those jurisdictions in which they
have been registered or qualified for sale or are exempt from the registration
or qualification requirement.
Set forth below are the minimum suitability standards for residents of the
District of Columbia and of each state in which the Fund has applied to have the
Units registered or qualified for sale. For these purposes, net worth is
exclusive of home, furnishings and automobiles.
Alabama, Arizona, Arkansas, Indiana, Kansas, Kentucky, Michigan,
Mississippi, Missouri, Nebraska, New Hampshire, New Mexico, North Carolina,
North Dakota, Oklahoma, Oregon, Tennessee, Texas, Vermont, Virginia and
Wisconsin Requirements. Each investor in Alabama, Arizona, Arkansas, Indiana,
Kansas, Kentucky, Michigan, Mississippi, Missouri, Nebraska, New Hampshire, New
Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Tennessee, Texas,
Vermont, Virginia or Wisconsin must have (i) an annual gross
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income of at least $45,000 and a net worth of at least $45,000 or (ii) a net
worth of at least $150,000.
Alaska, Colorado, Connecticut, Delaware, District of Columbia, Florida,
Georgia, Hawaii, Idaho, Illinois, Louisiana, Maryland, Montana, Nevada, New
Jersey, Rhode Island, South Carolina, Utah, West Virginia and Wyoming. Each
investor in Alaska, Colorado, Connecticut, Delaware, District of Columbia,
Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maryland, Montana, Nevada,
New Jersey, Rhode Island, South Carolina, Utah, West Virginia or Wyoming must
have (i) an annual gross income of at least $35,000 and a net worth of at least
$35,000 or (ii) a net worth of at least $75,000.
California and Washington Requirements. Each investor in California or
Washington must have (i) an annual gross income of at least $50,000 and a net
worth of at least $65,000 or (ii) a net worth of at least $200,000.
Iowa, Massachusetts, Minnesota and South Dakota Requirements. Each investor
in Iowa, Massachusetts, Minnesota or South Dakota who purchases his Units
entirely with cash must have (i) an annual gross income of at least $45,000 and
a net worth of at least $45,000 or (ii) a net worth of at least $150,000. Each
investor in Iowa, Massachusetts, Minnesota or South Dakota who purchases his
Units with a Promissory Note must have (i) an annual gross income of at least
$60,000 and a net worth of at least $60,000 or (ii) a net worth of at least
$225,000.
Maine Requirements. Each investor in Maine must have (i) an annual gross
income of at least $50,000 and a net worth of at least $50,000 or (ii) a net
worth of at least $200,000. No investor in Maine may purchase Units with a
Promissory Note; each investor in Maine must purchase his Units on an all-cash
basis.
Ohio Requirements. Each investor in Ohio must have (i) an annual gross
income of at least $45,000 and a net worth of at least $45,000 or (ii) a net
worth of at least $150,000. No investor in Ohio may invest more than 10% of his
net worth in a Series.
Pennsylvania Requirements. Each investor in Pennsylvania must have (i) an
annual gross income of at least $45,000 and a net worth of at least $45,000 or
(ii) a net worth of at least $150,000. No investor in Pennsylvania may invest
more than 10% of his net worth in a Series. Because the minimum closing amount
for each Series is less than $2,500,000, the amount suggested by Pennsylvania
regulations, prospective investors who are Pennsylvania residents are cautioned
to carefully evaluate the ability of the Fund to accomplish its stated
objectives and to inquire as to the current dollar volume of Series
subscriptions.
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ESTIMATED USE OF PROCEEDS
The following table sets forth information concerning the estimated use of
proceeds from the sale of the Units. As indicated therein, approximately 75.5%
of the total proceeds will be invested in Local Limited Partnerships. The
amounts in the table represent the Fund Manager's present estimates and the
actual amounts may be different.
Percentage Percentage
Minimum of Gross Maximum of Gross
Proceeds Proceeds(1) Proceeds Proceeds(1)
Gross Offering Proceeds (2)... $1,400,000 100.00% $50,000,000 100.00%
Less Public Offering Expenses:
Selling Commissions (3)....... 98,000 7.00% 3,500,000 7.00%
Dealer-Manager Fee (4)........ 28,000 2.00% 1,000,000 2.00%
Other Organizational and
Offering Expenses (4)....... 56,000 4.00% 2,000,00 4.00%
------------------- -------------------
Public Offering Expenses (5).. 182,000 13.00% 6,500,000 13.00%
Amount Available for Investment $1,218,000 87.00% $43,500,000 87.00%
========== ====== =========== ======
Acquisition Expenses (6)...... 21,000 1.50% 750,000 1.50%
Acquisition Fees (5)(6)....... 98,000 7.00% 3,500,000 7.00%
Working Capital Reserves (7).. 42,000 3.00% 1,500,000 3.00%
------------------- -------------------
Proceeds Invested (8)(9)...... $1,057,000 75.50% $37,750,000 75.50%
========== ====== =========== ======
(1) It is expected that all Capital Contributions as received, whether at the
time of subscription or as a result of payments of installments due under
the Promissory Notes, will be applied substantially in the percentages
indicated herein.
(2) Excludes one Unit purchased by the Initial Unitholder. Also excludes
interest on the unpaid principal balance of each Promissory Note which shall
be payable along with principal. See "Terms of the Offering and Plan of
Distribution." The amount of interest actually to be received by a Series
pursuant to Promissory Notes cannot be estimated, as it will depend on the
dates of receipt of the respective subscriptions and the amounts and dates
of payment of the Promissory Notes. Any such interest will constitute Cash
Flow, and as such may be used, in the discretion of
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the Fund Manager, to defray administrative costs, or to increase reserves or
the amount available for distribution to the Unitholders as Cash Available
for Distribution.
(3) For information concerning additional underwriting compensation payable by
the Fund, see "Terms of the Offering and Plan of Distribution." As is also
discussed in that section of this Prospectus, selling commissions may be
reduced for purchases of $100,000 or more by any "Purchaser" and Designated
Investors may purchase Units with a reduced sales commission. For the
purposes of this table, it has been assumed that the maximum selling
commissions will be paid.
(4) See "Management Compensation" and "Terms of the Offering and Plan of
Distribution."
(5) The portion of Public Offering Expenses and Acquisition Fees payable from
payments to be received on the Promissory Notes may only be paid as the
payments are actually received on the Promissory Notes.
(6) See "Management Compensation."
(7) See "Investment Objectives and Policies - Reserves."
(8) Proceeds Invested represents amounts payable for the acquisition of Local
Limited Partnership Interests. Portions of Proceeds Invested may be used to
repay the Fund Manager or its Affiliates amounts advanced by them (including
interest and carrying costs) to enable a Series to make initial investments
in Local Limited Partnership Interests prior to the sale of Units. See
"Investment Objectives and Policies - Investment Policies." The Local
General Partner of each Local Limited Partnership and/or his Affiliates may
retain as compensation, after deduction of amounts provided by the Local
General Partner or the Local Limited Partnership for the development of the
Apartment Complex, a portion of the Proceeds Invested, which will be
negotiated in each case and is anticipated to be equal to approximately 10%
to 30% (although in some cases it may be as much as 40%) of the cost of the
Apartment Complex. See "Investment Objectives and Policies - Investment
Policies." For each Apartment Complex being constructed or rehabilitated,
these costs will consist of the cost of the land (and building shell in the
case of a rehabilitation), construction costs, construction interest and
taxes, financing fees and developmental and organizational expenses.
(9) The Partnership Agreement requires that each Series commit, at a minimum, a
percentage of Capital Contributions to Investment in Local
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Limited Partnership Interests (defined in the Partnership Agreement to
include Reserves of up to 5% of Gross Proceeds as well as amounts used to
acquire interests in Apartment Complexes) which is equal to the greater of
(i) 80% of the Capital Contributions reduced by 0.1625% for each 1% of the
Series' allocable share of the mortgage financing encumbering the Apartment
Complexes or (ii) 70% of the Capital Contributions. For example, at a
leverage rate of 60%, the minimum Investment in Local Limited Partnership
Interests would be 70.25% of Capital Contributions ($983,500 of the minimum
Gross Offering Proceeds of $1,400,000), decreasing to a minimum of 70% of
Capital Contributions ($980,000) at a leverage rate of 62.15% and above.
Deferred Installments
Units are being offered at a price of $1,000 per Unit, with a minimum
investment of five Units ($5,000), except that employees of the Fund Manager and
its Affiliates, and/or investors in limited partnerships previously sponsored by
the Fund Manager may purchase a minimum of two Units ($2,000). Investors who
subscribe for fewer than 10 Units ($10,000) must pay the full amount of such
purchase price in cash upon subscription. However, investors who subscribe for
10 Units or more in any one Series may elect to pay only 50% of such purchase
price in cash upon subscription and the remaining 50% by the delivery of a
promissory note (the "Promissory Note") payable, together with interest, in a
single installment on (i) January 31, 1999, if the investor subscribes between
the date hereof and June 30, 1998, (ii) June 30, 1999, if the investor
subscribes between July 1, 1998 and December 31, 1998, or (iii) the later of the
date of subscription or January 31, 2000, if the investor subscribes after
December 31, 1998.
Promissory Notes will be (i) prepayable at any time in full (but not in
partial prepayments), without penalty or premium, (ii) secured by the respective
Unitholder's interest in the Series, and (iii) a full recourse obligation of the
respective Unitholder. If a Unitholder should fail to make the full amount of
the required payments on a Promissory Note, the Series would have the right to
recover by legal proceedings the amount of the Promissory Note remaining unpaid
from such Unitholder. In addition, the Series would have the right to foreclose
on the Units of such Unitholder under its security interest or to cause a resale
of one or more of such Unitholder's Units or to offset Series distributions
allocable to such Units under the provisions of Section 3.4.1 of the Partnership
Agreement. See "Summary of Certain Provisions of the Partnership Agreement." The
obligation of each Unitholder to pay his Promissory Note to the Series is
unconditional and involves certain risks. See "Risk Factors - Fund-Related Risks
- - Obligations for Capital Contributions."
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The Fund Manager and its Affiliates have substantial experience with respect
to the collection and application of deferred investor payments in their prior
limited partnerships. See "Management" and "Prior Performance Summary." Based on
this experience, the Fund Manager believes that deferred payment arrangements
can offer significant benefits to investors in direct participation programs
such as the Fund, notwithstanding the risks referred to above. A deferred
payment arrangement permits a more effective utilization of offering proceeds by
a partnership by minimizing the time during which unneeded investor funds are
held by the partnership. Rather than holding investor funds idle, or investing
them in low- yielding short-term government securities, it is more efficient to
match payments from investors with the partnership's actual needs for capital.
This allows investors to retain the use of their funds until needed by the
Series. Also based on this experience, however, the Fund Manager has concluded
that the administrative costs involved in processing and collecting promissory
notes make it advisable that such installment payment arrangements only be
available to purchasers of a significant amount of limited partnership
interests, and has determined that amount should be 10 Units ($10,000) or more
in the case of the Fund.
Business Development Plan. The Fund has adopted a business development plan
for the utilization of initial and deferred investor payments which takes into
account the historical patterns of deferred installment payments in connection
with investments in Local Limited Partnerships, such as those in which each
Series will invest, formed primarily to develop or substantially rehabilitate
Apartment Complexes which benefit from Government Assistance. No Series will
have a policy of deferring commitments for investments until receipt of
principal payments on the Promissory Notes; rather, each Series will seek to
make its investment commitments at the earliest possible date. However, as
discussed below under "Investment Objectives and Policies - Investment
Policies," each Series will normally make its capital contributions to each
Local Limited Partnership in stages over a period of one to two years, with each
contribution due when certain conditions regarding construction or leasing of
the Apartment Complex have been fulfilled.
For example (and solely for illustrative purposes), a Series' contribution
could be made over a one- to two-year period subject to satisfaction of some or
all of the following requirements: (1) reservation of Low Income Housing Credits
and receipt of Form 8609 (Low-Income Housing Credit Allocation Certification)
with respect thereto; (2) admission of the Series as a limited partner to the
Local Limited Partnership; (3) substantial completion of the Apartment Complex;
(4) receipt of a commitment for or closing of the construction loan; (5) receipt
of a commitment for or closing of the permanent loan; and/or (6) occupancy of
the Low Income Units by qualified tenants.
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There cannot be any assurance that payments required under the Promissory
Notes will be made when due, in which event the Fund Manager may attempt to
renegotiate the obligations of the Series or to obtain additional financing from
institutional or other lenders. The inability of a Series to perform its
obligations to a Local Limited Partnership could result in the dilution or
termination of a Local Limited Partnership Interest with resultant recapture of
previously-claimed Tax Credits and loss of expected future Tax Credits
pertaining to its Apartment Complex or legal actions by the Local General
Partners to require performance of such obligations and/or to recover their
damages and costs. The Fund Manager will seek to mitigate these risks by
attempting to negotiate certain protective provisions in the Local Limited
Partnership purchase agreements or commitments. Such provisions may include
extensions of the due dates for payment, releases from such commitments if
proceeds are not available, or dilution of a Local Limited Partnership Interest
to permit a reduced investment in an Apartment Complex. However, there is no
assurance that any of these mitigation measures could be successfully
implemented.
In the event that a Unitholder defaults on his obligation to pay the
deferred installments and interest when due, or any other Event of Default, as
defined in the Promissory Note, occurs he will face serious consequences,
including acceleration of his Promissory Note, loss of right to Tax Credits and
foreclosure and sale of his Units. Late installments will also be subject to the
payment of late charges. See "Summary of Certain Provisions of the Partnership
Agreement." In addition to a Unitholder's liability under his Promissory Note,
the Unitholder may also be liable to his Series or other holder of the
Promissory Note, as applicable, for any expenses incurred in enforcing their
respective rights.
The Partnership Agreement requires that the portion of Front-End Fees (e.g.,
selling commissions, Organizational and Offering Expenses and Acquisition Fees)
payable from payments to be received on the Promissory Notes may only be paid as
the payments are actually received on the Promissory Notes.
Prepayments and Temporary Investments. The Fund Manager anticipates that
some investors will not subscribe for a sufficient number of Units to qualify
for the use of the installment payment arrangement described above and that some
investors who do qualify will desire to pay for their Units in full upon
subscription or to later prepay their Promissory Notes to avoid or reduce
interest costs or otherwise in connection with their own financial planning. The
Fund Manager cannot predict the percentage of Fund equity which may be so paid.
The business development plan of the Fund contemplates that any such payments,
whether at the inception of the program or thereafter, will be applied in the
following order of priority: (i) to fund related amounts of Front-End Fees which
have been deferred as described in the preceding paragraph, and (ii) to make
Temporary Investments and applied as soon as practicable to Local Limited
Partnership investments and other deferred costs.
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Policies as to Pledges of Promissory Notes. The Partnership Agreement
precludes each Series from selling Promissory Notes prior to maturity, but
permits a Series to pledge and grant security interests in Promissory Notes as
security for any Series obligation. Such security interests in Promissory Notes
may be granted by a Series to secure its obligations to pay the deferred
portions of its capital contribution to the Local Limited Partnerships.
MANAGEMENT COMPENSATION
The following table summarizes the types, estimated amounts and recipients
of compensation to be paid to the Fund Manager and its Affiliates. Such
compensation was not determined by arm's-length negotiations. Further,
investment and management decisions which such persons make for the Series will
affect the amount of the compensation actually to be received. For example, one
of the limits on the Asset Management Fee payable by a Series to the Fund
Manager is based on the number of Apartment Complexes invested in which could
cause a conflict of interest because it could encourage the Fund Manager to
maximize the number of Apartment Complexes acquired. See "Conflicts of
Interest." Other than as set forth herein, no compensation is to be paid to the
Fund Manager or its Affiliates, and such compensation cannot be increased by
reclassifying into different categories fees or reimbursements which are in
excess of the limitations set forth herein.
Type of Compensation Estimated Maximum Amount
and Recipient of Compensation
Organizational and Offering Stage
Selling commissions payable to Up to 7% of the Capital Contribution
Dealer-Manager in the discretion of the Dealer-
Manager ($98,000 if 1,400 Units
are sold; $3,500,000 if all of the
Units are sold). (1)
Dealer-Manager Fee payable to Up to 2% of the Capital Contributions
Dealer-Manager ($28,000 if 1,400 Units are sold;
$1,000,000 if all of the Units are
sold). (1)
Nonaccountable Expense Reimbursement 1% of the Capital Contributions
payable to Dealer-Manager ($14,000 if 1,400 Units are sold;
$500,000 if all of the Units are
sold). (1)
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Accountable reimbursement of certain The Fund Manager and its Affiliates
Organizational and Offering Expenses will be reimbursed by each Series from
paid by the Fund Manager or its the Gross Proceeds for the actual
Affiliates amount of Organizational and Offering
Expenses advanced by them on behalf
of such Series and for salaries and
direct expenses of certain of their
employees in connection with the
organization and registration of such
Series. Such expenses may include
printing, legal, accounting, Escrow
Agent and depository fees, due
diligence expenses and other
accountable Organizational and
Offering Expenses. Notwithstanding,
the Fund Manager has agreed that
it will pay all other Organizational
and Offering Expenses (with the
exception of the 7% retail selling
commissions, the Dealer-Manager Fee
and the Nonaccountable Expense
Reimbursement) to the extent such
other expenses exceed an aggregate
amount equal to 3% of the Capital
Contributions. However, if and to
the extent Acquisition Expenses are
less than the maximum permitted
amount, as set forth below in this
table, the difference between the
actual Acquisition Expenses and
the maximum permitted amount of
Acquisition Expenses will reduce the
Fund Manager's obligation to pay such
Organizational and Offering Expenses,
but in any event the Fund Manager has
agreed to pay the amount of such
expenses in excess of 4.5% of the
Capital Contributions. In addition,
the Fund Manager has agreed to pay all
Organizational and Offering Expenses
(including the 7% retail selling
commissions, the Dealer-Manager Fee
and the Nonaccountable Expense
Reimbursement) in excess of 14.5% of
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the Capital Contributions. Each such
guaranty is without recourse to or
reimbursement by the Fund. ($42,000
if 1,400 Units are sold and the
maximum Acquisition Expenses are
reimbursed; $63,000 if 1,400 Units
are sold and no Acquisition Expenses
are reimbursed; $1,500,000 if
all of the Units are sold and the
maximum Acquisition Expenses are
reimbursed; $2,250,000 if all of the
Units are sold and no Acquisition
Expenses are reimbursed).
Acquisition Stage (2)
Acquisition Fee payable to the Up to 7% of the Capital Contribution
Fund Manager or its Affiliates (up to $98,000 if 1,400 Units are
sold; up to $3,500,000 if all of the
Units are sold). (3)
Reimbursement of Acquisition The Fund Manager and its Affiliates
Expenses paid by the Fund will be reimbursed by each Series
Manager or its Affiliates from the Gross Proceeds for the
actual amount of any of the
Acquisition Expenses (i.e., legal,
accounting and other expenses
pertaining to the negotiation and
acquisition of Local Limited
Partnership Interests) advanced by
them. These reimbursements plus all
other Acquisition Expenses will not
exceed 1.5% of Capital Contributions
($21,000 if 1,400 Units are sold;
$750,000 if all of the Units are
sold).
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Operating Stage
Asset Management Fees payable to An annual fee in an amount not to
the Fund Manager or its Affiliates exceed 0.2% of Invested Assets in
government-subsidized Local Limited
Partnerships which are subsidized
under one or more Federal, state
or local government programs. Actual
amounts will depend on the amount of
Invested Assets and are not
determinable at this time; however,
assuming the Apartment Complexes are
80% leveraged and all the Units
offered hereby are sold,
Invested Assets would be
approximately $195,000,000 and the
annual Asset Management Fee would be
approximately $390,000.
Property Management Fees payable Although not anticipated, the Fund
to the Fund Manager or its Affiliates Manager or its Affiliates may act as
the management and leasing agents
for some of the Local Limited
Partnerships. Actual amounts
are not determinable at this time,
but in any event would be at
Competitive rates for comparable
services, not to exceed 5% of gross
property revenues.
Reimbursement of Fund expenses The Fund Manager and its Affiliates
paid by the Fund Manager or its Affiliates will be reimbursed for the actual
amount of any of the Operating Cash
Expenses advanced by them. In no
event will reimbursements be
permitted for (i) services for which
the Fund Manager is entitled to
compensation by way of a separate
fee, (ii) rent, depreciation or
other such administrative items, or
(iii) salaries, fringe benefits or
travel expenses of a controlling
person of the Fund Manager. Actual
amounts are not determinable at
this time.
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Fund Manager's share of Cash 1% of Cash Available for Distribution
Available for Distribution Actual amounts will depend upon
results of operations of the Series
and are not determinable at this time.
SLP Affiliate's share of allocations Up to 0.1% of all allocations by Local
and operating cash distributions of Limited Partnerships of profits,
Local Limited Partnerships losses and Tax Credits and up to 1% of
distributions from operating cash
flow. Actual amounts will depend
upon the terms of the Local Limited
Partnership Agreement and the results
of the Local Limited Partnership's
operations and are not determinable
at this time. (4)
Local General Partner's share of In the event that the SLP Affiliate or
allocations and operating cash another Affiliate of the Fund Manager
distributions of any Local Limited becomes the Local General Partner of
Partnership in the event that an a Local Limited Partnership, such
Affiliate of the Fund Manager Affiliate may receive allocations by
(which may be the SLP Affiliate) the Local Limited Partnership of
becomes the Local General Partner profits, losses and Tax Credits and
of such Local Limited Partnership distributions from operating cash
flow. Actual amounts will depend
upon the terms of the Local Limited
Partnership Agreement and the
results of the Local Limited
Partnership's operations and are not
determinable at this time. (4)
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Liquidation Stage (5)
Fund Manager's Subordinated Subject to the prior return of Capital
Disposition Fee Contributions to its Unitholders and
Fund Manager, and payment of the
Return on Investment, which includes
Tax Credits, to the Unitholders, a
Series may pay the Fund Manager from
the proceeds of Apartment Complexes
sold by Local Limited Partnerships,
a Subordinated Disposition Fee equal
to 1% of the sales price of the
Apartment Complexes. Actual amounts
will depend upon results of the sale
and are not determinable at
this time. (6)
Fund Manager's share of Sale or After its Unitholders have received
Refinancing Proceeds Sale or Refinancing Proceeds equal
to the amounts of their Capital
Contributions and their Return on
Investment, which includes Tax
Credits, and the Fund Manager has
received (i) Sale or Refinancing
Proceeds equal to the amount of its
Capital Contributions, and (ii) any
Subordinated Disposition Fee,
a Series will distribute any
additional Sale or Refinancing
Proceeds 90% to its Unitholders and
10% to the Fund Manager. Actual
amounts will depend upon the
amount of Sale or Refinancing
Proceeds received from Local Limited
Partnerships and are not determinable
at this time.
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<PAGE>
Local General Partner's share of In the event that the SLP Affiliate or
distributions from a Sale or another Affiliate of the Fund Manager
Refinancing transaction by any Local becomes the Local General Partner of
Limited Partnership in the event that a Local Limited Partnership, such
an Affiliate of the Fund Manager Affiliate may receive distributions
(which may be the SLP Affiliate) from the Sale or Refinancing of the
becomes the Local General Partner of Local Limited Partnership's Apartment
such Local Limited Partnership Complex. Actual amounts will depend
upon the terms of the Local Limited
Partnership Agreement and the results
of Local Limited Partnership
operations and are not determinable
at this time. (4)
Interest in Fund (7)
Fund Manager's allocations of Generally, 1% of Profits and Losses
Profits and Losses for Tax for Tax Purposes and of Tax Credits,
Purposes and Tax Credits except that in the case of Profits for
Tax Purposes arising from a Sale or
Refinancing, the percentage may be
increased to as much as 10%,
calculated in accordance with the
Partnership Agreement. Actual amounts
allocable to the Fund Manager will
depend upon results of operations of
the Series and the Local Limited
Partnerships and are not determinable
at this time.
(1) All or a portion of these amounts will be reallowed to participating
Soliciting Dealers.
(2) In addition, the Fund Manager or its Affiliates may receive interest on
short-term loans to a Series to facilitate investments in Apartment
Complexes prior to the sale by the Series of that number of Units sufficient
to fund such purchases, or for other Series' purposes, subject to the
restrictions set forth in Section 5.3.1(ii) of the Partnership Agreement,
which provides that the maximum amount of interest charged on such loans
shall in no event exceed by more than 2% per annum the Prime Rate.
(3) Acquisition Fees to the Fund Manager and its Affiliates are subject to
reduction in the case of Unit purchases by Discount Investors, as discussed
under "Terms of the Offering and Plan of Distribution." Acquisition Fees
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may also be reduced from time to time as deemed appropriate by the Fund
Manager in its sole discretion.
(4) Notwithstanding, the interest of the Fund Manager and each of its Affiliates
in cash to be distributed by the Partnership or by any Local Limited
Partnership from Cash Available for Distribution, from Sale or Refinancing
Proceeds, or from similar sources in the case of a Local Limited
Partnership, will not exceed, in the case of Cash Available for
Distribution, 10% of total Cash Available for Distribution and, in the case
of Sale or Refinancing Proceeds, after payment to the Limited Partners of an
amount equal to 100% of their Capital Contributions and their Return on
Investment, 15% of remaining Sale or Refinancing Proceeds.
(5) Liquidation Stage includes liquidations of investments in Apartment
Complexes.
(6) In compliance with the "blue sky" laws of certain states in which the Units
will be offered, a Subordinated Disposition Fee will be paid by a Series
with respect to the sale of an Apartment Complex only if the Fund Manager or
an Affiliate provides a substantial amount of services in the sales effort.
The Partnership Agreement does not specify the extent of the services which
will be required to satisfy this requirement, and the Fund Manager will
cause such a fee to be paid when it believes that it is appropriate to do
so.
(7) See "Profits and Losses for Tax Purposes, Tax Credits and Cash
Distributions."
CONFLICTS OF INTEREST
The interests of the Fund Manager and its Affiliates may conflict with the
interests of the Unitholders in various ways. These conflicts include:
Receipt of Fees and Other Compensation by the Fund Manager and its
Affiliates
The Fund Manager has absolute discretion with respect to transactions
involving the purchase, sale and management of the Series' investments in
Apartment Complexes which will result in the realization by the Fund Manager and
its Affiliates of fees, compensation and other income. See "Investment
Objectives and Policies," "Management Compensation" and "Summary of Certain
Provisions of the Partnership Agreement." Such compensation arrangements were
not negotiated at arm's length and may create conflicts between the interests of
the Fund Manager and its Affiliates and those of the Series and the Unitholders.
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For example, in connection with the sale of an Apartment Complex by a Local
Limited Partnership the consent of the SLP Affiliate and/or a Series may be
necessary. The Fund Manager and the SLP Affiliate may face a conflict in these
circumstances inasmuch as their share of Sale or Refinancing Proceeds and
Subordinated Disposition Fees from the transaction may be more or less than the
Fund Manager's expected share of Asset Management Fees which would be paid
absent the sale of the Apartment Complex. And by negotiating with Local General
Partners of partnerships in which the Series might invest for the Fund Manager
or its Affiliates to provide property management or leasing services to those
Local Limited Partnerships, the Fund Manager may cause it or its Affiliates to
earn property management or leasing fees from the Local Limited Partnerships, as
is permitted under the Partnership Agreement. The result of these conflicts
could be that a Series may make investments which are less desirable, or on
terms which are less favorable, to the Series than might otherwise be the case.
Other Business Activities of the Fund Manager and its Affiliates
The Fund Manager and its Affiliates have formed and are serving as general
partners of other public and private real estate limited partnerships and are
providing administrative and consulting services for other real estate limited
partnerships of which they were not the original managing general partners. See
"Management" and "Prior Performance Summary." In addition, the Fund Manager and
its Affiliates may in the future become general partners of other public or
private real estate limited partnerships and may become involved in other
business activities unrelated to the business of the Fund.
Under the Partnership Agreement, the Fund Manager is required to devote to
the affairs of each Series only such time as is necessary for the proper
performance of its duties under the Partnership Agreement. The duties of the
Fund Manager will be performed by its officers, directors and employees. None of
such persons are expected to devote their full time to the performance of such
duties. Therefore, conflicts may arise in the allocation of the time of the
officers, directors and employees of the Fund Manager among the activities of
each Series and the other activities of the Fund Manager. However, the Fund
Manager believes that it has sufficient personnel to fully discharge its duties
to the Series and to all other entities to which they are responsible. See
"Management."
Competition with the Fund Manager and its Affiliates with Respect to the
Purchase or Ownership of Properties
As noted above, the Fund Manager and its Affiliates are also general
partners of a substantial number of other real estate limited partnerships and
in the future may form and manage additional real estate entities. The other
existing partnerships
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<PAGE>
have, and it is expected that any entities to be organized in the future will
have, the same or similar investment objectives as the Fund.
The Fund Manager might be presented with an investment opportunity which
might be availed of by a Series and one or more other entities (including the
other Series) which the Fund Manager or one of its Affiliates manages, in which
event the Series may be unable to consummate the investment. The decision as to
the particular entity which will make the investment will be based upon such
factors as the effect of the acquisition on diversification of each entity's
portfolio, the estimated income tax effects of the purchase on each entity, the
amount of funds of each entity available for investment and the length of time
such funds have been available for investment. If a particular investment is
determined to be suitable for more than one entity, priority generally will be
given to the entity having uninvested funds for the longest period of time;
except that an entity which was formed to invest primarily in apartment
complexes eligible for California or other state low income housing credits as
well as the Federal Low Income Housing Credit will be given priority over each
Series and other entities which are not seeking to provide such state tax
credits with respect to any investment which is eligible for such state tax
credits.
The Local General Partners and their Affiliates and the Fund Manager and its
Affiliates may presently own or may acquire interests in properties near or
adjacent to the Apartment Complexes in which a Series may invest. It is possible
that the value of properties in which such persons have interests may be
enhanced by their proximity to the Series' Apartment Complexes or that such
properties may be in competition with the Series' Apartment Complexes for
prospective tenants or purchasers. As a result, the interests of the Fund
Manager, the Local General Partners and their respective Affiliates may conflict
with those of a Series with respect to the acquisition of a Local Limited
Partnership Interest.
Other Transactions with Developers, Local General Partners, Lenders and
Joint Venturers
The Fund Manager anticipates that certain persons controlling or having
business dealings with the Local Limited Partnerships in which a Series invests,
such as general partners, developers and lenders, will be persons with whom the
Fund Manager and its Affiliates have entered into previous real estate
transactions and may enter into additional real estate transactions in the
future. The Fund Manager and its Affiliates may receive substantial
compensation, profits or other benefits in connection with such other
transactions, and, as a result, conflicts may arise between their interests and
the interests of the Fund. In this regard, the Fund Manager generally is
entitled to remove a Local General Partner without the consent of the
Unitholders. If the Fund Manager has other business dealings with the Local
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General Partner, the Fund Manager might be reluctant to do so under
circumstances which otherwise would warrant removal.
Representation in Tax Audit Proceedings
The Fund Manager has been designated the "Tax Matters Partner" of each
Series and is authorized and directed by the Partnership Agreement to represent
each Series and its Unitholders at the expense of the Series in connection with
all examinations of the Series' affairs by tax authorities, including any
resulting administrative or judicial proceedings. Such proceedings may involve
or affect the other Series and other partnerships and limited liability
companies for which the Fund Manager or an Affiliate acts as general partner or
manager. In such situations, the positions taken by the Fund Manager with
respect to the Series may have differing effects on the Series and the other
Series and such other entities.
Distribution of Units
No independent managing underwriter has been engaged for the distribution of
the Units. Furthermore, WNC Capital Corporation (the "Dealer-Manager"), an
Affiliate of the Fund Manager, may sell Units and will perform wholesaling
services for the Fund, and may not be expected to perform due diligence in the
same manner as an independent broker-dealer.
Joint Investments
A Series may invest in Local Limited Partnerships jointly with the other
Series or with other limited partnerships (including other limited partnerships
sponsored by the Fund Manager or its Affiliates) if the conditions set forth
under "Investment Objectives and Policies - Joint Investments" are met. There is
always a risk that joint venture partners will reach an impasse respecting the
activities of the joint venture. For example, because of the differing financial
positions of the co- venturers, it may be in the best interest of a Series to
sell a jointly-held Local Limited Partnership Interest at a time when it is in
the best interest of its co-venturer to retain such investment. In such event,
the Series may be unable to timely sell the Local Limited Partnership Interest.
Resolution of Conflicts of Interest
Other than the process described above relating to the acquisition of an
interest in a Local Limited Partnership when funds are available both from a
Series and another entity (including the other Series) sponsored by the Fund
Manager or its Affiliates, the Fund has not developed any formal process for
resolving conflicts of interest. However, the Fund Manager is subject to a
fiduciary duty to exercise good faith and integrity in handling the affairs of
each Series, which duty will
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govern its actions in all such matters (see "Fiduciary Responsibility"), and is
subject to restrictions contained in the Partnership Agreement concerning the
manner in which investments may be made in Apartment Complexes and the manner in
which the Series will be operated (see "Investment Objectives and Policies").
While the foregoing conflicts could result in materially adverse effects on
the Unitholders, the Fund Manager, in its discretion, will attempt to mitigate
such potential adversity by the exercise of its business judgment in an attempt
to fulfill its fiduciary obligations. There can be no assurance that such an
attempt will prevent adverse consequences resulting from the numerous conflicts
of interest.
Lack of Separate Representation
The Fund, the Fund Manager and its Affiliates, and the Unitholders are not
represented by separate counsel. See "Legal Matters." All of the attorneys,
accountants and other experts performing services for the Fund also perform
services for the Fund Manager and its Affiliates. Following the termination of
the Offering, if any controversy arises in which the interests of a Series
appear to be in conflict with those of the other Series, or the Fund Manager or
its Affiliates, or in which the interests of a Series appear to be in conflict
with those of a Local Limited Partnership, other counsel would be retained for
one or more of the parties.
Organizational Diagram
The following diagram illustrates the relationships among the Fund, the Fund
Manager, certain other Affiliates and certain other parties:
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Owner of WNC & Associates, Inc.
WNC Capital Corporation Fund Manager
(General Partner)
of
WNC Housing Tax Credit
Fund VI, L.P.,
Series 5 and Series 6
Limited Partners
of
Local Limited
Partnerships
In addition to the foregoing relationships, the Fund Manager and its
Affiliates have sponsored and are serving as general partners of other real
estate limited partnerships. See "Management" and "Prior Performance Summary."
FIDUCIARY RESPONSIBILITY
The Fund Manager is accountable to the Fund as a fiduciary. The Fund has
been advised by Counsel that the laws of the State of California govern the
fiduciary obligations of the Fund Manager to each Series and its Unitholders.
Under such laws, a general partner owes his partners the utmost good faith and
loyalty. The Partnership Agreement does not modify these fiduciary obligations
provided under California law. Rather, the Partnership Agreement expressly
provides that the Fund Manager (i) has fiduciary responsibility for the
safekeeping and use of all funds and assets of each Series, whether or not in
its immediate possession or control, and may not employ or permit another to
employ such funds or assets in any manner except for the exclusive benefit of
the Series; (ii) may not contract away its fiduciary duty under common law; and
(iii) may engage in other business activities independent of the Series provided
that the right to engage in such activities does not relieve it of its general
fiduciary obligation to the Series.
Under California law and subject to certain conditions, a limited partner
may institute legal action on behalf of a partnership (a partnership derivative
action) to
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recover damages from third parties or to recover damages for a breach by a
general partner of its fiduciary duty. In addition, a limited partner may
institute a legal action on behalf of himself and all other similarly situated
limited partners (a class action) to recover damages for a breach by a general
partner of its fiduciary duties, subject to California rules of general
applicability with respect to class actions. In any such action, the Fund
Manager may assert defenses based on the exculpation provisions in the
Partnership Agreement described in the following paragraph. If the Fund Manager
demonstrates that it satisfied such exculpation standards, it would be deemed
not to have breached its fiduciary obligation. This area of the law is changing
and developing and investors who have questions concerning the duties of the
Fund Manager to the Series should consult with their counsel.
The Partnership Agreement exculpates each Person who is a Sponsor from
liability for acts or omissions that any of them performs in good faith and in a
manner the Sponsor reasonably believes to be within the scope of authority
granted to it and in the best interest of the Series, provided such conduct did
not constitute negligence or misconduct of such Sponsor. The Partnership
Agreement also indemnifies such Sponsor against liabilities for losses to a
Series resulting from errors in judgment or other acts or omissions, whether or
not disclosed, provided such conduct did not constitute negligence or misconduct
of such Sponsor and were the result of a course of conduct which such Sponsor,
in good faith, determined was in the best interests of the Series. See Section
5.8 of the Partnership Agreement. As a result of the exculpation and
indemnification provisions in the Partnership Agreement, a Unitholder may have a
more limited right of action than he would otherwise have had in the absence of
such provisions. In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Act of 1933 is
against public policy and therefore unenforceable.
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INVESTMENT OBJECTIVES AND POLICIES
Principal Investment Objectives
The Fund's principal investment objective is to provide tax benefits in the
form of:
(a) A predictable stream of Tax Credits which Unitholders may use
to offset their Federal income tax liabilities, subject to
certain specific limitations. The Fund intends to invest in
Local Limited Partnerships with a view to realizing Tax
Credits of from $1,100 to $1,300 per Unit.
(b) Losses for Tax Purposes which (i) individuals, S Corporations
and personal service C Corporations may use to offset passive
income, (ii) closely-held C Corporations may use to offset
income other than portfolio income and (iii) all other C
Corporations may use to offset any type of income.
In addition the Fund will seek, to the extent feasible, to preserve and
protect the Fund's invested capital and to return such capital through cash
distributions resulting from Sale or Refinancing transactions. See "Sale or
Other Disposition of Investments" below.
If the Fund satisfies its investment objective, for example, by providing
tax credits equal to 12% of a Unit's purchase price each year for 10 years, an
investor would have to receive a return of from 16.5% to 20% (depending on the
investor's marginal tax bracket) from an investment in a taxable investment
vehicle to have the same after-tax results.
THERE CAN BE NO ASSURANCE THAT THESE INVESTMENT OBJECTIVES WILL BE
ACHIEVED. IN ADDITION, THE DEGREE OF ACHIEVEMENT OF THE FUND'S OBJECTIVES MAY
VARY BETWEEN THE SERIES.
NOT TO BE USED IN ARIZONA, MAINE, MASSACHUSETTS, MINNESOTA, MISSOURI,
NEBRASKA, PENNSYLVANIA, TENNESSEE OR TEXAS
66a
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INVESTMENT OBJECTIVES AND POLICIES
Principal Investment Objectives
The Fund's principal investment objective is to provide tax benefits in the
form of:
(a) A predictable stream of Tax Credits which Unitholders may use
to offset their Federal income tax liabilities, subject to
certain specific limitations.
(b) Losses for Tax Purposes which (i) individuals, S Corporations
and personal service C Corporations may use to offset passive
income, (ii) closely-held C Corporations may use to offset
income other than portfolio income and (iii) all other C
Corporations may use to offset any type of income.
In addition the Fund will seek, to the extent feasible, to preserve and
protect the Fund's invested capital and to return such capital through cash
distributions resulting from Sale or Refinancing transactions. See "Sale or
Other Disposition of Investments" below.
It is not an investment objective of the Fund to provide significant amounts
of cash distributions from operations, and any such distributions can be
anticipated only where a particular Apartment Complex is subject to relatively
lower mortgage financing or includes units which are not intended to be eligible
for Tax Credits.
THERE CAN BE NO ASSURANCE THAT THESE INVESTMENT OBJECTIVES WILL BE
ACHIEVED. IN ADDITION, THE DEGREE OF ACHIEVEMENT OF THE FUND'S OBJECTIVES MAY
VARY BETWEEN THE SERIES.
TO BE USED ONLY IN ARIZONA, MAINE, MASSACHUSETTS, MINNESOTA, MISSOURI,
NEBRASKA, PENNSYLVANIA, TENNESSEE OR TEXAS
66b
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At such times during the negotiations for a specific investment as the Fund
Manager believes a reasonable probability exists that the investment will be
acquired by a Series, this Prospectus will be supplemented to disclose the
negotiations and pending investment. Any such supplement will set forth
available data with respect to the investment, including the proposed terms of
purchase, a description of the Apartment Complex and other information
considered appropriate for an understanding of the transaction.
The consummation of any acquisition that is not covered by binding
agreements will be subject to further negotiation with the developer and
execution of a final agreement. Such final agreement may differ in material
respects from prior understandings or agreements between the developer and the
Series. The acquisition or retention of each investment will also be subject to
various terms and conditions of closing, including the receipt of satisfactory
closing documentation, and to the receipt of sufficient Net Proceeds of the
Series which is to make the investment. Accordingly, there can be no assurance
that any potential Apartment Complex investment initially disclosed in a
supplement to this Prospectus will ultimately be acquired, nor that the terms of
any acquisition will not differ substantially from those which were initially
disclosed.
Low Income Housing Credits will be available for an Apartment Complex over a
10-year period commencing with the date that the Property is placed in service
and otherwise meets the requirements for the credit. Although Unitholders are
expected to be allocated Low Income Housing Credits beginning in the year they
are admitted to a Series, it is also expected that the amount of Low Income
Housing Credits available to Unitholders will be higher in subsequent years
because of the time that is necessary for the Fund Manager to identify the Local
Limited Partnerships in which a Series will invest and for such Local Limited
Partnerships to complete construction of their respective Apartment Complexes.
However, any reduction in Low Income Housing Credits in the first and second
years of a Series is expected to result in additional Low Income Housing Credits
in the tenth and eleventh years of a Series.
The Fund Manager believes that each Series will be able to acquire a
sufficient number of Local Limited Partnership Interests at a purchase price
which will enable the Series to provide the amounts of Tax Credits anticipated
at commencement of the Series Offering. This belief is based upon the general
knowledge that the management personnel of the Fund Manager have with respect to
the current and past purchase prices for properties that are eligible for Tax
Credits. In negotiating the purchase price to be paid by a Series for its
interest in a Local Limited Partnership, the Fund Manager will determine the
portion of the Net Proceeds that can be paid for such interest which will enable
the Unitholders to receive the anticipated amount of Tax Credits. The Fund
Manager will take into consideration the possibility that a Local Limited
Partnership will not provide all of the Tax
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Credits that are expected, and the purchase price paid by the Series for that
interest will be reduced to take into account the possibility that the full
amount of the Tax Credits will not be delivered. Prospective investors should
note that, to the extent a Series does not make Distributions of Sale or
Refinancing Proceeds and Cash Available for Distribution in respect of a Unit
equal to the $1,000 purchase price of the Unit, the Tax Credits generated by the
Series would in effect represent a return of (and not a return on) the
investor's investment in the Series.
Among other things, the Fund Manager's estimate of the amount of Tax Credits
that will be provided by each Series is based upon the assumption that
investment demand for Apartment Complexes receiving Tax Credits does not
increase the price for Local Limited Partnership Interests. In the recent past,
heightened demand for, and a reduced supply of, Local Limited Partnership
Interests has increased the purchase price thereof. Further increases could
impair the ability of the Fund to provide investors with the anticipated amount
of Tax Credits. See "Risk Factors Investment Risks - Keen Competition for
Investments."
The Fund Manager's estimate of the amount of the Tax Credits that will be
provided by each Series is based upon additional assumptions, including, that
(a) no tax laws or regulations (and court interpretations thereof) will be
enacted or adopted in the future which would adversely affect the tax positions
of the Series; (b) the Apartment Complexes will qualify for the anticipated Tax
Credits at the appropriate times; (c) 100% of the cost of the Low Income Units
in each Apartment Complex will qualify for the low-income housing credit base;
(d) the Low Income Units in each Apartment Complex will be rented to eligible
tenants; (e) the "qualified basis" of each Apartment Complex for purposes of
calculating the Tax Credits will not decrease during the 15-year Initial
Compliance Period and each Local Limited Partnership will continually meet the
rental and occupancy tests for the Low Income Units during the Initial
Compliance Period; (f) payments to Local General Partners or their Affiliates
for their services to the Local Limited Partnerships in connection with the
development of the Low Income Units will be included in the eligible tax credit
base; and (g) in the case of an existing Apartment Complex, the acquisition
thereof will constitute a "purchase" for purposes of Code Section 42. See "The
Low Income Housing Credit."
Events subsequent to the acquisition of Local Limited Partnership Interests
could materially affect a Series' ability to provide all of the anticipated Tax
Credits. For example, Tax Credits will be less than anticipated if there is a
change in the present value calculation (which is based, pursuant to IRS
regulations, on current interest rates) at the time the Apartment Complex is
placed in service or if the expenditures by the Local General Partners to
develop the Low Income Units, or other factors, cause the "qualified basis" to
be less than anticipated. The amount of Tax Credits achieved could also be
materially and adversely affected by the failure of any other of the assumptions
mentioned in the preceding paragraphs. See "Risk Factors -
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Risks Related to Tax Credits." However, as discussed below in this section under
"Terms of the Local Limited Partnership Agreements," the Local Limited
Partnership Agreements will include various "adjuster" provisions intended to
reduce the adverse consequences to a Series if such subsequent events occur by
reducing the Series' required capital contribution to the affected Local Limited
Partnership.
The foregoing investment objectives are set forth in the Partnership
Agreement and can only be changed by an amendment to the Partnership Agreement.
An amendment to a Series' investment objectives may be made with the approval of
Unitholders owning more than 50% of the Units in the Series unless the amendment
would adversely affect the limited liability of a Unitholder of the Series or
the rights, powers, duties or compensation of the Fund Manager or any of its
Affiliates, in any of which events it will also require the consent of such
persons. See "Risk Factors - Fund-Related Risks - Risks Related to Exercise of
Unitholder Voting Rights." Further, in the event that recent changes in the
Federal income tax laws are not interpreted in the way in which the Fund Manager
has interpreted such provisions or in the event other changes occur which would
materially and adversely affect the ability of a Series to attain its investment
objectives by pursuing the investment policies described below, the Fund Manager
may be required to make certain modifications to such investment policies,
subject to the restrictions set forth in the Partnership Agreement, so as to
afford the Series a better opportunity to achieve its investment objectives.
Investment Policies
Investment Criteria. In selecting Apartment Complexes the Fund Manager will
evaluate, among other factors: the amount of Tax Credits which are anticipated;
the amount of cash flow from operations, if any, which is anticipated; the
location of the Apartment Complex; general rental market conditions in the area
of the Apartment Complex (including vacancy rates and information as to the
numbers of people who meet the income standards required to be met by tenants in
the area so that the Apartment Complex would be able to qualify for the Low
Income Housing Credits); the expenses, rental rates and costs of construction of
the Apartment Complex and comparable apartment complexes; the data supplied to
the agency providing government financing subsidies or other lender; the
financial strength of the Local General Partners; the prior performance of the
Local General Partners; the experience and prior performance of the property
manager for the Apartment Complex; the types of guarantees which can be obtained
from Local General Partners or other sellers or developers; and the prior
experience and reputation of the builder and architect of the Apartment Complex.
In the event that the potential investment is in an older Apartment Complex, the
Fund Manager will investigate the physical condition of such Property, including
obtaining an engineering report
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if it determines that it is in the best interest of the Series to do so, and
will review the current rent roll of the Apartment Complex.
The criteria for selecting a particular investment of a Series will include
the following:
(1) The Apartment Complex must be completed, under development or in the
process of being rehabilitated.
(2) The Apartment Complex must not have been placed in service prior to
January 1, 1990 so that the limitations on utilization of the Low Income Housing
Credits determined with regard to a taxpayer's adjusted gross income (see
"Federal Income Tax Considerations - Limitations on Losses and Credits from
Passive Activities") will not apply to Unitholders.
(3) In the case of a new construction or rehabilitation Apartment Complex,
no substantial part of the Series' investment shall be made prior to receipt of
a commitment for the construction loan and no more than 75% of the Series'
investment shall be made prior to receipt of a commitment for the permanent loan
for the Apartment Complex.
(4) With respect to a Local Limited Partnership owning an Apartment Complex
which is to qualify for Low Income Housing Credits, the Local Limited
Partnership must represent that at least 40% of the residential units comprising
the Apartment Complex will be Low Income Units and, with respect to each Local
Limited Partnership, the Local Limited Partnership must agree to provide the
Series with the amount of Tax Credits anticipated to be received as a result of
the ownership of the Apartment Complex.
(5) In no case shall the Series invest in any Local Limited Partnership of
which, at the date of initial investment, the Fund Manager or any Affiliate of
the Fund Manager is a Local General Partner or an Affiliate of a Local General
Partner, or otherwise has an interest therein, except as provided in Sections
5.2.2(vii), 5.3.2(i) and/or Section 5.3.1(viii) of the Partnership Agreement.
As a condition to the Partnership's becoming a limited partner or member of
a Local Limited Partnership, the Fund Manager will seek to ascertain the status
of certain matters with respect to such Local Limited Partnership. These matters
are expected to include (i) assurance that the Local Limited Partnership has
title to its Apartment Complex, (ii) assurance that the Local Limited
Partnership is duly formed as a limited partnership or limited liability company
under the laws of its state of origin and (iii) receipt of an opinion of counsel
for the Local Limited Partnership as to the limited liability of the Series as a
limited partner or member thereof. Such counsel's opinion will also include, or
permit the Fund's counsel to
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deliver to the Series, an opinion that the Local Limited Partnership is a
partnership for Federal income tax purposes, that the allocation provisions of
the Local Limited Partnership Agreement will not be significantly modified by
the IRS and, based on the assumption that the Local Limited Partnership will
operate as represented by the Local General Partners, that the Apartment Complex
will qualify for the anticipated Tax Credits.
A Series will not acquire any Local Limited Partnership Interest unless the
Series has received, with respect to the Apartment Complex of such Local Limited
Partnership, either (i) an appraisal prepared by a competent, independent
appraiser or (ii) RD Forms 1924-13 (estimate and certificate of actual cost) and
1930-7 (statement of budget, income and expense) or HUD project cost and budget
analysis on Form 2264, or a comparable form of any successor of RD or HUD or of
a state or other governmental agency, including any applicable Tax Credit
allocation agency, setting forth estimates with respect to construction and
mortgage financing costs and initial rental income and operating expenses, which
in either case will be maintained in the Series' records for at least five
years, and shall be available for inspection and duplication by any Unitholder.
Each Series intends to invest only in Local Limited Partnerships which will
arrange for comprehensive insurance coverage for their Apartment Complexes,
including liability, fire and extended coverage, of the type which is
customarily obtained for similar properties. See, however, "Risk Factors -
Investment Risks Possibility of Uninsured Losses."
Eligibility for Low Income Housing Credits. Each Series will invest in Local
Limited Partnerships which own and operate Apartment Complexes which are
expected to be eligible for the Low Income Housing Credits and/or Historic
Credits. With respect to Apartment Complexes which will generate Low Income
Housing Credits, at a minimum, at least (i) 40% of the residential units in each
Apartment Complex, and (ii) 70% of the total number of residential units in all
of the Apartment Complexes, in which a Series invests shall be expected to be
Low Income Units.
Historic Tax Credits. Certain of the Local Limited Partnerships in which a
Series invests may own Apartment Complexes which qualify for Historic Tax
Credits in addition to, or instead of, Low Income Housing Credits. Historic Tax
Credits are available for certain rehabilitation expenditures incurred in
improving certified historic structures. If an expenditure is a qualified
rehabilitation expenditure, the Historic Tax Credit is generally equal to 20% of
such expenditure. Unlike Low Income Housing Credits, the full amount of the
Historic Tax Credit is claimed in the year in which the rehabilitated structure
is placed in service. The Historic Tax Credit is more fully discussed in
"Federal Income Tax Considerations Historic Tax Credit" and "- Historic Tax
Credit Recapture."
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Types of Properties. Each Series might invest in two basic types of
Apartment Complexes. The first type consists of newly-constructed or
substantially rehabilitated Apartment Complexes which generally will be
comprised of a number of buildings containing a total of from 15 to 200
apartment units. These projects will be financed either by the U.S. Department
of Agriculture, Rural Development ("RD") (formerly, the Farmers Home
Administration of the U.S. Department of Agriculture), under the Home Investment
Partnership program ("HOME"), or with the proceeds of tax-exempt bonds or of
state and local bonds which are not tax-exempt, or with other
below-market-interest-rate indebtedness, and may also receive rental assistance.
The second type consists of newly-constructed or substantially rehabilitated
Apartment Complexes without Federal or state government subsidies, but which
otherwise qualify for Tax Credits, including single-room occupancy complexes.
Location of Properties. The Apartment Complexes may be located in any of the
United States, territories, or islands which are possessions of the United
States. Apartment Complexes financed or assisted by RD will be located in towns
of under 50,000 population. HUD-assisted Apartment Complexes will be located in
cities with medium to large populations. Other Apartment Complexes may be
located in urban, suburban or rural areas. It is the Fund Manager's intention to
seek as much diversity as reasonably possible in the locations of the Apartment
Complexes; however, a Series' ability to provide such diversification will be
substantially influenced by the amount of the Net Proceeds of its Offering and
the purchase prices of Local Limited Partnership Interests. See "Number of
Investments" below and "Risk Factors - Investment Risks - Risks of Limited
Diversification" and "Keen Competition for Investments." The Fund does not
intend to invest in any distressed low-income areas with a high risk of property
deterioration and neighborhood instability, but may invest in renewal areas
where the Fund Manager believes there to be a strong probability of economic
success.
Number of Investments. The number of different Apartment Complexes in which
a Series will be able to invest will depend on the amount of the Net Proceeds
from the sale of Units and the purchase prices of Local Limited Partnership
Interests. If only the minimum $1,400,000 of Capital Contributions for a Series
is received, it is expected that the Series would invest in three to five
Apartment Complexes. If the maximum Capital Contributions for a Series is
received, the number of Apartment Complexes in which the Series would invest
would be substantially greater. In each instance the actual number of Apartment
Complexes will vary depending on the purchase price of interests in the Local
Limited Partnerships. The Fund does not have a policy, and there is no
limitation, as to the amount or percentage of a Series' assets which may be
invested in any one Local Limited Partnership or group of Local Limited
Partnerships or Local Limited Partnerships with which any person or group of
persons is affiliated.
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Timing of Investments. Subject to the limitations below, a Series may make
or commit to investments in Apartment Complexes at any time, including a time
prior to the commencement or completion of its Offering. See "Risk Factors -
Investment Risks - Risks of Investments Prior to the Sale of Units." The Fund
Manager will attempt to mitigate the risks accompanying investments or
commitments made in anticipation of the receipt of Offering proceeds by
appropriately limiting such investments and commitments and by attempting to
negotiate certain protective provisions in the related agreements or
commitments. Such provisions may include extensions of the due dates for
payment, releases from such commitments if proceeds are not available, or
dilution of a Local Limited Partnership Interest to permit a reduced investment
in an Apartment Complex.
Any of the Capital Contributions of the Offering of a Series which the
Series has not invested or committed to investment in Apartment Complexes within
the later of (i) 24 months from the date of commencement of the Series' Offering
or (ii) 12 months after termination of the Offering, except for amounts set
aside for Reserves, will be returned by the Series to its Unitholders without
reduction for Front-End Fees; and Capital Contributions so returned to
Unitholders will constitute a return of capital and will not reduce the
aggregate interest in the Series allocated to the Unitholders. Any funds with
respect to the investment of which a Series has executed a written agreement in
principle, commitment letter, letter of intent or understanding, option
agreement or other similar understanding or contract or which the Series has set
aside as a reserve for contingent payments as of the later of (i) the date 24
months after the date of the commencement of the Series' Offering or (ii) the
date twelve months after the termination of the Offering, will be deemed
committed to investment on that date and will not subsequently be returned to
the Unitholders even if the investment of such funds is not consummated or the
contingent payments are not made.
Until required by a Series for use in connection with its business and
operations as described in this Prospectus, all funds received out of the escrow
account described under "Terms of the Offering and Plan of Distribution" or in
payment of the Promissory Notes will be held by the Series in United States
government securities, securities issued or fully guaranteed by United States
government agencies, certificates of deposit and time or demand deposits in, or
repurchase agreements constituting obligations of, commercial banks with
deposits insured by the Federal Deposit Insurance Corporation or other
short-term, highly-liquid investments ("Temporary Investments"). The rate of
return on such types of investments has fluctuated widely in recent years and
may be significantly more or less than that obtainable from investments in
Apartment Complexes. The Net Proceeds will not be segregated or held separate
from other funds of the Series pending investment, and no interest will be
payable to the Unitholders if uninvested funds are returned to them upon the
expiration of the 24-month period described above.
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Payment for Investments. A Series will normally make its capital
contributions to a Local Limited Partnership in stages over a period of from one
to two years, with each contribution due when certain conditions regarding
construction or operation of the Apartment Complex have been fulfilled. For
example (and solely for illustrative purposes), the Series' contribution could
be made over a one- to two-year period subject to satisfaction of some or all of
the following requirements: (1) reservation of Low Income Housing Credits and
receipt of Form 8609 (Low Income Credit Allocation Certification); (2) admission
of the Series as a limited partner or member in the Local Limited Partnership;
(3) receipt of a commitment for or closing of the construction loan for its
Apartment Complex; (4) substantial completion of the Apartment Complex; (5)
receipt of a commitment for or closing of the permanent loan; or (6) occupancy
of the Low Income Units by qualified tenants. In connection with the acquisition
of an interest in a Local Limited Partnership owning a completed project, a
Series may make its capital contribution in stages, as described above, or in
full at the time of its acquisition of such interest. Payments made by a Series
or released from escrow to a Local Limited Partnership will generally be made
subject to receipt of representations and warranties of the Local General
Partners to the effect that there is no material default by the Local Limited
Partnership under any mortgage loan or under any other material agreements in
respect of the Apartment Complex. See "Terms of the Local Limited Partnership
Agreements" below in this section.
Once an investment has been selected, the Fund Manager's asset management
personnel will monitor the Apartment Complex monthly to determine compliance
with construction and rent-up schedules. After stabilized occupancy has been
achieved, quarterly reviews and annual on-site visits will be conducted to
monitor building maintenance, occupancy and other operations and maintenance of
reserves.
In determining whether or not to acquire an interest in a Local Limited
Partnership, a Series may make a loan to the Local Limited Partnership prior to
acquiring the interest. Any such loan must be on a short-term basis (not to
exceed one year) and must, unless earlier repaid, be repaid from the Series'
initial capital contribution to the Local Limited Partnership. The amount of any
such loan may not exceed 50% of the total capital contribution to be made to the
Local Limited Partnership.
In the event a Local Limited Partnership as to which no investment is made
fails to repay a loan to a Series, the amount of the Net Proceeds of a Series
available for investment in other Local Limited Partnerships would be reduced.
See "Risk Factors - Investment Risks - Risks of Loss of Loans Made to Local
Limited Partnerships."
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The Local General Partners
Under the terms of the respective Local Limited Partnership Agreements, the
Local General Partners will operate and control the business of the Local
Limited Partnerships, and the role of a Series will be limited to that of a
limited partner or non-managing member. Hence, the experience and the financial
condition of the Local General Partners will be crucial to the success of any
investment by a Series in a Local Limited Partnership.
Financial Condition and Experience of Local General Partners. Prior to any
investment in a Local Limited Partnership, the Fund Manager will obtain from the
Local General Partners financial statements (which may be unaudited) and
information and representations with respect to the prior experience of the
Local General Partners in connection with real estate development. Except in the
case of non-profit organizations, the Local General Partners and any Affiliate
guaranteeing the obligations of any Local General Partner generally will be
required to demonstrate to the reasonable satisfaction of the Fund Manager an
aggregate net worth which is in an amount deemed appropriate by the Fund Manager
and which is sufficiently liquid or otherwise readily available to be able to
protect the Local Limited Partnership in view of the size and scope of its
Apartment Complex, the obligations of the Local General Partners and their
Affiliates to the Local Limited Partnership, any security or other assurances or
measures taken to perform such obligations and the material contingent
liabilities of the Local General Partners. A Series may invest in a Local
Limited Partnership whose Local General Partner does not satisfy the foregoing
standard if the Fund Manager determines that there are adequate alternative
forms of assurance protecting the Local Limited Partnership. Notwithstanding the
preceding, there cannot be any assurance that full disclosure in this regard
will be made by Local General Partners, or that their financial condition will
not adversely change during the course of a Series' investment in such Local
Limited Partnership.
Real estate development organizations which specialize in construction and
ownership of apartment complexes of the type in which the Fund expects to invest
are typically closely-held entities which depend, for their successful
management and operation, on one or a very limited number of principal owners.
In a typical Apartment Complex the principal owners of the development
organization will, directly or through various entities controlled by them,
provide rent-up, property management and other services involved in the
development and ownership of such Apartment Complex, and possibly will also,
through a separate entity, construct the Apartment Complex. Except in the case
of non-profit organizations, the principal owners of the development
organization will usually be the Local General Partners; in cases acceptable to
the Fund Manager an Affiliate of the principal owners will be the Local General
Partner, and all or some portion of its obligations under the Local Limited
Partnership Agreement may be guaranteed by the principal owners
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or by one or more of their Affiliates. For purposes of this Prospectus, the term
"Local General Partners" may include the various individuals and entities
comprising the development organization which has organized and is operating the
respective Local Limited Partnership.
Compensation of Local General Partners. The Local General Partners will
receive fees from the Local Limited Partnership in consideration of the
construction and development of the Apartment Complex, management of such
partnership and the Apartment Complex, their agreement to fund certain deficits
discussed below, the initial rent-up of the Apartment Complex, and for other
services rendered to such partnership, which may include a sales preparation fee
and/or real estate commission for services rendered with respect to sale of the
Apartment Complex. For a discussion of certain of these fees, see "Estimated Use
of Proceeds."
Withdrawal of Local General Partners. Each Series intends to invest only in
Local Limited Partnerships in which an experienced real estate developer will
agree to supervise management of the Apartment Complex or to serve as the
managing general partner for a period of time acceptable to the Fund Manager.
Under the terms of each Local Limited Partnership Agreement, the Local General
Partner will not be permitted to withdraw from the Local Limited Partnership
without the consent of the Series, unless a designated successor acceptable to
the Series is admitted in its place, or unless a successor meeting certain
specified criteria established in the Local Limited Partnership Agreement is
admitted in its place.
Terms of the Local Limited Partnership Agreements
It is anticipated that in each instance the Local Limited Partnership
Agreement will be negotiated by the Fund Manager in such a manner as to impose
on the Local General Partners significant responsibilities with respect to the
Apartment Complex. The precise terms of such responsibilities, and the
limitations thereon, will be subject to negotiation. However it is anticipated
that the terms of each Local Limited Partnership Agreement may include the
provisions described below.
Development Obligation. In the case of a new construction or rehabilitation
property, the Local General Partners will agree to provide all funds needed
through the completion of the construction or rehabilitation of the Apartment
Complex and the closing of its long-term mortgage financing, after applying
mortgage loan proceeds and the Series' capital contribution (net of fees payable
to the Local General Partners and their Affiliates). Funds so provided may or
may not be reimbursable by the Local Limited Partnership. In the event of the
failure of the Local General Partners to perform those obligations, the Local
General Partners or their Affiliates will be in default pursuant to the terms of
the Local Limited Partnership Agreement, and may be removed from the Local
Limited Partnership by the Series.
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Operating Guarantees. The Local Limited Partnership Agreement will typically
impose obligations on the Local General Partners to provide funds to the Local
Limited Partnership to defray any operating deficits for a minimum of four years
following the completion of the construction or rehabilitation of the Apartment
Complex or to create a reserve to provide a source of payment of such deficits.
The Local General Partners may or may not be entitled to reimbursement of such
funds by the Local Limited Partnership. A Series may invest in Local Limited
Partnerships for which such operating guarantees are not required if the Fund
Manager determines that there are adequate alternative forms of assurance
protecting the Series' investment in the Local Limited Partnership.
Protection Against Reduction or Loss of Tax Credits. To reduce the adverse
consequences which a Series would experience in the event that the amount of the
Tax Credits actually allocated to the Series should be less than the amount
represented when the investment was made, the Local Limited Partnership
Agreement will include so-called "adjuster" provisions designed to provide the
Series with a substantially similar aggregate return on investment as would have
been received had the Tax Credits been as originally anticipated. Such
provisions may adjust any one or more of the following: the required capital
contribution by the Series, the Local General Partners' share of the cash
available for distribution of such Local Limited Partnership, the development
fee, the property management fee or partnership administration fee payable to
the Local General Partners or their Affiliates, or the Series' share of Sale or
Refinancing proceeds of such Local Limited Partnership. While the intention is
to require the adjuster provisions described in this paragraph, such provisions
may not be included in each Local Limited Partnership Agreement if the Fund
Manager considers one or more of such provisions to be unnecessary for the
protection of the Series or if the Fund Manager determines that it is otherwise
in the interest of the Series to modify or eliminate such provisions. For
example, such adjuster provisions may be modified or eliminated in connection
with the acquisition of an interest in a Local Limited Partnership which owns a
completed Apartment Complex.
Each Local General Partner will covenant to take no action which would cause
a termination or discontinuance of the qualification of an Apartment Complex as
a "qualified low-income housing project" under Code Section 42(g)(1) or which
would cause the recapture of any Tax Credit under the Code without the consent
of the Series. In addition, the Local General Partner of a Local Limited
Partnership which owns a Property which is not receiving government financing or
operating subsidies will be obligated to pay to the Series an amount equal to
any Low Income Housing Credit which is recaptured as a result of any Low Income
Unit ceasing to qualify for Low Income Housing Credits (see "The Low Income
Housing Credit") or to furnish such other safeguards as the Fund Manager
determines are appropriate to protect the Series and the Unitholders against the
consequences of recapture.
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Prospective investors should note that, to the extent the Fund Manager is
successful in negotiating guarantees, undertakings and assurances from the Local
General Partners of the nature described in this Prospectus or otherwise, the
prices paid by a Series for its Local Limited Partnership investments may be
marginally higher than would otherwise be the case.
Rights of Limited Partner. As a limited partner or non-managing member of a
Local Limited Partnership, a Series will have no right to manage the operations
of such partnership. However, each Local Limited Partnership Agreement will
provide the Series with certain voting rights, including the right, in each case
without the concurrence of the Local General Partners, to replace the Local
General Partner on the basis of the performance and discharge of the Local
General Partner's obligations, to approve or disapprove a sale or refinancing of
the Apartment Complex owned by such Local Limited Partnership, to approve or
disapprove the dissolution of the Local Limited Partnership and to approve or
disapprove amendments to the Local Limited Partnership Agreement materially and
adversely affecting the Series' investment in the Local Limited Partnership.
Nonetheless, in the case of Apartment Complexes which are government assisted,
the ability of the Series to take such actions may be subject to the prior
approval of the government agency providing such assistance (see "Other
Government Assistance Programs" below and "Risk Factors - Investment Risks -
Risks of Government-Subsidized Housing Projects"). Similarly, each Local Limited
Partnership Agreement will provide the Series with certain other rights,
including rights relating to the calling of meetings, reports to holders of
limited partnership interests and access to records comparable to those which
the Partnership Agreement provides to the Unitholders. See "Summary of Certain
Provisions of the Partnership Agreement." No assurance can be given that the
exercise of such rights (and possibly their mere existence) will not cause the
Series to be deemed a general partner of any such Local Limited Partnership
which is a limited partnership. See "Risk Factors - Fund-Related Risks - Risks
of Unitholder Liability." Except where the Fund Manager or its Affiliates serve
as a Local General Partner of a Local Limited Partnership, each of the foregoing
voting and other rights of the Series as a limited partner or non-managing
member in the Local Limited Partnership will be exercised by the Fund Manager on
behalf of the Series, and Unitholders will not have any right to participate
therein. See "Conflicts of Interest."
Role of SLP Affiliate. It is anticipated that the SLP Affiliate will be a
special limited partner of certain Local Limited Partnerships and will have one
or more of the following: the right to assume the duties and receive the
benefits of the Local General Partner upon the removal or withdrawal of the
Local General Partner; the right to approve the selection of, and/or dismiss,
any manager of the Apartment Complex; the right to approve the selection of,
and/or dismiss, the accountants for the Local Limited Partnership; the right to
direct the decisions of the "tax matters partner" of the Local Limited
Partnership, including the right to bring and defend
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administrative and judicial actions and make tax elections; the right to compel
the Local General Partner to locate a buyer for the Apartment Complex or the
Series' Local Limited Partnership Interest; and the right to approve or
disapprove certain transactions outside of the ordinary course of business
proposed to be taken by the Local Limited Partnership. It should be noted that
in the case of Apartment Complexes which are government assisted, the ability of
the SLP Affiliate to take such actions may be subject to the prior approval of
the government agency providing such assistance (see "Other Government
Assistance Programs" below and "Risk Factors - Investment Risks - Risks of
Government-Subsidized Housing Projects").
Interests in Profits, Losses and Distributions. Each Series will normally
acquire at least a 90% interest in the profits, losses and Tax Credits of each
Local Limited Partnership, with the balance remaining with the Local General
Partners and the SLP Affiliate. However, in certain cases, at the discretion of
the Fund Manager, a Series may acquire a lesser interest (but normally at least
a 50% interest) in the profits, losses and Tax Credits of a Local Limited
Partnership. See "Joint Investments" below in this section. The Local General
Partners will generally receive as management fees and/or participations a
portion of the cash flow from operations of an Apartment Complex and
reimbursements payable from cash flow. The Local Limited Partnership Agreement
will normally provide that distributions of proceeds from a Sale or Refinancing
of the Apartment Complex will be paid in the range of from 95% to 100% to the
Series until it has received a full return of that portion of the Net Proceeds
invested in the Local Limited Partnership (which may be reduced by any cash flow
distributions previously received) as well as providing the Series with a share
of any remaining Sale or Refinancing proceeds, which share may range from 10% to
90%. The sharing arrangements for cash distributions from operations and Sale or
Refinancing proceeds will depend upon the competition for interests in Apartment
Complexes which are suitable for investment and will also depend upon the
particular circumstances of each Apartment Complex, including the proportion of
residential units in the Apartment Complex eligible for Low Income Housing
Credits, the amount invested by the Series in the Apartment Complex relative to
the other sources of financing for the Apartment Complex, the percentage
interest in the profits and losses of the Local Limited Partnership which is
acquired by the Series relative to the interests held by other parties, and the
amounts of cash flow and appreciation anticipated or realized.
Joint Investments
Local Limited Partnerships may be invested in jointly by a Series and the
other Series or other limited partnership (including another limited partnership
sponsored by the Fund Manager or any of its Affiliates), provided that: (1) the
two partnerships have similar investment objectives, (2) there are no duplicate
property management or other fees, (3) the compensation to the sponsors of each
partnership
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is substantially similar, (4) each partnership will have a right of first
refusal if the other partnership wishes to sell its interest in the Local
Limited Partnership (although there is a risk that a partnership may not have
sufficient resources to accomplish such purchase), (5) the investment of each
partnership is on substantially the same terms and conditions, and (6) if the
other limited partnership is (a) controlled by the Fund Manager, the other
limited partnership must be publicly registered under the Securities Act of
1933, or (b) is not controlled by the Fund Manager, the Series must acquire a
controlling interest in the joint venture. See "Risk Factors - Investment Risks
- - Risks of Joint Investments" and "Conflicts of Interest." A Series cannot
engage in activities through a joint venture that it could not otherwise
undertake.
Use of Leverage
Except as may be necessary to make initial investments in Local Limited
Partnerships prior to the sale of Units, the Fund does not anticipate borrowing
funds, although the Fund Manager has full authority to cause a Series to borrow
money as deemed necessary or appropriate to the achievement of the Series'
investment objectives.
The Fund Manager or its Affiliates may advance funds from time to time to a
Series in order that the Series may make initial investments (including loans
and deposits) in Local Limited Partnerships prior to the sale of its Units. Such
advances, together with interest thereon, will be repaid from the proceeds of
the Offering. See "Estimated Use of Proceeds." All borrowings by a Series from
the Fund Manager or an Affiliate must (i) be on a short-term basis; (ii) not
bear any interest, charges or fees in excess of the amounts which would be
charged by unrelated lending institutions on comparable loans for the same
purpose in the same locality (and in no event may such interest exceed by more
than 2% per annum the Prime Rate); and (iii) not be subject to any prepayment
charge or penalty.
The ability of a Series to generate Tax Credits in the amounts anticipated
will depend in part on the use of leverage by the Local Limited Partnerships.
Accordingly, the Fund Manager expects that the Local Limited Partnerships will
use debt to finance, on a combined basis, approximately 60% to 90% of the
acquisition and development costs of their Apartment Complexes. Such financing
may include loans made, guaranteed or subsidized by agencies of Federal, state
or local governments, including state or local government bond financing,
balloon payment mortgages, loans providing for variable interest rates,
renegotiable interest rates or deferral of principal payments, wrap-around loans
and loans from non-profit organizations one of the tax-exempt purposes of which
includes the financing of low-income housing. See "Other Government Assistance
Programs" below and "Risk Factors - Investment Risks - Risks Associated With Use
of Leverage." No Series will impose any limitation on the indebtedness which may
be incurred by any
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Local Limited Partnership and, consistent with the investment objectives of the
Fund, the Fund Manager has discretion to select Local Limited Partnerships which
have structured the financing of their Apartment Complexes in any way and from
any source that the Local General Partners believe is feasible for the
properties, and that the Fund Manager believes is both (i) feasible for the
particular property and (ii) beneficial for the investors. Notwithstanding the
preceding, following the termination of the Offering of Units a Series' share of
such indebtedness may not exceed (i) with respect to conventionally-financed
Apartment Complexes, the sum of 85% of the aggregate purchase price of all
Apartment Complexes which have not been refinanced, and 85% of the aggregate
fair market value of all Apartment Complexes which have been refinanced and (ii)
with respect to subsidized Apartment Complexes, the sum of 100% of the aggregate
purchase price of all Apartment Complexes which have not been refinanced, and
100% of the aggregate fair market value of all Apartment Complexes which have
been refinanced.
Sale or Other Disposition of Investments
In general, sale or refinancing of an Apartment Complex or a Series'
interest in a Local Limited Partnership will be subject to various restrictions
which will require that investments be held for substantial periods. The present
expectation of the Fund Manager is that a Series will hold its investments for
at least 15 years after the Series acquires them in order to avoid recapture of
Tax Credits (see "The Low Income Housing Credit"), and will thereafter, subject
to the restrictions discussed below, attempt to sell or refinance the
investments with the objective of returning to the Unitholders of the Series, at
a minimum, their invested capital. However, when it determines that it is in the
best interests of the Series to do so under all of the then applicable
circumstances, the Fund Manager may cause the Series to sell or refinance any
investments at an earlier or later time.
The Low Income Units in an Apartment Complex generally must be rented as
low-income housing for the Low Income Use Period (i.e., a period of at least 30
years and, possibly, of up to 55 years), so that any sale of such an Apartment
Complex during that period must be to a purchaser who agrees to maintain the Low
Income Units as low-income housing for the duration of such period. However,
except where more stringent requirements are imposed under state law, the Low
Income Use Period can be terminated as to an Apartment Complex after the 15-year
Initial Compliance Period if the housing agency of the state in which the
Apartment Complex is located is unable to find a purchaser at a price that will
return the owner's adjusted equity investment in the Apartment Complex, although
existing tenant leases cannot be terminated by the owner during the three years
thereafter. See "The Low Income Housing Credit - Credits Subject to State
Allocation."
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Any Apartment Complexes receiving government financing or operating
subsidies will generally be subject to substantial additional restrictions on
sale or refinancing. For example, currently applicable RD regulations do not
permit the sale of a property which is financed by such agency except with the
specific approval of RD, and mortgage loans which are funded after December 14,
1989 cannot be prepaid at any time during their terms of up to 50 years.
Similarly, current HUD regulations require that HUD must approve the sale of
more than 50% of the interests in any limited partnership or limited liability
company which owns a property which is receiving some form of HUD subsidies.
However, consistent with the foregoing and other applicable regulatory
restrictions, the Fund Manager believes that the Local Limited Partnerships
should be able to sell or refinance the Apartment Complexes after a 15 to
20-year holding period under one or a combination of the following
circumstances:
(1) After the expiration of the Initial Compliance Period with respect
to its Apartment Complex, a Local Limited Partnership could seek to sell the
Apartment Complex to:
(a) another entity similar to the Fund or the Local Limited
Partnership which would agree to continue to operate the Low Income
Units as housing for low-income tenants for the balance of the Low
Income Use Period and otherwise in compliance with restrictions imposed
under the regulations applicable to Low Income Housing Credits and the
requirements of existing mortgage indebtedness. Such a sale would
likely be feasible only if at that time the Code includes provisions
extending significant tax benefits to purchasers of existing low-income
housing; or
(b) certain other types of purchasers who, irrespective of
then-existing Code provisions, may have incentives to acquire and
operate the Low Income Units as housing for low-income tenants, such as
the tenants of the Low Income Units (or a cooperative or other
organization formed on their behalf) or a state agency or non-profit
organization.
(2) With respect to Apartment Complexes which are subject to the RD
prepayment prohibition discussed above, RD will, under certain
circumstances, guarantee an equity loan to the Local Limited Partnership
owner 20 years after the original loan was made. The equity loan would be in
an amount of up to 30% of the amount of the original loan and would be
funded from monthly payments to a special RD national pool. See "Other
Government Assistance Programs - RD Financing and Rural Rental Assistance
Programs."
In connection with any disposition of an Apartment Complex (or Local Limited
Partnership Interest), the Local Limited Partnership (or the Series) will have
the
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right to engage in seller financing of the disposition of such Apartment Complex
(or Local Limited Partnership Interest) by accepting a promissory note in
partial payment of the sales price. However, it is anticipated that a Series as
a limited partner or non-managing member of the Local Limited Partnership will
have the right to approve or disapprove any such proposed sale. A Series will
thus be in a position to weigh the higher sales price that such seller financing
will generally provide against the credit risk that the obligor on such
promissory note would default in its payment obligations, and the fact that
distribution by a Series of Sale or Refinancing Proceeds, if any, would be
further delayed to the extent of the principal amount of such promissory note.
Reserves
Each Series initially will set aside at least 3% of the Capital
Contributions as a Reserve for contingencies. The Fund Manager will increase or
decrease such Reserve from time to time as it deems appropriate. The Reserve may
be used to cure any problems arising from the Apartment Complexes, although most
Apartment Complexes will have their own reserve requirements. Reserves of a
Series may also be utilized to pay expenses of the Series, including the annual
Asset Management Fee, to the extent other funds of the Series are not so
available.
Other Policies
No Series will lend funds (other than in the form of Temporary Investments
as described above) to any person or entity, including the Fund Manager and its
Affiliates, except that it may make loans to, or post letters of credit for, a
Local Limited Partnership in which the Series is expected to acquire an
interest, subject to certain limitations specified in the Partnership Agreement.
No Series will underwrite securities of other issuers, offer securities in
exchange for property or, except in connection with the investments of funds in
Local Limited Partnerships, invest in securities of other issuers, other than in
Temporary Investments as described above.
No Series will (i) utilize Cash Available for Distribution to acquire Local
Limited Partnership Interests; or (ii) reinvest Sale or Refinancing Proceeds
unless a sufficient portion thereof is distributed to the Series' Unitholders to
enable each such Unitholder (assuming that he is in a combined Federal, state
and local marginal income tax bracket of 30%) to pay the Federal, state and
local income tax liability arising from the Sale or Refinancing which generated
such proceeds, and in any event Sale or Refinancing Proceeds will not be
reinvested following the second anniversary of the first day of the calendar
quarter in which the Investment Date occurs, except to the extent of any
Reserves retained therefrom.
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A Series may, in the absolute discretion of the Fund Manager and once the
Series' offering has concluded, repurchase Units upon the written request of a
Unitholder. No Series has any obligation to repurchase any Units at any time,
and there is no assurance that any Units will in fact ever be repurchased by a
Series. No Units will be repurchased from the Fund Manager or any of its
Affiliates.
Neither of the Series is a real estate investment trust and, therefore,
neither is subject to the restrictions imposed on such entities by the Code.
Each Series will use its best efforts to conduct its operations so as not to be
required to register as an investment company under the 1940 Act.
No Series will engage in any transaction which would result in the receipt
by the Fund Manager or an Affiliate of the Fund Manager of any undisclosed
"rebate" or "give-up" or in any reciprocal business arrangement which results in
the circumvention of the restrictions contained in the Partnership Agreement.
THE LOW INCOME HOUSING CREDIT
Summary
Section 42 of the Internal Revenue Code of 1986 ("Code"), as amended by the
Technical and Miscellaneous Revenue Act of 1988 ("1988 Act"), the Omnibus Budget
Reconciliation Act of 1989 ("1989 Act"), the Omnibus Budget Reconciliation Act
of 1990 ("1990 Act") and the Omnibus Budget Reconciliation Act of 1993 (the
"1993 Act"), provides tax credits (the "Low Income Housing Credits") to
investors in certain low-income housing. Following is a summary of the more
salient provisions of Code Section 42 and its interrelation with other Code
provisions. Each of these provisions is discussed in greater detail in the
subsections below and under "Federal Income Tax Considerations."
Low Income Housing Credits are indirect Federal subsidies of low-income
housing and are being claimed by individuals, small businesses and large
corporations. Low Income Housing Credits offset tax liability dollar-for-dollar
regardless of a taxpayer's tax bracket because they are tax credits and not tax
deductions; thus, tax credits are more valuable than tax deductions or tax
deferrals. Taxes are one of the largest expenses faced by taxpayers throughout
their lifetimes, and therefore represent one of the greatest barriers to
retaining earned income. According to a report issued by the Tax Foundation, in
1997 the average American will have to work two hours and 49 minutes of each
eight-hour workday to pay all taxes. Federal taxes will exhaust one hour and 53
minutes of earnings, and state and local taxes will exhaust 56 minutes of
earnings. The report states that American workers utilized a greater portion of
the workday to pay taxes than to pay for food and tobacco, clothing, and housing
and household operations. An
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investment in Low Income Housing Credits reduces Federal tax liability and
thereby can increase after-tax spendable income.
It is important to note that Low Income Housing Credits are tax credits
rather than the more familiar tax deductions. For example, a married couple
filing jointly with taxable income of $125,000 in 1997 would be subject to
Federal income tax liability before Tax Credits in the amount of approximately
$30,000, or approximately 24% of taxable income. (The tax liability for later
years could be different due to changes in the tax rates resulting from
inflation adjustments or amendments to the tax laws. See "Federal Income Tax
Considerations - Other Important Tax Considerations - Tax Rates" and "- Changes
in Tax Law.")
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If the couple had $7,750 in Low Income Housing Credits (the maximum permissible
amount pursuant to the $25,000 deduction equivalent, as discussed under "Federal
Income Tax Considerations - Limitations on Losses and Credits from Passive
Activities - Exception for Low Income Housing Credits and Historic Tax
Credits"), their Federal tax liability of $31,000 would be reduced by $7,750 to
$23,250.
These pie charts are intended to graphically display that Tax Credits reduce
income taxes dollar-for-dollar, and are not intended to be, nor should they be
interpreted as, predictions of Tax Credits to be allocated to an investor. The
absolute and/or relative percentage reduction in Federal income taxes to be
realized by any investor will depend on his actual tax liabilities and his
actual Tax Credits.
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Low Income Housing Credits account for the construction of approximately
120,000 housing units annually. Nonetheless, the availability of quality
low-income housing has declined. According to the Joint Center of Housing
Studies of Harvard University, "[t]he national goal of decent and affordable
housing for all Americans remains out of reach because of two broad trends: the
persistence of poverty and the loss of low-cost rental units from the housing
inventory." According to another study (A Place To Call Home, Center On Budget
and Policy Priorities, based on information from the American Housing Survey
through 1993), the shortage of affordable rental housing is not a new problem,
but one that dates back to the early 1970's. Since 1970, the number of low rent
or affordable units has continued to fall in relation to the number of those in
need of these units. This persistent decline has created a shortage of 4.7
million affordable rental units nationwide. Among the problems the nation faces
is the loss of low-cost rental units that provide shelter for families, the
elderly and other citizens of modest means.
Low Income Housing Credits are designed to subsidize either 70% or 30% of
the costs of the low-income units in an apartment complex. Accordingly, the
amount of Low Income Housing Credits is based on the cost of a property, rather
than the operations of the property, and thus are pre-determined in amount. The
subsidies are realized by claiming Federal Tax Credits every year for 10 years,
with the entire amount of the subsidies allocated at the beginning of the
10-year period, resulting in a steady and predictable stream of Tax Credits.
Unlike other investments, once determined, the amount of Tax Credits does not
fluctuate.
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In exchange for the right to claim Low Income Housing Credits, the owner of
the apartment complex must agree to rent the low-income units to low-income
individuals at reduced rental rates for a period of at least 15 years. Failure
to do so will result in ineligibility for any portion of the Low Income Housing
Credits not yet claimed and, possibly, the recapture of such credits previously
claimed.
Code Section 42 authorizes a fixed amount of Low Income Housing Credits
which any state may allocate in any year. Generally, an apartment complex owner
must receive an allocation of Low Income Housing Credits from an agency of the
state in which the apartment complex is located.
Most taxpayers are not able to claim Low Income Housing Credits in unlimited
amounts. Rather, such ability is limited by the provisions of the Code known as
the "passive activity" rules, the "at risk" rules, the overall limitation on
"general business" credits, and the alternative minimum tax rules.
Prospective investors should note that the Low Income Housing Credit program
is extremely technical in nature. Few Treasury Regulations have been issued
interpreting Code Section 42, and there can be no assurance that the provisions
of that Section will be interpreted in a manner consistent with the description
set forth below. Furthermore, the discussion that follows is general in nature.
Because the Fund has not yet identified any of the Local Limited Partnerships in
which it will invest, it is impossible to predict how certain specific
provisions of the Low Income Housing Credit program will apply to the Apartment
Complexes.
Maximum Amount of Credit
Under Code Section 42, for a 10-year period an owner (which may include a
limited partner in a limited partnership owner or member of a limited liability
company owner) of an apartment building receives tax credits equal to the
"applicable percentage" (as explained in the next paragraph) times that portion
of the basis of the building qualified for the credit (the "qualified basis").
For a discussion of qualified basis, see "Qualified Properties" below. Such Low
Income Housing Credits may be used by the owner, subject to various limitations,
to reduce his Federal income tax liabilities over a 10-year period.
The "applicable percentage" is a percentage prescribed by the Secretary of
the Treasury for the earlier of (i) the month in which the building is placed in
service, or (ii) at the election of the owner, the month in which the owner and
the housing credit agency enter into an agreement as to the amount of Credit
Authority to be allocated to the building. The applicable percentage varies
essentially according to two major factors: (i) whether a property is newly
constructed or substantially rehabilitated or is an existing property and (ii)
whether or not a property is Federally subsidized. There are two basic credit
categories:
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1. Non-Federally subsidized new construction or substantial rehabilitation
properties receive a maximum credit which will yield a present value of 70% of
the qualified basis of the property. This is the applicable percentage expressed
in present value terms for recognition of credits over 10 years. Accordingly,
the applicable percentage is determined primarily by long-term interest rates,
and does not fluctuate with stock or bond prices. Congress determined that for
1987 a 9% credit would have a present value of 70%; thus 9% was the applicable
credit percentage for 1987. For years subsequent to 1987, each month the
Treasury Department redetermines the appropriate yearly percentage that will
yield a 70% present value over 10 years utilizing a prescribed discounting
methodology. For properties placed in service in June 1997, the yearly
percentage is 8.64%. "Substantial rehabilitation" is defined as capital
expenditures (other than acquisition costs) incurred in connection with
rehabilitation of a building aggregated over a 24-month period in an amount
equal to at least the greater of 10% of adjusted basis or $3,000 per Low Income
Unit.
2. Federally subsidized new construction or substantial rehabilitation
properties receive a maximum credit which will yield a present value of 30% of
the qualified basis of the property. Congress determined that for 1987 a 4%
credit would have a present value of 30%; thus 4% was the applicable credit
percentage for 1987. For years subsequent to 1987, the Treasury Department makes
monthly redeterminations in a manner corresponding to that described in the
preceding paragraph for the 70% present value credit. For properties placed in
service in June 1997, the yearly percentage for this 30% present value credit is
3.70%. For purposes of the Low Income Housing Credit program, Federal subsidies
include only tax-exempt financing and below-market-interest-rate Federal loans
the proceeds of which are used directly or indirectly with respect to the
property. See the material below under the caption "Other Government Assistance
Programs" for a discussion as to whether certain programs which may be utilized
for the Apartment Complexes are considered "Federally subsidized" within the
meaning of the 1986 Act, which used this term in a manner which is not
co-extensive with its customary definition. An owner has the option of excluding
Federally subsidized loans from qualified basis and then using the 70% present
value credit against the remaining qualified basis.
The acquisition costs of existing buildings will only be eligible for a
credit if the buildings are subject to substantial rehabilitation (as defined
above). (If the acquisition is from a government agency, the rehabilitation
expenditures must average at least $3,000 per low-income residential unit,
without regard to the 10% of adjusted basis rule.) If the substantial
rehabilitation test is satisfied the acquisition costs are eligible for the 30%
present value credit. However, acquisition costs are not available for the 30%
present value credit if the property was last transferred, or if it underwent
certain rehabilitation work, during the prior 10 years, although the Secretary
of the Treasury may waive this rule with respect to any
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Federally-assisted building in order to avert certain mortgage assignments or
claims against Federal mortgage insurance funds, or to preserve as low-income
housing properties which are acquired from failed thrift institutions or
properties as to which certain mortgages may be prepaid.
The qualified basis of a low-income housing property is determined at the
end of the first taxable year of the credit period. However, an owner may elect
to make more of a property eligible for Low Income Housing Credits after the
ten-year credit period has already begun. The so-called "addition to qualified
basis" provides a credit equal to two-thirds of the applicable percentage noted
above, and such credits are claimed over the remainder of the Initial Compliance
Period. Additional credits must be allocated from the state's Credit Authority
described below under "Credits Subject to State Allocation," but are not subject
to recapture. See "Recapture of Low Income Housing Credits" below in this
section.
Qualified Properties
Pursuant to Code Section 42(g), Low Income Housing Credits are available
only with respect to "qualified low-income housing projects." "Qualified
low-income housing projects" are generally residential rental projects in which
(a) 20% or more of the aggregate residential rental units are occupied by
individuals with incomes of 50% or less of area median income, as adjusted for
family size (the "20-50 set-aside test") or (b) 40% or more of the aggregate
residential rental units are occupied by individuals with incomes of 60% or less
of area median income, as adjusted for family size (the "40-60 set-aside test").
This requirement, referred to as the minimum set-aside, must be met in order for
any portion of an apartment development to be eligible for Low Income Housing
Credits. Additional residential rental units in an apartment development, beyond
the minimum set-aside, also will qualify for Low Income Housing Credits if such
residential rental units meet the income standards selected for the minimum
number of residential rental units.
Additionally, in order to qualify for Low Income Housing Credits, the gross
rent charged to tenants who meet the applicable income limitation cannot exceed
30% of the applicable set-aside income (i.e., 50% or 60% of area median income),
assuming that, in the case of a unit which does not have a separate bedroom, the
unit is occupied by one individual, and, in all other cases, that the unit is
occupied by one and one-half individuals per separate bedroom (the "rent
restriction test"). Gross rent for this purpose includes the cost of any
utilities, other than telephone, and any mandatory costs for services such as
meals and social services. Federal, state and local rental assistance payments
are not included in gross rent and thus an owner may receive a rental subsidy
payment under the RD Rental Assistance Program or similar programs of other
agencies in addition to the amount paid by the tenant.
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Units which are both rent-restricted and occupied by individuals who meet
the applicable income limitation are referred to herein as "Low Income Units."
Low Income Units must be suitable for occupancy, and used, on a non-transient
basis.
Pursuant to Code Section 42(g)(3) an apartment development must, in general,
meet the minimum set-aside requirements as well as the rent restriction test not
later than the close of the first year of the 10-year credit period for the
development. The owner may elect which of the minimum set-aside tests (i.e., the
20-50 set-aside test or the 40-60 set-aside test) it proposes to meet but, once
made, the election is irrevocable. In order to avoid credit recapture, the
apartment development must remain in compliance with the rules governing the Low
Income Housing Credit program for the 15-year Initial Compliance Period.
However, a separate 15-year compliance period commences in the year that
substantial rehabilitation is completed. Thus, with respect to a building
undergoing substantial rehabilitation, the effective compliance period will be
extended by the time period between acquisition and the completion of such
substantial rehabilitation.
The "qualified basis" of an apartment development with respect to which Low
Income Housing Credits are computed is generally the portion of the "eligible
basis" in a building attributable to the Low Income Units. This proportion is
the lesser of (1) the proportion of occupied low-income units to all residential
rental units (whether or not occupied), or (2) the proportion of floor space in
the occupied low-income units to the total floor space of all residential rental
units (whether or not occupied) in the building.
In general, the "eligible basis" of a building is its adjusted basis for
Federal income tax purposes, determined as of the close of the first taxable
year of the Initial Compliance Period. For a newly-constructed building,
eligible basis will be the cost of construction, including all direct costs and
various related "soft" costs, such as construction period interest, developer's
and architects' fees, other compensation, insurance and general and
administrative expenses related to construction. For a
substantially-rehabilitated building eligible basis would be comprised of
rehabilitation costs aggregated over a 24-month period, provided that such costs
are in an amount equal to at least the greater of 10% of adjusted basis or
$3,000 per Low Income Unit. Acquisition costs may only be included in eligible
basis to the extent they satisfy the principles for inclusion discussed above
under "Maximum Amount of Credit." Land costs may not be included in eligible
basis. Because only the adjusted basis of a building may be included in eligible
basis, one must take into account the adjustments to basis described in Section
1016 of the Code, except for depreciation. For example, a reduction in basis
equal to any Historic Tax Credit allowed with respect to a property would be
taken into account. As indicated in "Federal Income Tax Considerations - Basis
of Local Limited Partnerships in Their Apartment Complexes" and " -
Depreciation," no opinion of Counsel or of counsel to a Local Limited
Partnership will be rendered with respect
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to the calculation of an Apartment Complex's adjusted basis. It should be noted
that the eligible basis for any building is reduced by an amount equal to the
portion of the adjusted basis of the building which is attributable to
residential rental units in the building which are not Low Income Units and
which are above the average quality standard of the Low Income Units in the
building. However, at the election of the taxpayer, the cost of a unit that
would otherwise be so excluded from eligible basis may be included in eligible
basis if (1) the excess cost of such unit over the average cost of the Low
Income Units does not exceed 15% of the average cost of the Low Income Units and
(2) the excess cost is excluded from eligible basis.
For all types of buildings, the eligible basis includes not only the
adjusted basis of the residential rental units (subject to the limitations
discussed above) but also the adjusted basis of facilities and certain personal
property (such as major appliances) for use by the tenants and other facilities
reasonably required for use in the common areas of the building. The costs of
amenities in non-Low Income Units may only be included if the amenities are
comparable to the costs of amenities in the Low Income Units. Also, the
allocable costs of tenant facilities such as swimming pools or other
recreational facilities and parking areas may be included provided there is not
a separate fee for use of these facilities and they are available on a
comparable basis to all tenants.
Residential rental property may qualify for Low Income Housing Credits even
though a portion of the building in which residential units are located is
available for commercial use. However, no portion of the cost of such
nonresidential property may be included in the eligible basis. The legislative
history of the 1986 Act suggests that it was the Congressional intention that
the costs of such mixed-use facilities would be allocated according to a
reasonable method that properly reflects proportionate benefits to be derived
directly or indirectly by the nonresidential rental property and the residential
units. The portion of the cost of each Apartment Complex owned by Local Limited
Partnerships allocable to commercial space will be determined on a pro rata
basis using a ratio of the area of commercial space to the total area of such
Apartment Complex.
Eligible basis may not include in any taxable year the amount of any Federal
grant, whether or not such grant is includable in gross income. A Federal grant
for such purpose (as opposed to a Federal loan or rental subsidy) includes any
grant to the extent it is Federally funded.
The eligible basis of a building located in an area designated by HUD as a
"qualified census tract" or as "difficult to develop" will be deemed to be 130%
of the eligible basis determined under the principles outlined above. For this
purpose, a "qualified census tract" means a census tract designated by the
Secretary of HUD (or, if census tract information is unavailable, an enumeration
district) in which 50% or more of the households have an income which is less
than 60% of the area
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median gross income. An area is treated as "difficult to develop" if it has high
construction, land and utility costs relative to area median gross income. No
more than 20% of the population of a metropolitan statistical area may be
designated as within a qualified census tract or as difficult to develop, and no
more than 20% of nonmetropolitan areas may be designated as difficult to
develop.
Credits Subject to State Allocation
All buildings, except those financed through proceeds of tax-exempt bonds
subject to the tax-exempt bond ceiling included in the Code, must be allocated
Credit Authority by the state or local credit agency for the jurisdiction in
which the buildings are located. The aggregate annual Credit Authority is $1.25
per resident of the jurisdiction. In the event that a state fails to allocate
its entire Credit Authority in a given year, the Code permits a one-year carry
forward of the unused amount; to the extent the unused amount is not utilized
during the carryforward period, it will be reallocated to other states through a
national pool.
Once Credit Authority is allocated by the credit agency to a particular
housing development, the development does not have to reapply for Credit
Authority in later years nor does the aggregate amount of the Credit Authority
allocated to a housing development reduce the amount of Credit Authority
available to other buildings in later years, if any. Accordingly, it is the case
that all Low Income Housing Credits to be claimed by investors over a 10-year
period are allocated at the outset of the 10-year period. However, in some
circumstances it may be necessary to seek additional allocations of Credit
Authority, if available, with respect to increases in qualified basis.
Generally, a building must be placed in service during the calendar year for
which the Credit Authority is allocated by the housing credit agency. The
exceptions to this general rule are as follows: (i) allocations pursuant to a
binding commitment made by a housing credit agency (not later than the close of
the calendar year in which the building is placed in service) to allocate a
specified dollar amount of Credit Authority to the building beginning in a
specified later year; (ii) allocations attributable to an increase in qualified
basis made not later than the close of the calendar year in which ends the
taxable year to which the allocation will first apply; and (iii) allocations
respecting a building which is placed in service not later than the close of the
second calendar year following the calendar year in which the allocation is
made, provided that the taxpayer's basis in the building as of the close of the
calendar year in which the allocation is made is more than 10% of the taxpayer's
reasonably expected basis in such building as of the close of such second
calendar year. An additional exception to the general rule exists in the case of
a development which includes (or will include) more than one building. Under
this exception, the state agency has authority to allocate Credit Authority on a
development rather than on a building-by-building basis, and the allocation to
the
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development generally will be valid if (a) it is made to the development at any
time during the period beginning with the first calendar year for which an
allocation may be made for the first building placed in service as part of the
development and ending with the calendar year the last building is placed in
service as part of such development, and (b) the portion of such allocation
which is allocated to any building in the development is specified not later
than the close of the calendar year in which the building is placed in service.
An allocation of Credit Authority to a development only applies to buildings in
the development which are placed in service during or after the calendar year
for which the allocation is made.
Low Income Housing Credits are not permitted for any building unless an
Extended Low Income Housing Commitment is executed between the owner of the
building and the state which allocates the Credit Authority. In general, an
Extended Low Income Housing Commitment requires that the building qualify as
low-income housing for a Low Income Use Period equal to the longer of (a) 30
years, beginning with the commencement of the Initial Compliance Period, or (b)
the period specified by the state in the Extended Low Income Housing Commitment.
The Extended Low Income Housing Commitment does not prevent the sale of the
building to a new owner; rather, it only requires that the new owner continue to
rent the building as low-income housing. Further, after a period of 14 years the
owner may make a written request to the state to find a person to acquire the
Low Income Units within the building. The state will have one year to locate a
buyer at a price no less than (i) with respect to the portion of the building
which does not constitute Low Income Units, the fair market value thereof, and
(ii) with respect to the Low Income Units, the applicable fraction (specified in
the Extended Low Income Housing Commitment and determined by the extent to which
units within the building constitute Low Income Units) of the excess of (1) the
sum of (A) the outstanding indebtedness secured by the building and (B) the
adjusted investor equity in the building (i.e., the aggregate amount of cash
invested in the building increased by a cost of living adjustment), over (2)
cash distributions (or available distributions) from the building. If no buyer
is located the building may be converted to market-rate use with the
qualification that existing low-income tenants may not be evicted within three
years. The "one-year notice" provision will not apply to the extent more
stringent requirements are imposed under the commitment or state law. The
Extended Low Income Housing Commitment must be binding on all successors of the
owner, grant all individuals meeting the income limitation applicable to the
building the right to enforce its terms in state court, be recorded as a
restrictive covenant, prohibit the eviction or other termination of tenancy
(other than for good cause) of an existing tenant of a Low Income Unit before
the close of the three-year period following the Low Income Use Period, prohibit
any increase in the gross rent for a Low Income Unit not otherwise permitted by
Code Section 42, prohibit the refusal to lease to a holder of a Section 8
voucher or certificate of eligibility (see "Government Assistance Programs"
below) because of the status of the prospective tenant as such a holder, and
prohibit the disposition to
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any person of any portion of the building to which the Extended Low Income
Housing Commitment applies unless all of the building to which the Extended Low
Income Housing Commitment applies is disposed of to such person.
Code Section 42(m) imposes requirements on the state agencies which allocate
Credit Authority. In general, an allocating agency must develop and follow a
qualified allocation plan which includes pre-established criteria for ranking
the various developments applying for Credit Authority. The selection criteria
must include development location factors (e.g., broad geographic distribution,
designated target areas such as inner cities, Community Development Block Grant
neighborhoods, distressed communities, pockets of poverty and rural areas),
housing needs characteristics (e.g., low vacancy rate, income mix of tenants
within the development and meeting state, regional or local housing needs and
priorities), development characteristics (e.g., whether the development
increases the stock of low-income housing, whether substantial rehabilitation
expenditures are needed by the development, energy conservation, quality of
units and type of financing), sponsor characteristics (e.g., nonprofit
sponsorship and minority participation in development and management), tenant
populations with special housing needs (e.g., elderly, handicapped, disabled,
homeless, large families and the displaced) and public housing waiting lists.
Once the agency has selected its developments, it must allocate the Credit
Authority by giving preference to developments serving the lowest income tenants
and developments obligated to serve tenants for the longest periods. Further, an
allocating agency must use good faith efforts to allocate no more Credit
Authority to a development than is necessary for its financial feasibility and
viability as low-income housing through the 10-year credit period. In making
this determination the agency must consider the sources and uses of funds, the
available Federal, state and local subsidies committed to the development, the
total financing planned for the development, the proceeds or receipts expected
to be generated by reason of tax benefits, the percentage of the Credit
Authority to be used for project costs other than the cost of intermediaries and
the reasonableness of the developmental and operational costs of the
development. In this regard the allocating state agency may reduce the
applicable percentage and/or the qualified basis from the amounts for which the
development would otherwise be eligible if the agency believes that the full
amounts are not necessary in light of other sources of assistance that are
available to the development. The allocation plan must also include a procedure
whereby the agency will monitor the development for non-compliance with the
provisions of the Code respecting Low Income Housing Credits and will notify the
IRS of any noncompliance of which the agency becomes aware.
At least 10% of a state's annual Credit Authority must be allocated to
buildings as to which a qualified nonprofit organization has an ownership
interest and materially participates in the development and operation thereof.
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The Series will only purchase interests in Apartment Complexes which have
been allocated Credit Authority by the appropriate credit agency or as to which
there appears a reasonable probability that such Credit Authority will be
allocated. However, there can be no assurance that delay in the completion of an
Apartment Complex will not deprive the Unitholders of anticipated Low Income
Housing Credits.
Utilization of the Low Income Housing Credit
Low Income Housing Credits are claimed by taxpayers owning an interest in a
"qualified low-income project" over a 10-year period. In the first year the
credit is claimed the allowable credit amount is determined using an average
convention to reflect the number of months Low Income Units were occupied by
low-income individuals during the year. For example, if half of the Low Income
Units included in qualified basis were first occupied in October and the
remaining half were first occupied in December, a calendar year taxpayer would
adjust the amount of Low Income Housing Credits claimed in the first year to
reflect that these units were occupied on average only 2 months or 1/6 of the
year. To the extent that there is such a reduction of the credit amount in the
first year, an additional credit in the amount of such reduction is available in
the 11th taxable year.
In order to fully utilize Low Income Housing Credits, a taxpayer who is an
individual, an S Corporation or a "closely-held corporation" (i.e, one in which
five or fewer shareholders directly or indirectly owned, by value, more than 50%
of the stock at any time during the last half of its relevant fiscal year), must
be "at risk" with respect to his investment in the low-income housing.
Generally, the qualified basis of any low-income housing property is reduced for
"at risk" purposes by the amount of any non-qualified nonrecourse financing with
respect to such property.
However, "qualified commercial financing" is not considered non-qualified
nonrecourse financing and therefore a taxpayer will be considered to be "at
risk" for purposes of Low Income Housing Credits with respect to such financing.
For purposes of Low Income Housing Credits, qualified commercial financing is
defined as financing with respect to any property if (a) such property is
acquired by the taxpayer from a person who is not a related person, and (b) such
financing is borrowed from a qualified person or represents a loan from any
Federal, state or local government instrumentality. A "qualified person" for
such purposes is a person who is actively and regularly engaged in the business
of lending money and who is not (a) a person from whom the taxpayer acquired the
property, or (b) a person who receives a fee with respect to the taxpayer's
investment in the property. An exception is provided for financing borrowed from
a nonprofit organization which is not affiliated with or controlled by a
for-profit organization and whose exempt purpose includes fostering low-income
housing, i.e., a "qualified nonprofit organization." Such financing is
considered "qualified commercial financing" even
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if it is seller financing or if the lender is not regularly engaged in the
business of lending money, provided such financing is (a) generally not in
excess of 60% of the eligible basis of the qualified low-income building, (b)
secured by the building, and (c) fully repaid on or before the earliest of (1)
the date the financing matures, (2) the ninetieth day after the close of the
Initial Compliance Period with respect to the building, except that, for
property financed by qualified nonprofit organizations, such date is 90 days
after the earlier of the date upon which the building ceases to be a qualified
low-income building or the date which is 15 years after the close of the Initial
Compliance Period, but only if such financing does not constitute seller
financing, or (3) the date of the refinancing or sale of the building.
It is not anticipated that the amount of Low Income Housing Credits
allowable to a Series will be limited under the "at risk" rules because the
Series intends to invest in Local Limited Partnerships that obtain "qualified
commercial financing," as described above, which will be included in the Series'
(and the Partners') amount "at risk." However, Counsel has rendered no opinion
on this issue or on the qualification of any Apartment Complex for Low Income
Housing Credits because these issues depend upon the specific nature of each
Apartment Complex and its financing.
Taxpayers cannot use Low Income Housing Credits in unlimited amounts.
Generally, individuals who have no net passive income can only use Tax Credits
(i.e., Low Income Housing Credits and Historic Tax Credits) to shelter up to the
equivalent of $25,000 of active or portfolio income with deductions from rental
real estate activities in which they actively participate and with Tax Credits.
Further, the allowance of these deductions and Tax Credits is subject to other
limitations. Corporations, other than S Corporations or personal service
corporations, can generally use Tax Credits against taxes on all income and can
use losses to reduce taxable income. However, closely-held corporations can only
use Tax Credits against active income. Tax Credits are not a preference item for
purposes of the Federal alternative minimum tax but cannot be used to offset
that tax.
For a more complete discussion of these limitations on the utilization of
Tax Credits, see "Federal Income Tax Considerations - Limitations on Losses and
Credits from Passive Activities," "- General Business Tax Credit Limitations"
and " - Other Important Tax Considerations - Alternative Minimum Tax."
Recapture of Low Income Housing Credits
Following the close of the first taxable year for which Low Income Housing
Credits are claimed and for each taxable year thereafter during the Initial
Compliance Period, the owner must certify to the Secretary of the Treasury that
the development has continuously complied throughout the year with the minimum
set-aside requirements and report the dollar amount of the qualified basis of
the
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development and the maximum applicable percentage and qualified basis permitted
to be taken into account by the housing credit agency.
The owners of a "qualified low-income housing project" will lose their
entitlement to Low Income Housing Credits and will be required to recapture
(with interest) a portion of any credit previously taken if, in any year during
the Initial Compliance Period, any of the following events occur, although
certain rules, described below, provide some flexibility:
(1) the project fails to meet the minimum set-aside or rent restriction
requirements of Code Section 42(g);
(2) there is a change of ownership (with exceptions noted below);
(3) there is a decrease in the qualified basis of the project (even
though the minimum set-aside requirements continue to be met); or
(4) there is a failure to fully repay the principal and interest
attributable to financing borrowed from a "qualified nonprofit organization"
within the required time period (see "Utilization of the Low Income Housing
Credit" above in this section).
Recapture event (1) results in a recapture of a portion of Low Income
Housing Credits previously claimed with respect to the qualified basis of the
entire development. Recapture event (2) results in a recapture of a portion of
Low Income Housing Credits previously claimed with respect to the portion of the
development that has changed ownership. Recapture event (3) results in the
recapture of a portion of Low Income Housing Credits previously claimed with
respect to the residential units which no longer qualify as Low Income Units or
to the other decreases in the qualified basis of the development. In each case,
the amount of Low Income Housing Credits recaptured is the accelerated portion
thereof (as discussed below) for all prior years. Recapture event (4) results in
a recapture of the amount of Low Income Housing Credits previously claimed that
are attributable to the financing.
Upon the occurrence of recapture events (1), (2) or (3), the amount of
recapture is the accelerated portion of Low Income Housing Credits (hereinafter
described) on the project for all prior years. In addition, interest will be
charged on the recapture amount calculated from the due date for filing the
return for the year any recapture amount was claimed at the rate established
under Code Section 6621. The accelerated portion of Low Income Housing Credits
in any year is the amount of the credit determined for the year less the amount
which would have been determined for the year if all Low Income Housing Credits
had been allowable
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ratably over the Initial Compliance Period. Low Income Housing Credits are
recaptured in the year of noncompliance as follows:
Year of Event Giving
Rise to Recapture Portion Recaptured
1-11 5/15
12 4/15
13 3/15
14 2/15
15 1/15
After Year 15 0
The Code provides certain rules for avoiding recapture penalties. No
recapture applies if the failure to satisfy the minimum set-aside requirement is
de minimis error and the failure is waived by the Secretary of the Treasury. No
recapture occurs if noncompliance with the set-aside requirement or the
reduction of qualified basis is corrected within a "reasonable period," although
the term "reasonable" is not defined in the Code. A tenant's income, which must
be recertified annually during the Initial Compliance Period unless the entire
building is occupied by low-income tenants and recertification is waived by the
Secretary of the Treasury, may rise by as much as 140% over the then-current
qualifying income for that unit and the unit may still be considered a Low
Income Unit if it continues to be rent-restricted. Even if the tenant's income
increases by more than that 140% amount, no recapture results unless any vacant
unit of comparable or smaller size in the development is rented to a
non-qualifying tenant.
Generally, any change of ownership of a development during the Initial
Compliance Period is an event of recapture. Although a partner in a partnership
generally will be treated as the taxpayer for purposes of recapture of Low
Income Housing Credits, any partnership that has 35 or more partners will be
treated as the taxpayer with respect to Low Income Housing Credits, unless the
partnership otherwise elects. Because a Series will invest in Apartment
Complexes only through Local Limited Partnerships, which will not have 35 or
more direct partners, this exception will not permit a Local Limited Partnership
to be treated as the taxpayer upon transfer of a Local Limited Partnership
Interest or Apartment Complex, respectively. However, because such Series will
have more than 35 partners, it appears as if this exception will permit a
Unitholder to transfer his Units without recapture, unless 50% or more of the
Units are transferred in a single 12- month period.
A Local Limited Partnership may avoid recapture upon change of ownership by
posting a bond with the Secretary of the Treasury in an amount satisfactory to
the Secretary and provided it can reasonably be expected that the development
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will continue to be operated as a "qualified low-income project" for the
remainder of the Initial Compliance Period.
There is no recapture of Low Income Housing Credits if there is a reduction
in qualified basis by reason of a casualty loss to the extent such loss is
restored by reconstruction or replacement within a reasonable period of time as
established by the Secretary of the Treasury.
State Low Income Housing Credits
In addition to Federal Low Income Housing Credits, a few states have enacted
provisions for similar credits which can be used to offset liability for income
taxes otherwise payable to the respective state with respect to low income
housing which is constructed, substantially rehabilitated or otherwise placed in
service within the state. However, the Fund does not expect that a significant
number, if any, of the Apartment Complexes in which any Series invests will
qualify for a state credit.
OTHER GOVERNMENT ASSISTANCE PROGRAMS
THE DISCUSSION WHICH FOLLOWS DESCRIBES VARIOUS FEDERAL AND STATE GOVERNMENT
FINANCING AND OPERATING SUBSIDY PROGRAMS TO WHICH APARTMENT COMPLEXES IN WHICH
THE FUND INVESTS MAY BE SUBJECT. THE DISCUSSION IS NOT INTENDED TO BE ALL
INCLUSIVE. THERE CAN BE NO ASSURANCE THAT THE TERMS OF SUCH PROGRAMS, OR THE
REGULATIONS GOVERNING THEM, WILL REMAIN THE SAME. The Fund is unable to predict
which of the government subsidy programs described below will be utilized for
the Apartment Complexes, or the percentage of Apartment Complexes which will
receive government financing or operating subsidies.
As discussed above, Low Income Housing Credits can be utilized in
conjunction with projects that receive financing or operating subsidies from
Federal, state or local governments as well as those that do not receive such
subsidies, and the Fund expects that the Series may invest some of the Net
Proceeds in such "conventional" Apartment Complexes.
RD Financing and Rural Rental Assistance Programs
Section 515 of the Housing Act of 1949 authorizes the U.S. Department of
Agriculture, Rural Development ("RD") (formerly, the Farmers Home Administration
of the U.S. Department of Agriculture) to provide direct below-
market-interest-rate mortgage loans for rural rental housing. Such loans are
extended to qualified sponsors organized exclusively for the purpose of
providing housing in amounts of up to 95% of apartment complex costs as
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determined pursuant to RD regulations and for terms of up to 50 years. In
addition, RD may provide an owner with mortgage interest subsidies, which
effectively lower the interest rate of the loan to 1% per annum after the
completion of the apartment complex, the benefits of which the owner must pass
on to eligible tenants in the form of lower rents. Section 515 apartment
complexes may be eligible for Low Income Housing Credits. However, because such
apartment complexes are the beneficiaries of Federal below-market-interest-rate
loans, they would be considered to be Federally subsidized for purposes of Low
Income Housing Credits and thus eligible only for the 30% present value credit.
See "The Low Income Housing Credit."
Each apartment complex receiving a permanent mortgage loan from RD is
subject to various RD regulations with respect to its operation. Failure of an
owner to operate its apartment complex in conformity with RD regulations could
result in termination of RD assistance.
RD regulations limit cash distributions to owners of apartment complexes
which it finances with mortgage loans or interest subsidies to a maximum
cumulative return of 8% per annum on their equity investments. RD also requires
that monthly payments to a reserve account be made until the maximum amount of
10% of the total construction cost of the apartment complex has been set aside.
Rent increases required to meet increased operating expenses for such an
apartment complex must be approved by RD. The management agent and the terms of
the management agreement for each such apartment complex must also be approved
by RD.
RD approval is required before an owner may sell or otherwise transfer or
encumber title to its apartment complex. Furthermore, RD approval is required
before a partnership owner may admit or remove a general partner thereof or
permit a general partner thereof to reduce its percentage interest in that
partnership. Similar restrictions may apply to limited liability company owners.
In addition, for projects funded after December 14, 1989, prepayment of an
RD mortgage loan is prohibited during its 50-year term. However, if it
determines that there is a reasonable likelihood that the Apartment Complex will
continue to be decent, safe and sanitary housing for the remaining term of the
original loan and that neither an undue hardship on tenants or an unreasonable
cost to the government would result therefrom, RD can guarantee an equity loan
to the owner 20 years after the original loan was made. The equity loan would be
in an amount equal to the difference between the outstanding principal balance
of debt secured by the property and 90% of the appraised value of the property,
but not to exceed 30% of the amount of the original loan, and would be funded
from monthly payments to a special RD national pool.
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In its application for interest credit subsidies, the owner of the apartment
complex must submit to RD budgets for "market rentals" (rents required to
operate on a limited profit basis with mortgage payments based on the interest
rate provided in the RD mortgage loan) and budgets for "basic rentals" (rents
required to operate on a limited profit basis assuming a mortgage bearing
interest at 1% per annum). The owner will have the option of charging basic rent
or rent equal to 30% of each tenant's monthly adjusted income less a utility
allowance. In neither case would the tenant be charged more than the "market
rent" or less than the "basic rent." Utilities are not included in either the
basic rent or market rent. The owner will receive interest subsidies so that the
additional amount which it must pay for debt service is the same as if the
interest rate on its RD mortgage loan were 1% per annum (rather than the actual
interest rate on the RD mortgage loan), plus the amount of "overage" for the
month (if any). Overage is the amount by which 30% of one-twelfth of a tenant's
adjusted gross annual income exceeds the "basic rent" for his unit.
RD also provides rent subsidies ("Rental Assistance Payments") to low-income
tenants in apartment complexes receiving direct loans from RD pursuant to the
Section 515 Rural Rental Housing Program.
Tenants with adjusted annual incomes at a level established from time to
time by RD are eligible for assistance under the rental assistance program. Each
eligible tenant is required to pay rent at the lesser of 30% of his adjusted
gross income or the "basic rent" established for the applicable apartment
complex. Funds provided by RD are applied to cover any difference between rents
required to be paid by eligible tenants and basic rents. When tenants pay
utility bills directly a utility allowance is established by RD. The amount of
the allowance is subtracted from the rental subsidy otherwise payable to the
apartment complex owner. If the monthly rent plus the utility allowance exceeds
30% of the tenant's income, the tenant will receive the difference directly from
the apartment complex owner out of the rental subsidy funds paid by RD.
In order to obtain Rental Assistance Payments for a newly-constructed or
substantially-rehabilitated apartment complex, the owner executes a rental
assistance agreement with RD for a term of up to 20 years. However, some
contracts may have only a five-year term. Upon expiration of the term of the
agreement, a new agreement may be executed for a period of up to five years.
Additional units in the apartment complex may subsequently be eligible if funds
are available.
HOME Program
The Home Investment Partnership program ("HOME") was authorized under Title
II of the Cranston-Gonzalez National Affordable Housing Act, enacted into
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law in 1990. HOME is a formula-based Federal housing program intended to support
a wide variety of state and local affordable housing programs.
HOME funds, which are allocated by HUD on a formula basis to participating
state and local governments, can be used by such governments to expand the
supply of affordable housing and increase the number of households who can be
served by assisted housing programs. Funds can be used for acquisition,
construction, moderate or substantial rehabilitation activities or for
tenant-based rental assistance programs.
State and local jurisdictions are statutorily required to meet matching
requirements in order to qualify for HOME funding. This requires a 30% match for
new construction and a 25% match for rehabilitation.
Participating jurisdictions are allowed to use funds for equity investments,
interest-bearing or non-interest-bearing loans, advances, interest subsidies or
other forms of assistance that HUD finds to be consistent with the purpose of
law. If a jurisdiction were to make a loan to an apartment complex with an
interest rate below the applicable borrowing rate, the apartment complex would
be eligible only for the 30% present value Low Income Housing Credits because
the apartment complex would be considered to be Federally subsidized.
Specific apartment complexes which are assisted with HOME funds must be
occupied by low-income families (those whose incomes do not exceed 80% of area
median income) with the further condition that at least 20% of the dwelling
units are occupied by very low-income families, i.e., those whose incomes do not
exceed 50% of the area median income, adjusted for family size, who pay rent
equal to no more than 30% of their adjusted income or rent which does not exceed
the amount permitted under the Low Income Housing Credit program. Remaining
units must be rented at amounts which do not exceed the lesser of (1) the
existing fair market rent under the HUD Section 8 program or (2) an amount equal
to 30% of the adjusted income of a family whose income is 65% of the area median
income, adjusted for family size. It should be noted that the rents allowed for
such remaining units may exceed the amounts permitted for units under the Low
Income Housing Credit program.
State and Local Bond Programs
A number of states and some local governmental entities have established
housing finance agencies ("HFAs") to assist in the development and financing of
low- and moderate-income housing. HFAs are empowered to issue their own
obligations (short-term notes and long-term revenue bonds) which, due to the
status of the HFAs as governmental entities, are under certain conditions exempt
from Federal income taxation and thus are sold in the tax-exempt municipal bond
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market at interest costs to the HFAs below conventional money market rates.
The HFAs then use the proceeds of the sale of their notes and/or bonds to make
or purchase mortgage loans for low- and moderate-income apartment complexes.
When an HFA provides direct construction and permanent mortgage loans for
multi-family housing without HUD mortgage insurance, the HFA itself generally
determines the economic feasibility, market need and demand for, and
architectural construction characteristics of, the apartment complex. In such
cases, the HFA generally also monitors the progress of construction, marketing,
rent-up of dwelling units and the management of the completed apartment complex.
Although HFAs' criteria and requirements for non-HUD-insured direct
construction and permanent mortgage loans vary, generally such loans are
available in an amount of up to 90% of an HFA's estimate of the total
development cost of the apartment complex, for terms of up to 40 years, for
newly constructed or substantially rehabilitated multi-family rental housing
intended for occupancy by individuals and families, elderly individuals and
handicapped individuals of low and moderate incomes, where the owner accepts a
limitation on the amount of operating income from the apartment complex which
may be distributed to it annually. The HFAs' direct loan programs frequently
include requirements as to operating assurances, escrow, working capital and
other deposits. While certain of these operating assurances may be funded from
mortgage loan proceeds, most are to be provided by the developer/owner either in
cash, in the form of letters of credit or through the pledge of certain equity
syndication proceeds.
Generally, in cases where the mortgage loans of HFAs are also HUD-insured,
the underwriting and regulatory standards and procedures of HUD pursuant to the
applicable HUD mortgage insurance program are employed without any substantial
additional requirements.
State enabling laws establishing HFA direct mortgage loan programs generally
do not require the apartment complex to receive additional subsidy assistance if
it otherwise can meet the housing needs of low- and moderate-income individuals
and families. However, the preponderance of HFA-financed multi-family housing is
also assisted (as to at least a portion of the dwelling units in each
development) pursuant to the HUD Section 8 program.
In order to maintain the tax-exempt nature of obligations issued by HFAs,
20% of the units in an apartment complex must be rented to households at 50% of
the area median income (or 40% at 60% of area median income) as adjusted for
family size, and tenants may not pay more than 30% of their adjusted incomes for
rent. These tenant qualification requirements must be satisfied annually based
on income earned each year by tenants over the term of the qualified project
period. This period extends until the latest of (a) 15 years from the date 50%
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of the units are occupied; (b) redemption of the bonds; or (c) termination
of any Section 8 Program rental assistance. Typically, a mortgage loan financed
with the proceeds of tax-exempt bonds may not be prepaid during this period and,
thereafter, may be prepaid only upon payment of amounts necessary to redeem the
bonds, including the payment of premiums for early redemption. HFAs' direct
mortgage loan programs also generally impose limitations on the sale,
refinancing or change in use of the apartment complex. They may also require
that a restrictive covenant be placed on record prohibiting the use of the
apartment complex for anything other than rental housing. Further, they may
require approval of the sale of an interest in a partnership or limited
liability company owner. These requirements may make it more difficult for a
Series to sell its interest in a Local Limited Partnership owning an Apartment
Complex financed with the proceeds of tax-exempt bonds or to refinance the
mortgage loan on such an Apartment Complex.
Apartment complexes financed by tax-exempt bonds issued by HFAs may be
eligible for Low Income Housing Credits. In such cases, Low Income Housing
Credits are not allocated from Credit Authority; rather, the amount of
tax-exempt bond authority available to a state or local agency is subject to a
strict state bond ceiling. Apartment Complexes financed through tax-exempt
financing are considered to be Federally subsidized for purposes of Low Income
Housing Credits, and thus eligible only for the 30% present value credit. See
"The Low Income Housing Credit."
HUD Section 8 Rental Assistance Programs
HUD administers the Existing Housing Program under Section 8 of the National
Housing Act, under which tenants whose incomes do not exceed certain specified
percentages of area median incomes are given housing vouchers through a local
housing authority. These vouchers can be used to pay a significant portion of
the rents for housing available in the private market, but only in projects
approved by HUD on the basis of housing quality and suitability standards.
The definition of "Federally subsidized" for purposes of Low Income Housing
Credits excludes all of the Section 8 programs except for the Moderate
Rehabilitation Section 8 program (other than funds disbursed under the Stewart
B. McKinney Homeless Assistance Act of 1988), so that units receiving such
assistance may be eligible for the 70% present value credit.
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MANAGEMENT
The Fund Manager
The Fund Manager is WNC & Associates, Inc. The Fund Manager has the
shareholder's equity reflected in its audited balance sheet (see "Financial
Statements"). The Fund Manager will be responsible for all aspects of the
operations of the Series. The Fund Manager will provide executive supervisory
and certain administrative services for the operations of the Series. Property
management will be provided at the expense of each Local Limited Partnership by
agents, which may include Affiliates of the Fund Manager. See "Management
Compensation." The services provided by the Fund Manager will include exercising
all of the rights of the Series under the Local Limited Partnership Agreements.
Unitholders will have no right to participate in the management of their Series.
The Fund Manager and its Affiliates are serving as the general partners of
the limited partnerships described below under "Prior Performance Summary" and
may serve as general partners for other real estate limited partnerships in the
future. It is anticipated that the officers of the Fund Manager will initially
devote approximately 5% to 50% of their time to the Fund; however, the amount of
time devoted to the Fund by all of these individuals is expected to decrease
significantly after the investment of the Net Proceeds in Local Limited
Partnership Interests. See "Conflicts of Interest."
The Fund Manager is a California corporation which was organized in 1971.
Its officers and significant employees are:
Wilfred N. Cooper, Sr............. Chief Executive Officer
John B. Lester, Jr................ President, Chief Operating
Officer and Secretary
David N. Shafer, Esq.............. Senior Vice President and
General Counsel
Wilfred N. Cooper, Jr............. Senior Vice President
Theodore M. Paul, CPA............. Vice President - Finance
and Chief Financial Officer
Thomas J. Riha.................... Vice President - Asset Management
Sy P. Garban...................... Vice President - National
Sales
Carl Farrington................... Director - Originations
David Turek....................... Director - Originations
N. Paul Buckland.................. Director - Acquisitions
Michele M. Taylor................. Investor Services Director
Theresa I. Champany............... Marketing Services Director
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The directors of WNC & Associates, Inc. are Wilfred N. Cooper, Sr., who
serves as Chairman of the Board, John B. Lester, Jr., David N. Shafer, Wilfred
N. Cooper, Jr. and Kay L. Cooper. Substantially all of the shares of WNC &
Associates, Inc. are owned by Wilfred N. Cooper, Sr., through the Cooper
Revocable Trust, and John B. Lester, Jr., through the Lester Family Trust.
Wilfred N. Cooper, Sr., age 66, has been the principal shareholder and a
Director of WNC & Associates, Inc. since its organization in 1971, of Shelter
Resource Corporation since its organization in 1981 and of WNC Resources, Inc.
from its organization in 1988 through its acquisition by WNC & Associates, Inc.
in 1991, serving as President of those companies until 1992 and as Chief
Executive Officer since 1992, and has been a Director of WNC Capital Corporation
since its organization. He is also a general partner with WNC & Associates, Inc.
in WNC Financial Group, L.P. and WNC Tax Credit Partners, L.P. During 1970 and
1971 he was a principal of Creative Equity Development Corporation, a
predecessor of WNC & Associates, Inc., and of Creative Equity Corporation, a
real estate investment firm. For 12 years prior to that, Mr. Cooper was employed
by Rockwell International Corporation, last serving as its manager of housing
and urban developments. Previously, he had responsibility for new business
development including factory-built housing evaluation and project management in
urban planning and development. Mr. Cooper is a Director of the Executive
Committee of the National Association of Home Builders (NAHB) and a past
Chairman of the NAHB's Rural Housing Council, a Director of the National Housing
Conference, a Director of the Affordable Housing Tax Credit Coalition, a past
President of the Rural Builders Council of California (RBCC), and a past
President of Southern California Chapter II of the Real Estate Syndication and
Securities Institute (RESSI) of the National Association of Realtors (NAR). Mr.
Cooper graduated from Pomona College in 1956 with a Bachelor of Arts degree.
John B. Lester, Jr., age 63, has been a shareholder, a Director and
Secretary of WNC & Associates, Inc. since 1986, Executive Vice President from
1986 to 1992, and President and Chief Operating Officer since 1992, and has been
a Director of WNC Capital Corporation since its organization. He was a
shareholder, Executive Vice President, Secretary and a Director of WNC
Resources, Inc. from 1988 through its acquisition by WNC & Associates, Inc. in
1991. From 1973 to 1986 he was the Chairman of the Board and Vice President or
President of E & L Associates, Inc., a provider of engineering and construction
services to the oil refinery and petrochemical industries which he co-founded in
1973. Mr. Lester is a former Director of the Los Angeles Chapter of the
Associated General Contractors of California. His responsibilities at WNC &
Associates, Inc. include property acquisitions and company operations. Mr.
Lester graduated from the University of Southern California in 1956 with a
Bachelor of Science degree in Mechanical Engineering.
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David N. Shafer, age 45, has been a Director of WNC & Associates, Inc. since
1997, a Senior Vice President since 1992 and General Counsel since 1990, and
served as Asset Management Director from 1990 to 1992. Previously he was
employed as an associate attorney by the law firms of Morinello, Barone, Holden
& Nardulli from 1987 until 1990, Frye, Brandt & Lyster from 1986 to 1987 and
Simon and Sheridan from 1984 to 1986. Mr. Shafer is a Director and President of
RBCC, a member of NAHB's Rural Housing Council, a past President of Southern
California Chapter II of RESSI, a past Director of the Council of Affordable and
Rural Housing and Development and a member of the State Bar of California. Mr.
Shafer graduated from the University of California at Santa Barbara in 1978 with
a Bachelor of Arts degree, from the New England School of Law in 1983 with a
Juris Doctor degree (cum laude) and from the University of San Diego in 1986
with a Master of Law degree in Taxation.
Wilfred N. Cooper, Jr., age 34, has been employed by WNC & Associates, Inc.
since 1988 and has been a Director since 1997 and a Senior Vice President or
Vice President since 1992. Mr. Cooper heads the Acquisition Originations
department at WNC and has been President of, and a registered principal with,
WNC Capital Corporation since its organization. Previously, he was employed as a
government affairs assistant by Honda North America from 1987 to 1988, and as a
legal assistant with respect to Federal legislative and regulatory matters by
the law firm of Schwartz, Woods and Miller from 1986 to 1987. Mr. Cooper is a
Director and member of NAHB's Rural Housing Council and serves as Chairman of
its Membership Committee. Mr. Cooper graduated from The American University in
1985 with a Bachelor of Arts degree.
Theodore M. Paul, age 41, has been Vice President - Finance of WNC &
Associates, Inc. since 1992 and Chief Financial Officer since 1990. Previously,
he was a Vice President and the Chief Financial Officer of National Partnership
Investments Corp., a sponsor and general partner of syndicated partnerships
investing in affordable rental housing qualified for tax credits, from 1986
until 1990, and was employed as an associate by the accounting firms of
Laventhol & Horwath, during 1985, and Mann & Pollack Accountants, from 1979 to
1984. Mr. Paul is a member of the California Society of Certified Public
Accountants and the American Institute of Certified Public Accountants. His
responsibilities at WNC & Associates, Inc. include supervision of investor
partnership accounting and tax reporting matters and monitoring the financial
condition of the Local Limited Partnerships in which the Fund will invest. Mr.
Paul graduated from the University of Illinois in 1978 with a Bachelor of
Science degree and is a Certified Public Accountant in the State of California.
Thomas J. Riha, age 42, has been Vice President - Asset Management of WNC
& Associates, Inc. since 1994. He has more than 18 years' experience in
commercial and multi-family real estate investment and management. Previously,
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<PAGE>
Mr. Riha was employed by Trust Realty Advisor, a real estate acquisition and
management company, from 1988 to 1994, last serving as Vice President
Operations. His responsibilities at WNC & Associates, Inc. include monitoring
the operations and financial performance of, and regulatory compliance by,
properties in the WNC portfolio. Mr. Riha graduated from the California State
University, Fullerton in 1977 with a Bachelor of Arts degree (cum laude) in
Business Administration with a concentration in Accounting and is a Certified
Public Accountant in the State of California and a member of the American
Institute of Certified Public Accountants.
Sy P. Garban, age 51, has 20 years' experience in the real estate securities
and syndication industry. He has been associated with WNC & Associates, Inc.
since 1989, serving as National Sales Director through 1992 and as Vice
President National Sales since 1992. Previously, he was employed as Executive
Vice President by MRW, Inc., Newport Beach, California from 1980 to 1989, a real
estate development and management firm. Mr. Garban is a member of the
International Association of Financial Planners. He graduated from Michigan
State University in 1967 with a Bachelor of Science degree in Business
Administration.
Carl Farrington, age 51, has been associated with WNC & Associates, Inc.
since 1993, and has served as Director-Originations since 1994. Mr. Farrington
has more than 12 years' experience in finance and real estate acquisitions.
Previously, he served as Acquisitions Director for The Arcand Company from 1991
to 1993, and as Treasurer and Director of Finance and Administrator for Polytron
Corporation from 1988 to 1991. Mr. Farrington is a member and Director of the
Council of Affordable and Rural Housing and Development. Mr. Farrington
graduated from Yale University with a Bachelor of Arts degree in 1966 and from
Dartmouth College with a Masters of Business Administration in 1970.
David Turek, age 42, has been Director - Originations of WNC & Associates,
Inc. since 1996. He has 23 years' experience in real estate finance and
acquisitions. Previously, from 1995 to 1996 Mr. Turek served as a consultant for
a national Tax Credit sponsor where he was responsible for on-site feasibility
studies and due diligence analyses of Tax Credit properties, from 1992 to 1995
he served as Executive Vice President for Levcor, Inc., a multi-family
development company, and from 1990 to 1992 he served as Vice President for the
Paragon Group where he was responsible for Tax Credit development activities.
Mr. Turek graduated from Southern Methodist University in 1976 with a Bachelor
of Business Administration degree.
N. Paul Buckland, age 34, has been employed by WNC & Associates, Inc. since
1994 and currently serves as Director - Acquisitions. He has 11 years'
experience in analysis pertaining to the development of multi-family and
commercial properties. Previously, from 1986 to 1994 he served on the
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<PAGE>
development team of the Bixby Ranch which constructed more than 700
apartment units and more than one million square feet of "Class A" office space
in California and neighboring states, and from 1984 to 1986 he served as a land
acquisition coordinator with Lincoln Property Company where he identified and
analyzed multi-family developments. Mr. Buckland graduated from California State
University, Fullerton in 1992 with a Bachelor of Science degree in Business
Finance.
Michele M. Taylor, age 42, has been employed by WNC & Associates, Inc. since
1986, serving as a paralegal and office manager, and currently is the Investor
Services Director. Previously she was self-employed between 1982 and 1985 in
non-financial services activities and from 1978 to 1981 she was employed as a
paralegal by a law firm which specialized in real estate limited partnership
transactions. Ms. Taylor graduated from the University of California at Irvine
in 1976 with a Bachelor of Arts degree.
Theresa I. Champany, age 39, has been employed by WNC & Associates, Inc.
since 1989 and currently is the Marketing Services Director and a registered
principal with WNC Capital Corporation. Previously, she was employed as Manager
of Marketing Services by August Financial Corporation from 1986 to 1989 and as
office manager and Assistant to the Vice President of Real Estate Syndications
by McCombs Securities Co., Inc. from 1979 to 1986. Ms. Champany attended
Manchester (Conn.) Community College from 1976 to 1978.
Kay L. Cooper, age 60, has been an officer and Director of WNC &
Associates, Inc. since 1971 and of WNC Resources, Inc. from 1988 through its
acquisition by WNC & Associates, Inc. in 1991. Mrs. Cooper has also been the
sole proprietor of Agate 108, a manufacturer and retailer of home accessory
products, since 1975. She is the wife of Wilfred N. Cooper, Sr., the mother of
Wilfred N. Cooper, Jr. and the sister of John B. Lester, Jr. Ms. Cooper
graduated from the University of Southern California in 1958 with a Bachelor of
Science degree.
Statement of Purpose. Organized in 1971, WNC & Associates, Inc. since then
has specialized in providing quality investment opportunities exclusively in the
field of affordable housing. WNC & Associates, Inc. has a time-honored tradition
of prudent investing and is one of the nation's oldest sponsors of Tax Credit
investments. Its officers believe that WNC & Associates, Inc. has developed an
insight into the affordable housing business based upon the fundamental
principles of diversification and market need that few other companies can
match. Using a disciplined selection process it evaluates all investment
properties for value and location, placing particular emphasis on long-term
economic stability and rental demand.
Prior to 1982 WNC & Associates, Inc. was in the business of structuring and
sponsoring private placements of equity securities in limited partnerships
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organized to develop and operate residential rental properties which
benefit from Government Assistance, and thereafter monitoring the investments
made by such partnerships and providing certain administrative services to the
investors. A discussion of these partnerships is set forth below under
"Syndicated Partnerships."
In addition to the Syndicated Partnerships, through December 31, 1996, WNC
& Associates, Inc. and/or its Affiliates had sponsored 14 public and 48
non-public real estate programs as managing general partner. See "Prior
Performance Summary."
Syndicated Partnerships. WNC & Associates, Inc. structured for independent
real estate developers 57 private placements of partnerships formed to own real
estate projects ("Syndicated Partnerships"). In such transactions, investors
paid an aggregate of approximately $15,825,000 in equity capital contributions
to limited partnerships with respect to projects having an aggregate acquisition
cost estimated at approximately $82,000,000. Estimates of acquisition costs of a
project herein are made by adding the related limited partner and general
partner capital commitments to the principal amount of its mortgage financing.
These investment programs invested in 57 apartment properties, all of which
benefit from Government Assistance, in the following jurisdictions:
Arizona (2) Ohio (6)
California (29) Texas (4)
Colorado (1) Utah (1)
Florida (6) Virginia (1)
Kansas (1) Washington (1)
Kentucky (1) West Virginia (3)
New Mexico (1)
As of December 31, 1996, nine of the Syndicated Partnerships had either
sold, resyndicated (to Affiliates) or refinanced their properties, returning to
their investors between approximately 100% and 200% of their invested capital in
addition to providing tax deductions averaging in excess of 200% of their
invested capital.
In connection with the Syndicated Partnerships, WNC & Associates, Inc., in
addition to providing structuring and consulting services to developers,
directly or through professional consultants, arranged for preparation of
partnership agreements and other requisite documents for such projects,
including legal opinions as to Federal income tax and organizational matters,
and arranged for the placement of such securities, typically pursuant to
Regulation D under the Securities Act of 1933. It relied on independent
broker-dealers to place such securities.
WNC & Associates, Inc., as an investor service agent, typically has also
provided certain on-going partnership administrative services to the Syndicated
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Partnerships. In this role, it has gathered and evaluated information, handled
all communications between the partnerships and investors, including the
forwarding of financial statements and tax reporting forms, and served as the
initial channel for investor inquiries. In cases where projects have failed to
perform as expected, WNC & Associates, Inc. has intensified its monitoring
operations, visited the projects, attempted to organize the interests of the
investors, to provide general advice to the partners and to help seek a
resolution of pending problems, and, with respect to five of the Syndicated
Partnerships, each of which owned a single property, become the successor
managing general partner after the original managing general partners had
misappropriated partnership accounts. With respect to three of those Syndicated
Partnerships (which had the same original managing general partner), WNC &
Associates, Inc. became the successor managing general partner in 1986;
thereafter, the three Syndicated Partnerships sold their respective properties
to three other partnerships which were not Affiliates of WNC & Associates, Inc.
After the general partner thereof obtained Tax Credits for such properties, a
partnership sponsored by WNC & Associates, Inc. (see "Prior Performance
Summary") purchased the limited partnership interests therein. With respect to
the other two Syndicated Partnerships, WNC & Associates, Inc. became successor
managing general partner in 1989. Thereafter, using the proceeds from RD loans,
the properties were substantially rehabilitated and continue to be owned and
operated by the Syndicated Partnerships.
Change in Management
The management and control of the Fund Manager may be changed at any time in
accordance with its organizational documents, without the consent or approval of
the Unitholders. In addition, the Partnership Agreement provides for the
admission of one or more additional or successor Fund Managers to any Series in
certain circumstances.
First, with the consent of any other Fund Managers of the Series and a
majority-in-interest of the Unitholders, the Fund Manager may designate one or
more persons to be successor or additional Fund Managers to the Series. In
addition, the Fund Manager may, without the consent of any other Fund Manager or
the Unitholders, (i) substitute in its stead as Fund Manager any entity which
has, by merger, consolidation or otherwise, acquired substantially all of its
assets, stock or other evidence of equity interest and continued its business,
or (ii) cause to be admitted to the Series an additional Fund Manager or Fund
Managers if it deems such admission to be necessary or desirable so that the
Series will be classified as a partnership for Federal income tax purposes.
Finally, a majority-in-interest of the Unitholders may at any time remove the
Fund Manager of their Series and elect a successor Fund Manager. The Partnership
Agreement provides that if at any time a Series does not have a Fund Manager
which is an Affiliate of WNC & Associates,
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Inc., the Series shall change its name in such a manner as not to include
the initials "WNC."
WNC Capital Corporation
WNC Capital Corporation, a California corporation which is wholly-owned by
WNC & Associates, Inc., was organized in February 1994 principally to facilitate
the distribution of securities of partnerships sponsored by the Fund Manager.
WNC Capital Corporation is a member firm with the NASD, and is registered as a
broker-dealer with the Securities and Exchange Commission, the California
Department of Corporations and regulatory agencies of certain other states. The
officers of WNC Capital Corporation are Wilfred N. Cooper, Jr., President and
Theresa I. Champany, Vice President.
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PRIOR PERFORMANCE SUMMARY
WNC & Associates, Inc. directly and through its Affiliates has had
significant prior experience in the syndication and management of real estate
programs. From its formation through May 27, 1997 the Fund Manager and its
Affiliates have raised equity from more than 11,800 investors to acquire
interests in more than 500 properties located in 37 states and one territory,
and representing more than $826,000 in aggregate acquisition costs. The
information which follows and the section of this Prospectus entitled
"Management" contain discussions as of December 31, 1996 of all of the prior
real estate investment programs in which the Fund Manager and its Affiliates
have been involved.
In addition to the Syndicated Partnerships for which the Fund Manager has
performed syndication and related services for third parties as discussed above
under "Management," as of December 31, 1996 the Fund Manager and its Affiliates
have sponsored a total of 14 public and 48 non-public real estate programs
(excluding the Fund). As of December 31, 1996, two of the non-public real estate
programs had not sold their limited partnership interests; the other 60
partnerships had raised an aggregate of approximately $229,719,000 from
approximately 10,800 investors. These 60 programs invested in a total of 410
apartment properties at an aggregate acquisition cost of approximately
$654,281,000 in the following jurisdictions:
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Alabama (15) Mississippi (8)
Arizona (7) Missouri (12)
Arkansas (10) Nebraska (6)
California (95) New Mexico (11)
Florida (4) North Carolina (26)
Georgia (5) Ohio (4)
Idaho (1) Oklahoma (9)
Illinois (10) Oregon (5)
Indiana (4) South Carolina (14)
Iowa (7) South Dakota (1)
Kansas (3) Tennessee (26)
Kentucky (2) Texas (85)
Louisiana (13) U. S. Virgin Islands (1)
Maryland (2) Virginia (5)
Michigan (1) West Virginia (1)
Wisconsin (17)
Of these 60 partnerships, 12 public and 32 private real estate programs
commenced their offerings during the 10-year period beginning January 1, 1987
(the "Prior Programs"). See "Public Programs Sponsored" and "Private Programs
Sponsored" below. The Prior Programs were organized to invest in apartment
complexes (by acquiring limited partnership interests in other limited
partnerships which owned the apartment complexes) benefitting from Low Income
Housing Credits and, in most instances, one or more other forms of Government
Assistance. See "Other Government Assistance Programs." As will be the case with
respect to the Apartment Complexes in which the Fund will invest, management and
operational control of the properties in which the Prior Programs have invested
is exercised by the general partners of the local limited partnerships.
Public Programs Sponsored
The 12 public Prior Programs are WNC Housing Tax Credit Fund, L.P. ("HTCF"),
WNC California Housing Tax Credits, L.P. ("CHTC"), WNC Housing Tax Credit Fund
II, L.P. ("HTCFII"), WNC California Housing Tax Credits II, L.P. ("CHTCII"), WNC
Housing Tax Credit Fund III, L.P. ("HTCFIII"), WNC California Housing Tax
Credits III, L.P. ("CHTCIII"), WNC Housing Tax Credit Fund IV, L.P., Series 1
("HTCFIV Series 1"), WNC Housing Tax Credit Fund IV, L.P., Series 2 ("HTCFIV
Series 2"), WNC California Housing Tax Credits IV, L.P., Series 4 ("CHTCIV
Series 4"), WNC California Housing Tax Credits IV, L.P., Series 5 ("CHTCIV
Series 5"), WNC Housing Tax Credit Fund V, L.P., Series 3 ("HTCFV Series 3") and
WNC Housing Tax Credit Fund V, L.P., Series 4 ("HTCFV Series 4"). With the
exception of HTCFV Series 4, each of the public Prior Programs had completed its
offering as of December 31, 1996.
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Through December 31, 1996, the 12 public Prior Programs had raised an
aggregate of approximately $138,494,000 in capital contributions from an
aggregate of approximately 9,000 investors and invested in a total of 206
apartment properties located in the following jurisdictions:
Alabama (13) Mississippi (6)
Arizona (3) Missouri (3)
Arkansas (5) Nebraska (6)
California (48) New Mexico (4)
Florida (1) North Carolina (15)
Georgia (2) Ohio (4)
Idaho (1) Oklahoma (3)
Illinois (8) Oregon (3)
Indiana (4) South Carolina (1)
Iowa (7) South Dakota (1)
Kansas (2) Tennessee (6)
Kentucky (1) Texas (40)
Louisiana (3) Virginia (4)
Maryland (1) Wisconsin (11)
The aggregate mortgage debt encumbering the properties was approximately
$247,618,000 and the aggregate acquisition cost of the properties was
approximately $348,261,000. At the times of the Prior Programs' investments
therein 73 of the properties were existing apartment complexes and 133 were
under development or construction by the local partnerships which own them.
All of the public Prior Programs have as their principal investment
objective providing Federal Low Income Housing Credits to their investors, and
CHTC, CHTCII, CHTCIII, CHTCIV Series 4, and CHTCIV Series 5 have the additional
objective of providing California Low Income Housing Credits.
Certain information with regard to the public Prior Programs is set forth in the
tables which follow:
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<TABLE>
Federal Credit Programs
Federal
Offering Partnership Credits Received Per $10,000 Investment Credit Years
Commencement Name Total 1996 1995 1994 1993 1992 1991 1990 1989 Remaining(1)
- ------------ ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 HTCF $10,170 $1,410 $1,410 $1,410 $1,410 $1,410 $1,400 $1,640 $80 5
1990 HTCFII 9,010 1,450 1,450 1,460 1,380 1,210 1,300 760 -- 7
1992 HTCFIII 5,000 1,570 1,520 1,190 680 40 -- -- -- 9
1993 HTCFIV
Series 1 2,690 1,360 1,010 320 -- -- -- -- -- 10
1994 HTCFIV
Series 2 1,960 1,050 700 210 -- -- -- -- -- 10
1995 HTCFV
Series 3 650 620 30 -- -- -- -- -- -- 11
1996 HTCFV
Series 4 140 140 -- -- -- -- -- -- -- 12(2)
Federal and California Credit Programs
Federal
Offering Partnership Credits Received Per $10,000 Investment Credit Years
Commencement Name Total 1996 1995 1994 1993 1992 1991 1990 1989 Remaining(1)
- ------------ ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ------------
1989 CHTC $13,660 $ 990 $ 990 $1,180 $1,720 $2,360 $2,590 $2,270 $1,560 5
1991 CHTCII 9,770 1,530 2,060 1,940 1,780 1,810 650 -- -- 4(2)
1993 CHTCIII 4,630 1,970 1,800 800 60 -- -- -- -- 10
1994 CHTCIV
Series 4 2,050 1,340 710 -- -- -- -- -- -- 10
1995 CHTCIV
Series 5 -- -- -- -- -- -- -- -- -- 11
<FN>
(1) As of December 31, 1996.
(2) These Prior Programs will generate a small amount of Tax Credits for four
years beyond the stated number of years due to increases in qualified basis.
</FN>
</TABLE>
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Private Programs Sponsored
As of December 31, 1996, the 32 private Prior Programs involved an aggregate
of approximately $75,891,000 in commitments for capital contributions payable in
installments from an aggregate of approximately 1,470 investors. These private
Prior Programs invested in a total of 159 apartment properties located in the
following jurisdictions:
Alabama (2) Missouri (6)
Arizona (3) New Mexico (6)
Arkansas (5) North Carolina (9)
California (35) Oklahoma (3)
Florida (3) Oregon (2)
Georgia (2) South Carolina (7)
Illinois (1) Tennessee (18)
Kentucky (1) Texas (39)
Louisiana (7) Virginia (1)
Maryland (1) Wisconsin (6)
Mississippi (2)
The aggregate mortgage debt encumbering the properties was approximately
$187,401,000 and the aggregate acquisition cost of the properties was
approximately $246,869,000.
All of the 32 private Prior Programs have as their principal investment
objective providing Federal Low Income Housing Credits to their investors, and
12 of the 32 programs have the additional objective of providing California Low
Income Housing Credits.
In addition to the 32 private Prior Programs discussed above (each of which
had completed its offering as of December 31, 1996), the Sponsor has sponsored
WNC Institutional Tax Credit Fund III, L.P. ("ITC III"), and WNC California
Institutional Tax Credits, L.P. ("CTC"). ITC III sold all $20,000,000 of its
units of limited partnership interest in 1997 and has invested in nine Apartment
Complexes. CTC sold all $27,000,000 of its units of limited partnership interest
in 1997 and has invested in four Apartment Complexes. It is expected that
additional properties will be acquired by ITC III and CTC.
Certain additional information with regard to the 32 private Prior Programs
is set forth in the tables which follow:
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<TABLE>
Federal Credit Programs
Offering Federal
Commence- Partnership Credits Received Per $10,000 Investment(1) Credit Years
ment Name Total 1996 1995 1994 1993 1992 1991 1990(3) 1989 1988 1987 Remaining(2)
- ------- ---- ----- ---- ---- ---- ---- ---- ---- ------- ---- ---- ---- ------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 Pepper Tree (4) $13,650 1,470 1,470 $1,470 $1,470 $1,470 $1,470 $2,370 $1,530 $ 900 $ 30 2
1987 East Bay 13,940 1,360 1,350 1,360 1,360 1,360 1,360 1,670 1,700 1,400 1,020 1
1987 Sequoia Manor 13,440 1,370 1,370 1,370 1,370 1,350 1,380 2,220 1,460 1,340 210 2
1987 Bayou 12,890 1,290 1,290 1,290 1,290 1,290 1,290 2,110 1,400 1,330 310 1
1987 Laurel Hill 12,770 1,320 1,320 1,320 1,320 1,320 1,300 2,090 1,320 1,230 230 2(5)
1988 Ridgetop 12,310 1,390 1,390 1,390 1,390 1,390 1,390 2,250 1,500 220 -- 2(6)
1989 Alta Mesa 10,410 1,320 1,320 1,320 1,320 1,320 1,320 1,950 540 -- -- 4
1990 WNC-90 8,240 990 1,400 1,400 1,400 1,400 1,400 250 -- -- -- 4
1991 Shelter Resource XIX 7,920 1,440 1,440 1,440 1,440 1,440 720 -- -- -- -- 5
1991 WNC Tax Credits XX 8,240 1,460 1,460 1,460 1,460 1,460 940 -- -- -- -- 5
1991 WNC Tax Credits XXI 6,520 1,360 1,360 1,360 1,360 1,030 50 -- -- -- -- 6
1992 WNC Tax Credits XXII 6,730 1,410 1,410 1,410 1,410 1,090 -- -- -- -- -- 6
1992 WNC Tax Credits XXIII 6,440 1,400 1,400 1,400 1,370 870 -- -- -- -- -- 6
1992 WNC Tax Credits XXV 5,060 1,380 1,380 1,280 870 150 -- -- -- -- -- 8
1993 WNC Tax Credits XXVI 4,820 1,330 1,330 1,320 840 -- -- -- -- -- -- 7
1993 WNC Tax Credits XXVIII 3,350 1,300 1,300 640 110 -- -- -- -- -- -- 8
1993 WNC Tax Credits XXIX 3,220 1,290 1,110 790 30 -- -- -- -- -- -- 9
1994 WNC Tax Credits XXX 2,330 1,220 1,000 110 -- -- -- -- -- -- -- 9
1994 ITC I 2,860 1,670 780 410 -- -- -- -- -- -- -- 10
1995 ITC II 660 590 70 -- -- -- -- -- -- -- -- 11
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Federal and California Credit Programs
Offering Federal
Commence- Partnership Credits Received Per $10,000 Investment(1) Credit Years
ment Name Total 1996 1995 1994 1993 1992 1991 1990(3) 1989 1988 1987 Remaining(2)
- -------- ---- ----- ---- ------------ ---- ---- ---- ------- ---- ---- ---- --------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 Beech Villa $17,750 $1,360 $1,360 $1,350 $1,350 $1,350 $1,350 $2,670 $3,210 $3,210 $540 1
1988 Elmwood Villa 17,030 990 990 990 990 1,330 2,610 4,010 3,460 1,660 -- 3
1988 Poplar Villa 16,650 970 970 970 970 970 2,280 3,420 3,410 2,690 -- 1
1988 Olive Tree 16,490 970 970 970 970 970 1,620 3,990 3,310 2,720 -- 2
1988 Pine Rock 15,530 940 940 940 880 1,220 3,280 3,810 3,240 280 -- 3
1988 Mesa Verde 15,040 1,030 1,030 1,030 1,030 1,870 1,690 3,610 2,760 990 -- 3
1988 Sunfield 14,310 1,340 1,340 1,340 1,340 1,340 1,650 3,090 2,080 790 -- 3
1988 Foxglove 11,880 1,360 1,360 1,360 1,550 2,020 2,020 1,920 290 -- -- 4
1989 Elliot Place 14,160 1,200 1,200 1,200 1,200 1,670 2,460 3,200 2,030 -- -- 4
1990 Wheatridge 10,880 1,120 1,120 1,120 1,480 2,240 2,230 1,570 -- -- -- 5
1992 WNC Tax Credits XXIV 8,590 1,260 1,740 2,180 2,180 1,230 -- -- -- -- -- 6
1993 WNC Tax Credits XXVII 6,070 1,560 1,750 1,740 1,020 -- -- -- -- -- -- 8
<FN>
(1) Represents the return received by investors utilizing deferred payment
purchase plans. In many instances the respective returns to cash investors were
higher than those listed above inasmuch as the use of deferred payment purchase
notes entailed the payment of interest.
(2) As of December 31, 1996.
(3) In 1990 certain partnerships were permitted to, and did, elect to
utilize 150% of the Federal Low Income Housing Credit otherwise allowable for
1990.
(4) Pepper Tree originally offered Federal Tax Credits only. After the
investors were admitted to the Prior Program, the Local General Partners
obtained California Low Income H using Credits as well, which are not reflected
in this chart.
(5) These Prior Programs will generate a small amount of Tax Credits for
five years beyond the stated number of years due to increases in qualified
basis.
(6) These Prior Programs will generate a small amount of Tax Credits for
five years beyond the stated number of years due to increases in qualified
basis.
</FN>
</TABLE>
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Additional Information
In one prior private program sponsored in 1981, WNC & Associates, Inc.,
became successor managing general partner in 1989 after the original managing
general partner had misappropriated partnership accounts. Thereafter, using the
proceeds from an RD loan, the property was substantially rehabilitated and
continues to be owned and operated by the prior program. In another prior
private program sponsored in 1996, a Local General Partner filed a petition in
bankruptcy; the Sponsor's motion to remove the Local General Partner from the
Local Limited Partnership and replace him with an experienced non-profit agency
was approved by the bankruptcy court in 1997. And in a public program sponsored
in 1993, a Local General Partner was removed and replaced by the Sponsor in 1997
after the Local General Partner violated provisions of the Local Limited
Partnership Agreement. The remaining Local General Partner, which is an agency
of the county in which the property is located, is expected to be replaced by
the Sponsor and/or an experienced non-profit agency.
Additional information with regard to certain of the Prior Programs is set
forth in Tables I, II and III, which comprise Exhibit A to this Prospectus, and
in Table VI which appears in Part II of the Registration Statement of which this
Prospectus is a part and describes in greater detail the properties in which
these programs have invested. Tables IV and V have been omitted since none of
the prior programs sponsored by the Fund Manager or its Affiliates have sold any
of their properties or completed operations.
There will be made available to any prospective investor, upon request and
without charge, copies of Table VI and of the most recent report on Form 10-K
filed by any of the public programs with the Securities and Exchange Commission,
and upon request, for a reasonable fee, the exhibits to such Form 10-K will also
be provided.
FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following discussion summarizes the material Federal income tax aspects
of the purchase, ownership and disposition of Units and the opinion of Derenthal
& Dannhauser, counsel to the Fund, the Fund Manager and their Affiliates
("Counsel") with regard to such aspects, other than Low Income Housing Credits,
which are discussed under "The Low Income Housing Credit." This discussion,
Counsel's opinion and the discussion of Low Income Housing Credits are based on
the Code, Treasury Regulations thereunder, published administrative rulings, and
judicial decisions in effect on the date of this Prospectus. The 1986 Act and
the 1987 Act substantially altered the Federal income tax system, particularly
as it
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relates to the tax consequences of investments by limited partnerships in real
estate, and the 1988 Act, the 1989 Act, the 1990 Act and the 1993 Act have made
numerous other changes in the Code. Consequently, significant uncertainty exists
regarding various aspects of the taxation of limited partnerships. Furthermore,
applicable regulations and interpretations in this area have not yet been
written or are under continuing review by the IRS. No assurance can be given
that future legislative or administrative changes or court decisions will not
significantly modify the statements and opinions expressed in this Prospectus.
Any such changes may or may not be retroactive with respect to transactions
completed prior to the effective dates of such changes.
Summary
The following is a summary of, and is qualified by, the more extensive
discussion of the Federal income tax consequences set forth below in this
section.
Opinion of Counsel. In connection with its preparation of the following
discussion Counsel has rendered its opinion as to certain of the material
Federal income tax issues. With regard to certain other matters Counsel is
unable to render an opinion. See "Opinions of Counsel." The Fund has not
received and will not apply for a ruling from the IRS with respect to any of
these matters.
Classification as a Partnership. As indicated throughout this Prospectus,
the primary tax benefit to investors will be Low Income Housing Credits.
However, Low Income Housing Credits will only be available to Unitholders in a
Series if, among other things (see "The Low Income Housing Credit" as well as
the discussion which follows), the Series is classified as a partnership for
Federal income tax purposes. As indicated below (see "Classification as a
Partnership"), Counsel has rendered its opinion that each Series will be
classified as a partnership in this regard.
Tax Treatment of Unitholders. As set forth below (see "Tax Treatment of
Unitholders"), the Series themselves will not be subject to Federal income tax.
Rather, each Unitholder will report on his own income tax return his share of
his Series' Profits and Losses for Tax Purposes and Tax Credits, which includes
his share of the Series' share of such items from the Local Limited
Partnerships. See "Investment in Local Limited Partnerships."
Because a Unitholder's share of cash distributions will not ordinarily equal
his share of Taxable Income for Tax Purposes, a Unitholder may have taxable
income for a year in an amount which exceeds his distributions for the year. See
"Tax Treatment of Unitholders" and "Tax Liabilities in Later Years."
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A Unitholder's ability to utilize his Tax Credits and to deduct Losses for
Tax Purposes is limited. For example, because the Fund's credits and losses will
for most investors be classified as "passive," a Unitholder might need income
from other sources to fully utilize his Tax Credits, and in most instances will
need income from other sources to deduct his Losses for Tax Purposes. See
"Limitations on Losses and Credits from Passive Activities" and "General
Business Tax Credit Limitations." In addition, a Unitholder may not deduct
Losses for Tax Purposes in excess of his basis in his Units. See "Tax Basis for
the Units." A Unitholder may not deduct Losses for Tax Purposes in excess of his
amount "at risk" in his Series' activities (see "Application of At Risk
Limitation"), nor may he utilize Low Income Housing Credits in excess of the
amount he has "at risk" with respect to expenditures qualifying for Low Income
Housing Credits. See "The Low Income Housing Credit - Utilization of the Low
Income Housing Credit." Further, no deductions will be available to a Unitholder
if his investment in his Series and/or the Series' activities are "not engaged
in for profit." See "Profit Motive."
Historic Tax Credits and Recapture. In addition to Low Income Housing
Credits, tax credits generally are available for certain rehabilitation
expenditures incurred in improving certified historic structures and certain
other buildings originally placed in service before 1936 (the "Historic Tax
Credit"). If an expenditure respecting such a building is a qualified
expenditure, 20% of the expenditure will give rise to an Historic Tax Credit.
See "Federal Income Tax Considerations - Historic Tax Credit."
Historic Tax Credits are subject to recapture in the event of early
disposition of the building. See "Federal Income Tax Considerations - Historic
Tax Credit Recapture."
Fund Allocations. The Code and Treasury Regulations include certain highly-
technical provisions respecting allocations which are included in a partnership
agreement. The Partnership Agreement has been drafted in an attempt to comply
with such provisions. For a discussion of them, and the terms of the Partnership
Agreement in this regard, see "Fund Allocations."
The Code also prohibits the allocation to a partner of partnership items
incurred prior to the admission of the partner as a partner. See "Allocations
Prior to Admission."
Fund Deductions. In general, the Code requires that the Fund use the
accrual method of accounting. However, the Code provides special rules for the
treatment of such items as depreciation, Acquisition Fees, management fees and
organization expenses. See "Basis of Local Limited Partnerships in Their
Apartment Complexes," "Depreciation," "Deductibility of Fees," "Organization and
Offering Expenses" and "Start-Up Expenditures."
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<PAGE>
Sale of Apartment Complexes. Gain or loss on the sale of an Apartment
Complex will equal the amount of consideration received (including the amount of
any liability to which the Apartment Complex was subject), minus the Local
Limited Partnership's basis in the Apartment Complex. This rule applies to all
dispositions of an Apartment Complex, including a foreclosure, so that the tax
liability on a disposition may exceed the cash received therefor. The character
of gain or loss as ordinary or capital, and as passive or portfolio, will depend
upon, among other things, the manner in which the Local Limited Partnership held
the Property. See "Sales or Exchanges of Local Limited Partnership Property;
Depreciation Recapture."
Treatment of Debt. If a promissory note issued or received by a Series or a
Local Limited Partnership includes original issue discount, the original issue
discount must be claimed as an expense or recognized as income annually over the
term of the loan regardless of the amount of interest actually paid or received.
See "Treatment of Mortgage Loans."
Transfers of Units. On a sale of his Units, a Unitholder will recognize
taxable gain in an amount equal to the excess, if any, of the consideration
received for the Units (including his share of Series or Local Limited
Partnership nonrecourse liabilities), over his basis in the Units. The tax
consequences of a transfer of Units as a gift or upon the death of a Unitholder
will depend upon, among other things, the Unitholder's particular circumstances.
See "Sales or Exchanges of Units and Local Limited Partnership Interests;
Transfers by Gift or at Death."
Liquidation. Upon liquidation of his Series, a Unitholder will recognize
taxable gain if the cash received by him (including his share of Series or Local
Limited Partnership nonrecourse liabilities) exceeds his basis in his Units. See
"Dissolution and Liquidation of a Series or Local Limited Partnership."
Section 754 Election. No Series is expected to file an election under
Section 754 of the Code. The absence of an election may have an adverse effect
on the marketability and sales price of Units. See "Elections."
Other Considerations. The following discussion also includes other
subsections which discuss less significant tax consequences. See "Other
Important Tax Considerations," "Tax Returns and Tax Information," "Tax Shelter
Registration" and "Changes in Tax Law."
These and other material Federal income tax issues are discussed below.
However, the following discussion does not purport to deal with Federal income
tax consequences applicable to all categories of investors, some of which may be
subject to special rules, and is not intended as a substitute for careful
planning. Prospective investors are urged to consult their own tax advisers,
attorneys or accountants with
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<PAGE>
specific reference to their own tax situations and the effect thereon of an
investment in the Fund.
Opinion of Counsel
Counsel is of the opinion that to the extent that the summaries of Federal
income tax consequences to the Unitholders set forth in this "Federal Income Tax
Considerations" section and under the headings "Risk Factors - Risks Related to
Tax Credits" and " - Other Tax Risks" and "The Low Income Housing Credit"
involve matters of law, such statements are accurate in all material respects
under the Code, Treasury Regulations and existing interpretations thereof and
address fairly the principal aspects of each material Federal income tax issue
relating to an investment in the Fund. Based on the assumptions and
representations described herein, Counsel is of the opinion that for Federal
income tax purposes (i) each Series will be classified as a partnership and not
as an association taxable as a corporation; (ii) upon admission to a Series, an
investor will be a limited partner of the Series; (iii) each Unitholder will be
permitted to include in his tax basis of his Units his share of the bona fide
nonrecourse liabilities of his Series, including his Series' share of bona fide
nonrecourse liabilities of each Local Limited Partnership; (iv) the allocations
of Profits and Losses for Tax Purposes and Tax Credits provided for in the
Partnership Agreement will not be significantly modified; (v) Profits and Losses
for Tax Purposes and Tax Credits (other than the portion thereof classified as
portfolio income) will be treated as derived from a passive activity; and (vi)
no Series will be considered "publicly traded" within the meaning of Section
469(k) or 7704 of the Code.
Notwithstanding the foregoing, no Series has yet acquired any particular
investment, and the tax benefits available to Unitholders necessarily will
depend in large part upon the characteristics of the particular investments
acquired. Due to the factual nature of the issues involved, Counsel is unable to
render an opinion at this time regarding the specific application of the Federal
income tax laws to such investments. As a condition to an investment by any
Series in any Local Limited Partnership, the Series will obtain an opinion of
counsel, which may be based on assumptions and on representations from the Fund
Manager and the general partners of such Local Limited Partnership,
substantially to the effect that for Federal income tax purposes (i) the Local
Limited Partnership will be classified as a partnership and not as an
association taxable as a corporation; (ii) the Local Limited Partnership will be
the owner of the relevant Apartment Complex; (iii) upon admission, the Series
will be a limited partner of the Local Limited Partnership; (iv) the allocations
of profit or loss and Tax Credits under the Local Limited Partnership Agreement
will not be significantly modified by the IRS; (v) for purposes of determining
its tax basis and amount "at risk" (under Code Sections 42 and 465) for the
Local Limited Partnership, the Series will be permitted to take into account its
properly allocable share of such Local Limited Partnership's nonrecourse
liabilities;
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(vi) the relevant Apartment Complex will qualify for Tax Credits; and (vii) the
Local Limited Partnership will not be considered "publicly traded" within the
meaning of Section 469(k) or 7704 of the Code. In addition to reaching the
foregoing conclusions, such opinion will conclude that substantially more than
half of the material Federal income tax benefits anticipated from such
investment more likely than not will be realized by the Series.
Prospective investors should note that no legal opinion has been obtained,
and it is not anticipated that an opinion will be obtained, regarding
determinations, the correctness of which depends in significant part on future
factual circumstances, regarding matters peculiar to certain investors or
regarding matters in which opinions are not customarily obtained. Such
determinations and matters may include:
- - the allocation of basis among various components of a property, particularly
as between buildings, the cost of which is depreciable, and the underlying
land, the cost of which is not depreciable; a successful challenge by the
IRS to the amount of basis allocated to buildings would decrease
depreciation attributable to the property;
- - the estimated useful lives for depreciation purposes of properties
ineligible for depreciation under the cost recovery provisions of the Code;
a successful challenge by the IRS to the useful life selected by a Local
Limited Partnership would extend the period over which the cost of the
property was recovered through depreciation deductions;
- - the characterization of various expenses and payments made to or by a Series
or a Local Limited Partnership (for example, the extent to which such
payments represent deductible fees or interest); a successful challenge by
the IRS to the characterization of an expense as deductible would require
that such expense be capitalized and recovered, if at all, upon liquidation;
- - the portion of the cost of any Apartment Complex that qualifies for Tax
Credits (but see the discussion of so-called "adjuster" provisions in
"Investment Objectives and Policies - Investment Policies"); a successful
challenge by the IRS would reduce the amount of such credits;
- - the application to any specific Unitholder of the limitation on the
availability of passive activity losses and credits; Unitholders must
determine for themselves the extent to which their passive income and the
"$25,000 deduction equivalent" are available to them to claim Tax Credits
and Losses for Tax Purposes;
- - the classification of any Series or any Local Limited Partnership as a
dealer in interests in Local Limited Partnerships or Apartment Complexes,
respectively;
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a dealer generally may not claim depreciation deductions; and
- - the application of the alternative minimum tax to, or the calculation
thereof by, any Unitholder; if a Unitholder is subject to the alternative
minimum tax, tax benefits from an investment in a Series could be reduced.
There can be no assurance, therefore, that some of the deductions to be
claimed by a Series, or the allocation of items of Profits and Losses for Tax
Purposes and Tax Credits among its Fund Manager and Unitholders, will not be
challenged by the IRS and that such challenge will not be sustained by the
courts. Such challenge, if successful, could have a detrimental effect on the
ability of a Series to realize its investment objectives. See also "Risk Factors
- - Other Tax Risks."
Classification as a Partnership
The Fund does not plan to apply for a ruling from the IRS as to the status
of any Series as a partnership. Counsel is of the opinion that, under the
default provisions of newly-issued Treasury Regulations under Code Section 7701,
each Series will be classified as a partnership and will not be treated as an
association taxable as a corporation for Federal income tax purposes. Counsel's
opinion as to partnership status for each Series assumes and is conditioned on
the Fund Manager's representation that neither Series will elect to be treated
as a corporation for Federal income tax purposes.
As indicated above, Counsel's opinion is based upon the present provisions
of the Code and Regulations thereunder. If the IRS were to amend its
Regulations, it is possible that the Series would not qualify as partnerships
under the amended regulations.
Additionally, under Section 7704 of the Code, a publicly traded partnership
will be treated as a corporation for Federal income tax purposes, unless the
partnership meets certain gross income requirements, described below. For this
purpose, a publicly traded partnership is one the interests in which are (a)
traded on an established securities market, or (b) readily tradable on a
secondary market (or the substantial equivalent thereof). As indicated under the
heading "Transferability of Units," it is not anticipated that a public market
for the Units will develop. The report of the Conference Committee on the 1987
Act (the "Conference Report") indicates that where interests are quoted and
traded on an irregular basis and such interests cannot be disposed of within the
time that they could be disposed of in an over-the-counter market, the interests
are not to be treated as readily tradable on the substantial equivalent of a
secondary market.
The Partnership Agreement provides that a transfer of a Unit will not be
recognized by a Series unless (i) the transferror represents that the
transaction will
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not occur through a market maker in the Units, through a broker-dealer that
provides a readily available, regular, and ongoing opportunity to Unitholders to
sell or exchange their Units, through a public means of obtaining or providing
information on offers to buy, sell or exchange Units or through a broker-dealer
or matching agent whose procedures for transfer of the Units have not been
approved by the Fund Manager as not being incident to trading on an established
securities market or a secondary market, or (ii) if in the opinion of Counsel,
such transfer would cause the Series to be considered publicly traded.
Furthermore, the Partnership Agreement provides that any transfer of a Unit not
made for investment but for resale will be void if the transferee is a person
who makes a market in securities. Finally, the Fund Manager is empowered to
amend the Partnership Agreement to the extent necessary to prevent a Series from
being taxed as an association taxable as a corporation. Based on these
provisions of the Partnership Agreement and on representations that these
provisions will be enforced according to their terms, Counsel is of the opinion
that the Series will not be "publicly traded" within the meaning of Section 7704
of the Code.
Even if a Series is treated as publicly traded under Section 7704 of the
Code, it will not be classified as a corporation if 90% or more of its income
for the taxable year is qualifying income. For this purpose, qualifying income
includes interest, dividends, real property rents and gain from the sale or
other disposition of real property. The Fund Manager has represented that 90% or
more of the gross income of each Series will consist of such interest,
dividends, real property rents and gains from the sale or other disposition of
real property. Accordingly, based on this representation, Counsel is of the
opinion that the Series will not be treated as associations taxable as
corporations for Federal income tax purposes under Section 7704 of the Code even
if the Series were to be considered publicly traded. However, see "Limitations
on Losses and Credits from Passive Activities" for a discussion of additional
restrictions that may be imposed if the Series were considered publicly traded.
In the event that a Series were to become a publicly traded partnership, the
Fund Manager would be responsible for monitoring the composition of the income
of the Series and would be empowered to take such action as may be necessary to
avoid classification of the Series as an association taxable as a corporation.
Section 7704 of the Code generally would apply to a Series in its first taxable
year in which it became a publicly traded partnership.
If, for any reason, a Series were treated for Federal income tax purposes as
a corporation in any taxable year, income, gain, loss, deductions, Tax Credits
and tax preferences of the Series would be reflected only on its own tax return
rather than being passed through to the Partners. In that event, the Low Income
Housing Credits, as well as any losses, deductions or Historic Tax Credits of
the Local Limited Partnerships or the Series, would not be available to reduce
the tax liability of any Unitholder. In addition, the Series would be required
to pay Federal income tax (at the corporate tax rates described in "Other
Important Tax Considerations -
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Tax Rates") on its net income, thereby potentially reducing the amount of cash
available to be distributed to the Unitholders, and all or a portion of any
distributions to Unitholders could be treated as dividends, taxable to them as
ordinary income to the extent of the current and accumulated earnings and
profits of the Series. Distributions in excess of earnings and profits would be
treated as a return of capital to the extent of the recipient's basis (which
would not include the Unitholder's share of any nonrecourse liabilities of the
Series), while the remainder would be treated as capital gain (assuming the
Unitholder's Units qualified as capital assets). In addition, such a change in
the Series' status for tax purposes could be treated by the IRS as a taxable
event, in which case the Unitholders could have a tax liability under
circumstances where they would not receive a cash distribution from the Series.
Investment in Local Limited Partnerships
The Series will not invest directly in the Apartment Complexes. Rather, the
Series will invest in Local Limited Partnerships each of which will own an
Apartment Complex. The availability to prospective Unitholders of the tax
benefits that are anticipated to be derived from an investment in the Units is
dependent, in the first instance, on the following general principles of
partnership taxation:
1. Each of the Local Limited Partnerships must be classified as a
partnership for Federal income tax purposes, and not as an association taxable
as a corporation.
2. The allocation of the items of income, gain, loss, deduction, and Tax
Credit to the Series by each Local Limited Partnership must have substantial
economic effect or otherwise be in accordance with the Series' interest in such
Local Limited Partnership.
3. The Series' tax basis in each of the Local Limited Partnerships must
exceed the amounts of losses and deductions allocated to the Series from such
Local Limited Partnership.
4. The Series' amount "at risk" in each of the Local Limited Partnerships
must exceed the amount of losses and deductions allocated to the Series from
such Local Limited Partnership.
5. The Series' amount "at risk" with respect to expenditures of each Local
Limited Partnership that qualify for Low Income Housing Credits must exceed the
amount of such expenditures allocated to the Series.
The application of these general principles of Federal income taxation to
any investment by a Series in a Local Limited Partnership will depend on the
specific facts associated with that investment, including the provisions of the
partnership
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agreement of such Local Limited Partnership and the nature of the debts incurred
by such Local Limited Partnership to finance its investment in its Apartment
Complex.
As indicated above in "Opinion of Counsel," as a condition to acquiring any
Local Limited Partnership Interest, a Series will obtain an opinion of counsel
to the Local Limited Partnership or the Series respecting certain Federal income
tax matters. The discussion set forth below and opinions of Counsel described
herein regarding the Federal income tax consequences of an investment in the
Units assume that the Series will obtain such opinions regarding each of the
Local Limited Partnerships in which it invests, and rely on the accuracy of each
of such opinions. Prospective investors should be aware that the Fund Manager
does not intend to seek a ruling from the IRS regarding any of the tax
consequences of an investment by a Series in any Local Limited Partnership, and
that an opinion of counsel is not binding on the IRS and has no official status
of any kind.
The IRS has rendered several published rulings regarding the Federal income
tax consequences of an investment by a partnership in another partnership.
Although such rulings have not addressed every Federal income tax consequence of
such an investment, they have addressed the material consequences expected to be
relevant to an investment in the Units. Based on such rulings and the general
principles of partnership taxation, except as specifically noted below, the
discussion of the Federal income tax consequences of an investment in the Units
is equally applicable to an investment by a Series as a limited partner or
non-managing member in each Local Limited Partnership.
Tax Treatment of Unitholders
A Series itself will not be subject to Federal income tax (subject to the
matters discussed under "Classification as a Partnership" above), although it is
possible that a Series will be subject to income tax in one or more states or
local tax jurisdictions. Instead, each Unitholder will be required to report on
his own income tax return his share of the Series' Profits and Losses for Tax
Purposes and Tax Credits.
The share of each Unitholder in Profits and Losses for Tax Purposes and in
Tax Credits is based on the application to the Local Limited Partnerships of the
general principles of Federal income taxation of partnerships that are discussed
above under the heading "Investment in Local Limited Partnerships." Thereafter,
in determining the Federal income tax liability of a Unitholder as a consequence
of his investment in the Units, the following principles will apply in the order
summarized below:
1. The allocation provisions contained in Article 4 of the Partnership
Agreement will determine each Unitholder's share of the items of Profits and
Losses
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for Tax Purposes and Tax Credits to the extent that such allocations have
substantial economic effect or are otherwise in accordance with the Unitholder's
interest in his Series.
2. The Unitholder's tax basis in his Units must exceed the amount of losses
and deductions allocated to such Unitholder.
3. The Unitholder's amount "at risk" in his Units must exceed the amount of
losses and deductions allocated to the Unitholder.
4. The Unitholder's amount "at risk" with respect to expenditures of each
Local Limited Partnership that qualify for Low Income Housing Credits must
exceed the amount of such expenditures allocated to the Unitholder.
To the extent that the allocation of any Profits or Losses for Tax Purposes
or Tax Credits is disallowed to a Unitholder as a result of the application of
any of the principles set forth above, such Unitholder will not be permitted to
take such allocation into account in determining his Federal income tax
liability unless and until that principle, and each of the principles, if any,
stated thereafter, has been satisfied. Each of these principles is described in
greater detail below.
In addition to and after satisfying the foregoing principles, the ability of
a Unitholder to take advantage of any Losses for Tax Purposes or Tax Credits
allocated to him with respect to his Units may be limited by the passive loss
and passive credit limitations described below in "Limitations on Losses and
Credits from Passive Activities," by the overall limitation on business credits
described below under "General Business Tax Credit Limitations," by the
limitations on miscellaneous itemized deductions described below in "Other
Important Tax Considerations - Tax Rates," and by the alternative minimum tax
described below under "Other Important Tax Considerations - Alternative Minimum
Tax."
The amount of a Unitholder's share of Profits for Tax Purposes for any year
will not ordinarily be identical to the amount of his share of Cash Available
for Distribution for the year. Accordingly, in a particular year a Unitholder
may be allocated Profits for Tax Purposes without receiving a distribution of
Cash Available for Distribution. See "Tax Liabilities in Later Years."
Conversely, a Unitholder may receive a distribution of Cash Available for
Distribution in a year when a Loss for Tax Purposes is reportable by him. See
"Fund Allocations" below.
Cash received by a Unitholder from his Series generally will not cause
recognition of income by the Unitholder but will reduce his basis in his Units.
A distribution of Cash Available for Distribution in excess of a Unitholder's
adjusted basis in his Units prior to the distribution will result in the
recognition of taxable income to the extent of the excess. Any such taxable
income generally will be
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treated as capital gain. The gain realized in a non-pro rata distribution may be
taxed to Unitholders as ordinary income to the extent attributable to the
Unitholders' share of "unrealized receivables" and inventory that has
substantially appreciated in value. See "Sales or Exchanges of Units and Local
Limited Partnership Interests; Transfers by Gift or at Death" below.
The most significant Federal income tax benefits of an investment in the
Units are expected to be derived from Low Income Housing Credits (and, to a
substantially lesser extent, Losses for Tax Purposes and, possibly, Historic Tax
Credits) allocated to each Unitholder. However, as indicated above, the Code
imposes substantial restrictions on the ability of all individuals, trusts and
estates and certain corporate taxpayers to take advantage of losses and credits
generated from so-called "passive activities." Although the rules applicable to
tax credits, including Low Income Housing Credits and Historic Tax Credits, and
to losses from passive activities are to be applied after the application of the
limitations on deductibility of losses to the amount of a Unitholder's basis and
amount "at risk" in his Units (see "Tax Basis for the Units" and "Application of
At Risk Limitations" below), the rules applicable to passive losses and credits
will be described first due to their importance in evaluating the advisability
of an investment in the Fund. The rules regarding the availability of Low Income
Housing Credits are discussed in "The Low Income Housing Credit," which should
be reviewed carefully by each prospective investor and his advisers.
Limitations on Losses and Credits from Passive Activities
A. General Limitations
In the case of individuals, trusts, estates and certain corporations (as
discussed below), Code Section 469 imposes limits on the ability of such
taxpayers to use losses and credits from so-called "passive activities" to
offset taxable income and tax liability arising from non-passive sources. A
passive activity includes (a) one which involves the conduct of a trade or
business in which the taxpayer does not materially participate, or (b) any
rental activity, regardless of the level of participation. With certain limited
exceptions, a limited partner will not be treated as materially participating in
a limited partnership's activities. Accordingly, absent satisfaction of the
conditions to such limited exceptions, and with the exception of the portion of
a Series' income that is portfolio income and any gain or loss from the
disposition of Series' property that Treasury Regulations under Code Section 469
classify as not arising from a passive activity, based on the anticipated
activities of each Series and Local Limited Partnerships in which it will
invest, Counsel is of the opinion that Profits and Losses for Tax Purposes and
Tax Credits of each Series will be treated as derived from a passive activity.
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Generally, a taxpayer's deductions and credits from passive activities may
be used to reduce his tax liability in a given taxable year to the extent such
liability arises from passive activities. In determining the amount of income
from passive activities in any taxable year, a taxpayer must exclude "portfolio
income," that is, (a) any gross income from the activity that is derived from
interest, dividends, annuities or royalties, unless such income is derived in
the ordinary course of a trade or business; (b) expenses (other than interest)
directly and clearly allocable to such income; and (c) interest expenses
properly allocable to such income. For this purpose, portfolio income also
includes any gain or loss from the disposition of property that produces
portfolio income or that is held for investment. Any income, gain or loss that
is attributable to an investment of working capital also will be treated as
portfolio income. Prospective investors should note that any portfolio income of
the Fund must be reported as taxable income, without reduction for any of the
expenses of the Fund (other than those described in clauses (b) and (c) of the
second sentence of this paragraph), and that each Unitholder will be required to
pay Federal income tax on his share of such portfolio income, even if no
corresponding distribution is made to the Partners and regardless of the fact
that overall operations result in Losses for Tax Purposes.
To the extent that a taxpayer's aggregate losses from all passive activities
exceed his aggregate income from all such activities in a taxable year, the
taxpayer has a "passive activity loss" for such year. Similarly, a "passive
activity credit" arises in any year to the extent that the taxpayer's tax
credits (with certain limited exceptions) arising from all passive activities
exceed his tax liabilities allocable to all passive activities. Such a loss or
credit may be carried forward to successive taxable years until fully utilized
against income from passive activities in such years; however, such losses and
credits may not be carried back to prior years.
With respect to gain on the disposition of property used in an activity, the
Treasury Regulations generally provide that such gain will be treated as passive
if the activity in which the property was used in the year of disposition was a
passive activity.
In the event a taxpayer disposes of his entire interest in a passive
activity to an unrelated party in a transaction in which all of the gain or loss
realized on such disposition is recognized, any loss (but not a credit) from the
activity that was disallowed by the passive activity rules will cease to be
treated as a passive activity loss and any loss on such disposition will not be
treated as arising from a passive activity. Such losses will be allowed as
deductions against income in the following order: (i) gain recognized on such
disposition; (ii) net income or gain for the taxable year from all passive
activities; and (iii) any other income or gain. Suspended Tax Credits are not
made available as a result of a disposition of a taxpayer's interest
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in an activity. Rather, to the extent not subject to recapture, such credits are
carried forward to subsequent tax years. Special rules apply to dispositions by
gift or by death and to certain installment sales.
Counsel has rendered no opinion regarding the manner in which the
limitations on losses and credits from passive activities and/or the exceptions
thereto discussed below will apply to any particular Unitholder, because these
limitations are applied at the Unitholder rather than the Series level and will
depend on the particular circumstances of each Unitholder. Each Unitholder is
strongly advised to consult his own tax adviser regarding the effect on such
Unitholder of the limitations on the allowance of passive losses and credits.
B. Exception for Low Income Housing Credits and Historic Tax Credits
1. Individuals. An exception to the general rules discussed above permits
certain taxpayers to shelter up to $25,000 of nonpassive income with losses from
certain rental real estate activities in which they actively participate and
with Low Income Housing Credits and Historic Tax Credits regardless of the level
of participation. Generally, a limited partner will not be treated as actively
participating in a rental real estate activity conducted by a partnership of
which he is a member.
The exception is commonly referred to as the "$25,000 deduction equivalent"
and is available to individuals and, in limited circumstances (as discussed
below), estates. Special rules apply to married individuals as follows: (i) in
the case of married individuals filing jointly, the full $25,000 deduction
equivalent is available, (ii) in the case of married individuals filing
separately who have lived apart for the entire taxable year, the deduction
equivalent for each individual is reduced to $12,500, and (iii) in the case of
married individuals filing separately who have not lived apart for the entire
taxable year, no deduction equivalent is available.
For (i) all rental real estate losses in which the taxpayer actively
participates, (ii) Historic Tax Credits, and (iii) Low Income Housing Credits
attributable to property placed in service prior to January 1, 1990, the $25,000
maximum deduction equivalent ($12,500 for certain married individuals filing
separate returns) is reduced in the event the adjusted gross income of the
taxpayer (including the taxpayer's spouse where a joint return is filed) exceeds
certain limits. In the case of losses from rental real estate activities in
which the taxpayer actively participates, the maximum deduction equivalent is
reduced by one-half of the amount by which the taxpayers' adjusted gross income
exceeds $100,000 ($50,000 in the case of a married individual filing a separate
return). In the case of Tax Credits described in the first sentence of this
paragraph, the maximum deduction equivalent is reduced by one-half of the amount
by which the taxpayer's adjusted gross income exceeds $200,000 ($100,000 in the
case of a married individual filing a separate return).
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Adjusted gross income for this purpose is determined without regard to
contributions to Individual Retirement Accounts, taxable social security
benefits and passive activity losses, but is otherwise determined in accordance
with Section 62 of the Code. It is not anticipated that any Series will invest
in Local Limited Partnerships owning Apartment Complexes which were placed in
service prior to January 1, 1990; accordingly, the adjusted gross income
limitations described in this paragraph should not apply to Unitholders, except
to the extent that Local Limited Partnerships generate Historic Tax Credits.
There are several important ordering rules that must be understood to
determine whether and to what extent the $25,000 deduction equivalent (subject
to the phase-out rules discussed above) will be available to a Unitholder who is
an individual. First, losses from a passive activity, including losses generated
from rental real estate activities in which the taxpayer actively participates,
must be offset by any income from a passive activity. The $25,000 deduction
equivalent is then used against (i) the remaining passive activity losses
generated from the rental real estate activities in which the taxpayer actively
participates, which, as noted above, will not include any Losses for Tax
Purposes generated by the Units; (ii) the passive activity credits generated
from rental real estate activities in which the taxpayer actively participates,
other than Historic Tax Credits and Low Income Housing Credits; (iii) the
Historic Tax Credits (subject to the phase-out rules); and (iv) the Low Income
Housing Credits. In this regard the Fund has not sought and will not seek to
determine the extent to which potential investors have losses (including losses
from rental real estate activities in which potential investors actively
participate) or credits from passive activities. Further, there is no limitation
on the number of Units which may be purchased by a single investor. Accordingly,
potential individual investors should consult with their own tax advisers as to
whether they may fully utilize any Low Income Housing Credits or Historic Tax
Credits which may be generated by an investment in the Fund under the ordering
rules set forth above.
Assuming that a prospective individual investor does not have a passive
activity loss generated from rental real estate activities in which he actively
participates (or that such losses are not allowable because his adjusted gross
income exceeds $150,000), and that he does not have passive activity income for
the taxable year (that is, the excess of income over losses from passive
activities), such investor could use up to $7,000 of Tax Credits a year based on
a 28% marginal tax rate, $7,750 a year based on a 31% marginal tax rate, $9,000
a year based on a 36% marginal tax rate, and $9,900 a year based on a 39.6%
marginal tax rate. See "Other Important Tax Considerations - Tax Rates." In each
instance, because Federal income tax is imposed at marginal rates, the maximum
amount of credits could be used only if the investor has at least $25,000 in
income subject to the marginal rate.
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Maximum Annual Tax Credits
Federal Maximum Annual
Tax Bracket Income Federal Credit
15% x $25,000 = $3,750
28% x $25,000 = $7,000
31% x $25,000 = $7,750
36% x $25,000 = $9,000
39.6% x $25,000 = $9,900
Most taxpayers pay a substantial portion of their Federal annual tax
liability by way of regular employer withholding from their salaries and/or by
way of estimated Federal tax payments due on the April 15, June 15, September 15
and January 15 preceding the filing date of the taxpayers' annual Federal income
tax returns. To the extent that an individual taxpayer has Tax Credits which are
otherwise allowable for a year, the taxpayer may use the Tax Credits to reduce
his regular withholding amounts or to reduce his estimated tax payments. For
example, a married couple filing jointly with taxable income of $75,000 in 1997
would be subject to Federal tax liability before Tax Credits in the amount of
approximately $16,000. (The tax liability for later years could be different due
to changes in the tax rates resulting from inflation adjustments or amendments
to the tax laws. See "Other Important Tax Considerations - Tax Rates.") If the
couple had $7,000 in Tax Credits for 1997 (the maximum permissible amount
pursuant to the $25,000 deduction equivalent), and the couple would otherwise
make estimated tax payments of their Federal tax liability in the amount of
$4,000 each, the couple could reduce each estimated tax payment by $1,750, for a
net payment of $2,250. If a taxpayer does not adjust his withholding or
estimated tax payments for allowable Tax Credits, his annual tax refund or
annual tax liability will be increased or reduced, respectively. Accordingly,
Tax Credits can be used to reduce tax liability from all sources, including
taxable income arising from wages, self-employment income, retirement account
withdrawals, and capital gains from the sale of stock and other investments.
If an investor is able to utilize Tax Credits under the passive activity
rules discussed above, and under the other Federal income tax rules discussed in
this section, Tax Credits would be claimed on the investor's individual IRS Form
1040 as follows: First, the investor enters all taxable income and subtracts all
available deductions and exemptions to compute taxable income. The tax imposed
on such taxable income is entered on line 38 of the Form 1040, and the total
amount of the investor's tax liability is entered on line 40. The investor's
utilizable Tax Credits are entered on line 44 and are subtracted, on a
dollar-for-dollar basis, from the taxes which appear on line 40.
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The 1987 Act added Section 469(k) to the Code pursuant to which the
limitations on losses and credits from passive activities will be applied
separately to, and the $25,000 deduction equivalent will not be available for,
investments in publicly traded partnerships, except with respect to Low Income
Housing Credits and Historic Tax Credits. As discussed under the heading
"Classification as a Partnership," Counsel is of the opinion that the Series
will not be treated as publicly traded. If any Series were to be treated as
publicly traded, individual investors in the Series could not use Losses for Tax
Purposes to offset passive income from other sources, but could use Tax Credits
generated by the Series to offset tax liability from all other sources to the
extent of the $25,000 deduction equivalent. Losses for Tax Purposes could not be
used to offset income from another publicly traded partnership whether or not
the Series were considered publicly traded.
2. Other Investors. As noted above, the limitations on the utilization of
passive losses and credits apply to all individuals and, subject to certain
additional limitations, to all trusts and estates. In the case of a grantor
trust, the provisions apply at the grantor rather than the trust level.
Generally, neither a nongrantor trust nor an estate can take advantage of the
$25,000 deduction equivalent. A limited exception is provided to allow an estate
to take advantage of the $25,000 deduction
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equivalent in any taxable year ending less than two years after the death of the
decedent.
Certain corporations are also subject to limitations on their use of passive
losses and credits. The corporations subject to these rules are (a) all
"regular" or "C" corporations that at any time during the last half of the
taxable year were more than 50% owned, by value, directly or indirectly, by five
or fewer individuals ("closely-held corporations"), and (b) all personal service
corporations. For this purpose, the term "personal service corporation" is
defined to mean a corporation the principal purpose of which is the performance
of personal services in the fields of health, law, engineering, architecture,
accounting, actuarial science, performing arts, or consulting, when such
services are substantially performed by any employee who owns, on any day during
the year, any of the outstanding shares of such corporation. Stock held by
related parties is taken into account pursuant to special attribution rules.
Closely-held corporations, but not personal service corporations, are
allowed to utilize their passive activity losses and their passive activity
credits to offset their tax liabilities arising from certain net active income,
i.e, taxable income from other sources, other than portfolio income. However, if
a Series were to be treated as publicly traded under Section 469(k) of the Code,
Losses for Tax Purposes could not be used to offset income from other sources.
Furthermore, if a closely-held corporate investor were to have an interest in
another partnership that was publicly traded, Losses for Tax Purposes and Tax
Credits from the Series could not be used to offset the net income or the tax
liability attributable to the net income, respectively, of such other
partnership, whether or not the Series were considered publicly traded.
Generally, personal service corporations will only be allowed to use passive
losses and credits, including Losses for Tax Purposes and Tax Credits, to
shelter passive income, subject to the provisions of Section 469(k), and will
not be allowed to take advantage of the $25,000 deduction equivalent that is
available to individuals.
With respect to S Corporations and partnerships, the passive activity rules
are applied to the shareholders and partners, respectively.
Historic Tax Credit
In addition to the Federal Low Income Housing Credit, a tax credit generally
is available for certain rehabilitation expenditures incurred in improving
certified historic structures and certain other buildings originally placed in
service before 1936 (the "Historic Tax Credit"). If an expenditure is a
qualified rehabilitation expenditure on a certified historic structure, Code
Section 47 provides that the
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taxpayer is entitled to a credit equal to 20% of the expenditure against his
income tax liability for that year. Such qualification depends upon the approval
by the Department of Interior of the plans and completed rehabilitation work.
The historic structure generally must be left in place, must be rehabilitated in
a manner consistent with history and the rehabilitation expenditures must exceed
the greater of $5,000 or the adjusted basis of the building during a 24-month
period. In the case of certain nonresidential buildings placed in service prior
to 1936 (other than certified historic structures) a 10% credit is allowed. The
tax basis of rehabilitated real property is reduced by 100% of the allowed
Historic Tax Credit. Therefore, the gain upon disposition of an interest in such
a property is increased by 100% of the allowed Historic Tax Credit. See
"Depreciation."
Moreover, in order to utilize the Historic Tax Credit a taxpayer must
satisfy the same "at risk" requirements with regard to any investment which
generates a Historic Tax Credit as is required under the "at risk" rules
applicable to Federal Low Income Housing Credits. See "The Low Income Housing
Credit." In addition, to be considered "at risk" with respect to an investment
which generates Historic Tax Credits, it is also necessary that the amount of
all nonrecourse financing (which is defined very broadly for this purpose) with
respect to such property not exceed 80% of the credit base of the qualified
rehabilitation expenditures.
A Series may invest in a Local Limited Partnership that incurs
rehabilitation expenditures that will qualify for such Historic Tax Credit,
which would then be available to the Unitholders to reduce their Federal income
taxes, but the ability of a Unitholder to utilize such credits may be restricted
by the passive activity limitation rules, the limitation on general business
credits, and the alternative minimum tax rules. See "Limitations on Losses and
Credits from Passive Activities," "General Business Tax Credit Limitations" and
"Other Important Tax Considerations - Alternative Minimum Tax." Counsel has
rendered no opinion regarding the qualification of any Apartment Complex for the
Historic Tax Credit or the application of related "at risk" limitations to such
Apartment Complex, because such issues depend on the nature of the Apartment
Complexes and their financing, none of which are known at this time.
Historic Tax Credit Recapture
Any Historic Tax Credit taken for qualified rehabilitation expenditures is
subject to recapture in the event of early disposition of the property. If such
property is disposed of by the Partnership or a Local Limited Partnership within
five years after the property is placed in service, a Partner's tax for the year
of disposition will be increased by the total credit taken for rehabilitation
expenditures, multiplied by a "recapture percentage" determined on the basis of
the holding period of the property. The amount of recapture decreases by 20% for
each full year that elapses
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after the property is placed in service. Thus, there is 100% recapture if the
property is disposed of less than one year after the property is first placed in
service; there is 80% recapture after one year, 60% after two years, 40% after
three years, 20% after four years and no recapture after five years.
Moreover, recapture will also result if a Unitholder sells or disposes of
his entire interest in the Partnership within five years from the date property
for which the Historic Tax Credit is claimed is placed in service. Additionally,
if a Unitholder's interest in the profits of the Partnership is reduced to less
than 66 2/3% of what it was when the property for which the Historic Tax Credit
is claimed was placed in service, the reduction will be treated as a
proportional disposition of the property by the Unitholder. Therefore, for
example, if a Unitholder disposed of 50% of his partnership interest in the
first year in which an Historic Tax Credit was claimed, then 50% of the Historic
Tax Credit claimed by the Unitholder will be recaptured.
General Business Tax Credit Limitations
The ability of taxpayers to use Tax Credits is subject to an annual
limitation on the allowance of aggregate general business tax credits (i.e., the
Low Income Housing Credit, the Historic Tax Credit, any other investment tax
credit, the targeted jobs credit, the alcohol fuels credit, the research credit,
the enhanced oil recovery credit, the disabled access credit, the renewable
electricity production credit, the empowerment zone employment credit, the
Indian employment credit and the employer social security credit). Such annual
limitation is generally equal to the first $25,000 of tax liability ($12,500 for
married persons filing separately) plus 75% of tax liability in excess of that
amount, except that (i) business tax credits may not be used to offset any
applicable alternative minimum tax, and (ii) even if no alternative minimum tax
is imposed in a particular year (because "regular" tax liability exceeds the
amount which would have been imposed under the alternative minimum tax rules),
business tax credits may not be used to reduce regular tax liability below the
amount which would be imposed under the alternative minimum tax rules. Tax
credits limited by this rule are first carried back three years and then forward
15 years. It should be noted that, for purposes of determining which of a
taxpayer's general business tax credits will be treated as exceeding the limit
in any year, Low Income Housing Credits will be treated as being used only after
all of the other general business tax credits.
Any Tax Credit that is allowable in any year under the passive activity
rules described above, but is disallowed in such year as a result of the
application of the general business credit limitations described in this
section, ceases to be subject to the limitations on credits from passive
activities for purposes of any carryback or carryforward of such Tax Credit.
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Tax Basis for the Units
A Unitholder's tax basis for his Units generally will be equal to his
Capital Contribution plus his share of his Series' nonrecourse liabilities to
the extent that they do not exceed the fair market value of the assets subject
thereto. From time to time such tax basis will be (a) increased by the amount of
Profits for Tax Purposes allocated to him, and (b) decreased by the amount of
Losses for Tax Purposes allocated to him and by the amount of Cash Available for
Distribution and Sale or Refinancing Proceeds distributed to him.
In the opinion of Counsel, a Series' nonrecourse liabilities will include
its share of the nonrecourse liabilities of each Local Limited Partnership, to
the extent that such liabilities do not exceed the fair market value of the
property subject thereto. Further, in the opinion of Counsel, each Unitholder
will be permitted to include in his tax basis of his Units his share of the
nonrecourse liabilities of his Series, including the Series' share of such
liabilities of each Local Limited Partnership, as so determined. Pursuant to
Treasury Regulations promulgated under Section 752 of the Code, a partner's
share of nonrecourse liabilities of a partnership (those liabilities with
respect to which no partner or related person bears the economic risk of loss)
is determined as follows: first, an amount of liabilities is allocated among the
partners to reflect their respective shares of partnership minimum gain; second,
any tax gain that would be allocated to the partners under the principles of
Section 704(c) if the partnership's property were sold for an amount equal to
the nonrecourse debt securing the property is matched by an allocation of
partnership nonrecourse debt; and, third, to the extent that nonrecourse
liabilities exceed these items, such liabilities are allocated among partners in
accordance with their profits interests in the partnership.
Each Unitholder may deduct, on his own Federal income tax return, his share
of the Losses for Tax Purposes, if any, to the extent that he has tax basis in
his Units. Any losses in excess of a Unitholder's tax basis may be carried over
indefinitely and may be deducted in future years to the extent that the
Unitholder's basis has increased above zero. It is anticipated that
substantially all of the liabilities of the Local Limited Partnerships will
constitute nonrecourse liabilities for this purpose; consequently, it is
anticipated that each Unitholder will have sufficient basis in his Units to
claim his allocable share of Losses for Tax Purposes. See, however, "Tax
Treatment of Unitholders," "Application of At Risk Limitations," and
"Limitations on Losses and Credits from Passive Activities" for other
limitations on the amount of losses that may be claimed by a Unitholder.
A decrease in a Partner's proportionate share of nonrecourse liabilities
(as, for example, when a mortgage is paid off in whole or in part by a Local
Limited Partnership, or when an Apartment Complex subject to a mortgage is
transferred by a Local Limited Partnership, or when nonrecourse debt of a Local
Limited
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Partnership is refinanced with recourse debt) is treated for tax purposes as
though it were a cash distribution. Such a constructive cash distribution
reduces a Unitholder's tax basis in his Units (but not below zero), and any
remaining portion of his share of the reduction in liabilities is taxable to him
as though it were gain on the sale or exchange of his Units. See "Sales or
Exchanges of Units and Local Limited Partnership Interests; Transfers by Gift or
at Death" below.
Application of At Risk Limitations
Section 465 of the Code provides that the amount of any losses (otherwise
allowable for the year in question) that may be deducted by an individual, an S
corporation, or a closely-held corporation other than a leasing company, in
connection with an activity that is part of a trade or business or that is
engaged in for the production of income, cannot exceed the aggregate amount with
respect to which such taxpayer is "at risk" in such activity at the close of the
tax year. In the case of a partnership, the limitations apply to each partner
who is an individual, S corporation or closely-held corporation.
A partner generally will be considered "at risk" to the extent of the cash
and adjusted basis of the other property contributed to the partnership, as well
as any borrowed amounts contributed to the partnership with respect to which
such partner has personal liability for payment from his own assets.
In addition, special rules apply to an activity involving the holding of
real estate. A taxpayer engaged in such activity will be considered "at risk"
with respect to any "qualified nonrecourse financing" that is secured by real
property used in the activity. In general, "qualified nonrecourse financing" is
non-convertible, nonrecourse debt which is borrowed from a government or an
instrumentality thereof (or is guaranteed by a government) or any person
actively and regularly engaged in the business of lending money, other than (a)
the person from whom the taxpayer acquired the property, (b) a person receiving
a fee with respect to the taxpayer's investment in the property, or (c) a person
related to either of such persons. However, if a lender that is otherwise a
qualified person is related to the taxpayer, the loan will qualify as "qualified
nonrecourse financing" only if the loan is commercially reasonable and on
substantially the same terms as loans involving unrelated persons. A partner's
share of "qualified nonrecourse financing" for purpose of the "at risk" rules
will be the same as his share of such financing for the purpose of determining
his tax basis in his partnership interests. See "Tax Basis for the Units" above.
If at the end of a taxable year a taxpayer's amount "at risk" has been
reduced below zero, the deficit amount "at risk" is recaptured and must be
included in gross income in that year. The amount recaptured is treated in
future years as if it were a deduction suspended by the "at risk" provisions. To
the extent that the taxpayer's
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amount "at risk" is increased above zero in a subsequent year, an additional
deduction may be allowable at such time.
Based on the anticipated investments of the Fund described in "Investment
Objectives and Policies" above, the "at risk" rules under Code Section 465
should not limit the amount of deductions available for a Unitholder, because a
substantial portion of the financing secured by each Apartment Complex is
expected to consist of qualified nonrecourse financing that is includable in the
Unitholder's amount "at risk." It is expected that an opinion of counsel will be
rendered on this issue as a condition to a Series' investment in a Local Limited
Partnership. See "Opinion of Counsel" above.
Fund Allocations
The Partnership Agreement provides for allocations of Profits and Losses for
Tax Purposes and Tax Credits as described under "Profits and Losses for Tax
Purposes, Tax Credits and Cash Distributions." Generally, each partner's
distributive share of income, gain, loss, deduction or credit of a partnership
is determined in accordance with the partnership agreement. However, Section 704
of the Code provides that an allocation to a partner under a partnership
agreement of income, gain, loss, deduction or credit (or item thereof) will not
be respected unless such allocation has "substantial economic effect." If an
allocation does not have substantial economic effect, the partner's distributive
share of income, gain, loss, deduction or credit (or item thereof) is determined
in accordance with the partner's interest in the partnership (determined by
taking into account all facts and circumstances).
Treasury Regulations have been issued governing the interpretation of
Section 704 of the Code. The Regulations in general provide that an allocation
does not have "economic effect" unless (i) a capital account is maintained for
each partner in accordance with Federal income tax accounting principles; (ii)
allocations of income, gain, loss and deduction are reflected by appropriate
increases, or decreases, to the partners' capital accounts; (iii) liquidation
proceeds throughout the term of the partnership are to be allocated in
accordance with the partners' capital account balances; and (iv) any partner
with a deficit in his capital account following the distribution of liquidation
proceeds is required to restore ("makeup") such deficit amount to the
partnership, which amount is to be distributed to partners in accordance with
their positive capital account balances or paid to creditors. The Regulations
provide another test as an alternative to the fourth requirement, under which an
allocation will have economic effect to the extent it does not create a deficit
or increase an existing deficit in any partner's capital account balance and the
partnership agreement has provisions allocating income and gain to partners who
do have deficit capital account balances. Counsel has advised the Fund that the
Partnership Agreement contains provisions which, if followed throughout the
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existence of the Series, substantially comply with requirements (i), (ii) and
(iii) above and the alternative test to the fourth requirement.
An allocation which has economic effect nevertheless may be disregarded by
the IRS if the effect of the allocation is not "substantial." The IRS may assert
that the effect of certain allocations provided in the Partnership Agreement is
not substantial. If at any time the allocations of a Series among its Partners
do not have economic effect or are not substantial, they will be made in
accordance with the interests of the Partners in the Series. The Regulations
indicate that the determination of a partner's interest in a partnership is made
by taking into account all facts and circumstances relating to the economic
arrangement of the partners. The Regulations further provide that where capital
accounts are maintained in accordance with the rules set forth in the
Regulations and liquidating distributions are to be made in accordance with
positive capital account balances, the partners' interests in the partnership
each year generally will be determined by comparing the manner in which
distributions and contributions would be made if all partnership property were
sold at book value and the partnership were liquidated immediately prior to the
taxable year with the manner in which distributions and contributions would be
made if the sale of partnership property at book value and liquidation occurred
at the end of the taxable year. Allocations made under this rule generally would
be similar to those provided in the Partnership Agreement, although there is no
assurance the IRS would not be successful in reallocating a Series' income or
losses in a different manner with the result that the shares of Profits for Tax
Purposes of any or all Unitholders might be increased or their shares of Losses
for Tax Purposes or Tax Credits decreased.
The Regulations state that an allocation of an item of loss or deduction
(such as depreciation) attributable to nonrecourse debt secured by a partnership
property cannot have substantial economic effect. However, such an allocation is
deemed to be made in accordance with the partners' interests in the partnership
if requirements (i), (ii) and (iii) of the economic effect test set forth above
are satisfied, allocations of nonrecourse deductions are made among partners in
a manner which is reasonably consistent with allocations which have substantial
economic effect of some other significant partnership item attributable to
assets securing the nonrecourse debt, the partnership agreement contains a
"minimum gain chargeback" provision (i.e., a provision requiring chargeback of
income or gain to partners who have been allocated nonrecourse deductions and
who have deficit capital account balances) and all other material allocations
and capital account adjustments under the partnership agreement are recognized
under the Regulations. The Partnership Agreement contains provisions which are
intended to comply with the requirements of these Regulations. If the
nonrecourse debt allocation provision of the Regulations is not satisfied, the
allocation of income, gain, loss and deduction attributable to nonrecourse
indebtedness is to be made in accordance with the overall economic interests of
the partners in the partnership.
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The Regulations provide that because allocations of tax credit and recapture
do not give rise to adjustments to partners' capital accounts (except to the
extent of basis adjustments attributable to Section 38 property), they cannot
have economic effect. Accordingly, tax credits and recapture must be allocated
in accordance with the partners' interests in the partnership as of the time the
tax credit or recapture arises. In the case of tax credits other than the
investment tax credit (such as Low Income Housing Credits), the Regulations
provide that allocations will be deemed to be in accordance with the partners'
interests in the partnership if made in the ratio in which the partners share
the expenditures giving rise to the credits. In the case of investment tax
credits (such as Historic Tax Credits), credits should be allocated in
accordance with the ratio in which partners share the general profits of the
partnership for the year in which the property is placed in service, or, in some
cases, for the date on which the property is placed in service. The Partnership
Agreement contains provisions which are intended to comply with these provisions
of the Regulations.
It is possible that the Regulations under Section 704(b) of the Code which
are described in the preceding paragraphs may be modified. Under the Partnership
Agreement, the Fund Manager is authorized to amend the Partnership Agreement to
the minimum extent necessary to preserve the plan of allocations and
distributions provided in the Partnership Agreement if the Fund is advised by
its counsel or accountants that such modifications are necessary because of the
adoption of new regulations under Section 704 of the Code or other developments
in the law.
Notwithstanding the possibility of challenge by the IRS, provided that the
Partnership Agreement is followed throughout the entire term of a Series in
allocating and making distributions, maintaining capital accounts, allocating
Profits and Losses for Tax Purposes (and items thereof) and Tax Credits, and
determining the rights and obligations of the Unitholders and Fund Manager of
the Series upon dissolution and liquidation of the Series, Counsel is of the
opinion that the Unitholders would not be allocated significantly more Profits
for Tax Purposes or less Losses for Tax Purposes or Tax Credits than is
allocated to them under the Partnership Agreement if the allocations were fully
litigated in court. However, there can be no assurance that the IRS will not
challenge the allocations in the Partnership Agreement on the ground that they
lack substantial economic effect or do not reflect a Unitholder's interest in
his Series. If such a challenge were successful, all income and losses and Tax
Credits of the Series would be reallocated to its Unitholders and Fund Manager
in accordance with their respective interests in the Series.
The Series will enter into Local Limited Partnerships the partnership or
limited liability company agreements of which will be subject to future
negotiations. As a condition to entering into each of such partnership
agreements, the Fund Manager will obtain an opinion of tax counsel regarding the
Federal income tax consequences
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of an investment by a Series in the respective Local Limited Partnership,
including specifically an opinion that the allocation provisions of such
partnership agreement will not be substantially modified by the IRS. See
"Opinion of Counsel" above. Counsel's opinion stated above regarding the
allocation provisions of the Partnership Agreement assumes the Fund Manager will
obtain (and the accuracy of) such an opinion of tax counsel regarding the
allocation provisions of each Local Limited Partnership.
It is possible that the IRS will seek to recharacterize the relationship
between a Local Limited Partnership and other parties. Such recharacterization
could adversely affect the tax treatment of a Local Limited Partnership (and
consequently of the Unitholders). For example, the IRS might contend that a
lender to a Local Limited Partnership is actually a partner, either because the
lender is entitled to interest measured in whole or in part by the income
generated by certain property or because the lender had made a subordinated
nonrecourse loan whose repayment arguably is subject to an equity-type risk. In
that event, some or all of the payments to the lender would be partnership
distributions. The Local Limited Partnership would be denied an interest
deduction for such payments, and the lender might be allocated a share of the
deductions of the Local Limited Partnership attributable to the property.
Allocations of taxable income and losses also may be affected by possible
IRS recharacterizations and disallowances of Series or Local Limited Partnership
deductions. For example, a Local Limited Partnership might pay a general partner
or an Affiliate of a general partner fees for services performed or to be
performed. The IRS might contend that such fees are not deductible expenses, but
are actually partnership distributions, and that the general partner was
entitled to a larger percentage of the Local Limited Partnership's taxable
income or loss.
Whether the IRS would be successful in any attempted recharacterization
would depend upon all the facts and circumstances of the transaction, including,
in the case of fees, the nature of the services for which the fees actually are
being paid. Because such facts and circumstances are unknown at present, Counsel
has rendered no opinion with respect thereto.
Allocations Prior to Admission
Items of partnership income, gain, loss, deduction or credit are allocable
to a partner only if realized, paid or incurred by the partnership during the
portion of the year in which the partner is a member of the partnership. Items
realized, paid or incurred during periods prior to the partner's admission may
not be allocated retroactively to the partner. In determining whether any items
have been realized, paid or incurred prior to a Unitholder's admission, the
Partnership Agreement provides that the items of income, gain, loss deduction or
credit accrued during each
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month are allocated among persons who are Partners of the Series at the end
of that month.
The Tax Reform Act of 1984 authorizes the Treasury Department to issue
regulations concerning the allocation of income, gain, loss, deduction and
credit to partners whose interests in a partnership vary during the
partnership's tax year. The General Explanation of the Tax Reform Act of 1986
indicates that Congress intended that these regulations apply to the allocation
of Tax Credits where a partner is admitted to a partnership or his interest
therein changes during a taxable year. The General Explanation of the Tax Reform
Act of 1984 indicates that until such Treasury Regulations are issued and for a
reasonable period thereafter any reasonable convention will be permissible. As
of the date of this Prospectus, Treasury Regulations have not been issued and
consequently, Counsel is of the opinion that the method of allocation used by
the Fund is proper. However, Treasury Regulations, when issued, may require that
some other method of allocation be used.
Basis of Local Limited Partnerships in Their Apartment Complexes
A Local Limited Partnership's basis in its Apartment Complex determines in
part its (and thus the Unitholders') depreciation and interest deductions.
Section 1012 of the Code provides that the basis of property acquired by
purchase is its cost. This cost includes cash paid to acquire such property and
certain purchase transaction costs such as real estate commissions, attorneys'
fees and appraisal costs. The basis of property is increased to the extent of
the cost of capital improvements thereon. Moreover, where property is acquired
or improved with proceeds of the owner's note, the owner's basis in the property
includes the principal amount of the note regardless of whether the owner is
personally liable for payment thereof. The foregoing rule has been applied in
cases where little or no downpayment has been made, where payments of principal
are not made currently and where the note itself is payable partially or
entirely from the proceeds realized from the property acquired.
The principal amount of a nonrecourse note may not, however, be included in
the basis of acquired property unless it is recognized for tax purposes as a
bona fide liability. The rule adopted by the courts which is most often asserted
by the IRS in attacking the bona fide nature of a nonrecourse liability is that
the principal amount of a nonrecourse liability may not be included in the basis
of acquired or improved property unless the fair market value of such property
is at least equal to the face amount of the nonrecourse note. (See Wilman v.
Commissioner, 78 T.C. 943 (1982); Narver v. Commissioner, 75 T.C. 53 (1980).)
Additionally, in Hager v. Commissioner, 76 T.C. 759 (1981), the Tax Court stated
that in a transaction involving a large amount of nonrecourse debt incurred in
the purchase of a property at an inflated price, the entire sale may be
disregarded. Thus, the IRS will closely
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scrutinize any transaction involving nonrecourse liability to determine whether
the principal amount of the liability approximates the value of the property
purchased.
It is anticipated that nonrecourse liabilities will exist only at the Local
Limited Partnership level. Accordingly, if any such liabilities are successfully
challenged by the IRS, a Unitholder's share of Tax Credits, depreciation and
interest deduction and the basis in his Units (to the extent attributable to
such Local Limited Partnership liability) would be reduced. It is expected that
an opinion of counsel will be rendered in this regard prior to a Series'
investment in a Local Limited Partnership. See "Opinion of Counsel" above.
Depreciation
In determining profits and losses for tax purposes and under generally
accepted accounting principles, a partnership's income for any year is reduced
by deductions representing depreciation of the partnership's assets. The larger
the depreciation deductions, the lower the income or higher the loss reportable
on the partnership's tax information return will be. Consequently, Partners may
receive Cash Available for Distribution in years in which they are not required
to report any Profits for Tax Purposes attributable to their Units.
Code Section 168 provides rules for determining the manner in which tangible
assets are to be depreciated. Subject to certain transitional rules that may
apply to one or more Apartment Complexes, residential rental property placed in
service on or after January 1, 1987 may be depreciated over a 27.5-year period
or a 40-year period using the straight-line method. Personal property is
depreciated over recovery periods of three, five, seven, ten, 15 or 20 years,
depending on the nature of the asset, using an accelerated method.
Residential rental property depreciated pursuant to the rules described in
the preceding paragraph is not subject to depreciation recapture upon
disposition except to the extent of any adjustment to the basis of such property
required by Section 50 of the Code in the case of expenditures eligible for
Historic Tax Credits. Prior depreciation for all personal property will result
in recapture when the property is disposed of at a gain. Any such recapture will
be taxed as ordinary income to the Unitholders. The excess of accelerated
depreciation over straight-line depreciation for all types of property generally
is an item of "tax preference" that may result in additional Federal income tax
to a Unitholder, as discussed below under "Other Important Tax Considerations -
Alternative Minimum Tax."
The purchase price of the Apartment Complexes must be allocated between
depreciable assets (such as improvements on real estate and personal property)
and nondepreciable items (such as land). Such allocations are questions of fact
which will not be subject to Counsel's review or opinion, and IRS reallocations
of
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purchase price may result in Losses for Tax Purposes and Tax Credits being
decreased or Profits for Tax Purposes being increased. A Series may invest in
Local Limited Partnerships which have Apartment Complexes under construction.
Both the direct costs and any indirect costs properly allocable to such
property, including interest and taxes incurred during construction, must be
capitalized and may be deducted only through cost recovery deductions.
Deductibility of Fees
A. Development Fees and Acquisition Fees
The Fund Manager anticipates that each Local Limited Partnership will pay
its Local General Partners a fee for services in connection with the development
of its Apartment Complex. Further, each Series will pay Acquisition Fees to the
Fund Manager for services in connection with the acquisition of Local Limited
Partnership Interests. The Local Limited Partnerships will capitalize the
development fees as part of the basis of their respective Apartment Complexes
and recover the cost thereof through depreciation deductions to the extent
applicable to depreciable property. Each Series will capitalize Acquisition Fees
related to the acquisition of its Local Limited Partnership Interests as part of
the respective basis of such interests. Such Acquisition Fees may be allocated
to depreciable property and deducted over the useful life of such property,
treated as start-up expenses that may be amortized over a 60-month period,
amortized over the life of the Local Limited Partnership, or treated as
nondeductible until the termination of the Local Limited Partnership, depending
on the facts and circumstances surrounding the investment in each Local Limited
Partnership, including the manner in which such investment is structured. The
balance of the Acquisition Fees will be amortized by the Series as start-up
costs or deducted as ordinary and necessary business expenses. Counsel has
rendered no opinion regarding the proper treatment of any development fees or
Acquisition Fees due to the inherently factual nature of the issues involved.
B. Management Fees
Each Local Limited Partnership intends to claim a deduction for certain fees
paid to its general partners or their Affiliates, including fees paid for
property management services, and each Series intends to deduct Asset Management
Fees paid to the Fund Manager. The Fund Manager believes that such property
management fees and Asset Management Fees should be deductible by each Local
Limited Partnership and each Series, as the case may be, as ordinary and
necessary business expenses. It is impossible to predict the outcome of
litigation if the IRS were to challenge the treatment of all or any portion of
these fees. Many of the issues involved in any such litigation would be factual,
not legal, issues. Resolution of the issue would depend upon, among other
things, the credibility of witnesses, the availability of expert witnesses, and
the strength of their testimony as to the
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value of the services to be performed. The disallowance of the deductibility of
these fees could result in an increase in the Profits for Tax Purposes of the
Unitholders with no associated increase in Cash Available for Distribution with
which to pay any resulting increase in tax liability, or a decrease in Losses
for Tax Purposes.
Organization and Offering Expenses
Each Series will incur expenses in connection with its organization and
Offering. See "Estimated Use of Proceeds." The Code requires that such expenses
be capitalized. However, each Series is permitted and intends to elect to
amortize over 60 months as much of these expenditures as qualify as
"organizational expenses" as defined in Section 709(b)(2) of the Code. Offering
and syndication expenses will be capitalized permanently, and no deduction will
be obtained by a Series with respect to such expenses. The IRS may challenge the
amount of expenses that a Series treats as "organizational expenses," and/or
attempt to recharacterize other payments, including, without limitation, a
portion of the fees described in the preceding section, as nondeductible
Offering or syndication expenses. Counsel has rendered no opinion on this issue
because of its inherently factual nature.
Start-Up Expenditures
Section 195 of the Code provides that certain "start-up expenditures" may,
at the election of the taxpayer, be amortized ratably over a period of not less
than 60 months beginning with the month in which the business begins. "Start-up
expenditures" include costs incurred (other than amounts properly allocable to
the acquisition cost of Local Limited Partnership Interests and amortizable
organization expenses as discussed above) prior to entering into an active trade
or business, which would have been deductible if incurred in connection with the
expansion of an existing trade or business in the same field as that entered by
the taxpayer. The determination of whether an item is a start-up expenditure is
based on the facts and circumstances in each case.
A Local Limited Partnership may deduct certain expenses incurred by it prior
to the date that it completes the construction of any Properties or generates
rental income, and a Series will deduct its allocable share of such expenses.
The IRS may disallow any such deductions as not having been incurred in
connection with an existing trade or business of any one or more of the Local
Limited Partnerships. If the IRS were successful, the disallowed expenses would
be available as deductions, if at all, only through amortization, either over
the applicable start-up expenditure period (to the extent that a proper election
is in place and these expenses qualify as start-up expenditures) or over another
applicable period. Due to the inherently factual nature of the issues involved,
Counsel is unable to render
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an opinion regarding the manner in which Section 195 may apply to any Series or
any Local Limited Partnership.
Sales or Exchanges of Local Limited Partnership Property; Depreciation
Recapture
Each Local Limited Partnership's gain on sale of an Apartment Complex will
be measured by the difference between the sale proceeds (including the amount of
any indebtedness to which the property is subject) and the adjusted basis of the
Apartment Complex. Consequently, the amount of tax payable by a Unitholder on
his share of his Series' allocable share of such gain may in some cases exceed
his share of the cash proceeds therefrom. In the event of a foreclosure of an
Apartment Complex, a Series may realize gain equal to the excess of the
indebtedness secured by the mortgage or trust deed over the adjusted basis of
the Apartment Complex, and the Unitholders may realize taxable income without
the receipt of any cash distributions as a result of the foreclosure.
Circumstances involving a disposition of an Apartment Complex that might
result in the Unitholders receiving insufficient cash with which to pay any tax
liability generated by the disposition could include: (i) the sale of the
Apartment Complex at a time when all or part of the net proceeds thereof may
have to be retained by the Local Limited Partnership or the Series to support
its remaining operations, and (ii) the sale of the Apartment Complex for
proceeds which include illiquid assets, such as promissory notes of the
purchaser. See "Treatment of Mortgage Loans." Unitholders should note that the
partnership agreements of the Local Limited Partnerships have not yet been
negotiated and that in certain instances such agreements may permit the
retention by a Local Limited Partnership of all or a portion of its sale or
refinancing proceeds.
The Apartment Complexes will most likely be considered to be "Section 1231
assets" (i.e., real property and depreciable assets used in a trade or business
and held for more than one year and not for sale to customers in the ordinary
course of business). In such event, a Unitholder's allocable share of gain or
loss from the sale of an Apartment Complex would be combined with any other
Section 1231 gains or losses incurred by him in that year and his net Section
1231 gains or losses would constitute capital gains or ordinary losses, as the
case may be. Notwithstanding the above, to the extent net Section 1231 losses
are treated as ordinary losses in any taxable year, net Section 1231 gains
recognized during the five succeeding taxable years will be treated as ordinary
income.
If an Apartment Complex is deemed to be held for sale to customers in the
ordinary course of business ("dealer property"), all gain on the disposition
thereof will constitute ordinary income. Because the determination as to whether
any Apartment Complex is dealer property depends on future facts, Counsel
expresses
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no opinion as to that issue. Further, gain realized by a Local Limited
Partnership on a disposition of an Apartment Complex will be ordinary income to
the extent of depreciation recapture. See "Depreciation" above. In addition, the
sale of an Apartment Complex may give rise to the recapture of Tax Credits. See
"Historic Tax Credit Recapture" above and "The Low Income Housing Credit -
Recapture of Low Income Housing Credits."
For a discussion of the income tax consequences attendant to a sale of an
Apartment Complex on the installment basis, see "Treatment of Mortgage Loans"
below.
Tax Liabilities in Later Years
After a period of years following commencement of operations by a Local
Limited Partnership, the Local Limited Partnership may generate Profits for Tax
Purposes rather than Losses for Tax Purposes. In earlier years, depreciation
deductions are expected to result in Losses for Tax Purposes. However, in later
years, as the portion of debt service payments attributable to deductible
interest decreases and the portion attributable to non-deductible principal
amortization increases, net operating income of the Local Limited Partnership
might exceed depreciation. A Unitholder's share of such Profits for Tax Purposes
would constitute passive income and would be taxable at regular rates unless the
Unitholder had unused "suspended" passive losses from his Series or other
investments, or current passive losses from other investments. See "Limitations
on Losses and Credits from Passive Activities" above. In such circumstances it
would be unlikely that the Unitholder would receive a cash distribution from his
Series with which to pay any tax liability resulting from the allocation of
Profits for Tax Purposes, and the tax liability would require a nondeductible
out-of-pocket payment of tax by such Unitholder.
Treatment of Mortgage Loans
A Local Limited Partnership may take back purchase money mortgages as part
of the consideration received upon sale of an Apartment Complex. The Fund
Manager anticipates that any such sale would qualify as an "installment sale"
for Federal income tax purposes and that taxable income therefrom generally
would be recognized over the period during which payments are received.
However, the 1986 Act and the 1987 Act substantially modified the timing of
the recognition of gain arising from installment sales under Code Section 453. A
taxpayer who disposes of property other than dealer property on the installment
basis may be required to pay interest on the portion of his tax liability
deferred by use of the installment method. This rule applies to installment
obligations arising from such dispositions if the aggregate face amount of all
such obligations arising
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in any one year and outstanding at the end of that year exceeds $5,000,000.
Interest is payable each year at the rate specified by the Code for
underpayments of tax (the short-term Federal rate plus three percentage points)
in effect for the month in which the tax year ends. In determining the
application of this rule, all taxpayers under common control within the meaning
of Section 52 of the Code are to be treated as a single taxpayer. It is likely
that a Series and each Local Limited Partnership in which it owns more than 50%
of the profits or capital interests will be treated as under common control.
Any depreciation or other ordinary income recapture is denied installment
sale treatment and must be recognized in the year of the sale. Further, the Code
provides for recognition of gain on installment obligations that are pledged to
secure indebtedness of the taxpayer. The proceeds of the secured indebtedness
are treated as payment on the pledged installment obligation.
A sale or exchange of dealer property is not eligible for installment sale
treatment. Accordingly, if a Local Limited Partnership disposes of an Apartment
Complex on an installment basis and the Apartment Complex is determined to have
been sold to customers in the ordinary course of business, all gain on such sale
would be recognized in the year of sale. In such a case, tax would be payable as
a result of such sale even though no proceeds of the sale had yet been received.
The Fund Manager intends to take into account the application of these new
rules regarding the timing of recognition of income in determining whether to
approve the sale of an Apartment Complex in return for a purchase money
mortgage.
Any notes held by a Local Limited Partnership as a result of an installment
sale generally will be secured by mortgages or deeds of trust. If the stated
redemption price at maturity of such notes exceeds the issue price (the amount
originally loaned), the difference will be treated as original issue discount
("OID"). In the case of purchase money financing, the issue price is determined
by discounting future payments of principal and interest to present value
utilizing specified rates that are intended to reflect market conditions at the
time of the sale. The stated redemption price at maturity generally consists of
the face amount of the notes, plus deferred interest and other amounts payable
at maturity. A Local Limited Partnership will be required to accrue, as interest
income in addition to that stated in the notes, a portion of any OID. The
accrued portion is calculated in accordance with the formula designed to
approximate the true economic yield on the notes.
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Sales or Exchanges of Units and Local Limited Partnership Interests; Transfers
by Gift or at Death
A Unitholder may not be able to sell his Units because the Fund Manager
intends to prohibit the development of a public trading market in the Units.
However, it may be possible to arrange a sale in some cases. See
"Transferability of Units." Any gain realized on a sale of Units by a Unitholder
who is not a "dealer" in the Units or other similar securities generally will be
a capital gain, except to the extent the gain is allocable to "unrealized
receivables" (which is defined in Section 751 of the Code to include
unrecognized depreciation recapture) or inventory items of his Series, if any,
that have appreciated substantially in value. In determining the amount received
upon the sale or exchange of a Unit, a Unitholder must include, among other
things, his allocable share of the Series' allocable share of each Local Limited
Partnership's nonrecourse indebtedness. In addition, as a result of the sale of
Units a Unitholder may be subject to the recapture of Tax Credits. See "Historic
Tax Credit Recapture" above and "The Low Income Housing Credit - Recapture of
Low Income Housing Credits." Similar rules will apply in the case of a sale or
exchange by a Series of its interest in a Local Limited Partnership. Therefore,
it is possible that the gain realized upon the sale of a Unit or Local Limited
Partnership Interest may exceed the cash proceeds of such sale, and in some
cases the income taxes payable with respect to such sale may exceed such cash
proceeds. See, however, "Limitations on Losses and Credits from Passive
Activities" above regarding the allowance of previously suspended passive
activity losses and passive activity credits upon the disposition of a
taxpayer's entire interest in a passive activity.
A gift of a Unit may result in Federal or state income tax (as well as
Federal or state gift tax) liabilities to the donor. The IRS will take the view
that a Unitholder who makes a gift of a Unit is relieved of his share of his
Series' allocable share of a Local Limited Partnership's nonrecourse
indebtedness and, therefore, will realize a taxable gain (taxable as described
above with respect to the sale of a Unit) on the gift to the extent his share of
such liabilities exceeds the tax basis for his Units. In addition, the tax basis
of any donated Unit will be increased in the hands of the donee by any suspended
passive activity losses of the donor and such losses will not be allowable as
deductions to either the donor or the donee. See "Limitations on Losses and
Credits from Passive Activities" above.
If a Unitholder dies, the fair market value of his Units at death (or, if
elected, at the alternative valuation date) will be subject to Federal estate
taxation. The cost or other basis of a Unit inherited from a decedent generally
is "stepped up" or "stepped down" to its fair market value for Federal estate
tax purposes. An estate is allowed to use the $25,000 deduction equivalent
attributable to rental real estate in which the decedent actively participated
before his death and to use Low Income Housing Credits only for its taxable
years ending less than two years after the date
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of death of the decedent. See "Limitations on Losses and Credits from Passive
Activities" above.
Dissolution and Liquidation of a Series or Local Limited Partnership
Generally, upon liquidation or termination of his Series, a Unitholder will
recognize income only to the extent that the sum of the cash distributed to him
and his proportionate share of the Series' allocable share of any then existing
nonrecourse liabilities of the Local Limited Partnerships exceeds his adjusted
basis in his Units at the time of distribution. Similar rules will apply in the
event of the dissolution or liquidation of a Local Limited Partnership.
Elections
The Code permits a partnership to elect to adjust the basis of partnership
property on the transfer of an interest in the partnership by sale or exchange
or on the death of a partner and on the distribution of property by the
partnership to a partner (a "Section 754 election"). The general effect of such
an election by a Series would be that transferees of Units would be treated, for
purposes of depreciation and taxable gain, as though they had acquired a direct
interest in the Series' assets, including the Series' interest in the assets
held by each Local Limited Partnership. As a result of the complexities of the
tax accounting required, the Fund Manager does not presently intend to make a
Section 754 election, although it is empowered to do so by the Partnership
Agreement. The absence of any such election may, in some circumstances, reduce
the value of Units to a potential purchaser.
In certain instances, a Section 754 election may have been made by a Series,
or the Fund Manager may require that one be made, with respect to a Local
Limited Partnership, effective for the year in which the Series acquires an
interest therein. Such election may affect the amount of the tax basis of an
Apartment Complex, including the amount of expenditures qualifying for Tax
Credits, properly allocable to the Series. See "Depreciation."
Transferability - Termination of a Series
The Code provides that if 50% or more of the capital and profits interests
in a partnership are sold or exchanged within a single 12-month period, such
partnership generally will terminate for Federal income tax purposes. Under the
Partnership Agreement, 50% or more of the Units may not be sold or exchanged
within a single 12-month period. However, if a termination should occur, it may
cause recapture and might require that the Series use the methods of
depreciation and recovery periods applicable to property placed in service in
the year in which termination occurs.
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Profit Motive
Under Section 183 of the Code, certain expenses (other than real estate
taxes and interest) from activities not engaged in for profit are disallowed as
deductions from other income. Notwithstanding the fact that low-income housing
typically does not generate a profit from operations, the Treasury Department
has issued Regulations stating that Code Section 183 will not be applied to
apartment complexes which qualify for the Federal Low Income Housing Credit so
long as the investment in such properties is bona fide and not an economic sham.
Accordingly, Counsel is of the opinion that it is more likely than not that
Section 183 would not be applied to disallow deductions arising from the
ownership of the Apartment Complexes.
Other Important Tax Considerations
In addition to the provisions of the Code specifically applicable or
directly relevant to investments in limited partnerships or in real property,
investors should be aware of other important Code provisions that are applicable
to investments in general, or that may, depending upon the facts and
circumstances, be applicable to certain taxpayers. While a detailed discussion
of such general tax aspects is beyond the scope of this section, prospective
investors should be aware of the following matters, among others, and should
consult their own tax advisers for more details if further information is
desired.
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A. Tax Rates
The Code includes five marginal tax rates for individuals, as set forth in
the following tables:
Filing Marginal
Status Income Tax
Married up to $41,200 15%
Filing between $41,200 and $99,600 28%
Jointly between $99,600 and $151,750 31%
between $151,750 and $271,050 36%
over $271,050 39.6%
Head up to $33,050 15%
of between $33,050 and $85,350 28%
household between $85,350 and $138,200 31%
between $138,200 and $271,050 36%
over $271,050 39.6%
Single up to $24,650 15%
between $24,650 and $59,750 28%
between $59,750 and $124,650 31%
between $124,650 and $271,050 36%
over $271,050 39.6%
Married up to $20,600 15%
Filing between $20,600 and $49,800 28%
Separate between $49,800 and $75,875 31%
between $75,875 and $135,525 36%
over $135,525 39.6%
The dollar amounts set forth above apply to 1997 and will be adjusted for
inflation in each year thereafter.
Notwithstanding the preceding, the maximum tax rate on capital gains is
28%. Capital losses are deductible to the extent of capital gains plus $3,000
($1,500 in the case of a married individual filing a separate return) of
ordinary income. The remainder is carried forward.
The personal exemption amount, established at $2,000 for 1989, is indexed
for inflation after 1989 ($2,650 for 1997). The personal exemption is phased out
by 2% (4% for a married person filing a separate return) for each $2,500 by
which a taxpayer's adjusted gross income exceeds certain threshold amounts.
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It also should be noted that under Code Section 67, noncorporate Unitholders
may claim most miscellaneous itemized deductions (including expenses paid or
incurred (a) for the production or collection of income, (b) for management,
conservation, or maintenance of property held for the production of income, (c)
in connection with the determination, collection or refund of a tax, or (d) for
the trade or business of being an employee) only to the extent such expenses
exceed 2% of adjusted gross income. This rule is to apply with respect to
indirect deductions through pass-through entities (such as the Series, the Local
Limited Partnerships and any corporation electing to be taxed under Subchapter S
of the Code (an "S corporation")) of amounts that are not allowable as a
deduction if paid or incurred directly by an individual.
Further, Code Section 68 imposes a limit on the individual's aggregate
itemized deductions, other than deductions for medical expenses under Section
213, investment interest under Section 163 and casualty, theft and wagering
losses under Section 165. For an individual whose adjusted gross income exceeds
the "applicable amount," the amount of the itemized deductions otherwise
allowable for the taxable year will be reduced by the lesser of (i) 3% of the
excess of the adjusted gross income over the "applicable amount," or (ii) 80% of
the itemized deductions otherwise allowable for the taxable year. For these
purposes, the "applicable amount" means $100,000 ($50,000 in the case of a
married person filing a separate return). The applicable amount is adjusted for
inflation in tax years beginning after December 31, 1991 ($121,200 for 1997).
Code Section 68 is to be applied after the application of any other Code
limitation on the allowance of itemized deductions.
With respect to corporations, other than personal service corporations, the
Code imposes the following tax rates:
(i) 15% of so much of the taxable income as does not exceed $50,000;
(ii) 25% of so much of the taxable income as exceeds $50,000 but does not
exceed $75,000;
(iii) 34% of so much of the taxable income as exceeds $75,000 but does not
exceed $10,000,000; and
(iv) 35% of so much of the taxable income as exceeds $10,000,000.
In the case of a corporation which has taxable income in excess of
$15,000,000, the amount of the tax determined under the foregoing provisions is
increased by an additional amount equal to the lesser of (i) 3% of such excess,
or (ii) $100,000.
With respect to personal service corporations, the 1993 Act imposes a single
rate of tax equal to 35%.
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B. Alternative Minimum Tax
In addition to the regular income tax, there is imposed under Code Sections
55- 59 an alternative minimum tax for noncorporate and corporate taxpayers. The
1986 Act significantly broadened the alternative minimum tax base. That base is
equal to a taxpayer's taxable income, subject to certain adjustments, increased
by items of tax preference and reduced by an exemption, all as described below.
For purposes of the alternative minimum tax, depreciation deductions on real
property are computed under the straight-line method over a 40-year recovery
period, and depreciation deductions on personal property are computed using the
150% declining balance method over the property's class life. A less favorable
alternative tax net operating loss deduction is used in lieu of the regular tax
net operating loss deduction.
For corporations, the Code requires an addition to taxable income of 75% of
the amount by which adjusted current earnings exceeds alternative minimum
taxable income.
In addition to the adjustments described above, alternative minimum taxable
income is increased by the amount of "items of tax preference." Tax preferences
include certain excess depletion deductions, excess intangible drilling costs,
certain tax-exempt interest, and the difference between the fair market value
and the exercise price of stock acquired by exercise of an incentive stock
option. No deduction is allowed for losses from a tax shelter farm activity.
Tax Credits cannot be used to offset alternative minimum tax. Rather, Tax
Credits may only be utilized to the extent they do not exceed the excess of the
taxpayer's net income tax (i.e., the sum of the regular tax liability and the
alternative minimum tax liability) over the greater of (i) his tentative minimum
tax liability, or (ii) 25% of his regular tax liability in excess of $25,000.
Any "excess" Tax Credits are first carried back three years and then forward 15
years.
The itemized deductions allowable in computing alternative minimum taxable
income include the following: charitable contributions, medical deductions in
excess of 10% of adjusted gross income, casualty losses, interest on certain
personal housing, and other interest to the extent of net investment income. No
standard deduction is allowed, but an exemption amount is available as discussed
below.
It should be noted that when a taxpayer pays alternative minimum tax, the
amount of such tax allocable to certain adjustments and timing preferences (such
as depreciation) is allowed as a credit against the regular tax liability of the
taxpayer in subsequent years. Timing adjustments and preferences are those for
which the timing, rather than the amount, of a deduction gives rise to its
treatment as an
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adjustment or tax preference. The credit allowed may not be used in any
subsequent year to reduce a taxpayer's alternative minimum tax liability.
The alternative minimum tax for individuals is equal to (A) 26% of so much
of the taxable excess as does not exceed $175,000, plus (B) 28% of so much of
the taxable excess as exceeds $175,000. For this purpose, "taxable excess" means
the amount by which alternative minimum taxable income exceeds the exemption
amount. The exemption amount is $45,000 for a married couple filing a joint
return or a surviving spouse, $33,750 for a single individual and $22,500 for a
married individual filing a separate return or for an estate or trust. However,
the exemption is reduced (but not below zero) by 25% of the amount by which the
alternative minimum taxable income exceeds $150,000 in the case of a married
couple filing a joint return, $112,500 in the case of a single individual and
$75,000 in the case of a married individual filing a separate return or for an
estate or trust. The Code eliminates any incentive for married taxpayers to file
separate returns by increasing the amount of alternative minimum taxable income
by the lesser of (i) 25% of the excess of alternative minimum taxable income
over $165,000, or (ii) $22,500.
The corporate alternative minimum tax is the amount, if any, by which (A)
20% of the excess of (1) the corporation's alternative minimum taxable income
over (2) the exemption amount, exceeds (B) the corporation's regular tax for the
year. The corporate exemption amount is $40,000. However, this exemption is
reduced by 25% of the amount by which alternative minimum taxable income exceeds
$150,000. The corporate alternative minimum tax does not apply to S
corporations; rather, the alternative minimum tax for taxpayers who are not
corporations applies to the shareholders of an S corporation.
Because the impact of the alternative minimum tax is dependent upon each
Unitholder's particular tax situation, each prospective Unitholder should
consult his own tax adviser as to the effect of an investment in a Series on the
calculation of his alternative minimum tax liability.
C. Deduction of Investment Interest
The 1986 Act imposed substantial limitations upon the deductibility of
interest on funds borrowed by an investor to purchase or to carry investment
assets. Code Section 163(d) provides that a deduction for "investment interest"
may be taken by an individual only to the extent of such individual's net
investment income for the taxable year. Investment interest generally is any
interest that is paid or accrued on indebtedness incurred or continued to
purchase or carry investment property. Investment interest includes interest
expense allocable to portfolio income and investment and interest expense
allocable to an activity in which the taxpayer does not materially participate,
if such activity is not treated as a passive activity under
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the passive loss rules. Investment interest does not include any interest that
is taken into account in determining a taxpayer's income or loss from a passive
activity or a rental activity in which a taxpayer actively participates.
Net investment income consists of the excess of investment income over
investment expenses. Investment income generally includes gross income (other
than gain on disposition) from property held for investment, gain (excluding
gain treated as capital gain) attributable to property held for investment and
amounts treated as portfolio income under the passive loss rules. Investment
income does not include income taken into account in computing gain or loss from
a passive activity. Investment expenses are deductible expenses (other than
interest) directly connected with the production of investment income.
Generally, in calculating investment expenses, only those expenses in excess of
2% of adjusted gross income are included. See "Other Important Tax
Considerations - Tax Rates."
Tax Returns and Tax Information
A. Audit and Assessment Procedure
The IRS could audit the tax information returns filed by a Series or a Local
Limited Partnership. Any such audit could result in the audit of a Unitholder's
tax return. An audit of a Unitholder's return could result in adjustments to
items related to the Series as well as items not related to the Series.
Unitholders should be aware that the Tax Equity and Fiscal Responsibility
Act of 1982 enhanced the ability of the IRS to assess partners for tax
deficiencies attributable to adjustments of partnership tax items. As a result
of the 1982 Act, a partnership is treated as a separate entity for purposes of
audit, settlement and judicial review. Thus, the IRS may audit and make a single
determination of the propriety of a partnership's treatment of partnership tax
items at the partnership level. In general, a partnership's "tax matters
partner" (the Fund Manager in the case of each Series) is charged with the
responsibility of representing the partnership and its partners in the event of
such an audit of the partnership's tax returns. All partners are nevertheless
entitled to participate in any such audit and each partner may enter into a
settlement agreement on his own behalf with the IRS.
Further, it should be noted that by reason of the 1982 Act partners must
report partnership items consistently with the position reported by the
partnership on its tax returns or file a statement identifying the
inconsistency. If an inconsistency statement is not filed, the IRS may treat the
inconsistency as a computational error on the return and assess any deficiency
resulting from such inconsistency, and may additionally assess negligence
penalties for failure to comply with the statute.
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If the IRS proposes any adjustments to the tax returns filed by a Series, a
Local Limited Partnership or a Unitholder, substantial legal and accounting
expenses and deficiency interest and penalties may be incurred by any of them. A
Series will not bear any expense that may be incurred by one of its Unitholders
in connection with his participation in an audit of the Series' or a Local
Limited Partnership's tax returns, the audit of his tax returns, or the
determination or redetermination of his tax liability even though resulting
solely from adjustments to the Series' or a Local Limited Partnership's tax
returns.
B. Imposition of Penalties
The 1989 Act included provisions which streamline and revamp the civil tax
penalty provisions of the Code. Changes were made in the following broad topic
areas: document and information return penalties; accuracy-related and fraud
penalties; preparer, promoter and protestor penalties; and penalties for failure
to file or pay. The latter two penalties are of no particular relevance to an
investment in the Fund and are not discussed herein.
Document and Information Return Penalties. Three separate and distinct
categories of penalties apply to information returns and payee statements, as
follows: a penalty for failing to file an information return or to include
correct information therein (e.g., Form 8308, which must be filed by a
partnership upon a transfer of its partnership interests); a penalty for failing
to file a payee statement or to include correct information on a payee statement
(e.g., Schedule K-1); and a penalty for failure to comply with other information
reporting requirements (e.g., the requirement that a transferor must give notice
to a partnership concerning the exchange of an interest in the partnership).
The penalties in this category differ in amount. Under certain
circumstances, some of the penalties may be reduced or avoided by filing
corrected returns within specific time limits, or if the omissions and
inaccuracies are inconsequential. On the other hand, the penalties may be
increased if the failure to comply is due to intentional disregard.
Accuracy-Related and Fraud Penalties. All penalties related to the accuracy
of tax returns are consolidated into one penalty equal to 20% of the portion of
an underpayment resulting from one or more of the following: negligence or
disregard of the rules and regulations; any substantial understatement of income
tax; any substantial valuation overstatement; any substantial overstatement of
pension liabilities; and any substantial estate or gift tax valuation
understatement.
A substantial understatement of income tax exists if the amount of the
understatement exceeds the greater of (i) 10% of the tax required to be shown,
or
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(ii) $5,000 ($10,000 in the case of a corporation other than an S
Corporation or a personal holding company).
A substantial valuation overstatement exists if the value or adjusted basis
of any property is 200% or more of the amount determined to be the correct value
or adjusted basis, or if the price for services or property in connection with
transactions between certain affiliated entities is 200% or more of the current
price. In the case of a gross overstatement (i.e., where the value or adjusted
basis or price is 400% or more of the correct amount), the penalty is increased
to 40%. In no event will a penalty be imposed unless the underpayment exceeds
$5,000 ($10,000 in the case of a corporation other than an S Corporation or a
personal holding company).
Any portion of an understatement which is attributable to fraud is subject
to a penalty at the rate of 75% of the understatement. The 20% accuracy-related
penalty will not apply to any portion of an understatement as to which the fraud
penalty is imposed.
Tax Shelter Registration
Under the Tax Reform Act of 1984, tax shelter organizers are required to
register their tax shelters with the IRS. Furthermore, tax shelter organizers
are required to maintain lists of investors in the tax shelter, which lists must
be turned over to the IRS upon request. Both of these requirements have enhanced
the ability of the IRS to audit tax shelters.
Each Series has applied to the IRS for a tax shelter registration number.
The registration number and the taxpayer identification number to be assigned to
a Series will be provided to the Unitholders of the Series upon availability.
EACH UNITHOLDER MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE
SERVICE IF HE CLAIMS ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR
REPORTS ANY INCOME BY REASON OF HIS INVESTMENT IN A SERIES.
Each Unitholder must report the registration number (as well as the name and
taxpayer identification number of his Series) on Form 8271.
FORM 8271 MUST BE ATTACHED TO THE RETURN ON WHICH A UNITHOLDER CLAIMS THE
DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORTS ANY INCOME.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THE INVESTMENT
DESCRIBED HEREIN OR THAT THE CLAIMED TAX
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BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE INTERNAL REVENUE
SERVICE.
It should also be noted that a Local Limited Partnership may be required to
register as a tax shelter. If such is the case, each Unitholder may be required
to report the registration number of such Local Limited Partnership to the IRS
on Form 8271. If a Unitholder fails to include a required registration number on
his individual tax returns he is subject to a maximum penalty of $250 for each
such failure.
Further, Unitholders are required to notify transferees of their Units of
the Series' tax shelter registration number. If a Unitholder fails to notify his
transferee of the registration number, he is subject to a maximum penalty of
$100 for each such failure.
Changes in Tax Law
Many of the amendments to the Code enacted since 1980 have not been
interpreted by corresponding amendments to the Treasury Regulations. Also, few
judicial decisions or administrative rulings with regard thereto exist as of the
date of this Prospectus. Accordingly, certain of the Code provisions described
above may be further amended, modified or clarified by Congress, the IRS or the
courts so as to have an adverse effect on the Fund.
The passage of legislation does not preclude the enactment of further
amendments to the Code in later years (including amendments having a retroactive
effect) which could adversely affect an investment in the Fund.
STATE AND LOCAL TAX CONSIDERATIONS
In addition to the Federal income tax aspects described above, prospective
investors should consider potential state and local tax consequences of an
investment in the Fund. A Unitholder's distributive share of Series tax items
generally will be required to be included in determining his reportable income
for state or local tax purposes in the jurisdiction in which he is a resident.
Moreover, California and other states in which a Series may do business impose
taxes on nonresident Unitholders, determined with reference to their allocable
shares of Series income and gain derived from such states; and losses associated
with an investment in a Series from operations in one state may not be available
to offset income from the Series or other sources taxable in a different state.
Personal exemptions, computed in various ways, are allowed by some states and
may reduce the amount of tax owed to a particular state. A Series may be
required to withhold state taxes from distributions to Unitholders in some
instances.
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To the extent that a Unitholder who is not a resident of a state pays tax to
that state by virtue of Series operations within that state, he may be entitled
to a deduction or credit against tax owed to his state of residence with respect
to the same income, and should consult his tax adviser in that regard. In
addition, payment of such state taxes presently constitutes a deduction for
Federal income tax purposes, assuming that the taxpayer itemizes deductions.
Tax benefits that are available for Federal income tax purposes may not be
available for state income tax purposes. For example, certain states have not
adopted the Federal cost recovery depreciation rules and the Federal installment
sale rules. Thus, it is possible that investors in some states will be required
to recognize more or less income or loss from operations, or gain from the sale
of Series investments, for state tax purposes than for Federal tax purposes.
Finally, it should be noted that Unitholders may be subject to state estate
or inheritance taxes in the states in which the Series conducts business, as
well as in their own states of residence. Corporate Unitholders may be liable
for minimum state franchise taxes in such states. Each prospective investor
should therefore consult his own personal tax adviser concerning his individual
tax situation with respect to the state and local tax aspects of investing in a
Series.
PROFITS AND LOSSES FOR TAX PURPOSES,
TAX CREDITS AND CASH DISTRIBUTIONS
Set forth below in this section of the Prospectus is a discussion of the
allocation and distribution provisions of the Partnership Agreement.
Cash Available for Distribution
Subject to certain adjustments, Cash Available for Distribution will consist
of the Series' net cash flow from cash distributions by Local Limited
Partnerships after payment of all Operating Cash Expenses and amounts required
for Reserves.
Because of the high leverage expected to be utilized by most or all of the
Local Limited Partnerships, cash flow participations and fees expected to be
paid to the Local General Partners and restrictions which will be imposed by
Federal and state agencies on Apartment Complexes receiving government financing
or operating subsidies, it is not anticipated that there will be any significant
amounts of distributions of Cash Available for Distribution. The Partnership
Agreement provides that all Cash Available for Distribution of a Series shall be
paid or distributed 99% to its Unitholders and 1% to the Fund Manager within 120
days following the close of the fiscal year during which such Cash Available for
Distribution was generated.
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Sale or Refinancing Proceeds
Sale Proceeds will consist of net cash receipts arising from sales or other
dispositions of, and condemnations, damage awards and insurance recoveries with
respect to, Apartment Complexes of the Local Limited Partnerships. Refinancing
Proceeds will consist of net cash receipts arising from any mortgage financing,
refinancing or borrowing secured by the Apartment Complexes. Sale or Refinancing
Proceeds will not include any amounts necessary for the payment of Series debts
and the funding of Reserves.
Sale or Refinancing Proceeds received by a Series after the expiration of
two years from the beginning of the quarter in which the Investment Date occurs
will be distributed by the Series in the following order of priority:
(1) First, to its Unitholders, until they have received an amount equal to
(a) their Adjusted Capital Contributions, plus (b) their Return on Investment,
to the extent not previously received through Tax Credits and Cash Available for
Distribution;
(2) Second, to the Fund Manager, an amount equal to the Fund Manager's
Capital Contributions; and
(3) Third (after payment of any accrued but unpaid Subordinated Disposition
Fees), the balance 90% to its Unitholders and 10% to the Fund Manager.
Sale or Refinancing Proceeds distributed in connection with the liquidation
of the Series will be distributed in accordance with Capital Accounts as
maintained for Federal income tax purposes. It is anticipated that these
distributions would have the same effect in all material respects as those
described in clauses (1) through (3) above.
If a Local Limited Partnership sells an Apartment Complex on terms involving
its receipt of a purchase money mortgage or other installment obligation of the
purchaser, distribution of the proceeds of the installment obligation will be
based upon a distribution percentage determined by calculating the percentage of
the then present value of any sales proceeds that the respective classes
composed of the Fund Manager and the Unitholders would receive had the Local
Limited Partnership received the deferred installments in cash at closing in
lieu of the installment obligation. The present value of any sales proceeds
(including interest, if any, on the installment obligation) will be based on a
discount rate equal to the current yield, on the date of the installment sale,
of a United States Treasury obligation selected by the Fund Manager having a
stated maturity comparable to the ultimate stated maturity date of the
installment obligation. The Unitholders as a class
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thereafter will receive principal and interest payments on such installment
obligations according to their percentage share of such installment proceeds.
Allocations of Profits and Losses for Tax Purposes and Tax Credits
Low Income Housing Credits of a Series generally will be allocated among its
Unitholders and Fund Manager in the same manner that deductions attributable to
the expenditures giving rise to such credits will be allocated among them.
Historic Tax Credits of a Series generally will be allocated among its
Unitholders and Fund Manager in the manner in which Profits are or would be
allocated for the fiscal year in which the property qualifying for such tax
credits is placed in service. In accordance with these rules, it is anticipated
that Low Income Housing Credits and Historic Tax Credits of a Series will be
allocated 99% to its Unitholders and 1% to the Fund Manager.
Profits for Tax Purposes (including Profits) and Losses for Tax Purposes
(including Losses) are not the same as cash distributions. Profits and Losses
for Tax Purposes of a Partner are determined on a tax accounting basis for use
in the preparation of the individual income tax returns of each Partner. Because
of the effect of certain deductions allowable for Federal income tax purposes,
the amount of income taxable to each Partner may be greater or less than the
amount of cash distributable to him from his Series. Accordingly, the
Partnership Agreement provides separately for allocations of Profits and Losses
for Tax Purposes on the one hand and Cash Available for Distribution and Sale or
Refinancing Proceeds on the other.
Losses of a Series generally will be allocated: first, to the extent of the
positive Capital Account balances of its Partners, in such manner and amount as
is necessary to cause such balances, as so adjusted, to be in the ratio of 99%
to its Unitholders and 1% to the Fund Manager; second, to the extent of the
excess of Partnership Minimum Gain over the aggregate negative Capital Account
balances of the Partners with such balances, to the Fund Manager and Unitholders
in such manner and amount as is necessary to cause their negative Capital
Account balances, as so adjusted, to be in the ratio of 99% to its Unitholders
and 1% to the Fund Manager; and third, to the Fund Manager.
Partnership Minimum Gain generally is the aggregate of the excess, if any,
of the principal amount of each Local Limited Partnership's nonrecourse debts
over its adjusted basis in the property securing such debt, i.e., the amount of
income each Local Limited Partnership would realize if all of its properties
were sold for the amount of the outstanding nonrecourse debts secured by such
properties.
Profits of a Series generally will be allocated: first, in the event that
its Unitholders have an aggregate positive Capital Account balance and the Fund
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Manager has a negative Capital Account balance or vice versa, to the class of
Partners with and to the extent of such negative balance; second, to the extent
of the aggregate negative Capital Account balances of the Partners, to its
Unitholders and the Fund Manager in such manner and amount as is necessary to
cause the negative Capital Account balances of such Partners to be in the ratio
of 99% to its Unitholders and 1% to the Fund Manager; and third, to its
Unitholders to the extent that their positive Capital Account balances are less
than their Adjusted Capital Contributions.
Notwithstanding the above, to the extent that there are any Profits
remaining after the allocation of Profits under clause third of the preceding
paragraph or to the extent that the positive Capital Account balances of the
Unitholders before the allocation of any Losses to them exceed their Adjusted
Capital Contributions, such Profits or Losses shall be allocated among the
Unitholders and the Fund Manager in such manner and amount as is necessary to
cause the positive Capital Account balances of the Partners to be equal to such
Partners' respective Deemed Liquidation Distributions. A Partner's Deemed
Liquidation Distribution generally is the amount that would be distributed to
him if his Series were dissolved and liquidated and (i) the Series' assets were
sold for their Federal adjusted tax basis; (ii) the Series' liabilities were
paid; and (iii) the Series' remaining cash were distributed in accordance with
the provisions applicable to Sale or Refinancing Proceeds arising other than in
liquidation of the Series.
To the extent such relationships between the Capital Account balances of the
Fund Manager and the Unitholders cannot be maintained through the allocation of
Profits or Losses for a given year, the Partnership Agreement provides for
allocations of gross income or gain for such year (or in some instances,
subsequent years) to cause such relationships to be maintained as of the end of
each fiscal year. Further, the Partnership Agreement provides that if the
allocation of Profits and Losses for Tax Purposes by a Series fails to cause the
Capital Accounts of its Partners to be equal to their Deemed Liquidation
Distributions, or, where there would be no Deemed Liquidation Distributions to
the Partners, to cause the negative Capital Account balances of the Partners (to
the extent that the aggregate amount of such balances is not in excess of
Partnership Minimum Gain) to be in the ratio of 99% to the Unitholders and 1% to
the Fund Manager, the Fund Manager is authorized to amend the allocation
provisions applicable to Profits and Losses for Tax Purposes on the advice of
the Series' accountants or legal counsel to the extent necessary to cure such
defect, provided that the provisions related to the distribution of Cash
Available for Distribution and Sale or Refinancing Proceeds may not be amended
to cure such defect.
The Partnership Agreement provides that each Partner's Capital Account will
initially equal his Capital Contribution, with certain adjustments. Throughout
the existence of his Series each Partner's Capital Account will be (i) reduced
by the
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amount of Losses for Tax Purposes allocated and the amount of Cash Available for
Distribution and Sale or Refinancing Proceeds distributed to him, and (ii)
increased by the amount of Profits for Tax Purposes allocated to him.
Any interest income recognized by the Partnership in connection with the
payment to the Partnership of a Capital Contribution (or portion thereof) will
be allocated to the Limited Partner making such payment.
If a Local Limited Partnership sells its Apartment Complex under an
installment sale arrangement, the allocation of Profits and Losses for Tax
Purposes arising from such transaction generally will have the same effect as
the foregoing, but may vary depending on the percentage interest determined for
the Unitholders as a class in such installment proceeds, as discussed under
"Sale or Refinancing Proceeds" above.
The Partnership Agreement also includes provisions which are intended to
comply with Code Sections 704(b), 704(c) and 752 and the Regulations promulgated
thereunder and other official interpretations thereof. (See "Federal Income Tax
Considerations" above.) For example, the Partnership Agreement includes a
chargeback for Partnership Minimum Gain, a chargeback for Partner Nonrecourse
Debt Minimum Gain, a qualified income offset provision, a provision allocating
Nonrecourse Deductions, a provision allocating deductions attributable to
Partner Nonrecourse Debt to the Partner bearing the Economic Risk of Loss for
the Partner Nonrecourse Debt, an adjustment to Capital Accounts in the event
that the tax basis of a Series' property is adjusted pursuant to Code Sections
734(b) or 743(b), a provision respecting allocations attributable to Code
Section 704(c) property and a limitation on allocations creating or increasing
Adjusted Capital Account Deficits. Prospective investors are urged to read
Article 4 of the Partnership Agreement in its entirety for a full description of
the provisions summarized above.
Determination of Distributions and Allocations Among Unitholders
Payments of Cash Available for Distribution and Sale or Refinancing Proceeds
and allocations of Profits and Losses for Tax Purposes and Tax Credits for a
Series will be made among its Unitholders in proportion to the number of Units
owned by each of them. Distributions and allocations during the Offering period
will be as described under "Federal Income Tax Considerations - Allocations
Prior to Admission." Distributions and allocations with respect to holders of
transferred Units will be as described under "Transferability of Units."
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SUMMARY OF CERTAIN PROVISIONS OF THE
PARTNERSHIP AGREEMENT
The Partnership Agreement (attached hereto as Exhibit B) is the governing
instrument establishing the rights and obligations of the Partners in each
Series. Each prospective investor should therefore read the Partnership
Agreement in full. Many of the principal provisions of the Partnership Agreement
have been summarized elsewhere in this Prospectus under various headings.
Certain other provisions of the Partnership Agreement are summarized below, but
for complete information reference should be made to the Partnership Agreement.
Default by Unitholder in Payment of the Deferred Capital Contribution
Under the Promissory Notes to be given to a Series by those investors who
are eligible, and elect, to do so in partial payment for their Units, an Event
of Default will include: (i) the failure to make any payment due under the
Promissory Note within 30 days after the due date ("Payment Default"), (ii) a
material misrepresentation by an investor in connection with the purchase of
Units, (iii) the filing of a proceeding by or against an investor under the
Federal bankruptcy laws, (iv) an assignment by an investor for the benefit of
creditors and (v) the appointment of a receiver or trustee for all or any part
of the investor's assets.
If an Event of Default occurs, the Series may declare the entire unpaid
balance of the Promissory Note due and payable and the Promissory Note will
continue to bear interest until paid. A late charge of 5% will be imposed on any
late payment. In addition, any distributions of cash to which the Unitholder
would be entitled may be offset against amounts due under the Promissory Note.
Pursuant to the terms of a security agreement in favor of the Series contained
in Section 3.4.1 of the Partnership Agreement, upon any such default the Series
will be entitled to the remedies available under the applicable Uniform
Commercial Code, including foreclosure and sale of the Units and proceeding
directly against the Unitholder. The Series may sell the Units (or fractional
interests thereof) of the defaulting Unitholder to the nondefaulting Unitholders
or to non-Partners for the highest price which the Series can obtain in a
commercially reasonable sale. The Fund Manager and its Affiliates may (but are
not obligated to) purchase any such Units, but only if such Units have first
been offered to the nondefaulting Unitholders. There can be no assurance that
the sales will provide sufficient funds to make the full payment to the Series
and the defaulting Unitholder; and any monies received through such sale shall
first be applied to the payments due to the Series.
In addition to the above-described right to sell a Unitholder's Units in
default, the Series is not restricted in the exercise of its rights to institute
legal proceedings against a defaulting Unitholder to compel payment of the
unpaid balance of the Promissory Note as well as all costs (including attorneys'
fees) incurred by the
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Series in enforcing its rights under the security agreement contained in the
Partnership Agreement. A defaulting Unitholder will remain liable for any
deficiency remaining after any properly conducted foreclosure sale. If a
defaulting Unitholder's Units are sold by or on behalf of the Series in a
foreclosure sale, the defaulting Unitholder will be deemed to have consented, by
having executed the Partnership Agreement, to the substitution of the purchaser
of the Units as a Unitholder. See "Risk Factors - Fund-Related Risks -
Obligations for Capital Contributions." In the event of a Payment Default, until
30 days after the Payment Default and notice thereof and intent to foreclose has
been given to the defaulting Unitholder, such Unitholder will have the right to
cure the Payment Default with late charges thereon without suffering any
reduction in interest in the Series and the Series may not commence proceedings
to enforce its security interest in the defaulting Unitholder's Units.
The Promissory Notes may be pledged as collateral to secure Series debt. If
a Unitholder defaults under his Promissory Note, a subsequent holder of the
Promissory Note will have the rights of the Series as described above.
Liability of Unitholders to Third Parties
The Fund Manager will be liable for all general obligations of the Series to
the extent not paid by the Series. Under California law, a Unitholder is not
personally liable for the debts, liabilities and obligations of his Series in
excess of his Capital Contribution, except for the payments due under his
Promissory Note, if any, and except to the extent and under the circumstances
discussed in "Risk Factors - Fund- Related Risks - Risks of Unitholder
Liability."
Dissolution and Liquidation
Each Series is intended to be self-liquidating and will be dissolved no
later than December 31, 2052, or earlier upon the prior occurrence of certain
events, including: (1) the disposition of all Local Limited Partnership
Interests and other assets of the Series; (2) the election by the Fund Manager
(with the consent of its Unitholders owning more than 50% of the Units in the
Series) or by Unitholders owning more than 50% of the Units in the Series to
dissolve the Series; or (3) unless the business of the Series is continued by
the Series or a reconstituted partnership under Section 8.1 of the Partnership
Agreement, the removal, bankruptcy or dissolution (or death or adjudication of
incompetence in the case of an individual) of a sole remaining Fund Manager. The
Fund Manager has agreed not to retire or withdraw voluntarily from the Series.
Upon dissolution of a Series unless its business is continued in accordance
with the Partnership Agreement, the Series will be liquidated and the proceeds
of liquidation will be applied first to the payment of obligations of the Series
to
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creditors and the expenses of liquidation, and to the setting up of any reserves
for contingencies which the Fund Manager considers necessary. Any remaining
proceeds of liquidation and any other funds or properties of the Series will
then be distributed in the manner described under "Profits and Losses for Tax
Purposes, Tax Credits and Cash Distributions - Sale or Refinancing Proceeds."
Removal of Fund Manager
The Partnership Agreement provides that the Fund Manager may be removed as
such with respect to any Series, and a new Fund Manager elected, upon the
written consent or affirmative vote of Unitholders owning more than 50% of the
Units in the Series. If the Fund Manager is removed, the fair market value of
the interest of the removed Fund Manager in the Series will be determined by
agreement of the former Fund Manager and the Series or, if they cannot agree, by
arbitration, and will be paid to the Fund Manager by delivery of a promissory
note of the Series for such fair market value payable in no less than five equal
consecutive annual installments commencing on the first anniversary of the date
of such note. Payments required under such promissory note could result in the
Series having to sell one or more of its interests in Local Limited
Partnerships. Such promissory note shall bear simple interest at a rate per
annum which is at all times equal to the Prime Rate, payable on the last day of
each calendar quarter while such note is outstanding; provided, however, that if
such note is delivered following an Event of Withdrawal of the Fund Manager
which is a Voluntary Withdrawal on its part then (i) such note shall neither be
secured nor bear interest and (ii) the principal payable to the withdrawing Fund
Manager shall be limited in amount and date of payment to distributions which
such withdrawing Fund Manager would have received under the Partnership
Agreement had it not withdrawn.
Within 120 days after the determination of the fair market value of the
former Fund Manager's Interest, the Series may, with the consent of any
remaining Fund Managers and the consent of a majority-in-interest of its
Unitholders, sell such Interest to one or more persons, who may be Affiliates of
any remaining Fund Manager or Fund Managers, and admit such person or persons to
the Series as substitute Fund Managers; provided, however, that the purchase
price to be paid to the Series for the Interest of the former Fund Manager shall
not be less than its fair market value as determined by the procedures described
above. Such substitute Fund Manager or Fund Managers may pay said purchase price
in installments in the manner set forth above.
Voting Rights
Unitholders owning more than 50% of the Units in a Series may amend the
Partnership Agreement of the Series at any time, except that an amendment which
would adversely affect the limited liability of a Unitholder or the rights,
powers,
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duties or compensation of the Fund Manager or any of its Affiliates, will also
require the consent of such Partner. The Partnership Agreement of a Series may
also be amended by the Fund Manager without the consent of the Unitholders to
admit Unitholders in connection with the sale or transfer of Units as described
in this Prospectus and for certain other amendments for the benefit of (or not
adverse to) the interests of the Unitholders as specified in Section 12.1.2 of
the Partnership Agreement.
The removal of the Fund Manager and the admission to a Series of a successor
or additional Fund Manager also requires the approval of Unitholders of the
Series owning more than 50% of the Units in the Series in certain circumstances.
See "Removal of Fund Manager" above in this section and "Management."
In addition, the Fund Manager may not, without the consent of Unitholders
owning more than 50% of the Units in the Series, (a) sell all or substantially
all the assets of the Series at one time, except in connection with the
liquidation and winding up of the Series business upon its dissolution; (b)
cause the merger or other reorganization of the Partnership; or (c) elect to
dissolve the Series.
Notwithstanding the general ability of Unitholders owning more than 50% of
the Units in a Series to amend the Partnership Agreement of the Series, Section
10.3 of the Partnership Agreement imposes strict limitations on the ability of a
Series to propose or participate in a Roll-Up. Unitholders owning more than 50%
of the Units in a Series could vote to revise or eliminate these limitations.
Nonetheless, in addition to these limitations, the California Revised Limited
Partnership Act, which governs each Series, gives limited partners who dissent
to a Roll-Up the right, subject to certain procedural limitations, to require
that their limited partnership repurchase their interests at a price equal to
their fair market value.
Meetings
There will be no annual or other periodic meetings of the Unitholders.
However, meetings of the Unitholders of a Series for any purpose may be called
by the Fund Manager and are required to be called by the Fund Manager upon
written request of Unitholders in a Series owning in the aggregate 10% or more
of the Units in the Series. In addition, the Fund Manager may, and the Fund
Manager shall upon request of Unitholders owning in the aggregate 10% or more of
the Units in a Series, submit any matter (upon which they are entitled to vote)
to the Unitholders in the Series for a vote without a meeting.
Books and Records
Each Series will maintain its books and records at the Fund's office
(currently 3158 Redhill Avenue, Costa Mesa, California 92626). The books and
records are
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open to inspection, reproduction and examination by the Unitholders of the
Series at all reasonable times. Further, upon request, the Fund Manager will
promptly deliver to a Unitholder of a Series a copy of the following books and
records of his Series: the Certificate of Limited Partnership and all amendments
thereto; the Partnership Agreement, and all amendments thereto; and a current
list of the full name and last known address of each Partner in the Series. If
such a list is requested, the Fund Manager is required to provide it within 10
days of the receipt of the request, such list to be arranged in alphabetical
order, on white paper and in a readily readable form. Under California law, if
the Fund Manager fails to provide the list of Partners and a court finds that
the failure to do so was without justification, the court may award, in addition
to any actual damages suffered, an amount sufficient to reimburse the Unitholder
bringing the court action for reasonable expenses incurred in connection
therewith.
TRANSFERABILITY OF UNITS
There are restrictions on the transfer of Units as set forth in Article 7 of
the Partnership Agreement and as described below. To transfer Units, a written
instrument of assignment must be signed by both the transferror and the
transferee and returned to the Fund Manager together with payment of all
reasonable legal fees and filing costs in connection with the transfer, but not
to exceed $100. The Fund Manager may also request additional documentation to
evidence the authority of the parties to the assignment and compliance of the
assignment with the terms of the Partnership Agreement, as well as the consent,
if required, of the Commissioner of Corporations of the State of California or
of any other state official who asserts jurisdiction over such assignment. For
these reasons, no Series will issue any transferable certificates representing
the Units, and an assignment shall not take effect for any purpose until it has
been registered on the books of the Series. A pledge or other encumbrance of a
Unit shall similarly not be effective unless so registered. On the death of a
Unitholder, his executor or administrator will have all rights of a Unitholder
for the purpose of settling his estate, including the same power as the decedent
had to assign his interest to another party.
It is not intended or anticipated that a public market will develop for the
purchase and sale of Units. Thus, Unitholders may not be able to liquidate their
investment promptly or at a reasonable price prior to the dissolution and
liquidation of their Series, and the Units should only be considered as a
long-term investment. See "Risk Factors - Fund-Related Risks - Lack of Liquidity
of Investment."
If a Unitholder is able to negotiate a sale, exchange or other transfer of
his Units, the effectiveness thereof may be denied or deferred by the Fund
Manager if necessary, in the opinion of counsel, to avoid: the premature
termination of the Series for tax purposes; the disqualification of the Series
for Low Income Housing
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Credits under Code Section 42(j)(5)(B); classification of the Series as a
publicly-traded partnership or as an association taxable as a corporation for
Federal income tax purposes; or recapture of Tax Credits. In addition, no
transfers may be made to tax-exempt or foreign entities, or through a securities
market or a secondary market. The Fund Manager will give written notice to all
Unitholders in the event that transfers of Units are generally suspended.
Section 7 of the Partnership Agreement gives the Fund Manager broad powers to
enforce or modify these provisions. The Fund Manager will review from time to
time the restrictions on transfer of Units and will modify such restrictions to
make them less restrictive if the Fund shall have received an opinion of counsel
that such modification may be made without material adverse tax consequences to
the Partners.
A transfer (except for a transfer by gift, inheritance, bequest or family
dissolution, or a transfer to an Affiliate of the transferror) will not be
recognized if, immediately thereafter, any transferror or transferee would hold
a fraction of a Unit.
Except as otherwise provided in Section 7.3.3 of the Partnership Agreement,
transfers will generally be recognized and entered on the records of a Series
only as of the first day of the fiscal quarter following the fiscal quarter in
which the Series receives appropriate documentation relating to the transfer
together with the payment described above. Cash Available for Distribution, if
any, will be allocated to the persons recognized as Unitholders on the last day
of each fiscal quarter. Profits and Losses for Tax Purposes from current
operations and Tax Credits for a fiscal year during which a transfer is
recognized will be allocated between a transferror and a transferee based upon
the number of quarterly periods that each was recognized as the holder of a
Unit, without regard to whether Series operations during particular quarterly
periods of such year produced profits or losses or cash distributions. Sale or
Refinancing Proceeds, if any, will be distributed, and all related Profits and
Losses for Tax Purposes will be allocated, to the persons recognized as
Unitholders as of the date on which the Sale or Refinancing occurred, and for
this purpose transfers will be recognized as of the date specified by the
transferror and the transferee in the instrument of assignment or, if no date is
specified, the first day of the fiscal quarter following the fiscal quarter in
which the Series receives the instrument of assignment. However, any Sale or
Refinancing Proceeds received as a result of an installment or other deferred
sale will be distributed, and any Profits and Losses for Tax Purposes will be
allocated, to the persons recognized as Unitholders on the day such Sale or
Refinancing Proceeds are received by the Series. Adverse Federal income tax
consequences may result from any transfer of Units, and Unitholders are advised
to consult their tax advisers prior to any such transfer. See "Federal Income
Tax Considerations."
Transferees may become Substitute Unitholders, entitled to all the rights of
a Unitholder, by obtaining the consent of the Fund Manager (which consent may
only
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be withheld for the purpose of preserving the Partnership's tax status or to
avoid adverse legal consequences to the Partnership) and by complying with the
provisions of Section 13.3 of the Partnership Agreement. The rights of an
assignee of a Unit who does not become a Substitute Unitholder will be limited
to the right to receive his share of Profits and Losses for Tax Purposes, Tax
Credits, Cash Available for Distribution and Sale or Refinancing Proceeds, and
will not include other rights, such as the voting rights described in "Summary
of Certain Provisions of the Partnership Agreement."
Transfer of Units by or to California Residents
Any sale or transfer of Units in California or involving any California
resident (but not a transfer which does not occur in California and does not
involve any California resident) requires the prior written consent of the
Commissioner of Corporations of the State of California, except as provided in
the Commissioner's Rules. Accordingly, any certificates representing Units will
bear the following legend:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OR THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
REPORTS
Within 120 days after the end of each year, each Series will distribute to
its Unitholders: (i) financial statements of the Series for such year, which
will include a balance sheet and statements of operations, partners' equity and
cash flows prepared on an accrual basis in accordance with generally accepted
accounting principles and accompanied by an auditor's report containing an
opinion of an independent accountant; (ii) a report of any distributions made
during the year; and (iii) a report of the Series' significant activities during
such year. In addition, each Series will distribute to its Unitholders unaudited
quarterly financial statements for each of the first three quarters of each
year, together with a report of the Series' activities during such quarter. Such
quarterly financial statements will consist of a balance sheet and a statement
of operations. Within 75 days after the end of each year, each Series will
distribute to its Unitholders such tax information as is necessary for the
preparation of their Federal and state income tax returns.
Until the Net Proceeds of its Offering are fully invested or returned to its
Unitholders, each Series will also furnish to its Unitholders, at least
quarterly, a report concerning the investments of the Series.
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Within 60 days after the end of each of the first three quarters of each
year, each Series will distribute to its Unitholders a detailed statement
describing any fees and other compensation paid by the Series or a Local Limited
Partnership during such quarter to the Fund Manager and its Affiliates. In
addition, each Series will send to its Unitholders within 120 days after the end
of each year a detailed statement of any transactions between the Series or a
Local Limited Partnership and the Fund Manager and its Affiliates and of the
fees, commissions, compensation and other benefits paid or accrued to the Fund
Manager and its Affiliates for the year.
Reporting requirements similar to those set forth above for each Series are
expected to be included in each Local Limited Partnership Agreement so that each
Series will be able to prepare the reports set forth above. The Fund Manager
shall, to the extent it deems it appropriate, transmit to the Unitholders of the
Series copies of all reports received by the Series in its capacity as a limited
partner of each Local Limited Partnership.
TERMS OF THE OFFERING AND PLAN OF DISTRIBUTION
The Fund is offering 50,000 Units for sale to the public in two Series. Each
Series will consist of 25,000 Units. The Fund Manager will determine in its
discretion when Series 5 will be terminated and Series 6 will begin. No Units in
a Series will be sold unless at least $1,400,000 of Capital Contributions
(defined to exclude contributions which are in the form of Promissory Notes -
see "How to Subscribe" below) from such Series are received and accepted prior
to termination of the Series Offering. See "Escrow Arrangements" below. In no
event will any Offering be conducted more than two years from the date of this
Prospectus. All Units will be sold at a price of $1,000 per Unit (except as
discussed below under "Volume Discounts" and "Purchases by Affiliates and
Designated Investors"), payable in cash upon subscription (except as discussed
below under "How to Subscribe").
Issuance of Units in Series
As indicated above, the Fund is offering Units in two Series. Each Series is
organized as a separate California limited partnership. Except as set forth
below, each Series will account for, and issue information with respect to, its
Units separately. Organizational and Offering Expenses may be higher for one
Series than for the other Series; if so, one Series will reimburse the other in
such a manner so that the pro rata portion of Organizational and Offering
Expenses borne by each Series is the same. With respect to Operating Cash
Expenses, (i) those expenses allocable to a Local Limited Partnership Interest
will be borne by the Series which owns such Local Limited Partnership Interest,
and (ii) those expenses not allocable to a Local Limited Partnership Interest
will be apportioned among and borne by the respective Series based upon the
advice of the Accountants.
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Any certificate representing Units will be marked to identify the Series to
which the certificate relates.
Underwriting Arrangements
Units are being offered on an all-or-nothing minimum, best-efforts maximum,
basis through WNC Capital Corporation (the "Dealer-Manager") and through other
members ("Soliciting Dealers") of the National Association of Securities
Dealers, Inc. ("NASD") selected by the Dealer-Manager. The Dealer-Manager will
manage the selling group and provide certain wholesaling services, and may
participate in the Offering. The Dealer-Manager is a wholly-owned subsidiary of
the Fund Manager formed to participate in offerings sponsored by the Fund
Manager. See "Conflicts of Interest" and "Management."
The Dealer-Manager will receive as compensation retail selling commissions
in an amount of up to 7% of the Capital Contributions. The Dealer-Manager will
also receive a Dealer-Manager Fee in an amount of up to 2% of the Capital
Contributions, and a Nonaccountable Expense Reimbursement in an amount of up to
1% of the Capital Contributions. From the accountable reimbursement of
Organizational and Offering Expenses to be paid by the Fund (see "Management
Compensation"), the Dealer-Manager may receive an amount not to exceed 0.5% of
the Capital Contributions for accountable, bona fide due diligence activities.
The Dealer-Manager may reallow any portion of its underwriting compensation to
Soliciting Dealers (i) proportionately in accordance with the number of Units
sold by them in payment for retailing and wholesaling activities, (ii) in
reimbursement of selling and due diligence activities, and (iii) subject to the
requirements set forth hereinafter, in payment of cash or noncash sales
incentive programs. Subject to the prior approval of the NASD and compliance
with the NASD's Conduct Rules, the Fund or the Dealer-Manager may establish cash
or noncash sales incentive programs, provided that the aggregate value of any
noncash incentive awards to individual registered representatives during any
year does not exceed $100. Sales incentives with a value in excess of $100, if
any, will consist of cash and will be paid directly to Soliciting Dealers, which
will have sole discretion as to how such incentives will be distributed to their
individual registered representatives. In no event will the aggregate of all
underwriting compensation paid to the Dealer- Manager and the Soliciting Dealers
exceed 10% of the Capital Contributions, plus a maximum of 0.5% of Capital
Contributions for expenses incurred for accountable, bona fide due diligence
purposes.
Underwriting compensation of any form payable with respect to proceeds
represented by the Promissory Notes will be payable only when, as and if the
Promissory Notes are paid in cash.
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The Fund has agreed to indemnify the Dealer-Manager and the Soliciting
Dealers against certain liabilities resulting from untrue statements of material
facts (or the omission to state material facts) in this Prospectus, the
Registration Statement or supplemental sales literature authorized for use by
the Fund, including liabilities under the Securities Act of 1933. In the opinion
of the Securities and Exchange Commission, indemnification for liabilities
arising out of the Securities Act of 1933 is against public policy and therefore
unenforceable.
Volume Discounts
As indicated above in this section and under "Management Compensation,"
generally the Fund will pay up to 7% of Capital Contributions as retail selling
commissions to the Dealer-Manager; the Fund also will pay up to 2% of Capital
Contributions as the Dealer-Manager Fee and up to 7% of Capital Contributions as
Acquisition Fees to the Fund Manager. However, with respect to retail selling
commissions, in connection with subscriptions for 100 or more of the Units in
one or more Series or other real estate syndications sponsored by the Sponsor,
such selling commissions will be determined in accordance with the following
schedule:
Amount of Units Subscribed Maximum Retail Selling
to by Any "Purchaser" Commissions Per Unit Price Per Unit
Up to 99 7.0% ($70) $1,000
100 to 199 5.5% ($55) $ 985
200 to 299 4.5% ($45) $ 975
300 to 399 3.5% ($35) $ 965
400 to 499 2.5% ($25) $ 955
500 and over (1) 1.5% ($15) $ 945
- ----------------
(1) Provided that the Fund and the Fund Manager may further reduce the retail
selling commission with respect to subscriptions to 500 Units and over, but any
such reduction must be the same for investors making investments of
substantially the same size.
Investors should note that reductions in retail selling commissions apply in
a graduated manner. For example, in connection with a purchase of 299 Units,
retail selling commissions of $70 per Unit will be payable in connection with
the first 99 Units, retail selling commissions of $55 per Unit will be payable
in connection with the next 100 Units, and retail selling commissions of $45 per
Unit will be payable in connection with the remaining 100 Units.
With respect to Acquisition Fees payable to the Fund Manager and Dealer-
Manager Fees payable to the Dealer-Manager, the Fund Manager and the Dealer-
Manager have reserved the right to agree upon lower Acquisition Fees and Dealer-
Manager Fees regarding subscriptions to a significant number of Units in one or
more Series or other real estate syndications sponsored by the Sponsor, but all
such
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discounts will be the same for investors making investments of substantially the
same size.
Subscriptions to one or more Series or other real estate syndications
sponsored by the Sponsor may be combined for the purpose of determining the
amounts reimbursable in the case of subscriptions made by any "Purchaser" as
that term is defined below. Any request to combine more than one subscription
must be made in writing on a form which will be available upon request from the
Series or the Soliciting Dealers, and must set forth the basis for such request.
If all of the information required in the form, including an indication that
subscriptions are to be combined, is not provided, the Series will not be
responsible for failing to properly combine subscriptions. Any request to
combine subscriptions will be subject to verification by the Series that all
such subscriptions were made by a single "Purchaser" as defined below.
In the event that a "Purchaser" subscribes for additional Units subsequent
to his initial purchase of Units, no reimbursement will be made with respect to
selling commissions or Acquisition Fees which have been paid or are payable in
connection with the prior subscription(s). However, in determining the selling
commissions or Acquisition Fees reimbursable in connection with the additional
purchase, all subscriptions made by such "Purchaser" will be aggregated.
For the foregoing purposes, the term "Purchaser" shall be deemed to include
(i) an individual, or an individual, his or her spouse and their children under
the age of 21, who purchase the Units for his or her or their own account, (ii)
a corporation, partnership, association, joint-stock company, trust, fund or any
organized group of persons, whether incorporated or not (provided that the
entities described in this clause (ii) must have been in existence for at least
six months before purchasing the Units), (iii) investors whose funds are managed
by a single professional investment adviser registered under the Investment
Advisers Act of 1940, and (iv) investors for whom a designated bank, insurance
company, trust company or other designated entity exercises discretionary
investment responsibility. Any such reduction in selling commissions will be
prorated among the separate subscribers considered part of a "Purchaser."
Purchases by Affiliates and Designated Investors
Prior to this Offering John B. Lester, Jr., a shareholder, officer and
director of the Fund Manager, purchased one Unit in Series 5, at a price of
$1,000. Similarly, Mr. Lester or another Affiliate of the Fund Manager will
purchase one Unit at a price of $1,000 in Series 6 prior to commencement of that
Series' Offering. The Fund Manager and its Affiliates do not presently intend to
purchase additional Units; however, the Fund Manager and its Affiliates may
purchase an unlimited number of Units for any reason deemed appropriate by the
Fund Manager and its
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Affiliates, provided that any Units acquired by such Persons will not be applied
to the requirement that a minimum of $1,400,000 in subscription funds be
received for a Series. The Fund Manager and its Affiliates will hold all Units
which they acquire for investment and not for distribution. Any purchase of
Units by the Fund Manager and its Affiliates will be for the same price and
subject to the same terms as all other Units issued by the Series, will be fully
disclosed to all purchasers of Units and will provide the purchaser thereof with
the same rights as other purchasers of Units, except that neither the Fund
Manager nor any of its Affiliates may vote any Unit in an election held pursuant
to Section 10.2 of the Partnership Agreement or in any vote otherwise required
by the Partnership Agreement which entails a conflict of interest on the part of
the Fund Manager or its Affiliates.
In addition to the schedule of reduced rates set forth above under "Volume
Discounts," the Soliciting Dealers and their employees, except any of such
persons who may be Affiliates of the Fund Manager (collectively referred to
herein as "Designated Investors"), may, in the discretion of the Fund Manager,
purchase Units on the same terms and conditions as other purchasers, except that
they will not pay the 7% retail selling commission. In addition, Designated
Investors will include clients of an investment adviser who have been advised by
such adviser on an ongoing basis regarding investments other than investments in
the Fund, and who are not being charged by such adviser or its Affiliates,
through the payment of commissions or otherwise, for the advice rendered by such
adviser in connection with the purchase of Units, if such adviser (i) is
registered under the Investment Advisers Act of 1940, as amended, (ii) is
registered as a broker-dealer under the Securities Exchange Act of 1934, and
(iii) has executed a Soliciting Dealer Agreement with the Dealer-Manager. In
connection with any purchases by Designated Investors, the proceeds to the
Series, net of retail selling commissions and any reductions thereof, will be
the same.
Any investor who pays a reduced retail selling commission or reduced
Acquisition Fees or Dealer-Manager Fees (through the application of the schedule
set forth above for certain volume purchasers or as a Designated Investor) will
receive an interest in Cash Available for Distribution, Sale or Refinancing
Proceeds, Profits or Losses for Tax Purposes and Tax Credits computed without
regard to the discount (i.e., such investor will receive the same share per Unit
owned of such items as an investor who purchased without a discount).
Investors who qualify as Designated Investors are urged to consider the
provisions of the Tax Reform Act of 1984 relating to the tax status of certain
fringe benefits, including employee discounts.
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How To Subscribe
In order to purchase Units, the subscriber must complete and execute the
Investor Form accompanying this Prospectus and deliver it to his account
executive. A specimen of the Investor Form is attached as part of Exhibit C to
the Prospectus. Execution copies of the Investor Form may be obtained from any
Soliciting Dealer. Certain Soliciting Dealers may use alternative forms of the
Investor Form, which may be obtained from such Soliciting Dealers.
The minimum investment is five Units ($5,000), except that employees of the
Fund Manager and its Affiliates and/or investors in limited partnerships
previously sponsored by the Fund Manager may purchase a minimum of two Units
($2,000). After an investor has purchased the required minimum number of Units
in any Series, he may make investments in increments of $1,000 in the same or
any subsequent series. Subscriptions for fewer than 10 Units must be accompanied
by a check for $1,000 per Unit payable to "National Bank of Southern California
- - WNC/HTCFVI." However, investors who subscribe for 10 Units ($10,000) or more
in any one Series may elect to utilize an installment payment method whereunder
their subscriptions need be accompanied by a check for only $500 per Unit, with
the balance of the $1,000 purchase price for such Unit (i.e., $500) to be
payable in accordance with the terms of the Promissory Note which is included
with the Investor Form in a single installment on (i) January 31, 1999, if the
investor subscribes between the date hereof and June 30, 1998, (ii) June 30,
1999, if the investor subscribes between July 1, 1998 and December 31, 1998, or
(iii) the later of the date of subscription or January 31, 2000, if the investor
subscribes after December 31, 1998. Each Promissory Note will be a full recourse
obligation of the investor and will bear interest at a fixed rate equal to the
one-year Treasury Bill rate, such rate to be determined quarterly. See "Risk
Factors - Fund-Related Risks - Obligations for Capital Contributions."
Completed Investor Forms and checks should be sent to the Escrow Agent, at
the following address:
National Bank of Southern California
4100 Newport Place, Suite 100
Newport Beach, CA 92660
Attention: WNC Escrow Manager
Each investor whose subscription is accepted will receive a letter of
welcome from the Fund Manager and a certificate of interest with the amount of
the investment and the number of Units purchased. No sale will be deemed
complete until at least five business days after the investor has received a
Prospectus.
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Escrow Arrangements
All subscribers' funds and Promissory Notes received by a Series will be
placed in an escrow account established by the Series with National Bank of
Southern California, Newport Beach, California, at the Series' expense. Pursuant
to the Escrow Agreement between each Series and the Escrow Agent, the Escrow
Agent shall deposit escrowed funds in accordance with instructions from the Fund
Manager in short-term U.S. government securities, securities issued or
guaranteed by the U.S. government, certificates of deposit or time or demand
deposits in commercial banks.
Upon receipt by a Series of a minimum of $1,400,000 of Capital Contributions
(defined to exclude contributions which are in the form of Promissory Notes),
the subscribers for such Units will be admitted to the Series and the Escrow
Agent will release to the Series all funds and Promissory Notes which it then
holds. Funds and Promissory Notes received from subsequent subscribers to such
Series will continue to be placed in escrow, and the Series will admit
additional Unitholders on a monthly (or more frequent) basis until the
termination of the Series Offering. Only subscribers whose subscriptions have
been received and accepted at least five days prior to an Investor Closing
(other than the initial Investor Closing) will be admitted as Unitholders at
such closing, unless the Fund Manager shall elect otherwise. Promptly after the
release to a Series of a subscriber's funds and Promissory Note, if any, the
Escrow Agent will pay to such subscriber any interest earned on the cash portion
of his subscription proceeds while in escrow.
Funds and the Promissory Note, if any, of an investor whose subscription is
rejected will be returned to him promptly after rejection, together with any
interest actually earned on the cash portion of his subscription proceeds while
in escrow.
A subscription is not subject to termination by the subscriber. If a Series
does not receive a minimum of $1,400,000 of Capital Contributions within one
year from the commencement of the Series Offering, the Series will cancel all
existing subscriptions to such Series and all funds and Promissory Notes paid on
account of each such subscription to such Series will be released from escrow
and returned promptly to the subscriber together with all interest earned on the
cash portion of his subscription proceeds while in escrow.
Pending the receipt of the initial $1,400,000 of Capital Contributions for a
Series, and in the sole discretion of the Fund Manager, the Series may borrow
funds from an institutional lender or from the Fund Manager or any of its
Affiliates to pay all or a portion of the selling commissions and reimbursements
to which Soliciting Dealers would become entitled after the receipt of the
initial $1,400,000 of Capital Contributions, provided that any such Soliciting
Dealer must agree to return all selling commissions and reimbursements received
by it in the event the
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initial $1,400,000 of Capital Contributions is not received by the Series. The
Series would repay the borrowed funds only after the receipt of such initial
$1,400,000 of Capital Contributions.
SALES MATERIAL
The Fund may make use of certain material in addition to this Prospectus in
connection with the Offering of the Units. Such material may consist of sales
brochures which will be distributed to prospective investors together with this
Prospectus, "tombstone" advertisements, invitations to seminars, prospecting
letters, videotapes and slide presentations.
The Fund has not authorized the use of sales material other than that
described above. The Offering of Units is made only by means of this Prospectus.
Although the information contained in the Fund's sales material is believed not
to conflict with any of the information contained in this Prospectus, such
material does not purport to be complete and should not be considered as part of
this Prospectus, as being incorporated in this Prospectus by reference or as
forming the basis of the Offering of the Units.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
As reflected in its financial statements, the Fund currently has only
nominal funds, as it is newly-formed, has not yet commenced operations and the
capital anticipated to be raised through its public Offering of Units has not
yet become available.
The Fund plans to raise equity capital from investors by means of this
public Offering, and then to apply such funds, including the installment
payments on the Promissory Notes as received, to the purchase price and
acquisition fees and costs of Local Limited Partnership Interests, Reserves and
expenses of this Offering.
It is not expected that any of the Local Limited Partnerships in which the
Fund will invest will generate cash from operations sufficient to provide
distributions to the Unitholders in any significant amount, except possibly in
the circumstances discussed under "Investment Objectives and Policies -
Principal Investment Objectives." Such cash from operations, if any, would first
be used to meet operating expenses of the Fund, including the payment of the
Asset Management Fee. See "Management Compensation."
The Fund's investments will not be readily marketable and may be affected by
adverse general economic conditions which, in turn, could substantially increase
the risk of operating losses for the Apartment Complexes, the Local Limited
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Partnerships and the Fund. These problems may result from a number of factors,
many of which cannot be controlled. See "Risk Factors - Investment Risks - Risks
of Real Estate Ownership." Nevertheless, the Fund Manager anticipates that
capital raised from the sale of the Units will be sufficient to fund the Fund's
future investment commitments and proposed operations.
The Fund will establish working capital Reserves of at least 3% of Capital
Contributions, an amount which is anticipated to be sufficient to satisfy
general working capital and administrative expense requirements of the Fund
including payment of the Asset Management Fee as well as expenses attendant to
the preparation of tax returns and reports to the Unitholders and other investor
servicing obligations of the Fund. Liquidity would, however, be adversely
affected by unanticipated or greater than anticipated operating costs. The
Fund's liquidity could also be affected by defaults or delays in payment of the
Promissory Notes, from which a portion of the working capital Reserves is
expected to be funded. To the extent that working capital Reserves are
insufficient to satisfy the cash requirements of the Fund, it is anticipated
that additional funds would be sought through bank loans or other institutional
financing. The Fund may also apply any cash distributions received from the
Local Limited Partnerships for such purposes or to replenish or increase working
capital Reserves.
Under the Partnership Agreement the Fund does not have the ability to assess
the Unitholders for additional Capital Contributions to provide capital if
needed by the Fund or Local Limited Partnerships. Accordingly, if circumstances
arise that cause the Local Limited Partnerships to require capital in addition
to that contributed by the Fund and any equity of the Local General Partners,
the only sources from which such capital needs will be able to be satisfied
(other than the limited Reserves available at the Fund level) will be (i)
third-party debt financing (which may not be available if, as expected, the
Apartment Complexes owned by the Local Limited Partnerships are already
substantially leveraged), (ii) additional equity contributions or advances of
the Local General Partners, (iii) other equity sources (which could adversely
affect the Fund's interest in Tax Credits, cash flow and/or proceeds of sale or
refinancing of the Apartment Complexes and result in adverse tax consequences to
the Unitholders), or (iv) the sale or disposition of the Apartment Complexes
(which could have the same adverse effects as discussed in (iii) above). There
can be no assurance that funds from any of such sources would be readily
available in sufficient amounts to fund the capital requirements of the Local
Limited Partnerships in question. If such funds are not available, the Local
Limited Partnerships would risk foreclosure on their Apartment Complexes if they
were unable to renegotiate the terms of their first mortgages and any other debt
secured by the Apartment Complexes to the extent the capital requirements of the
Local Limited Partnerships relate to such debt. See "Risk Factors - Investment
Risks - Risks Associated With Use of Leverage" and "Investment Objectives and
Policies - Use of Leverage."
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The Fund's capital needs and resources are expected to undergo major changes
during its first several years of operations as a result of the completion of
its Offering of Units and its acquisition of investments. Thereafter, the Fund's
capital needs and resources are expected to be relatively stable over the
holding periods of the investments, except to the extent of proceeds received in
payment of Promissory Notes and disbursed to fund the Fund's deferred
obligations. See, however, "Risk Factors - Investment Risks - Risks of Real
Estate Ownership."
LEGAL MATTERS
The legality of the Units offered hereby and certain Federal income tax
matters will be passed upon for the Fund by Derenthal & Dannhauser, San
Francisco, California, counsel for each Series and the Fund Manager.
EXPERTS
The balance sheet of WNC Housing Tax Credit Fund VI, L.P., Series 5 as of
April 30, 1997 and the balance sheet of WNC & Associates, Inc. as of August 31,
1996 which are included in this Prospectus and in the Registration Statement
have been audited by Corbin & Wertz, independent certified public accountants,
as set forth in their reports thereon appearing elsewhere herein and in the
Registration Statement and are included in reliance upon such reports given upon
the authority of said firm as experts in accounting and auditing.
The matters of law discussed in the section entitled "Federal Income Tax
Considerations" and under the captions "Risks Related to Tax Credits" and "Other
Tax Risks" in the section entitled "Risk Factors" and in the section entitled
"The Low Income Housing Credit" as they relate to Federal income tax matters
have been reviewed by Derenthal & Dannhauser and are included herein in reliance
upon the authority of such firm as experts.
FURTHER INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the Fund has
filed with the Securities and Exchange Commission under the Securities Act of
1933, and to which reference is hereby made. Copies of the Registration
Statement and exhibits relating thereto are on file at the principal office of
the Securities and Exchange Commission at 450 Fifth Street, Northwest,
Washington, D.C. 20549, and may be obtained, upon payment of the fee prescribed
by the Commission, or may be examined without charge, at the offices of the
Commission. The Commission also maintains a website on the Internet
(http://www.sec.gov) that contains all filings respecting the Fund.
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GLOSSARY
The meanings of the defined terms used in this Prospectus are set forth
below.
"Accountants" means Corbin & Wertz, Irvine, California, or such other firm
of independent public accountants as from time to time shall be engaged for a
Series by the Fund Manager.
"Acquisition Expenses" means expenses, including, but not limited to, legal
fees and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on property not acquired, accounting fees and
expenses, title insurance and miscellaneous expenses related to selection and
acquisition by a Series of Local Limited Partnership Interests and the selection
and acquisition of Apartment Complexes by the Local Limited Partnerships,
whether or not acquired.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the selection or purchase by a Series of any Local
Limited Partnership Interest, and the purchase, development or construction of
an Apartment Complex by a Local Limited Partnership, whether designated as a
real estate commission, acquisition fee, finders' fee, selection fee,
Development Fee, Construction Fee, nonrecurring management fee, consulting fee
or any fee of a similar nature however designated, with the exception of
Development Fees and Construction Fees paid to Persons not affiliated with the
Sponsor in connection with the actual development and construction of an
Apartment Complex. As used herein, a "Development Fee" shall be a fee for the
packaging of an Apartment Complex, including negotiating and approving plans,
and undertaking to assist in obtaining zoning and necessary variances, necessary
financing and Tax Credits for the Apartment Complex, either initially or at a
later date, and a "Construction Fee" shall be a fee or other remuneration for
acting as general contractor and/or construction manager to construct
improvements, supervise and coordinate projects or provide Major Repairs or
Rehabilitation for an Apartment Complex.
"Act" means the California Revised Limited Partnership Act (Corp. Code
Section 15611, et seq.), as now in effect and as the same may be amended from
time to time hereafter.
"Additional Unitholders" means those Persons who purchase Units pursuant to
this Prospectus.
"Adjusted Capital Account Deficit" means, with respect to each Partner in a
Series, the deficit balance in his Capital Account as of the end of the relevant
fiscal period of the Series, after giving effect to the following adjustments:
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(a) Increasing such Capital Account by any amounts such Person is
obligated to restore under the standards set by Section 1.704-1(b)(2)(ii)(c)
of the Regulations (or is deemed obligated to restore under Section
1.704-2(g)(1) and (i)(5) of the Regulations); and
(b) Decreasing such Capital Account by the items described in Section
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6)
of the Regulations.
"Adjusted Capital Contribution" means, for each fiscal period, the
Unitholders' Capital Contribution reduced by all distributions of noninvested
funds and distributions of Sale or Refinancing Proceeds made to the Unitholders
through the end of such period.
"Affiliate" or "Affiliated Person" means, when used with reference to a
specified Person: (i) any Person who, directly or indirectly, controls or is
controlled by or is under common control with the specified Person; (ii) any
Person who is an officer or director of, or partner in, or serves in a similar
capacity with respect to, the specified Person or of which the specified Person
is an officer, director or partner, or with respect to which the specified
Person serves in a similar capacity; (iii) any Person who, directly or
indirectly, is the beneficial owner of, or controls, 10% or more of any class of
equity securities of, or otherwise has a 10% or more beneficial interest in, the
specified Person; or (iv) any Person of which the specified Person is, directly
or indirectly, the owner of, or in control of, 10% or more of any class of
equity securities, or in which the specified Person has a 10% or more beneficial
interest.
"Agreement" means a Series' Agreement of Limited Partnership, as originally
executed and as amended or restated from time to time.
"Apartment Complex" or "Property" means a multi-family residential rental
complex owned or under development or rehabilitation by a Local Limited
Partnership.
"Asset Based Fee" means compensation to the Sponsor computed in accordance
with Section IV.J. of the NASAA Guidelines. No Asset Based Fee shall be payable
to the Sponsor.
"Asset Management Fee" means the annual fee payable to the Fund Manager or
an Affiliate of the Fund Manager for services in connection with the
administration of the affairs of the Series.
"C Corporation" has the meaning given it under "Who Should Invest;
Limitations on Use of Credits and Losses."
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"CHTC" means WNC California Housing Tax Credits, L.P.
"CHTCII" means WNC California Housing Tax Credits II, L.P.
"CHTCIII" means WNC California Housing Tax Credits III, L.P.
"CHTCIV Series 4" means WNC California Housing Tax Credits IV, L.P., Series
4.
"CHTCIV Series 5" means WNC California Housing Tax Credits IV, L.P., Series
5.
"CTCAC" means the California Tax Credit Allocation Committee.
"Capital Account" means, with respect to any Partner in a Series, the
Capital Account maintained for such Partner in such Series in accordance with
the following provisions: (i) to each Partner's Capital Account there shall be
credited such Partner's Capital Contribution and such Partner's distributive
share of Profits for Tax Purposes and (ii) to each Partner's Capital Account
there shall be debited the amount of cash and the net fair market value of
property distributed to such Partner pursuant to any provision of the
Partnership Agreement and such Partner's distributive share of Losses for Tax
Purposes. In the event any interest in a Series is transferred in accordance
with the terms of the Partnership Agreement, the transferee shall succeed to the
Capital Account of the transferror to the extent it relates to the transferred
interest. Subject to Section 4.4.1 of the Partnership Agreement, Capital
Accounts shall be maintained in accordance with Treasury Regulation Section
1.704-1(b)(2)(iv).
"Capital Contribution" means the total amount of cash contributed to a
Series determined without inclusion of any interest or late charges paid on the
Promissory Notes and without reduction for any discounts for Designated
Investors and Discount Investors (prior to the deduction of any Syndication
Expenses) by all the Partners or any class of Partners or any one Partner, as
the case may be (or the predecessor holders of the Interests of such Partners or
Partner), reduced, in the case of the Unitholders by the amount of any
noninvested funds returned to them.
"Cash Available for Distribution" means, with respect to any period, Cash
Flow less any amounts set aside from Cash Flow for the restoration or creation
of Reserves.
"Cash Flow" means, with respect to any period, (i) all cash funds provided
to a Series from Local Limited Partnership operations (exclusive of any proceeds
derived from the sale, disposition, financing or refinancing of Apartment
Complexes, or other Sale or Refinancing transactions) plus (ii) all cash funds
from
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Series operations (including any interest from Promissory Notes), without
deduction for depreciation, but after deducting cash funds used to pay all other
expenses, Debt Service and capital expenditures.
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of succeeding law.
"Competitive" when applied to a fee, commission (other than a real estate or
brokerage commission) or other payment for goods supplied or services rendered,
means a payment equal to the amount customarily charged by Persons not
Affiliated with the payee for such goods or services in the geographic area in
which such goods are supplied or services rendered.
"Competitive Real Estate Commission" means a real estate or brokerage
commission paid for the purchase or sale of Property which is reasonable,
customary and competitive in light of the size, type and location of the
Property.
"Consent" means either (i) the approval given by vote at a meeting called
and held in accordance with the provisions of the Partnership Agreement, or (ii)
a prior written approval required or permitted to be given pursuant to the
Partnership Agreement.
"Counsel" means Derenthal & Dannhauser.
"Credit Authority" means, for any state, the amount of Low Income Housing
Credits which may be allocated by such state in a given year pursuant to Code
Section 42(h).
"Dealer-Manager" means WNC Capital Corporation.
"Dealer-Manager Fee" means the fee payable to the Dealer-Manager for its
services as Dealer-Manager pursuant to Section 5.6.2 of the Partnership
Agreement.
"Debt Service" means all payments required to be made in connection with any
loan to the Series or any loan secured by a lien on any of the Apartment
Complexes.
"Deemed Liquidation Distribution" means, with respect to the Unitholders of
a Series, as a class, and the Fund Manager the amount that would be distributed
to them as of the end of each fiscal year of the Series if the Series were
dissolved and liquidated and (i) the assets of the Series (other than
installment obligations where Section 4.7.1 of the Partnership Agreement
applies) were sold for cash equal to their Federal adjusted tax basis (or their
book value, where Section 4.4.2 of the Partnership Agreement applies); (ii) the
liabilities of the Series were paid; and (iii)
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the remaining cash of the Series were distributed to such class of Partners in
accordance with Section 4.2.1 of the Partnership Agreement (and not Section
4.2.2 of the Partnership Agreement). For the purposes of this definition, (a)
the Capital Accounts of the Partners shall not be adjusted for their shares of
any Partnership Minimum Gain that would be recognized as a result of a deemed
sale of Properties or Local Limited Partnership Interests; and (b) installment
obligations shall be treated in the manner provided in Section 4.7 of the
Partnership Agreement.
"Designated Investor" shall have the meaning specified in the Prospectus
under "Terms of the Offering and Plan of Distribution."
"Discount Investor" means any Additional Unitholder (other than a Designated
Investor) who has paid or agreed to pay less than $1,000 per Unit subscribed for
by him on account of reduced selling commissions, reduced Dealer-Manager Fees
and/or reduced Acquisition Fees attributable to his Units, as specified in the
Prospectus under "Terms of the Offering and Plan of Distribution."
"Economic Risk of Loss" means the extent to which a Partner or Related
Person bears the economic risk of loss for a Series liability as determined
under Treasury Regulation Section 1.752-2.
"Escrow Agent" means National Bank of Southern California, Newport Beach,
California, or any other escrow agent chosen by the Fund Manager to hold funds
from investors pending their admission to a Series.
"Event of Withdrawal" with respect to a Series means the occurrence of any
of the following events as to the Fund Manager: (i) its withdrawal from the
Series pursuant to Section 15662 of the Act; (ii) its removal in accordance with
the Partnership Agreement; (iii) it (a) makes an assignment for the benefit of
creditors, (b) files a voluntary petition in bankruptcy, (c) is adjudged a
bankrupt or insolvent, or has entered against it an order for relief in any
bankruptcy or insolvency proceeding, (d) files a petition or answer seeking for
itself any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation, (e) files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against it in any proceeding of this nature, or
(f) seeks, consents to or acquiesces in the appointment of a trustee, receiver
or liquidator of itself or of all or any substantial part of its properties;
(iv) the lapse of 120 days after the commencement of any proceeding against it
seeking reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation, if during
such period the proceeding has not been dismissed, or the lapse of 90 days after
the appointment, without its consent or acquiescence, of a trustee, receiver or
liquidator of itself or of all or any substantial part of its properties, if
during such period the appointment is not vacated or stayed, or if within 90
days after the
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expiration of any such stay, the appointment is not vacated; (v) in the case of
a Fund Manager who is a natural person, (a) his death, or (b) the entry by a
court of competent jurisdiction adjudicating him incompetent to manage his
person or his property; (vi) in the case of a Fund Manager who is acting as a
general partner by virtue of being a trustee of a trust, the termination of the
trust (but not merely the substitution of a new trustee); (vii) in the case of a
Fund Manager which is a separate partnership, the dissolution and commencement
of winding up of the separate partnership; (viii) in the case of a Fund Manager
which is a corporation, the filing of a certificate of dissolution, or its
equivalent, for the corporation or the revocation of its charter; or (ix) in the
case of a Fund Manager which is an estate, the distribution by the fiduciary of
the estate's entire interest in the Series. Notwithstanding the foregoing, an
Event of Withdrawal shall not be deemed to have occurred as to a Fund Manager
under the preceding clause (iv) until 120 days shall have elapsed after
Notification has been given to the Unitholders in the Series of the event which,
with or without lapse of time, would constitute an event contemplated by such
clause.
"Extended Low Income Housing Commitment" means, for any Apartment Complex,
the agreement between the Local Limited Partnership and the housing credit
agency of the state in which the Apartment Complex is located which specifies
the Low Income Use Period for such Apartment Complex.
"Extended Use Period" means, for any Apartment Complex, the period beginning
at the conclusion of the Initial Compliance Period and ending on the later of
the date specified in the Extended Low Income Housing Commitment with respect to
such Apartment Complex or the date which is 15 years after the end of the
Initial Compliance Period.
"Front-End Fees" means fees and expenses paid by any party for any services
rendered during the organizational and acquisition phases of a Series, including
Organizational and Offering Expenses, Acquisition Fees, Acquisition Expenses,
interest on deferred fees and expenses and any other similar fees, however
designated. Front-End Fees which are to be paid pursuant to the Partnership
Agreement from installment payments on the Promissory Notes shall be paid pro
rata as the installment payments are received by the Series.
"Fund" means, collectively, WNC Housing Tax Credit Fund VI, L.P., Series 5,
and WNC Housing Tax Credit Fund VI, L.P., Series 6.
"Fund Manager" means WNC & Associates, Inc., or any Person or Persons who,
at the time of reference thereto, has been admitted as a successor to such Fund
Manager or as an additional Fund Manager, in each such Person's capacity as a
general partner. Restrictions placed on the rights and powers of the "Fund
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Manager" throughout the Partnership Agreement also serve to restrict the rights
and powers of the Affiliates of the Fund Manager.
"Government Assistance" means any form of Federal, state or local government
assistance provided to Properties or their tenants or owners, including mortgage
insurance, rental assistance payments, permanent mortgage financing, low
interest mortgage loans, interest reduction payments and Tax Credits.
"Gross Proceeds" means the gross proceeds of the Offering, determined
without inclusion of any interest or late charges paid on the Promissory Notes
and without reduction for any discounts for Designated Investors and Discount
Investors.
"HOME" means the Home Investment Partnership program established under Title
11 of the Cranston-Gonzalez National Affordable Housing Act.
"HTCF" means WNC Housing Tax Credit Fund, L.P.
"HTCFII" means WNC Housing Tax Credit Fund II, L.P.
"HTCFIII" means WNC Housing Tax Credit Fund III, L.P.
"HTCFIV Series 1" means WNC Housing Tax Credit Fund IV, L.P., Series 1.
"HTCFIV Series 2" means WNC Housing Tax Credit Fund IV, L.P., Series 2.
"HTCFV Series 3" means WNC Housing Tax Credit Fund V, L.P., Series 3.
"HTCFV Series 4" means WNC Housing Tax Credit Fund V, L.P., Series 4.
"HUD" means the United States Department of Housing and Urban Development or
any successor thereto.
"Historic Tax Credit" means the tax credit allowable pursuant to Section 47
of the Code for rehabilitation expenditures incurred with respect to certain
qualified buildings.
"IRS" means the Internal Revenue Service.
"Independent Expert" means a Person with no material current or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Series, and who is qualified to perform such
work.
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"Initial Compliance Period" means, for any Apartment Complex, a 15-year
period beginning with the year in which a Low Income Housing Credit is first
taken with respect to such Apartment Complex.
"Initial Unitholder" means John B. Lester, Jr.
"Interest" means the entire ownership interest of a Partner in a Series at
any particular time, including the right of such Partner to any and all benefits
to which a Partner of such Series may be entitled as provided in the Partnership
Agreement, together with the obligations of such Partner to comply with all the
terms and provisions of the Partnership Agreement. Reference to a majority, or
specified percentage, in interest of the Unitholders of a Series means
Unitholders whose combined Capital Contribution represents over 50%, or such
specified percentage, respectively, of the Capital Contribution of all
Unitholders in such Series.
"Invested Assets" means the sum of a Series' Investment in Local Limited
Partnership Interests and the Series' allocable share of the amount of the
mortgage loans on, and other debts related to, the Apartment Complexes owned by
such Local Limited Partnerships.
"Investment Date" means, with respect to any Series, the date of the final
admission into the Series of Additional Unitholders who purchased Units during
such Series.
"Investment in Local Limited Partnership Interests" means the amount of
Capital Contributions used by a Series to acquire Local Limited Partnership
Interests (except that, if a portion of the Series' investment in a Local
Limited Partnership is used to fund working capital reserves of the Local
Limited Partnership, there shall be excluded from this calculation any amount
which is used to fund working capital reserves which is in excess of 5% of Gross
Proceeds) plus Reserves of the Series, except that Reserves in excess of 5% of
Gross Proceeds shall not be included, but excluding Front-End Fees.
Notwithstanding the preceding, the total amount of Capital Contributions used to
fund Partnership Reserves or working capital reserves of the Local Limited
Partnerships which shall be included in Investment in Local Limited Partnership
Interests shall not exceed 5% of Gross Proceeds.
"Investor Closing" means a closing at which purchasers of Units are admitted
to a Series as Additional Unitholders pursuant to Section 3.3 of the Partnership
Agreement.
"Limited Partner" means any Unitholder.
194
<PAGE>
"Local General Partners" (whether or not capitalized) means the Persons who
are from time to time general partners (or managers in the cases of limited
liability companies) of Local Limited Partnerships, except that where reference
is made to Local General Partners in respect of any guaranties or undertakings
provided to a Series in connection with its investment in a Local Limited
Partnership, such term shall mean such Local General Partners at the date of
such investment or such other Persons (including Affiliates of such Local
General Partners) as actually provide such guaranties and undertakings.
"Local Limited Partnership" means a limited partnership or a limited
liability company which owns or is developing or rehabilitating one or more
rental housing projects to be qualified under Section 42(g) and/or Section 47 of
the Code.
"Local Limited Partnership Agreement" means, with respect to a Local Limited
Partnership, its agreement of limited partnership, or, in the case of a limited
liability company, its operating agreement, in either case as originally
executed and as amended from time to time.
"Local Limited Partnership Interest" means the limited partnership interest
of a Series in a Local Limited Partnership.
"Low Income Housing Credit" means the tax credit allowable under Section 42
of the Code for a qualified low income housing project.
"Low Income Units" means, for any Apartment Complex, the residential units
in the Apartment Complex intended for occupancy by tenants who satisfy the
set-aside test of Code Section 42(g)(1) applicable to the Apartment Complex and
the rent restriction test of Code Section 42(g)(2).
"Low Income Use Period" means the Initial Compliance Period and any
Extended Use Period.
"Major Repairs and Rehabilitation" means the repair, rehabilitation or
reconstruction of a Property where the aggregate costs of the repair,
rehabilitation or reconstruction exceed 10% of the fair market value of the
Property at the time of such services.
"Mortgage" (whether capitalized or not) means any mortgage, deed of trust,
or similar security instrument and, where the sense of the Prospectus so
requires, the indebtedness secured thereby.
"NASAA Guidelines" means the Statement of Policy Regarding Real Estate
Programs adopted by the North American Securities Administrators Association,
Inc., as in effect on the date of the Partnership Agreement.
195
<PAGE>
"NASD" means the National Association of Securities Dealers, Inc.
"1986 Act" means the Tax Reform Act of 1986.
"1987 Act" means the Revenue Act of 1987.
"1988 Act" means the Technical and Miscellaneous Revenue Act of 1988.
"1989 Act" means the Omnibus Budget Reconciliation Act of 1989.
"1990 Act" means the Omnibus Budget Reconciliation Act of 1990.
"1993 Act" means the Omnibus Budget Reconciliation Act of 1993.
"Net Proceeds" means the Gross Proceeds less Organizational and Offering
Expenses.
"Nonaccountable Expense Reimbursement" means the payment to be made to the
Dealer-Manager or an Affiliate of the Dealer-Manager pursuant to Section 5.6.3
of the Partnership Agreement.
"Nonrecourse Deductions" has the meaning given it in Treasury Regulation
Section 1.704-2(b)(1).
"Nonrecourse Liability" means a Series liability with respect to which no
Partner of the Series or Related Person bears the Economic Risk of Loss.
"Note Capital Contribution" means that portion of a Unitholder's Capital
Contribution, if any, paid in accordance with his Promissory Note.
"Notification" means a writing, containing the information required by the
Partnership Agreement to be communicated to any Person, personally delivered to
such Person or sent by registered, certified or regular mail, postage prepaid,
to such Person at the last known address of such Person. The date of personal
delivery or the date of mailing thereof, as the case may be, shall be deemed the
date of giving the Notification.
"Offering" means, with respect to a Series, the offering and sale of its
Units pursuant to the Prospectus.
"Offering Commencement Date" means, with respect to the initial Series of
Units, the effective date of the registration statement filed with the
Securities and Exchange Commission with respect to the Units, and, with respect
to subsequent Series of Units, such later date as may be specified by the
Prospectus.
196
<PAGE>
"Operating Cash Expenses" means, with respect to any fiscal period, the
amount of cash disbursed by a Series in that period in the ordinary course of
business for the payment of its operating expenses, such as expenses for
management, utilities, repair and maintenance, insurance, investor
communications, legal, accounting, statistical and bookkeeping services, use of
computing or accounting equipment, travel and telephone expenses, salaries and
direct expenses of Series employees while engaged in Series business, and any
other operational and administrative expenses necessary for the prudent
operation of the Series. Without limiting the generality of the foregoing,
Operating Cash Expenses shall include the actual cost of goods, materials and
administrative services used for or by the Series, whether incurred by the Fund
Manager, an Affiliate of the Fund Manager or a non-Affiliated Person in
performing the foregoing functions. As used in the preceding sentence, actual
cost of goods and materials means the actual cost of goods and materials used
for or by the Series and obtained from entities not Affiliated with the Fund
Manager, and actual cost of administrative services means the pro rata cost of
personnel (as if such persons were employees of the Series) associated
therewith, but in no event to exceed the Competitive amount.
"Organizational and Offering Expenses" means all expenses incurred in
connection with the formation of a Series, the registration and qualification of
its Units under Federal and state securities laws and the Offering, including
selling commissions, the Dealer-Manager Fee, the Nonaccountable Expense
Reimbursement
and all advertising expenses.
"Partner" means any Fund Manager or Unitholder.
"Partner Nonrecourse Debt" has the meaning given it in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" means the amount determined in
accordance with the principles of Treasury Regulation Section 1.704-2(i)(3).
"Partnership Agreement" means, with respect to a Series, its Agreement of
Limited Partnership as originally executed and as amended from time to time.
"Partnership Minimum Gain" means the amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Register" means the schedule listing the names and addresses of
all Unitholders of a Series together with the amounts of their respective
Capital Contributions which shall be maintained by the Fund Manager.
"Person" means any individual, partnership, corporation, trust or other
legal entity.
197
<PAGE>
"Prime Rate" means the prime or reference rate of interest from time to time
announced by National Bank of Southern California as being charged by it on
short-term unsecured loans to its most creditworthy customers.
"Prior Programs" has the meaning given to it under "Prior Performance
Summary."
"Profits" and "Losses" means, with respect to a Series, for each fiscal year
or other relevant period, an amount equal to the Series' taxable income or loss
for such year or period determined in accordance with Section 703(a) of the Code
(for this purpose all items of income, gain, loss or deduction required to be
stated separately pursuant to Section 703(a)(1) of the Code shall be included in
taxable income or loss), with the following adjustments: (i) any income of the
Series that is exempt from Federal income tax and not otherwise taken into
account in computing Profits or Losses pursuant to this definition shall be
added to such taxable income or loss; (ii) any expenditures of the Series
described in Section 705(a)(2)(B) of the Code or treated as such pursuant to
Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into
account in computing Profits or Losses pursuant to this definition, shall be
subtracted from such taxable income or loss; (iii) any adjustment pursuant to
Section 743(b) of the Code shall be allocated solely to the Partner to whom such
adjustment relates and shall not be taken into account in computing Profits or
Losses; (iv) any gain or loss which would have been realized by the Series on
the sale of assets distributed in kind to Partners, determined with reference to
the fair market value and the adjusted tax basis of such property for Federal
income tax purposes immediately prior to such distribution, shall be added to or
subtracted from such taxable income or loss; (v) notwithstanding any other
provision of this definition, any items that are specially allocated pursuant to
Section 4.4.3 of the Partnership Agreement shall not be taken into account in
computing Profits or Losses; and (vi) if required, the adjustments specified in
Section 4.4.2 of the Partnership Agreement shall be taken into account.
"Profits and Losses for Tax Purposes" means all items of Profits and Losses
as well as any items that are specifically excluded from Profits and Losses by
clause (v) of the definition thereof.
"Promissory Note" means the full recourse promissory note evidencing the
deferred installments, if any, of the Capital Contribution required to be made
for a Unit.
"Property Management Fee" means a fee paid for day-to-day professional
property management services.
"Prospectus" means the prospectus contained in the registration statement
filed with the Securities and Exchange Commission with respect to the Units, in
the final
198
<PAGE>
form in which said prospectus is filed with said Commission and as thereafter
supplemented pursuant to Rule 424 under the Securities Act of 1933, as amended.
"Purchase Price" means the price paid upon the purchase or sale of a
particular Local Limited Partnership Interest or Apartment Complex, as the case
may be, including the amount of Acquisition Fees and all liens and mortgages on
the Apartment Complex, but excluding points and prepaid interest.
"RD" means the United States Department of Agriculture, Rural Development,
or any successor thereto.
"Registration Date" means the date on which an assignment of Units has been
recorded on the Partnership Register.
"Related Person" means a Person having a relationship with a Partner that is
described in Treasury Regulation Section 1.752-4(b).
"Reserves" means amounts set aside by a Series for working capital or other
obligations of the Series and contingencies related to the ownership of Local
Limited Partnership Interests.
"Return on Investment" means, with respect to any Series, an annual,
cumulative, but not compounded, "return" to the Unitholders of such Series as a
class on their Adjusted Capital Contributions commencing for each such
Unitholder on the last day of the calendar quarter during which the Unitholder's
Capital Contribution is received by the Series, calculated at the following
annual rates: (i) 12% through December 31, 2008, and (ii) 6% for the balance of
the Series' term.
"Roll-Up" means a transaction involving the acquisition, merger, conversion
or consolidation, either directly or indirectly, of a Series and the issuance of
securities of a Roll-Up Entity. Such term does not include:
(i) any transaction if the securities of the Series have been for at least
twelve months traded on a national securities exchange or through the National
Association of Securities Dealers, Inc. Automated Quotation National Market
System; or
(ii) a transaction involving the conversion to corporate, trust or
association form of only the Series, if, as a consequence of the transaction,
there will be no significant adverse change in any of the following: (a) the
Unitholders' voting rights; (b) the term of existence of the Series; (c) the
terms of compensation of the Sponsor; or (d) the Series' investment objectives.
199
<PAGE>
"Roll-Up Entity" means the partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up transaction.
"S Corporation" has the meaning given it under "Who Should Invest;
Limitations on Use of Credits and Losses."
"SLP Affiliate" means an Affiliate of the Fund Manager in its capacity as a
special limited partner (or member in the case of limited liability companies)
of Local Limited Partnerships.
"Sale or Refinancing" means any Series or Local Limited Partnership
transaction not in the ordinary course of its business, including, without
limitation, sales, exchanges or other dispositions of Apartment Complexes, Local
Limited Partnership Interests and real or personal property of the Series, or
any borrowings or refinancings. Sale or Refinancing shall not include any
receipt of capital contributions by a Series or a Local Limited Partnership;
provided, however, that the receipt by a Series of a return of all or a portion
of its capital contribution to a Local Limited Partnership, however funded,
shall be treated as a Sale or Refinancing.
"Sale or Refinancing Proceeds" means all cash receipts of a Series arising
from a Sale or Refinancing less the following:
(i) the amount paid or to be paid in connection with or as an expense of
such Sale or Refinancing, and, with regard to damage recoveries or insurance or
condemnation proceeds, the amount paid or to be paid for repairs, replacements
or renewals resulting from damage to or partial condemnation of the affected
property;
(ii) the amount applied to the payment of the debts and obligations of the
Series; and
(iii) any Reserves funded with such proceeds.
"Series" means WNC Housing Tax Credit Fund VI, L.P., Series 5, and/or WNC
Housing Tax Credit Fund VI, L.P., Series 6.
"Soliciting Dealers" means the broker-dealers through whom the Units are
being offered and sold.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership, or any Person who will manage or
participate in the management of the Partnership, and any Affiliate of any such
Person, but does not include a Person whose only relation with the Partnership
is as that of an
200
<PAGE>
independent property manager whose only compensation is as such. "Sponsor" does
not include wholly independent third parties such as attorneys, accountants and
underwriters whose only compensation is for professional services rendered in
connection with the Offering. A Person may also be a "Sponsor" of the
Partnership by: (i) taking the initiative, directly or indirectly, in founding
or organizing the business or enterprise of the Partnership, either alone or in
conjunction with one or more Persons; (ii) receiving a material participation in
the Partnership in connection with the founding or organizing of the business of
the Partnership, in consideration of services or property, or both services or
property; (iii) having a substantial number of relationships and contacts with
the Partnership; (iv) possessing significant rights to control Partnership
properties (other than Local General Partners whose only association with the
Partnership is as such); (v) receiving fees for providing services to the
Partnership which are paid on a basis that is not customary in the industry; and
(vi) providing goods or services to the Partnership on a basis which was not
negotiated at arm's length with the Partnership.
"Subordinated Disposition Fee" means the fee payable by a Series to the Fund
Manager in connection with dispositions of Properties owned by Local Limited
Partnerships.
"Substitute Unitholder" means an assignee of a Unit in a Series who is
admitted to the Series as a limited partner.
"Syndicated Partnerships" has the meaning given it under "Management - WNC
& Associates, Inc."
"Syndication Expenses" means all expenditures classified as syndication
expenses pursuant to Treasury Regulation Section 1.709-2(b). Syndication
Expenses shall be taken into account by a Series under the Partnership Agreement
at the time they would be taken into account under the Series' method of
accounting if they were deductible expenses.
"Tax Credits" means any credit permitted under the Code against the Federal
income tax liability of any Partner as a result of activities or expenditures of
his Series or any Local Limited Partnership, including, without limitation, the
Low Income Housing Credit and the Historic Tax Credit.
"Temporary Investments" means United States Government securities,
securities issued or fully guaranteed by United States Government agencies,
certificates of deposit and time or demand deposits in, or repurchase agreements
constituting obligations of, commercial banks with deposits insured by the
Federal Deposit Insurance Corporation and other short-term, highly liquid
investments.
201
<PAGE>
"Treasury Regulation or Regulations" means the Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
"Unit" means the Interest of a Unitholder attributable to a Capital
Contribution of $1,000 (determined without regard to any discounts for
Designated Investors and Discount Investors).
"Unitholder" means any Person who is a limited partner of a Series, whether
an Initial Unitholder, an Additional Unitholder or a Substitute Unitholder at
the time of reference thereto, in such Person's capacity as a limited partner of
the Series.
"Voluntary Withdrawal" by the Fund Manager means, with respect to a Series,
any withdrawal initiated by the Fund Manager and includes, but is not limited
to, the commencement of an action in bankruptcy by or against such Fund Manager
and excludes any withdrawal accomplished as the result of a settlement, whether
or not incorporated in a decree of a court or administrative agency, between a
withdrawing Fund Manager and one or more of any remaining Fund Managers, a
majority-in-interest of the Unitholders or any regulatory agency whether a
Federal or state agency or a self-regulatory agency, having jurisdiction over
the affairs of the Series.
wncnat6-7/01.pro
202
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
WNC Housing Tax Credit Fund VI, L.P., Series 5
Independent Auditors' Report.............................................FS-1
Balance Sheet, April 30, 1997............................................FS-2
Notes to Balance Sheet...................................................FS-3
WNC & Associates, Inc.
Independent Auditors' Report.............................................FS-6
Consolidated Balance Sheets, February 28, 1997 (Unaudited)
and August 31, 1996....................................................FS-7
Notes to Consolidated Balance Sheet......................................FS-8
FS-i
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
WNC Housing Tax Credit Fund VI, L.P., Series 5
We have audited the accompanying balance sheet of WNC Housing Tax Credit Fund
VI, L.P., Series 5 (a California limited partnership) (the "Partnership") (a
development-stage enterprise) as of April 30, 1997. The balance sheet is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the accompanying balance sheet referred to above, presents
fairly, in all material respects, the financial position of WNC Housing Tax
Credit Fund VI, L.P., Series 5 (a California limited partnership) (a
development-stage enterprise) as of April 30, 1997 in conformity with generally
accepted accounting principles.
CORBIN & WERTZ
Irvine, California
May 5, 1997
FS-1
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5
(A California Limited Partnership)
(A Development-Stage Enterprise)
BALANCE SHEET
April 30, 1997
ASSETS
Cash $ 1,100
----------
$ 1,100
==========
LIABILITIES AND PARTNERS' CAPITAL
Commitments and contingencies (Note 2)
Partners' capital (Note 1):
General partner $ 100
Original limited partner 1,000
----------
Total partners' equity 1,100
$ 1,100
==========
nat6-6.497 See accompanying notes to balance sheet
FS-2
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5
(A California Limited Partnership)
(A Development-Stage Enterprise)
NOTES TO BALANCE SHEET
April 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
WNC Housing Tax Credit Fund VI, L.P., Series 5 (the "Partnership") was formed
pursuant to the laws of California on March 3, 1997 and has not commenced
operations. The Partnership was formed to invest primarily in other limited
partnerships which will own and operate multi-family housing complexes that will
qualify for low income housing credits.
The general partner is WNC & Associates, Inc. (the "General Partner").
Wilfred N. Cooper, Sr., through the Cooper Revocable Trust, owns 70% of the
outstanding stock of WNC & Associates, Inc. John B. Lester, Jr. is the original
limited partner of the Partnership and owns, through the Lester Family Trust,
30% of the outstanding stock of WNC & Associates, Inc.
Allocations Under the Terms of the Partnership Agreement
The General Partner has a 1% interest in operating profits and losses, taxable
income and losses and cash available for distribution from the Partnership. The
limited partners will be allocated the remaining 99% of these items in
proportion to their respective investments.
After the limited partners have received proceeds from a sale or refinancing
equal to their capital contributions and their return on investment (as defined
in the Partnership's Agreement of Limited Partnership) and the General Partner
has received a subordinated disposition fee (as described in Note 2 below), any
additional sale or refinancing proceeds will be distributed 90% to the limited
partners (in proportion to their respective investments) and 10% to the General
Partner.
Continued
FS-3
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5
(A California Limited Partnership)
(A Development-Stage Enterprise)
NOTES TO BALANCE SHEET - CONTINUED
April 30, 1997
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Partnership is offering up to 25,000 limited partnership units at $1,000 per
unit (the "Units"). The accompanying balance sheet does not include certain
Partnership legal, accounting, and other organization and offering costs paid
and to be paid by the General Partner and/or affiliates of the General Partner.
If the minimum offering amount of $1,400,000 is raised, the Partnership will be
required to reimburse the General Partner and/or its affiliates for such fees
out of the proceeds of the offering, up to certain maximum levels set forth
below. In the event the Partnership is unable to raise the minimum offering
amount, the General Partner will absorb all organization and offering costs.
The Units are being offered by WNC Capital Corporation, a wholly-owned
subsidiary of the General Partner.
If the minimum offering amount of $1,400,000 is raised, the Partnership will be
obligated to the General Partner or affiliates for certain acquisition,
management and other fees as set forth below:
Acquisition fees up to 7.0%, as defined, of the gross proceeds from the
sale of Units.
Reimbursement for organizational, offering, dealer-manager, selling and
acquisition expenses advanced by the General Partner or affiliates on
behalf of the Partnership. These reimbursements plus all other
organizational and offering expenses inclusive of sales commissions and
dealer-manager fees will not exceed 14.5% of the gross proceeds. No
amounts have been paid through April 30, 1997 to the General Partner or
affiliates. The estimated costs to be paid in the event the minimum
offering amount is raised are $203,000. Such amounts, except for
acquisition expenses estimated at $21,000, will be recorded as a
reduction to equity and recorded as liability.
An annual management fee equal to 0.2% of the invested assets (defined
by the Partnership's Agreement of Limited Partnership as the sum of the
Partnership's capital contributions to limited partnerships plus its
allocable percentage of the permanent financing of the limited
partnerships).
Continued FS-4
<PAGE>
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5
(A California Limited Partnership)
(A Development-Stage Enterprise)
NOTES TO BALANCE SHEET - CONTINUED
April 30, 1997
NOTE 2 - COMMITMENTS AND CONTINGENCIES, continued
A subordinated disposition fee in an amount equal to 1% of the sales
price of real estate sold. Payment of this fee is subordinated to the
limited partners receiving distributions equal to their capital
contributions and their return on investment (as defined in the
Partnership's Agreement of Limited Partnership) and is payable only if
services are rendered in the sales effort.
NOTE 3 - INCOME TAXES
The Partnership will not incur a provision for income taxes since all income
taxes and losses will be allocated to the Partners for inclusion in their
respective returns.
FS-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
WNC & Associates, Inc.
We have audited the consolidated balance sheet of WNC & Associates, Inc. and
subsidiary (the "Company") as of August 31, 1996. This consolidated balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on this consolidated balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of WNC & Associates,
Inc. and subsidiary as of August 31, 1996 in conformity with generally accepted
accounting principles.
CORBIN & WERTZ
Irvine, California
October 28, 1996
FS-6
<PAGE>
<TABLE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
ASSETS February 28, 1997 August 31, 1996
(Unaudited) (Audited)
<S> <C> <C>
Cash $ 608,809 $ 321,681
Fees receivable, net (Note 2) 652,371 665,547
Loans to property developers (Notes 3 and 6) 3,253,662 2,288,783
Offering costs advanced 36,246 139,989
Advances to partnerships 156,600 163,004
Income tax receivable 0 19,527
Property and equipment, net (Note 4) 261,161 236,887
Other assets (Notes 5 and 9) 298,718 315,253
---------- ----------
$5,267,567 $4,150,671
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes payable to bank (Note 6) 1,393,100 $ 500,000
Accounts payable and accrued expenses 154,305 129,747
Deferred income taxes (Note 7) 286,545 183,772
Income taxes payable 30,597 0
Interest payable (Note 6) 58,000 35,000
Due to partnership 0 68,510
Accumulated losses of partnerships in excess of
investments 575,982 544,395
Capitalized lease obligations (Note 8) 69,320 90,173
---------- ----------
Total liabilities 2,567,849 1,551,597
========== ==========
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, none issued
Common stock, no par value, 1,000,000 shares
authorized, 104,750 issued and outstanding in
1995 and 1996 177,677 177,677
Retained earnings 2,522,041 2,421,397
---------- ----------
Total stockholders' equity 2,699,718 2,599,074
---------- ----------
$5,267,567 $4,150,671
========== ==========
See accompanying notes to consolidated balance sheets
FS-7
</TABLE>
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS
February 28, 1997(Unaudited) and August 31, 1996 (Audited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
WNC & Associates, Inc. (a California corporation) (the "Company"), acts as a
corporate general partner and syndicator of both public and private placement
real estate partnerships (the "Partnerships"), which invest in apartment
complexes throughout the United States, the majority of which are government
assisted apartment complexes that qualify for low income housing tax credits.
The Company is the general partner of various Partnerships which own government
assisted housing apartment complexes (either directly or indirectly through
other partnership interests). The majority of the Partnerships' apartment
complexes are subsidized through various United States governmental low-income
housing programs. The Company's interest in the profits and losses of each
Partnership, as general partner, varies between one-quarter and five percent.
Principles of Consolidation
- ---------------------------
The accompanying consolidated balance sheet includes the accounts of the Company
and its wholly owned subsidiary, WNC Capital Corporation. WNC Capital
Corporation was incorporated on February 23, 1994 and is registered with the
Securities and Exchange Commission as a broker/dealer in securities. WNC Capital
Corporation does not carry customers' accounts or hold securities for the
accounts of its customers. WNC Capital Corporation provides wholesaling services
to affiliates of the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Interim Financial Statements
- ----------------------------
The financial information presented as of February 28, 1997 is prepared in
conformity with generally accepted accounting principles and such principles are
applied on a basis consistent with those reflected in the Annual Report for the
year ended August 31, 1996. The financial information presented herein as of
February 28, 1997 has been prepared by management without audit by independent
certified public accountants who do not express an opinion thereon. The balance
sheet presented as of February 28, 1997 has been derived from, but does not
include all the disclosures contained in the audited balance sheet as of August
31, 1996. The information furnished as of February 28, 1997 includes all
adjustments (consisting of only normal recurring accruals), which are, in the
opinion of management, necessary for a fair presentation of financial position
as of the interim date.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities, as well as disclosure of
contingent assets and liabilities at the date of these consolidated balance
sheets. Actual results could materially differ from those estimates.
FS-8
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS - CONTINUED
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Fair Value of Financial Instruments
- -----------------------------------
The consolidated balance sheets contain financial instruments whereby the fair
market value of the financial instruments could be different than those recorded
on a historical basis in the accompanying consolidated balance sheets. The
Company's financial instruments consist of cash, fees receivable, loans to
property developers, offering costs advanced, advances to partnerships, note
payable to bank, accounts payable and due to partnership. Management believes
that the carrying amounts of the Company's financial instruments generally
approximate their fair market values at February 28, 1997 (unaudited) and August
31, 1996 (audited). In the case of certain financial instruments which are
non-interest bearing, it was not practical to determine fair market values due
to the lack of a market for such financial instruments.
Concentration of Credit Risk
- ----------------------------
The Company, at times, maintains cash balances at certain financial institutions
in excess of the federally insured amounts.
Risks and Uncertainties
- -----------------------
Net Capital Requirements
WNC Capital Corporation, as a broker/dealer, is required under provisions of
Rule 15c-1 of the Securities and Exchange Act of 1934, to maintain a ratio of
aggregate indebtedness to net capital, as defined, not to exceed 15 to 1. The
basic concept of the rule is liquidity, its objective being to require a broker
or dealer have, at all times, sufficient liquid assets to cover its current
indebtedness. WNC Capital Corporation is also required to maintain a minimum net
capital of the greater of $5,000 or 2% of aggregate indebtedness, as defined. At
February 28, 1997 and August 31, 1996, WNC Capital Corporation had net capital
of $5,854 (unaudited) and $89,548 (audited), respectively, which are in excess
of the required minimum capital and a ratio of aggregate indebtedness to net
capital of .49 to 1 (unaudited) and .57 to 1 (audited), respectively.
Registration
WNC Capital Corporation must register with state departments which govern
compliance with securities laws in the states in which it does business. Various
regulatory requirements exist in each state with which WNC Capital Corporation
must comply. Because of the various compliance laws, there is a risk that one or
more regulatory authorities could determine that WNC Capital Corporation has not
complied with securities laws necessary for it to conduct business in a given
state. Regulatory actions, if ever taken, could have a material adverse effect
on WNC Capital Corporation's financial condition.
Fees Receivable
- ---------------
Fees receivable consist of syndication fees due from various Partnerships in
which the Company acts as general partner. Certain syndication fees are received
by the Company from the Partnerships as the limited partners make their capital
contributions to the Partnerships. Syndication fees that are scheduled to be
collected more than one year from the Company's year end are discounted to
reflect their present value.
FS-9
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS - CONTINUED
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Loans to Property Developers
- ----------------------------
Loans to property developers are comprised of amounts loaned or deposits made to
the general partners of limited partnerships in which the Partnerships have or
will have an equity interest. All such loans receivable are secured by the
respective general partners interest in the limited partnerships. In the event a
property is not acquired, deposits may not be refunded to the Company.
Accordingly, such amounts are written off in the period determined by management
that a property will not be acquired and the deposit will not be refunded. The
Compan's historical losses related to its loans to property developers have
been minimal.
Offering Costs Advanced
- -----------------------
Offering costs advanced represent funds that the Company advances to the
Partnerships for certain costs and expenses to produce the offering materials
and to qualify the Partnership interests for sale under the various state or
federal securities laws. Such advances are repaid to the Company out of the
Partnerships' initial capital proceeds and may be subject to limitations as
defined in the individual partnership agreements.
Organization Costs
- ------------------
Organization costs consist principally of legal and regulatory fees incurred to
incorporate WNC Capital Corporation and obtain the necessary approvals to
commence operations. These costs are being amortized over a five year period on
a straight-line basis and are included in other assets in the accompanying
consolidated balance sheets. Accumulated amortization at February 28, 1997 and
August 31, 1996 was $8,387 (unaudited) and $7,400 (audited), respectively.
Property and Equipment
- ----------------------
Property and equipment and improvements which extend the economic life of assets
are recorded at cost and are depreciated using the straight-line method over the
estimated useful life of the related asset, generally from three to five years.
Leasehold improvements and capitalized leases are amortized over the shorter of
the life of the lease or estimated useful life of the related asset.
Investments in Partnerships
- ---------------------------
The Company records its investment in the Partnerships using the equity method,
which recognizes the Company's proportionate share of income or loss as an
increase or decrease in the investment in the Partnership. As the Company acts
as the General Partner, losses in excess of the Company's investment are
recorded as Accumulated Losses of Partnerships in Excess of Investments.
FS-10
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS - CONTINUED
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting For Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that includes the
enactment date.
NOTE 2 - FEES RECEIVABLE
Aggregate annual future minimum collections as of February 28, 1997
unaudited) and August 31, 1996 (audited) are as follows:
FS-11
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS - CONTINUED
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
NOTE 2 - FEES RECEIVABLE, continued
February 28, 1997 August 31, 1996
(Unaudited) (Audited)
1997 $536,595 $555,655
1998 150,000 150,000
-------- --------
Total 686,595 705,655
Less: Discounts recorded on fees receivable
at an effective rate ranging from 8%
to 9.5% (34,224) (40,108)
-------- --------
Present value of future minimum fees
receivable $652,371 $665,547
======== ========
At February 28, 1997 (unaudited), fees receivable from four Partnerships
represented 29%, 19%, 12% and 12%, respectively, of total fees receivable. At
August 31, 1996 (audited), fees receivable from four Partnerships represented
24%, 17%, 13% and 11%, respectively, of total fees receivable
NOTE 3 - LOANS TO PROPERTY DEVELOPERS
Loans to property developers consist of the following:
February 28, 1997 August 31, 1996
(Unaudited) (Audited)
Notes receivable due on demand,
non-interest bearing $1,483,161 $777,386
Notes receivable due on demand with interest
at the Compan's borrowing rate 46,659 46,659
Notes receivable with interest at the Company's
borrowing rate. The 1996 amount is due May
1997 (audited). The 1997 amount is due at
various dates from May 1997 to September
1997 (unaudited) 962,196 400,000
Notes receivable past due, generally with interest
at the Company's borrowing rate 761,646 1,064,738
--------- ----------
$3,253,662 $2,288,783
========== ==========
The Company's borrowing rate at February 28, 1997 and August 31, 1996 was 9.75%
(unaudited) and 10.75% (audited), respectively.
The Company has loans to three property developers at February 28, 1997
(unaudited) which represent 31%, 14% and 13% respectively, of total loans to
property developers. The Company has loans to three property developers at
August 31, 1996 (audited) which represent 29%, 27% and 12%, respectively, of
total loans to property developers.
FS-12
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS - CONTINUED
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
February 28, 1997 August 31, 1996
(Unaudited) (Audited)
Furniture, fixtures and computer software $ 363,341 $ 318,067
Automobiles 23,388 23,388
Leasehold improvements 36,321 36,321
Equipment subject to capital leases (see Note 8) 157,046 157,046
--------- --------
580,096 534,822
Less accumulated depreciation and amortization (318,935) (297,935)
--------- ---------
$ 261,161 $ 236,887
========= =========
NOTE 5 - OTHER ASSETS
Other assets consist of the following:
February 28, 1997 August 31, 1996
(Unaudited) (Audited)
Real estate joint venture costs $181,674 $169,109
Due from stockholders (Note 9) 81,206 86,000
Prepaid insurance 0 28,000
Deposits, advances and other 28,076 24,747
Organization costs 7,762 7,397
$298,718 $315,253
NOTE 6 - NOTES PAYABLE
On October 15, 1996, the Company renewed its line-of-credit with a bank.
The renewed line-of-credit allows for borrowings of up to $3,600,000 at the
bank's index rate plus 1.5% (10.25% (audited) at August 31, 1996). Interest is
payable monthly. The line-of-credit is secured by assignment of the Company's
interests in Partnership properties to be acquired for which amounts are
borrowed and is personally guaranteed by the majority stockholder of the
Company. The line-of-credit matured January 15, 1997 and requires the Company to
maintain a certain debt to net worth ratio level and profitable operations for
future years.
Unaudited - On January 15, 1997, the Company established a line-of-credit
with a bank which allows for borrowings of up to $1,500,000 at the bank's index
rate plus 1.5% (9.75% at February 28, 1997). This line of credit was used to
repay the amount outstanding on the $3,600,000 line of credit. Interest is
payable monthly. The line of credit is also personally guaranteed by the
majority stockholder of the Company and matures April 15, 1997.
FS-13
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS - CONTINUED
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
NOTE 7 - INCOME TAXES
The deferred tax liability of $286,545 (unaudited) and $183,772 (audited)
as of February 28, 1997 and August 31, 1996, respectively, represents primarily
the tax effect of the temporary difference between syndication fees recognized
on the accrual basis for financial statement purposes and on the cash basis for
tax return purposes.
NOTE 8- COMMITMENTS AND CONTINGENCIES
Leases
The Company lease office space, automobiles and furniture under operating
leases and certain equipment under capital leases. Aggregate monthly capital
lease payments amount to $3,631 (audited) as of August 31, 1996. The leases are
non--cancelable and require future minimum lease payments as of August 31, 1996
(audited) as follows:
Capitalized Operating
Leases Leases
Fiscal year:
1997 $43,571 $109,548
1998 43,571 96,857
1999 17,940 92,412
2000 1,494 15,402
______ ______
Total minimum lease payments $106,576 $314,219
========
Less amounts representing interest at rates
ranging from 9.5% to 12.5% (16,403)
________
Present value of future minimum capitalized
lease obligations $90,173
=======
Guarantees
The Company is a guarantor of certain bank loans made to the
Partnerships. The aggregate amounts outstanding on these notes was $50,000
(unaudited) and $50,000 (audited) as of February 28, 1997 and August 31, 1996,
respectively. These loans will be repaid by the Partnerships as the limited
partners make their capital contributions to the respective Partnerships.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company entered into an equity participation agreement with a key
officer of the Company and his spouse. This agreement provided for an investment
of $80,000 by the Company to acquire a 50% interest in certain property, which
was later converted into rental property, owned by the key officer and his
spouse. Pursuant to terms of this agreement, all income and losses arising from
the operations of the rental property, including the allocation of income and
losses upon a sale or refinance shall be allocated 50% to the Company and 50% to
the key officer and his spouse. During fiscal 1995, the investment was written
down to $65,000 to reflect current market conditions.
FS-14
<PAGE>
WNC & ASSOCIATES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS - CONTINUED
February 28, 1997 (Unaudited) and August 31, 1996 (Audited)
NOTE 9 - RELATED PARTY TRANSACTIONS, continued
In April, 1993, the Company's majority stockholder, who is an officer,
borrowed $55,000. This note bears interest at 7.5% per annum. The note's
maturity date was extended along with accrued interest to March 31, 1997. The
note, together with accrued interest, is included in other assets in the
accompanying consolidated balance sheets.
During 1994, an officer and stockholder of the Company borrowed $25,000.
This note bears interest at 7.5% per annum. The note's maturity date was
extended along with accrued interest to March 31, 1997. The note, together with
accrued interest, is included in other assets in the accompanying consolidated
balance sheets.
FS-15
<PAGE>
EXHIBIT A
PRIOR PERFORMANCE TABLES
The tables set forth below present financial information with respect
to programs which were sponsored by the Sponsor. Each of these programs is
considered to have investment objectives similar to those of the Fund in that
they each own interests in local limited partnerships which own properties
generating low income housing credits. None of these tables are covered by the
reports of independent public accountants set forth in this document.
For additional information as to the investment objectives and policies
of such prior programs see "Prior Performance Summary." Additional information
concerning prior performance is included in Part II of the Registration
Statement of the Fund and for the public programs in the Form 10-K annual
reports. Copies of these 10-K Forms are available to any investor upon request
to the Sponsor. Any such request should be directed to 3158 Redhill Avenue,
Suite 120, Costa Mesa, California 92626.
The purpose of the tables is to provide information on the prior
performance of these partnerships so as to permit a prospective purchaser of the
Units to evaluate the experience of the Sponsor in sponsoring such limited
partnerships. The tables consist of:
Table I Experience in Raising and Investing Funds
Table II Compensation to Sponsor
Table III Operating Results of Prior Programs
Tables IV and V have been omitted since none of the prior programs
which were sponsored by the Sponsor have sold their properties or completed
operations.
Definitions
The following terms used in the prior performance tables have the following
meanings:
A-1
<PAGE>
"Acquisition Cost" includes all costs related to the acquisition of partnership
interests, including equity contributions, acquisition and selection fees
payable to the general partners and other fees and expenses incident to the
acquisition of partnership interests.
"Capital Contributions" represents the contributions by investors in the
prior partnerships.
"GAAP" means generally accepted accounting principles.
"Months to Invest 90% of Amount Available for Investment" means the length of
time, in months, from the offering date to the date of the closing of properties
which, in the aggregate, represented the investment commitment of 90% of the
amount available for investment.
"Percent leverage" means mortgage financing divided by total acquisition costs.
IT SHOULD NOT BE ASSUMED THAT INVESTORS IN THIS OFFERING WILL
EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE
PARTNERSHIPS DESCRIBED IN THE FOLLOWING TABLES. INVESTORS WILL NOT HAVE ANY
INTEREST IN ANY OF THE PARTNERSHIPS DESCRIBED IN THE TABLES OR IN ANY OF THE
PROPERTIES OWNED BY THE LOCAL LIMITED PARTNERSHIPS IN WHICH THOSE PARTNERSHIPS
HAVE INVESTED AS A RESULT OF THE ACQUISITION OF UNITS.
A-2
<PAGE>
TABLE I
TABLE I provides information regarding the raising and investing of funds by
partnerships sponsored by the Sponsor which raised funds during the three-year
period ended December 31, 1996. The table presents the aggregate dollar amount
of the offering, the percentage of dollars raised which were used to pay
offering costs, establish reserves and acquire investments, as well as
information regarding percent of leverage and the timing for both raising and
investing funds. The information concerns investor capital contributions as the
sole source of funds for investment and excludes the nominal capital
contributions by the general partners.
A-3
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND
INVESTING FUNDS (January 1,
1994 - December 31, 1996)
CHTC III % HTCF IV-1 %
<S> <C> <C>
Dollar amount offered $30,000,000 $10,000,000
=========== ===========
Dollar amount raised 18,000,000 100.0 10,000,000 100.0
Less offering expenses:
Selling commissions &
discounts 1,440,000 8.0 750,000 7.5
paid to non-affiliates 909,000 5.0 686,300 6.9
Organizational expenses (a)
Reserves 855,000 4.8 280,600 2.8
------- --- ------- ---
Percent invested as of
close of offering 14,796,000 82.2 8,283,100 82.8
Acquisition costs:
Prepaid items and fees
related to purchase of
property 104,000 0.6 34,100 0.3
Cash down payments (b) 13,072,000 72.6 7,449,000 74.5
Acquisition fees 1,620,000 9.0 800,000 8.0
Other ------ -.- ------ -.-
---------- --- ---------- ---
Total acquisition cost 14,796,000 82.2 8,283,100 82.8
Percentage leverage (mortgage
financing divided by total
acquisition cost) 64% 77%
Date offering began 2/17/93 10/20/93
Length of offering (months) 17 9
Months to invest 90% of
amount available for
investment (measured from
beginning of offering) 17 9
- -------------------------------
<FN>
(a) Consists of estimated legal, accounting, printing and other
organization and offering expenses paid by the partnership directly or
indirectly through the sponsor.
(b) Represents the capital contributions of the partnership paid or the
required payments to be paid to the local limited partnerships.
</FN>
</TABLE>
A-4
UNAUDITED
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND
INVESTING FUNDS (January 1,
1994 - December 31, 1996)
HTCF IV-2 CHTC IV-4
% %
<S> <C> <C>
Dollar amount offered $20,000,000 $25,000,000
=========== ===========
Dollar amount raised 15,241,000 100.0 11,099,000 100.0
Less offering expenses:
Selling commissions &
discounts 1,000,500 6.6 554,000 4.9
paid to non-affiliates (c) 969,900 6.4 827,000 7.5
Organizational expenses (a)
Reserves 241,600 1.7 387,000 3.5
------- --- ------- ---
Percent invested as of
close of offering 13,029,000 85.3 9,331,000 84.1
Acquisition costs:
Prepaid items and fees
related to purchase of
property 136,000 0.9 80,000 0.7
Cash down payments (b) 11,835,000 77.5 8,590,000 77.4
Acquisition fees 1,058,000 6.9 661,000 6.0
Other ------ -.- ------ -.-
----------- --- ----------- ---
Total acquisition cost 13,029,000 85.3 9,331,000 84.1
Percentage leverage (mortgage
financing divided by total
acquisition cost) 66% 60%
Date offering began 9/94 9/94
Length of offering (months) 13 12
Months to invest 90% of
amount available for
investment (measured from
beginning of offering) 17 15
- -------------------------------
<FN>
(a) Consists of estimated legal, accounting, printing and other
organization and offering expenses paid by the partnership directly or
indirectly through the sponsor.
(b) Represents the capital contributions of the partnership paid or the
required payments to be paid to the local limited partnerships.
(c) Selling commissions were first paid to an affiliated broker-dealer
which reallowed all selling commissions to non-affiliates.
</FN>
</TABLE>
A-5
UNAUDITED
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND
INVESTING FUNDS (January 1,
1994 - December 31, 1996)
HTCF V-3 % HTCF V-4 (d)(e) % CHTC IV-5 (d) %
<S> <C> <C> <C>
Dollar amount offered $25,000,000 $25,000,000 25,000,000
=========== =========== ==========
Dollar amount raised 17,559,000 100.0 8,386,800 100.0 6,253,000 100.0
Less offering expenses:
Selling commissions &
discounts 1,058,700 6.0 612,500 7.3 296,000 4.7
paid to non-affiliates (c) 1,062,900 6.1 490,800 5.9 475,000 7.6
Organizational expenses (a)
Reserves 349,000 2.0 550,700 6.6 1,462,500 23.4
------- --- ------- --- --------- ----
Percent invested as of
close of offering 15,088,400 85.9 6,732,800 80.2 4,019,500 64.3
Acquisition costs:
Prepaid items and fees
related to purchase of
property 80,000 0.5 60,000 0.7 8,000 0.1
Cash down payments (b) 14,000,000 79.7 6,090,100 72.6 3,689,500 59.1
Acquisition fees 1,008,400 5.7 582,700 6.9 322,000 5.1
Other ------ -.- ---- -.- ----- -.-
----------- --- -------- --- ----- ---
Total acquisition cost 15,088,400 85.9 6,732,800 80.2 4,019,500 64.3
Percentage leverage (mortgage
financing divided by total
acquisition cost) 70% 56% 49%
Date offering began 7/95 7/96 11/95
Length of offering (months) 11 (e) 7
Months to invest 90% of
amount available for
investment (measured from 21 (d) (d)
beginning of offering)
- -------------------------------
<FN>
(a) Consists of estimated legal, accounting, printing and other
organization and offering expenses paid by the partnership directly or
indirectly through the sponsor.
(b) Represents the capital contributions of the partnership paid or the
required payments to be paid to the local limited partnerships.
(c) Selling commissions were first paid to an affiliated broker-dealer
which reallowed all selling commissions to non-affiliates.
(d) Not all properties have been identified.
(e) The offering was continuing as of December 31, 1996.
</FN>
</TABLE>
A-6
UNAUDITED
<PAGE>
<TABLE>
TABLE I
EXPERIENCE IN RAISING AND
INVESTING FUNDS (January 1,
1994 - December 31, 1996)
P R I V A T E O F F E R I N G S
Two One
Partnerships Partnership
Organized in Organized in
1994 % 1995 %
<S> <C> <C>
Dollar amount offered $13,177,000 $15,000,000
=========== ===========
Dollar amount raised 13,177,000 100.0 15,000,000 100.0
Less offering expenses:
Selling commissions & discounts
paid to non-affiliates (c) 475,866 3.6 337,500 2.2
Organizational expenses (a) 354,314 2.7 337,500 2.2
Reserves 391,800 3.0 591,000 4.0
------- --- ------- ---
Percent invested as of
close of offering 11,955,020 90.7 13,734,000 91.6
Acquisition costs:
Prepaid items and fees
related to purchase of
property ------ -.- 150,000 1.0
Cash down payments (b) 11,141,539 84.5 12,984,000 86.6
Acquisition fees 655,000 5.0 600,000 4.0
Other 158,481 1.2 ----- -.-
------- --- ---------- ---
Total acquisition cost 11,955,020 90.7 13,734,000 91.6
Percent leverage (mortgage
financing divided by total
acquisition cost) 72% 60%
Date offering began Various 3/95
Length of offering (months) 3 7
Months to invest 90% of
amount available for
investment (measured from
beginning of offering) 3 11
- ------------------------------
<FN>
(a) Consists of estimated legal, accounting, printing and other
organization and offering expenses paid by the partnership directly or
indirectly through the sponsor.
(b) Represents the capital contributions of the partnership paid or the
required payments to be paid to the local limited partnerships.
(c) Selling commissions were first paid to an affiliated broker-dealer
which reallowed all selling commissions to non-affiliates
</FN>
</TABLE>
A-7
UNAUDITED
<PAGE>
TABLE II
TABLE II presents information concerning the cumulative compensation paid to the
Sponsor for the period from January 1, 1994 to December 31, 1996 with respect to
programs presented in TABLE I and on an aggregate basis with respect to all
other programs which have been sponsored by the Sponsor. None of the programs
presented in TABLE II have been liquidated, nor have there been any sales or
refinancing of any of the programs' investments.
A-8
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR
(January 1, 1994 - December 31, 1996)
HTCF V-3 HTCF V-4 (a) CHTC IV-5
<S> <C> <C> <C>
Date offering commenced 7/95 7/96 11/95
Dollar amount raised $17,559,000 $8,386,800 $6,253,000
Amount paid to sponsor from
proceeds of offering: (b)
Underwriting fees 0 0 0
Acquisition fees 1,008,400 582,700 322,000
Syndication fee 0 0 0
Other (c) 0 106,000 43,000
Dollar amount of cash generated
from (used in) operations before
deducting payments to sponsor 561 4,010 53,439
Amount paid to sponsor from
operations: 0 0 0
Property management fees 0 0 0
Partnership management fees 0 0 0
Reimbursements 0 0 0
Leasing commissions
Dollar amount of property sales and
refinancing before deducting
payments
to sponsor: 0 0 0
Cash 0 0 0
Notes
Amount paid to sponsor from property sales and refinancing:
Real estate commissions 0 0 0
Incentive fee 0 0 0
Other 0 0 0
- ------------------------------------
<FN>
(a) The offering was continuing as of December 31, 1996.
(b) Represents amounts paid to sponsor which were not reallowed to
non-affiliates.
(c) Represents amounts retained by the sponsor and not reallowed to
non-affiliates.
</FN>
</TABLE>
A-9
UNAUDITED
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR
(January 1, 1994 - December 31, 1996)
HTCF IV-1 HTCF IV-2 CHTC IV-4
<S> <C> <C> <C>
Date offering commenced 10/93 9/94 9/94
Dollar amount raised $10,000,000 $15,241,000 $11,099,000
Amount paid to sponsor from
proceeds of offering: (a)
Underwriting fees 0 0 0
Acquisition fees 800,000 1,058,000 661,000
Syndication fee 0 0 0
Other (b) 0 0 126,000
Dollar amount of cash generated
from (used in) operations before
deducting payments to sponsor 119,631 199,830 168,490
Amount paid to sponsor from
operations: 0 0 0
Property management fees 15,000 101,800 45,000
Partnership management fees 0 0 0
Reimbursements 0 0 0
Leasing commissions
Dollar amount of property sales and
refinancing before deducting
payments
to sponsor: 0 0 0
Cash 0 0 0
Notes
Amount paid to sponsor from property sales and refinancing:
Real estate commissions 0 0 0
Incentive fee 0 0 0
Other 0 0 0
- ------------------------------------
<FN>
(a) Represents amounts paid to sponsor which were not reallowed to
non-affiliates
(b) Represents amounts retained by the sponsor and not reallowed to
non-affiliates.
</FN>
</TABLE>
A-10
UNAUDITED
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR
(January 1, 1994 - December 31, 1996)
CHTC III Other Public
Programs (a)
<S> <C>
Date offering commenced 2/93 Various
Dollar amount raised $18,000,000 $23,221,500
Amount paid to sponsor from
proceeds of offering: (c)
Underwriting fees 0 0
Acquisition fees 868,500 283,746
Syndication fee 0 0
Dollar amount of cash generated
from (used in) operations before
deducting payments to sponsor 269,058 9,383
Amount paid to sponsor from
operations: 0 0
Property management fees 200,000 270,065
Partnership management fees (b) 0 0
Reimbursements 0 0
Leasing commissions
Dollar amount of property sales and
refinancing before deducting
payments
to sponsor: 0 0
Cash 0 0
Notes
Amount paid to sponsor from property sales and refinancing:
Real estate commissions 0 0
Incentive fee 0 0
Other 0 0
- ------------------------------------
<FN>
(a) Includes six public programs.
(b) Partnership management fees were paid from partnership reserves in the
instances where amounts paid to sponsor from operations exceed dollar amount of
cash generated from operations.
(c) Represents amounts paid to sponsor which were not reallowed to
non-affiliates
</FN>
</TABLE>
A-11
UNAUDITED
<PAGE>
<TABLE>
TABLE II
COMPENSATION TO SPONSOR
(January 1, 1994 - December 31, 1996)
----------------------------------------P R I V A T E O F F E R I N G S---------------------
Two One All
Partnerships Partnership Other
Organized in Organized in Private
1994 1995 Partnerships (a)
<S> <C> <C>
Date offering commenced Various 3/95 1993 & prior
Dollar amount raised $13,177,000 $15,000,000 N/A
Amount paid to sponsor from
proceeds of offering: (c)
Underwriting fees 0 0 N/A
Acquisition fees 655,000 600,000 N/A
Syndication fee 0 0 N/A
Dollar amount of cash generated
from (used in) operations before
deducting payments to sponsor (217,838) 470,148 N/A
Amount paid to sponsor from operations:
Property management fees 0 0 0
Partnership management fees (b) 15,000 0 282,100
Reimbursements 0 0 0
Leasing commissions 0 0 0
Dollar amount of property sales and refinancing
before deducting payments to
sponsor:
Cash 0 0 0
Notes 0 0 0
Amount paid to sponsor from property sales and refinancing:
Real estate commissions 0 0 0
Incentive fee 0 0 0
Other 0 0 0
- ------------------------------------
<FN>
(a) Includes 43 private programs sponsored since January 1984.
(b) Partnership management fees were paid from partnership reserves in the
instances where amounts paid to sponsor from operations exceed dollar amount of
cash generated from operations.
(c) Represents amounts paid to sponsor which were not reallowed to
non-affiliates
</FN>
</TABLE>
A-12
UNAUDITED
<PAGE>
TABLE III
TABLE III presents the operating results for all partnerships sponsored by the
Sponsor which closed during the five years ended December 31, 1996. The prior
partnerships are structured as investment partnerships acquiring interests in
operating partnerships. The investment partnerships account for such investments
using the equity method of accounting which recognizes each of such
partnership's pro rata share of the operating partnership's total income or
loss. Revenues generated by the investment partnerships consist substantially of
interest on short-term investments. This interest income generally decreases
after the initial two years of operations as funds available for investment
decrease. This decrease in funds arises from the investment partnership's
payments of capital contributions due.
For the prior public partnerships presented and WNC Institutional and WNC
Institutional II, which report on a GAAP basis, "Cash generated (or used) from
operations" is per the program's Statement of Cash Flows. The remaining prior
private programs maintain their books and records on the tax basis of accounting
and not on the basis of generally accepted accounting principles (GAAP), and
"Cash generated (or used) from operations" for such programs is per their
respective books and records. The significant difference is that depreciation
expense on a tax basis as compared to a GAAP basis is greater in the early years
of operations.
Other information included in the table includes data on cash generated from
operations and tax and cash distribution information per $1,000 invested,
including Tax Credit allocations.
A-13
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
------------------------------------------- HTCF II ----------------------------------------\
1992 1993 1994 1995 1996
------- ------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Gross revenue $ 23,054 $ 11,193 $ 9,287 11,368 10,157
Less:
Operating expenses 145,784 154,060 157,875 161,151 212,809
Interest 0 0 0 0 0
Depreciation and amortization 23,584 22,079 23,905 23,266 21,352
Equity in losses in local partnerships 551,431 634,893 544,630 602,163 568,488
-------- -------- --------- ------- -------
Net income (loss) - GAAP basis (697,745) (799,839) (717,123) (777,212) (792,492)
Taxable loss from operations (824,186) (888,131) (818,566) (858,138) (841,068)
Cash generated (used) from operations 6,481 (8,894) 40,620 (5,443) (41,630)
Cash generated from sales 0 0 0 0 0
Cash generated from refinancing 0 0 0 0 0
Less: Cash distributions to investors 0 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items 6,481 (8,894) 40,620 (5,443) (41,630)
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (116) (125) (116) (121) ( 119)
From gain on sale 0 0 0 0 0
Federal tax credits 121 138 146 145 145
California tax credits 0 0 0 0 0
Cash distributions to investors 0 0 0 0 0
Amount (in percentage terms) remaining
invested in program properties at end of
year (original total acquisition costs of
properties retained divided by total
original acquisition costs of all
properties) 100 100 100 100 100
- --------------------------------
</TABLE>
A-14
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
/--------------------------------------------------- CHTC II -------------------------\
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Gross revenue $ 72,092 $ 133,580 $ 61,226 $ 52,399 $ 24,231
Less:
Operating expenses 105,481 158,082 355,671 251,425 234,202
Interest 2,157 0 0 0 0
Depreciation and amortization 32,961 52,480 47,565 54,836 54,836
Equity in losses in local partnerships 731,542 1,081,114 1,194,095 1,579,652 1,128,793
--------- --------- --------- --------- ---------
Net income (loss) - GAAP basis (800,049) (1,158,096) (1,536,105) (1,833,514) (1,393,600)
Taxable loss from operations (794,969) (1,208,709) (1,425,376) (2,079,433) (1,851,598)
Cash generated (used) from operations 3,637 (221,444) 42,033 (68,921) (46,174)
Cash generated from sales 0 0 0 0 0
Cash generated from refinancing 0 0 0 0 0
Less: Cash distributions to investors 0 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items 3,637 (221,444) 42,033 (68,921) (46,174)
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (a)(114) (68) (85) (116) (103)
From gain on sale 0 0 0 0 0
Federal tax credits (a)52 74 85 107 116
California tax credits (a)129 104 109 99 37
Cash distributions to investors (b)44 0 0 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition
costs of properties retained
divided by total original
acquisition costs of all
properties 100 100 100 100 100
--------------------------------
<FN>
(a) Tax losses and tax credits allocated to an investor in 1992 (second
year of operations) is dependent upon an investor's entry date. Amount shown is
that allocated to initial investors.
(b) This amount was distributed from CHTCII's reserves to investors who
purchased their units prior to January 1, 1991.
</FN>
</TABLE>
A-15
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
/---------------------------------- HTCF III ------------------------------\
1992(a) 1993 1994 1995 1996
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross revenue $ 45,236 $ 137,116 $ 87,521 $ 57,741 $ 16,756
Less:
Operating expenses 13,036 120,054 313,134 314,320 394,781
Interest 679 0 0 0 0
Depreciation and amortization 3,394 24,478 45,724 47,176 47,176
Equity in losses in local
partnerships 68,933 779,251 1,323,487 1,312,540 1,406,638
-------- --------- ---------- --------- ---------
Net income (loss) - GAAP basis (40,806) (786,667) (1,594,824) (1,616,295) (1,831,839)
Taxable loss from operations (36,895) (850,051) (1,594,118) (1,715,667) (1,820,369)
Cash generated (used) from operations 53,333 (393,615) (38,224) (16,170) (73,931)
Cash generated from sales 0 0 0 0 0
Cash generated from refinancing 0 0 0 0 0
Less: Cash distributions to investors 0 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items 53,333 (393,615) (38,224) (16,170) (73,931)
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)(4) (b)(56) (105) (113) (120)
From gain on sale 0 0 0 0 0
Federal tax credits (b)4 (b)68 119 152 157
California tax credits 0 0 0 0 0
Cash distributions to investors 0 0 0 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year (original
total acquisition costs of
properties retained divided by
total original acquisition costs
of all properties) 100 100 100 100 100
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first two
years is dependent upon an investor's entry date. Amount shown is that allocated
to initial investors.
</FN>
</TABLE>
A-16
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
/----------------------------CHTC III--------------------------\
1993(a) 1994 1995 1996
------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross revenue $ 22,885 $ 156,271 $ 145,959 $ 74,947
Less:
Operating expenses 7,204 86,306 193,916 214,737
Interest 0 0 0 0
Depreciation and amortization 0 41,757 57,466 57,933
Equity in losses in local partnerships 33,260 352,511 1,155,114 (1,132,216)
-------- --------- --------- -----------
Net income (loss) - GAAP basis (17,579) (324,303) (1,260,537) (1,329,939)
Taxable loss from operations (30,475) (388,247) (1,279,818) (1,523,381)
Cash generated (used) from operations (9,831) (225,005) 437,400 (143,337)
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
Less: Cash distributions to investors 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items (9,831) (225,005) 437,400 (143,337)
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)(4) (b)(21) (71) (84)
From gain on sale 0 0 0 0
Federal tax credits (b)6 (b)32 95 112
California tax credits 0 (b)48 85 85
Cash distributions to investors 0 0 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs
of properties retained divided
by total original acquisition
costs of all properties) 100 100 100 100
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first two
years is dependent upon an investor's entry date. Amount shown is that allocated
to initial investors.
</FN>
</TABLE>
A-17
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
/---------HTCF IV-1----------\ /----------HTCT VI-2-----------\
1994(a) 1995 1996 1994(a) 1995 1996
------ ------- ------- ------ ------- ----
<S> <C> <C> <C> <C> <C> <C>
Gross revenue $85,261 $66,645 $25,046 $ 3,475 $179,927 $161,610
Less:
Operating expenses 47,149 53,536 19,099 27,269 57,965 60,777
Interest 0 0 0 0 39,148 5,350
Depreciation and amortization 20,797 30,926 29,440 1,638 26,208 40,109
Equity in losses in local partnerships 413,316 574,538 392,400 240,698 628,521 628,631
-------- ------- ------- ------- ------- -------
Net income (loss)- GAAP basis (396,001) (592,355) (415,893) (266,130) (571,915) (573,257)
Taxable loss from operations (417,185) (874,044) (982,635) (228,979) (702,048) (641,050)
Cash generated (used) from operations 46,649 19,058 (4,393) (25,518) 62,653 60,895
Cash generated from sales 0 0 0 0 0 0
Cash generated from refinancing 0 0 0 0 0 0
Less: Cash distributions to investors 0 0 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items 46,649 19,058 (4,393) (25,518) 62,653 60,895
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)(41) (86) (97) (c)(40) (c)(56) (41)
From gain on sale 0 0 0 0 0 0
Federal tax credits (b)32 101 136 (c)21 (c)70 105
California tax credits 0 0 0 0 0 0
Cash distributions to investors 0 0 0 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition
costs of properties retained
divided by total original
acquisition costs of all
properties) 100 100 100 100 100 100
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first year
is dependent upon an investor's entry date. Amount shown is that allocated to
initial investors.
(c) Tax losses and tax credits allocated to an investor in the first two
years is dependent upon an investor's entry date. Amount shown is that allocated
to initial investors.
</FN>
</TABLE>
A-18
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
/------------------------CHTC IV-4--------\
1994(a) 1995 1996
------- ---- ----
<S> <C> <C> <C>
Gross revenue $ 1,613 $ 160,888 $ 147,254
Less:
Operating expenses 13,399 41,325 51,488
Interest 0 79,853 0
Depreciation and amortization 0 16,056 24,865
Equity in losses in local partnerships (2,212) 100,224 528,288
------- --------- -------
Net income (loss) - GAAP basis (9,574) (76,570) (457,387)
Taxable loss from operations (11,786) (60,108) (566,147)
Cash generated (used) from operations 1,602 26,322 95,766
Cash generated from sales 0 0 0
Cash generated from refinancing 0 0 0
Less: Cash distributions to investors 0 0 0
Cash generated (deficiency) after cash
distributions and special items 1,602 26,322 95,766
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)(5) (b)(29) (49)
From gain on sale 0 0 0
Federal tax credits 0 (b)18 64
California tax credits 0 (b)53 70
Cash distributions to investors 0 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs
of properties retained divided
by total acquisition costs of all
properties) 100 100 100
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first two years
is dependent upon an investor's entry date. Amount shown is that allocated to
initial investors.
</FN>
</TABLE>
A-19
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
/---------HTCF V-3---------\ /---HTCF V-4----\ /---CHTC IV-5-------\
1995(a) 1996 1996 (a) 1996 (a)
------- ------ -------- --------
<S> <C> <C> <C> <C>
Gross revenue $ 3,487 $ 209,940 $ 15,529 $ 54,573
Less:
Operating expenses 12,379 59,816 30,183 1,393
Interest 0 0 0 0
Depreciation and amortization 454 23,436 2,851 7,753
Equity in losses in local partnerships (10,200) 185,071 29,329 0
------ ------- ------ ----
Net income (loss) - GAAP basis 854 (58,383) (46,834) 45,427
Taxable loss from operations (3,520) (128,969) (23,166) 45,427
Cash generated (used) from operations 3,402 34,885 4,010 53,439
Cash generated from sales 0 0 0 0
Cash generated from refinancing 0 0 0 0
Less: Cash distributions to investors 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items 3,402 34,885 4,010 53,439
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)0 (b)(70) (b) (3) (b)7
From gain on sale 0 0 0 0
Federal tax credits (b)3 (b)62 (b)14 0
California tax credits 0 0 0 0
Cash distributions to investors (c)5 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs
of properties retained divided by
total original acquisition costs of all
properties) 100 100 100 100
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax losses and tax credits allocated to an investor in the first two years
is dependent upon an investor's entry date. Amount shown is that allocated to
initial investors. For HTCF V-3, amount is less than $1 per $1,000 invested in
1995.
(c) This amount was distributed in 1995 by the general partner.
</FN>
</TABLE>
A-20
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
FOUR PRIVATE
/-----OFFERINGS CLOSED DURING 1992----\
1992(a) 1993 1994 1995 1996
------- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Gross revenue $ 179,081 $394,031 $261,322 $219,584 $110,625
Less:
Operating expenses 9,951 12,208 9,958 15,822 20,825
Interest 38,574 40,265 20,139 13,392 0
Depreciation and amortization 0 1,346 2,619 3,518 9,006
Equity in losses in local partnerships 535,833 967,507 1,098,116 1,129,379 1,097,925
------- ------- --------- --------- ---------
Net income (loss) - Tax basis (405,277) (627,295) (869,510) (942,527) (1,017,491)
Cash generated (used) from operations (31,736) (28,897) (6,385) 1,999 89,440
Cash generated from sales 0 0 0 0 0
Cash generated from refinancing 0 0 0 0 0
Less: Cash distributions to investors 0 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items (31,736) (28,897) (6,385) 1,999 89,440
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)(47) (73) (110) (114) ( 123)
From gain on sale 0 0 0 0 0
Federal tax credits 63 122 134 136 136
California tax credits 104 92 92 49 0
Cash distributions to investors 0 0 0 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs
of properties retained divided by
total acquistions costs of
all properties) 100 100 100 100 100
- --------------------------------
<FN>
(a) Partial year of operations.
(b) Tax loss and tax credits allocated to an investor in the first year is
dependent upon an investor's entry date. Amount shown is that allocated to
initial investors.
</FN>
</TABLE>
A-21
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
FOUR PRIVATE TWO PRIVATE
---OFFERINGS CLOSED DURING 1993--- ---OFFERINGS CLOSED DURING 1994---
1993(a) 1994 1995 1996 1994(a) 1995 1996
------- ---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross revenue $130,878 $332,016 $242,791 $147,841 $ 7,619 $ 112,058 $ 67,700
Less:
Operating expenses 2,834 16,958 10,944 23,613 111,523 36,529 54,699
Interest 6,111 14,094 14,427 0 0 0 0
Depreciation and amortization 13,808 12,262 15,457 13,863 1,305 12,906 37,940
Equity in losses in local partnerships 435,734 959,693 878,965 805,025 129,352 861,238 1,285,203
------- ------- ------- ------- ------- ------- ---------
Net income (loss) - Tax basis (327,609) (670,691) (677,002) (694,660) (234,561) (798,615) (1,310,142)
Cash generated (used) from operations 121,645 302,422 6,094 124,228 (39,826) (61,055) 13,001
Cash generated from sales 0 0 0 0 0 0 0
Cash generated from refinancing 0 0 0 0 0 0 0
Less: Cash distributions to investors 0 0 0 0 0 0 0
Cash generated (deficiency) after cash
distributions and special items 121,645 302,422 6,094 124,228 (39,826) (61,055) 13,001
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)(48) (113) (112) ( 114) (b)(76) (101) (158)
From gain on sale 0 0 0 0 0 0
Federal tax credits 49 101 126 130 31 90 126
California tax credits 46 46 46 27 0 0 0
Cash distributions to investors 0 0 0 0 0 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs of
properties retained divided by total
original acquisition costs of all
properties) 100 100 100 100 100 100 100
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax loss and tax credits allocated to an investor in the first year is
dependent upon an investor's entry date. Amount shown is that allocated to
initial investors.
</FN>
</TABLE>
A-22
UNAUDITED
<PAGE>
<TABLE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
ONE PRIVATE
---OFFERING CLOSED DURING 1995---
1995 (a) 1996
<S> <C> <C>
Gross revenue $ 58,335 $ 138,052
Less:
Operating expenses 10,488 232,666
Interest 0 0
Depreciation and amortization 6,099 22,965
Equity in losses in local partnerships 188,245 599,407
_______ _______
Net income (loss) - GAAP basis (146,497) (416,838)
Taxable loss from operations (146,497) (716,986)
Cash generated (used) from operations 47,847 (118,000)
Cash generated from sales 0 0
Cash generated from refinancing 0 0
Less: Cash distributions to investors 0 0
Cash generated (deficiency) after cash
distributiond and special items 47,847 (118,000)
TAX AND DISTRIBUTION DATA PER $1,OOO INVESTED
Federal income tax results
Ordinary income (loss)
From operations (b)(10) (48)
From gain on sale 0 0
Federal tax credits (b)7 59
California tax credits 0 0
Cash distributions to investors 0 0
Amount (in percentage terms)
remaining invested in program
properties at end of year
(original total acquisition costs of
properties retained divided by
total original acquisition costs
of all properties) 100 100
--------------------------------
<FN>
(a) Partial year of operations.
(b) Tax loss and tax credits allocated to an investor in the first year is
dependent upon an investor's entry date. Amount shown is that allocated to
initial investors.
</FN>
</TABLE>
A-23
UNAUDITED
<PAGE>
EXHIBIT B
WNC HOUSING TAX CREDIT FUND VI
AGREEMENT OF LIMITED PARTNERSHIP
Table of Contents
Page
ARTICLE 1 DEFINITIONS................................................... B-4
ARTICLE 2 FORMATION; NAME; PLACE OF BUSINESS;
PURPOSE AND TERM.......................................B-18
Section 2.1 Formation of Partnership............................B-18
Section 2.2 Name................................................B-18
Section 2.3 Place of Business...................................B-18
Section 2.4 Purpose.............................................B-18
Section 2.5 Agent for Service of Process........................B-19
Section 2.6 Term................................................B-19
ARTICLE 3 PARTNERS AND CAPITAL...........................................B-19
Section 3.1 General Partner.....................................B-19
Section 3.2 Initial Limited Partner.............................B-19
Section 3.3 Additional Limited Partners;
Terms of Offering....................B-20
Section 3.4 Payment or Return of
Additional Limited Partners' Capital.B-21
Section 3.5 Liability of Limited Partners.......................B-24
Section 3.6 Miscellaneous.......................................B-24
ARTICLE 4 DISTRIBUTIONS OF CASH; ALLOCATIONS OF
PROFITS AND LOSSES.....................................B-25
Section 4.1 Distributions of Cash Available for Distribution . B-25
Section 4.2 Distributions of Sale or Refinancing Proceeds.......B-25
Section 4.3 Profits and Losses..................................B-26
Section 4.4 Certain Provisions Related to Partnership
Allocations and Distributions.........B-28
Section 4.5 Allocation of Tax Credits............................B-33
B-1
wncnat6-6/05.lpa
<PAGE>
Section 4.6 Determinations of Allocations and Distributions
Within Classes of Partners............B-34
Section 4.7 Installment Obligations..............................B-35
ARTICLE 5 RIGHTS, POWERS AND DUTIES OF
GENERAL PARTNER.........................................B-36
Section 5.1 Management of the Partnership........................B-36
Section 5.2 General Authority of General Partner.................B-37
Section 5.3 Authority of General Partner and its
Affiliates to Deal with Partnership...B-42
Section 5.4 Restrictions on Authority of General Partner.........B-46
Section 5.5 Duties and Obligations of General Partner............B-49
Section 5.6 Compensation of Sponsor..............................B-51
Section 5.7 Other Business of Partners...........................B-53
Section 5.8 Limitation on Liability of
Sponsor; Indemnification............................B-53
ARTICLE 6 ADMISSION OF SUCCESSOR AND ADDITIONAL
GENERAL PARTNERS; WITHDRAWAL OF
GENERAL PARTNER.........................................B-55
Section 6.1 Admission of Successor or Additional
General Partners .....................B-55
Section 6.2 Restrictions on Transfer of
General Partner's Interest............B-56
Section 6.3 Consent of Limited Partners to
Admission of Successor or
Additional General Partners...........B-56
Section 6.4 Event of Withdrawal of a General Partner.............B-56
Section 6.5 Interest and Liability of a Withdrawn
General Partner ..................... B-57
Section 6.6 Valuation and Sale of Interest of
Former General Partner................B-57
ARTICLE 7 TRANSFERABILITY OF UNITS........................................B-58
Section 7.1 Right to Transfer Units..............................B-58
Section 7.2 Restrictions on Transfers............................B-58
Section 7.3 Assignees and Assignment Procedure...................B-60
Section 7.4 Substitute Limited Partners..........................B-63
B-2
wncnat6-6/05.lpa
<PAGE>
ARTICLE 8 DISSOLUTION AND WINDING-UP OF
THE PARTNERSHIP.........................................B-63
Section 8.1 Events Causing Dissolution...........................B-63
Section 8.2 Liquidation..........................................B-64
ARTICLE 9 BOOKS AND RECORDS, ACCOUNTING, REPORTS,
TAX ELECTIONS, ETC......................................B-65
Section 9.1 Books and Records....................................B-65
Section 9.2 Accounting and Fiscal Year...........................B-66
Section 9.3 Bank Accounts and Temporary Investments..............B-66
Section 9.4 Reports..............................................B-66
Section 9.5 Depreciation and Other Tax Elections.................B-68
Section 9.6 Designation of Tax Matters Partner...................B-68
ARTICLE 10 MEETINGS AND VOTING RIGHTS
OF LIMITED PARTNERS............................B-69
Section 10.1 Meetings and Actions Without Meetings...............B-69
Section 10.2 Voting Rights of Limited Partners...................B-69
Section 10.3 Limitations on Roll-Ups; Dissenters' Rights.........B-70
ARTICLE 11 SPECIAL POWER OF ATTORNEY......................................B-71
ARTICLE 12 AMENDMENTS.....................................................B-73
Section 12.1 Adoption of Amendments..............................B-73
Section 12.2 Filing of Required Documents........................B-74
Section 12.3 Required Change of Partnership Name.................B-74
ARTICLE 13 MISCELLANEOUS PROVISIONS.......................................B-74
Section 13.1 Security Interest and Right of Set-Off..............B-74
Section 13.2 Notices.............................................B-75
Section 13.3 Execution...........................................B-75
Section 13.4 Binding Effect......................................B-75
Section 13.5 Applicable Law......................................B-76
Section 13.6 Counterparts........................................B-76
Section 13.7 Separability of Provisions..........................B-76
Section 13.8 Captions............................................B-76
Section 13.9 Mandatory Arbitration...............................B-76
Section 13.10 Partnerships Treated as Separate...................B-77
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AGREEMENT OF LIMITED PARTNERSHIP dated as of March 3, 1997 among WNC &
Associates, Inc., as General Partner, John B. Lester, Jr. as Initial Limited
Partner and those Persons who shall hereafter be admitted to the Partnership as
Additional Limited Partners, who hereby agree as follows:
ARTICLE 1
DEFINITIONS
The following terms used in this Agreement shall, unless the context
otherwise requires, have the meanings specified in this Article 1. The singular
shall include the plural and the masculine gender shall include the feminine and
neuter genders, and vice versa, as the context requires.
"Accountants" means Corbin & Wertz, Irvine, California, or such other firm
of independent public accountants as from time to time shall be engaged for the
Partnership by the General Partner.
"Acquisition Expenses" means expenses, including, but not limited to, legal
fees and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on property not acquired, accounting fees and
expenses, title insurance and miscellaneous expenses related to selection and
acquisition by the Partnership of Local Limited Partnership Interests and the
selection and acquisition of Apartment Complexes by the Local Limited
Partnerships, whether or not acquired.
"Acquisition Fees" means the total of all fees and commissions paid by any
party in connection with the selection or purchase by the Partnership of any
Local Limited Partnership Interest, and the purchase, development or
construction of an Apartment Complex by a Local Limited Partnership, whether
designated as a real estate commission, acquisition fee, finders' fee, selection
fee, Development Fee, Construction Fee, nonrecurring management fee, consulting
fee or any fee of a similar nature however designated, with the exception of
Development Fees and Construction Fees paid to Persons not affiliated with the
Sponsor in connection with the actual development and construction of an
Apartment Complex. As used herein, a "Development Fee" shall be a fee for the
packaging of an Apartment Complex, including negotiating and approving plans,
and undertaking to assist in obtaining zoning and necessary variances, necessary
financing and Tax Credits for the Apartment Complex, either initially or at a
later date, and a "Construction Fee" shall be a fee or other remuneration for
acting as general contractor and/or construction manager to construct
improvements, supervise and coordinate projects or provide Major Repairs or
Rehabilitation for an Apartment Complex.
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"Act" means the California Revised Limited Partnership Act (Corp. Code
Section 15611, et seq.), as now in effect and as the same may be amended from
time to time hereafter.
"Additional Limited Partners" means those Persons admitted to the
Partnership pursuant to Section 3.3 hereof.
"Adjusted Capital Account Deficit" means, with respect to each Partner, the
deficit balance in his Capital Account as of the end of the relevant fiscal
period of the Partnership, after giving effect to the following adjustments:
(a) Increasing such Capital Account by any amounts such Person is
obligated to restore under the standards set by Section
1.704-1(b)(2)(ii)(c) of the Regulations (or is deemed obligated to restore
under Section 1.704-2(g)(1) and (i)(5) of the Regulations); and
(b) Decreasing such Capital Account by the items described in
Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and
1.704-1(b)(2)(ii)(d)(6) of the Regulations.
"Adjusted Capital Contribution" means, for each fiscal period, the Limited
Partners' Capital Contribution reduced by all distributions of noninvested funds
pursuant to Section 3.4.2 hereof and distributions of Sale or Refinancing
Proceeds made to the Limited Partners through the end of such period.
"Affiliate" or "Affiliated Person" means, when used with reference to a
specified Person: (i) any Person who, directly or indirectly, controls or is
controlled by or is under common control with the specified Person; (ii) any
Person who is an officer or director of, or partner in, or serves in a similar
capacity with respect to, the specified Person or of which the specified Person
is an officer, director or partner, or with respect to which the specified
Person serves in a similar capacity; (iii) any Person who, directly or
indirectly, is the beneficial owner of, or controls, 10% or more of any class of
equity securities of, or otherwise has a 10% or more beneficial interest in, the
specified Person; or (iv) any Person of which the specified Person is, directly
or indirectly, the owner of, or in control of, 10% or more of any class of
equity securities, or in which the specified Person has a 10% or more beneficial
interest.
"Agreement" means this Agreement of Limited Partnership, as originally
executed and as amended or restated from time to time. Words such as "herein,"
"hereinafter," "hereof," "hereto," "hereby" and "hereunder," when used with
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reference to this Agreement, refer to this Agreement as a whole, unless the
context otherwise requires.
"Apartment Complex" or "Property" means a multi-family residential rental
complex owned or under development or rehabilitation by a Local Limited
Partnership.
"Asset Based Fee" means compensation to the Sponsor computed in accordance
with Section IV.J. of the NASAA Guidelines. No Asset Based Fee shall be payable
to the Sponsor.
"Asset Management Fee" means the annual fee payable to the General Partner
or an Affiliate of the General Partner pursuant to Section 5.6.6.
"Capital Account" means, with respect to any Partner, the Capital Account
maintained for such Partner in accordance with the following provisions: (i) to
each Partner's Capital Account there shall be credited such Partner's Capital
Contribution and such Partner's distributive share of Profits for Tax Purposes
and (ii) to each Partner's Capital Account there shall be debited the amount of
cash and the net fair market value of property distributed to such Partner
pursuant to any provision of this Agreement and such Partner's distributive
share of Losses for Tax Purposes. In the event any interest in the Partnership
is transferred in accordance with the terms of this Agreement, the transferee
shall succeed to the Capital Account of the transferror to the extent it relates
to the transferred interest. Subject to Section 4.4.1, Capital Accounts shall be
maintained in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv).
"Capital Contribution" means the total amount of cash contributed to the
Partnership (excluding any cash contributed by the General Partner pursuant to
the last sentence of Section 3.3.3 hereof) determined without inclusion of any
interest or late charges paid on the Promissory Notes and without reduction for
any discounts for Designated Investors and Discount Investors (prior to the
deduction of any Syndication Expenses) by all the Partners or any class of
Partners or any one Partner, as the case may be (or the predecessor holders of
the Interests of such Partners or Partner), reduced, in the case of the Limited
Partners, by the amount of any funds returned to them pursuant to Section 3.4.2.
"Cash Available for Distribution" means, with respect to any period, Cash
Flow less any amounts set aside from Cash Flow for the restoration or creation
of Reserves.
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"Cash Flow" means, with respect to any period, (i) all cash funds provided
to the Partnership from Local Limited Partnership operations (exclusive of any
proceeds derived from the sale, disposition, financing or refinancing of
Apartment Complexes, or other Sale or Refinancing transactions) plus (ii) all
cash funds from Partnership operations (including any interest from Promissory
Notes), without deduction for depreciation, but after deducting cash funds used
to pay all other expenses, Debt Service and capital expenditures.
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of succeeding law.
"Competitive" when applied to a fee, commission (other than a real estate
or brokerage commission) or other payment for goods supplied or services
rendered, means a payment equal to the amount customarily charged by Persons not
Affiliated with the payee for such goods or services in the geographic area in
which such goods are supplied or services rendered.
"Competitive Real Estate Commission" means a real estate or brokerage
commission paid for the purchase or sale of Property which is reasonable,
customary and competitive in light of the size, type and location of the
Property.
"Consent" means either (i) the approval given by vote at a meeting called
and held in accordance with the provisions of Section 10.1, or (ii) a prior
written approval required or permitted to be given pursuant to this Agreement.
"Dealer-Manager" means WNC Capital Corporation.
"Dealer-Manager Fee" means the fee payable to the Dealer-Manager pursuant
to Section 5.6.2.
"Debt Service" means all payments required to be made in connection with
any loan to the Partnership or any loan secured by a lien on any of the
Apartment Complexes.
"Deemed Liquidation Distribution" means, with respect to the Limited
Partners, as a class, and the General Partner the amount that would be
distributed to them as of the end of each fiscal year of the Partnership if the
Partnership were dissolved and liquidated and (i) the assets of the Partnership
(other than Installment Obligations, as defined in Section 4.7.1) were sold for
cash equal to their Federal adjusted tax basis (or their Book Value, where
Section 4.4.2 applies); (ii) the liabilities of the Partnership were paid; and
(iii) the remaining cash of the Partnership were distributed to such class of
Partners in accordance with Section
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4.2.1 (and not Section 4.2.2). For the purposes of this definition, (a) the
Capital Accounts of the Partners shall not be adjusted for their shares of any
Partnership Minimum Gain that would be recognized as a result of a deemed sale
of Properties or Local Limited Partnership Interests; and (b) Installment
Obligations shall be treated in the manner provided in Section 4.7.
"Designated Investor" shall have the meaning specified in the Prospectus
under "Terms of the Offering and Plan of Distribution."
"Discount Investor" means any Additional Limited Partner (other than a
Designated Investor) who has paid or agreed to pay less than $1,000 per Unit
subscribed for by him on account of reduced selling commissions, reduced Dealer-
Manager Fees and/or reduced Acquisition Fees attributable to his Units, as
specified in the Prospectus under "Terms of the Offering and Plan of
Distribution."
"Economic Risk of Loss" means the extent to which a Partner or Related
Person bears the economic risk of loss for a Partnership liability as determined
under Treasury Regulation Section 1.752-2.
"Escrow Agent" means National Bank of Southern California, Newport Beach,
California, or any other escrow agent chosen by the General Partner to hold
funds from investors pending their admission to the Partnership.
"Event of Withdrawal" means the occurrence of any of the following events
as to a General Partner: (i) its withdrawal from the Partnership pursuant to
Section 15662 of the Act; (ii) its removal in accordance with this Agreement;
(iii) it (a) makes an assignment for the benefit of creditors, (b) files a
voluntary petition in bankruptcy, (c) is adjudged a bankrupt or insolvent, or
has entered against it an order for relief in any bankruptcy or insolvency
proceeding, (d) files a petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation, (e) files an answer or
other pleading admitting or failing to contest the material allegations of a
petition filed against it in any proceeding of this nature, or (f) seeks,
consents to or acquiesces in the appointment of a trustee, receiver or
liquidator of itself or of all or any substantial part of its properties; (iv)
the lapse of 120 days after the commencement of any proceeding against it
seeking reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation, if during
such period the proceeding has not been dismissed, or the lapse of 90 days after
the appointment, without its consent or acquiescence, of a trustee, receiver or
liquidator of itself or of all or any substantial part of its properties, if
during such period the appointment is not vacated or stayed, or if within 90
days after the expiration of any such stay,
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the appointment is not vacated; (v) in the case of a General Partner who is a
natural person, (a) his death, or (b) the entry by a court of competent
jurisdiction adjudicating him incompetent to manage his person or his property;
(vi) in the case of a General Partner who is acting as a general partner by
virtue of being a trustee of a trust, the termination of the trust (but not
merely the substitution of a new trustee); (vii) in the case of a General
Partner which is a separate partnership, the dissolution and commencement of
winding up of the separate partnership; (viii) in the case of a General Partner
which is a corporation, the filing of a certificate of dissolution, or its
equivalent, for the corporation or the revocation of its charter; or (ix) in the
case of a General Partner which is an estate, the distribution by the fiduciary
of the estate's entire interest in the Partnership. Notwithstanding the
foregoing, an Event of Withdrawal shall not be deemed to have occurred as to a
General Partner under the preceding clause (iv) until 120 days shall have
elapsed after Notification has been given to the Limited Partners of the event
which, with or without lapse of time, would constitute an event contemplated by
such clause.
"Front-End Fees" means fees and expenses paid by any party for any services
rendered during the organizational and acquisition phases of the Partnership,
including Organizational and Offering Expenses, Acquisition Fees, Acquisition
Expenses, interest on deferred fees and expenses and any other similar fees,
however designated. Front-End Fees which are to be paid pursuant to this
Agreement from installment payments on the Promissory Notes shall be paid pro
rata as the installment payments are received by the Partnership.
"General Partner" means WNC & Associates, Inc., or any Person or Persons
who, at the time of reference thereto, has been admitted as a successor to any
such General Partner or as an additional General Partner, in each such Person's
capacity as a general partner. Restrictions placed on the rights and powers of
the "General Partner" throughout this Agreement also serve to restrict the
rights and powers of the Affiliates of the General Partner.
"Government Assistance" means any form of Federal, state or local
government assistance provided to Properties or their tenants or owners,
including mortgage insurance, rental assistance payments, permanent mortgage
financing, low interest mortgage loans, interest reduction payments and Tax
Credits.
"Gross Proceeds" means the gross proceeds of the Offering, determined
without inclusion of any interest or late charges paid on the Promissory Notes
and without reduction for any discounts for Designated Investors and Discount
Investors.
"HUD" means the United States Department of Housing and Urban Development
or any successor thereto.
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"Historic Tax Credit" means the tax credit allowable pursuant to Section 47
of the Code for rehabilitation expenditures incurred with respect to certain
qualified buildings.
"Independent Expert" means a Person with no material current or prior
business or personal relationship with the Sponsor who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Partnership, and who is qualified to perform such
work.
"Initial Limited Partner" means John B. Lester, Jr.
"Interest" means the entire ownership interest of a Partner in the
Partnership at any particular time, including the right of such Partner to any
and all benefits to which a Partner may be entitled as provided in this
Agreement, together with the obligations of such Partner to comply with all the
terms and provisions of this Agreement. Reference to a majority, or specified
percentage, in interest of the Limited Partners means, Limited Partners whose
combined Capital Contribution represents over 50%, or such specified percentage,
respectively, of the Capital Contribution of all Limited Partners.
"Invested Assets" means the sum of the Partnership's Investment in Local
Limited Partnership Interests and the Partnership's allocable share of the
amount of the mortgage loans on, and other debts related to, the Apartment
Complexes owned by such Local Limited Partnerships.
"Investment Date" means the date of the final admission into the
Partnership of Additional Limited Partners who purchased Units.
"Investment in Local Limited Partnership Interests" means the amount of
Capital Contributions used by the Partnership to acquire Local Limited
Partnership Interests (except that, if a portion of the Partnership's investment
in a Local Limited Partnership is used to fund working capital reserves of the
Local Limited Partnership, there shall be excluded from this calculation any
amount which is used to fund working capital reserves which is in excess of 5%
of Gross Proceeds) plus Reserves of the Partnership, except that Reserves in
excess of 5% of Gross Proceeds shall not be included, but excluding Front-End
Fees. Notwithstanding the preceding, the total amount of Capital Contributions
used to fund Partnership Reserves or working capital reserves of the Local
Limited Partnerships which shall be included in Investment in Local Limited
Partnership Interests shall not exceed 5% of Gross Proceeds.
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"Investor Closing" means a closing at which purchasers of Units are
admitted as Additional Limited Partners pursuant to Section 3.3 hereof.
"Limited Partner" means any Person who is a Limited Partner, whether an
Initial Limited Partner, an Additional Limited Partner or a Substitute Limited
Partner at the time of reference thereto, in such Person's capacity as a Limited
Partner of the Partnership.
"Local General Partners" (whether or not capitalized) means the Persons who
are from time to time general partners (or managers in the cases of limited
liability companies) of Local Limited Partnerships, except that where reference
is made to Local General Partners in respect of any guaranties or undertakings
provided to the Partnership in connection with its investment in a Local Limited
Partnership, such term shall mean such Local General Partners at the date of
such investment or such other Persons (including Affiliates of such Local
General Partners) as actually provide such guaranties and undertakings.
"Local Limited Partnership" means a limited partnership or a limited
liability company which owns or is developing or rehabilitating one or more
rental housing projects to be qualified under Section 42(g) and/or Section 47 of
the Code.
"Local Limited Partnership Interest" means the limited partnership interest
of the Partnership in a Local Limited Partnership.
"Low Income Housing Credit" means the tax credit allowable under Section 42
of the Code for a qualified low income housing project.
"Major Repairs and Rehabilitation" means the repair, rehabilitation or
reconstruction of a Property where the aggregate costs of the repair,
rehabilitation or reconstruction exceed 10% of the fair market value of the
Property at the time of such services.
"Mortgage" (whether capitalized or not) means any mortgage, deed of trust,
or similar security instrument and, where the sense of this Agreement so
requires, the indebtedness secured thereby.
"NASAA Guidelines" means the Statement of Policy Regarding Real Estate
Programs adopted by the North American Securities Administrators Association,
Inc., as in effect on the date of this Agreement.
"Net Proceeds" means the Gross Proceeds less Organizational and Offering
Expenses.
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"Nonaccountable Expense Reimbursement" means the payment to be made to the
Dealer-Manager pursuant to Section 5.6.3.
"Nonrecourse Deductions" has the meaning given it in Treasury Regulation
Section 1.704-2(b)(1).
"Nonrecourse Liability" means a Partnership liability with respect to which
no Partner or Related Person bears the Economic Risk of Loss.
"Note Capital Contribution" means that portion of a Limited Partner's
Capital Contribution, if any, paid in accordance with his Promissory Note.
"Notification" means a writing, containing the information required by this
Agreement to be communicated to any Person, personally delivered to such Person
or sent by registered, certified or regular mail, postage prepaid, to such
Person at the last known address of such Person. The date of personal delivery
or the date of mailing thereof, as the case may be, shall be deemed the date of
giving the Notification.
"Offering" means, with respect to the Partnership, the offering and sale of
its Units pursuant to the Prospectus.
"Offering Commencement Date" means, with respect to the Offering, the
effective date of the registration statement or post-effective amendment thereto
filed with the Securities and Exchange Commission which authorizes the
commencement of such Offering.
"Operating Cash Expenses" means, with respect to any fiscal period, the
amount of cash disbursed by the Partnership in that period in the ordinary
course of business for the payment of its operating expenses, such as expenses
for management, utilities, repair and maintenance, insurance, investor
communications, legal, accounting, statistical and bookkeeping services, use of
computing or accounting equipment, travel and telephone expenses, salaries and
direct expenses of Partnership employees while engaged in Partnership business,
and any other operational and administrative expenses necessary for the prudent
operation of the Partnership. Without limiting the generality of the foregoing,
Operating Cash Expenses shall include the actual cost of goods, materials and
administrative services used for or by the Partnership, whether incurred by the
General Partner, an Affiliate of the General Partner or a non-Affiliated Person
in performing the foregoing functions. As used in the preceding sentence, actual
cost of goods and materials means the actual cost of goods and materials used
for or by the Partnership and obtained from entities not Affiliated with the
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General Partner, and actual cost of administrative services means the pro
rata cost of personnel (as if such persons were employees of the Partnership)
associated therewith, but in no event to exceed the Competitive amount.
"Organizational and Offering Expenses" means all expenses incurred in
connection with the formation of the Partnership, the registration and
qualification of the Units under Federal and state securities laws and the
Offering, including selling commissions, the Dealer-Manager Fee, the
Nonaccountable Expense Reimbursement and all advertising expenses.
"Partner" means any General Partner or Limited Partner.
"Partner Nonrecourse Debt" has the meaning given it in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" means the amount determined in
accordance with the principles of Treasury Regulation Section 1.704-2(i)(3).
"Partnership" means the partnership formed under the terms of this
Agreement.
"Partnership Minimum Gain" means the amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Register" means the schedule listing the names and addresses
of all Limited Partners together with the amounts of their respective Capital
Contributions which shall be maintained by the General Partner in accordance
with Section 3.3.
"Person" means any individual, partnership, corporation, trust or other
legal entity.
"Prime Rate" means the prime or reference rate of interest from time to
time announced by National Bank of Southern California as being charged by it on
short-term unsecured loans to its most creditworthy customers.
"Profits" and "Losses" means, for each fiscal year or other relevant
period, an amount equal to the Partnership's taxable income or loss for such
year or period determined in accordance with Section 703(a) of the Code (for
this purpose all items of income, gain, loss or deduction required to be stated
separately pursuant to Section 703(a)(1) of the Code shall be included in
taxable income or loss), with the following adjustments: (i) any income of the
Partnership that is exempt from Federal income tax and not otherwise taken into
account in computing Profits or
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Losses pursuant to this definition shall be added to such taxable income or
loss; (ii) any expenditures of the Partnership described in Section 705(a)(2)(B)
of the Code or treated as such pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits
or Losses pursuant to this definition, shall be subtracted from such taxable
income or loss; (iii) any adjustment pursuant to Section 743(b) of the Code
shall be allocated solely to the Partner to whom such adjustment relates and
shall not be taken into account in computing Profits or Losses; (iv) any gain or
loss which would have been realized by the Partnership on the sale of assets
distributed in kind to Partners, determined with reference to the fair market
value and the adjusted tax basis of such property for Federal income tax
purposes immediately prior to such distribution, shall be added to or subtracted
from such taxable income or loss; (v) notwithstanding any other provision of
this definition, any items that are specially allocated pursuant to Section
4.4.3 shall not be taken into account in computing Profits or Losses; and (vi)
if required, the adjustments specified in Section 4.4.2 shall be taken into
account.
"Profits and Losses for Tax Purposes" means all items of Profits and Losses
as well as any items that are specifically excluded from Profits and Losses by
clause (v) of the definition thereof.
"Promissory Note" means the full recourse promissory note evidencing the
deferred installments, if any, of the Capital Contribution required to be made
for a Unit.
"Property Management Fee" means a fee paid for day-to-day professional
property management services in connection with the Properties.
"Prospectus" means the prospectus contained in the registration statement
filed with the Securities and Exchange Commission with respect to the Units, in
the final form in which said prospectus is filed with said Commission and as
thereafter supplemented pursuant to Rule 424 under the Securities Act of 1933,
as amended.
"Purchase Price" means the price paid upon the purchase or sale of a
particular Local Limited Partnership Interest or Apartment Complex, as the case
may be, including the amount of Acquisition Fees and all liens and mortgages on
the Apartment Complex, but excluding points and prepaid interest.
"RD" means the United States Department of Agriculture, Rural Development,
or any successor thereto.
"Registration Date" has the meaning given it in Section 7.3.2.
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"Related Person" means a Person having a relationship with a Partner that
is described in Treasury Regulation Section 1.752-4(b).
"Reserves" means amounts set aside by the Partnership for working capital
or other obligations of the Partnership and contingencies related to the
ownership of Local Limited Partnership Interests.
"Return on Investment" means an annual, cumulative, but not compounded,
"return" to the Limited Partners as a class on their Adjusted Capital
Contributions commencing for each Limited Partner on the last day of the
calendar quarter during which the Limited Partner's Capital Contribution is
received by the Partnership, calculated at the following annual rates: (i) 12%
through December 31, 2008, and (ii) 6% for the balance of the Partnership's
term.
"Roll-Up" means a transaction involving the acquisition, merger, conversion
or consolidation, either directly or indirectly, of the Partnership and the
issuance of securities of a Roll-Up Entity. Such term does not include:
(i) any transaction if the securities of the Partnership have been for
at least twelve months traded on a national securities exchange or through the
National Association of Securities Dealers, Inc. Automated Quotation National
Market System; or
(ii) a transaction involving the conversion to corporate, trust or
association form of only the Partnership, if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following: (a) the Limited Partners' voting rights; (b) the term of existence of
the Partnership; (c) the terms of compensation of the Sponsor; or (d) the
Partnership's investment objectives.
"Roll-Up Entity" means the partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive after
the successful completion of a proposed Roll-Up transaction.
"SLP Affiliate" means an Affiliate of the Fund Manager in its capacity as a
limited partner (or member in the case of limited liability companies) of Local
Limited Partnerships.
"Sale or Refinancing" means any Partnership or Local Limited Partnership
transaction not in the ordinary course of its business, including, without
limitation, sales, exchanges or other dispositions of Apartment Complexes, Local
Limited Partnership Interests and real or personal property of the Partnership,
or any borrowings or refinancings. Sale or Refinancing shall not include any
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receipt of capital contributions by the Partnership or a Local Limited
Partnership; provided, however, that the receipt by the Partnership of a return
of all or a portion of its capital contribution to a Local Limited Partnership,
however funded, shall be treated as a Sale or Refinancing.
"Sale or Refinancing Proceeds" means all cash receipts of the Partnership
arising from a Sale or Refinancing less the following:
(i) the amount paid or to be paid in connection with or as an expense of
such Sale or Refinancing, and, with regard to damage recoveries or insurance or
condemnation proceeds, the amount paid or to be paid for repairs, replacements
or renewals resulting from damage to or partial condemnation of the affected
property;
(ii) the amount applied to the payment of the debts and obligations of the
Partnership; and
(iii) any Reserves funded with such proceeds.
"Sponsor" means any Person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership, or any Person who will manage or
participate in the management of the Partnership, and any Affiliate of any such
Person, but does not include a Person whose only relation with the Partnership
is as that of an independent property manager whose only compensation is as
such. "Sponsor" does not include wholly independent third parties such as
attorneys, accountants and underwriters whose only compensation is for
professional services rendered in connection with the Offering. A Person may
also be a "Sponsor" of the Partnership by: (i) taking the initiative, directly
or indirectly, in founding or organizing the business or enterprise of the
Partnership, either alone or in conjunction with one or more Persons; (ii)
receiving a material participation in the Partnership in connection with the
founding or organizing of the business of the Partnership, in consideration of
services or property, or both services or property; (iii) having a substantial
number of relationships and contacts with the Partnership; (iv) possessing
significant rights to control Partnership properties (other than Local General
Partners whose only association with the Partnership is as such); (v) receiving
fees for providing services to the Partnership which are paid on a basis that is
not customary in the industry; and (vi) providing goods or services to the
Partnership on a basis which was not negotiated at arm's length with the
Partnership.
"Subordinated Disposition Fee" means the fee payable to the General Partner
in connection with dispositions of Properties owned by Local Limited
Partnerships pursuant to Section 5.6.7.
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"Substitute Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 7.3 and 7.4 hereof.
"Syndication Expenses" means all expenditures classified as syndication
expenses pursuant to Treasury Regulation Section 1.709-2(b). Syndication
Expenses shall be taken into account under this Agreement at the time they would
be taken into account under the Partnership's method of accounting if they were
deductible expenses.
"Tax Credits" means any credit permitted under the Code against the Federal
income tax liability of any Partner as a result of activities or expenditures of
the Partnership or any Local Limited Partnership, including, without limitation,
Low Income Housing Credits and Historic Tax Credits.
"Temporary Investments" means United States Government securities,
securities issued or fully guaranteed by United States Government agencies,
certificates of deposit and time or demand deposits in, or repurchase agreements
constituting obligations of, commercial banks with deposits insured by the
Federal Deposit Insurance Corporation and other short-term, highly liquid
investments.
"Treasury Regulation or Regulations" means the Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
"Unit" means the Interest of a Limited Partner attributable to a Capital
Contribution of $1,000 (determined without regard to any discounts for
Designated Investors and Discount Investors).
"Voluntary Withdrawal" by a General Partner means any withdrawal initiated
by the General Partner and includes, but is not limited to, the commencement of
an action in bankruptcy by or against such General Partner, and excludes any
withdrawal accomplished as the result of a settlement, whether or not
incorporated in a decree of a court or administrative agency, between a
withdrawing General Partner and one or more of any remaining General Partners, a
majority-in-interest of the Limited Partners or any regulatory agency whether a
Federal or state agency or a self-regulatory agency, having jurisdiction over
the affairs of the Partnership.
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ARTICLE 2
FORMATION; NAME; PLACE OF BUSINESS; PURPOSE AND TERM
2.1. Formation of Partnership
The parties hereto hereby form the Partnership on the terms and conditions
set forth herein and pursuant to the provisions of the Act.
2.2. Name
The name of the Partnership shall be "WNC Housing Tax Credit Fund VI, L.P.,
Series 5," "WNC Housing Tax Credit Fund VI, L.P., Series 6," "WNC Housing Tax
Credit Fund VI, L.P., Series 7," or "WNC Housing Tax Credit Fund VI, L.P.,
Series 8," as the case may be. The General Partner, in its sole discretion, may
change the name of the Partnership at any time and from time to time provided
that Notification thereof is given to the Limited Partners within 30 days of the
effective date thereof.
2.3. Place of Business
The Partnership shall continuously maintain an office in the State of
California which shall constitute its principal office and place of business and
at which the records required by Section 15615 of the Act and by Section 9.1 of
this Agreement shall be maintained. Such office shall initially be located at
3158 Redhill Avenue, Suite 120, Costa Mesa, California 92626, but may be changed
from time to time by the General Partner provided that Notification thereof is
given to the Limited Partners within 30 days of the effective date thereof.
The Partnership may maintain additional offices and places of business in
other locations selected by the General Partner.
2.4. Purpose
The purpose and character of the business of the Partnership shall be to
acquire, hold, sell, dispose of and otherwise invest in Local Limited
Partnership Interests and to engage in any other activities related or
incidental thereto. The investment objectives of the Partnership, in order of
importance, shall be to:
(i) provide current tax benefits, primarily in the form of Tax Credits
which Limited Partners may use to offset Federal income tax liabilities;
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(ii) preserve and protect the Partnership's capital; and
(iii) provide cash distributions from Sale or Refinancing transactions.
2.5. Agent for Service of Process
The Partnership shall continuously maintain an agent for service of process
on the Partnership at the Partnership's principal office in the State of
California. Such agent shall initially be David N. Shafer, Esq.
2.6. Term
The term of the Partnership shall commence on the date of the filing of its
Certificate of Limited Partnership with the office of the Secretary of State of
the State of California and shall continue in full force and effect until
December 31, 2052, or until the termination and winding up of the Partnership
prior to that time pursuant to the provisions of Article 8.
ARTICLE 3
PARTNERS AND CAPITAL
3.1. General Partner
The business address of the General Partner is 3158 Redhill Avenue, Suite
120, Costa Mesa, California 92626. The General Partner has made a Capital
Contribution to the Partnership of $100. The General Partner shall have no
personal liability for the repayment of the Capital Contribution of any Limited
Partner nor any other obligation to make Capital Contributions, loans or
advances to the Partnership.
3.2. Initial Limited Partner
The business address of the Initial Limited Partner is 3158 Redhill Avenue,
Suite 120, Costa Mesa, California 92626. The Initial Limited Partner has made a
Capital Contribution to the Partnership of $1,000. The Initial Limited Partner,
as such, shall not be required to make any additional Capital Contribution to
the Partnership.
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3.3. Additional Limited Partners; Terms of Offering
3.3.1. The Partnership intends to make a public Offering of not more than
25,000 additional Units and shall admit as Limited Partners the Persons whose
subscriptions for such Units are accepted by the General Partner (who may refuse
to accept any subscription for any reason). The names and the residence,
business or mailing addresses of the Additional Limited Partners and their
Capital Contributions shall be set forth in the Partnership Register.
3.3.2. The Capital Contribution required of each Additional Limited Partner
shall be not less than $5,000 and may be such greater integral multiple of
$1,000 (in each case determined without regard to any discounts for Designated
Investors and Discount Investors) as such Additional Limited Partner and the
General Partner shall agree upon. Notwithstanding the preceding, employees of
the General Partner and its Affiliates and/or investors in real estate
syndications previously sponsored by the Fund Manager may make a minimum Capital
Contribution of $2,000. Except with respect to subscribers who qualify for, and
elect to utilize, the installment payment procedure provided for in Section
3.4.1 below for the payment of up to one-half their Capital Contributions, all
of such required Capital Contribution shall be paid in cash at the time of
subscription for the Units.
All subscribers whose subscriptions are acceptable to the General Partner
shall be admitted to the Partnership as Additional Limited Partners on or before
the last day of the calendar month during which such subscriptions were
accepted.
3.3.3. All cash and Promissory Notes received from subscribers for Units
shall be received by the Partnership in trust and deposited in an escrow account
with the Escrow Agent. Subscriptions for Units shall be accepted or rejected by
the General Partner within 30 days after their receipt by the Partnership. Upon
receipt and deposit into escrow of Capital Contributions in the amount of at
least $1,400,000, the Escrow Agent shall release to the Partnership such Capital
Contributions and the Promissory Notes evidencing any Note Capital
Contributions, and the subscribers for such Units shall be admitted to the
Partnership as Additional Limited Partners within 15 days after the date of such
release. Thereafter, subscribers whose subscriptions are acceptable to the
General Partner shall be admitted to the Partnership as Additional Limited
Partners on or before the last day of the calendar month during which such
subscriptions were accepted. All cash and Promissory Notes deposited by
subscribers whose subscriptions are rejected by the General Partner shall be
returned to such subscribers within 10 business days after such rejection. If
the Escrow Agent does not receive Capital Contributions in the amount of at
least $1,400,000 within one year from the Offering Commencement Date, it shall
within 30 days thereafter return all cash and Promissory Notes
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deposited by subscribers for Units. Any interest earned on subscription funds in
the hands of the Escrow Agent received by the Escrow Agent from any subscriber
for Units shall be paid to such subscriber promptly after the release of such
subscription proceeds by the Escrow Agent to the Partnership or to such
subscriber, as the case may be. The General Partner, in its sole discretion,
may, but is not obligated to, increase the total interest earned by the
subscribers on funds held by the Escrow Agent. If so, the amount of the increase
in interest will be identified in the Prospectus. Any funds necessary to pay
such additional amount shall be contributed to the Partnership by the General
Partner.
3.3.4. The Offering shall be terminated not later than two years from the
Offering Commencement Date, and may be terminated earlier at the election of the
General Partner.
3.3.5. To accomplish the purpose of this Section 3.3, the General Partner
is hereby authorized to do all things necessary to admit such Additional Limited
Partners, including, but not limited to, registering the Units under the
Securities Act of 1933, as amended, qualifying the Units for sale with state
securities regulatory agencies or perfecting exemptions from qualification, and
entering into underwriting or agency arrangements for the Offering upon such
terms and conditions as the General Partner may deem advisable.
3.4. Payment or Return of Additional Limited Partners' Capital
3.4.1. (a) Each Limited Partner who subscribes for 10 or more Units may
elect to contribute only $500 in cash for each Unit which such Partner acquires,
provided that he also shall make a Note Capital Contribution in the amount of
$500 for each such Unit. The Note Capital Contribution of each such Limited
Partner shall be evidenced by a Promissory Note delivered upon subscription for
the Units. Each Promissory Note shall be payable in one installment of principal
on (i) January 31, 1999, if the maker subscribes for his Units between the date
hereof and June 30, 1998, (ii) June 30, 1999, if the maker subscribes for his
Units between July 1, 1998 and December 31, 1998, or (iii) the later of the date
of subscription or January 31, 2000, if the maker subscribes for his Units after
December 31, 1998. Each Promissory Note shall bear interest on the unpaid
balance at a rate equal to the one-year Treasury Bill rate, such rate to be
determined quarterly. Interest will be payable in arrears on the principal
payment date.
(b) Each Limited Partner who elects to pay for his Units in the
manner described in Section 3.4.1.(a) (an "Installment Contributor Limited
Partner") hereby grants to the Partnership a security interest in the Limited
Partner's Units to secure all of the Limited Partner's obligations under the
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Promissory Note, any modifications, renewals or extensions of the
Promissory Note and all of the Limited Partner's other obligations under this
Section 3.4.1.
(c) If an Installment Contributor Limited Partner defaults under
his Promissory Note or under any modifications, renewals or extensions thereof,
at the option of the Partnership, the entire unpaid principal balance of his
Promissory Note shall be immediately due and payable, the Promissory Note shall
continue to bear interest at the rate set forth in Section 3.4.1(a), a late
charge shall be imposed in an amount equal to 5% of any delinquent payment and
the Partnership shall be entitled to retain and, in any event, set off against
the amount owed to the Partnership by the defaulting Limited Partner, all
distributions attributable to the Units of the defaulting Limited Partner. In
addition, the Partnership may pursue any remedy available (including those
available under the provisions of the Uniform Commercial Code) or in equity to
collect, enforce and satisfy the obligations of the defaulting Limited Partner,
including the filing of a suit to obtain a judgment against the defaulting
Limited Partner.
The defaulting Limited Partner shall pay to the Partnership all costs
incurred by the Partnership in enforcing the Promissory Note, including but not
limited to costs of obtaining money damages and attorneys' fees. Each
Installment Contributor Limited Partner acknowledges that the Partnership may
pledge his Promissory Note as collateral security for Partnership debt. In the
event of a default under the Promissory Note, the Partnership or any other
holder of the Promissory Note, as applicable, may foreclose upon the defaulting
Limited Partner's interest in the Partnership and sell the Units in a
commercially reasonable manner to non-defaulting Limited Partners or to other
qualified investors on terms approved by the Partnership or any holder of the
Promissory Note. It is acknowledged by each Installment Contributor Limited
Partner that the purchase of the Units is a suitable investment only for Persons
meeting certain suitability standards and that it will be difficult for the
Partnership to find a suitable purchaser of the Units and to make adequate
disclosure of all of the then existing risks of the investment to prospective
purchasers. The General Partner and its Affiliates may (but are not obligated
to) purchase any such Units, but only if such Units have first been offered to
the non-defaulting Limited Partners. If Units are offered to non-defaulting
Limited Partners, they will be sold on a first-come, first-sold basis in
increments of whole Units only.
Each Installment Contributor Limited Partner agrees that in the event of a
default under his Promissory Note and a foreclosure and sale of his Units by the
Partnership or any holder of his Promissory Note, as applicable, the purchaser
of the Units in such a sale may be substituted as a Limited Partner in place of
the defaulting Limited Partner without any further consent being required from
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the defaulting Limited Partner, and specifically authorizes the General
Partner to execute on his behalf any amendment to the Partnership Agreement or
other documentation necessary to effect the substitution. Units acquired by the
Partnership through a foreclosure sale or otherwise may be reissued by the
Partnership.
Each Promissory Note shall (i) be made with full recourse to the maker;
(ii) not be a negotiable instrument; (iii) be assignable only subject to the
defenses of the maker; (iv) be subject to venue for collection in the
jurisdiction in which the Installment Contributor Limited Partner resides; (v)
not be sold by the Partnership prior to maturity; (vi) provide that a default in
a payment due shall not occur until 30 days after its due date; provided, that
until 30 days after default and notice thereof and intent to foreclose has been
given to the defaulting Limited Partner, such Limited Partner shall have the
right to cure such default with interest due thereon without suffering any
reduction in Interest in the Partnership and the Partnership may not commence
proceedings to enforce its security interest in the defaulting Limited Partner's
Units; (vii) not contain any provision authorizing a confession of judgment; and
(viii) be prepayable at any time in whole (but not in part) without penalty.
Subject to the foregoing, the Partnership may pledge and grant security
interests in Promissory Notes as security for any Partnership obligation.
3.4.2. In the event that any portion of the amount available for Investment
in Local Limited Partnership Interests is not so invested within the later of
(i) 24 months after the Offering Commencement Date, or (ii) 12 months after
termination of the Offering, such uninvested portion (except for Reserves) shall
be distributed to the Limited Partners who invested in the Partnership as a
return of capital. In addition, in order to refund to the Limited Partners the
amount of Front-End Fees attributable to such returned capital, the General
Partner shall contribute to the Partnership and the Partnership shall distribute
pro rata to the Limited Partners the amount by which the quotient of (x) the
amount of uninvested capital distributed pursuant to the foregoing sentence,
divided by (y) the percentage of the Capital Contributions which remain after
payment of all Front-End Fees, exceeds the uninvested capital so distributed.
Any funds (i) with respect to the investment of which the Partnership has
executed a written agreement in principle, commitment letter, letter of intent
or understanding, option agreement or other similar understanding or contract,
or (ii) which the Partnership has set aside or temporarily invested for Reserves
or to fund capital contributions to any Local Limited Partnerships as of the
later of (i) the date 24 months after the Offering Commencement Date or (ii) the
date 12 months after termination of the Offering will be deemed invested on that
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date and will not subsequently be returned to the Limited Partners even if
investment of such funds is not consummated or the contingent payments are not
made.
3.5. Liability of Limited Partners
3.5.1. A Limited Partner shall be liable only to make his Capital
Contribution, including his Note Capital Contribution, and shall not be liable
for the debts, liabilities, contracts or any other obligations of the
Partnership.
3.5.2. A Limited Partner may be obligated to return a distribution of cash
or other property received by him from the Partnership to the extent that,
immediately after giving effect to the distribution, all liabilities of the
Partnership, other than liabilities to Limited Partners on account of their
Interests in the Partnership and liabilities as to which recourse of the
creditors is limited to specified property of the Partnership, exceed the fair
value of the Partnership's assets, provided that the fair value of any Property
that is subject to a liability as to which recourse of creditors is so limited
shall be included in the Partnership's assets only to the extent that the fair
value of the Property exceeds the liability.
3.6. Miscellaneous
3.6.1. No Partner shall be paid interest on any Capital Contribution.
3.6.2. No Partner shall have the right to withdraw prior to the dissolution
and winding up of the Partnership or to receive any return of his Capital
Contribution except as specifically provided in Article 4 and Sections 3.4.2 and
8.2. No Capital Contribution may be returned in the form of property other than
cash, except as specifically provided in Section 8.2.
3.6.3. After its issuance by the Partnership, no Unit shall be subject to
Assessment. For these purposes, the term "Assessment" means additional amounts
of capital which may be mandatorily required of or paid at the option of a
Limited Partner beyond his subscription commitment. The term "Assessment" does
not mean a Limited Partner's Note Capital Contribution.
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ARTICLE 4
DISTRIBUTIONS OF CASH; ALLOCATIONS OF PROFITS AND LOSSES
4.1. Distributions of Cash Available for Distribution
Any Cash Available for Distribution at the end of any fiscal year shall be
distributed, within 120 days after the end of such fiscal year, 99% to the
Limited Partners and 1% to the General Partner.
4.2. Distributions of Sale or Refinancing Proceeds
4.2.1. Subject to other provisions of this Section 4.2, all Sale or
Refinancing Proceeds, to the extent not used to acquire Local Limited
Partnership Interests as permitted by Section 5.4.1(x), shall be distributed in
the following amounts and order of priority:
(i) First, to the Limited Partners until they have received (a) their
Adjusted Capital Contributions, plus (b) their Return on Investment minus (i)
any cash distributed by the Partnership to the Limited Partners pursuant to
Section 4.1 or this Section 4.2.1(i)(b) on or before the close of the year in
which the distribution of Sale or Refinancing Proceeds occurs, and (ii) an
amount equal to the Tax Credits allocated to the Limited Partners on or before
the close of such year (reduced by any recapture thereof arising other than as a
result of the disposition of a Unit by a Limited Partner);
(ii) Second, to the General Partner in an amount equal to (a) its Capital
Contribution minus (b) any amounts previously distributed to it from Sale or
Refinancing Proceeds; and
(iii) Third (after payment of any accrued but unpaid Subordinated
Disposition Fee), the balance 90% to the Limited Partners and 10% to the General
Partner.
4.2.2. Upon termination and winding up of the Partnership, after payment
of, or adequate provision for, the debts and obligations of the Partnership, and
the funding of any Reserves deemed reasonable by the General Partner, the
remaining assets of the Partnership shall be distributed to all Partners with
positive Capital Accounts in the ratio of their respective positive Capital
Accounts to the sum of all such positive Capital Accounts. For purposes of the
preceding sentence, the Capital Account of each Partner shall be determined
after all adjustments in accordance with this Article 4 resulting from
Partnership operations and from all Sales or Refinancings. If any assets of the
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Partnership are to be conveyed to a liquidating trust for the Partners
under Section 8.2.2, then prior thereto the Capital Account of each Partner
shall be credited or charged in accordance with this Article 4 with the amount
of Profits and Losses for Tax Purposes that would have been credited or charged
to reflect the distribution of such assets as though the adjusted basis of such
assets to the Partnership were equal to the fair market value of such assets, as
determined under Section 8.2.2.
4.2.3. Notwithstanding any other provision of this Agreement to the
contrary, the interest of the General Partner and of its Affiliates in cash to
be distributed by the Partnership or by any Local Limited Partnership from Cash
Available for Distribution, from Sale or Refinancing Proceeds, or from similar
sources in the case of a Local Limited Partnership, will not exceed, in the case
of Cash Available for Distribution, 10% of total Cash Available for Distribution
and, in the case of Sale or Refinancing Proceeds, after the payment to Limited
Partners of an amount equal to 100% of their Capital Contributions and their
Return on Investment, 15% of remaining Sale or Refinancing Proceeds.
Furthermore, the interest of the General Partner and its Affiliates as Local
General Partners and/or as the SLP Affiliate in operating cash flow of all Local
Limited Partnerships, plus the Asset Management Fee payable pursuant to Section
5.6.6, will not in any year exceed an amount equal to 0.5% of that portion of
Invested Assets in Local Limited Partnerships which are attributable to
apartment units receiving Government Assistance.
4.3. Profits and Losses
After taking into account all special allocations of income or gain and
Profits and Losses for Tax Purposes and otherwise adjusting the Partners'
Capital Accounts in accordance with the applicable provisions of Section 4.4,
any remaining Profits and Losses shall be allocated among the Partners in
accordance with this Section 4.3, subject to Section 4.7.
4.3.1. Unless Section 4.3.3 applies, if there is an aggregate Loss
remaining, such remaining aggregate Loss shall be allocated:
(i) First, to the extent of the positive Capital Account balances of the
Partners, in such manner and amount as is necessary to cause such balances, as
so adjusted, to be in the ratio of 99% to the Limited Partners and 1% to the
General Partner until such balances are reduced to zero;
(ii) Second, to the extent of the excess of Partnership Minimum Gain over
the aggregate negative Capital Account balances of the Partners with such
balances, to the General Partner and the Limited Partners in such manner and
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amount as is necessary to cause their negative Capital Account balances, as
so adjusted, to be in the ratio of 99% to the Limited Partners and 1% to the
General Partner; and
(iii) Third, to the General Partner.
4.3.2. Unless Section 4.3.3 applies, if there is an aggregate Profit
remaining, such remaining aggregate Profit shall be allocated:
(i) First, in the event that the Limited Partners have an aggregate
positive Capital Account balance and the General Partner has a negative Capital
Account balance or vice versa, to the class of Partners with and to the extent
of such negative balances;
(ii) Second, to the extent of the aggregate negative Capital Account
balances of the Partners, to the Limited Partners and the General Partner in
such manner and amount as is necessary to cause the negative Capital Account
balances of such Partners, as so adjusted, to be in the ratio of 99% to the
Limited Partners and 1% to the General Partner; and
(iii) Third, to the Limited Partners to the extent that their positive
Capital Account balances are less than their Adjusted Capital Contributions.
4.3.3. Notwithstanding any provision of this Section 4.3 to the contrary,
to the extent of (i) any aggregate Profit remaining after the allocations
provided in Section 4.3.2.(iii), or (ii) the lesser of the Partnership's
remaining aggregate Losses and the excess of the positive Capital Account
balances of the Limited Partners over their Adjusted Capital Contributions, any
such Profits or Losses shall be allocated among the Limited Partners and the
General Partner in such manner and amount as is necessary to cause the positive
Capital Account balances of the Partners to be equal to such Partners' Deemed
Liquidation Distribution.
4.3.4. Whenever in this Section 4.3 a reference is made to the Limited
Partners, such reference shall be deemed to be a reference to the Limited
Partners as a class.
4.3.5. Profits and Losses for Tax Purposes and the amount of any
expenditure giving rise to a Tax Credit shall be determined and allocated with
respect to each fiscal year of the Partnership as of, and within 75 days after,
the end of such year.
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4.4. Certain Provisions Related to Partnership Allocations and
Distributions
4.4.1.(i) The provisions of this Agreement related to the maintenance of
Capital Accounts, the allocation of Profits and Losses for Tax Purposes and Tax
Credits and the distribution of cash and property to the Partners are intended
to comply with the requirements of Treasury Regulation Section 1.704-1(b) by
causing the amount of such Profits and Losses for Tax Purposes to be allocated
among the Partners' Capital Accounts so that the amount in their Capital
Accounts as of the end of each fiscal year of the Partnership is equal to the
Partners' Deemed Liquidation Distributions. Where there would be no Deemed
Liquidation Distribution to the Partners, such provisions are intended to comply
with the above-referenced Treasury Regulations by (a) limiting the maximum
negative balance in the Capital Accounts of the Limited Partners, as a class, to
an amount not in excess of their aggregate share (determined in accordance with
Treasury Regulation Section 1.704- 2(g)) of Partnership Minimum Gain, (b)
allocating the Partnership's aggregate Nonrecourse Deductions to cause the
negative Capital Account balances of the Limited Partners, as a class, and the
General Partner to be in the ratio of 99% to the Limited Partners and 1% to the
General Partner, and (c) allocating to the Partners an amount of gross income or
gain of the Partnership to the extent necessary to cause the Partnership to
comply with clauses (a) and (b) of this sentence at the end of each fiscal year
of the Partnership. In addition, such provisions are intended to cause the
amount distributable to each Partner in an actual distribution pursuant to
Section 4.2.2 to equal the amount that would be distributable to each Partner if
Section 4.2.1 rather than Section 4.2.2 applied to such distribution.
(ii) If the Partnership is advised at any time by its Accountants or
counsel that the allocations of Profits and Losses for Tax Purposes and/or Tax
Credits are unlikely to be respected for Federal income tax purposes or that an
actual distribution to the Partners in accordance with Section 4.2.2 would not
result in each Partner receiving the amount that he would have received if
Section 4.2.1 rather than Section 4.2.2 applied to such distribution, the
General Partner is authorized and empowered, without any Consent of Limited
Partners, to amend this Agreement (other than Sections 4.1 and 4.2 hereof) to
cure such defect consistent with the principles of Section 4.4.1(i).
4.4.2. The Partners acknowledge that under certain circumstances specified
in the Treasury Regulations, the allocations of taxable income or loss and any
item thereof may not be respected for Federal income tax purposes, unless the
assets of the Partnership are revalued to reflect their fair market value and
the Capital Accounts of the Partners are properly adjusted to reflect the
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difference between this fair market value (referred to herein as the "Book
Value") and the Partnership's tax basis in such assets (or, in the case of a
prior revaluation, the Partnership's prior Book Value). The circumstances in
which such revaluation may be required include, without limitation, the
contribution of property (other than cash) to the Partnership by a Partner and
certain distributions of property by the Partnership to a Partner, as well as
any deemed distribution and contribution in accordance with Treasury Regulation
Section 1.708-1(b)(1)(iv). This Agreement does not permit or provide for the
contribution of property (other than cash) to the Partnership and does not
provide for the distribution of property (other than cash) to the Partners,
except for distributions to a liquidating trust for the Partners under Section
8.2.2. However, in the event that the Treasury Regulations are determined to
require such a revaluation, the Capital Accounts of the Partners shall be
properly adjusted to reflect such revaluation and the effect of such
contribution or distribution on liabilities that the recipient assumes or to
which the revalued property is subject. Any allocation of Profits and Losses for
Tax Purposes and any adjustment to the Partners' Capital Accounts required by
the Treasury Regulations as a result of such required revaluation, including,
without limitation, any adjustments required by Section 704(c) of the Code,
shall be made in accordance with the principles of Section 4.4.1(i).
4.4.3.(i) In the event any Limited Partners unexpectedly receive any
adjustments, allocations, or distributions described in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d)(4)-(ii)(d)(6), items of Partnership income and gain
(consisting of a pro rata portion of each item of the Partnership's income,
including gross income, and gain for such year) shall be specially allocated to
such Partners in an amount and manner sufficient to eliminate, to the extent
required by the Regulations, the Adjusted Capital Account Deficit created by
such adjustments, allocations, or distributions as quickly as possible.
(ii) In the event the adjusted tax basis of any investment tax credit
property that has been placed in service by the Partnership is increased
pursuant to Section 50(c)(2) of the Code, such increase shall be allocated among
the Partners (as an item in the nature of income or gain) in the same
proportions as the investment tax credit that is recaptured with respect to such
Property is shared among the Partners.
(iii) The Capital Account of each Limited Partner shall be reduced by a
charge equal to the amount of the selling commission paid by the Partnership to
the soliciting dealers that is properly allocable to the Units held by such
Limited Partner. Notwithstanding any provision of this Agreement to the
contrary, the Partnership shall be deemed to have distributed to each Limited
Partner, and the Capital Account of each Limited Partner shall be reduced by a
charge equal to, the excess of a 7% selling commission over the amount charged
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such Limited Partner's Capital Account as a selling commission in
accordance with the preceding sentence (the "Discount"). Any deemed distribution
pursuant to this Section 4.4.3(iii) shall not be deemed a return of a Partner's
Capital Contribution, but rather shall be deemed to be a compromise within the
meaning of Section 15636(c) of the Act, and no Partner shall be obligated to pay
any such amount to or for the benefit of the Partnership or any creditor of the
Partnership. With respect to each Designated Investor and each Discount
Investor: (a) the Capital Contribution of such Investor shall be deemed to be
equal to $1,000 for each Unit purchased; (b) the amount of the selling
commission paid by the Partnership that is properly allocable to the Units held
by such Investor shall be deemed to be the reduced selling commission; and (c)
such Investor shall not receive an actual distribution but shall be deemed to
have received a distribution pursuant to this Section 4.4.3(iii) equal to the
Discount. All other Syndication Expenses for any fiscal year or other period
shall be specially allocated to the Limited Partners in proportion to their
Units, provided that if additional Limited Partners are admitted to the
Partnership pursuant to Section 3.3 hereof on different dates, all of such other
Syndication Expenses shall be divided among the Partners who own Units from time
to time so that, to the extent possible, the cumulative amount of such other
Syndication Expenses allocated with respect to each Unit at any time is the same
amount. In the event the General Partner shall determine that such result is not
likely to be achieved through future allocations of such other Syndication
Expenses, the General Partner may allocate a portion of Profits and Losses for
Tax Purposes so as to achieve the same effect on the Capital Accounts of the
Limited Partners subject to the principles of Section 4.4.1.
(iv) Any reduction in the adjusted tax basis (or cost) of Partnership
property pursuant to Section 50(c)(1) of the Code shall be allocated among the
Partners (as an item in the nature of expenses or losses) in the same
proportions as the basis (or cost) of such property is allocated pursuant to
Treasury Regulation Section 1.46- 3(f)(2)(i).
(v) (a) Except as otherwise provided in Treasury Regulation Section 1.704-
2(f), if there is a net decrease in Partnership Minimum Gain during a fiscal
year of the Partnership, each Partner shall be allocated items of Partnership
income and gain for such year (and, if necessary, subsequent years) in
proportion to, and to the extent of, an amount equal to the portion of such
Partner's share of the net decrease in Partnership Minimum Gain during such
year.
(b) Except as otherwise provided in Treasury Regulation Section
1.704- 2(h), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain
during a fiscal year of the Partnership determined in accordance with the
principles of Section 1.704-2(i) of the Regulations, each Partner who had a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such year
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shall be allocated items of Partnership income and gain for such year (and,
if necessary, subsequent years) in proportion to, and to the extent of, an
amount equal to the portion of such Partner's share of the net decrease in
Partner Nonrecourse Debt Minimum Gain during such year that is allocable (in
accordance with the principles set forth in Treasury Regulation Section
1.704-2(i)) to the disposition of Partnership property subject to the related
Partner Nonrecourse Debt.
(c) For the purposes of this Section 4.4.3(v), the date of any Sale
or Refinancing shall be treated as the end of a fiscal year of the Partnership.
The character and origin of any income or gain allocated in accordance with this
Section 4.4.3(v) shall be determined in accordance with Treasury Regulation
Section 1.704-2(j).
(vi) The allocations set forth in Sections 4.4.2 and 4.4.3 hereof, other
than this Section 4.4.3(vi) and Section 4.4.3(vii) hereof (the "Regulatory
Allocations") are intended to comply with certain requirements of Treasury
Regulations. It is the intent of the Partners that, to the extent possible, all
Regulatory Allocations shall be offset either with other Regulatory Allocations
or with special allocations of other items of Partnership income, gain, loss or
deduction pursuant to this Section 4.4.3(vi). Therefore, notwithstanding any
other provision of this Article 4 (other than the Regulatory Allocations), the
General Partner shall make such offsetting special allocations of Partnership
income, gain, loss or deductions in whatever amount it determines appropriate so
that, after such offsetting allocations are made, each Partner's Capital Account
balance is, to the extent possible, equal to the Capital Account balance such
Partner would have had if the Regulatory Allocations were not part of the
Partnership Agreement and all Partnership items were allocated pursuant to the
provisions of this Article 4 other than the Regulatory Allocations. In
exercising its discretion under this Section 4.4.3(vi), the General Partner
shall take into account future Regulatory Allocations under Section 4.4.3(v)(a)
and (b) that, although not yet made, are likely to offset other Regulatory
Allocations previously made under Sections 4.4.3(viii) and (ix).
(vii) In any fiscal year in which Section 4.3.1(i) or (ii) applies to the
allocation of Losses or Section 4.3.2(ii) applies to the allocation of Profits,
the General Partner shall be specially allocated an amount of income, including
gross income, or gain from such fiscal year to the extent necessary to cause the
Capital Accounts of the Limited Partners and the General Partner to be in the
ratios stated in whichever of such sections is applicable.
(viii) Notwithstanding Section 4.3.1, any deduction attributable to Partner
Nonrecourse Debt shall be allocated to the Partners that bear the Economic Risk
of Loss for the Partner Nonrecourse Debt.
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(ix) Except as otherwise expressly provided herein, Nonrecourse Deductions
shall be allocated 99% to the Limited Partners and 1% to the General Partner.
4.4.4. For the purpose of making any allocation of Profit and Loss for Tax
Purposes, the Capital Account of each Partner shall first be deemed to have been
reduced by the amount of any distribution that, at the end of the fiscal year of
the Partnership with respect to which such allocation is to be made, was
reasonably anticipated to be made to such Partner pursuant to Section 4.1 or
Section 4.2.1, except to the extent that, in compliance with Treasury Regulation
Section 1.704- 1(b)(2)(ii)(d)(6), the General Partner reasonably anticipates
that the Partnership will subsequently have offsetting income or gains.
4.4.5. To the extent that any amount of gain from the sale or other
disposition of a Property is treated as gain subject to the provisions of
Section 1245 or 1250 of the Code (other than as a result of the application of
Section 291 of the Code), such gain shall be allocated between the Limited
Partners, as a class, and the General Partner in the manner and amount necessary
to offset the amount of depreciation previously allocated to them that is being
recaptured as a result of such sale or other disposition (including any amount
so treated as a result of the application of Section 50(c) of the Code);
provided, however, that nothing in this Section 4.4.5 shall alter the aggregate
amount of Profits and Losses for Tax Purposes allocable to any Partner pursuant
to this Article 4, and the character of other items included in such Profits and
Losses for Tax Purposes for the relevant period shall be appropriately adjusted
to give effect to this provision.
4.4.6. All amounts withheld pursuant to the Code or any provision of any
state or local tax law with respect to any distribution to, or allocable share
of, the Partners shall be treated as amounts distributed to the Partners
pursuant to this Article 4 for all purposes under this Agreement. The General
Partner may allocate any such amounts among the Limited Partners in any manner
that is in accordance with applicable law.
4.4.7. Where relevant in determining the allocation of Profits and Losses
for Tax Purposes among the Partners, including the character of any amount so
allocated, such Profits and Losses arising other than from a Sale or Refinancing
shall be allocated among the Partners before the allocation of such Profits and
Losses from a Sale or Refinancing, and where more than one Sale or Refinancing
occurs during the fiscal year, Profits and Losses for Tax Purposes from such
transactions shall be allocated among the Partners in chronological order.
4.4.8. To the extent permitted by Section 1.704-2(h)(3) of the Treasury
Regulations, the General Partner shall endeavor to treat Partnership
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distributions as having been made from the proceeds of a Nonrecourse
Liability or a Partner Nonrecourse Debt only to the extent that such
distributions would cause or increase an Adjusted Capital Account Deficit for
any Limited Partner.
4.4.9 Any interest income recognized by the Partnership in connection with
payments to the Partnership pursuant to a Promissory Note shall be allocated to
the Limited Partner which delivered such Promissory Note to the Partnership (or
his successor in interest).
4.5. Allocation of Tax Credits
4.5.1. Except as provided in Section 4.5.2, in accordance with Treasury
Regulation Section 1.704-1(b)(4)(ii), all expenditures giving rise to the
allowance of any Tax Credits shall be allocated among the Partners in the manner
in which the deductions arising from such expenditures are allocated among the
Partners for the relevant taxable year, it being the intention of the Partners
that such expenditures, including, without limitation, expenditures giving rise
to the allowance of Low Income Housing Credits, be allocated 99% to the Limited
Partners, as a class, and 1% to the General Partner.
4.5.2. For purposes of the investment tax credit, including the Historic
Tax Credit, each Partner shall be allocated a share of the Partnership's basis
in the property qualifying for the investment tax credit. Each Partner's share
of such basis shall be determined in accordance with the ratio in which the
Partners are allocated Profits of the Partnership (other than Profits from a
Sale or Refinancing) for the year during which the property is placed in
service. If the Partnership realizes no Profits during such year, then such
share of such basis shall be determined in accordance with the ratio in which
the next dollar of such Profits would have been allocated if such Profits had
been realized.
4.5.3. Any recapture of any Tax Credits shall be allocated between the
Limited Partners, as a class, and the General Partner in the same manner in
which they shared the Tax Credits.
4.5.4. Notwithstanding Section 4.5.3, in the case of any recapture of any
Tax Credits resulting from the sale, exchange, transfer or assignment of any
Units, the Limited Partners holding such Units prior to the sale, exchange,
transfer or assignment shall indemnify the Partnership and the Partners not
transferring their Units for the consequences of such recapture in the
proportion in which such transferred Units shared the Tax Credits.
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4.6. Determinations of Allocations and Distributions
Within Classes of Partners
4.6.1. All Cash Available for Distribution and Sale or Refinancing Proceeds
distributable to the Limited Partners as a class, and all Profits and Losses for
Tax Purposes and Tax Credits (including each item of income, gain, loss,
deduction or credit included therein, except as provided in Section 4.4)
allocable to the Limited Partners as a class, shall be distributed or allocated,
as the case may be, to each Limited Partner entitled to a distribution or
allocation, in the ratio which the number of Units held by each Limited Partner
bears to the total number of Units held by all Limited Partners entitled to the
distribution or allocation.
4.6.2. Except a provided in Sections 3.3.3, 4.6.3, 4.6.4, and 4.6.5, all
Profits and Losses for Tax Purposes not arising from a Sale or Refinancing and
all Tax Credits allocable to the Limited Partners as a class, shall be
allocated, and all Cash Available for Distribution distributable to the Limited
Partners as a class shall be distributed, to the Persons recognized (in
accordance with Section 7.3.3 in the case of a transfer of Units) as the holders
of Units for this purpose as of the last day of the fiscal period for which the
allocation or distribution is to be made.
4.6.3. Subject to Section 4.6.5, all Profits and Losses for Tax Purposes
not arising from a Sale or Refinancing and all Tax Credits for a fiscal year
allocable to any Unit which is transferred during the year shall be divided and
allocated between the transferee and the transferror based upon the number of
quarterly periods that each was recognized (in accordance with Section 7.3.3) as
the holder of the Unit for this purpose, without regard to whether Partnership
operations during particular quarterly periods of such fiscal year produced
profits or losses or cash distributions.
4.6.4. All Profits and Losses for Tax Purposes arising from a Sale or
Refinancing allocable to the Limited Partners as a class shall be allocated, and
all Sale or Refinancing Proceeds distributable to the Limited Partners as a
class shall be distributed, to the Persons recognized (in accordance with
Section 7.3.3 in the case of a transfer of Units) as the holders of Units for
this purpose as of the date of the Sale or Refinancing, except as provided in
the following sentence. All Profits and Losses for Tax Purposes which are
attributable to, and all Sale or Refinancing Proceeds which represent, Sale or
Refinancing Proceeds not received by the Partnership as cash upon a sale but
later received by the Partnership as a result of an Installment Sale (as defined
in Section 4.7) or other deferred payment arrangement and distributable or
allocable to the Limited Partners as a class in accordance with Section 4.7,
shall be allocated or distributed, as the case may be, to the Persons recognized
as the holders of Units for this purpose as of the date the deferred Sale or
Refinancing Proceeds are received by the Partnership (or, in the
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case of a transfer of such Unit that is treated, under Section 7.3.3, as
occurring after the date of such Installment Sale or other deferred payment
arrangement, to the transferee of such Unit).
4.6.5. In the event that there is more than one Investor Closing, all Cash
Available for Distribution and Profits and Losses for Tax Purposes not arising
from a Sale or Refinancing, distributable or allocable, as the case may be, to
the Limited Partners as a class for the period commencing with the first day of
the month of the Investor Closing and ending on the last day of the month of the
Investor Closing will be distributed or allocated, as the case may be, on a
monthly basis in accordance with Section 4.6.1 solely to the Limited Partners
admitted to the Partnership as of or prior to the Investor Closing date which
occurs during such month.
4.7. Installment Obligations
4.7.1. If as a result of the sale by a Local Limited Partnership of its
Property or of a sale by the Partnership of a Local Limited Partnership Interest
which results in the receipt of an installment obligation, including, without
limitation, a purchase money mortgage or a purchase contract prescribing one or
more payments following closing of the sale (an "Installment Obligation") as
part of the purchase price (an "Installment Sale"), after payment of, or
adequate provision for, the currently payable debts and obligations of the
Partnership and any Reserves deemed appropriate by the General Partner, the
aggregate of the cash, if any, received and the principal and interest payments
to be made under the Installment Obligation shall be distributed following
actual receipt of such payments by the Partnership between the General Partner
and the Limited Partners as a class in accordance with their Distribution
Percentages in such sales proceeds. The "Distribution Percentages" of the
General Partner and the Limited Partners as a class with respect to an
Installment Obligation shall equal the percentage of the total distributions
that they would have been entitled to receive under the provisions of Section
4.2, if the Partnership had received the amount of cash actually received from
such Installment Sale plus cash equal to the present value of such Installment
Obligation at the closing of the related Installment Sale. The present value of
an Installment Obligation shall be determined with respect to the total payments
of principal and interest to be made under the Installment Obligation (without
regard to any rights of prepayment or prepayment premiums), by applying a
discount rate equal to the current yield, on the date of the Installment Sale,
on a United States Treasury obligation, selected by the General Partner, having
a stated maturity comparable to the ultimate stated maturity date of such
Installment Obligation.
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4.7.2. Notwithstanding the provisions of Section 4.3, any Profits and
Losses for Tax Purposes resulting from an Installment Sale (including, without
limitation, any amount of income or gain attributable to the relevant
Installment Obligation as a result of (i) the application of Section 453C of the
Code or (ii) the disposition thereof by the Partnership or Local Limited
Partnership, but excluding any interest income to which Section 4.7.3 applies)
shall be allocated between the General Partner and the Limited Partners as a
class in accordance with their Allocation Percentages in such Profits and Losses
for Tax Purposes. The Allocation Percentages of the General Partner and the
Limited Partners as a class shall equal the percentage of the total Profits and
Losses for Tax Purposes deemed recognized by the Partnership in accordance with
this sentence that would have been properly allocable to the General Partner and
the Limited Partners as a class under the provisions of Section 4.3 if the
Partnership had received the amount of cash actually received from such
Installment Sale plus cash equal to the present value of the Installment
Obligation at the closing of the Installment Sale, as determined under Section
4.7.1.
4.7.3. Any interest income on an Installment Obligation shall be allocated,
when and if accrued by the Partnership, between the General Partner and the
Limited Partners as a class in accordance with their Distribution Percentages in
such Installment Obligation.
4.7.4. For purposes of calculating each Partner's share of Profits and
Losses for Tax Purposes and Tax Credits, the Partnership will be deemed to have
distributed to the General Partner and the Limited Partners as a class their
respective Distribution Percentages, on the date of the closing of an
Installment Sale, of the present value of the Installment Obligation, as
determined under Section 4.7.1. Any amounts deemed to have been distributed to
the Limited Partners as a class will reduce Adjusted Capital Contributions and
Capital Accounts as of the date of the Installment Sale, and the actual receipt
by the Partners of any proceeds from an Installment Sale shall not further
reduce Adjusted Capital Contributions and Capital Accounts.
ARTICLE 5
RIGHTS, POWERS AND DUTIES OF GENERAL PARTNER
5.1. Management of the Partnership
5.1.1. Subject to the Consent of the Limited Partners (or of a specified
percentage thereof) where required by this Agreement, the General Partner shall
have the exclusive right and authority to manage and control the business of the
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Partnership and is hereby authorized to take any action and to do anything it
deems necessary to achieve the purposes of the Partnership in accordance with
the provisions of this Agreement and applicable law.
5.1.2. The General Partner shall, except as otherwise provided in this
Agreement, have all rights and powers and shall be subject to all the
restrictions and liabilities of a partner in a partnership without limited
partners.
5.1.3. No Limited Partner (except one who may also be a General Partner,
and then only in its capacity as a General Partner) shall participate in or have
any control over the Partnership business or have any authority or right to act
for or bind the Partnership.
5.2. General Authority of General Partner
5.2.1. Subject to Sections 5.2.2, 5.3 and 5.4, the General Partner for, and
in the name and on behalf of, the Partnership is hereby authorized, without
limitation:
(i) to acquire, hold, encumber, sell, dispose of and otherwise deal with
Local Limited Partnership Interests, at such price and upon such terms as it
deems to be in the best interests of the Partnership, including exercise of the
Partnership's voting and other rights and powers as a limited partner in the
Local Limited Partnerships;
(ii) to acquire by purchase, lease, exchange or otherwise, any other real
or personal property;
(iii) to borrow money and issue evidences of indebtedness, and to secure
the same by pledge or other lien on any Local Limited Partnership Interests or
other assets of the Partnership;
(iv) to employ agents, employees, managers, accountants, attorneys,
consultants and other Persons necessary or appropriate to carry out the business
and operations of the Partnership, and to pay fees, expenses, salaries, wages
and other compensation to such Persons;
(v) to pay, extend, renew, modify, adjust, submit to arbitration,
prosecute, defend or compromise, upon such terms as it may determine and upon
such evidence as it may deem sufficient, any obligation, suit, liability, cause
of action or claim, including taxes, either in favor of or against the
Partnership;
(vi) to cause the Partnership to make or revoke any of the elections
referred to in the Code;
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(vii) to offer and sell Units in the Partnership to the public directly or
through any licensed Person and to employ personnel, agents and dealers for such
purpose;
(viii) to establish and maintain Reserves for such purposes and in such
amounts as it deems appropriate from time to time, it being understood and
agreed that, after the termination of the Offering, the General Partner shall
establish initial Reserves out of Capital Contributions, in the manner
contemplated by the Prospectus, in an amount equal to not less than 3% of such
Capital Contributions;
(ix) to invest the Net Proceeds in Temporary Investments prior to
investment in Local Limited Partnership Interests;
(x) to engage in any kind of activity necessary to, or in connection with,
or incidental to the accomplishment of the purposes of the Partnership;
(xi) to withhold income taxes as required by, and to otherwise comply with
and take actions necessary as a result of, provisions of the Code (or comparable
provisions of law in any state or other jurisdiction in which the Partnership
does business) requiring withholding; and
(xii) in the absolute discretion of the General Partner, at any time after
conclusion of the Offering, to repurchase any Units upon the request of the
holder thereof on terms mutually agreeable to the Partnership and such holder if
the repurchase does not impair the capital or the operations of the Partnership.
Neither the Partnership nor the General Partner shall, at any time, have any
obligation whatsoever to repurchase any Units.
5.2.2. Notwithstanding any provision in this Agreement to the contrary, it
is understood and agreed that in selecting Local Limited Partnership Interests
for investment by the Partnership the General Partner shall be bound by the
following investment policies which may not be changed, altered or amended,
except as provided in Section 10.2:
(i) the Partnership shall make investments only in Local Limited
Partnerships which own completed Apartment Complexes or are in the process of
developing new Apartment Complexes or rehabilitating Apartment Complexes which
shall be eligible, in the opinion of counsel, (a) for the Low Income Housing
Credit, and/or (b) the Historic Tax Credit;
(ii) the Partnership shall not acquire any Local Limited Partnership
Interest unless the Partnership has received, with respect to the Apartment
Complex of such Local Limited Partnership, either (i) an appraisal prepared by a
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competent, independent appraiser or (ii) RD Forms 1924-13 (estimate and
certificate of actual cost) and 1930-7 (statement of budget, income and expense)
or HUD project cost and budget analysis on Form 2264, or a comparable form of
any successor of RD or HUD or of a state or other governmental agency, including
any applicable Tax Credit allocation agency, setting forth estimates with
respect to construction and mortgage financing costs and initial rental income
and operating expenses, which in either case shall be maintained in the
Partnership's records for at least five years, and shall be available for
inspection and duplication by any Partner;
(iii) no part of the Partnership's investment in a Local Limited
Partnership (other than a Local Limited Partnership which owns a completed
Apartment Complex at the time of the Partnership's initial investment therein)
shall be made prior to receipt of a commitment for the construction loan, and no
more than 75% of the Partnership's investment in such a Local Limited
Partnership shall be made prior to receipt of a commitment for the permanent
loan;
(iv) the agreements with respect to each Local Limited Partnership (other
than a Local Limited Partnership which owns a completed Apartment Complex at the
date of the Partnership's initial investment therein) must contain provisions
whereby the completion of construction of the Apartment Complex at the price
contracted is secured by an adequate completion bond or other satisfactory
arrangements. For the purposes of this Section 5.2.2(iv), other satisfactory
arrangements include, but are not limited to, the following:
(a) a written guarantee of completion by the Local General Partner
supported by financial statements demonstrating sufficient net worth or
adequately collateralized by other real or personal properties or other Persons'
guarantees; or
(b) a retention of a reasonable portion of the purchase
consideration as a potential offset to such purchase consideration in the event
the Local General Partner does not perform in accordance with such agreement;
(v) the Partnership shall not invest in any Local Limited Partnership
unless an experienced real estate developer has agreed in writing for a minimum
term acceptable to the General Partner to supervise management of the Property
or to serve as its managing Local General Partner or Property manager;
(vi) the Partnership shall invest only in Local Limited Partnerships which
restrict the payment of real estate commissions by any Person to any Person upon
resale of an Apartment Complex to a maximum of the lesser of (a) the Competitive
Real Estate Commission or (b) 6% of the sales price of the Apartment Complex
(including the amount of the commission paid);
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(vii) the Partnership shall invest only in Local Limited Partnerships as
follows:
(a) if the Local General Partner of the Local Limited Partnership
is a Sponsor, the partnership agreement of the Local Limited Partnership must
include provisions (1) complying with Section IX.F. of the NASAA Guidelines, (2)
acknowledging privity between the Local General Partner and the Limited
Partners, (3) providing that the compensation payable to the Sponsor in the
aggregate from both the Partnership and the Local Limited Partnership shall not
exceed the amounts permitted under Section IV. of the NASAA Guidelines, (4)
providing that the Local Limited Partnership have as its limited partners only
publicly registered partnerships, except that special limited partners not
affiliated with the Sponsor shall be permitted if the interests taken by the
special limited partners result in no diminution in the control exercisable by
the other limited partners of the Local Limited Partnership, and (5) providing
that the Partnership's investment in the Local Limited Partnership shall not be
structured through more than a two-tier arrangement;
(b) if the Local General Partner of the Local Limited Partnership
is not a Sponsor, the partnership agreement of the Local Limited Partnership
must include provisions granting to the limited partners therein rights and
obligations with respect to such Local Limited Partnership similar to those
granted to the Limited Partners with respect to the Partnership in Sections
3.3.3 (respecting admissions), 3.6.3, 5.2.1(xii), 5.4.1(ix), 5.4.1(x), 5.4.2,
5.5.4, 5.5.6, 6.1, 7.1, 7.3.2, 7.4, 9.1, 9.4, 10.1, 10.2, 12.1.2 and 13.9
hereof;
(viii) the Partnership shall invest in Local Limited Partnerships jointly
with other limited partnerships (including limited partnerships which are
controlled by or otherwise affiliated with the General Partner) (the Partnership
and any other limited partnership being referred to hereinafter as a "Program")
only if each of the following conditions is satisfied:
(a) the two Programs have substantially identical investment
objectives;
(b) there are no duplicate property management or other fees;
(c) the compensation to the sponsor of each Program is substantially
identical in each Program;
(d) each Program will have a right of first refusal if the other
Program wishes to sell its Local Limited Partnership Interest;
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(e) the investment of each Program is on substantially the same
terms and conditions;
(f) if the other Program is controlled by or otherwise affiliated
with the General Partner, the other Program must be publicly registered under
the Securities Act of 1933; and
(g) if the other Program is not controlled by or otherwise affiliated
with the General Partner, the Partnership must acquire a Controlling Interest in
the joint venture. For this purpose the phrase "Controlling Interest" means
possessing the power to direct or cause the direction of the activities and
policies of the joint venture, whether through ownership of securities, by
contract, by the exercise of a power of veto over its activities and policies
other than in the ordinary course of business, or otherwise;
(ix) the Partnership shall commit a percentage of the Limited Partners'
Capital Contributions to Investment in Local Limited Partnership Interests which
is at least equal to the greater of (a) 80% of the Capital Contributions reduced
by 0.1625% for each 1% of the aggregate indebtedness secured or to be secured by
all liens and mortgages encumbering Properties owned by Local Limited
Partnerships or (b) 70% of the Capital Contributions. For purposes of this
calculation, the percentage of "aggregate indebtedness secured or to be secured
by all liens and mortgages encumbering Properties owned by Local Limited
Partnerships" is the percentage resulting when the Partnership's share of such
aggregate indebtedness is divided by the Partnership's share of the aggregate of
the Purchase Prices of all Properties held by Local Limited Partnerships,
excluding Front-End Fees. If the total amount of Front-End Fees must be reduced
in order to enable the Partnership to satisfy the foregoing restrictions, the
General Partner shall, and shall cause its Affiliates or other Persons to,
reimburse the Partnership for the amount of Front-End Fees received by them as
necessary to enable the Partnership to meet this investment requirement; and
(x) the Partnership may invest in Local Limited Partnerships owning
existing Apartment Complexes which have experienced cash flow or operational
difficulties, including mortgage delinquencies, provided that the following are
satisfied with respect to any such investment: (a) a satisfactory workout
arrangement is in place, (b) the General Partner has determined that the risk
associated with the investment is not significantly greater than the risk
associated with an investment in a newly-constructed Apartment Complex, and (c)
not more than 10% of Investment in Local Limited Partnership Interests is
invested in such Local Limited Partnerships. For purposes of this Section
5.2.2(x), an Apartment Complex which has been subject to substantial
rehabilitation shall not be considered to be an existing property.
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5.2.3. With respect to each of its obligations, powers and responsibilities
under this Agreement, the General Partner is authorized to execute and deliver,
for and on behalf of the Partnership, such notes and other evidences of
indebtedness, contracts, agreements, assignments, deeds, leases, loan
agreements, mortgages and other security instruments and agreements as it deems
proper, all on such terms and conditions as it deems proper.
5.2.4. Any Person dealing with the Partnership or the General Partner may
rely upon a certificate signed by the General Partner as to:
(i) the identity of the General Partner or any Limited Partner;
(ii) the Persons who are authorized to execute and deliver any instrument
or document of or on behalf of the Partnership;
(iii) the existence or non-existence of any fact or facts which constitute
a condition precedent to acts by the General Partner or in any other manner are
germane to the affairs of the Partnership; or
(iv) any act or failure to act by the Partnership or as to any other matter
whatsoever involving the Partnership or any Partner.
5.3. Authority of General Partner and its Affiliates to Deal with
Partnership
5.3.1. Without limitation upon the other powers set forth herein, the
General Partner is expressly authorized for, in the name of, and on behalf of,
the Partnership to:
(i) subject to the limitations set forth herein, pay to the General Partner
or any of its Affiliates designated by them the compensation provided for in
Section 5.6 hereof;
(ii) borrow funds from the General Partner or any of its Affiliates;
provided, however, that such borrowings may only be made on a short-term basis
(not to exceed one year) and provided further that the Partnership may not pay
in connection therewith (a) interest or other financing charges or fees in
excess of the amounts which would be charged by unrelated lending institutions
on comparable loans for the same purpose in the same locality (and in no event
may interest on such borrowings exceed 2% per annum above the Prime Rate) or (b)
any prepayment charge or penalty;
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(iii) in connection with the organization of the Partnership and the
Offering, the Partnership shall pay, or reimburse the General Partner or its
Affiliates for advances made to cover, Organizational and Offering Expenses,
including salaries and direct expenses of employees of the General Partner and
its Affiliates directly engaged in the organization and Offering of the
Partnership to the extent such salaries and expenses are allocable thereto;
provided that the General Partner or its Affiliates shall pay all Organizational
and Offering Expenses (with the exception of retail selling commissions equal to
7% of the Capital Contributions, the Dealer-Manager Fee, and the Nonaccountable
Expense Reimbursement) in excess of 3% of the Capital Contributions. However, if
and to the extent Acquisition Expenses are less than the maximum permitted
amount, as set forth in Section 5.3.1(iv), the difference between the actual
Acquisition Expenses and the maximum permitted amount of Acquisition Expenses
will reduce the General Partner's obligation to pay such Organizational and
Offering Expenses, provided, however, that in any event the General Partner
shall pay all such Organizational and Offering Expenses which exceed 4.5% of the
Capital Contributions. In addition, the General Partner shall pay any
Organizational and Offering Expenses (including retail selling commissions equal
to 7% of the Capital Contributions, the Dealer-Manager Fee, and the
Nonaccountable Expense Reimbursement) in excess of 14.5% of the Capital
Contributions;
(iv) in connection with the acquisition by the Partnership of investments
in Local Limited Partnerships, the Partnership shall pay, or reimburse the
General Partner or its Affiliates for advances made to cover, Acquisition
Expenses, provided that the General Partner shall pay any Acquisition Expenses
in excess of 1.5% of Capital Contributions;
(v) deal with, or otherwise engage in business with, or provide services to
and receive compensation therefor from, any Person who has provided any services
to, lent money to, sold property to, or purchased property from, the General
Partner or any of its Affiliates;
(vi) require in any or all Partnership contracts that the General Partner
shall not have any personal liability thereon but that the Person contracting
with the Partnership shall look solely to the Partnership and its assets for
satisfaction; however, if any additional cost is imposed upon the Partnership as
a result of such a requirement, such additional cost shall be paid by the
General Partner from its own funds, without recourse to the funds of the
Partnership;
(vii) subject to the provisions of Section 5.2.2(vii) hereof, exercise the
right to cause an Affiliate of the General Partner to become a Local General
Partner, including the sole Local General Partner, of a Local Limited
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Partnership (a) upon request by a lender that such action be taken, (b) in
the event of the bankruptcy, death, dissolution, withdrawal, removal or
adjudication of incompetence of a Local General Partner, or (c) in the event of
a material default by a Local General Partner or any of its Affiliates on any
obligations of such Local General Partner or Affiliate to the Local Limited
Partnership or to the Partnership or upon a material default by the Local
Limited Partnership under its mortgage loan or upon the occurrence of certain
other events; and
(viii) exercise the right to cause the SLP Affiliate to become a special
limited partner of each Local Limited Partnership upon the terms and for the
interest in the Local Limited Partnership described in the Prospectus.
5.3.2. Other than as specifically authorized in this Section 5.3, the
General Partner is prohibited from entering into any agreements, contracts or
arrangements on behalf of the Partnership with the General Partner or any
Affiliate of the General Partner. Such prohibition shall include, without
limitation, the following:
(i) the Partnership shall not purchase any Local Limited Partnership
Interest or Apartment Complex from the Sponsor unless such purchase is pursuant
to the right of first refusal required by Section 5.2.2(viii) hereof or unless
such Person purchased the Local Limited Partnership Interest or the Apartment
Complex which is the principal asset of the Local Limited Partnership in its
name in order to facilitate the acquisition of such Local Limited Partnership
Interest or Apartment Complex by the Partnership; provided, however, that in the
event of such an acquisition from the Sponsor (a) the purchase price paid by the
Partnership may not (except to the extent of any reimbursement by the
Partnership of carrying costs) exceed the cost of such Local Limited Partnership
Interest or Apartment Complex to the seller; (b) no compensation or other
benefit from the transaction may accrue to the Sponsor except as otherwise
permitted by this Agreement; (c) the seller has not held the Local Limited
Partnership Interest or Apartment Complex for a period in excess of twelve
months prior to commencement of the Offering; (d) there is no difference in
interest terms of the loans secured by the Local Limited Partnership Interest or
Apartment Complex at the time acquired by the Sponsor and the time acquired by
the Partnership; (e) all income and expense which accrues to the Sponsor as a
result of the ownership of such Local Limited Partnership Interest or Apartment
Complex shall be treated as belonging to the Partnership; (f) the cost of the
Local Limited Partnership Interest or Apartment Complex may not exceed the funds
reasonably anticipated to be available to the Partnership to purchase such
asset; and (g) the seller is not a Program in which the General Partner has an
interest. For this purpose, the term "Program" shall mean a limited or general
partnership, joint venture, unincorporated association or similar organization
other than a corporation formed and operated for the primary purpose of
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investment in and the operation of or gain from an interest in real
property including such entities formed to make or invest in mortgage loans;
(ii) neither the General Partner nor any of its Affiliates shall enter into
an agreement or contract with a Local Limited Partnership for the development of
any Apartment Complex or the construction of improvements with respect to any
Apartment Complex;
(iii) neither the General Partner nor any of its Affiliates shall receive
directly or indirectly a commission or fee in connection with the reinvestment
of the proceeds of the sale, exchange or refinancing of any Local Limited
Partnership Interest or any Apartment Complex;
(iv) neither the General Partner nor any of its Affiliates shall provide
insurance brokerage services in connection with obtaining any insurance policy
covering any Apartment Complex;
(v) neither the General Partner nor any of its Affiliates shall be given an
exclusive right to sell or exclusive employment to sell any Local Limited
Partnership Interest for the Partnership or any Apartment Complex for any Local
Limited Partnership;
(vi) except as provided in Section 5.3.1(viii) hereof, neither the
Partnership nor any Local Limited Partnership shall sell any Local Limited
Partnership Interest or Apartment Complex to, or lend any funds to, the General
Partner or any of its Affiliates; and
(vii) no rebates or give-ups may be received by the General Partner or any
of its Affiliates, nor may the General Partner or any of its Affiliates
participate in any reciprocal business arrangement which would have the effect
of circumventing any of the provisions of this Agreement.
5.3.3. All of the Partnership's expenses shall be billed directly to and
paid by the Partnership to the extent practicable. Reimbursements to the General
Partner or any of its Affiliates by the Partnership shall be allowed only for
the Partnership's Organizational and Offering Expenses, Acquisition Expenses and
Operating Cash Expenses and only subject to the limitations on the reimbursement
of such expenses
set forth herein.
5.3.4. Reimbursement to the General Partner or any of its Affiliates of
Operating Cash Expenses pursuant to Section 5.3.3 hereof shall be subject to the
following:
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(i) No such reimbursement shall be permitted for services for which the
General Partner or any of its Affiliates is entitled to compensation by way of a
separate fee; and
(ii) No such reimbursement shall be made for (a) rent or depreciation,
utilities, capital equipment or other such administrative items, and (b)
salaries, fringe benefits, travel expenses and other administrative items
incurred or allocated to any "controlling person" of the General Partner or any
Affiliate of the General Partner. For the purposes of this Section 5.3.4(ii),
"controlling person" includes, but is not limited to, any Person, however
titled, who performs functions for the General Partner or any Affiliate of the
General Partner similar to those of: (1) chairman or member of the board of
directors; (2) executive management, such as president, vice president or senior
vice president, corporate secretary or treasurer; (3) senior management, such as
the vice president of an operating division who reports directly to executive
management; or (4) those holding 5% or more equity interest in the General
Partner or any Affiliate of the General Partner or a person having the power to
direct or cause the direction of the General Partner or any Affiliate of the
General Partner, whether through the ownership of voting securities, by contract
or otherwise.
5.4. Restrictions on Authority of General Partner
5.4.1. The General Partner shall not:
(i) do any act in contravention of this Agreement;
(ii) do any act which would make it impossible to carry on the ordinary
business of the Partnership;
(iii) possess Partnership property, or assign the Partnership's rights in
specific Partnership property, for other than a Partnership purpose;
(iv) admit a Person as a General Partner, except as provided in this
Agreement;
(v) admit a Person as a Limited Partner, except as provided in this
Agreement;
(vi) directly or indirectly pay or award any commissions or other
compensation to any Person engaged by a potential investor in the Partnership
for investment advice as an inducement to such adviser to advise the purchase of
Units, but this clause shall not prohibit the payment of the selling commissions
and other underwriting compensation contemplated herein or in the Prospectus to
a registered broker-dealer or other properly-licensed Person for selling Units;
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(vii) cause the Partnership to lend any funds to any Person (other than in
connection with Temporary Investments), except that the General Partner may
cause the Partnership to make loans to or to post letters of credit for Local
Limited Partnerships in which the Partnership is expected to own a Local Limited
Partnership Interest, provided that in the case of any such loan (a) the loan is
made prior to the date that the Partnership makes its initial capital
contribution to the Local Limited Partnership, (b) the total amount of all such
loans does not exceed 50% of the Limited Partners' Capital Contribution
committed to the investment in such Local Limited Partnership, and (c) such
borrowings may only be made on a short-term basis (not to exceed one year) and
must, unless earlier repaid, be repaid from the Partnership's initial capital
contribution to the Local Limited Partnership at the time such initial capital
contribution is made;
(viii) cause the Partnership to acquire unimproved or nonincome producing
property (but this clause shall not restrict the rights of the Partnership to
invest in Local Limited Partnerships owning Apartment Complexes under
construction or rehabilitation or Apartment Complexes as to which construction
or rehabilitation has not commenced but with respect to which closing of the
construction loan has occurred or the Apartment Complex site has been acquired
and a construction loan commitment has been obtained);
(ix) cause the Partnership to utilize Cash Available for Distribution to
acquire Local Limited Partnership Interests;
(x) cause the Partnership to reinvest Sale or Refinancing Proceeds unless a
sufficient portion thereof is distributed to the Limited Partners to enable each
Limited Partner, assuming that he is in a combined Federal, state and local
marginal income tax bracket of 30%, to pay the Federal, state and local income
tax liability arising from the Sale or Refinancing which generated such
proceeds, and in any event Sale or Refinancing Proceeds shall not be reinvested
following the second anniversary of the first day of the calendar quarter in
which the Investment Date occurs, except to the extent of any Reserves retained
therefrom;
(xi) cause the Partnership to acquire any Local Limited Partnership
Interest in exchange for Units;
(xii) change the Partnership's purposes from those set forth in Section
2.4;
(xiii) facilitate or recognize the trading of Units on an established
securities market or on a secondary market, if, in the opinion of counsel, such
action would result in the Partnership being classified as a publicly traded
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partnership under Section 7704 of the Code and such classification would
have material adverse tax consequences for the Limited Partners;
(xiv) cause the Partnership to invest in Local Limited Partnerships under
circumstances where duplicate fees for the same service may be payable by the
Partnership and/or the particular Local Limited Partnership;
(xv) except as set forth below in this subsection, following the
termination of the offering of Units, cause the total amount of indebtedness
incurred by the Partnership to at any time exceed the sum of 85% of the
aggregate purchase price of all Apartment Complexes which have not been
refinanced, and 85% of the aggregate fair market value of all Apartment
Complexes which have been refinanced, as determined by the lender as of the date
of refinancing. Notwithstanding the preceding, with respect to all indebtedness
insured or guaranteed by the full faith and credit of the United States
government, a state or local government, or an agency or instrumentality of any
of them, and with respect to all indebtedness provided by any such Person, the
total amount of indebtedness incurred by the Partnership shall at no time exceed
the sum of 100% of the aggregate purchase price of all Apartment Complexes which
have not been refinanced, and 100% of the aggregate fair market value of all
Apartment Complexes which have been refinanced, as determined by the lender as
of the date of refinancing. For purposes of this subsection only, the term
"indebtedness" shall include the principal of any loan together with any
interest that may be deferred pursuant to the terms of the loan agreement which
exceeds 5% per annum of the principal balance of such indebtedness (excluding
contingent participations in income and/or appreciation in the value of the
Apartment Complexes), and shall exclude any indebtedness incurred by the
Partnership for necessary working capital reserves;
(xvi) cause the Partnership to invest in a Local Limited Partnership under
circumstances where the General Partner or any of its Affiliates would receive
compensation for administrative services performed on behalf of the Local
Limited Partnership;
(xvii) cause the Partnership to pay aggregate Acquisition Fees to all
Persons in an amount which exceeds the lesser of (a) the Competitive rate or (b)
18% of the Gross Proceeds. The foregoing limitation shall be complied with at
any given time and on an ongoing basis;
(xviii) cause the Partnership to invest in junior trust deeds or other
similar obligations, except for junior trust deeds which arise from the sale of
Properties; or
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(xix) cause the Partnership to invest in general partner interests of
limited partnerships or, except as provided in Section 5.2.2(viii), cause the
Partnership to invest in general partnerships or joint ventures.
5.4.2. Without the Consent of a majority-in-interest of the Limited
Partners, the General Partner may not:
(i) sell at one time all or substantially all the assets of the
Partnership, except in connection with the liquidation and winding up of the
Partnership's business upon its dissolution;
(ii) cause the merger or other reorganization of the Partnership; or
(iii) elect to dissolve the Partnership.
5.4.3. The General Partner shall not sell, assign or otherwise transfer the
Promissory Notes at a discount; provided that this restriction shall not
prohibit the General Partner from pledging or otherwise granting a security
interest in the Promissory Notes as security for any Partnership obligation.
5.5. Duties and Obligations of General Partner
5.5.1. The General Partner shall take such actions as may be necessary or
appropriate to form, qualify and continue the Partnership as a limited
partnership under the laws of the State of California and in order to form or
qualify the Partnership under the laws of any other jurisdiction in which the
Partnership is doing business or in which such formation or qualification is
necessary to protect the limited liability of the Limited Partners or in order
to continue in effect such formation or qualification. In this connection the
General Partner shall cause a Certificate of Limited Partnership to be filed on
behalf of the Partnership in the office of the California Secretary of State,
and shall cause an amendment to the Certificate to be filed in such office, and
in each other public office in which the Certificate was previously filed,
within 30 days after the happening of any of the following events:
(i) A change in the name of the Partnership;
(ii) A change in the address of the Partnership office;
(iii) A change in the name or address of the Partnership's agent for
service of process;
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(iv) The withdrawal of a General Partner;
(v) The admission of a General Partner; or
(vi) The discovery by a General Partner of any false or erroneous material
statement contained in the Certificate.
5.5.2. The General Partner shall prepare or cause to be prepared and shall
file on or before the due date (or any extension thereof) any Federal, state or
local tax returns required to be filed by the Partnership.
5.5.3. The General Partner shall use its best efforts to assure that the
Partnership shall not be deemed an investment company as such term is defined in
the Investment Company Act of 1940 and shall use its best efforts to obtain from
the Securities and Exchange Commission an order exempting the Partnership from
the provisions of the Investment Company Act of 1940. The General Partner is
expressly authorized to prepare, execute and file with the Securities and
Exchange Commission an application pursuant to Section 6(c) of the Investment
Company Act of 1940 for an exemption from all the provisions of such Act,
together with such other documents, and to do such other acts and things, as may
be necessary or convenient in seeking such an exemption. In the event that delay
is encountered in obtaining such order, the General Partner is authorized to
rely upon an opinion of counsel to the effect that the Partnership is exempt
from the provisions of the Investment Company Act of 1940 until such time as
such order is obtained, if ever.
5.5.4. The General Partner shall have fiduciary responsibility for the
safekeeping and use of all funds and assets of the Partnership, whether or not
in its immediate possession or control. The General Partner shall not employ, or
permit another to employ, such funds or assets in any manner except for the
exclusive benefit of the Partnership.
5.5.5. The funds of the Partnership shall not be commingled with the funds
of any other Person.
5.5.6. The General Partner shall not contract away the fiduciary duty owed
at common law to the Limited Partners.
5.5.7. The General Partner is authorized, in its discretion, to cause the
Partnership to acquire policies of limited partnership liability insurance,
insuring the Partners and their Affiliates against liabilities in connection
with the business of the Partnership and insuring the Partnership against
liabilities with respect to any
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indemnification it is legally required or permitted to provide Partners and
their Affiliates; subject to the provisions of Section 5.8.3 hereof.
5.6. Compensation of Sponsor
5.6.1. The Sponsor shall not receive any salary, fees, profits,
distributions or allocations from the Partnership or any Local Limited
Partnership in which the Partnership invests except as expressly allowed by this
Agreement.
5.6.2. The Dealer-Manager shall be entitled to receive from the Partnership
retail selling commissions and the Dealer-Manager Fee in respect of the sale of
Units, all as set forth in the Prospectus.
5.6.3. In connection with the Offering of the Units, the Dealer-Manager
shall receive from the Partnership a Nonaccountable Expense Reimbursement in an
amount equal to 1% of the Capital Contributions.
5.6.4. For services actually rendered or to be rendered, directly or
indirectly, by the Sponsor in connection with acquiring Local Limited
Partnership Interests (including services performed for the Partnership in
connection with Local Limited Partnership Interests which are the subject of
review, evaluation and, ultimately, rejection as potential acquisitions for the
Partnership), which services may include selecting, evaluating, structuring,
negotiating and closing the Partnership's investments in Local Limited
Partnership Interests, the Partnership and/or the Local Limited Partnerships
shall pay to the Sponsor an amount equal to 7% of the Capital Contributions,
provided that the amount payable may be reduced by the General Partner in its
sole discretion. Such Acquisition Fee shall be payable at the time Gross
Proceeds are received. Notwithstanding the amount of Sponsor Acquisition Fees
set forth herein, the total amount thereof shall be reduced in connection with
the purchase of Units by Discount Investors, as described in the Prospectus
under "Terms of the Offering and Plan of Distribution." The amount of such
reduction shall be treated as a distribution to a Discount Investor but shall
not be deemed a return of the Discount Investor's Capital Contribution; rather,
the reduction amount shall be deemed to be a compromise within the meaning of
Section 15636(c) of the Act, and no Discount Investor shall be obligated to pay
any such amount to or for the benefit of the Partnership or any creditor of the
Partnership. Except as set forth in this Section 5.6.4, no Acquisition Fees
shall be paid to the Sponsor.
5.6.5. For any property management services actually rendered by the
General Partner or its Affiliates respecting the Properties owned by Local
Limited Partnerships, the General Partner or any such Affiliate may receive
Property Management Fees from the Local Limited Partnerships. Included in any
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such Property Management Fee shall be bookkeeping services and fees paid to
nonAffiliated Persons for property management services. The maximum Property
Management Fees paid to the General Partner or any of its Affiliates (including
all leasing and releasing fees and bonuses and other payments for leasing
related services, paid to any Person) shall be the lesser of 5% of the gross
revenues from the Property or a Competitive amount.
5.6.6. For services rendered by the General Partner or an Affiliate of the
General Partner in connection with the administration of the affairs of the
Partnership, the General Partner or any such Affiliate shall receive from the
Partnership an annual Asset Management Fee in an amount not to exceed 0.2% of
that portion of Invested Assets in Local Limited Partnerships which are
attributable to apartment units receiving Government Assistance. The Asset
Management Fee shall be payable with respect to the previous calendar quarter on
the first day of each calendar quarter during the year, provided that the Asset
Management Fee shall only accrue and be payable as follows: the total Asset
Management Fee shall be allocated among the Apartment Complexes in proportion to
the amount of the Partnership's capital contribution to each Local Limited
Partnership, and the portion of the Asset Management Fee so attributable to any
Apartment Complex shall only accrue and be payable commencing with the date on
which such Apartment Complex commences operations. Accrued but unpaid Asset
Management Fees for any year shall be deferred without interest and shall be
payable in subsequent years from any funds available to the Partnership after
payment of all other costs and expenses of the Partnership, including any
Reserves then determined by the General Partner to no longer be necessary to be
retained by the Partnership, or from the proceeds of a Sale or Refinancing.
5.6.7. For services rendered by the General Partner or an Affiliate of the
General Partner in connection with the sale of any Property owned by a Local
Limited Partnership, the General Partner shall receive from the Partnership a
Subordinated Disposition Fee in an amount equal to 1% of the sales price of such
Property if the General Partner or its Affiliate provides a substantial amount
of services in the sales effort. This fee shall be payable only after the
distributions in Section 4.2.1(i) and (ii) have been made, and may accrue if
there are insufficient Sale or Refinancing Proceeds payable to the Partnership
upon any such sale. This fee is subject to the limitations imposed by Section
5.2.2(vi).
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5.7. Other Business of Partners
5.7.1. The General Partner shall devote to the affairs of the Partnership
such time as may be necessary for the proper performance of its duties
hereunder, but neither the General Partner, its officers and directors, nor any
successors to such parties shall be expected to devote their full time to the
performance of such duties.
5.7.2. Any Partner or any of his Affiliates may engage independently or
with others in other business ventures of every nature and description,
including, without limitation, the rendering of advice or services to other
investors and the making or management of other investments, including
investments in real properties receiving Government Assistance. Neither the
Partnership nor any Partner shall have any rights by virtue of this Agreement or
the partnership relationship created hereby in or to such other ventures or
activities or to the income or proceeds derived therefrom, provided that nothing
in this Section 5.7.2 shall relieve the General Partner of its general fiduciary
obligation to the Partnership.
5.7.3. The Sponsor may be presented with an investment opportunity which
could be availed of by the Partnership and one or more other entities which the
Sponsor or one of its Affiliates manages. The decision as to the particular
entity which shall make the investment shall be based upon such factors as the
effect of the acquisition on diversification of each entity's portfolio, the
estimated income tax effects of the purchase on each entity, the amount of funds
of each entity available for investment and the length of time such funds have
been available for investment. If a particular investment is determined to be
suitable for more than one entity, priority generally shall be given to the
entity having uninvested funds for the longest period of time; except that an
entity which was formed to invest primarily in apartment complexes eligible for
state low income housing credits as well as the Low Income Housing Credit shall
be given priority over the Partnership and other entities which are not seeking
to provide such state tax credits with respect to any investment which is
eligible for such state tax credits.
5.8. Limitation on Liability of Sponsor; Indemnification
5.8.1. No Sponsor shall have any liability to the Partnership or to any
Partner for any loss suffered by the Partnership which arises out of any action
or inaction of the Sponsor if the Sponsor, in good faith, determined that such
course of conduct was in the best interest of the Partnership, the Sponsor was
acting on behalf of, or performing services for, the Partnership, and such
course of conduct did not constitute negligence or misconduct of the Sponsor.
Each Sponsor shall be indemnified by the Partnership against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
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sustained by it when acting on behalf of, or performing services for, the
Partnership, provided that the same were not the result of negligence or
misconduct on the part of such Sponsor and were the result of a course of
conduct which the Sponsor, in good faith, determined was in the best interest of
the Partnership. Any indemnity under this Section 5.8 shall be provided out of
and to the extent of Partnership assets only, and no Limited Partner shall have
any personal liability on account thereof.
5.8.2. Notwithstanding anything to the contrary contained in Section 5.8.1,
the Sponsor (which term, for the purposes of this Section 5.8.2, shall include
Affiliates of the Sponsor only if such Affiliates are performing services on
behalf of the Partnership) and any Person acting as a broker-dealer shall not be
indemnified for any losses, liabilities or expenses arising from or out of an
alleged violation of Federal or state securities laws unless (i) there has been
a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee, or (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee, or (iii) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made, provided that in the case of this clause (iii) the court has been advised
of the positions of the Securities and Exchange Commission, the California
Commissioner of Corporations, the Missouri Securities Division and any other
state securities regulatory authority in which Units of the Partnership were
offered and sold as to indemnification for violations of securities laws;
provided that the court need only be advised of and consider the positions of
the securities regulatory authorities of those states (i) which are specifically
set forth in this Section 5.8.2 and (ii) in which plaintiffs claim they were
sold Units.
5.8.3. The Partnership shall not pay for any insurance covering liability
of any party as to which such party is hereby prohibited from being indemnified;
provided, however, that nothing contained herein shall preclude the Partnership
from purchasing and paying for such types of insurance, including extended
coverage liability and casualty and workers' compensation, as would be customary
for any Person owning comparable assets and engaged in a similar business, or
from naming any Sponsor as additional insured parties thereunder, provided that
such addition does not add to the premiums payable by the Partnership.
5.8.4. The Partnership may advance funds to each Sponsor for legal expenses
and other costs incurred by it in connection with any legal action brought
against it, provided that each of the following is satisfied: (i) the legal
action relates to acts or omissions with respect to the performance of duties or
services on behalf of the Partnership; (ii) the legal action is initiated by a
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third party who is not a Limited Partner, or the legal action is initiated
by a Limited Partner and a court of competent jurisdiction specifically approves
the advancement of funds; and (iii) the Sponsor receiving the funds undertakes
to repay the funds to the Partnership in the event it is not entitled to
indemnification at the conclusion of such legal action.
ARTICLE 6
ADMISSION OF SUCCESSOR AND ADDITIONAL
GENERAL PARTNERS; WITHDRAWAL OF GENERAL PARTNER
6.1. Admission of Successor or Additional General Partners
6.1.1. With the Consent of all other General Partners, if any, and the
Consent of at least a majority-in-interest of the Limited Partners, any General
Partner may at any time designate one or more Persons to be its successor or to
be an additional General Partner, with such Interest in the Partnership as such
General Partner and the successor or additional General Partner agree upon,
provided that the Interests of the other Partners shall not be affected thereby.
6.1.2. If at any time any material reduction shall occur in the net worth
of the General Partner, the General Partner shall consult with legal counsel
and, if such counsel is of the opinion that such reduction might adversely
affect the treatment of the Partnership as such for Federal income tax purposes,
the General Partner shall use its best efforts either (i) to admit as General
Partners one or more Persons having a net worth sufficient to offset such
reduction, the additional General Partner or General Partners to have whatever
participation in the General Partner's Interests the General Partner and the
additional General Partners agree upon, provided that the additional General
Partners have no authority to manage or control the Partnership, there is no
change in the identity of the Persons who have authority to manage or control
the Partnership, and the admission of the additional General Partners does not
materially affect the Interests of the Limited Partners; or (ii) if necessary in
the opinion of legal counsel, to obtain additional capitalization sufficient to
satisfy any then existing requirements of the Internal Revenue Service for a
ruling that an entity, whether or not a corporation, has sufficient net worth so
that a limited partnership of which it is a general partner has the
characteristic of unlimited liability.
6.1.3. Except in connection with a transfer to a successor or additional
General Partner pursuant to Section 6.1.1. or 6.1.2., the General Partner shall
have no right to retire or withdraw voluntarily from the Partnership or to sell,
transfer, or assign all or any portion of its Interest, except that it may
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substitute in its stead as General Partner any entity which has, by merger,
consolidation or otherwise, acquired substantially all of its assets or stock
and continued its business.
6.1.4. Any Voluntary Withdrawal by the General Partner from the Partnership
or any sale, transfer or assignment by the General Partner of its Interest shall
be effective only upon the admission in accordance with this Section 6.1 and
Section 13.3 of a successor or additional General Partner, as the case may be.
6.1.5. No assignee or transferee of all or any part of the Interest of the
General Partner shall have any right to become a General Partner except as
provided in this Article 6.
6.2. Restrictions on Transfer of General Partner's Interest
Notwithstanding anything to the contrary in this Article 6, the assignment
or transfer of the General Partner's Interest shall at all times be subject to
the same restrictions applicable to an assignment or transfer of Units set forth
in Sections 7.2.1 and 7.2.2.
6.3. Consent of Limited Partners to Admission of Successor or
Additional General Partners
Each of the Limited Partners, by the execution of this Agreement, Consents
for all purposes of the Act to the admission of any Person as a successor or
additional General Partner for which the express Consent of a
majority-in-interest of the Limited Partners has been obtained at the time
pursuant to Section 6.1. Upon receipt of such a Consent to such admission from a
majority-in-interest of the Limited Partners, then, subject to the provisions of
Section 6.2, the admission shall, without any further Consent or approval of the
Limited Partners, be an act of all the Limited Partners.
6.4. Event of Withdrawal of a General Partner
If, at the time of an Event of Withdrawal of a General Partner, such
General Partner was not the sole General Partner, the remaining General Partner
or General Partners shall immediately: (i) give Notification to the Limited
Partners of such event; and (ii) make any amendments to this Agreement and
execute and file for recordation any amended Certificates or other instruments
necessary to reflect the termination of the Interest of the General Partner as
to which such event has occurred and such General Partner's having ceased to be
a General Partner.
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6.5. Interest and Liability of a Withdrawn General Partner
6.5.1. Upon an Event of Withdrawal as to a General Partner, such General
Partner shall immediately cease to be a General Partner, and its Interest shall
be subject to purchase in accordance with Section 6.6; provided, however, that
such a termination shall not affect any rights of such General Partner which
arose prior to such event (including rights to amounts then accrued and owing to
such General Partner), or the value, if any, at the time of such event of the
Interest of such General Partner.
6.5.2. Any General Partner who voluntarily or involuntarily for any reason
(including bankruptcy, death, dissolution or adjudication of incompetence)
withdraws from the Partnership or sells, transfers or assigns its Interest shall
be and shall remain liable for all obligations and liabilities incurred by the
Partnership prior to the time the withdrawal, sale, transfer or assignment
becomes effective, but it shall be free of any obligation or liability incurred
on account of the activities of the Partnership after that time.
6.6. Valuation and Sale of Interest of Former General Partner
6.6.1. If the business of the Partnership is continued after the Event of
Withdrawal of a General Partner, or if, following such event, the Partnership is
reconstituted, in each case as contemplated by Section 8.1, the Partnership
shall purchase such General Partner's Interest for a price equal to the then
present fair market value thereof. Such fair market value shall be determined by
agreement of the former General Partner and the Partnership, or, if they cannot
agree, by arbitration in accordance with the current rules of the American
Arbitration Association. The expense of arbitration will be shared equally
between such former General Partner and the Partnership.
6.6.2. Promptly after determination of the fair market value of a former
General Partner's Interest pursuant to Section 6.6.1, the Partnership shall
deliver to such former General Partner a promissory note of the Partnership for
such fair market value payable in no less than five equal consecutive annual
installments commencing on the first anniversary of the date of such note. Such
promissory note shall bear simple interest at the rate per annum which is at all
times equal to the Prime Rate, but not to exceed the maximum rate permitted by
law, payable on the last day of each calendar quarter while such note is
outstanding; provided, however, that if such note is delivered following an
Event of Withdrawal of a General Partner which is a Voluntary Withdrawal on its
part then (i) such note shall neither be secured nor bear interest and (ii) the
principal payable to the withdrawing General Partner shall be limited in amount
and date of payment to distributions which such
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withdrawing General Partner would have received under this Agreement had it not
withdrawn. Within 120 days after the determination of the fair market value of
the former General Partner's Interest, the Partnership may, with the Consent of
all remaining General Partners and the Consent of a majority-in-interest of the
Limited Partners, sell such Interest to one or more Persons, who may be
Affiliates of the remaining General Partner or General Partners, and admit such
Persons to the Partnership as substitute General Partners; provided, however,
that the purchase price to be paid to the Partnership for the Interest of the
former General Partner shall not be less than its fair market value as
determined by the procedure set forth in Section 6.6.1. above. Such substitute
General Partner or Partners may pay said purchase price in installments in the
manner set forth above in this Section 6.6.2.
ARTICLE 7
TRANSFERABILITY OF UNITS
7.1. Right to Transfer Units
Subject to the requirements of this Article 7, a Limited Partner may assign
his Units by a written instrument of assignment, the terms of which shall
conform to the provisions of this Agreement.
7.2. Restrictions on Transfers
7.2.1. No sale, exchange, transfer or assignment of any Units may be made
if, in the opinion of counsel to the Partnership, such sale, exchange, transfer
or assignment would:
(i) when added to the total of all other Units sold or exchanged within a
period of 12 consecutive months prior thereto, result in the Partnership being
considered to have terminated within the meaning of Section 708 of the Code;
provided, that any deferred sales or exchanges shall be made (in chronological
order to the extent practicable) as of the first day of a fiscal quarter after
the end of any such 12-month period, subject to the provisions of this Article
7;
(ii) cause the Partnership to become a publicly-traded partnership for
Federal income tax purposes;
(iii) cause the Partnership to cease to qualify under Section 42(j)(5)(B)
or
Section 47 of the Code;
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(iv) result in the Partnership or any other Partner being required to
recapture any Tax Credits unless the holder of such Units indemnifies the
Partnership and its Partners for such recapture; or
(v) result in the Partnership being treated as an association taxable as a
corporation for Federal income tax purposes.
7.2.2. No sale, exchange, transfer or assignment of any Unit shall be made
to any Person exempt from Federal income tax under Section 501 of the Code, to
any Person defined in Section 168(h)(2) of the Code, to any Individual
Retirement Account as defined in Section 408(a) of the Code, to any Keogh Plan,
to any nonresident alien, or to any foreign Person.
7.2.3. Any transfer of a Unit to a Person who makes a market in securities
shall be void ab initio unless such Person shall certify to the General Partner
that it has acquired such Unit solely for investment purposes and not for the
purpose of resale.
7.2.4. No purported sale, exchange, transfer or assignment by a transferror
of a Unit shall be permitted unless the transferror shall have represented that
such transfer:
(i) was effected through a broker-dealer or matching agent whose procedures
with respect to the transfer of Units have been approved by the General Partner
as not being incident to trading on an established securities market or a
secondary market and not through any other broker-dealer or matching agent; or
(ii) otherwise was not effected through an established securities market or
through a broker-dealer or matching agent which makes a market in Units or which
provides a readily available, regular and ongoing opportunity to the holders of
Units to sell or exchange their Units through a public means of obtaining or
providing information of offers to buy, sell or exchange Units.
7.2.5. All Units shall be subject to, and all documents of assignment and
transfer evidencing such Units shall bear, the following legend condition:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
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Such restriction shall be noted in the appropriate records of the
Partnership, and no transfer of any interest in the Partnership shall be made
except in compliance with the terms of such legend condition.
7.2.6. No sale, exchange, transfer or assignment of any Unit shall be made
to any Person who does not satisfy the investor suitability standards imposed by
the Partnership in connection with the public Offering of the Units or such more
restrictive standards, if any, as may be required under applicable state
securities laws.
7.2.7. No purported sale, exchange, assignment or transfer by a Limited
Partner of any Unit after which any transferror or transferee would hold any
fraction of a Unit, will be permitted or recognized (except for transfers by
gift, inheritance, bequest or family dissolution, or transfers to Affiliates of
the transferror).
7.2.8. The General Partner (i) shall be entitled to make any reasonable
inquiry of the Limited Partners and prospective Limited Partners in connection
with the provisions of this Section 7.2, and (ii) may, in its sole discretion,
on behalf of the Partnership, impose any restrictions on transfers of Units or
any other additional procedures or requirements which it deems appropriate in
order to prevent the Partnership from being treated for tax purposes as an
association or as a publicly-traded partnership, or to give effect to the intent
of this Section 7.2, and shall be permitted, in order to give effect to any such
restriction, procedures or requirements, to amend this Agreement without the
Consent of the Limited Partners. The General Partner shall give Notification to
all Limited Partners in the event that sales, exchanges, transfers or
assignments have generally been suspended.
7.2.9. The General Partner will review from time to time the limitations
and restrictions on the sale, exchange, transfer or assignment of Units and will
eliminate or modify such limitations or restrictions to make them less
restrictive if the Partnership shall have received an opinion of counsel that
such elimination or modification may be made without material adverse tax
consequences to the Partners.
7.3. Assignees and Assignment Procedure
7.3.1. If a Limited Partner who is an individual dies or a court of
competent jurisdiction adjudges him to be incompetent to manage his person or
his property, such Limited Partner's executor, administrator, guardian,
conservator or other legal representative may exercise all of such Limited
Partner's rights for the purposes of settling his estate or administering his
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property, including any power under this Agreement to join with a proposed
assignee in satisfying conditions precedent to the assignment of his Interest to
such assignee and to such assignee becoming a Substitute Limited Partner. If a
Limited Partner which is not an individual is dissolved or terminated, the
powers of that Limited Partner may be exercised by its legal representative or
successor. Notwithstanding the foregoing, the Partnership shall not be under any
duty to recognize the authority of any such executor, administrator, guardian,
conservator or other legal representative or successor's rights unless and until
the Partnership shall have received such evidence of the authority of such party
as counsel for the Partnership may request. The death, dissolution, adjudication
of incompetence or bankruptcy of a Limited Partner shall not dissolve the
Partnership.
7.3.2. In order to give effect to the restrictions on transfer of Units
contained in this Article 7, a purported or proposed assignment of a Unit shall
not take effect for any purpose until it has been registered on the Partnership
Register (the date of such registration being called the "Registration Date").
The General Partner shall not be under any duty to cause any assignment to be so
registered until (i) the assigning Limited Partner and/or the proposed assignee,
as applicable, shall have delivered to the Partnership a duly executed and
acknowledged counterpart of the instrument of assignment, signed by both the
assignor and the assignee, evidencing written acceptance by the assignee of all
the terms and provisions of this Agreement and representing that the assignment
was made in accordance with all applicable laws and regulations (including
investment suitability requirements); (ii) the Partnership shall have received a
fee in an amount established by it from time to time sufficient to reimburse it
for all its actual costs in connection with such assignment, including, but not
by way of limitation, any advice of counsel contemplated by this Agreement in
connection with such assignment, and, if the Partnership has made an election
under Section 754 of the Code, any incremental accounting fees resulting from
compliance with Section 754 in connection with such assignment; provided,
however, that the amount of such fee shall in no event exceed the lower of the
Partnership's actual costs in connection with the transfer or $100; (iii) the
Partnership shall have received such evidence of the authority of the parties to
such assignment as counsel for the Partnership may request; (iv) if a Promissory
Note of the transferror has not been paid in full, the Partnership shall have
received a written statement signed by the assignee or transferee which
acknowledges the material terms of the Promissory Note, including the payment
due date, the status of payments, the Partnership's security interest in the
Units, the terms of default, the consequences thereof, and the terms for curing
the default; and (v) the Partnership shall have received such further evidence
of compliance of such assignment with the terms and conditions of this Agreement
and the Prospectus as the Partnership may reasonably request, including, but not
by way of limitation, instruments complying with Section 13.3 and any required
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consent to such assignment of the Commissioner of Corporations of the State
of California. The General Partner shall cause such an assignment, upon
compliance with the foregoing conditions and the conditions of Section 7.2, to
be registered on the Partnership Register not later than the last day of the
calendar month following satisfaction of such conditions.
7.3.3. Except as otherwise provided in this Section 7.3.3, if an assignment
of a Unit is registered on the Partnership Register as provided in Section
7.3.2, the assignee of such Unit shall: (i) for the purposes of Sections 4.6.2
and 4.6.3, be recognized as a holder of the Unit as of the first day of the
fiscal quarter following the fiscal quarter in which the Registration Date
occurs; and (ii) for the purposes of Section 4.6.4, be recognized as a holder of
the Unit as of the date specified by the parties in the instrument of assignment
provided for in Section 7.3.2, or if no date is specified therein, the first day
of the fiscal quarter following the fiscal quarter in which the Registration
Date occurs.
7.3.4. The rights of an assignee of a Unit who does not become a Substitute
Limited Partner shall be limited to the right to receive his share of Cash
Available for Distribution, Sale or Refinancing Proceeds, Profits and Losses for
Tax Purposes and Tax Credits, as determined under Article 4. Any assignee of all
or any of the Units of a Limited Partner who does not become a Substitute
Limited Partner and desires to make a further assignment of any of such Units
shall be subject to all the provisions of this Article 7 to the same extent and
in the same manner as any Limited Partner desiring to make an assignment of his
Units.
7.3.5. Upon receipt of documents purporting to create or release a pledge
or other security interest in a Limited Partner's Interest, the General Partner
shall promptly cause such transaction to be registered on the Partnership
Register. Any purported or proposed pledge of, or other security interest in,
any Limited Partner's Interest shall not take effect for any purpose or be
deemed perfected unless and until the same has been registered on the
Partnership Register and shall be subject to any existing pledge and security
interest granted to the Partnership pursuant to Section 13.1. The Partnership
may charge a fee in an amount established by it from time to time sufficient to
reimburse it for all its actual costs in connection with such pledge, including
but not by way of limitation, any advice of counsel in connection with such
pledge, and no pledge shall be effective until such fee is paid.
7.3.6. The General Partner shall provide to each Limited Partner and
registered pledgee, if any, from time to time the transaction statements
required to be provided to such respective parties by the California Commercial
Code.
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7.4. Substitute Limited Partners
Subject to the Consent of the General Partner, which Consent may only be
withheld for the purpose of preserving the Partnership's tax status or to avoid
adverse legal consequences to the Partnership, the assignee of any Units duly
transferred to him pursuant to this Section 7 shall be admitted to the
Partnership as a Substitute Limited Partner upon satisfaction of the conditions
contained in Section 13.3. The Partnership Register shall be amended not less
often than quarterly to recognize the admission of Substitute Limited Partners.
ARTICLE 8
DISSOLUTION AND WINDING-UP OF THE PARTNERSHIP
8.1. Events Causing Dissolution
8.1.1. The Partnership shall dissolve and its affairs shall be wound up
upon the happening of any of the following events: (i) an Event of Withdrawal
shall occur as to a General Partner; (ii) the sale or other disposition of all
the Local Limited Partnership Interests and other assets of the Partnership;
(iii) the election by the General Partner pursuant to Section 5.4.2, or the vote
by the Limited Partners pursuant to Section 10.2.1(ii), to dissolve the
Partnership; or (iv) the expiration of the term of the Partnership specified in
Section 2.6.
8.1.2. Notwithstanding the foregoing, the Partnership shall not be
terminated, liquidated or wound up upon the occurrence of an event specified in
clause 8.1.1(i) above if (a) a remaining General Partner, if any, elects within
120 days after such an event to continue the business of the Partnership, or,
(b) if there is no remaining General Partner, a majority-in-interest of the
Limited Partners agree in writing to continue the business of the Partnership
and, within six months after the last remaining General Partner has ceased to be
a General Partner, to admit one or more General Partners.
8.1.3. Dissolution of the Partnership shall be effective on the day on
which the event occurs giving rise to the dissolution, but the Partnership shall
not terminate until the Partnership's Certificate of Limited Partnership shall
have been canceled and the assets of the Partnership shall have been distributed
as provided in Section 8.2. Notwithstanding the dissolution of the Partnership,
until the termination of the Partnership the business and affairs of the
Partnership shall continue to be governed by this Agreement.
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8.2. Liquidation
8.2.1. Upon dissolution of the Partnership, unless the business of the
Partnership is continued pursuant to Section 8.1, the General Partner shall
liquidate the assets of the Partnership and apply and distribute the proceeds
thereof as contemplated by this Section 8.2. After payment of liabilities owing
to creditors of the Partnership, the General Partner shall set aside as a
Reserve such amount as it deems reasonably necessary for any contingent
liabilities or obligations of the Partnership. Said Reserve may be paid over by
the General Partner to a bank, to be held in Temporary Investments for the
purpose of paying any such contingent liabilities or obligations and, at the
expiration of such period as the General Partner may deem advisable, the amount
in such Reserve shall be distributed to the Partners in accordance with Section
4.2.2.
8.2.2. Notwithstanding the foregoing, in the event the General Partner
determines that an immediate sale of part or all of the Partnership assets would
cause undue loss to the Partners, the General Partner, in order to avoid any
such loss may, after having given Notification to all the Limited Partners, to
the extent not then prohibited by applicable law, either defer liquidation of
and withhold from distribution for a reasonable time any assets of the
Partnership except those necessary to satisfy the Partnership's debts and
obligations, or convey the remaining assets of the Partnership to a liquidating
trust for the benefit of the Partners. In such event, the trustee will be a bank
authorized to accept such trusts, having deposits insured by the Federal Deposit
Insurance Corporation and having a combined capital and surplus of not less than
$50,000,000; such trustee will liquidate such assets in an orderly manner and
distribute the proceeds of such liquidation, net of costs associated therewith,
to the Partners in accordance with Section 4.2. The fair market value of any
assets conveyed to such liquidating trust shall be determined, promptly after
such conveyance, by an independent appraiser to be selected by random number
from a list of three qualified appraisers obtained by the General Partner from
the American Institute of Real Estate Appraisers.
8.2.3. The General Partner shall cause the business of the Partnership to
be wound up and cause the cancellation of the Partnership's Certificate of
Limited Partnership following the liquidation and distribution of all the
Partnership's assets.
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ARTICLE 9
BOOKS AND RECORDS, ACCOUNTING,
REPORTS, TAX ELECTIONS, ETC.
9.1. Books and Records
(a) The General Partner shall cause the Partnership to keep and maintain
full and complete books and records which shall include each of the following:
(i) a current list (updated at least quarterly) of the full name
and last known business or residence address and business telephone of each
Partner set forth in alphabetical order together with the Capital
Contribution and the share in Profits and Losses of each Partner (the
"Participant List");
(ii) a copy of the Certificate of Limited Partnership and all
certificates of amendment thereto, together with executed copies of any
powers of attorney pursuant to which any certificate has been executed;
(iii) copies of the Partnership's Federal, state and local income
tax information returns and reports, if any, for the six most recent
taxable years;
(iv) copies of the original of this Agreement and all amendments
thereto;
(v) financial statements of the Partnership for the six most recent
fiscal years; and
(vi) the Partnership's books and records for at least the current
and past three fiscal years.
(b) Upon the request of a Limited Partner, the General Partner shall within
10 days of the receipt of the request mail to the Limited Partner copies of the
Participant List (which shall be on white paper in a readily readable form of no
less than 10-point type), and the information set forth in Section 9.1(a)(ii) or
(iv) above and of the provisions of the Act described in Section 10.1.2 of this
Agreement. A reasonable charge for copy work may be charged by the Partnership.
Each Limited Partner shall have the right upon request and during normal
business hours to inspect and copy any of the foregoing records at his own
expense, and, upon request, to obtain from the General Partner copies of the
Partnership's Federal, state and local income tax or information returns,
promptly after such returns become available.
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(c) If the Sponsor neglects or refuses to exhibit, produce or mail a copy
of the Participant List as requested, the Sponsor shall be liable to any Limited
Partner requesting the list for costs, including attorneys' fees, incurred by
the Limited Partner for compelling the production of the Participant List, and
for actual damages suffered by the Limited Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the information is to secure the list
of Limited Partners or other information for the purpose of selling such list or
information or copies thereof, or of using the same for a commercial purpose
other than in the interest of the requesting Person as a Limited Partner
relative to the affairs of the Partnership. The Sponsor may require the Limited
Partner requesting the Participant List to represent that the list is not
requested for a commercial purpose unrelated to the Limited Partner's interest
in the Partnership. The remedies provided hereunder to Limited Partners
requesting copies of the Participant List are in addition to, and shall not in
any way limit, other remedies available to Limited Partners under Federal law,
or the laws of any state.
9.2. Accounting and Fiscal Year
The books of the Partnership shall be kept on the accounting method
selected by the General Partner. The fiscal year of the Partnership shall end on
December 31 in each year, or on such other date as the General Partner
determines.
9.3. Bank Accounts and Temporary Investments
The bank accounts of the Partnership shall be maintained in banking
institutions determined by the General Partner, and withdrawals shall be made
only in the regular course of Partnership business on signatures determined by
the General Partner. All deposits and other funds not needed in the operation of
the business or not yet invested may be invested in Temporary Investments.
9.4. Reports
9.4.1. Within 60 days after the end of each of the first three quarters of
each fiscal year of the Partnership, the General Partner shall send to each
Person who was a Limited Partner at any time during such quarter one or more
reports which, taken together, provide the following information (which need not
be audited): (i) a balance sheet as at the end of such quarter; (ii) a statement
of operations for such quarter; (iii) a statement of cash flows for such
quarter; (iv) a statement setting forth the amount of all fees and other
compensation and distributions and reimbursed expenses paid by the Partnership
for the quarter to the General Partner or any Affiliate of the General Partner;
(v) a report of the significant activities of the Partnership during the
quarter; and (vi) until the Limited Partners' Capital
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Contributions (except for any amounts utilized to pay Organizational and
Offering Expenses, Acquisition Fees, Acquisition Expenses or Operating Cash
Expenses, or any amounts set aside for Reserves) are fully invested, a special
report of Local Limited Partnership Interests acquired during the quarter,
describing the terms of such investments. If the Partnership acquires a Local
Limited Partnership Interest during the last quarter of any fiscal year, a
report containing the information described in the preceding clause (vi) shall
be sent on or before the date of transmission of the report for such year
required by Section 9.4.3. Until all Promissory Notes have been paid in full,
each quarterly report shall reflect any defaults in the payment of the
Promissory Notes, actions taken by the Partnership in response to any defaults,
and a discussion and analysis of the impact thereof on capital requirements of
the Partnership.
9.4.2. Within 75 days after the end of each calendar year, the General
Partner shall provide to each Person who was a Limited Partner at any time
during the fiscal year ending during that calendar year all tax information
necessary for the preparation of his Federal and state income tax returns and
other tax returns with regard to jurisdictions in which the Partnership or a
Local Limited Partnership is formed or qualified or owns Properties.
9.4.3. Within 120 days after the end of each fiscal year of the
Partnership, the General Partner shall send to each Person who was a Limited
Partner at any time during such fiscal year: (i) a balance sheet as of the end
of such fiscal year and statements of operations, partners' equity and cash
flows for such fiscal year prepared in accordance with generally accepted
accounting principles and accompanied by an auditor's report containing an
opinion of the Accountants; (ii) a report (which need not be audited) setting
forth any distributions made to Persons who were Limited Partners at any time
during the fiscal year, separately identifying distributions from (a) Cash Flow
from Local Limited Partnership or Partnership operations during the fiscal year,
(b) Cash Flow from Local Limited Partnership or Partnership operations during a
prior fiscal year which had been held as Reserves, (c) Sale or Refinancing
Proceeds, and (d) amounts previously set aside as Reserves from Gross Proceeds;
(iii) a report of the significant activities of the Partnership during the year;
(iv) a special report setting forth the amount of all fees and other
compensation and distributions and reimbursed expenses paid by the Partnership
and the Local Limited Partnerships for the fiscal year to the General Partner or
any Affiliate of the General Partner and the services performed in consideration
therefor, which report shall be verified by the Accountants, with the method of
verification to include, at a minimum, a review of the time records of
individual employees, the costs of whose services were reimbursed, and a review
of the specific nature of the work performed by each such employee, all in
accordance with generally accepted auditing standards and, accordingly,
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including such tests of the accounting records and such other auditing
procedures as the Accountants consider appropriate in the circumstances. The
additional costs of such special report shall be itemized by the Accountants
among all programs sponsored by the General Partner and its Affiliates on a
program-by-program basis and may be reimbursed to the General Partner or its
Affiliates to the extent that such reimbursement, when added to the cost for
administrative services rendered, does not exceed the Competitive rate for such
services. Until all Promissory Notes have been paid in full, such annual report
shall reflect any defaults in the payment of the Promissory Notes, actions taken
by the Partnership in response to any defaults, and a discussion and analysis of
the impact thereof on capital requirements of the Partnership.
9.5. Depreciation and Other Tax Elections
The Partnership may elect to use with respect to depreciable assets of the
Partnership any depreciation method which is permitted by the Code and
appropriate in the opinion of the General Partner. All other Federal income tax
elections required or permitted to be made for or by the Partnership shall be
made by the General Partner after consulting with the Accountants. The General
Partner may, but shall not be under any duty to, cause the Partnership to make
an election under Section 754 of the Code (or any successor provision thereto).
9.6. Designation of Tax Matters Partner
The General Partner is hereby designated as the "Tax Matters Partner" of
the Partnership under Section 6231(a)(7) of the Code and, in connection
therewith and in addition to all powers given thereunto, shall have all other
powers needed to fully perform as the Tax Matters Partner, including, without
limitation, the power to retain all attorneys and accountants of its choice, the
right to settle any audits without the consent of the Limited Partners and the
right to challenge any final partnership administrative adjustment in a court
action. The designation made in this Section is hereby expressly consented to by
each Limited Partner as an express condition to becoming a Limited Partner.
Expenses of any administrative proceedings undertaken by the Tax Matters Partner
will be paid for out of Partnership assets. Each Limited Partner who elects to
participate in the proceedings will be responsible for any expenses incurred by
him in connection with his participation, and the cost of any resulting audits
or adjustments of a Limited Partner's tax return will be borne solely by the
affected Limited Partner. The General Partner is hereby designated as the
"notice partner" under Section 6231(a)(8) of the Code to receive any notice
provided by the Internal Revenue Service to the Limited Partners as a group in
accordance with Section 6223(b)(2) of the Code.
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ARTICLE 10
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS
10.1. Meetings and Actions Without Meetings
10.1.1. Meetings of the Limited Partners for any purpose may be called by
the General Partner at any time, and shall be called by the General Partner upon
receipt of a request in writing, containing a proposal for the holding of such a
meeting, signed by 10% or more in interest of the Limited Partners and stating
the purpose of the meeting. In addition, the General Partner may, and, upon
receipt of a proposal in writing signed by the holders of 10% or more in
interest of the Limited Partners shall, submit any matter (upon which the
Limited Partners are entitled to act) to the Limited Partners for a vote by
written Consent without a meeting.
10.1.2. All meetings and actions of the Limited Partners shall be governed
in all respects, including matters relating to notice, quorum, adjournment,
proxies, record dates and actions without a meeting, by the provisions of
Section 15637 of the Act, as said Section 15637 shall be amended from time to
time. Notwithstanding the foregoing, upon receipt of a written request for a
Partnership meeting from one or more Limited Partners either in person or by
certified mail stating the purpose(s) of the meeting, the General Partner shall
provide all Limited Partners, within 10 days after receipt of said request,
written notice (either in person or by certified mail) of the meeting and the
purpose of such meeting to be held on a date not less than 15 days nor more than
60 days after receipt of said request, at a time and place convenient to the
Limited Partners.
10.2. Voting Rights of Limited Partners
10.2.1. The holders of a majority of the outstanding Units may, without the
concurrence of the General Partner:
(i) amend this Agreement, subject to the provisions of Section 12.1 hereof;
(ii) dissolve the Partnership;
(iii) remove the General Partner and elect a replacement General Partner;
(iv) approve or disapprove the sale of all or substantially all of the
assets of the Partnership in a single transaction other than in connection with
the liquidation of the Partnership; or
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(v) if the Partnership invests in a Local Limited Partnership of which the
Local General Partner is a Sponsor, direct the General Partner (acting on behalf
of the Partnership) to take any action permitted to be taken by the Partnership
pursuant to the partnership agreement of the Local Limited Partnership.
10.2.2. Notwithstanding any provision of the Act to the contrary, the
Limited Partners shall only have the right to vote on the matters set forth in
Paragraph 10.2.1. of this Agreement.
10.2.3. In any vote of the Limited Partners, each Limited Partner shall be
entitled to cast one vote for each Unit which he owns as of the designated
record date. Notwithstanding any other provision of this Agreement, any Units
held by the Sponsor will not be entitled to vote, and will not be considered to
be "outstanding" Units for purposes of any vote, upon matters which involve a
conflict between the interests of such Sponsor and the Partnership, including,
but not limited to, any vote on the proposed removal of the General Partner or
regarding any transaction between the Partnership and the Sponsor.
10.3. Limitations on Roll-Ups; Dissenters' Rights
10.3.1. In connection with a proposed Roll-Up, an appraisal of all
Partnership assets shall be obtained from a competent, Independent Expert. If
the appraisal will be included in a prospectus used to offer the securities of a
Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange
Commission and the states as an exhibit to the registration statement for the
offering. Accordingly, an issuer using the appraisal shall be subject to
liability for violation of Section 11 of the Securities Act of 1933 and
comparable provisions under state laws for any material misrepresentations or
material omissions in the appraisal. Partnership assets shall be appraised on a
consistent basis. The appraisal shall be based on an evaluation of all relevant
information, and shall indicate the value of the Partnership's assets as of a
date immediately prior to the announcement of the proposed Roll-Up. The
appraisal shall assume an orderly liquidation of Partnership assets over a
12-month period. The terms of the engagement of the Independent Expert shall
clearly state that the engagement is for the benefit of the Partnership and its
Limited Partners. A summary of the independent appraisal, indicating all
material assumptions underlying the appraisal, shall be included in a report to
the Limited Partners in connection with a proposed Roll-Up.
10.3.2. In connection with a proposed Roll-Up, the Person sponsoring the
Roll- Up shall offer to Limited Partners who vote "no" on the proposal the
choice of:
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(i) accepting the securities of the Roll-Up Entity offered in the proposed
Roll-Up; or
(ii) one of the following: (a) remaining as Limited Partners in the
Partnership, and preserving their interests therein on the same terms and
conditions as existed previously; or (b) receiving cash in an amount equal to
the Limited Partners' pro-rata share of the appraised value of the net assets of
the Partnership.
10.3.3. The Partnership shall not participate in any proposed Roll-Up which
would result in Limited Partners having democracy rights which are less than
those provided for under this Agreement. If the Roll-Up Entity is a corporation,
the voting rights of Limited Partners shall correspond to the voting rights
provided for in this Agreement to the greatest extent possible.
10.3.4. The Partnership shall not participate in any proposed Roll-Up which
includes provisions which would operate to materially impede or frustrate the
accumulation of shares by any purchaser of the securities of the Roll-Up Entity
(except to the minimum extent necessary to preserve the tax status of the
Roll-Up Entity). The Partnership shall not participate in any proposed Roll-Up
which would limit the ability of a Limited Partner to exercise the voting rights
of the securities of the Roll-Up Entity on the basis of the number of Units held
by that Limited Partner.
10.3.5. The Partnership shall not participate in any proposed Roll-Up in
which Limited Partners' rights of access to the records of the Roll-Up Entity
will be less than those provided for under this Agreement.
10.3.6. The Partnership shall not participate in any proposed Roll-Up in
which any of the costs of the transaction would be borne by the Partnership if
the Roll-Up is not approved by the Limited Partners.
10.3.7. In addition to those set forth above, Limited Partners who dissent
with respect to a proposed Roll-Up will have the rights provided under Sections
15679.1 through 15679.14 of the Act.
ARTICLE 11
SPECIAL POWER OF ATTORNEY
Each Limited Partner, including each Additional Limited Partner and
Substitute Limited Partner, by the execution of this Agreement, irrevocably
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constitutes and appoints the General Partner, with full power of
substitution in the premises, his true and lawful attorney-in-fact with full
power and authority in his name, place and stead to execute, acknowledge,
deliver, swear to, file and record at the appropriate public offices any
documents necessary or appropriate to carry out the provisions of this
Agreement, including, but not limited to:
(i) all certificates and other instruments (including counterparts of this
Agreement), and any amendment thereof, which the General Partner deems
appropriate in order to form, qualify or continue the Partnership as a limited
partnership (or a partnership in which the Limited Partners will have limited
liability comparable to that provided by the Act) in the State of California and
in the jurisdictions in which the Partnership may conduct business or in which
formation, qualification or continuation is, in the opinion of the General
Partner, necessary or desirable to protect the limited liability of the Limited
Partners;
(ii) all amendments to this Agreement adopted in accordance with its terms,
and all instruments which the General Partner deems appropriate to reflect a
change or modification of the Partnership in accordance with the terms of this
Agreement;
(iii) all financing statements, continuation statements or other documents
and amendments thereto which the General Partner deems appropriate to perfect or
continue the perfection of the Partnership's security interest in his Units
provided for in Section 13.1, and, if the Limited Partner is an Installment
Contributor Limited Partner, Section 3.4.1(b), of this Agreement, and all
instruments relating to the admission of any Additional or Substitute Limited
Partner, including any amendment to this Agreement which substitutes as a
Limited Partner the purchaser at a foreclosure sale of Units previously given as
security by a defaulting Limited Partner for his Promissory Note; and
(iv) all conveyances and other instruments which the General Partner deems
appropriate to implement the provisions of this Agreement or to reflect the
dissolution and winding up of the Partnership in accordance with the terms of
this Agreement.
The appointment by each of the Limited Partners of the General Partner as
his attorney-in-fact shall be deemed to be a power coupled with an interest, in
recognition of the fact that each of the Partners under this Agreement will be
relying upon the power of the General Partner to act as contemplated by this
Agreement in any filing and other action by it on behalf of the Partnership, and
shall survive and shall not be affected by the subsequent bankruptcy, death,
adjudication of incompetence or insanity, disability, incapacity or dissolution
of any Person hereby giving the power nor by the transfer or assignment of all
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<PAGE>
or any part of the Units of any such Person; provided, however, that in the
event of the transfer by a Limited Partner of all of his Units, the foregoing
power of attorney of a transferror Limited Partner shall survive the transfer
only until the transferee is admitted to the Partnership as a Substitute Limited
Partner and all required documents and instruments are duly executed, filed and
recorded to effect the substitution.
ARTICLE 12
AMENDMENTS
12.1. Adoption of Amendments
12.1.1. In addition to the amendments authorized herein, amendments may be
made to this Agreement from time to time by a majority-in-interest of the
Limited Partners, without the Consent of the General Partner; provided that no
such amendment shall (a) in any manner allow the Limited Partners to take any
action which would constitute their participation in the control of the
Partnership's business within the meaning of Section 15632 of the Act, or
otherwise cause the loss of their limited liability, nor (b) without the Consent
of the General Partner, alter the rights, power, duties or compensation of the
General Partner or any of its Affiliates or its (or any of its Affiliates')
interest in Profits and Losses for Tax Purposes, Tax Credits, Cash Available for
Distribution or Sale or Refinancing Proceeds or alter any of the provisions of
Sections 3.6.2 or 6.6 or this Section 12.1.1.
12.1.2. In addition to the amendments otherwise authorized herein,
amendments may be made to this Agreement from time to time by the General
Partner, without the Consent of any of the Limited Partners: (i) to add to the
representations, duties or obligations of the General Partner or surrender any
right or power granted to the General Partner herein, for the benefit of the
Limited Partners; (ii) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision herein, or
to make any other provisions with respect to matters or questions arising under
this Agreement which will not be inconsistent with the provisions of this
Agreement; and (iii) to delete or add any provision of this Agreement required
to be deleted or added by the staff of the Securities and Exchange Commission or
other Federal agency or by a state "Blue Sky" commissioner or similar official
and deemed by the Commission, agency, commissioner or official to be for the
benefit or protection of the Limited Partners.
No amendment shall be adopted pursuant to this Section 12.1.2 (except under
the preceding clause (iii)) unless its adoption: (i) is for the benefit of or
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not adverse to the interests of the Limited Partners; (ii) is consistent
with Section 5.1 hereof; (iii) does not affect the distribution of Cash
Available for Distribution or Sale or Refinancing Proceeds or the allocation of
Profits and Losses for Tax Purposes or of Tax Credits among the Partners or
between the Limited Partners as a class and the General Partner; and (iv) does
not, in the opinion of counsel for the Partnership, affect the limited liability
of the Limited Partners under the Act or the status of the Partnership as a
partnership for Federal income tax purposes.
In addition to the amendments otherwise authorized herein, notwithstanding
the preceding paragraph, amendments may be made to this Agreement without the
Consent of any Limited Partner with respect to the provisions of Article 4 of
this Agreement in accordance with Section 4.4.1 and/or Section 4.4.2.
12.2. Filing of Required Documents
In making any amendments, there shall be prepared and filed for recordation
by the General Partner all documents and certificates required to be prepared
and filed under the Act and under the laws of any other jurisdictions under the
laws of which the Partnership is then formed or qualified.
12.3. Required Change of Partnership Name
If at any time there is no General Partner which is an Affiliate of WNC &
Associates, Inc., a California corporation (or any successor thereto), the
Partnership shall forthwith change its name in such a manner as not to include
the initials "WNC." All parties to this Agreement recognize that damages at law
may be an inadequate remedy for breach of the foregoing covenant, and consent
that the same may be enforced by specific performance, injunction or equitable
remedy as well as in an action at law.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1. Security Interest and Right of Set-Off
As security for any withholding tax or other liability or obligation to
which the Partnership may be subject as a result of any act or status of any
Limited Partner, or to which the Partnership becomes subject with respect to the
Interest of any Limited Partner, the Partnership shall have (and each Limited
Partner hereby grants to the Partnership) a security interest in all Cash
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Available for Distribution and Sale or Refinancing Proceeds distributable
to the Limited Partner to the extent of the amount of the withholding tax or
other liability or obligation.
13.2. Notices
Except as otherwise specifically provided herein, all notices, demands or
other communications hereunder shall be in writing and shall be deemed to have
been given, if given in any manner specified in the definition of "Notification"
herein, when dispatched, and shall be sent to the respective addresses referred
to in such definition.
13.3. Execution
Each Limited Partner, including any Additional Limited Partner and
Substitute Limited Partner, additional General Partner and successor General
Partner, shall become a Partner in the Partnership by signing counterpart
signature pages to this Agreement or a power of attorney to the General Partner
therefor, and any other instrument or instruments deemed necessary by the
General Partner. By so signing, each Limited Partner, including any Additional
Limited Partner and Substitute Limited Partner, additional General Partner or
successor General Partner, as the case may be, shall be deemed to have adopted,
and to have agreed to be bound by, all the provisions of this Agreement. A
Person may be admitted as an Additional Limited Partner and shall become bound
by this Agreement (i) if such Person (or a representative authorized by such
Person orally, in writing or by other action such as payment for his Units)
executes this Agreement or any other writing, including without limitation, the
Investor Form included with the Prospectus, evidencing the intent of such Person
to become an Additional Limited Partner or (ii) without such execution, if such
Person (or a representative authorized by such Person orally, in writing or by
other action such as payment for his Units) complies with the conditions for
becoming an Additional Limited Partner as set forth in this Agreement and
requests (orally, in writing or by other action such as payment for his Units)
that the Partnership Register reflect such admission.
13.4. Binding Effect
The covenants and agreements contained herein shall be binding upon, and
inure to the benefit of, the heirs, executors, administrators, personal
representatives, successors and assigns of the respective parties hereto.
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13.5. Applicable Law
This Agreement shall be construed and enforced in accordance with the laws
of the State of California; provided, however, that the provisions of this
Section 13.5 shall not govern causes of action based on alleged violations of
Federal or state (other than the State of California) securities laws.
13.6. Counterparts
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the same counterpart.
13.7. Separability of Provisions
Each provision of this Agreement shall be considered separable, and if for
any reason any provision or provisions hereof are determined to be invalid and
contrary to any existing or future law, no such invalidity shall impair the
operation or affect those portions of this Agreement which are valid.
13.8. Captions
Section titles and the table of contents are for convenience of reference
only and shall not control or limit the meaning of this Agreement as set forth
in the text hereof.
13.9. Mandatory Arbitration
Except as provided in Article 6 hereof, mandatory arbitration shall not be
required in connection with any dispute between a Limited Partner and the
Sponsor or the Partnership. Nothing contained in this Section 13.9 shall apply
to pre-existing contracts between Limited Partners and their broker-dealers.
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13.10. Partnerships Treated as Separate
This Partnership Agreement shall apply to each Partnership separately, and
each Partnership shall file its own Certificate of Limited Partnership.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
General Partner:
WNC & Associates, Inc.,
General Partner
By: /s/ John B. Lester, Jr.
John B. Lester, Jr.,
President
Initial Limited Partner:
/s/ John B. Lester, Jr.
John B. Lester, Jr.
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EXHIBIT C
INVESTOR FORM
WNC Housing Tax Credit Fund VI, L.P., Series __
Amount of Investment
______________ x $1,000 _________________
# Units Total Dollar Amount
Minimum Investments: $5,000 ($2,000 for certain investors)
Additional increments: $1,000
____ New Account
____ Addition to Existing Account
____ Initial Here if the investor is paying for his Units with a check for the
total subscription amount.
____ Initial Here if the investor elects to use the installment payment. In such
case he shall make a check for one-half of the total subscription amount (i.e.,
the number of Units subscribed for x $500) and pay the remaining half with
interest pursuant to the terms of the Promissory Note on the reverse side
hereof, which must be executed by the investor. An investor is eligible to use
this installment payment method only if he is subscribing for at least 10 Units
($10,000).
Make Check Payable To: National Bank of Southern California
WNC/HTCF VI
Submit To: National Bank of Southern California
4100 Newport Place, Suite 100
Newport Beach, CA 92660
Attention: WNC Escrow Manager
INVESTOR INFORMATION
Investor ____ Dr. ____ Mr. ____ Mrs. ____ Ms. Social Security Number
- -------------------------------------------------------------------------------
Investor ____ Dr. ____ Mr. ____ Mrs. ____ Ms. Social Security Number
- -------------------------------------------------------------------------------
Entity Name Taxpayer Identification Number
- ------------------------------------- ------------------------------
Occupation Income
- ------------------------------------- ------------------------------
Mailing Address Residence Address
(if different from mailing address)
- ------------------------------------- -----------------------------------
City City
- ------------------------------------- -----------------------------------
State Zip State Zip
- ------------------------------------- -----------------------------------
Daytime Phone Daytime Phone
CONTINUED ON OTHER SIDE
<PAGE>
INVESTOR FORM (CONTINUED)
LEGAL FORM OF OWNERSHIP
____ Individual ____ Community Property ____ Joint Tenants with Rights of
Survivorship ____ Tenants in Common ____ Partnership (Copy of partnership
agreement must be sent with this form.)
____ Corporate (Certified corporate resolution must be sent with this form.)
____ Revocable Trust (Trustee(s) is required to sign below. Copy of trust
instrument must be sent with this form.)
____ Custodian for: _______________________________________________
Under Uniform Gift to Minors Act of the State of ________________. The Units
are being purchased in the State of _____________________.
(Complete if different from the state of residence.)
____ Other (Specify.)
____ Check here if the investor is not a citizen of the United States.
____ Check here if the investor is subject to backup withholding pursuant to
Section 3406(a)(1)(C) of the Internal Revenue Code.
Investor Signature
Execution of the Investor Form below constitutes the undersigned's subscription
for the number of Units indicated above and his acceptance and agreement to
perform the terms and conditions of the Agreement of Limited Partnership
included as Exhibit B to the Prospectus of WNC Housing Tax Credit Fund VI, dated
______________, 1997.
Signature of First Investor Date
- ----------------------------------- ---------------------------
Signature of Second Investor Date
- ----------------------------------- ---------------------------
In order to induce the General Partner to accept this subscription, investor
represents by initialing in the space provided that investor has received a copy
of the final Prospectus. ____________
(Initial Here)
Broker/Dealer Information
The undersigned represents that he has complied with the requirements of the
Conduct Rules of the NASD with respect to the subscriber whose name appears on
the above Investor Form and hereby certifies that he has reasonable grounds
to believe on the basis of information obtained from the investor concerning his
objectives, financial situation and needs and any other information known
to the undersigned that the investment in the Units is suitable for the
investor, and, in addition, has informed the investor as to the lack of
liquidity and marketability of the Units. The undersigned warrants that a
Prospectus was delivered to the subscriber not less than five days prior to
submission of this subscription to the Series.
- ----------------------------------- ---------------------------
Account Executive Broker/Dealer Firm
- -------------------------------------------------------------------------------
Branch Office Address ____ Please check if new address
- -------------------------------------------------------------------------------
City State Zip Phone
- ------------------------------------ ------------------------
Account Executive's Signature and/or Branch Manager Date
C-1
<PAGE>
PROMISSORY NOTE
$500 PER UNIT
FOR VALUE RECEIVED, the undersigned ("Maker"), promises, jointly and severally
if more than one, to pay to the order of WNC Housing Tax Credit Fund VI, L.P.,
Series __, a California limited partnership ("Payee"), at the office of Payee,
3158 Redhill Avenue, Suite 120, Costa Mesa, California 92626-3416, or at such
other location as Payee may from time to time designate, the principal sum of
FIVE HUNDRED DOLLARS ($500), multiplied by the number of Units set forth in his
Investor Form, together with interest on the unpaid principal balance from the
date of the Maker's admission as a limited partner of the Payee until paid at
the rate of ____% per annum. Said principal sum shall be payable in one
installment as follows: (i) on January 31, 1999, if Maker subscribes on or
before June 30, 1988, (ii) on June 30, 1999, if Maker subscribes between July 1,
1998 and December 31, 1998, or (iii) the later of the date of subscription or
January 31, 2000, if Maker subscribes after December 31, 1998. Interest accrued
to the principal installment payment date shall also be due and payable on such
date.
This Promissory Note is delivered pursuant to the terms of the Agreement of
Limited Partnership of Payee, and shall be governed by the following provisions:
1. This Promissory Note shall be paid in lawful money of the United States.
2. The occurrence of any of the following shall constitute an "Event of
Default":
(a) Default in the payment of any amount payable hereunder when due,
which default in payment is not cured within 30 days after such due
date ("Payment Default"); or default in the performance of any other
obligation of Maker under this Promissory Note;
(b) A materially false or misleading omission or representation,
statement, certificate, warranty or other assertion in the Investor
Form or any other document executed by the Maker in connection with the
purchase of Units of limited partnership interest in Payee;
(c) The filing by, or against, the Maker of any proceeding under
the Federal Bankruptcy Code;
(d) An assignment for the benefit of creditors made by the Maker; or
(e) The appointment of, or application for, a receiver or trustee by
any party for all or any part of the assets of the Maker.
3. Upon the occurrence of an Event of Default, then at the option of Payee, the
entire unpaid balance of principal on this Promissory Note, together with
accrued interest and any other amounts due hereunder, shall be immediately due
and payable.
4. In the event that any amount payable under this Promissory Note is not paid
when due, a late charge in the amount of 5% of the late amount shall be due and
payable in addition to the interest provided herein.
5. If this Promissory Note is not paid when due or if an Event of Default
occurs, Maker promises to pay all costs of collection, including, but not
limited to, reasonable attorneys' fees incurred by Payee on account of such
collection whether or not suit is filed hereon.
6. In the event this Promissory Note is not paid when due or if an Event of
Default occurs, Payee may set off all amounts owed to Payee under this
Promissory Note against all distributions to which Maker is entitled relating to
Maker's Units of limited partnership interest in Payee.
7. In the event of a Payment Default, Maker shall be given a notice by Payee of
the Payment Default and the Payee's intent to foreclose on its security interest
given by Maker to secure the payment of this Promissory Note. For a period of 30
days after such notice (the "Cure Period"), Maker shall be entitled to cure such
Payment Default by paying the delinquent principal payment, with interest as
provided in this Promissory Note, to the Payee. Prior to the expiration of the
Cure Period, the Payee shall not be entitled to commence to foreclose its
security interest in the Maker's Units of limited partnership interest in Payee
and Maker's interest in Payee shall not be subject to any reduction as a result
of such Payment Default. However, Payee may withhold any distributions otherwise
payable or issuable to Maker pending the cure of the Payment Default prior to
the expiration of the Cure Period. Any reduction in Maker's interest in Payee
effective upon the expiration of the Cure Period will relate back and shall
apply to and affect any withheld distributions. Upon expiration of the Cure
Period Payee may commence to foreclose and foreclose its security interest in
the Maker's Units of limited partnership interest in Payee.
<PAGE>
8. This Promissory Note is made with full recourse to Maker, is by its terms not
a negotiable instrument, is assignable only subject to the defenses Maker may
have, is subject to venue for collection in the state in which Maker resides and
may not be sold by Payee prior to its maturity. Subject to the foregoing, Payee
may pledge and grant security interests in this Promissory Note as security for
any obligation of Payee.
9. This Promissory Note shall be governed by, and construed in accordance with,
the laws of the State of California.
10. Reference in this Promissory Note to "Payee" shall mean the original Payee
hereunder so long as the Payee shall be the holder of this Promissory Note and
thereafter shall mean any subsequent holder of the Promissory Note.
11. Time is of the essence of each obligation of Maker hereunder.
12. No delay or omission on the part of the Payee in exercising any rights
hereunder or under the Agreement of Limited Partnership of Payee or any other
instrument given to secure this Promissory Note shall operate as a waiver of
such rights or any other right hereunder or under said instruments.
13. This Promissory Note may be prepaid in full at any time without premium or
penalty; provided, however, that no partial prepayments shall be permitted.
14. Maker waives presentment, demand for payment, notice of dishonor, notice of
protest, protest and all other notices or demands in connection with the
delivery, acceptance, performance, default, endorsement or guaranty of this
instrument, except as provided in paragraph 7 above.
This note is executed as of _______, 199__.
---------------------------
Maker
---------------------------
Maker
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<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information and representations must not
be relied upon. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
state to any person to whom it is unlawful to make such offer. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Fund since the respective dates at which information is given
herein, or the date hereof. However, if any material change occurs while this
Prospectus is required by law to be delivered, this Prospectus will be amended
or supplemented accordingly.
TABLE OF CONTENTS
Page
Summary of the Offering.................................................... 10
Risk Factors............................................................... 23
Who Should Invest; Limitations on Use of Credits and Losses................ 41
Estimated Use of Proceeds.................................................. 47
Management Compensation.................................................... 52
Conflicts of Interest...................................................... 59
Fiduciary Responsibility................................................... 64
Investment Objectives and Policies......................................... 66
The Low Income Housing Credit.............................................. 84
Other Government Assistance Programs....................................... 100
Management................................................................. 106
Prior Performance Summary.................................................. 114
Federal Income Tax Considerations.......................................... 121
State and Local Tax Considerations......................................... 164
Profits and Losses for Tax Purposes, Tax Credits and Cash Distributions.... 165
Summary of Certain Provisions of the Partnership Agreement................. 170
Transferability of Units................................................... 174
Reports.................................................................... 176
Terms of the Offering and Plan of Distribution............................. 177
Sales Material............................................................. 184
Management's Discussion and Analysis of Financial Condition................ 184
Legal Matters.............................................................. 186
Experts.................................................................... 186
Further Information........................................................ 186
Glossary................................................................... 187
Financial Statements....................................................... FS-i
Exhibit A - Prior Performance Tables....................................... A-1
Exhibit B - Partnership Agreement.......................................... B-1
Exhibit C - Investor Form.................................................. C-1
For a period of 90 days after the effective date of this Prospectus,
all dealers effecting transactions in the registered securities, whether or not
participating in the distribution, may be required to deliver a Prospectus. This
obligation is in addition to the obligation of dealers to deliver a Prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
APPENDIX A
Description of Graphic Materials
1. At the upper portion of page 86 there are two adjacent pie charts. The
pie chart to the left is unsegmented, and the legend below it reads "Taxable
Income ($125,000)." The pie chart to the right is segmented, with the larger
segment denoted "Income After Taxes ($94,000)" and the smaller segment denoted
"Tax Payment ($31,000."
At the lower portion of page 86 there is a single pie chart consisting of
three segments. The largest segment is denoted "Income After Taxes ($94,000),"
the second-largest segment is denoted "Recomputed Tax Payments ($23,250) and
the smallest segment is denoted "Additional Income From Tax Credits ($7,750)."
2. On page 87 there appears a graph. The horizontal line represents the
years 1970 through 1993, and the vertical line represents the shortage of
affordable rental units in the United States. The graph is entitled "Supply/
Demand of Affordable Housing."
3. On page 114 there appears a map of the contiguous United States and the
U. S. Virgin Islands. The map denotes those states wherein properties
purchased by prior programs of the sponsor are located.
4. On page 137 there appears a reproduction of lines 34 to 53 of IRS Form
1040.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 30. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the issuance and distribution of the registered
securities. All expenses of the issuance and distribution of the securities to
the extent that they do not exceed 13% of the Capital Contributions received
through the offering, will be borne by the Registrants, subject to increase to
the extent Acquisition Expenses are less than 1.5% of the Capital Contributions
as set forth in the Registrants' Partnership Agreements. Any additional expenses
will be borne by the General Partner of the Registrants. In the event that less
than the maximum offering proceeds are raised by the Registrants, the amounts
estimated for certain of the expense items listed below are expected to be
reduced.
Issuer Seminar Costs . . . . . . . . . . . . . . . . . $229,000
Registration Fee - Securities and Exchange
Commission . . . . . . . . . . . . . . . . . 15,200
NASD Filing Fee . . . . . . . . . . . . . . . . . . . 5,500
Legal Fees and Expenses . . . . . . . . . . . . . . . 250,000
Printing . . . . . . . . . . . . . . . . . . . . . . 250,000
Accounting Fees . . . . . . . . . . . . . . . . . . . 150,000
Blue Sky Fees and Expenses. . . . . . . . . . . . . . 50,000
Advertising Costs and Sales Literature. . . . . . . . 250,000
Escrow Costs. . . . . . . . . . . . . . . . . . . . . 50,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . 50,300
Salaries and Expenses of Employees of
WNC & Associates, Inc. . . . . . . . . . . . 200,000
Retail Selling Commissions . . . . . . . . . . . . . . 3,500,000
Nonaccountable Expense Reimbursement to
WNC & Associates, Inc(1). . . . . . . . . . . 500,000
Dealer-Manager Fee(1). . . . . . . . . . . . . . . . . 1,000,000
Due Diligence. . . . . . . . . . . . . . . . . . . . . 250,000
----------
Total Expenses. . . . . . . . . . . . . . . . . . . . $6,750,000
(1) Will be used to pay all wholesaling and retailing costs, including salaries,
commissions (other than retailing commissions), expense reimbursements,
broker-dealer seminar costs, bonus or sales incentives and a portion of due
diligence expenses.
Item 31. Sales to Special Parties.
None.
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<PAGE>
Item 32. Recent Sales of Unregistered Securities.
On March 14, 1997, WNC Housing Tax Credit Fund VI, L.P., Series 5 sold
one unit of limited partnership interest to John B. Lester, Jr., an officer,
director and shareholder of the General Partner, for the sum of $1,000. Said
transaction was exempt from the registration requirements of the Securities Act
of 1933, pursuant to Section 4(2) thereof, as a transaction not constituting a
public offering.
Item 33. Indemnification of Directors and Officers.
The information set forth in the Prospectus under the heading
"Fiduciary Responsibility" and in Section 5.8 of the Partnership Agreement
(Exhibit B to the Prospectus) is incorporated herein by this reference.
Item 34. Treatment of Proceeds from Stock Being Registered.
Inapplicable.
Item 35. Financial Statements and Exhibits.
(a) Financial Statements
See "Financial Statements" in Part I of this Registration
Statement. All financial statements are included in the
Prospectus.
(b) Exhibits.
1.1 Selling Agreement
1.2 Selected Dealers Agreement
1.3 Investor Form (filed as Exhibit C to the
Prospectus)
3.1 Agreement of Limited Partnership (filed as Exhibit
B to the Prospectus)
5.1 Opinion of Counsel
8.1 Opinion of Tax Counsel
10.1 Escrow Agreement
24.1 Consent of Derenthal & Dannhauser as to securities
opinion is set forth in Exhibit 5.1 to this
Registration Statement
24.2 Consent of Derenthal & Dannhauser as to tax opinion
is set forth in Exhibit 8.1 to this Registration
Statement
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<PAGE>
24.3 Consent of Corbin & Wertz
25.1 Power of attorney is included in signature page
contained in Part II of this Registration Statement
Item 36. Undertakings.
Each Registrant undertakes with respect to the securities offered by
it: (1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement. (2) That, for the purpose of
determining liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof. (3) To remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
Each Registrant undertakes with respect to the securities offered by it
(a) to file any prospectuses required by Section 10(a)(3) as post-effective
amendments to the Registration Statement, (b) that for the purposes of
determining any liability under the Act each such post-effective amendment may
be deemed to be a new Registration Statement relating to the securities offered
therein and the offering of such securities at that time may be deemed to be the
initial bona fide offering thereof, (c) that all post-effective amendments will
comply with the applicable forms, rules and regulations of the Commission in
effect at the time such post-effective amendments are filed, and (d) to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
Each Registrant undertakes to send to each Limited Partner in such
Registrant at least on an annual basis a detailed statement of any transactions
with its General Partner or its Affiliates and of fees, commissions,
compensation and other benefits paid or accrued to its General Partner or its
Affiliates for the year completed, showing the amount paid or accrued to each
recipient and the services performed.
Each Registrant undertakes to file a sticker supplement pursuant to
Rule 424(b) under the Act during the distribution
II-3
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<PAGE>
period describing each property not identified in the Prospectus at such time as
there arises a reasonable probability that an interest in the Local Limited
Partnership owning such property will be acquired by the Registrant, and to
consolidate all such stickers into a post-effective amendment filed at least
once every three months, with the information provided simultaneously to its
existing Limited Partners. Each sticker supplement will disclose all
compensation and fees received by its General Partner and its Affiliates in
connection with the acquisition. The post-effective amendment shall include
audited financial statements meeting the requirements of Rule 3-14 of Regulation
S-X only for properties owned by Local Limited Partnerships interests in which
are acquired during the acquisition period.
Each Registrant undertakes to file after the end of the distribution
period a current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X to reflect each
commitment (i.e., the signing of a binding purchase agreement) made after the
end of the distribution period involving the use of ten percent or more (on a
cumulative basis) of the net proceeds of the offering and to provide the
information contained in such report to its Limited Partners at least once each
quarter after the distribution period of the offering has expired.
Each Registrant undertakes to provide to its Limited Partners the
financial statements required by Form 10-K for the first full fiscal year of its
operations.
Each Registrant undertakes to send to its Limited Partners, within 45
days of the close of each fiscal quarter, the information specified by Form
10-Q, if such report is required to be filed with the Commission.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of a
Registrant pursuant to the provisions of its Agreement of Limited Partnership,
or otherwise, each Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by a
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and will
be governed by the final adjudication of such issue.
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<PAGE>
Each Registrant undertakes that the prospectus will be supplemented at
the close of any Series to state the amount of Units sold therein, the
cumulative amount sold under all Series formed under the Registration Statement,
and the amount of Units to be offered in the next Series and in succeeding
Series to be formed under the Registration Statement.
Each Registrant undertakes that if at the commencement of the offering
of Units in a Series, the Series has a reasonable probability of acquiring a
property, the offering will not commence until after a post-effective amendment
to the Registration Statement has been filed and declared effective. Any such
post-effective amendment shall contain such information as would be required in
an original Registration Statement with respect to the property being acquired
(including audited financial statements of the property complying with Rule 3-14
of Regulation S-X if the property has been acquired).
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<PAGE>
INFORMATION CONCERNING PRIOR PROGRAMS
TABLE VI - Acquisition of Properties by Prior Programs
Table VI describes all property acquisitions by all public Prior
Programs during the three years ended December 31, 1996. Refer to Table I in the
Prospectus for a presentation of acquisition costs as a percentage of total
dollars raised.
II-6
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<PAGE>
<TABLE>
Table VI
Other Cash Expenditures
Total Mortgage Cash
Square Financing Down Total
Apt. Feet of Date of at Date of Payment Acquisition
Project/Location Units Units(1) Purchase Purchase (2) Total Expensed Capitalized Cost
WNC California Housing Tax Credits II, L.P.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ahoskie NC 56 39,200 4/26/94 1,736,713 272,040 2,008,753 32 2,008,785
WNC California Housing Tax Credits III, L.P.
Delhi CA 34 23,800 1/10/94 1,407,000 443,060 1,850,060 4,646 1,854,706
Fernandina Beach FL 48 33,600 2/15/94 1,540,774 353,581 1,894,355 3,707 1,898,062
Parlier CA 41 28,700 6/1/94 1,723,690 470,528 2,194,218 4,934 2,199,152
Perry IA 24 16,800 5/26/94 725,482 138,946 864,428 1,457 865,885
Richgrove CA 35 24,500 6/8/94 1,860,892 1,960,506 3,821,398 20,557 3,841,955
South Lake Tahoe CA 28 19,600 7/27/94 1,500,000 1,632,652 3,132,652 17,119 3,149,771
Stockton CA 72 50,400 2/2/94 1,793,227 1,657,290 3,450,517 17,377 3,467,894
Superior WI 20 14,000 6/2/94 555,750 203,530 759,280 2,134 761,414
Winters CA 38 26,600 1/13/94 1,852,700 612,396 2,465,096 6,421 2,471,517
Yankton SD 18 12,600 7/7/94 698,400 145,411 843,811 1,525 845,336
WNC California Housing Tax Credits IV, L.P., Series 4
Auburn CA 56 39,200 10/28/94 2,145,000 3,184,640 5,329,640 39,863 5,369,503
Chadron NE 16 11,200 12/17/96 400,000 482,865 882,865 6,044 888,909
Eagleville MO 16 11,200 2/28/96 358,000 81,827 439,827 1,024 440,851
Pawnee IL 20 14,000 2/28/96 615,264 138,042 753,306 1,728 755,034
Salem IN 24 16,800 1/9/95 814,800 184,972 999,772 2,315 1,002,087
Santa Barbara CA 14 9,800 9/26/95 970,940 960,891 1,931,831 12,028 1,943,859
Stockton CA 69 48,300 5/31/95 1,598,200 1,524,233 3,122,433 19,079 3,141,512
Wills Point TX 36 25,200 7/26/95 447,050 234,567 681,617 2,936 684,553
Woodlake CA 47 32,900 12/6/95 1,176,121 1,798,247 2,974,368 22,509 2,996,877
II-7
<PAGE>
Other Cash Expenditures
Total Mortgage Cash
Square Financing Down Total
Apt. Feet of Date of at Date of Payment Acquisition
Project/Location Units Units(1) Purchase Purchase (2) Total Expensed Capitalized Cost
WNC California Housing Tax Credits IV, L.P., Series 5
Carthage MO 52 36,400 5/30/96 690,000 657,221 1,347,221 1495 1,348,716
Stockton CA 82 57,400 3/31/96 2,711,699 2,909,790 5,621,489 6620 5,628,109
WNC Housing Tax Credit Fund III, L.P.
Beaumont MS 30 21,000 1/6/95 1,123,988 260,128 1,384,116 775 1,384,891
Blackshear GA 20 14,000 4/5/94 789,000 112,757 901,757 336 902,093
Brownfield TX 24 16,800 6/1/94 695,490 140,509 835,999 419 836,418
Buffalo TX 24 16,800 1/6/95 426,130 106,924 533,054 319 533,373
Carlinville IL 20 14,000 1/27/94 509,250 106,473 615,723 317 616,040
Crockett TX 40 28,000 1/4/94 928,760 199,452 1,128,212 594 1,128,806
Fox Lake WI 12 8,400 4/20/94 387,400 83,721 471,121 249 471,370
Orange Beach AL 30 21,000 1/10/94 1,153,330 281,936 1,435,266 840 1,436,106
Tiptonville TN 44 30,800 1/1/94 1,478,440 280,783 1,759,223 837 1,760,060
WNC Housing Tax Credit Fund IV, L.P., Series 1
Fort Stockton TX 36 25,200 2/7/94 1,024,000 237,530 1,261,530 1010 1,262,540
Alpine TX 36 25,200 2/7/94 931,200 248,305 1,179,505 1056 1,180,561
Angleton TX 48 33,600 2/8/94 1,383,770 301,693 1,685,463 1283 1,686,746
Aulander NC 24 16,800 5/26/94 960,203 228,043 1,188,246 970 1,189,216
Baytown TX 62 43,400 2/14/94 15,285,500 348,243 15,633,743 1481 15,635,224
Bucyrus OH 48 33,600 2/17/94 1,496,800 354,300 1,851,100 1506 1,852,606
Calhoun Falls SC 32 22,400 2/14/94 1,200,860 272,098 1,472,958 1157 1,474,115
Galena MD 31 21,700 2/8/94 1,500,000 316,485 1,816,485 1346 1,817,831
Gallup NM 40 28,000 9/1/94 1,499,900 413,040 1,912,940 1756 1,914,696
Madisonville TX 32 22,400 2/8/94 992,000 206,872 1,198,872 880 1,199,752
Manchester OH 28 19,600 2/7/94 873,000 169,290 1,042,290 720 1,043,010
Maynard AR 24 16,800 1/4/94 879,955 202,724 1,082,679 862 1,083,541
Monrovia CA 115 80,500 6/30/94 4,400,000 4,550,000 8,950,000 19347 8,969,347
Pampa TX 32 22,400 2/7/94 853,600 221,839 1,075,439 943 1,076,382
II-8
<PAGE>
Other Cash Expenditures
Total Mortgage Cash
Square Financing Down Total
Apt. Feet of Date of at Date of Payment Acquisition
Project/Location Units Units(1) Purchase Purchase (2) Total Expensed Capitalized Cost
WNC Housing Tax Credit Fund IV, L.P., Series 1 Continued)
Safford AZ 40 28,000 2/9/94 1,500,000 410,026 1,910,026 1743 1,911,769
San Luis Obispo CA 24 16,800 5/25/94 750,000 916,016 1,666,016 3895 1,669,911
Vernon TX 28 19,600 2/7/94 743,900 189,288 933,188 805 933,993
Yantis TX 24 16,800 1/31/94 641,070 151,365 792,435 644 793,079
WNC Housing Tax Credit Fund IV, L.P., Series 2
Bakersfield CA 112 78,400 7/5/95 1,960,000 2,139,736 4,099,736 30,544 4,130,280
Broken Bow NE 18 12,600 6/26/96 450,000 608,192 1,058,192 8,682 1,066,874
Buna TX 24 16,800 8/28/95 716,000 185,452 901,452 2,647 904,099
Comanche TX 22 15,400 8/31/94 597,520 174,847 772,367 2,496 774,863
Eden NC 48 33,600 7/1/94 898,311 449,415 1,347,726 6,415 1,354,141
Evansville WI 16 11,200 10/31/94 660,000 153,820 813,820 2,196 816,016
Forrest City AR 32 22,400 9/21/94 1,131,194 295,042 1,426,236 4,212 1,430,448
Fullerton CA 59 41,300 11/1/94 1,945,000 1,774,080 3,719,080 25,324 3,744,404
Hereford TX 28 19,600 1/4/95 809,756 179,012 988,768 2,555 991,323
Lamesa TX 24 16,800 7/27/94 679,000 152,672 831,672 2,179 833,851
Malvern AR 18 12,600 7/22/94 702,332 190,826 893,158 2,724 895,882
Navasota TX 48 33,600 2/20/96 1,009,500 228,320 1,237,820 3,259 1,241,079
Newton TX 24 16,800 8/28/95 598,900 172,024 770,924 2,456 773,380
North Wilkesboro NC 24 16,800 9/21/94 1,025,482 239,136 1,264,618 3,414 1,268,032
Orange Cove CA 54 37,800 8/8/94 1,576,050 2,022,183 3,598,233 28,866 3,627,099
Palestine TX 42 29,400 7/21/94 1,144,600 225,342 1,369,942 3,217 1,373,159
Sidney NE 18 12,600 5/9/96 450,000 535,892 985,892 7,650 993,542
Silsbee TX 58 40,600 11/11/94 1,256,680 411,892 1,668,572 5,880 1,674,452
Vidor TX 48 33,600 8/28/95 1,172,600 338,739 1,511,339 4,835 1,516,174
Waukee IA 23 16,100 2/14/95 694,148 125,388 819,536 1,790 821,326
II-9
<PAGE>
Other Cash Expenditures
Total Mortgage Cash
Square Financing Down Total
Apt. Feet of Date of at Date of Payment Acquisition
Project/Location Units Units(1) Purchase Purchase (2) Total Expensed Capitalized Cost
WNC Housing Tax Credit Fund V, L.P., Series 3
Alliance NE 19 13,300 2/5/96 647,779 604,108 1,251,887 3,697 1,255,584
Atlanta GA 375 262,500 4/26/96 8,555,000 1,471,854 10,026,854 9,008 10,035,862
Berkeley MD 78 54,600 7/23/96 713,307 773,469 1,486,776 4,734 1,491,510
Chattanooga TN 221 154,700 12/21/95 7,930,000 2,170,680 10,100,680 13,284 10,113,964
Curtis NE 12 8,400 9/25/96 430,000 98,622 528,622 604 529,226
El Monte (3) CA 68.5 47,950 9/17/96 1,762,500 2,581,086 4,343,586 15,796 4,359,382
Greensboro NC 22 15,400 2/6/96 947,000 1,482,525 2,429,525 9,073 2,438,598
Hastings NE 18 12,600 2/6/96 450,000 536,070 986,070 3,281 989,351
Morganton NC 36 25,200 2/5/96 1,194,500 943,918 2,138,418 5,777 2,144,195
Ontario OR 28 19,600 7/23/96 1,311,000 372,114 1,683,114 2,277 1,685,391
Shepherd TX 24 16,800 12/14/95 583,900 158,068 741,968 967 742,935
Silver City NM 31 21,700 5/26/96 1,330,000 308,762 1,638,762 1,890 1,640,652
Solomon KS 16 11,200 6/20/96 274,260 142,061 416,321 869 417,190
Syracuse KS 8 5,600 6/20/96 295,171 84,524 379,695 517 380,212
Talladega AL 30 21,000 2/5/96 822,513 688,792 1,511,305 4,215 1,515,520
Tulsa OK 76 53,200 11/14/95 650,000 549,327 1,199,327 3,362 1,202,689
WNC Housing Tax Credit Fund V, L.P., Series 4
Crescent City CA 55 38,500 5/24/96 1,960,000 1,191,878 3,151,878 23,616 3,175,494
El Monte (3) CA 68.5 47,950 9/17/96 1,762,500 2,581,086 4,343,586 51,143 4,394,729
Shawnee OK 100 70,000 12/31/96 2,187,000 231,700 2,418,700 4,591 2,423,291
<FN>
(1) Based on an average of 700 square feet per apartment unit.
(2) Cash down payments include capital contributions made to the operating
partnerships by the investment partnership.
(3) WNC Housing Tax Credit Fund IV, L.P., Series 3 and Series 4 have each
invested 49.495% the in El Monte project. Therefore units, square feet and
mortgage financing are equally allocated.
</FN>
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrants certify that they have reasonable grounds to believe that they meet
all of the requirements for filing on Form S-11 and have duly caused this
Registration Statement to be signed on their behalf by the undersigned,
thereunto duly authorized, in the City of Costa Mesa, State of California, on
the 2nd day of June, 1997.
WNC HOUSING TAX CREDIT FUND V, L.P.,
SERIES 5 and SERIES 6
By: WNC & ASSOCIATES, INC.,
General Partner
By: /s/ JOHN B. LESTER, JR.
John B. Lester, Jr.,
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Wilfred N. Cooper, Sr. and John B.
Lester, Jr., and each of them acting alone, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments to this Registration Statement, including Post-Effective Amendments,
and to file the same with all Exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, lawfully does or causes to be done by
virtue hereof.
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/WILFRED N. COOPER, SR. Director and chief June 2, 1997
Wilfred N. Cooper, Sr. executive officer of
WNC & Associates, Inc.
/s/ JOHN B. LESTER, JR. Director, president, June 2, 1997
John B. Lester, Jr. chief operating officer
and secretary of WNC &
Associates, Inc.
/s/ WILFRED N. COOPER, JR. Director and June 2, 1997
Wilfred N. Cooper, Jr. senior vice president
of WNC & Associates,
Inc.
/s/DAVID N. SHAFER Director and June 2, 1997
David N. Shafer senior vice president
of WNC & Associates,
Inc.
/s/ THEODORE M. PAUL Chief financial officer June 2, 1997
Theodore M. Paul and chief accounting
officer of WNC &
Associates, Inc.
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<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit Description
1.1 Selling Agreement
1.2 Selected Dealers Agreement
1.3 Investor Form (filed as
Exhibit C to the Prospectus)
3.1 Agreement of Limited Partnership
(filed as Exhibit B to the
Prospectus)
5.1 Opinion of Counsel
8.1 Opinion of Tax Counsel
10.1 Escrow Agreement
23.1 Consent of Derenthal & Dannhauser
as to securities opinion is set forth
in Exhibit 5.1 to this Registration
Statement
23.2 Consent of Derenthal & Dannhauser
as to tax opinion is set forth in
Exhibit 8.1 to this Registration
Statement
23.3 Consent of Corbin & Wertz
25.1 Power of attorney is included in
signature page contained in Part II
of this Registration Statement
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 6
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 8
Limited Partnership Units at $1,000 per Unit
Best Efforts
SELLING AGREEMENT
_________, 1997
WNC Capital Corporation
3158 Redhill Avenue, Suite 120
Costa Mesa, California 92626
as Dealer-Manager for the
above described Units
Gentlemen:
WNC & ASSOCIATES, INC., the general partner ("Fund Manager") of, and on
behalf of, WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5, WNC HOUSING TAX
CREDIT FUND VI, L.P., SERIES 6, WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
and WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 8 (collectively, the "Fund" and
individually, a "Series"), pursuant to the Agreement of Limited Partnership of
each Series (the "Partnership Agreement") set forth as Exhibit B to the
Prospectus (as hereinafter defined), hereby confirms its agreement with you as
follows:
l. Description of Securities. Subject to the terms hereof
the Fund proposes to issue and to offer for sale pursuant to the
Prospectus its limited partnership units (the "Units") through you
and those licensed brokers designated by you.
The purchase price of each Unit will be $1,000 payable in cash or cash
and a Promissory Note (the "Promissory Note") as discussed in the Prospectus.
2. Representations, Warranties and Agreements of Each Series
and the Fund Manager. Each Series and the Fund Manager, jointly
and severally, represent and warrant to, and agree with, you as
follows:
(a) The Fund has prepared and filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement and amendments
thereto, on Form S-11 covering the
wncnat6-6/08.sa
<PAGE>
registration of the Units under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus. Such
preliminary prospectus bears, and any amended prospectus will bear, the
legend required by the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Rules and Regulations"). Such Registration
Statement, in the form it first becomes effective and as thereafter
amended from time to time, and the final prospectus, as supplemented
from time to time, are herein respectively called the "Registration
Statement" and the "Prospectus."
(b) The Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with
the 1933 Act and the 1933 Act Rules and Regulations, and neither the
Registration Statement nor the Prospectus will contain any untrue
statement of a material fact or omit any material fact required to be
stated therein or necessary to make the statements therein not
misleading. In this connection, it is understood by each Series and the
Fund Manager that Rule 2810 of the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") requires that you
determine that all material facts relating to the subject offering are
adequately and accurately disclosed to prospective subscribers and
provide a basis for evaluating the offering, and each Series and the
Fund Manager therefore specifically represent and warrant that:
(i) all items of compensation payable to the Fund
Manager and its Affiliates are and will be set forth in
the Prospectus under the caption "Management
Compensation";
(ii) all properties to be acquired by any Series which is
conducting an offering of its Units are and will be described
in the Prospectus during the term of such offering under the
caption "Local Limited Partnership Investments";
(iii) all material tax aspects are and will be set forth in
the Prospectus under the captions "Federal Income Tax
Considerations" and "The Low Income Housing Credit";
(iv) the financial position and business experience of the
Fund Manager are and will be accurately and adequately
reflected in the Prospectus under the captions "Management,"
"Prior Performance Information" and
"Financial Statements";
(v) all material conflicts of interest and risk factors are
and will be set forth in the Prospectus under the captions
"Conflicts of Interest" and "Risk Factors"; and
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<PAGE>
(vi) all pertinent facts relating to the liquidity and
marketability of the Units are and will be set forth in the
Prospectus under the captions "Risk Factors - Lack of
Liquidity of Investment" and "Transferability of Units."
(c) The accountants who have certified or shall certify the audited
financial statements filed and to be filed with the Commission as parts
of the Registration Statement and the Prospectus are independent
accountants as required by the 1933 Act and the 1933 Act Rules and
Regulations.
(d) The financial statements filed with and as part of the Registration
Statement present fairly the financial positions of the respective
entities addressed therein as of the date of such financial statements,
in conformity with generally accepted accounting principles applied on
a consistent basis throughout the period involved.
(e) Except as set forth in or contemplated by the Registration
Statement and the Prospectus, since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has not been any material adverse change in the condition,
financial or otherwise, of any Series or the Fund Manager; and except
as set forth in or contemplated by the Registration Statement and the
Prospectus, neither any Series nor the Fund Manager has incurred any
liability or obligation or entered into any transaction since the date
as of which information is given in the Registration Statement and the
Prospectus, other than in the ordinary course of business, which is
material to the financial condition of any such person.
(f) The Units conform to the description thereof contained in
the Prospectus in all material respects.
(g) Neither the issuance nor the sale of the Units, nor the
consummation of any other of the transactions herein contemplated, nor
the fulfillment of the terms hereof, will conflict with, result in a
breach of, or constitute a default under the terms of, any indenture,
or other material agreement or instrument to which any Series or the
Fund Manager is, or will be, a party or is, or will be, bound, or, to
the best of the knowledge of such persons, any order or regulation
applicable to any Series or the Fund Manager of any court, regulatory
body, administrative agency or governmental body having jurisdiction
over any such person or any of their respective assets or operations.
(h) The Units, when issued, will be duly authorized, validly issued,
fully paid and nonassessable.
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<PAGE>
(i) Each Series has been duly formed pursuant to the California Revised
Limited Partnership Act and is validly existing as a limited
partnership in good standing under the laws of the State of California
with full power and authority to own properties (or interests therein)
and conduct its business as described in the Prospectus.
(j) The person or persons who have signed this Selling Agreement on
behalf of each Series and the Fund Manager are duly authorized so to
sign, and this Selling Agreement has been duly executed and delivered
by, and is the valid, legal and binding agreement of, each Series and
the Fund Manager enforceable in accordance with its terms.
3. Representations and Warranties of the Dealer-Manager. You
represent and warrant to and agree with each Series and the Fund
Manager as follows:
(a) You are a member in good standing of the NASD, and will maintain
such membership throughout the term of this Agreement.
(b) You will comply with all Federal laws pertaining to the sale of
securities, the laws of the jurisdictions in which you sell the Units,
the 1933 Act Rules and Regulations and the Constitution, By-Laws and
Rules of the Association of the NASD, and Rule 15c2-4 under the
Securities Exchange Act of 1934, as amended (the "1934 Act") as
interpreted in NASD Notice to Members 84-64 (which requires that during
the escrow period checks be transmitted by you to the escrow agent as
soon as practicable, but in any event by noon of the second business
day following receipt by you).
(c) You will make no sale of the Units unless such sale is preceded or
accompanied by the Prospectus.
(d) You will assist the Fund in qualifying or registering the Units for
sale under the laws of the State of California and such other
jurisdictions as to which you and the Fund Manager shall mutually
agree.
(e) You will (i) diligently make inquiries as required by law of all
prospective investors in order to ascertain whether a purchase of Units
is suitable for the investors and (ii) inform each prospective investor
of all pertinent facts relating to the liquidity and marketability of
the Units during the term of the investment. In recommending a
purchase, sale or exchange of the Units you shall:
(1) have reasonable grounds to believe, on the basis of
information obtained from the participant concerning his
investment objectives, investment experience, other
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<PAGE>
investments, income, net worth, financial situation and needs, and any
other information known by you, that:
(i) the participant is or will be in a financial
position appropriate to enable him to realize to a significant
extent the benefits described in the Prospectus, including
specifically the Federal income tax benefits;
(ii) the participant has a fair market net worth
sufficient to sustain the risks inherent in the program,
including loss of investment and lack of liquidity;
(iii) the participant meets the minimum income and
net worth standards established by the jurisdiction in
which such participant is a resident;
(iv) the program is otherwise suitable for the
participant; and
(2) maintain in your files documents disclosing the basis upon
which the determination of suitability was reached as to each
participant for the longer of (i) six years from the date of the
investment; (ii) the period prescribed by Rule 17a-4 under the 1934
Act; or (iii) the period required by applicable state blue sky laws.
(f) All Investor Forms and all subscription funds and Promissory Notes
received by you shall be promptly transmitted to National Bank of
Southern California, or such other bank as may be selected to act as
escrow agent for the Fund. As used herein, the term "promptly
transmitted" shall have the meaning set forth in Rule 15c2-4 under the
1934 Act.
(g) You will execute no transaction in a discretionary account without
prior written approval of the transaction by the investor.
4. Sale of Units. On the basis of the representations and warranties
herein contained, but subject to the terms and conditions herein set forth, you
agree to sell the Units on a "best efforts" basis, as agent for the Fund. You
are authorized to enlist other members of the NASD ("Soliciting Dealers"),
acceptable to the Fund to sell the Units. As compensation for these services,
the Fund agrees that it will pay you a retail selling commission in an amount
equal to 7% of the offering price of the Units sold pursuant to the terms of
this Agreement, a Dealer-Manager fee of 2% of the offering price of the Units
sold pursuant to the terms of this Agreement and a nonaccountable expense
reimbursement in an amount equal to 1% of the offering price of the Units sold
pursuant to the terms of this Agreement. You will pay wholesaling compensation
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<PAGE>
to your personnel, and your overhead costs attributable to underwriting
activities, out of the commissions, fees and expense reimbursements you will
receive hereunder. In no event will the aggregate amount of all selling
compensation paid in connection with the offering exceed a total equal to 10% of
the Gross Proceeds, plus an additional one-half of 1% as provided in the
following sentence. The Fund may, in the Fund Manager's discretion, reimburse
the Soliciting Dealers for their bona fide and accountable expenses for due
diligence purposes, in an amount not to exceed one-half of l% of the offering
price of the Units sold pursuant to this Agreement. As part of the selling
compensation described above, a Series may establish sales incentive programs as
described in the Prospectus, subject to the prior review and approval of the
NASD and compliance with all applicable NASD rules and procedures.
Notwithstanding the preceding, as described more fully in the
Prospectus under the caption "Terms of the Offering and Plan of Distribution,"
the retail selling commission payable in connection with subscriptions for
$100,000 or more of the Units in one or more Series or other syndications
sponsored by the Sponsor will be determined in accordance with the following
schedule:
Amount of Subscription Selling Commission on
by any "Purchaser" (1) the Offering Price
- ---------------------- ------------------
$100,000 to $199,000 5.5%
$200,000 to $299,000 4.5%
$300,000 to $399,000 3.5%
$400,000 to $499,000 2.5%
$500,000 and over 1.5% (2)
- ----------------
(1) As defined in the Prospectus under "Terms of the Offering and
Plan of Distribution."
(2) Provided that the Fund and the Fund Manager may further reduce the retail
selling commission with respect to subscriptions to $500,000 and over, but any
such reduction will be the same for investors making investments of
substantially the same size.
and provided, further, that the commission may be reduced with respect to
investments by certain "Designated Investors," as defined in the Prospectus
under "Terms of the Offering and Plan of Distribution," pursuant to agreement
between the Dealer-Manager, Soliciting Dealer and Fund Manager.
The Fund further agrees that it will pay the retail selling
commissions, Dealer-Manager fee and expense reimbursements with respect to the
purchase price of each Unit in a Series upon (a) the release to the Series from
the escrow account in which they are to be deposited the subscription proceeds
attributable to such Unit and (b) the admission of the purchaser of such Unit as
a limited partner of the Series. It is expressly understood and agreed that
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<PAGE>
the Fund Manager has reserved the right to accept or reject any subscriptions
for Units as set forth in the Prospectus and no retail selling commission,
Dealer-Manager fee or expense reimbursement will be payable to you or any of the
Soliciting Dealers with respect to the tender of any subscription which is
rejected by you or the Fund Manager as aforesaid. Similarly, in the event a
Series shall not receive in cash the full amount of the public offering price of
a Unit, whether by reason of the failure of the subscriber to pay the amounts
required under his Promissory Note or otherwise, no retail selling commission,
Dealer-Manager fee or expense reimbursement in respect of the unpaid public
offering price shall be payable to you or any of the Soliciting Dealers.
Furthermore, no subscription may be deemed binding until at least five days
after delivery of a Prospectus to the subscriber. Moreover, in the event of the
failure of you and the Soliciting Dealers to sell at least 1,400 of the Units
offered in a Series prior to the termination of that Series offering by the Fund
Manager, neither the Fund Manager nor any Series shall have any liability for
the payment of any commissions or fees hereunder.
5. Certain Covenants of Each Series and the Fund Manager.
Each Series and the Fund Manager covenant and agree with you as
follows:
(a) The Fund will not at any time file or make any amendment or
supplement to the Registration Statement or Prospectus of which you
shall not have previously been advised and furnished a copy, or to
which you shall object in writing.
(b) The Fund will advise you immediately, and confirm the advice in
writing, (i) when the Registration Statement shall have become
effective with the Commission, (ii) when any post-effective amendment
to the Registration Statement shall have become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been
filed, (iii) of any request of the Commission for amendment or
supplementation of the Registration Statement or Prospectus or for
additional information, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification or
registration of the Units for offering or sale in any jurisdiction, or
of the institution of any proceedings for any such purposes. The Fund
will use its best efforts to prevent the issuance of any such stop
order or of any order preventing or suspending such use and to obtain
as soon as possible the lifting thereof, if issued.
(c) The Fund will deliver to you without charge, and when requested,
such number of copies of the preliminary and amended preliminary
prospectus, and the Prospectus (as supplemented or amended, if the Fund
shall have made any
wncnat6-6/08.sa
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<PAGE>
supplements or amendments to the Prospectus) as you may
reasonably request.
(d) The Fund will comply to the best of its ability with the 1933 Act
and the 1933 Act Rules and Regulations so as to permit the continuance
of sales of and dealings in the Units under the 1933 Act. If at any
time when a prospectus is required to be delivered under the 1933 Act,
an event shall have occurred as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements
therein not untrue or misleading or to make the Prospectus comply with
the 1933 Act, the Fund will notify you promptly thereof and will
furnish to you an amendment or supplement which will correct such
statement in accordance with the requirements of Section 10 of the 1933
Act.
(e) The Fund will use its best efforts to qualify or register the Units
for sale under the laws of the State of California and such other
jurisdictions as to which the Fund Manager and you shall mutually agree
and will comply to the best of its ability with such laws so as to
permit the continuance of sales of and dealings in the Units
thereunder.
(f) The Fund will furnish to you copies of all such documents, reports
and information as shall be of general interest and are furnished by
the Fund to investors in the Units generally.
(g) The Fund and the Fund Manager will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement, preliminary and amended preliminary prospectus
and Prospectus, including fees of legal counsel for the Fund, the
qualifying or registering of the Units under the laws of certain
jurisdictions as aforesaid, including filing fees and fees and
disbursements of counsel in connection therewith, and the cost of
furnishing to you and the Soliciting Dealers copies of the Registration
Statement, preliminary and amended preliminary prospectus and
Prospectus as herein provided.
6. Conditions to Dealer-Manager's Obligations. Within a
period of five days after the effective date of the Prospectus (the
"Effective Date"), there shall be furnished to you the following:
(a) The favorable opinion of Messrs. Derenthal & Dannhauser, counsel
for the parties to this Agreement, in form and substance satisfactory
to you, respecting certain matters arising under Federal securities
laws.
(b) A certificate, dated the Effective Date, signed by or on behalf of
the Fund Manager, to the effect that (i) the representations and
warranties of each Series and the Fund
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<PAGE>
Manager contained in this Agreement are correct; and (ii) the signers
of said certificate have carefully examined the Registration Statement
and the Prospectus, and in their opinion (A) neither the Registration
Statement nor the Prospectus contains any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(B) there are no material legal or governmental proceedings to which
the Fund Manager or any Series is a party or of which the business or
assets of any such person are the subject which are not disclosed in
the Registration Statement and the Prospectus.
(c) A letter addressed to you from Corbin & Wertz dated not earlier
than the business day immediately preceding the Effective Date, stating
that:
(i) With respect to each Series and the Fund Manager they are
"independent public accountants" as such term is defined in
the 1933 Act and the 1933 Act Rules and Regulations, and they
were not employed by any such person on a contingent basis and
they (and their partners and associates individually) do not,
either at the time of the preparation of financial statements
reported upon by them or at any time thereafter, have
substantial interest in any Series or the Fund Manager or any
parent of any such person (as such term is defined in Rule 405
of the 1933 Act Rules and Regulations) or have any connection
with any such person as a promoter, underwriter, voting
trustee, director, officer, partner or employee.
(ii) In their opinion, the balance sheets reported upon by
them and included in the Registration Statement comply in all
material respects with all of the accounting requirements
contained in the 1933 Act and the 1933 Act Rules and
Regulations with respect to Registration Statements on Form
S-11.
(iii) On the basis of inquiries of officers of the Fund
Manager responsible for financial and accounting matters and
such other procedures as they have deemed adequate in
connection with said opinion, nothing has come to their
attention which caused them to believe that at a specific date
within five days of the date of such letter there was any
material change from amounts shown on the balance sheets
included in the Prospectus except in all instances for changes
or decreases which the Prospectus discloses have occurred or
may occur.
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<PAGE>
7. Indemnification.
(a) The Fund shall indemnify and hold you and any Soliciting Dealers
harmless against any losses, claims, damages or liabilities, joint or
several:
(i) to which you or any Soliciting Dealer may become subject
under the 1933 Act, the 1934 Act, the various state securities
laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration
Statement, the Prospectus or in any sales literature furnished
by the Fund, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not
misleading; or
(ii) to which you or any Soliciting Dealer may become subject
due to the misrepresentation by the Fund or its agents (other
than you or any Soliciting Dealer) of material facts in
connection with the sale of the Units, unless the
misrepresentation of such material facts was the direct result
of misleading information provided to the Fund by you or any
Soliciting Dealer; or
(iii) to which you or any Soliciting Dealer may become subject
as a result of any breach by the Fund of the representations,
warranties or agreements contained herein.
The Fund will reimburse you and any Soliciting Dealers for any
legal or other expenses reasonably incurred in connection with
investigating or defending any such loss, claim, damage or liability
(or actions in respect thereof); provided, however, that the Fund shall
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, the Prospectus, or in any sales literature, in
reliance upon and in conformity with written information furnished to
the Fund by you or any Soliciting Dealer specifically for use in the
preparation thereof. This indemnity agreement shall be in addition to
any liabilities which the Fund may otherwise have in connection with
this offering. The foregoing indemnity agreement shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls you or any Soliciting Dealer within the
meaning of the 1933 Act.
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<PAGE>
Notwithstanding the foregoing provisions of this Section 7(a),
neither you, any Soliciting Dealer nor any controlling person thereof
shall be indemnified for any losses, liabilities or expenses arising
from or out of an alleged violation of Federal or state securities laws
unless (i) there has been a successful adjudication on the merits of
each count involving alleged securities law violations as to the
particular indemnitee and the court approves indemnification of
litigation costs, or (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee and the court approves indemnification of
litigation costs, or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular indemnitee and finds that
indemnification of the settlement and related costs should be made. In
any claim for indemnification for Federal or state securities law
violations, the party seeking such indemnification shall place before
the court the positions of the Securities and Exchange Commission, the
California Commissioner of Corporations, and any other state securities
administrator whose rules require such disclosure with respect to the
issue of indemnification for securities law violations, provided that
at least one of the investors has an address in such state.
(b) You agree and each Soliciting Dealer will agree to
indemnify and hold harmless each Series and the Fund Manager against
any losses, claims, damages or liabilities, joint or several, to which
any Series or the Fund Manager may become subject, under the 1933 Act,
the 1934 Act, the various state securities laws, or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, the Prospectus, or in any sales literature, or arise out of
or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in the Registration Statement,
the Prospectus, or in any sales literature, in reliance upon and in
conformity with written information furnished by you or such Soliciting
Dealer specifically for use in the preparation thereof, or any breach
by you or such Soliciting Dealer, as the case may be, of your or its
respective representations, warranties or agreements contained herein
or in a Soliciting Dealers Agreement between you and the Soliciting
Dealer; and you and such Soliciting Dealer will reimburse each Series
and the Fund Manager for any legal or other expenses reasonably
incurred in connection with investigating or defending any such loss,
claim, damage or liability (or action in respect thereof). This
wncnat6-6/08.sa
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<PAGE>
indemnity agreement shall be in addition to any liabilities which you
or and Soliciting Dealer may otherwise have in connection with this
offering. The foregoing indemnity agreement shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person
if any, who controls each Series and the Fund Manager within the
meaning of the 1933 Act.
(c) Promptly after receipt by an indemnified party of notice
of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
under subparagraphs (a) and (b) of this Paragraph 7, notify the
indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise than
under such subparagraph. In case any such action shall be brought
against such indemnified party, and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party, similarly notified, to
assume the defense thereof, with counsel satisfactory to such
indemnifying and indemnified parties, and after the indemnified party
shall have received notice from the agreed upon counsel that the
defense has been so assumed, in the event that the indemnified party
nonetheless elects to participate in the defense of any such action for
any reason other than the presence of a conflict of interest, the
indemnifying party shall not be responsible for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof.
8. Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of California.
9. Notices. Except as otherwise provided in this Agreement, (a)
whenever notice is required by the provisions of this Agreement to be given to
the Fund, a Series or the Fund Manager, such notice shall be in writing
addressed to such person or persons, as the case may be, at 3158 Redhill Avenue,
Suite 120, Costa Mesa, California 92626 and (b) whenever notice is required by
the provisions of this Agreement to be given to the Dealer-Manager or the
Soliciting Dealers, such notice shall be in writing addressed to you at 3158
Redhill Avenue, Suite 120, Costa Mesa, California 92626.
10. Benefit. This Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of the parties hereto.
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<PAGE>
11. Defined Terms. Capitalized terms used but not otherwise
defined herein shall have the meanings given to them in the
Prospectus.
If the foregoing correctly sets forth your understanding, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement between us.
Very truly yours,
WNC HOUSING TAX CREDIT FUND VI, L.P.,
SERIES 5 THROUGH SERIES 8
By: WNC & Associates, Inc.,
General Partner
By: _________________________
John B. Lester, Jr.,
President
Accepted this ______ day of __________, 1997:
WNC CAPITAL CORPORATION,
a California corporation, Dealer-Manager
By: __________________________
Wilfred N. Cooper, Jr.,
President
wncnat6-6/08.sa
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WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 6
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 8
SELECTED DEALERS AGREEMENT
San Francisco, California
..................., 199_
Gentlemen:
The undersigned, WNC Capital Corporation (the "Dealer- Manager"), has
entered into an agreement (the "Selling Agreement") with WNC & ASSOCIATES, INC.,
the general partner ("Fund Manager") of, and on behalf of, WNC HOUSING TAX
CREDIT FUND VI, L.P., SERIES 5, WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 6,
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 7 and WNC HOUSING TAX CREDIT FUND
VI, L.P., SERIES 8 (collectively, the "Fund" and individually, a "Series"),
pursuant to which the undersigned has agreed to use its best efforts to form and
manage, as Dealer-Manager, a group of securities dealers (the "Soliciting
Dealers") for the purpose of soliciting offers for the purchase of units of
limited partnership interest ("Units") in the Fund. The terms of the offering
are set forth in the Fund's Registration Statement on Form S-11 which was filed
with the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended (the "1933 Act"). Such Registration
Statement, in the form it first becomes effective and as thereafter amended from
time to time, and the final prospectus, as supplemented from time to time, are
herein respectively called the "Registration Statement" and the "Prospectus."
The terms used but not otherwise defined in this Agreement have the same
meanings as in the Prospectus.
You are invited to become one of the Soliciting Dealers and by your
confirmation hereof you agree to act in such capacity and to use your best
efforts, in accordance with the following terms and conditions, to find
purchasers for the Units.
1. You hereby confirm that you are a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD").
2. You hereby agree to solicit, as an independent contractor and not as
our agent or as an agent of the Fund or the Fund Manager, persons acceptable to
the Fund Manager to enter into the Investor Form in the form attached to the
Prospectus. All subscription checks shall be payable to "National Bank of
Southern California - WNC/HTCFVI. All Investor Forms and all subscription checks
and Promissory Notes received by you with respect to any Investor Form shall be
transmitted to National Bank of Southern California. All check transmittal
procedures followed by you in connection with the offering of the Units shall
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<PAGE>
comply with Ru1e 5c2-4 adopted by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), as
interpreted in NASD Notice to Members 84-64. In connection with the foregoing:
(i) any subscriber's check received by you which is not made payable to the
Escrow Agent shall be returned by you to such subscriber by not later than the
end of the next business day following its receipt, and (ii) each subscriber's
Investor Form, check and Promissory Note, if any, received by you shall be
transmitted by you to the Escrow Agent as soon as possible, but in any event by
the end of the next business day following your receipt thereof if your internal
supervisory review is conducted at the same location at which subscription
documents and checks are received, or if your final internal supervisory review
is conducted at another location, you will transmit such Investor Form, check
and Promissory Note, if any, to your office conducting such final internal
supervisory review (the "Final Review Office") by the end of the next business
day following your receipt thereof and the Final Review Office will in turn
transmit the same to the Escrow Agent by the end of the next business day
following its receipt. No subscription to a Series shall be effective unless and
until accepted by the Fund Manager, and in no event may a subscription be deemed
binding until at least five days after delivery of a Prospectus to the
subscriber.
You agree that you will (i) diligently make inquiries as required by
law of all prospective investors in order to ascertain whether a purchase of
Units is suitable for the investors and (ii) inform each prospective investor of
all pertinent facts relating to the liquidity and marketability of the Units
during the term of the investment. In recommending a purchase, sale or exchange
of the Units you shall:
(a) have reasonable grounds to believe, on the basis of information
obtained from the participant concerning his investment objectives,
investment experience, other investments, income, net worth, financial
situation and needs, and any other information known by you, that:
(i) the participant is or will be in a financial
position appropriate to enable him to realize to a significant
extent the benefits described in the Prospectus, including
specifically the Federal income tax benefits;
(ii) the participant has a fair market net worth
sufficient to sustain the risks inherent in the program,
including loss of investment and lack of liquidity;
(iii) the participant meets the minimum income and
net worth standards established by the jurisdiction in
which such participant is a resident;
(iv) the program is otherwise suitable for the
participant; and
wncnat6-6/10.sda
2
<PAGE>
(b) maintain in your files copies of all Investor Forms and documents
disclosing the basis upon which the determination of suitability was
reached as to each participant for the longer of (i) six years from the
date of investment, (ii) the period prescribed by Rule 17a-4 under the
1934 Act, or (iii) the period required by applicable state blue sky
laws;
(c) execute no transaction in a discretionary account without
prior written approval of the transaction by the investor;
(d) make no sale of the Units unless such sale is preceded or
accompanied by a Prospectus; and
(e) comply in all respects with the Conduct Rules of the NASD
in the conduct of the offering of Units.
Furthermore, you expressly agree to be bound by the escrow agreement
between the Fund and the Escrow Agent.
Each subscription to a Unit solicited by you will be strictly subject
to confirmation by us and acceptance thereof by the Fund Manager and we, and
each Series and the Fund Manager reserve the right in our and their uncontrolled
discretion to reject any such subscription and to accept or reject subscriptions
in the order of their receipt by a Series or otherwise. A sale of a Unit in any
Series shall be deemed to be completed only after (i) the Escrow Agent receives
a properly completed Investor Form from the Soliciting Dealer, together with
payment of the full purchase price of each purchased Unit from a buyer who
satisfies each of the terms and conditions of the Registration Statement and
Prospectus; and (ii) such subscription has been accepted by the Fund Manager.
Neither you nor any other person is authorized to give any information or make
any representation other than those contained in the Prospectus or in any
supplemental sales literature furnished by the Dealer-Manager or the Fund for
use in making solicitations in connection with the offer and sale of the Units.
Upon release by us, you may offer the Units at the public offering
price, subject to the terms and conditions hereof.
3. We understand that the Fund will provide you with such number of
copies of the Prospectus and such number of copies of amendments and supplements
thereto as you may reasonably request. In this connection, each Series and the
Fund Manager have represented and warranted to us that the Registration
Statement and the Prospectus will contain all statements which are required to
be stated therein in accordance with the 1933 Act and the rules and regulations
of the Commission under the 1933 Act (the "1933 Act Rules and Regulations"), and
neither the Registration Statement nor the Prospectus will contain any untrue
statement of a material fact or omit any material fact required to be stated
therein or necessary to make the statements therein not misleading. It is
understood by the Fund and the Fund Manager that the Conduct Rules of the NASD
require that you determine that all material facts
wncnat6-6/10.sda
3
<PAGE>
relating to the subject offering are adequately and accurately disclosed to
prospective subscribers and provide a basis for evaluating the offering, and
that each Series and the Fund Manager therefore have specifically represented
and warranted to us that:
(i) all items of compensation payable to them and their
affiliates are and will be set forth in the Prospectus under
the caption "Management Compensation";
(ii) all properties to be acquired by any Series which is conducting an
offering of its Units are and will be described in the Prospectus under
the caption "Local Limited Partnership Investments";
(iii) all material tax aspects are and will be set forth in the
Prospectus under the captions "Federal Income Tax Considerations" and
"The Low Income Housing Credit";
(iv) the financial position and business experience of the Fund Manager
are and will be accurately and adequately reflected in the Prospectus
under the captions "Management," "Prior Performance Information" and
"Financial Statements," as will the financial position and business
experience of the Fund Manager of any Series which is conducting an
offering of its Units, during the term of such offering;
(v) all material conflicts of interest and risk factors are
and will be set forth in the Prospectus under the captions
"Conflicts of Interest" and "Risk Factors"; and
(vi) all pertinent facts relating to the liquidity and marketability of
the Units are and will be set forth in the Prospectus under the
captions "Risk Factors - Lack of Liquidity of Investment" and
"Transferability of Units."
We also understand that the Fund may provide you with certain
supplemental sales material to be used by you in connection with the
solicitation of Units in the Fund. In the event you elect to use such
supplemental sales material, you agree that such material shall not be used in
connection with the solicitations of Units unless accompanied or preceded by the
Prospectus unless you are notified by us that such material has been prepared
and cleared for use in compliance with Rule 134 of the 1933 Act Rules and
Regulations.
We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us in this Agreement. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not
constitute, a waiver by you of compliance with any provision of the 1933 Act, or
the 1933 Act Rules and Regulations.
wncnat6-6/10.sda
4
<PAGE>
You confirm that you are familiar with Securities Act Release No. 4968
and Rule 15c2-8 under the 1934 Act, relating to the distribution of preliminary
and final prospectuses, and confirm that you have complied and will comply
therewith. We will make available to you, to the extent they are made available
to us by the Fund, such number of copies of the Prospectus as you may reasonably
request for the purposes contemplated by the 1933 Act and the 1933 Act Rules and
Regulations.
You agree that you will exercise due diligence in determining that all
material facts are adequately and accurately disclosed in the Prospectus. For
purposes of compliance with the NASD's Conduct Rules regarding due diligence, it
is understood and agreed that you may rely upon the results of an inquiry
conducted by another member or members of the NASD, provided that:
(1) you have reasonable grounds to believe that such inquiry
was conducted with due care;
(2) the results of the inquiry were provided to you with the
consent of the member or members conducting or directing the
inquiry; and
(3) no member that participated in the inquiry is a sponsor
of the Fund or an Affiliate of such sponsor.
4. Except as otherwise set forth in the Prospectus under the caption
"Terms of the Offering and Plan of Distribution" with respect to volume
discounts, we will be entitled to receive from the Fund a retail selling
commission equal to 7% of the Gross Proceeds. For your services hereunder,
subject to the condition that subscriptions for a minimum of 1,400 Units have
been received and accepted by a Series prior to the termination date of such
Series' offering, you will receive from us a retail selling commission of up to
7% (subject to reduction as aforesaid for volume discounts) of the Gross
Proceeds from all subscriptions solicited by you and accepted by the Fund
Manager. No other payment or reimbursement of selling compensation or expenses
will be made hereunder unless and until we have executed an addendum to this
Agreement setting forth the terms of such payment or reimbursement.
In the event that a sale of Units for which you have solicited a
subscription shall not occur, whether by reason of the failure of any condition
specified herein or in the Investor Form or the Selling Agreement, rejection of
the subscription by the Fund Manager or otherwise, no payment with respect to
such Unit shall be made to you. Further, it is understood and agreed that we
shall be under no obligation to make payment to you, and you expressly waive
payment, of any commission hereunder except to the extent that we shall have
first received from the Fund the selling commission to which we are entitled in
connection with the subject transaction. In this regard we note that no
commissions shall be payable with respect to the portion of the purchase price
for a Unit paid for by
wncnat6-6/10.sda
5
<PAGE>
a Promissory Note until such time as the Promissory Note has been paid in full.
Any payment to you will be payable only with respect to transactions lawful in
the jurisdictions where they occur.
Notwithstanding the preceding, as described more fully in the
Prospectus under the caption "Terms of the Offering and Plan of Distribution,"
the retail selling commission payable in connection with subscriptions for
$100,000 or more of the Units in one or more Series will be determined in
accordance with the following schedule:
Amount of Subscription Selling Commission on
by any "Purchaser" (1) the Offering Price
- ---------------------- ------------------
$100,000 to $199,000 5.5%
$200,000 to $299,000 4.5%
$300,000 to $399,000 3.5%
$400,000 to $499,000 2.5%
$500,000 and over 1.5% (2)
- ----------------
(1) As defined in the Prospectus under "Terms of the Offering and Plan of
Distribution." (2) Provided that the Fund and the Fund Manager may further
reduce the retail selling commission with respect to subscriptions to $500,000
and over, but any such reduction will be the same for investors making
investments of substantially the same size.
Furthermore, we as Dealer-Manager may, in our discretion, reduce the
selling commissions otherwise payable in connection with any investment in Units
by a Soliciting Dealer or any Affiliate or employee of the foregoing, or certain
other "Designated Investors," as discussed in the Prospectus under the caption
"Terms of the Offering and Plan of Distribution." Any such reduction will only
be made if and to the extent that the Soliciting Dealer which would otherwise be
entitled to a selling commission on any such transaction agrees to such
reduction. Therefore, we will by separate letter agreement establish the amount
of selling commission reduction, if any, on transactions for which you would
otherwise be entitled to the full selling commission, but which are eligible for
the reduction. It shall be your responsibility to notify your Affiliates and
employees in this regard.
As described in the Prospectus, we may from time to time during the
offering establish a sales incentive bonus program, subject to prior NASD
approval and compliance with all applicable NASD rules and procedures. By your
execution hereof you expressly agree to the terms of any such sales incentive
bonus program, unless you notify us that you do not wish to participate in any
such program. It shall be your responsibility to notify your Affiliates and
employees if you choose not to participate in any sales incentive program.
5. This Agreement may be terminated by us at any time upon
five days' written notice to you.
wncnat6-6/10.sda
6
<PAGE>
6. In soliciting persons to acquire the Units, you agree to comply with
any applicable requirements of the 1933 Act, the 1933 Act Rules and Regulations,
the 1934 Act, the published rules and regulations thereunder and the Conduct
Rules of the NASD and, in particular, you agree that you will not give any
information or make any representation other than those contained in the
Prospectus and in any supplemental sales literature furnished to you by the Fund
or us for use in making such solicitations. You further confirm and agree that,
in connection with any assistance you may provide in the sale or transfer of
Units, you will fulfill your obligations pursuant to Sections (b)(2)(B) and
(b)(3)(D) of Rule 2810 of the Conduct Rules of the NASD.
7. We assume no obligation or responsibility in respect of the
qualification of the Units under the laws of any jurisdiction. The Blue Sky
Memorandum enclosed, or to be promptly furnished to you, indicates the states in
which it is believed by the Fund that the Units are exempt from, or have been
qualified under, the applicable state securities or "blue sky" laws and the
restrictions, if any, on the rights of dealers to solicit sales thereof. It is
understood that under no circumstances will you engage in any activities
hereunder in any state which is not listed in said Blue Sky Memorandum as a
state in which the Units are exempt from, or qualified under, the state
securities or "blue sky" laws. Solicitations are to be made only by Soliciting
Dealers qualified to act as such for such purpose within the states in which
they make such solicitations.
8. Nothing contained herein shall constitute the Soliciting Dealers and
us, or any of them, an association, partnership, unincorporated business, or
other separate entity. We shall be under no liability to make any payment to you
except out of funds received by us from the Fund as hereinabove provided, and we
shall not be under any liability for or in respect of the value or validity of
the Investor Forms, the Units, or the performance by anyone of any agreement on
its part, or for, or in respect of any matters connected with this Agreement,
except for lack of good faith, and for obligations expressly assumed by us in
this Agreement.
9. It is expressly understood that the Dealer-Manager may cooperate
with other broker dealers who are licensed members of the NASD, registered as
broker-dealers with the Commission and duly licensed by the appropriate
regulatory agency of each state in which they will offer and sell the Units of
the Fund. Such other NASD members may be employed by the Dealer-Manager as
Soliciting Dealers on terms and conditions identical or similar to this
Agreement and shall receive such rates of commission as are agreed to between
the Dealer-Manager and the respective other Soliciting Dealers and as are in
accordance with the terms of the Registration Statement, and to that extent such
other Soliciting Dealers shall compete with you in the sale of the Units.
wncnat6-6/10.sda
7
<PAGE>
10. Under the Selling Agreement, each Series has agreed to indemnify
us, the Soliciting Dealers and each person, if any, who controls us or any
Soliciting Dealer within the meaning of the 1933 Act against certain liabilities
under the 1933 Act. Each Soliciting Dealer hereby agrees to indemnify each
Series and the Fund Manager as provided in Paragraph 7 of the Selling Agreement
and to indemnify us and each other Soliciting Dealer to the same extent and in
the same manner as such Soliciting Dealer agrees to indemnify each Series and
the Fund Manager. In the execution of the Selling Agreement, we shall be deemed
to have acted as a representative of each of the Soliciting Dealers, and the
Soliciting Dealers shall be deemed to be in privity of contract with each Series
and the Fund Manager.
11. Any notice from us to you as Soliciting Dealer shall be deemed to
have been duly given if mailed or telegraphed to you at your address set forth
below.
Please confirm this agreement to solicit persons to acquire Units on
the foregoing terms and conditions by signing and returning the form enclosed
herewith.
Very truly yours,
WNC CAPITAL CORPORATION
By:______________________________
Wilfred N. Cooper, Jr.
wncnat6-6/10.sda
8
<PAGE>
WNC Capital Corporation
3158 Redhill Avenue, Suite 120
Costa Mesa, California 92626
RE: WNC Housing Tax Credit Fund VI, L.P.,
Series 5 through Series 8
Gentlemen:
The undersigned confirms its agreement to act as a Soliciting Dealer as
referred to in the foregoing Soliciting Dealers Agreement, subject to the terms
and conditions of such Agreement. The undersigned confirms that it is a member
in good standing of the National Association of Securities Dealers, Inc.
PLEASE NOTE: The undersigned further confirms that its
registered representatives (check one):
__ are authorized
__ are not authorized
to subscribe for Units for their own account on terms which include a reduction
of commissions otherwise payable on their investment, as described in the
Prospectus under "Terms of the Offering and Plan of Distribution."
Dated: ________, 199_. ___________________________________
(Print Name of Firm)
By: _______________________________
(Authorized Representative)
-----------------------------------
(Print Name of Authorized Representative)
Address __________________________
----------------------------------
Phone Number (___)________________
Send Due Diligence Information To: Send Marketing Information To:
- -------------------------------- ------------------------------
- -------------------------------- ------------------------------
Send Commission Checks To:
--------------------------
--------------------------
wncnat6-6/10.sda
9
May 30, 1997
WNC Housing Tax Credit Fund VI, L.P., Series 5
WNC Housing Tax Credit Fund VI, L.P., Series 6
3158 Redhill Avenue, Suite 120
Costa Mesa, California 92626
Re: Registration Statement on Form S-11
Gentlemen:
We have examined the above-referenced Registration Statement to be
filed by you with the Securities and Exchange Commission on or about the date
hereof in connection with the registration under the Securities Act of 1933, as
amended, of 50,000 limited partnership units (the "Units"). The Units are to be
offered and sold by and through selected member-dealers of the National
Association of Securities Dealers, Inc. on a "best efforts" basis.
As your counsel in connection with this transaction, we have examined
the proceedings taken and are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Units.
It is our opinion that upon completion of the proposed additional
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Units, consisting of the completion of the
registration of the Units under the Securities Act of 1933, and upon completion
of the proceedings being taken in order to permit the offer and sale of the
Units in accordance with the securities laws of the respective states, the
Units, when issued and sold in the manner referred to in the Registration
Statement, will be legally and validly issued, and, upon payment of the
consideration therefor specified in the Registration Statement, will be fully
paid and nonassessable.
<PAGE>
May 30, 1997
Page 2
We consent to the use of this opinion as an exhibit to said
Registration Statement and further consent to the use of our name wherever
appearing in said Registration Statement, including the Prospectus constituting
a part thereof, and any amendment thereto.
Very truly yours,
DERENTHAL & DANNHAUSER
wncnat6-6/01.so
May 30, 1997
WNC Housing Tax Credit Fund VI, L.P., Series 5
WNC Housing Tax Credit Fund VI, L.P., Series 6
3158 Redhill Avenue, Suite 120
Costa Mesa, California 92626
Re: Federal Income Tax Consequences
Gentlemen:
You have requested our opinion with respect to certain Federal income
tax matters in connection with the transactions contemplated by the prospectus
forming part of the Registration Statement filed with the Securities and
Exchange Commission on or about the date hereof (the "Prospectus"), relating to
the offering of securities of WNC Housing Tax Credit Fund VI, L.P., Series 5 and
WNC Housing Tax Credit Fund VI, L.P., Series 6 (individually, a "Series," and
collectively, the "Fund"). All terms used herein have the respective meanings
set forth in the Prospectus.
We have acted as special tax counsel to the Fund with respect to the
offering of Units. This letter is for delivery in connection with the offering
made by the Prospectus and is intended to confirm as of the effective date of
the Registration Statement certain opinions described in the "Federal Income Tax
Considerations" and "The Low Income Housing Credit" sections of the Prospectus.
This letter and the opinions confirmed herein are for delivery to the Fund. We
hereby consent to the use of this opinion as an exhibit to the Registration
Statement of the Fund and to the reference to this firm in the Prospectus under
the caption "Experts."
In rendering the opinion stated below and confirming the opinions
referred to in the Prospectus, we have examined and relied upon the following:
(i) The Partnership Agreement of each Series;
(ii) The Prospectus and the Registration Statement;
(iii) The audited balance sheet and related notes thereto of
WNC & Associates, Inc. dated as of August 31, 1996; and
<PAGE>
May 30, 1997
Page 2
(iv) Such other documents, records and instruments as we have deemed
necessary in order to enable us to render the opinions referred to in this
letter.
For purposes of rendering the opinion stated below and confirming the
other opinions referred to in the Prospectus, we have assumed:
(a) The truth and accuracy of the statements contained in
the Prospectus;
(b) The truth and accuracy of the balance sheet of WNC & Associates,
Inc., as of the date thereof, and its preparation in accordance with generally
accepted accounting principles;
(c) That each Series has been organized and has been and will be
operated at all times during its existence in accordance with the provisions of
the Partnership Agreement, the description of its organization and operation
contained in the Prospectus, and all applicable state statutes pertaining to
limited partnerships;
(d) In those cases in which we have not been involved directly in the
preparation, execution or the filing of a document, that (i) the document
reviewed by us is an original document, or a true and accurate copy of the
original document, and has not been subsequently amended, (ii) the signatures on
each original document are genuine, and (iii) each party who executed the
document had proper authority and capacity;
(e) The representations, views and beliefs of the Fund Manager referred
to in the "Federal Income Tax Considerations" and "The Low Income Housing
Credit" sections of the Prospectus, including, but not limited to, the
representation that the Fund will not elect to be treated as a corporation for
Federal tax purposes, are true, correct and accurate;
(f) The Units are not and will not be (i) listed on an established
securities market, nor (ii) readily tradable on a secondary market or the
substantial equivalent thereof.
Our opinion set forth in this letter and the opinions referred to in
the Prospectus and confirmed below are based upon the California Revised Limited
Partnership Act (Cal. Corp. Code ss.15611, et seq.), the Internal Revenue Code
of 1986, as amended, existing and proposed regulations of the Treasury
Department, reports and statements of Congressional committees and members,
published administrative announcements and rulings of the
<PAGE>
May 30, 1997
Page 3
Internal Revenue Service, and court decisions, all as of the date of this
letter.
For the reasons stated in the "Federal Income Tax Considerations" and
"The Low Income Housing Credit" sections of the Prospectus as discussed therein,
we are of the view that it is not possible for us to reach a judgment as to the
probable outcome (either favorable or unfavorable) of certain Federal income tax
issues and accordingly we give no opinion with respect to said issues.
Based on the foregoing, we hereby confirm that each of the statements
in the Prospectus in which it is stated that tax counsel has advised the Fund of
an opinion as to the probable outcome of an issue if the issue were fully
litigated in court is our current opinion as to such issue subject to all of the
qualifications, limitations and assumptions relating to such opinion.
The opinions set forth or confirmed above represent our conclusions as
to the application of Federal income tax law existing as of the date of this
letter to the transactions contemplated in the Prospectus, and we can give no
assurance that legislative enactments, administrative changes or court decisions
may not be forthcoming which would modify or supersede our opinions. Moreover,
there can be no assurance that positions contrary to our opinions will not be
taken by the Internal Revenue Service or that a court considering the issues
will not hold contrary to such opinions. Further, all of the opinions set forth
above represent our conclusions based upon the documents and facts referred to
above. Any material amendments to such documents or changes in any significant
facts could affect the opinions referred to herein. Although we have made such
inquiries and performed such investigation as we have deemed necessary to
fulfill our professional responsibilities as tax counsel, we have not undertaken
an independent investigation of the facts referred to in this letter.
We express no opinion as to any Federal income tax issue or other
matter except those set forth or confirmed above.
Very truly yours,
DERENTHAL & DANNHAUSER
wncnat6-6/02.to
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is entered into by and between
WNC HOUSING TAX CREDIT FUND VI, L.P., SERIES 5 and WNC HOUSING TAX CREDIT FUND
VI, L.P., SERIES 6 (individually, a "Series," and collectively, the
"Registrants") and NATIONAL BANK OF SOUTHERN CALIFORNIA, a California banking
corporation (the "Escrow Agent"), as of this __th day of _____, 1997. All
capitalized terms used but not defined in this Escrow Agreement shall have the
respective meanings given them in the Prospectus (as that term is defined
below).
R E C I T A L S
WHEREAS, the Registrants have filed a registration statement on Form
S-11 under the Securities Act of 1933 with the Securities and Exchange
Commission, File No. 333-24111 (the "Registration Statement"), relating to the
issuance and sale of a maximum of 50,000 units ("Units") of limited partnership
interest in an offering(s) ("Offering") to be conducted by one or more of the
Series, with a minimum subscription of five Units required for each subscriber
to one or more Series (two Units under certain circumstances set forth in the
Prospectus, as hereinafter defined), all Units to be sold at a price of $1,000
per Unit except as otherwise set forth in the prospectus included in the
Registration Statement, as amended or supplemented (such prospectus as amended
by any supplement thereto included in an amendment to the Registration Statement
which is declared effective, or any supplement filed with the Securities and
Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as
amended, are hereinafter collectively called the "Prospectus"), payable in cash
or cash and Promissory Notes upon subscription, all as more fully set forth in
the Prospectus; and
WHEREAS, in compliance with the Selling Agreement between the
Registrants and WNC Capital Corporation (the "Dealer-Manager") and the
Soliciting Dealer Agreement between the Dealer-Manager and those members (the
"Soliciting Dealers") of the National Association of Securities Dealers, Inc.
who have agreed therein to offer and sell the Units for the Registrants on a
"best efforts" basis, and Rule 15c2-4 under the Securities Exchange Act of 1934,
the Registrants propose to establish an escrow fund with the Escrow Agent; and
WHEREAS, the Offering of Units in any one Series will terminate on the
earlier of (1) one year from the commencement date of such Series Offering,
unless extended as provided in the Prospectus to a date not later than two years
from the commencement date of such Series Offering, or (2) the sale of all of
the Units (the "Offering Termination Date"); and unless gross cash offering
proceeds of at least $1,400,000 (the "Minimum Offering Amount") for
wncnat6-6/07.ea -1-
<PAGE>
a Series have been received within one year from the commencement date of such
Series Offering (the "Escrow Termination Date"), no Units will be sold in such
Series.
NOW, THEREFORE, the parties hereto agree as follows:
1. For a period commencing on the effective date of the Registration
Statement and terminating at the later of the Offering Termination Date for the
last Series to be offered or the last date upon which subscribers for Units are
admitted to one of the Registrants as Limited Partners thereof, the Escrow Agent
shall act as escrow agent in connection with the sale of Units and shall receive
and disburse the proceeds from the sale of Units in accordance herewith.
2. All Investor Forms and funds received by the Soliciting Dealers in
connection with the sale of Units (including the Promissory Notes, if
applicable) shall be promptly transmitted to the Escrow Agent by the Soliciting
Dealers.
3. Deposits in the form of checks which fail to clear the bank upon
which they are drawn shall be returned by the Escrow Agent to the subscriber,
together with the related Investor Form and any Promissory Note. The Escrow
Agent shall concurrently furnish to the Dealer-Manager a copy of any such
materials so returned. The Escrow Agent shall have no further liability
therefor.
If a Series rejects any subscription for which the Escrow Agent has
already collected funds, the Escrow Agent shall promptly issue and remit a
refund check to the rejected subscriber. If a Series rejects any subscription
for which the Escrow Agent has not yet collected funds but has submitted the
subscriber's check for collection, the Escrow Agent shall promptly issue and
remit a refund check to the rejected subscriber after the Escrow Agent has
cleared such funds. If a Series rejects any subscription for which the Escrow
Agent has not yet submitted the subscriber's check for collection, the Escrow
Agent shall promptly remit the subscriber's check directly to the subscriber.
All checks shall be accompanied by any related Investor Forms and Promissory
Notes.
4. The Escrow Agent shall invest all funds of a Series deposited with
it pursuant to Section 2 hereof, in accordance with written instructions from
time to time received from the Fund Manager, in United States Government
securities, securities issued or guaranteed by United States Government agencies
and certificates of deposit or time or demand deposits in commercial banks.
Interest accrued on subscription funds of a Series held in the escrow account
shall not be an asset of the Series but shall be paid to the subscribers as set
forth herein.
5. The Fund Manager will notify the Escrow Agent of the commencement
date of each Series Offering, and the termination date of each Series Offering.
wncnat6-6/07.ea -2-
<PAGE>
6. Upon receipt by the Escrow Agent of appropriate instructions from
the Fund Manager on or after the date as of which the Minimum Offering Amount
for a Series has been deposited with the Escrow Agent (the "Minimum Offering
Closing Date") and on each subsequent date on which subscribers to such Series
are admitted as limited partners to the Series (an "Admission Date"), as the
case may be, which instructions may be conveyed by telephonic or telegraphic
means (provided, however, that the same shall be confirmed in writing within
three days), the Escrow Agent shall deliver to the Series such portion of the
deposited funds attributable to such Series then held in escrow as are specified
in such instructions, together with any related Investor Forms and Promissory
Notes; provided that in no event shall the Escrow Agent release any of the
escrowed funds until it has confirmed that the payments for the Minimum Offering
Amount for such Series are represented by cleared funds. Promptly after release
of a subscriber's escrowed funds in accordance with this paragraph, the Escrow
Agent shall release to such subscriber all interest earned on such escrowed
funds.
7. If at least the Minimum Offering Amount for a Series has not been
deposited with the Escrow Agent by the Escrow Termination Date for such Series,
or if the Fund Manager notifies the Escrow Agent that it has elected to
terminate the Offering of a Series at an earlier date prior to the deposit into
escrow of the Minimum Offering Amount for such Series, the Escrow Agent shall
promptly, and in any event within 30 days, return all subscription funds
attributable to such Series, together with all interest on the funds, and any
related Investor Forms and Promissory Notes, to the respective subscribers.
8. In the event of either (a) the occurrence of the final Admission
Date in connection with the sale of the Units and the final disbursement by the
Escrow Agent pursuant to Section 6 hereof, or (b) at least the Minimum Offering
Amount for the last Series to be conducted not having been deposited with the
Escrow Agent by the Escrow Termination Date for such Series and compliance by
the Escrow Agent with Section 7 above, the Escrow Agent thereafter shall be
relieved of all liabilities in connection with the escrow deposits provided for
herein.
9. It is understood and agreed that the Escrow Agent shall:
(A) be under no duty to enforce payment of any
subscription or Promissory Note which is to be delivered to and
held by it hereunder;
(B) make no distribution of funds except according to Sections
3, 6 and 7 hereof, and (i) may act upon any instructions or advice believed by
it to be genuine and may assume that any person purporting to give advice or
instruction hereunder, believed by it to be duly authorized, has been authorized
to do so, (ii)
wncnat6-6/07.ea -3-
<PAGE>
shall not be liable for any action taken or omitted upon the advice of counsel
or upon a reasonable interpretation of any advice, instructions or document
furnished it, and (iii) may decline to act and shall not be liable for failure
to act if in doubt as to its duties hereunder;
(C) be deemed conclusively to have given and delivered any
notice required to be given or delivered hereunder if the same is in writing,
signed by any one of its authorized officers and mailed, by registered or
certified mail, or delivered by hand, in a sealed postpaid wrapper, addressed to
the Registrants at the following address:
c/o David N. Shafer, Esq.
3158 Redhill Avenue, Suite 120
Costa Mesa, California 92626-3416
(D) be indemnified by the Registrants against any claim made
against it by reason of its acting or failing to act in connection with any of
the transactions contemplated hereby (including reasonable fees and
disbursements of its counsel) and against any loss it may sustain in carrying
out the terms of this Agreement, except such claims which are occasioned by its
bad faith, gross negligence or willful misconduct.
10. The Escrow Agent, for services rendered under this
Agreement, shall receive from the Registrants an aggregate fee in
the amount of $3,000.
11. Nothing in this Agreement is intended to or shall confer upon any
other than the parties hereto any legal or equitable right, remedy or claim.
This Agreement shall be construed in accordance with the laws of the State of
California and may be modified only in writing.
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<PAGE>
12. For purposes of this Agreement, the term "collected funds" shall
mean all funds received by the Escrow Agent which have cleared normal banking
channels and are in the form of cash.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
WNC HOUSING TAX CREDIT FUND VI, L.P.,
SERIES 5 AND SERIES 6
By: WNC & Associates, Inc.,
General Partner
By: _________________________
John B. Lester, Jr.,
President
NATIONAL BANK OF SOUTHERN CALIFORNIA
(the "Escrow Agent")
By: ___________________________________
A Duly Authorized Officer
By: ___________________________________
A Duly Authorized Officer
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
WNC Housing Tax Credit Fund VI, L.P., Series 5 and 6
We consent to the use in this Registration Statement of WNC Housing Tax Credit
Fund VI, L.P., Series 5 and 6, on Form S-11 of our report on the consolidated
balance sheet of WNC & Associates, Inc. as of August 31, 1996 dated October 28,
1996 appearing in the Prospectus, which is a part of this Registration Statement
and to the reference to us under the heading "Experts" in such Prospectus.
CORBIN & WERTZ
Irvine, California
June 3, 1997
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
WNC Housing Tax Credit Fund VI, L.P., Series 5 and 6
We consent to the use in this Registration Statement of WNC Housing Tax Credit
Fund VI, L.P., Series 5 and 6, on Form S-11 of our report on the balance sheet
of WNC Housing Tax Credit Fund VI, L.P., Series 5 of April 30, 1997 dated May 5,
1997, appearing in the Prospectus, which is a part of this Registration
Statement and to the reference to us under the heading "Experts" in such
Prospectus.
CORBIN & WERTZ
Irvine, California
June 3, 1997
