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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999.
REGISTRATION NO. 333-52117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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DELAWARE 6513 39-1965590
(State or other (Primary Standard Industrial (I.R.S. Employer Identification No.)
jurisdiction of organization) Classification Number)
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1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1630
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MICHAEL B. YANNEY
1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1630
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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WITH COPIES TO:
PAUL E. BELITZ, ESQ.
Kutak Rock
717 17th Street, Suite 2900
Denver, Colorado 80202
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND AFTER
CONDITIONS IN THE MERGER AGREEMENT HAVE BEEN SATISFIED.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering / /
If this Form is post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8, MAY
DETERMINE.
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The information in this prospectus/consent solicitation statement is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus/consent solicitation statement is not an offer to
sell these securities and it is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION,
DATED SEPTEMBER 28, 1999
CONSENT SOLICITATION STATEMENT OF
CAPITAL SOURCE L.P. AND CAPITAL SOURCE II L.P.-A
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THIS CONSENT SOLICITATION STATEMENT ALSO SERVES AS
THE PROSPECTUS OF AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
7,765,772 UNITS REPRESENTING ASSIGNED LIMITED PARTNER INTERESTS AND UP TO $20
MILLION
IN AGGREGATE PRINCIPAL AMOUNT OF VARIABLE RATE JUNIOR NOTES CALLABLE ON OR AFTER
THE DATE OF ISSUANCE
As described in detail in this prospectus/consent solicitation statement, we
are proposing a merger of Capital Source L.P. and Capital Source II L.P.-A,
which we refer to as the partnerships, with and into America First Real Estate
Investment Partners, L.P., a newly formed Delaware limited partnership, which we
refer to as the company. We, the general partners of the partnerships, are
soliciting your consent to this transaction. In the transaction, the company
will distribute units of assigned limited partner interests, and in some
situations cash, promissory notes and Variable Rate Junior Notes Callable on or
After the Date of Issuance, or notes, to the partnerships in exchange for the
assets of the partnerships. After the transaction, you will be a unitholder or
noteholder, as the case may be, of the company and will no longer be a limited
partner, or BAC holder, in your respective partnership. We expect that the units
will be listed for trading on NASDAQ under the symbol "AFREZ". The notes will
not be listed for trading.
Through this prospectus/consent solicitation statement and the accompanying
supplements, we are asking you, as a BAC holder, to approve the transaction. BAC
holders holding in excess of 50% in interest of the outstanding BACs of each
partnership must vote "YES" in favor of the transaction on the enclosed consent
form in order for the transaction to be completed.
We have proposed the transaction to enhance the liquidity of your investment
and to increase the cash flow and net asset values of the partnerships. We plan
to accomplish this by listing the company's units on NASDAQ, by leveraging its
assets, by making equity investments primarily in multifamily residential
properties and by actively managing the makeup of its real estate portfolio. We
believe that the proposed transaction permits you to realize the value of your
investment in the partnerships, as opposed to liquidating your partnership or
continuing your partnership unchanged.
We, as the general partners of the partnerships, strongly recommend that you
vote "YES" in favor of the transaction.
THE TRANSACTION INVOLVES RISKS AND POSSIBLE DISADVANTAGES. YOU SHOULD
CONSIDER THE FACTORS BELOW AND THOSE DESCRIBED BEGINNING ON PAGES 4 AND 20 OF
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT.
- The units may trade at prices below the value of the company's assets and
the $10 per unit price arbitrarily assigned for the sole purpose of
allocating the units in the transaction. We do not expect a public market
for the notes to develop. If the notes are sold, they may sell at prices
substantially below their issuance price.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion.
- An unaffiliated third party has not been retained to represent your
interests in the transaction. Had a representative been retained, they
may have been able to negotiate, on your behalf, more favorable terms for
the transaction and different consideration may have been distributed to
you.
- If the transaction is completed, compensation, reimbursements and
distributions to our successor may increase.
- There can be no guarantee of the level of the company's future cash
distributions.
- The company is newly formed and has no operating history.
- If you vote "NO" against the transaction, but your partnership approves
it, you do not have any appraisal or other dissenters' rights under
Delaware law and none will be offered in the transaction.
- There are alternatives to the transaction. By approving the transaction,
you will effectively preclude the pursuit of some of the alternatives.
- The company intends to use debt financing to increase its real estate
asset portfolio. An increase in debt may increase the possibility of
default on the company's obligations. This could affect the company's
ability to pay distributions to you.
- If your partnership approves the transaction, you will be bound even if
you vote "NO" against the transaction.
- If you choose to receive notes, you will not hold an equity interest in
the company and will not be able to participate in the company's growth
or benefit from any increases in the value of the units. The notes are
unsecured obligations of the company and may be redeemed before maturity
at the company's option.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., EASTERN TIME ON
, 1999, UNLESS EXTENDED.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus/consent solicitation statement is truthful or complete. Any
representation to the contrary is a criminal offense.
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The date of the prospectus/consent solicitation statement is , 1999.
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ALL QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO AMERICA FIRST INVESTOR
SERVICES DEPARTMENT, 1004 FARNAM STREET, SUITE 400, OMAHA, NEBRASKA 68102, OR
CALL (800) 239-8787 AND SELECT OPTION 2. YOU MAY E-MAIL INVESTOR SERVICES AT
[email protected].
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TABLE OF CONTENTS
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PAGE
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SUMMARY.................................................................................................... 3
The Transaction.......................................................................................... 3
Summary Risk Factors..................................................................................... 4
Benefits of the Transaction.............................................................................. 5
Fairness................................................................................................. 6
Fairness Opinion......................................................................................... 6
Our Recommendation; Fairness Determination............................................................... 7
Appraisals............................................................................................... 7
Contacts Regarding Fairness Opinions, Valuations and Other Reports....................................... 7
The Units................................................................................................ 7
The Notes................................................................................................ 8
Consent Procedures....................................................................................... 8
Communicating With Other Investors....................................................................... 9
No Dissenters' Rights.................................................................................... 9
The Company.............................................................................................. 9
Background and Reasons for the Transaction............................................................... 10
Exchange Values.......................................................................................... 10
Consideration of Alternatives............................................................................ 11
Conflicts of Interests and Benefits to Insiders.......................................................... 13
Compensation, Reimbursements and Distributions to the Cap Source General Partners........................ 13
Federal Income Tax Consequences.......................................................................... 15
Accounting Treatment..................................................................................... 15
Ratio of Earnings to Fixed Charges....................................................................... 15
Organizational Structure................................................................................. 16
Comparison of BACs and Units............................................................................. 19
RISK FACTORS............................................................................................... 20
Risks Associated with the Transaction.................................................................... 20
No prior market for the units; Market price may decrease after the transaction......................... 20
No prior market for the notes; Price may decrease after the transaction................................ 20
Conflicts of interest of the Cap Source General Partners............................................... 20
Lack of representation may affect the terms of the transaction and its fairness to you................. 21
Compensation, reimbursements and distributions to the general partner may increase..................... 21
Possible lower distributions........................................................................... 21
Lack of operating history.............................................................................. 21
No dissenters' rights.................................................................................. 21
Possible alternatives to the transaction will not be pursued........................................... 21
A majority in interest will bind all investors in each partnership..................................... 21
Notes are unsecured obligations of the company......................................................... 22
Contingent or undisclosed liabilities.................................................................. 22
Investors who elect to receive notes could receive units............................................... 22
Risks Associated with the Company's Business............................................................. 22
Leveraging strategy.................................................................................... 22
No assurance of successful implementation of new business plan......................................... 23
Real estate investments................................................................................ 23
Dependence on available investments.................................................................... 23
Competition............................................................................................ 23
Illiquidity of real estate............................................................................. 23
Unspecified acquisitions............................................................................... 24
Title defects.......................................................................................... 24
Environmental laws may impose additional liability..................................................... 24
Registration under the Investment Company Act.......................................................... 24
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Potential liability under the Americans with Disabilities Act.......................................... 24
Regulatory and Legislative Risks......................................................................... 25
BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION............................................... 26
History of the Partnerships.............................................................................. 26
The Decision to Pursue the Transaction................................................................... 28
Preparation for and Chronology of Events Leading to the Transaction...................................... 29
Restructuring of the Transaction to a Publicly Traded Partnership........................................ 31
Alternatives Considered.................................................................................. 31
Reasons for, and Benefits of, the Transaction............................................................ 34
Consequences if Transaction Not Completed................................................................ 35
THE TRANSACTION............................................................................................ 35
General.................................................................................................. 35
Terms of the Merger Agreement............................................................................ 35
Issuance of Units and Notes of the Company............................................................... 36
No Fractional Units...................................................................................... 36
Fractional Notes......................................................................................... 36
Transaction Expenses..................................................................................... 37
Accounting Treatment..................................................................................... 37
Regulatory Matters....................................................................................... 38
Recommendation of the Cap Source General Partners........................................................ 38
Amendments to the Partnership Agreements................................................................. 38
Effect of the Transaction on Dissenting Investors........................................................ 38
Effective Time........................................................................................... 39
Conflicts of Interest and Benefits to Insiders........................................................... 39
Legal Proceedings........................................................................................ 39
FAIRNESS................................................................................................... 40
Belief as to Fairness.................................................................................... 40
Material Factors Underlying Belief as to Fairness........................................................ 41
Alternatives to the Transaction.......................................................................... 43
Comparison of Alternatives to the Transaction............................................................ 45
The Cap Source General Partners' Analysis for the Transaction............................................ 47
FAIRNESS OPINION AND APPRAISALS............................................................................ 48
Fairness Opinion......................................................................................... 48
Appraisals............................................................................................... 51
Compensation and Material Relationships.................................................................. 56
EXCHANGE VALUES............................................................................................ 56
COMPARISON OF BACS AND UNITS............................................................................... 58
Business................................................................................................. 58
Duration of Existence.................................................................................... 58
Investment Objectives and Policies....................................................................... 58
Borrowing Policies....................................................................................... 58
Management............................................................................................... 58
Compensation, Fees and Expenses.......................................................................... 59
Voting Rights............................................................................................ 60
THE COMPANY................................................................................................ 61
Overview................................................................................................. 61
The General Partner...................................................................................... 61
Investment Strategy...................................................................................... 63
Financing Strategies..................................................................................... 63
Operating Restrictions................................................................................... 64
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ii
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Distribution Policy...................................................................................... 64
Policy with Respect to Certain Activities................................................................ 64
MANAGEMENT OF THE GENERAL PARTNER.......................................................................... 64
General.................................................................................................. 64
Indemnification.......................................................................................... 66
PRIOR PARTNERSHIPS......................................................................................... 67
CONSENT SOLICITATION....................................................................................... 68
Solicitation by the Cap Source General Partners.......................................................... 68
Consent Procedures....................................................................................... 69
Record Date and Outstanding BACs......................................................................... 70
Solicitation of Consents; Solicitation Expenses.......................................................... 71
Communicating With Other Investors....................................................................... 71
No Right of Appraisal.................................................................................... 71
RESPONSIBILITIES OF GENERAL PARTNERS....................................................................... 72
PRO FORMA FINANCIAL INFORMATION............................................................................ 72
THE PARTNERSHIPS........................................................................................... 87
Cap Source I............................................................................................. 87
Cap Source II............................................................................................ 88
SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP BACS......................................................... 91
Sale Prices of BACs...................................................................................... 91
BAC Holders.............................................................................................. 93
Partnership Distributions................................................................................ 94
Third Party Tender Offers................................................................................ 95
SELECTED FINANCIAL DATA OF THE PARTNERSHIPS................................................................ 96
DESCRIPTION OF THE UNITS................................................................................... 97
General.................................................................................................. 97
Units Eligible for Future Sale........................................................................... 98
THE NOTES.................................................................................................. 98
General.................................................................................................. 98
Allocation of Notes...................................................................................... 98
Notes.................................................................................................... 99
FEDERAL INCOME TAX CONSEQUENCES............................................................................ 102
General.................................................................................................. 102
Opinions of Counsel...................................................................................... 103
Certain Tax Differences Between the Ownership of BACs and the Units...................................... 103
Tax Treatment of the Transaction......................................................................... 103
Taxation of the Company Subsequent to the Transaction.................................................... 106
Taxation of Unitholders.................................................................................. 107
Considerations for Tax-Exempt Unitholders................................................................ 109
Considerations for Non-U.S. Unitholders.................................................................. 109
Tax Issues Associated with Notes......................................................................... 110
General Partner Liabilities.............................................................................. 112
Termination of Trade Processing.......................................................................... 113
EMPLOYEE RETIREMENT INCOME SECURITY ACT.................................................................... 113
INDEPENDENT PUBLIC ACCOUNTANTS............................................................................. 114
LEGAL MATTERS.............................................................................................. 114
AVAILABLE INFORMATION...................................................................................... 115
INDEX TO FINANCIAL STATEMENTS.............................................................................. FS-1
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iii
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APPENDIX A FORM OF AGREEMENT AND PLAN OF MERGER AMONG THE COMPANY AND THE
PARTNERSHIPS
APPENDIX B FAIRNESS OPINION
APPENDIX C PRIOR PARTNERSHIPS PERFORMANCE TABLES
APPENDIX D FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
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SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT AND THE ACCOMPANYING SUPPLEMENTS. IN
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT WE REFER TO CAPITAL SOURCE L.P.
AS CAP SOURCE I, AND CAPITAL SOURCE II L.P.-A AS CAP SOURCE II, OR BOTH TOGETHER
AS THE PARTNERSHIPS. UNLESS OTHERWISE INDICATED, THE TERMS "WE," "US," AND "OUR"
REFER TO THE GENERAL PARTNERS OF THE PARTNERSHIPS. WE REFER TO AMERICA FIRST
REAL ESTATE INVESTMENT PARTNERS, L.P., THE SURVIVING ENTITY IN THE TRANSACTION,
AS THE COMPANY. TO FULLY UNDERSTAND THE TRANSACTION AND FOR A MORE COMPLETE
DESCRIPTION OF THE TERMS OF AND RISKS RELATED TO THE TRANSACTION, YOU SHOULD
READ CAREFULLY THIS ENTIRE PROSPECTUS/CONSENT SOLICITATION STATEMENT AND THE
ACCOMPANYING SUPPLEMENTS.
THE TRANSACTION
This prospectus/consent solicitation statement relates to the proposed
merger, or the transaction, of Cap Source I and Cap Source II with and into the
company. The company is a newly formed Delaware limited partnership formed to
facilitate the transaction. We are proposing the transaction in accordance with
an agreement and plan of merger among the partnerships and the company. The form
of the merger agreement is attached to this prospectus/consent solicitation
statement as Appendix A. In connection with the transaction, the company will
distribute the securities described below to the partnerships in exchange for
all of the assets of the partnerships. The partnerships in turn will distribute
the securities to you in proportion to the number of beneficial assignment
certificates representing assigned limited partner interests in the
partnerships, or BACs, you hold as provided in the merger agreement. After the
transaction, you will no longer be a BAC holder or limited partner in your
partnership and the separate existence of the partnerships will cease. You will
instead become either a (a) unitholder or (b) noteholder of the new company, as
the case may be.
We are asking you to approve the transaction as described in this
prospectus/consent solicitation statement. In connection with the transaction,
you will receive, at your election, with some limitations, certificates
representing assigned limited partner interests in the company, referred to as
units, or the company's Variable Rate Junior Notes Callable On or After the Date
of Issuance, referred to as notes. Even if you vote "NO" against the
transaction, you as a dissenting investor, will receive, at your election,
either units or notes in connection with the transaction if it is completed. The
company may, at its option, pay cash instead of issuing notes. See "THE NOTES."
We will hold a 1% interest in the company as its general partner, which
continues our 1% interest in the partnerships. We will receive this 1% interest
in exchange for the transfer of some of our assets to the company in connection
with the transaction. We expect the units to be listed on NASDAQ under the
symbol "AFREZ."
We are proposing the transaction in an effort to increase the value of your
investment while offering substantially enhanced liquidity. To achieve these
objectives, we are proposing to restructure the business of the partnerships by
merging the partnerships with and into the company as provided in the merger
agreement. After the transaction, the company's primary business objective will
be to increase cash flow and net asset value by making equity investments
primarily in multifamily residential properties and actively managing the makeup
of its real estate portfolio. See "THE COMPANY." There can be no assurance,
however, that any or all of these objectives will be met.
There are conditions to the transaction. The transaction will not occur
unless, among other things: (1) both partnerships participate in the
transaction, and (2) dissenting investors elect to receive less than the maximum
amount of notes issuable in connection with the transaction. Participation in
the transaction requires approval of a majority in interest of investors in each
partnership. The maximum amount of notes that may be issued in the transaction
is $20 million. If the transaction is not completed, the partnerships will
continue to operate as separate legal entities with their own assets and
liabilities, and their respective investment objectives, policies and
restrictions will not change.
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To comply with the rules and regulations of the Securities and Exchange
Commission governing the transaction and to facilitate the transaction, we have
amended the limited partnership agreement of each partnership to allow a record
date to be set and notice of the consent to be given up to 120 days before the
time at which the consent of the investors is being solicited and to provide for
the exchange of BACs for units or notes based solely on the books and records of
each partnership. For a detailed description of these amendments, see "THE
TRANSACTION--Amendments to the Partnership Agreements." If you vote "YES" in
favor of the transaction, you will be deemed to have voted in favor of ratifying
these amendments and any other actions taken by us to facilitate the
transaction.
SUMMARY RISK FACTORS
The following is a summary of some of the potential disadvantages, adverse
consequences and risks of the transaction. This summary is not complete. You
should also carefully consider the more detailed discussion in the section
entitled "RISK FACTORS" contained in this prospectus/consent solicitation
statement.
- We cannot predict the prices at which the units will trade after the
transaction. The price of the units may decrease after the transaction due
to the potentially large number of units that may be sold immediately by
unitholders. Thus, the units may trade at prices substantially below the
estimated liquidation value of the company's assets and the $10 per unit
price we arbitrarily assigned for the sole purpose of allocating the units
in the transaction.
- We do not expect a public market for the notes to develop. If the notes
are sold, they may sell at prices substantially below their issuance
price. Investors who receive notes are likely to receive the full face
amount of the notes only if they hold the notes to maturity or if the
company repays or refinances the notes at or before maturity. The maturity
date of the notes is approximately eight years after the transaction.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion. We will
receive economic benefits as a result of the transaction. We will hold a
1% interest in the company as its general partner, which continues our 1%
interest in the partnerships. We will also receive management and other
fees from the company as its general partner following the transaction.
See "THE TRANSACTION--Conflicts of Interest and Benefits to Insiders" and
"MANAGEMENT OF THE GENERAL PARTNER."
- We did not retain an unaffiliated third party to represent your interests
in the structuring of the transaction. Had we retained a party to
represent your interests, that party may have been able to negotiate, on
your behalf, more favorable terms for the structure of the transaction and
for different consideration to have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to the company's general partner, which will be our
successor, may increase.
- There can be no guarantee of the level of the company's future
distributions. Regardless of the initial level, distributions could
decline in the future so that you may receive distributions that are lower
than the distributions you currently receive as an investor in the
partnerships. The company may also reinvest cash generated by the sale of
existing assets or from operations to acquire additional assets. This
could cause cash distributions to be lower than the distributions made by
the partnerships in some cases.
- The company was recently formed and has no operating history. As a result,
there can be no assurance that any of the company's planned future
activities will be successful.
- If you vote "NO" against the transaction, but your partnership approves
the transaction, you will not be entitled to receive cash based on an
appraisal of your BACs or any other dissenters'
4
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rights under Delaware law, nor will you be given any similar rights in the
transaction. You will have the right to exchange your BACs for notes if
you so elect, with some limitations. See "THE NOTES."
- There are alternatives to the transaction. If you approve the transaction,
you will effectively preclude the pursuit of some of the alternatives. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered."
- The company intends to use debt financing to increase its real estate
asset portfolio. Although the notes will be issued under an indenture that
creates debt limitations, the company's formation documents do not limit
the amount of debt the company may incur. The company will therefore be
more leveraged than either of the partnerships. This use of debt financing
may increase the possibility of default on the company's obligations,
which could adversely affect the company's earnings and its ability to pay
expected distributions to you.
- If the investors holding a majority in interest of the BACs of each
partnership approve the transaction, your partnership will be merged with
and into the company. You will be bound by this approval even if you vote
"NO" against the transaction or abstain from voting.
- The notes are prepayable at any time, unsecured obligations of the company
and, as a practical matter, will be junior to all other debt of the
company. The notes will bear interest at a variable rate that may be lower
than rates on other variable rate debt instruments that may be perceived
as having comparable or lower risks than the notes. If you choose and
receive notes, you will not hold an equity interest in the company and
therefore will not be able to participate in the company's growth or
benefit from any increases in the value of the units.
- The company may be liable for unknown, undisclosed or contingent
liabilities of the partnerships, which could adversely affect the
liquidity of the company and its ability to pay expected distributions to
you.
- If dissenting investors elect to receive notes in excess of the maximum
note limitation, the transaction will not be completed. If this does not
occur, but the total amount of notes allocable to all investors who elect
to receive notes exceeds the maximum note limitation, notes will be
allocated first to dissenting investors who elected to receive notes and
then, on a pro rata basis, to investors who abstained from voting or who
voted "YES" in favor of the transaction. Thus, you could choose notes but
receive units instead. To be assured of receiving notes, you must vote
"NO" with respect to the transaction and elect to receive notes.
BENEFITS OF THE TRANSACTION
The following is a summary of the principal benefits of the transaction.
This summary is not complete. You should also consider the more detailed
discussion in the section entitled "BENEFITS OF, AND BACKGROUND AND REASONS FOR,
THE TRANSACTION" contained in this prospectus/consent solicitation statement:
- The transaction will provide for liquidity of investment because the BACs
will be converted into publicly traded units of the new company. There is
currently no established public trading market for the BACs. Secondary
sales activity for the BACs has been limited and sporadic at prices which
we believe are generally below fair value. If you elect to receive units,
the transaction will offer you liquidity through the public trading
expected to result from the listing of the units on NASDAQ.
- The company will be afforded significant growth and profit opportunities
from new real estate investments. The company will have the potential for
enhanced access to and flexibility in obtaining additional equity and debt
financing. In particular, the company will have the ability to
5
<PAGE>
fund future portfolio growth through the issuance of additional publicly
traded securities and the raising of funds from borrowing under secured
and unsecured debt obligations.
- If the transaction is completed, some of our affiliates have agreed to
permanently waive amounts which may be payable to them by some of the
operating partnerships in which Cap Source I and/or Cap Source II are
limited partners. These amounts may be payable under the terms of the
partnership agreements of these operating partnerships. As of December 31,
1998, these amounts totaled $3,228,405.
- If the transaction is competed, the general partner plans to eliminate the
mortgage insurance on some of the GNMA and FHA loans that are secured by
the real estate held by the operating partnerships because of their
significant operating history. This will result in cost savings to those
operating partnerships.
- Combining the partnerships into a single entity will create an investment
portfolio larger and more diversified than the portfolio of an individual
partnership. The increased size of the portfolio spreads the risk of your
investment over a broader group of assets and reduces the dependence of
your investment upon the performance of any particular asset or group of
assets.
- Combining the partnerships into a single entity will also allow the
consolidation of administration and management of the partnerships.
Eliminating duplication of these activities will afford the company cost
savings on general and administrative expenses.
For a discussion of the potential benefits of the alternatives to the
transaction and the reasons we rejected these alternatives, see "BENEFITS OF,
AND BACKGROUND AND REASONS FOR, THE TRANSACTION--Alternatives Considered,"
below, and "FAIRNESS--Comparison of Alternatives to the Transaction." The
transaction will require you to forego some of the alternatives to the
transaction.
FAIRNESS
We reasonably believe the terms of the transaction are fair as a whole, to
each partnership and to you. We have based our determination as to the fairness
of the transaction on the following material factors: (1) the terms and
conditions of the transaction will result in limited changes to the structure of
the partnerships and limited changes to the business and investment objectives
of the partnerships; (2) the opportunity for you to object to the transaction
and the requirement that the transaction be approved by investors holding a
majority in interest of the outstanding BACs of each partnership; (3) the form
and amount of consideration offered to you; (4) the method of allocating the
units and notes among the partnerships in the transaction and the exchange
values used in connection with this allocation; (5) the fairness opinion dated
September 23, 1999, rendered by Sutro & Co., Inc.; (6) the independent
appraisals prepared by Valuation Research Corporation, which were used in part
in the determination of the exchange values; (7) the lack of material
differences with respect to the assets of the partnerships and the consistent
valuation methodology applied to the assets; and (8) the fact that all
investors, including dissenting investors, will be given the opportunity to
elect to receive notes, with some limitations. For a more detailed discussion of
our belief as to the fairness of the transaction, see "FAIRNESS."
FAIRNESS OPINION
We retained Sutro & Co. to render the fairness opinion as to the fairness,
from a financial point of view, of the transaction. Based on the analysis
described under "FAIRNESS OPINION AND APPRAISALS--Fairness Opinion," and subject
to the assumptions, limitations and qualifications noted in the fairness
opinion, Sutro & Co. concluded that the aggregate consideration to be received
by you, the 1% interest in the company to be received by the company's general
partner and the allocation of the consideration and 1% interest among the
company's general partner and the investors in each
6
<PAGE>
partnership, and the principal allocation of the notes, in the transaction, is
fair to you and the company's general partner from a financial point of view.
The full text of the fairness opinion and the assumptions and qualifications
made, matters considered and limitations imposed on the review and analysis, is
included as Appendix B to this prospectus/ consent solicitation statement, and
should be read in its entirety.
OUR RECOMMENDATION; FAIRNESS DETERMINATION
We have determined that the transaction is in your best interests and that
it is fair to you, the partnerships, to the investors in each of the
partnerships and as a whole. Accordingly, we have approved the transaction and
the merger agreement and recommend that you vote "YES" in favor of the
transaction and the adoption of the merger agreement. We believe the transaction
is the most attractive alternative for providing you with the possibility of
increasing the value of your investment while offering substantially enhanced
liquidity. See "THE TRANSACTION--Recommendation of the Cap Source General
Partners" and "FAIRNESS."
APPRAISALS
In connection with the transaction, Valuation Research, an independent full
service appraisal firm, rendered its opinion as to the fair market value of the
real estate held by the operating partnerships, or the properties. In its
appraisal of the properties, Valuation Research considered the cost approach,
the direct sales comparison approach and the income approach to market value,
and relied upon the income approach as its primary appraisal technique, using
the direct sales comparison approach as a basis for checking the reasonableness
of the results obtained using the income approach. See "APPRAISALS."
CONTACTS REGARDING FAIRNESS OPINIONS, VALUATIONS AND OTHER REPORTS
We conducted interviews with four firms regarding the possibility of
advising us with respect to the transaction and issuing a fairness opinion for
the transaction. The firms were Sutro & Co., Inc., Valuation Research, J.C.
Bradford & Co. and Schroders. We also contacted Robert A. Stanger & Co., Inc.
regarding a fairness opinion and E&Y Kenneth Leventhal Real Estate Group
regarding valuation of the properties for the transaction, but did not pursue
extensive discussions. After conducting interviews with these firms, we selected
Sutro & Co. over these other firms to render a fairness opinion based on Sutro &
Co.'s experience in similar transactions, its familiarity with the partnerships
and its research capabilities, reputation, resources and more competitive fee
structure.
Other than Valuation Research, Robert A. Stanger & Co., Inc. and E&Y Kenneth
Leventhal Real Estate Group, we did not make any other contacts with outside
parties regarding the valuation of the properties or other partnership assets or
commission any other report with respect to the transaction. See "BENEFITS OF,
AND BACKGROUND AND REASONS FOR, THE TRANSACTION--Preparation for and Chronology
of Events Leading to the Transaction."
THE UNITS
In connection with the transaction, the company will issue to the
partnerships up to an aggregate of 7,765,772 units. The total number of units
allocated to the partnerships is based upon the investor exchange value for each
partnership. It was derived by taking 99% of the total exchange value for each
partnership to reflect the fact that we will hold a 1% interest in the company.
This number was then divided by $10, which is an arbitrary price per unit we
chose for the sole purpose of allocating the units. We will not receive any
units or notes in connection with the transaction. Instead, we will hold a 1%
interest in the company as its general partner, which continues our 1% interest
in the partnerships.
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<PAGE>
As general partner of the company, we will receive this 1% interest in exchange
for transferring some of our assets to the company in connection with the
transaction.
THE NOTES
All investors, including dissenting investors, will be given the opportunity
to elect to receive notes instead of units, with the limitations discussed
below. The notes will be Variable Rate Junior Notes Callable On or After the
Date of Issuance and will be unsecured obligations of the company. The company
may issue additional debt that is senior to the notes, which may be secured, in
compliance with the covenants of the indenture for the issuance of senior debt.
The notes will bear interest at a floating rate equal to 120% of the annual
applicable federal rate for debt instruments with a term of not over three years
as determined under the Internal Revenue Code of 1986, or the Code, and
applicable regulations thereunder. The interest rate on the notes will be
adjusted and paid annually. If the notes had been issued on September 30, 1999,
the interest rate would have been 6.52%. The notes will mature on ,
2007 and may be redeemed at any time by the company at its option. This optional
redemption may prevent the sale of the notes at prices above their face value
and limit the term the notes will be outstanding. See "THE NOTES."
The company may, at its option, pay cash instead of issuing the notes. If
the company elects to pay cash to investors otherwise entitled to receive notes,
it will pay these investors an amount equal to the principal amount of notes
these investors would have received plus interest accrued to the date of payment
at a rate determined as shown above.
The total amount of notes to be issued is limited by the maximum note
limitation, which is equal to $20 million. See "THE NOTES."
CONSENT PROCEDURES
We will not hold a meeting of the investors to consider the transaction, but
instead are seeking your written consent as provided in Article X of the
partnership agreements. Each BAC you own entitles you to one vote. You may only
grant your consent with respect to the transaction if you hold BACs of record at
the close of business on , 1999, the record date. A consent card is
included with this prospectus/consent solicitation statement and we are asking
you to complete, date and sign the consent card and return it to the tabulation
agent, Kissel-Blake, in the enclosed envelope as soon as possible. To be valid,
consents must be received by Kissel-Blake by 5:00 p.m. Eastern Time on
, 1999, the approval date, unless we extend this date, which we may
do in our sole discretion. See "CONSENT SOLICITATION."
We are asking you to consider the following elections with respect to the
transaction:
"YES," I approve of my partnership's participation in the transaction.
or
"NO," I do not approve of my partnership's participation in the transaction.
You may also abstain from granting your consent.
You will receive units representing equity ownership in the new company
unless you elect to receive notes representing debt. You may elect to receive
notes regardless of whether you mark your consent card "YES" or "NO" with
respect to the transaction. An otherwise valid consent card will be deemed to
grant consent to the transaction if it is not marked "NO" or to abstain. See
"CONSENT SOLICITATION."
If you do not approve of your partnership's participation in the
transaction, you may either withhold your consent by marking your consent card
"NO" or abstain from granting your consent. If you
8
<PAGE>
mark your consent card "NO" and your partnership approves the transaction, you
will receive units, unless you elect to receive notes as indicated on the
consent card. If you abstain from granting your consent, you will also receive
units if the transaction is approved by your partnership, unless you elect to
receive notes as indicated on the consent card. If you do not return your
consent card, you will receive units if the transaction is completed. YOU MAY
NOT WITHDRAW OR REVOKE YOUR CONSENT AFTER IT IS DELIVERED TO KISSEL-BLAKE.
If you sign and return your consent card without indicating a vote, it will
be deemed to be marked "YES" granting consent to the transaction. In which case,
and if you mark your consent card "YES" granting consent to the transaction, you
will also be deemed to have ratified and consented to the amendments to the
partnership agreements and any other actions taken by us to facilitate the
transaction. For a description of the amendments see "THE
TRANSACTION--Amendments to the Partnership Agreements." In addition, if you are
a Cap Source II investor who signs and returns the consent card without marking
your consent card or you mark your consent card "YES" in favor of the
transaction, you will also be deemed to have consented to the sale of the Cap
Source II general partner interest owned by one of the Cap Source II general
partners. For a description of this sale, see "THE COMPANY--The General
Partner."
WE BELIEVE THAT THE TERMS OF THE TRANSACTION ARE FAIR AND IN YOUR AND THE
PARTNERSHIPS' BEST INTERESTS AND RECOMMEND THAT YOU MARK YOUR CONSENT CARD "YES"
GRANTING YOUR CONSENT TO THE TRANSACTION.
COMMUNICATING WITH OTHER INVESTORS
Under Rule 14a-7 of the Securities Exchange Act of 1934, each partnership,
upon written request from you, will deliver to you (1) a statement of the
approximate number of investors in your partnership and (2) the estimated cost
of mailing proxy materials or similar communications to the investors of your
partnership. In addition, under the rule, you have the right, at your option, to
have your partnership (a) mail, at your expense, any proxy materials which you
desire to deliver to the other investors of your partnership in connection with
the transaction or (b) to have your partnership deliver, within five business
days of the receipt of your request, a reasonably current list of the names and
addresses of the investors of your partnership as of the record date. The
partnerships may require you to pay the reasonable cost of duplicating and
mailing the investor list. The partnerships may also require you to affirm that
you will not use the list information for any purpose other than to solicit
investors in your partnership with respect to the transaction and that you will
not disclose the list information to any other person. Any requests should be
sent to America First Investor Services Department, 1004 Farnam Street, Suite
400, Omaha, Nebraska, 68102.
NO DISSENTERS' RIGHTS
If you do not want to participate in the transaction, you are not entitled
to receive cash based on an appraisal of your BACs or other dissenters' or
appraisal rights under the partnership agreements or Delaware law, nor will any
similar rights be provided by the partnerships or the company. You do, however,
have the right to elect to exchange your BACs for notes rather than units, with
some limitations. If you vote against the transaction but do not elect to
receive notes, you will receive units. See "VOTING--No Right of Appraisal."
THE COMPANY
The company was formed under the laws of the State of Delaware on June 18,
1999, to facilitate the transaction. As a result of the transaction, the company
will succeed to the assets and liabilities of the partnerships. In addition, we
will transfer some of our assets to the company as a capital contribution in
connection with the transaction.
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<PAGE>
Following the transaction, the company's primary business objective will be
to increase cash flow and net asset value and to increase the liquidity and
market value of your BACs. The company expects to achieve this objective by
listing the units on NASDAQ and by making equity investments primarily in
multifamily residential properties. There can be no assurance, however, that the
company's business objectives will be met.
In connection with the transaction, your partnership's assets will be
transferred to the company. The company will also have the ability to acquire
additional multifamily residential properties. The company will have the ability
to more actively manage the makeup of its real estate portfolio as compared to
your partnership. The company's investment strategy will be funded initially
from available cash and short-term investments and from (1) borrowing against or
sale of the existing properties, (2) borrowing against or sale of the
mortgage-backed securities guaranteed as to principal and interest by GNMA, or
the GNMA certificates, and first mortgage loans on multifamily housing
properties insured as to principal and interest by the FHA, or FHA loans, and
(3) borrowing against the additional properties acquired by the company
following the transaction. The company may also use additional sources of
financing, both debt and equity, to further its business objectives and
investment strategies.
We will manage the company as its general partner following the transaction.
See "THE COMPANY" and "MANAGEMENT OF THE GENERAL PARTNER" below. The principal
executive offices of the company are located at 1004 Farnam Street, Suite 400,
Omaha, Nebraska 68102, and its telephone number is (402) 444-1630.
BACKGROUND AND REASONS FOR THE TRANSACTION
Cap Source I was formed in 1985 and Cap Source II was formed in 1986. Both
partnerships were formed to make debt and equity investments in multifamily
rental complexes. The partnerships were formed and sponsored by persons not
affiliated with the company, us or our affiliates. America First Companies
L.L.C., our parent entity, acquired ownership of two of the Cap Source general
partners in 1991, and ownership of the other two Cap Source general partners in
1997. Therefore, we were only able to restructure the partnerships after 1997
and we reviewed several alternatives, including this proposal.
We have proposed the transaction in an effort to, among other things,
increase the value of your investment while offering you substantially enhanced
liquidity, and to provide you with increased distributions if you elect to
receive units. To achieve these objectives, we are proposing to restructure the
business of the partnerships by merging them with and into company. The company
will then pursue its business objectives and will list the units on NASDAQ. See
"THE COMPANY" and "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION."
EXCHANGE VALUES
You will receive units or notes based upon the exchange values shown in the
table below. If you elect to receive units, you will receive 1.3957 of the
company's units for each Cap Source I BAC you own and 0.7620 of the company's
units for each Cap Source II BAC you own. The company will not issue any
fractional units. See "THE TRANSACTION--No Fractional Units." Approximately
92.7% of the partnerships' combined assets are in the form of (1) cash, (2) the
GNMA certificates, which are collateralized by first mortgage loans on
multifamily housing properties, and (3) the FHA loans. The exchange values,
which we determined, are based on (a) the principal amount of GNMA certificates
and the FHA loans as shown in the partnerships' audited financial statements for
the period ended December 31, 1998, (b) the value of the partnerships' limited
partner interests in the operating partnerships, and (c) the market value of the
partnerships' remaining net assets as shown in the partnerships' audited
financial statements for the period ended December 31, 1998. The fair market
value of the real
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<PAGE>
estate held by the operating partnerships, as determined by Valuation Research,
was the value assigned to the real estate for the purpose of determining the
exchange values. For a more detailed description of how the exchange values were
determined, see "EXCHANGE VALUES."
The following table shows the exchange values attributable to the
partnerships for purposes of the transaction.
EXCHANGE VALUES
<TABLE>
<CAPTION>
INVESTOR EXCHANGE VALUE
INVESTOR PER $1,000
TOTAL EXCHANGE ORIGINAL INVESTMENT
PARTNERSHIP EXCHANGE VALUE VALUE(1) BY INVESTORS(2)
- ------------------------------------------------------- -------------- ---------------- -------------------------
<S> <C> <C> <C>
Cap Source I........................................... $ 47,569,968 $ 47,094,268 $ 698
Cap Source II.......................................... 30,872,167 30,563,445 381
-------------- ----------------
Total................................................ $ 78,442,135 $ 77,657,713
-------------- ----------------
-------------- ----------------
</TABLE>
- ------------
(1) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that we will hold a 1% interest in the company as
its general partner.
(2) Since the initial investment by investors, the Cap Source I investors have
received a return of capital of $83, per $1,000 original investment, and the
Cap Source II investors have received a return of capital of $381, per
$1,000 original investment.
CONSIDERATION OF ALTERNATIVES
In addition to the proposed transaction, we also considered the following
options: (1) continued management of the partnerships as currently structured,
(2) separately listing the BACs of each partnership on a national securities
exchange or automated quotation system; (3) merging the partnerships into a
single corporation and listing that corporation's common stock on a national
securities exchange or automated quotation system; (4) merging the partnerships
together to form a single REIT; (5) qualifying each partnership as an individual
REIT; and (6) liquidating the partnerships through entire portfolio sales or
sales of individual properties. For the reasons listed under "BENEFITS OF, AND
BACKGROUND AND REASONS FOR, THE TRANSACTION--Alternatives Considered," we
rejected each of the alternatives in favor of the transaction.
CONTINUATION OF THE PARTNERSHIPS. An alternative to the transaction is to
continue each partnership under its own existing business plan and partnership
agreement. Continuing the partnerships without change has the following
benefits: (1) each partnership would remain a separate entity, with its own
assets and liabilities, and would remain under an obligation to pursue its
original investment objectives, consistent with its partnership agreement; (2)
the partnership's performance would not be affected by the performance of the
other partnership, including the investment objectives, interests and intentions
of the investors in the other partnership; (3) the partnerships would not incur
any expenses in connection with the transaction; and (4) the partnerships would
avoid the risks inherent in the transaction. See "RISK FACTORS."
However, maintaining the partnerships as separate entities has the following
disadvantages, among others: (1) illiquidity of investment on a current basis
due to the lack of a large and established secondary market; (2) inability to
raise new capital or make new investments, thus limiting growth of the
partnerships' capital to that inherent in the existing partnership investments;
(3) less flexibility and control in actively managing the portfolio; (4)
duplication among the partnerships in reporting, filing and other costly
administrative services; and (5) the declining value of the mortgage investments
due to amortization and subsequent distribution of these amounts.
11
<PAGE>
LISTING THE PARTNERSHIP BACS. Another alternative to the transaction is to
separately list the BACs of each partnership on a national securities exchange
or an automated quotation system in an attempt to increase the liquidity of the
BACs. We believe that this alternative would result in substantial duplication
of general and administrative expenses. Furthermore, we believe that pursuing
this alternative would substantially diminish the partnerships' ability to grow
compared to the transaction. As a publicly traded partnership with a base of
assets greater than a single partnership, the company expects to be able to
issue additional debt and equity securities with greater ease and on more
attractive terms than would be available to a partnership individually. We
therefore concluded that the potential negatives of this alternative outweigh
any advantages it may have over the transaction.
MERGER RESULTING IN A SINGLE TAXABLE CORPORATION. Instead of participating
in the transaction, the partnerships could be merged together to form a single
corporation with the common stock of the new corporation listed on a national
securities exchange or quoted on an automated quotation system. We originally
structured a transaction involving a merger of the partnerships into a single
corporation that would have been subject to federal income tax at customary
corporate tax rates. However, we decided to abandon this merger due to changes
in the capital markets for real estate investments, which began in the Fall of
1998. See "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Restructuring of the Transaction to a Publicly Traded Limited
Partnership." The major disadvantage of this alternative is that a corporation
will not have the tax advantaged status that a limited partnership has. To
overcome this disadvantage, a corporation has to generate a much higher return
on investment than a limited partnership, which can only be achieved by making
investments that have a higher degree of risk. We believe that the current
capital markets for real estate investments are emphasizing higher asset
qualities and safer investments. Therefore, we believe this alternative is less
advantageous to you when compared to the transaction.
SINGLE REIT. We considered merging the partnerships into a single entity
which would elect REIT status but determined that it is a less attractive
alternative to the transaction. We concluded that the resulting REIT would be
too small in terms of total capitalization to compete with existing REITs having
similar investment objectives. Furthermore, due to restrictions in the Code
relating to distributions of net taxable income and limitations on sales of
assets, as a REIT, the new company will not be able to pursue the business plan
described in this prospectus/consent solicitation statement which involves the
ability to retain cash flow for investment purposes and to regularly sell assets
after the achievement of goals set for those assets.
INDIVIDUAL REIT. We considered converting each partnership into an
individual REIT, but determined that it is a less attractive alternative than
the transaction for the same reasons discussed above for listing the partnership
BACs and the single REIT alternatives. The issues cited above as reasons for the
lack of attractiveness of a new company as a single REIT are magnified when
applied to each partnership as an individual REIT due to the significantly
smaller size of each partnership as a stand alone entity.
LIQUIDATION. Although the investment objectives and policies of the
partnerships do not require the commencement of the liquidation of the
partnerships at any specific time, we assessed the possibility of commencing the
orderly liquidation of the partnerships and distributing the net proceeds from
the liquidation to you. We concluded that liquidation would be costly and
time-consuming and would not be as beneficial to you as the transaction.
We determined that an attempt to liquidate the partnerships' investments at
the current time would likely result in you not achieving the full potential
benefits from an investment in the partnerships. We concluded that liquidation
would not be the best option to realize the optimum return on an investment in
the partnerships because although the partnerships' investments in mortgage
loans could likely be sold at or slightly above their face value in a short
period of time, most of the partnerships' equity positions in the operating
partnerships are not attractive to buyers. Liquidation of most of the
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<PAGE>
equity positions may require either (1) a protracted period of negotiations with
some of the various general partners of the operating partnerships which could
potentially create both substantial transaction costs and additional costs to
the partnerships of continuing operations during the negotiation period, and/or
(2) the partnerships' accepting substantial discounts in value. In addition,
there may be additional costs associated with representations, warranties, and
indemnifications that purchasers generally require and which may result in
additional escrow costs and a delay in final distributions to you. Furthermore,
the liquidation of the partnerships would involve transaction costs, for
example, legal fees and various other closing costs and the cost of
administering the partnerships during the liquidation period, which would
further reduce the amount of net proceeds available for distribution.
Liquidation would also deprive you of the potential increase in value which may
result from the restructuring of the partnerships and the refinancing of the
partnerships' assets.
On the other hand, in a liquidation of the partnerships, you would benefit
by avoiding the risks of continuing your ownership of the partnerships and those
associated with the transaction. Liquidation would provide for the final
liquidation of your investment and a likely substantial distribution of cash
equal to net liquidation proceeds, though not in an amount that would give you a
full return of your original investment. In addition, you would have the
potential to reinvest the net proceeds received in the liquidation in similar or
different investments.
CONFLICTS OF INTERESTS AND BENEFITS TO INSIDERS
We participated in the initiation and structuring of the transaction and are
expected to receive benefits as a result of its completion. First, in connection
with the transaction, we will hold a 1% interest in the company as its general
partner, which continues our 1% interest in the partnerships. We will receive
this interest in exchange for the transfer of some of our assets to the company
in connection with the transaction. In addition, we will manage the company as
its general partner and will be entitled to receive management and other fees
from the company as provided in the company's limited partnership agreement.
Further, an affiliate of America First Companies, the parent entity of the
company's general partner and the entity that controls us, currently provides
property management services for the partnerships and will be retained to
provide property management services for the company. This entity also provides
property management services for other entities controlled by or affiliated with
America First Companies. In addition, another affiliate of America First
Companies manages and controls a limited partnership that engages in similar
real estate businesses to those planned by the company. See "MANAGEMENT OF THE
GENERAL PARTNER" and "THE TRANSACTION--Conflicts of Interests and Benefits to
Insiders."
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE CAP SOURCE GENERAL
PARTNERS
The following table compares the cash distributions, fees and reimbursements
we currently receive from the partnerships and the fees that we, as general
partner of the company, would have received from the company had the transaction
occurred before the periods indicated.
13
<PAGE>
COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
CAP SOURCE GENERAL PARTNERS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------- ENDED
1996 1997 1998 JUNE 30, 1999
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL PARTNERS(1)
Capital Source I
1% Share of Cash Distributions............................ $ 34,424 $ 34,424 $ 34,425 $ 17,212
Asset Management and Partnership Administrative Fee....... 0 0 0 0
Reimbursements............................................ 192,896 243,973 319,874 219,421
---------- ---------- ---------- -------------
Subtotal................................................ $ 227,320 $ 278,397 $ 354,299 $ 236,633
---------- ---------- ---------- -------------
Capital Source II
1% Share of Cash Distributions............................ $ 32,818 $ 32,818 $ 26,741 $ 9,116
Asset Management and Partnership Administrative Fee....... 166,000 166,000 50,000 25,000
Reimbursements............................................ 175,922 225,782 266,946 156,888
---------- ---------- ---------- -------------
Subtotal................................................ $ 374,740 $ 424,600 $ 343,687 $ 191,004
---------- ---------- ---------- -------------
Total..................................................... $ 602,060 $ 702,997 $ 697,986 $ 427,637
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
COMPANY--AMOUNTS PAYABLE TO THE GENERAL PARTNER(2)
1% Share of Cash Distributions $ 67,242 $ 67,242 $ 61,166 $ 26,328
Acquisition Fee............................................. 0 0 0 0
Administrative Fee.......................................... 100,000 100,000 100,000 50,000
Reimbursements.............................................. 368,818 469,755 586,820 376,309
---------- ---------- ---------- -------------
Total..................................................... $ 536,060 $ 636,997 $ 747,986 $ 452,637
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>
- ------------
(1) Calculated based upon the compensation, fees and expenses we are currently
entitled to receive under the Cap Source partnership agreements. For a
description of this structure under the partnership agreements, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE
PARTNERSHIPS."
(2) Calculated based upon the compensation, fees and expenses the company's
general partner would have been entitled to receive under the company's
partnership agreement for the periods indicated. For a description of this
structure under the company's partnership agreement, see "COMPARISON OF BACS
AND UNITS--Compensation, Fees and Expenses--THE COMPANY."
The increase in our historical reimbursements from 1996 to 1998 is primarily
the result of an increase in salaries and related expenses. Starting in 1996,
additional management time was incurred in exploring various options available
to the partnerships to improve total returns. The historical reimbursements for
Cap Source I for 1996, 1997, 1998 and the six months ended June 30, 1999,
consisted of salaries and benefits of $171,494, $211,324, $256,101 and $212,817,
respectively, board member and consulting fees of $10,499, $13,934, $38,937 and
$0, respectively, and miscellaneous expenses of $10,903, $18,715, $24,836 and
$6,604, respectively. The historical reimbursements for Cap Source II for 1996,
1997, 1998 and the six months ended June 30, 1999, consisted of salaries and
benefits of $154,576, $192,973, $223,939 and $152,192, respectively, board
member and consulting fees of $10,499, $13,934,
14
<PAGE>
$25,963 and $0, respectively, and miscellaneous expenses of $10,847, $18,875,
$17,044 and $4,696, respectively.
The table above reflects the fact that no acquisition fees would have been
paid to the company during the periods indicated because no new assets were
purchased or permitted to be purchased during those periods. Since the company
will be permitted to acquire new assets, this fee will increase in future years
if the transaction is completed.
The total amounts that would have been paid to us under the company's
partnership agreement would have been higher than the amounts we actually
received during 1998 and the six months ended June 30, 1999, because the general
partner of the company is entitled to an annual base administrative fee of
$100,000. The Cap Source I partnership agreement does not provide for a base
administrative fee, and the Cap Source II partnership agreement provides for a
base asset management and partnership administrative fee of $50,000, which
corresponds to the company's administrative fee. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses."
FEDERAL INCOME TAX CONSEQUENCES
The company will not recognize any gain or loss as a result of the
transaction. If you are an investor in Cap Source II, you will be required to
include in income a share of income or gain recognized by Cap Source II as a
result of the receipt by Cap Source II of notes or cash, even if you receive
units in connection with the transaction. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the Transaction." If the maximum amount of notes
are issued in connection with the transaction, the maximum potential gain that
Cap Source II could recognize will be approximately $2 million, or approximately
$.50 per Cap Source II BAC. If you are a Cap Source I investor, you will only
recognize gain to the extent the fair market value of the notes or the amount of
cash you actually receive in the transaction exceeds your adjusted basis in your
BACs. The company will be characterized as a partnership for federal income tax
purposes. Therefore, the company will not be subject to federal income taxation
and, instead, each unitholder is required to take into account his or her share
of income, deductions or loss of the company regardless of whether any cash is
distributed. The character of income to each unitholder will be dependent upon
its character to the company. See "FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Unitholders." For the purposes of Section 469 of the Code, the company will be
deemed a publicly traded partnership. Therefore, passive income, gain and losses
from the company may only be applied against other items of income, gain or loss
from the company.
Income of the company may be generated by debt-financed property. Therefore,
distributions of the company may constitute unrelated business taxable income to
tax-exempt unitholders. See "FEDERAL INCOME TAX CONSEQUENCES--Considerations for
Tax-Exempt Unitholders" and "--Taxation of Unitholders."
ACCOUNTING TREATMENT
The transaction will be accounted for using the purchase method of
accounting under generally accepted accounting principles, or GAAP. Cap Source I
will be deemed to be the acquirer of Cap Source II under the purchase method
because its investors will be allocated the largest number of units.
Accordingly, the transaction will result, for financial accounting purposes, in
the effective purchase by Cap Source I of all of the BACs of Cap Source II. As
the surviving entity for financial accounting purposes, the assets and
liabilities of Cap Source I will be recorded by the company at their historical
cost and the assets and liabilities of Cap Source II will be recorded at their
estimated fair values.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for Cap Source I and Cap Source II
was not applicable for the five fiscal years ending December 31, 1998, because
Cap Source I and Cap Source II had no fixed charges for these periods.
15
<PAGE>
Chart depicting the organizational structure of Cap Source I before the
Transaction, including the General Partners.
16
<PAGE>
Chart depicting the organizational structure of Cap Source II before the
Transaction, including the General Partners.
17
<PAGE>
The following diagram shows the organizational structure of the company
after the transaction. The total number and percent of units refer to the units
issued in connection with the transaction assuming no notes are issued.
[LOGO]
18
<PAGE>
COMPARISON OF BACS AND UNITS
The following is a summary of some of the attributes of your ownership of
BACs and a unitholder's ownership of units of the company following the
transaction. The following summary descriptions are not complete and do not
purport to be complete discussions of these matters. For a complete description
you should read the company's Amended and Restated Agreement of Limited
Partnership and your partnership's partnership agreement. The company's
partnership agreement is included as Appendix D to this prospectus/consent
solicitation statement. You are also encouraged to review carefully the more
detailed comparison regarding the BACs, the units and the notes discussed in
"COMPARISON OF BACS AND UNITS" and elsewhere in this prospectus/consent
solicitation statement for additional comparisons.
<TABLE>
<CAPTION>
CHARACTERISTICS BACS UNITS
- ------------------ ----------------------------------- -----------------------------------
<S> <C> <C>
Liquidity - Illiquid--no established market - Traded on NASDAQ
- Transfers may be limited - Transfers may be limited
Property Portfolio - Static portfolio - Investment flexibility
- Larger portfolio
Distributions - Quarterly or monthly cash - Quarterly distributions of
distributions of available cash available cash flow
flow
Duration - Up to 45 to 49 years from - Up to 40 years
formation
Borrowing - New borrowing generally not - Generally permitted
permitted
Management - Vested in two Cap Source General - Vested in one General Partners
Partner
</TABLE>
19
<PAGE>
RISK FACTORS
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT AND THE ACCOMPANYING
SUPPLEMENTS INCLUDE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
INCLUDING IN PARTICULAR THE STATEMENTS ABOUT THE COMPANY'S PLANS, STRATEGIES AND
PROSPECTS. ALTHOUGH WE BELIEVE THE COMPANY'S PLANS, INTENTIONS AND EXPECTATIONS
REFLECTED IN OR SUGGESTED BY THESE FORWARD LOOKING STATEMENTS ARE REASONABLE, WE
CAN GIVE NO ASSURANCE THAT THESE PLANS, INTENTIONS OR EXPECTATIONS WILL BE
ACHIEVED. WE HAVE INCLUDED BELOW AND ELSEWHERE IN THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT AND THE ACCOMPANYING SUPPLEMENTS IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD LOOKING
STATEMENTS. WE QUALIFY THESE FORWARD LOOKING STATEMENTS BY THE CAUTIONARY
STATEMENTS INCLUDED BELOW, AS WELL AS GENERAL ECONOMIC, BUSINESS AND MARKET
CONDITIONS, CHANGES IN FEDERAL AND LOCAL LAWS AND REGULATIONS, COSTS OR
DIFFICULTIES RELATING TO THE TRANSACTION AND INCREASED COMPETITIVE PRESSURES
THAT COULD HAVE AN ADVERSE AFFECT UPON THE COMPANY.
You should read this entire prospectus/consent solicitation statement,
including all appendices and supplements hereto, and consider carefully the
following factors in evaluating the transaction, the company and its business
before completing the accompanying consent card. The risks and other adverse
factors described below are materially the same for the investors of each of the
partnerships.
RISKS ASSOCIATED WITH THE TRANSACTION
NO PRIOR MARKET FOR THE UNITS; MARKET PRICE MAY DECREASE AFTER THE
TRANSACTION. There has been no public market for the units before the
transaction. Even though we plan to list the units on NASDAQ, we cannot give any
assurance that an active trading market will develop or be sustained. There is
substantial uncertainty as to the prices at which the units will trade. The
possibility exists that the trading price of the units may be lower than the
exchange value estimated for each unit. The price of the units, which we
arbitrarily assigned for the sole purpose of allocating the units in the
transaction, may decrease after the transaction due to the potentially large
number of units that may be sold immediately by investors who elect to receive
units. The market value of the units could also be substantially affected by
numerous factors, for example: governmental regulatory action; changes in tax
laws; the market's perception of the company and its ability to maintain or
increase distribution levels; the size of the company in terms of assets and
market capitalization; the degree to which the company's general partner's
interests are perceived to be aligned with the interests of the unitholders; the
degree to which leverage is used in the company's capital structure; the
historical performance of the partnerships; and external factors, for example,
market interest rates and conditions of the mortgage investment and stock
markets.
NO PRIOR MARKET FOR THE NOTES; PRICE MAY DECREASE AFTER THE
TRANSACTION. The notes will not be listed on a national securities exchange or
quoted on an automated quotation system. Therefore, we do not expect that an
orderly and active trading market for the notes will develop. There is
substantial uncertainty as to the prices at which the notes will trade following
the transaction. Since the notes may be redeemed at any time by the company for
an amount equal to the outstanding principal balance thereon plus accrued
interest, the notes may never trade at a price above their face value.
Noteholders are likely to receive the full face amount of the notes only if they
hold the notes to maturity, which is eight years after the transaction, unless
the notes are redeemed earlier by the company. See "THE NOTES--Notes." There can
be no guarantee, however, that the company will not default on the notes.
CONFLICTS OF INTEREST OF THE CAP SOURCE GENERAL PARTNERS. We initiated and
participated in the structuring of the transaction and have conflicts of
interest with respect to its completion. We will receive economic benefits as a
result of the transaction. We will hold a 1% interest in the company as its
general partner, which continues our 1% interest in the partnerships. We will
receive this 1% interest in the company in exchange for transferring some of our
assets to the company as a capital contribution in connection with the
transaction. In addition, as general partner of the company, we will be
20
<PAGE>
entitled to receive management and other fees from the company following the
transaction. We are a subsidiary of America First Companies. Further, Michael B.
Yanney, who is a member and manager of America First Companies, will also serve
as our Chairman of the Board of Managers following the transaction. See "THE
TRANSACTION--Conflicts of Interest and Benefits to Insiders."
LACK OF REPRESENTATION MAY AFFECT THE TERMS OF THE TRANSACTION AND ITS
FAIRNESS TO YOU. We did not retain an unaffiliated, independent third party to
represent your interests in the structuring of the transaction. Had we retained
an independent party to represent your interests, that party may have been able
to negotiate, on your behalf, for more favorable terms for the structure of the
transaction and for different consideration to have been distributed to you.
This lack of representation could affect the transaction's fairness to you.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNER MAY
INCREASE. The company's limited partnership agreement contains a different
structure for compensating, reimbursing and making distributions to the
company's general partner. If the transaction is completed, this structure may
result in compensation, reimbursements and distributions to the company's
general partner being higher than the amounts that we are currently entitled to
receive.
POSSIBLE LOWER DISTRIBUTIONS. There is no guarantee of the level of the
company's future cash distributions. Regardless of the initial level of
distributions, they could decline in the future to a level at which you would
receive distributions lower than the distributions you currently receive as an
investor in the partnerships. The company may also reinvest cash generated by
the sale of existing assets or from operations to acquire additional assets,
potentially causing cash distributions to be lower than the distributions made
by the partnerships in some cases.
LACK OF OPERATING HISTORY. The company is newly formed and has no operating
history. The company's results of operations, financial condition and liquidity
depend, to a material extent, on the ability of the company to successfully
carry out its business plan. There can be no assurance that any of the company's
business objectives or planned future activities will be successful.
NO DISSENTERS' RIGHTS. If you mark your consent card "NO" withholding your
consent to the transaction, you will have no appraisal, dissenters' or similar
rights under Delaware law in connection with the transaction, and no similar
rights will be afforded to you by the partnerships or the company. Therefore,
you will not be entitled to receive cash payment for the fair value of your BACs
if you withhold your consent to the transaction and the transaction is approved
and completed.
POSSIBLE ALTERNATIVES TO THE TRANSACTION WILL NOT BE PURSUED. Alternatives
to the transaction include (1) continued management of the partnerships as
currently structured, (2) separately listing the BACs of each partnership on a
national securities exchange or automated quotation system; (3) merging the
partnerships into a single corporation and listing the common stock on a
national securities exchange or automated quotation system; (4) merging the
partnerships together to form a single REIT; (5) qualifying each partnership as
an individual REIT; and (6) liquidating the partnerships through entire
portfolio sales or sales of individual properties. While the completion of the
transaction does not preclude the company from electing REIT status in the
future, it does effectively preclude the pursuit of the other alternatives
listed above.
A MAJORITY IN INTEREST WILL BIND ALL INVESTORS IN EACH PARTNERSHIP. Under
the partnership agreements and the requirements of the Delaware Revised Uniform
Limited Partnership Act, or the Delaware Partnership Law, a partnership may
participate in the transaction if its general partners and a majority in
interest of its investors consent to the transaction. If your partnership
approves the transaction, you will be bound by the decision of the majority,
even if you vote against the transaction or abstain from voting.
21
<PAGE>
NOTES ARE UNSECURED OBLIGATIONS OF THE COMPANY. The notes, which will be
prepayable at any time, are junior unsecured obligations of the company. They
will be, as a practical matter, junior to all other debt, other than trade
payables, of the company. The notes will bear interest at a variable rate that
may be lower than rates on other variable rate debt instruments that may be
perceived as having comparable or lower risks than the notes. In addition, there
is no guarantee that the company will not default on the notes. See "THE NOTES."
CONTINGENT OR UNDISCLOSED LIABILITIES. Under the merger agreement, the
company will, as of the effective date of the transaction, succeed to all assets
and liabilities of the partnerships. Each partnership will deliver to the
company its financial statements disclosing all known material liabilities and
reserves, if any, set aside for contingent liabilities as of the effective date.
We will represent and warrant that, to the best of our knowledge, the financial
statements fairly present the financial position of each partnership, as if
there is no liability or obligation to be shown or reserved against in the
financial statements based upon generally accepted accounting principles. The
accuracy and completeness of these representations are conditions to the closing
of the transaction and if, on or before the effective date, these
representations and warranties are shown to be inaccurate, there may be
adjustments to the consideration paid by the company or the company may elect
not to proceed to close the transaction.
INVESTORS WHO ELECT TO RECEIVE NOTES COULD RECEIVE UNITS. If dissenting
investors elect to receive notes in excess of the maximum note limitation, the
transaction will not be completed. If this does not occur, and the total amount
of notes allocable to all investors electing to receive notes would exceed the
maximum note limitation, then notes will be allocated among those who elected to
receive notes, based on how they voted with respect to the transaction, in the
following order of priority: first to dissenting investors who elected to
receive notes and then, on a pro rata basis, to investors who mark "ABSTAIN" on
their consent card or mark their consent card "YES" granting consent to the
transaction. Thus, it is possible that a consenting investor who elects to
receive notes may receive units instead of notes. To be assured of receiving
notes, you must mark your consent card "NO" with respect to the transaction and
elect to receive notes. See "THE NOTES--Allocation of Notes."
RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS
LEVERAGING STRATEGY. The company will employ a strategy to increase the
size of its real estate asset portfolio by bank borrowing or other credit
arrangements used to finance the acquisition of real estate investments.
Therefore, these assets may not be available to you in the event of the
liquidation of the company except to the extent that the market value of the
assets exceeds the amounts due to creditors. The company's limited partnership
agreement does not limit the amount of debt the company can incur.
The company intends to make new real estate investments with the objective
of limiting the amount of company borrowings to 50% of the purchase price of
that investment. The company may change this objective at any time. This
moderate use of leverage, or debt, by the company may involve the following
risks: (1) the company could lose its interests in assets given as collateral
for secured borrowing if the required principal and interest payments are not
made when due; (2) the company's cash flow from operations may not be sufficient
to retire these obligations as they mature, making it necessary for the company
to either refinance these obligations before maturity or to raise additional
debt and/or equity for the company or dispose of some of the company's assets to
retire the obligations, which could have an adverse effect on the amount of
funds available for distributions to you; (3) no assurance can be given as to
the availability, or the terms and conditions, of any financing needed by the
company to refinance borrowing; and (4) debt incurred by the company may be at
interest rates that adjust based on prevailing market interest rates, and an
increase in the prevailing market interest rates would adversely affect the
company's earnings and could reduce the amount of funds available for
distributions to you.
22
<PAGE>
NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF NEW BUSINESS PLAN. The
profitability of the company depends on the successful development and
implementation of the company's business plan. To achieve its objective, the
company will need to develop effective investment and operating policies and
strategies in connection with the implementation of its business plan. There can
be no assurance that the company will be successful in developing the necessary
investment and operating policies or that it will be able to effectively
implement its business plan.
REAL ESTATE INVESTMENTS. The ultimate performance of the company's proposed
investments under its new business plan will depend upon the varying degrees of
risk generally associated with the ownership and operation of the underlying
real property. The ultimate value of the company's security in the underlying
real property depends upon the owners' ability to operate the real property in a
manner sufficient to maintain or increase revenues in excess of operating
expenses and debt service. Revenues may be adversely affected by adverse changes
in national economic conditions, adverse changes in local market conditions due
to changes in general or local economic conditions and neighborhood
characteristics, competition from other properties offering the same or similar
services, changes in interest rates and in the availability, cost and terms of
mortgage funds, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements,
particularly in older structures, changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including earthquakes, hurricanes and other natural
disasters, which may result in uninsured losses, acts of war, adverse changes in
zoning laws, and other factors which are beyond the control of the real property
owners and the company. In the event that any of the properties underlying the
company's investments experience any of the foregoing events or occurrences, the
value of and return on these investments would be negatively impacted.
DEPENDENCE ON AVAILABLE INVESTMENTS. The results of the company's future
operations under the new business plan will be dependent upon the availability
of, as well as our ability to identify, complete and realize, real estate
investment opportunities. In general, the availability of desirable investment
opportunities and the results of the company's operations will be affected by
the level and volatility of interest rates, by conditions in the financial
markets, and general economic conditions. No assurances can be given that the
company will be successful in finding and then acquiring economically desirable
assets or that the assets, once acquired, will maintain their economic
desirability.
COMPETITION. The company is engaged in a highly competitive business. The
company will be competing for investments with many recent entrants into the
business, including numerous public and private real estate investment vehicles,
including financial institutions like mortgage banks, pension funds and REITs,
and other institutional investors, as well as individuals. In addition, the
company's competitors may seek to establish relationships with the financial
institutions and other firms from whom the company intends to purchase assets.
Many of the company's anticipated competitors are significantly larger than the
company, have established operating histories and procedures, may have access to
greater capital and other resources, may have management personnel with more
experience than the officers of the company, and may have other advantages over
the company in conducting businesses and providing services.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively
illiquid. Illiquidity limits the ability of the company to vary its portfolio of
proposed and current investments in response to changes in economic and other
conditions. Illiquidity may result from the absence of an established market for
investments as well as the legal or contractual restrictions on their resale by
the company. In addition, illiquidity may result from the decline in value of a
property securing an investment by the company. No assurances can be given that
the fair market value of any of the real property serving as security will not
decrease in the future leaving the company's investment under-collateralized or
not collateralized at all. It would be difficult to sell an under-collateralized
investment, and if the company needed
23
<PAGE>
to do so, assuming it were even able to do so given its typically subordinated
lien position, it is likely that the investment would be sold at a loss.
UNSPECIFIED ACQUISITIONS. Any decision to pursue real estate acquisition
opportunities will be in our discretion as the company's general partners and
may be completed without prior notice to or approval from you. In which case,
you will be relying on us to assess the relative benefits and risks associated
with any acquisition.
TITLE DEFECTS. At the time the properties were developed or acquired by the
operating partnerships, each of the operating partnerships obtained title
insurance policies under which a successor in interest by operation of law to
the operating partnerships will become the insured under the policies. We are
generally not aware of any exceptions to title that may have been created by
third parties during the operating partnerships' ownership of the properties. We
have no actual knowledge of any actions or liens of third parties which would
have a material adverse effect upon the transaction or the financial condition
of the company.
ENVIRONMENTAL LAWS MAY IMPOSE ADDITIONAL LIABILITY. Under various federal,
state, and local environmental laws, ordinances, and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under, or in the
property. These laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of the hazardous or toxic
substances. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate the property, may adversely affect the owner's
ability to borrow using the real property as collateral. There are environmental
laws that impose liability for release of asbestos-containing materials, or ACMs
into the air, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with ACMs. In connection with the
ownership, direct or indirect, operation, management, and development of real
properties, the company may be liable for removal or remediation costs, as well
as other potential costs which could relate to the hazardous or toxic substances
or ACMs, including governmental fines and injuries to persons and property.
REGISTRATION UNDER THE INVESTMENT COMPANY ACT. The company at all times
intends to conduct its business so as not to become regulated as an investment
company under the Investment Company Act of 1940. The Investment Company Act
exempts entities, among other possible exemptions, that are "primarily engaged
in the business of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate," also referred to as qualifying interests.
Under current interpretation of the staff of the Commission, to quality for this
exemption, the company must maintain at least 55% of its assets directly in
qualifying interests. If the company fails to qualify for exemption from
registration as an investment company, its use of leverage would be
substantially reduced and it would be unable to conduct its business as
described in this prospectus/consent solicitation statement and could have a
material adverse effect on the company.
POTENTIAL LIABILITY UNDER THE AMERICANS WITH DISABILITIES ACT. All of the
properties were required to be in compliance with the Americans With
Disabilities Act, or the ADA. The ADA generally requires that places of public
accommodation be made accessible to people with disabilities to the extent
readily achievable. Compliance with the ADA requirements could require removal
of access barriers, and non-compliance could result in imposition of fines by
the federal government, an award of damages to private litigants and/or a court
order to remove access barriers. Because of the limited history of the ADA, the
impact of its application to the company's properties, including the extent and
timing of required renovations, is uncertain. Consequently, the company will be
required to cover the costs associated with compliance, if any, with funds from
operations, established reserves or bank borrowings.
24
<PAGE>
REGULATORY AND LEGISLATIVE RISKS
The company's business is governed by numerous federal, state and consumer
laws and regulations, which among other things: (1) require the company to
obtain and maintain licenses, certifications, registrations and qualifications;
(2) require the company to post a bond in some states; (3) limit the interest
rates, fees and other charges the company is allowed to charge; (4) limit or
prescribe other terms and conditions of the company's contracts; and (5) require
the company to provide specified disclosures.
The company's business is regulated, supervised and licensed by the federal,
state and local government authorities and must comply with various laws and
judicial administrative decisions imposing requirements and restrictions on a
substantial portion of its operations. Failure to comply with these requirements
can cause the termination or suspension of rights of recision for mortgage
loans, class action law suits and administrative enforcement actions. Although
the company believes that it has systems and procedures to facilitate compliance
with these requirements and believes that it is in compliance with all material
aspects with applicable local, state and federal laws, rules and regulations,
there can be no assurance that more restrictive laws, regulations or rules will
not be adopted in the future that could make compliance more difficult or
expensive.
25
<PAGE>
BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION
HISTORY OF THE PARTNERSHIPS
FORMATION. Cap Source I was formed in 1985, and Cap Source II was formed in
1986. Both partnerships were formed to make debt and equity investments in
multifamily rental complexes (the "Complexes"). The partnerships' combined debt
and equity investments are intended to provide investors with regular
distribution of cash derived from principal and interest payments on insured
mortgages, as well as the benefits of ownership of the Complexes, including any
tax losses and income from operations.
CAP SOURCE I GENERAL PARTNERS' MANAGEMENT OF CAP SOURCE I. Cap Source I's
original general partners were TIG Insured Mortgage Equities Inc. (the "TIG
General Partner") and Hutton Insured Mortgage Equities Inc. (the "Hutton General
Partner"). All of the issued and outstanding stock of the TIG General Partner
was purchased by TIG I Holdings, Inc. ("TIG Holdings") pursuant to a stock
purchase agreement dated June 10, 1991. Thereafter, TIG Holdings merged into the
TIG General Partner with the TIG General Partner being the surviving
corporation. The TIG General Partner subsequently changed its name to America
First Capital Source I Inc. All of the issued and outstanding capital stock of
America First Capital Source I Inc. was transferred to America First Companies
L.L.C. ("America First Companies") as of March 1, 1994. America First Capital
Source I Inc. was subsequently converted from a Delaware corporation to a
Delaware limited liability company and changed its name to America First Capital
Source I L.L.C.
Lehman Brothers, Inc. ("Lehman"), the successor to E.F. Hutton & Company
Inc., acquired all of the interests in the Hutton General Partner. The Hutton
General Partner changed its name to Insured Mortgage Equities Inc. Subsequently,
on May 16, 1997, Lehman sold all of the shares of capital stock of Insured
Mortgage Equities Inc. to America First Companies.
Thus, Insured Mortgage Equities Inc. and America First Capital Source I
L.L.C. are the current general partners of Cap Source I (the "Cap Source I
General Partners"). The Cap Source I General Partners are both wholly owned by
America First Companies.
Cap Source I's limited partnership agreement provides that the Cap Source I
General Partners manage Cap Source I and are entitled to receive management fees
and reimbursements from Cap Source I and 1% of the distributions from Cap Source
I.
CAP SOURCE II GENERAL PARTNERS' MANAGEMENT OF CAP SOURCE II. Cap Source
II's original general partners were TIG Insured Mortgage Equities II Inc. (the
"TIG II General Partner") and Hutton Insured Mortgage Equities II L.P. (the
"Hutton II General Partner"). All of the issued and outstanding stock of the TIG
II General Partner was purchased by TIG II Holdings, Inc. ("TIG II Holdings")
pursuant to a stock purchase agreement dated June 10, 1991. Thereafter, TIG II
Holdings merged into the TIG II General Partner with the TIG II General Partner
being the surviving corporation. The TIG II General Partner subsequently changed
its name to America First Capital Source II Inc. All of the issued and
outstanding capital stock of America First Capital Source II Inc. was
transferred to America First Companies as of March 1, 1994. America First
Capital Source II Inc. was subsequently converted from a Delaware corporation to
a Delaware limited liability company and changed its name to America First
Capital Source II L.L.C.
The sole general partner of the Hutton II General Partner was CS Housing II
Inc. Lehman, the successor to E.F. Hutton & Company Inc., acquired all of the
interests in CS Housing II Inc. The Hutton II General Partner changed its name
to Insured Mortgage Equities II L.P. Subsequently, on May 16, 1997, Lehman sold
all of the shares of capital stock of CS Housing II Inc. to America First
Companies.
Thus, Insured Mortgage Equities II L.P. and America First Capital Source II
L.L.C. are the current general partners of Cap Source II (the "Cap Source II
General Partners" and together with the Cap Source I General Partners the "Cap
Source General Partners"). The Cap Source II General Partners are both
controlled by America First Companies. America First Companies owns 100% of
America First
26
<PAGE>
Capital Source II L.L.C. and owns 100% of CS Housing II Inc., the sole general
partner of Insured Mortgage Equities II L.P.
Cap Source II's partnership agreement provides that the Cap Source II
General Partners manage Cap Source II and are entitled to receive management
fees and reimbursements from Cap Source II and 1% of the distributions from Cap
Source II.
HISTORICAL INFORMATION AND ACHIEVEMENT OF OBJECTIVES. Cap Source I has paid
quarterly distributions at the same level since March 31, 1993. Cap Source II
paid distributions at the same level from June 30, 1993, until August of 1998.
As of June 30, 1999, Cap Source I has distributed to its investors an aggregate
of approximately $58,758,936, and Cap Source II has distributed to its investors
an aggregate of approximately $58,717,758. Cap Source II was making a portion of
its distributions to investors from reserves. As a result, Cap Source II's
reserves have been substantially decreased. Therefore, the Cap Source II General
Partners reduced the monthly distribution rate to $.45 per unit on an annual
basis, beginning with the distribution for the month of August 1998, which
distribution was paid in October 1998.
The table below provides a comparison of the capital raised and
distributions made by the partnerships as of June 30, 1999:
HISTORICAL INFORMATION CONCERNING THE PARTNERSHIPS
<TABLE>
<CAPTION>
DATE OF
DISTRIBUTIONS DISTRIBUTIONS TO LAST
TO INVESTORS INVESTORS IN ADMISSION
TOTAL INVESTOR THROUGH MOST OF ORIGINAL
PARTNERSHIP CAPITAL RAISED 6/30/99 RECENT QUARTER INVESTORS
- ---------------------------------------------- -------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
Cap Source I.................................. $ 67,484,440 $ 58,758,936 $ 851,991 5/13/86
Cap Source II................................. 62,372,621(1) 58,717,758 451,249 1/04/88
-------------- -------------- ----------------
Total....................................... $ 129,857,061 $ 117,476,694 $ 1,303,240
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
- ------------
(1) Total capital contributions for Cap Source II were $80,222,020, of which
$62,372,621 was invested in accordance with the partnership's original
investment objectives, and the remaining $17,849,399 was returned to
investors as a return of capital.
To the best knowledge of the Cap Source General Partners, 100% of the net
proceeds of the original offerings of Cap Source I was invested in a manner
consistent with the partnership's original investment objectives. To the best
knowledge of the Cap Source General Partners, 77.75% of the net proceeds of the
original offerings of Cap Source II was invested in a manner consistent with the
partnership's original investment objectives.
The following information shows the original objectives of the partnerships
and the extent to which the Cap Source General Partners believe the objectives
have been met.
CAP SOURCE I. The original investment objectives of Cap Source I are to:
(a) achieve long-term capital appreciation through increases in the value of Cap
Source I's equity investments in the Cap Source I Operating Partnerships (as
defined below); (b) provide quarterly cash distributions to Cap Source I
investors; (c) provide Cap Source I investors with federal income tax deductions
that may offset, in part, taxable cash distributions subsequent to two years
after the initial closing on Cap Source I BACs purchased by Cap Source I
investors; (d) provide the potential for increases in cash distributions from
income from the Cap Source I Operating Partnerships and sale of the Complexes;
and (e) preserve and protect Cap Source I's capital. Cap Source I originally
intended to qualify its BACs for quotation on NASDAQ within 24 to 36 months
after it commenced operations to make the BACs freely transferable. However, at
a Special Meeting of investors on May 17, 1990, an amendment to the Cap Source I
partnership agreement was approved to only allow limited transferability of BACs
to preserve the tax status of the partnership as a partnership under the Code
and avoid being designated as a "publicly traded partnership." Based upon the
27
<PAGE>
original capital raised from the Cap Source I investors of $67,484,440,
distributions of $58,758,936 as of June 30, 1999, and a net asset value of
$47,569,968, the Cap Source I General Partners believe that objectives (b), (c)
and (e) above were substantially met and objectives (a) and (d) were not met.
The Cap Source I Operating Partnerships are Bluff Ridge Associates Limited
Partnership, Waters Edge Limited Partnership, Interstate Limited Partnership,
also known as Highland Park, Cypress Landings II, Ltd., also known as Misty
Springs, Oyster Cove Limited Partnership, also known as Waterman's Crossing, Fox
Hollow, Ltd. and Ponds at Georgetown Limited Partnership (collectively the "Cap
Source I Operating Partnerships").
CAP SOURCE II. The original investment objectives of Cap Source II are to:
(a) preserve and protect Cap Source II's capital by investing in federally
insured mortgages and Cap Source II Operating Partnership (as defined below)
interests; (b) provide quarterly cash distributions to Cap Source II investors
from income from federally insured mortgages; and (c) achieve increasing current
income and long-term capital appreciation through increases in the income from
Cap Source II's equity investments in the Cap Source II Operating Partnerships.
Originally, there was a fourth investment objective which was to make the Cap
Source II BACs freely transferable 24 to 36 months after the partnership
commenced operations by qualifying the BACs for quotation on NASDAQ. However, at
a Special Meeting of Cap Source II investors on December 17, 1990, amendments to
the Cap Source II partnership agreement were approved to allow limited
transferability of BACs to preserve the tax status of the partnership as a
partnership under the Code and avoid being designated as a "publicly traded
partnership." Based upon the original capital raised from the Cap Source II
investors of $62,372,621, net of capital returned, distributions of $58,717,758
as of June 30, 1999, and a net asset value of $30,872,167 the Cap Source II
General Partners believe that objective (a) and (b) above were substantially met
and that objective (c) above was not met.
The Cap Source II Operating Partnerships are Crane's Landing Partners, Ltd.,
Delta Crossing Limited Partnership, Centrum Monticello Limited Partnership and
Ponds at Georgetown Limited Partnership (collectively the "Cap Source II
Operating Partnerships," and together with the Cap Source I Operating
Partnerships, the "Operating Partnerships").
The following table shows, with respect to each partnership, the age of the
partnership relative to the original term of the partnership as stated in the
applicable partnership agreement:
LEGAL LIFE OF THE PARTNERSHIPS
<TABLE>
<CAPTION>
COMMENCED LEGAL ORIGINAL REMAINING
OPERATIONS TERMINATION DURATION LIFE
PARTNERSHIP (MO./YR.) (MO./YR.) (YEARS) (YEARS)
- ---------------------------------------------------------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Cap Source I.................................................... 8/85 12/30 45 31
Cap Source II................................................... 8/86 12/35 49 36
</TABLE>
THE DECISION TO PURSUE THE TRANSACTION
As the Cap Source General Partners reviewed the original investment
objectives of the partnerships and began to explore options to increase the
value of the investments made by investors in the partnerships, the Cap Source
General Partners concluded that the partnerships had failed to achieve two of
their original investment objectives, namely liquidity and growth.
The Cap Source General Partners have been concerned about the lack of
meaningful liquidity available for investors in the partnerships. The lack of a
formal secondary market for the BACs limits the ability of investors to increase
or decrease their investment in the partnerships in response to changing
personal circumstances or the performance of the partnerships. This concern has
recently increased as unrelated third parties have made tender offers and other
offers to purchase the BACs at prices which the Cap Source General Partners
believe do not fairly represent the underlying value of the BACs. Liquidity
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was further decreased by the suspension of trading of partnership interests on
the Chicago Partnership Board by action of the Commission. The Cap Source
General Partners concluded that it was in the best interest of investors to
develop a transaction which would provide substantially better liquidity and
will permit investors the opportunity to increase or decrease their individual
investment at prices more directly related to their underlying value.
The operations of the partnerships were adversely affected in their early
years by weaknesses in the real estate markets throughout the United States.
This adversely impacted the operating results of the partnerships' real estate
investments and led to decreases in distributions to investors. However, in
recent years, the real estate markets nationwide have generally improved, in
some cases significantly, and the Cap Source General Partners have been
concerned with the failure of those national trends to translate into improved
operating results for the partnerships, and hence increased distributions to
their investors. In analyzing this situation, the Cap Source General Partners
decided that there were two primary reasons for the lack of improvement in the
operations of the partnerships. First, the partnerships' portfolios have been
fixed since original acquisition. Therefore, the partnerships have been unable
to acquire new investments irrespective of potential investment return, have
been unable to trade poorly performing assets for assets with better profit
potential, and have been unable to increase the overall size of their portfolios
to take advantage of improving markets. Second, the majority of the
partnerships' assets are fixed income GNMA securities (the "GNMA Certificates")
or FHA insured loans (the "FHA Loans"), which by their nature do not participate
in improvements in the real estate markets. Consequently, the Cap Source General
Partners decided that the best way to improve total returns to the investors was
to develop a transaction that would broaden the investment limitations of the
current partnerships so as to allow more flexibility in the type of assets
acquired and their investment management and to allow overall portfolio growth
as market conditions warrant.
The Cap Source General Partners evaluated a number of alternative
transactions to achieve these objectives. Each of these alternatives appeared to
have some advantages and disadvantages, and might be in the best interest of
some investors but not others. The Cap Source General Partners consequently
concluded that on balance the proposed transaction was the best alternative for
the investors of each partnership and as a whole.
PREPARATION FOR AND CHRONOLOGY OF EVENTS LEADING TO THE TRANSACTION
The events leading to the transaction may be divided into two general
phases, which overlap somewhat: (1) general investigation and consideration of
alternate transactions; and (2) events directly leading to the structuring and
implementation of the transaction.
GENERAL INVESTIGATION AND CONSIDERATION OF ALTERNATE TRANSACTIONS. Since
assuming management of each of the partnerships, the Cap Source General Partners
have been evaluating each partnership's business prospects, especially with
respect to the feasibility of providing liquidity to the investors and
increasing distributions to investors. As the Cap Source General Partners
reviewed the original investment objectives of the partnerships and began to
explore options, the Cap Source General Partners concluded that the partnerships
had failed to achieve two of their original investment objectives, which were
liquidity and growth. The Cap Source General Partners thus began to explore
options like the transaction and alternatives to the transaction. See "--The
Decision to Pursue the Transaction" above.
Beginning in September 1997, representatives of the Cap Source General
Partners contacted legal counsel, investment bankers and appraisal firms to
discuss options available to the partnerships. The Cap Source General Partners
contacted the law firms of Kutak Rock in Denver and Skadden, Arps, Slate,
Meagher & Flom in New York, New York. In addition, the Cap Source General
Partners contacted Sutro & Co. in Los Angeles and Robert A. Stanger & Co., Inc.
in New Jersey, Valuation Research in New York and E&Y Kenneth Leventhal Real
Estate Group regarding valuations and fairness opinions for the transaction.
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Originally, a merger of Cap Source I and Cap Source II with and into a newly
organized corporation, which would have been subject to federal income tax at
customary corporate tax rates, was selected as the most favorable alternative,
in light of current market conditions, considered by the Cap Source General
Partners. This structure was subsequently abandoned by the Cap Source General
Partners. See "--Restructuring of the Transaction to a Publicly Traded
Partnership" below. In connection with this proposed corporate merger, the Cap
Source General Partners formed a special committee of two of the outside
independent directors of America First Companies, the entity that controls the
Cap Source General Partners, to represent the investors in the structuring and
negotiation of the terms of the proposed corporate merger. From November 1997,
to November 1998, the special committee met on numerous occasions and had
numerous telephone conferences with financial and legal advisors to the
committee, as well as other representatives of the Cap Source General Partners
and its counsel regarding the proposed corporate merger. Upon conclusion of the
special committee's review of the proposed corporate merger, it determined that
the proposed corporate merger was fair as a whole to, and in the best interests
of, the investors, and recommended that the Cap Source General Partners and the
investors approve the proposed corporate merger.
A registration statement relating to the proposed merger of the partnerships
into a newly organized corporation was originally filed on May 7, 1998, on Form
S-4 with the Commission, and was subsequently amended on July 21, 1998, and
November 3, 1998.
In November 1998, the Cap Source General Partners determined that the
proposed corporate merger was no longer in the best interests of investors and
decided to abandon the proposed corporate merger. See "--Restructuring of the
Transaction to a Publicly Traded Partnership."
STRUCTURING AND IMPLEMENTATION OF THE TRANSACTION
On January 15, 1999, representatives of the Cap Source General Partners met
with representatives of Kutak Rock to discuss and review preliminary issues
related to the transaction. At the time, various alternatives and structures for
the transaction were discussed.
On January 22, 1999, the transaction was selected as the most favorable
alternative, in light of current market conditions, considered by the Cap Source
General Partners. See "--Reasons for, and Benefits of, the Transaction" below.
In January, 1999, Valuation Research was retained to update the Appraisals
it had provided to the partnerships relating to the value of the real estate
owned by the Operating Partnerships as of December 31, 1997.
On April 14 and 15, 1999, representatives of the Cap Source General Partners
met with representatives of Kutak Rock to discuss various issues related to the
transaction. At this time, the Cap Source General Partners concluded that the
expense of forming a special committee to review the transaction outweighed any
benefits to the investors that might result from independent representation. The
Cap Source General Partners believed that a special committee was not necessary
because they believed that (1) there are no material differences with respect to
the assets of the partnerships and the valuation methodology applied to the
assets was consistent between the two partnerships, (2) the method of
determining the exchange values for the partnerships and the allocation of the
units and the notes in the transaction are the same as the method used in the
previously proposed merger, which method the special committee determined was
fair to the investors and as a whole, and (3) the revised structure and
investment objectives for the company as the successor to the partnerships in
the transaction are substantially similar to the current investment objectives
and structure of the partnerships.
On July 21, 1999, the company filed with the Commission Pre-Effective
Amendment No. 3 to the Registration Statement on Form S-4 relating to the
transaction.
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<PAGE>
On September 8, 1999, at a special telephonic meeting of the Cap Source
general partners, the Cap Source general partners discussed the possibility of
retaining an independent investment banking firm to render a fairness opinion
relating to the transaction and various other issues relating to the
transaction. At this meeting, Sutro & Co. was selected as the fairness opinion
provider for the transaction. Sutro & Co. was selected in large part based on
Sutro & Co.'s experience in similar transactions, its familiarity with the
partnerships, its research capabilities, resources and more competitive fee
structure. Sutro & Co. was also selected because of its reputation in connection
with companies involved in real estate activities and real estate assets.
On September 24, 1999, at a special telephonic meeting of the Cap Source
general partners, Sutro & Co. made a presentation regarding their analysis of
the transaction. Sutro & Co. also discussed various issues regarding their
fairness opinion, which was delivered to the partnerships on September 23, 1999.
On September 28, 1999, the company filed with the Commission Pre-Effective
Amendment No. 4 to the Registration Statement on Form S-4 in response to
comments issued by the Commission with respect to the Registration Statement.
RESTRUCTURING OF THE TRANSACTION TO A PUBLICLY TRADED PARTNERSHIP
Before pursuing the transaction, the Cap Source General Partners had
structured a merger of Cap Source I and Cap Source II with and into a newly
organized corporation, with the corporation being the surviving entity, as is
reflected in the company's original filings with the Commission. The common
stock of the corporation was to be listed on a national securities exchange
after completion of the proposed corporate merger. Under the proposed corporate
merger, the corporation was to make opportunistic real estate investments with a
focus on investments with high growth potential. The corporation planned to use
high amounts of leverage and invest in real estate assets that had the potential
to generate higher than average returns. These real estate assets would have
also carried with them a significant increase in risk when compared to the
planned investment objectives of the company.
The Cap Source General Partners believe there was, and continues to be, a
fundamental change in the capital markets for real estate investments since the
structuring of the proposed corporate merger. The Cap Source General Partners
believe the current capital markets for real estate investments have changed
their focus to place greater importance on high asset qualities and low amounts
of risk. Due to this change, the proposed corporate merger was abandoned. The
Cap Source General Partners then began considering alternatives to the proposed
corporate merger. See "--Alternatives Considered." The Cap Source General
Partners concluded that the transaction is the best alternative for investors.
The Cap Source General Partners believe that the investment objectives of the
company are better suited to the current capital markets and are not a
significant change from the original investment objectives of the partnerships.
The investment objectives of both the company and the partnerships are to invest
primarily in multifamily residential properties. In addition, the Cap Source
General Partners believe that continuing the businesses of the partnerships as a
single publicly traded partnership offers more advantages to the investors. See
"--Reasons for, and Benefits of, the Transaction" below.
ALTERNATIVES CONSIDERED
Before deciding to recommend the transaction, the Cap Source General
Partners considered alternatives to the proposed transaction in an effort to
achieve maximum investor return and substantially enhance liquidity. In addition
to the proposed transaction, the Cap Source General Partners considered the
following options: (1) continued management of the partnerships as currently
structured, (2) listing the BACs of each partnership on a national securities
exchange or automated quotation system; (3) merging the partnerships into a
single corporation and listing the resulting common stock on a national
securities exchange or automated quotation system; (4) merging the partnerships
together to form a single REIT; (5) qualifying each partnership as an individual
REIT; and (6) liquidating the partnerships through entire
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<PAGE>
portfolio sales or sales of individual properties. For a quantitative comparison
of the alternatives to the transaction, see "FAIRNESS."
CONTINUATION OF PARTNERSHIPS. An alternative to the transaction would be to
continue each of the partnerships under its own existing business plan. If the
partnerships were to continue in their current form, they would remain separate
legal entities governed by their respective partnership agreements, with their
own assets and liabilities. Investors in favor of this option should consider
voting against the transaction. Continuing the partnerships without change has a
number of benefits, including the following:
- each partnership would remain a separate entity, with its own assets,
liabilities and original investment objectives, consistent with the
guidelines, restrictions and safeguards in its partnership agreement;
- there would be no change in the nature of the investors' investments, and
the partnership's performance would not be affected by the performance of
the other partnership, including the investment objectives, interests and
intentions of the investors in the other partnership;
- the partnerships would not incur any expenses in connection with the
transaction; and
- the partnerships would avoid the risks inherent in the transaction.
Maintaining the partnerships as separate entities may have the following
potentially negative results when compared with the benefits the Cap Source
General Partners believe may be derived from the transaction:
- illiquidity of investment on a current basis due to the lack of a large
and established secondary market;
- inability to raise new capital or make new investments, thus limiting
growth of the partnerships' capital to that inherent in the existing
partnership investments;
- no flexibility or control in actively managing the portfolio in response
to changing conditions in real estate markets;
- the declining value of the mortgage investments due to amortization of
principal and subsequent distributions of these amounts; and
- duplication among the partnerships in reporting, filing and other costly
administrative services.
LISTING PARTNERSHIP BACS. Another alternative to the transaction would be
to list the BACs of each partnership on a national securities exchange or on an
automated quotation system in an attempt to increase the liquidity of the BACs.
The Cap Source General Partners believe that this alternative would result in
substantial duplication of general and administrative expenses. Furthermore, the
Cap Source General Partners believe that pursuing this alternative would
substantially diminish the partnerships' ability to grow compared to the
transaction. As a publicly traded company with a base of assets greater than a
single partnership, the company expects to be able to issue additional debt and
equity securities with greater ease and on more attractive terms than would be
available to a partnership individually. For the reasons described above, as
well as for some of the reasons above with respect to continuation of the
partnerships, the Cap Source General Partners concluded that the potential
negatives of this alternative outweigh any advantages it may have over the
transaction.
MERGER RESULTING IN A SINGLE TAXABLE CORPORATION. Instead of participating
in the transaction, the partnerships could be merged together to form a single
corporation with the common stock of the new corporation listed on a national
securities exchange or quoted on an automated quotation system. The Cap Source
General Partners originally structured a transaction involving the merger of the
partnerships into a single corporation that would have been subject to federal
income tax at customary corporate tax rates, but decided to abandon that merger
due to changes in the capital markets for real estate investments. See
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"--Restructuring of the Transaction to a Publicly Traded Partnership." The major
disadvantage of this alternative is that the company would have been taxed as a
corporation. A corporation is taxed both at the corporate level on the
corporation's income, and again at the investor level where, in many cases,
dividends are taxed as income to the investor. On the other hand, distributions
from a partnership are only taxed once at the investor level, with some
qualifications. See "FEDERAL INCOME TAX CONSEQUENCES--Taxation of the Company
After the Transaction" and "--Taxation of Unitholders." To overcome this
disadvantage, a corporation would have to generate a much higher return on
investment than would a limited partnership, which could only be achieved by
making investments that have higher risk. The Cap Source General Partners
believe that the current real estate market is emphasizing higher asset
qualities and safer investments. Therefore, the Cap Source General Partners
believe this alternative would be less advantageous to the investors than the
transaction.
SINGLE REIT. The Cap Source General Partners considered merging the two
partnerships into a single entity which would elect REIT status but determined
that it was a less attractive alternative to the transaction. The Cap Source
General Partners concluded that the resulting REIT would be too small in terms
of total capitalization to compete with existing REITs having similar investment
objectives. Furthermore, due to restrictions in the Code relating to
distributions of net taxable income, which would require the company to
distribute each year at least 95% of its net taxable income, excluding capital
gains, and limitations on sales of assets, as a REIT the company would not be
able to pursue the business plan described in this prospectus/consent
solicitation statement which involves the ability to retain cash flow for
investment purposes and to sell assets regularly after the achievement of goals
set for those assets.
INDIVIDUAL REITS. The Cap Source General Partners considered converting
each partnership into an individual REIT, but determined that it was a less
attractive alternative than the transaction for the same reasons discussed above
for listing partnership BACs and the single REIT alternatives. The issues cited
above as reasons for the lack of attractiveness of a new company as a single
REIT would be magnified when applied to each partnership as an individual REIT
due to the significantly smaller size of each partnership as a stand alone
entity.
LIQUIDATION. Although the investment objectives and policies of the
partnerships do not contemplate the commencement of the liquidation of the
partnerships at any specific time, the Cap Source General Partners assessed the
possibility of commencing the orderly liquidation of the partnerships and
distributing the net proceeds from the liquidation to the investors and the Cap
Source General Partners. The Cap Source General Partners concluded that
liquidation would be costly and time consuming and would not be as beneficial to
investors as the transaction.
The Cap Source General Partners determined that an attempt to liquidate the
partnerships' investments at the current time would likely result in the
investors not achieving the full potential benefits from an investment in the
partnerships. They concluded that liquidation would not be the best option to
realize the optimum return on an investment in the partnerships because although
the partnerships' investments in mortgage loans could likely be sold at or
slightly above their face value in a short period of time, most of the
partnerships' equity positions in the Operating Partnerships are not attractive
to buyers. Liquidation of most of the equity positions may require either (1) a
protracted period of negotiations with some of the various general partners of
the Operating Partnerships which could potentially create both substantial
transaction costs and additional costs to the partnerships of continuing
operations during the negotiation period, and/or (2) the partnerships' accepting
substantial discounts in value. In addition, there may be additional costs
associated with representations, warranties, and indemnifications that
purchasers generally require and which may result in additional escrow costs.
Liquidation would also deprive investors of the potential increase in value
which may result from the restructuring of the partnerships and the refinancing
of the partnerships' assets.
On the other hand, in a liquidation of the partnerships, investors would
benefit by avoiding the risks of continuing their ownership of the partnerships
and those associated with the transaction. Liquidation
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<PAGE>
would provide for the final liquidation of the investors' investments and a
likely substantial distribution of cash equal to net liquidation proceeds,
though not at a level that would allow investors to realize their original
investment. In addition, the investors would have the potential to reinvest the
net proceeds received in the liquidation in similar or different investments.
REASONS FOR, AND BENEFITS OF, THE TRANSACTION
In deciding whether to recommend the transaction to the investors, and in
structuring its terms, the Cap Source General Partners considered the benefits
to be derived as a result of the transaction. The following is a brief
discussion of the primary benefits the transaction is expected to generate for
the investors.
SUBSTANTIALLY ENHANCED LIQUIDITY POTENTIAL. The BACs are not currently
listed or regularly traded on a national securities exchange or quoted in the
automated quotation system of any registered securities association or other
over-the-counter market. Following the transaction, the anticipated listing of
the units on the NASDAQ and the company's larger size and growth strategy should
enhance the liquidity of investments held by investors. The Cap Source General
Partners therefore believe the transaction offers investors a faster and more
efficient means of liquidating their investment than if the partnerships were to
attempt to liquidate their portfolios through conventional property sales.
POTENTIAL FOR COMPANY GROWTH; ENHANCED ACCESS TO CAPITAL. The company will
expand the investment objectives and policies of the partnerships. Following the
transaction, the company will have the potential for enhanced access to and
flexibility in obtaining additional equity and debt financing. In particular,
the company will have the ability to fund future portfolio growth through the
issuance of additional publicly traded securities and the raising of funds from
borrowing under secured and unsecured debt obligations. The partnerships are
currently limited under their respective partnership agreements in their ability
to raise additional capital. Following the transaction, the company will not
have the same capital-raising limitations. In addition, the size and structure
of the company should provide financing alternatives presently not available to
the partnerships. The Cap Source General Partners believe that the larger total
size of the company, as compared to those of the individual partnerships, will
encourage additional and continuing investment.
WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL PARTNERS OF AMOUNTS
POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS. If the transaction is
completed, affiliates of the Cap Source General Partners have agreed to
permanently waive amounts which may be payable by some of the Operating
Partnerships to those affiliates. As of December 31, 1998, these amounts totaled
$3,228,405 as reflected in the partnerships' financial statements. These amounts
may be payable under the terms of the partnership agreements for the respective
Operating Partnerships.
DIVERSIFICATION OF ASSETS. By combining the partnerships into a single
ownership entity, the transaction will create an investment portfolio
substantially larger and more diversified than the portfolio of an individual
partnership. This increased size and the resulting combination of operations
spreads the risk of the investment over a broader group of assets and reduces
the dependence of the investors' investment upon the performance of any
particular asset or group of assets, any specific geographic area, or any
particular large tenant or tenants.
The Cap Source General Partners also considered: (1) that the effects of the
transaction may differ with each investor and may be disadvantageous to some
investors, depending on their individual circumstances and investment
objectives; and (2) negative factors relating to the transaction. The following
is a list of all material negative factors considered by the Cap Source General
Partners: (a) the uncertainty as to the prices at which the units will trade and
the possibility that the trading price of the units may be lower than the value
assigned to them for purposes of the transaction; (b) the company is newly
formed, with no operating history; (c) potential conflicts facing the company
following the transaction, including, among
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other things, the fees payable to the General Partner under the company's
limited partnership agreement; (d) the payment of expenses relating to the
transaction will reduce the net worth of the company following the transaction;
and (e) there can be no assurance the company will be able to achieve the
benefits of the transaction and successfully implement its business plan as
described in this prospectus/consent solicitation statement. The Cap Source
General Partners did not believe that the negative factors were sufficient,
either individually or collectively, to outweigh the advantages of the
transaction. See "RISK FACTORS" and "THE TRANSACTION--Conflicts of Interest and
Benefits to Insiders."
For a discussion of the potential benefits of the alternatives to the
transaction and the reasons those alternatives were rejected by the Cap Source
General Partners, see "--Alternatives Considered," above, and
"FAIRNESS--Comparison of Alternatives to the Transaction." While the transaction
does not preclude the company from electing REIT status in the future, it does
effectively preclude the pursuit of the other alternatives to the transaction.
CONSEQUENCES IF TRANSACTION NOT COMPLETED
If the transaction is not completed the partnerships will continue to
operate as separate legal entities with their own assets and liabilities. There
will be no change in their investment objectives, policies and restrictions.
THE TRANSACTION
GENERAL
The Cap Source General Partners have proposed the transaction in which (1)
the partnerships and the company will be merged together, (2) the separate
existence of the partnerships will cease and the company will be the surviving
entity and will succeed to all of the assets and liabilities of the
partnerships, and (3) investors will receive, at their election and with some
limitations, either units or notes based upon the exchange value assigned to
their respective partnership for purposes of the transaction. The company may,
at its option, pay cash instead of issuing notes. The Cap Source General
Partners will not receive any units or notes in connection with the transaction.
The Cap Source General Partners will hold a 1% interest in the company as its
general partner after the completion of the transaction, which continues their
1% interest in the partnerships, as consideration for the transfer of some of
the Cap Source General Partners' assets to the company. The transaction has been
proposed by the Cap Source General Partners in an effort to increase the value
of investments held by investors while offering substantially enhanced
liquidity.
The company and the partnerships have entered into the merger agreement and
will complete the transaction under its terms promptly after the receipt of
consents from investors holding a majority of the outstanding BACs of each of
the partnerships. If the consent of a majority in interest of the investors of
each of the partnerships is not received, or all other conditions to the
transaction are not satisfied, by , 1999, the merger agreement may
be terminated. In addition, the merger agreement may be terminated by the Cap
Source General Partners or the general partner of the company before or after
the receipt of consents from investors at any time before the effective date of
the merger agreement.
TERMS OF THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement.
This summary does not purport to be complete and is qualified in its entirety by
the terms of the merger agreement, a copy of which is included as Appendix A to
this prospectus/consent solicitation statement and is incorporated by reference
in this prospectus/consent solicitation statement.
EFFECT OF THE MERGER. Under the terms of the merger agreement (1) the
separate existence of the partnerships will cease and the company will be the
surviving entity and will succeed to all of the assets and liabilities of the
partnerships, and (2) investors will become unitholders or noteholders of the
company.
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CONDITIONS TO COMPLETION OF THE TRANSACTION. The closing for the
transaction will take place promptly after the Cap Source General Partners have
received the consent to the transaction from the holders of a majority of the
outstanding BACs of each of the partnerships and the solicitation period
relating to the transaction has ended. The receipt of the consent by no later
than , 1999, unless this date is extended by the Cap Source General
Partners in their sole discretion, is a condition to closing the transaction and
if it is not obtained, or all other conditions to closing are not satisfied or
waived, the merger agreement may be terminated. Other conditions to closing
include (1) the declaration of effectiveness of the registration statement for
the units and notes of the company under the Securities Act; (2) the delivery of
a tax opinion acceptable to the Cap Source General Partners stating that for
federal income tax purposes the transaction will be an exchange subject to the
nonrecognition provisions of Section 721 of the Code, provided that for purposes
of the opinion the transaction shall include only the merger of the partnerships
into the company and the related transfer of assets by the partnerships to the
company; (3) the absence of any material adverse change in the overall business
of the partnerships from the date of this prospectus/consent solicitation
statement to the effective date; and (4) the approval of the units of the
company for listing on NASDAQ.
TERMINATION OF THE MERGER AGREEMENT. The merger agreement may be terminated
by the Cap Source General Partners or the general partner of the company before
or after the receipt of consents from investors at any time before the effective
time of the Certificate of Merger, which will be filed with the Secretary of
State of the State of Delaware relating to the transaction.
ISSUANCE OF UNITS AND NOTES OF THE COMPANY
On the effective date, the BACs of both partnerships will be cancelled. At
that time, investors whose ownership is reflected on the books and records of
the partnerships on the record date will become either unitholders or
noteholders, as the case may be, on the books and records of the company, with
all the rights of a unitholder or noteholder of the company, as the case may be,
including the right to receive distributions or interest payments, as the case
may be. As soon as practicable after the effective date, the company will cause
to be mailed to the unitholders or noteholders, as the case may be, certificates
representing the number of units to which the unitholder is entitled or notes
which will be issued in denominations of $1,000 and any integral multiple of
$1,000. See "THE NOTES."
NO FRACTIONAL UNITS
No fractional units will be issued by the company in the transaction. Each
investor who would otherwise be entitled to a fractional unit, which entitlement
will be determined by combining the investor's allocation of units from each
partnership as to which the investor is receiving units, will instead receive a
cash payment equal to $10 multiplied by the fraction.
FRACTIONAL NOTES
The principal balance of the notes to which an investor is entitled is
determined by multiplying the number of lots of 50 BACs held by the investor by
the exchange value, per $1,000 original investment, assigned to the investor's
partnership. The application of this formula may result in the investor being
entitled to a fractional interest in a note, determined after combining the
investor's allocation of notes from each partnership as to which the investor is
receiving notes. The company will issue to each investor entitled to a
fractional interest a promissory note with an original principal balance equal
to that fraction times $1,000, subject to the company's right, at its option, to
pay cash instead of any portion of a promissory note. Apart from its principal
balance, this promissory note will be identical to the notes and will be issued
by the company under the indenture. No market is expected to develop for these
promissory notes and they will not be listed on any securities exchange. See
"THE NOTES."
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<PAGE>
TRANSACTION EXPENSES
GENERAL. The term "Transaction Costs" means all costs associated with the
transaction. Assuming the transaction is approved, the Transaction Costs are
estimated to be as follows:
SOLICITATION/COMMUNICATION COSTS
<TABLE>
<S> <C>
Information Agent......................................................... $ 35,000
Printing, postage and brochure............................................ 225,000
Marketing expenses........................................................ 20,000
---------
Subtotal................................................................ $ 280,000
---------
</TABLE>
PRECLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees................................................................ $ 230,000
Appraisals (including fees and expenses).................................. 100,000
Fairness Opinion (including fees and expenses)............................ 275,000
Registration, Listing and Filing Fees..................................... 125,000
Accounting................................................................ 25,000
Contingency............................................................... 25,000
---------
Subtotal................................................................ $ 780,000
---------
</TABLE>
CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Transfer Fees, Taxes and Title............................................. $ 50,000
---------
</TABLE>
COSTS TO WIND UP AND DISSOLVE PARTNERSHIPS
<TABLE>
<S> <C>
Accounting.............................................................. $ 20,000
---------
Total Transaction Costs................................................. $1,130,000
---------
---------
</TABLE>
ALLOCATION OF COSTS. If the transaction is approved, all Transaction Costs
will be paid by the partnerships and the company. If the transaction is
rejected, the general partners of each partnership will bear a percentage of all
Transaction Costs, excluding solicitation/communication costs, equal to the
total number of abstentions and "NO" votes cast by investors in that partnership
with respect to the transaction, divided by the total number of abstentions and
votes cast by investors in that partnership. In that event, the partnerships
will bear the remaining Transaction Costs. The solicitation/communication costs
listed above will be paid by the partnerships.
ACCOUNTING TREATMENT
The transaction will be accounted for using the purchase method of
accounting under generally accepted accounting principles ("GAAP"). Cap Source I
will be deemed to be the acquirer of Cap Source II under the purchase method
because its investors will be allocated the largest number of units.
Accordingly, the transaction will result, for financial accounting purposes, in
the effective purchase by Cap Source I of all of the BACs of Cap Source II. As
the surviving entity for financial accounting purposes, the
37
<PAGE>
assets and liabilities of Cap Source I will be recorded by the company at their
historical cost and the assets and liabilities of Cap Source II will be recorded
at their estimated fair values.
REGULATORY MATTERS
The transaction will not be subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. However, the transaction
is conditioned upon the completion or receipt by the Cap Source General Partners
of all necessary requirements and approvals by the United States Department of
Housing and Urban Development ("HUD"). These requirements include the filing by
principals and affiliates of a certificate regarding their previous
participation in HUD projects and clearance of the certificate by HUD. HUD may
also require the submission of information for a modified review of the
transaction. The Cap Source General Partners are not aware of any facts which
would cause HUD not to take the required action or approvals. Other than federal
proxy solicitation rules relating to the solicitation of investor consents and
state and federal regulations relating to the offering of the company's units
and notes, no other federal or state regulatory requirements must be complied
with and no approval thereunder must be obtained in connection with the
transaction.
RECOMMENDATION OF THE CAP SOURCE GENERAL PARTNERS
The Cap Source General Partners have determined that the transaction is in
the best interest of the investors and that it is fair to the partnerships, to
the investors in each of the partnerships and as a whole. Accordingly, the Cap
Source General Partners have approved the transaction and the merger agreement
and recommend that the investors vote "YES" in favor of the transaction and the
adoption of the merger agreement. The Cap Source General Partners believe the
transaction is the most attractive alternative, in light of current market
conditions, for providing investors with the possibility of increasing the value
of their investments while offering substantially enhanced liquidity. See
"FAIRNESS."
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
To eliminate the need for investors to locate and present to the Cap Source
General Partners certificates representing BACs to be exchanged in connection
with the transaction, the Cap Source General Partners amended Sections 7.01 and
7.02 of the partnership agreements to provide that ownership of the BACs be
evidenced solely by the books and records of the partnerships. To comply with
the rules and regulations of the Commission governing the transaction, which
require a solicitation period of at least 60 days, the Cap Source General
Partners also amended Sections 10.01(b) and 10.01(c) of the partnership
agreements to specifically provide for giving notice of a meeting and the
setting of a record date at least 10 but not more than 120 days before the final
date on which the solicitation of the consent of the investors takes place.
Investors voting in favor of the transaction will also have voted in favor of
ratifying these amendments to the partnership agreements and any other actions
taken by the Cap Source General Partners to facilitate the transaction.
EFFECT OF THE TRANSACTION ON DISSENTING INVESTORS
Investors who mark their consent card "NO" against the transaction and
investors who abstain from granting their consent with respect to the
transaction do not have a statutory right to elect to be paid the appraised
value of their interests in the partnership. However, all investors, including
dissenting investors, will be given the opportunity to elect to receive notes
instead of units for their BACs as described under "THE NOTES." Noteholders are
entitled to receive only the principal and interest payments required under the
notes. Unlike unitholders, noteholders will have no right to participate in the
company's earnings in excess of operating expenses, debt service and other
obligations, and will not benefit from growth in the unitholders' equity that
might result from future financial performance of the company.
38
<PAGE>
EFFECTIVE TIME
The effective time of the transaction will be at the time the Certificate of
Merger with respect to the merger of the partnerships and the Cap Source General
Partners with and into the company is filed with the Secretary of State of
Delaware, or at a later time as may be specified in the Certificate of Merger.
It is anticipated that the filings will be made as soon as practicable after the
requisite approval of the investors has been obtained and the other conditions
to the transaction have been satisfied or waived, if permitted under the merger
agreement.
CONFLICTS OF INTEREST AND BENEFITS TO INSIDERS
The Cap Source General Partners participated in the initiation and
structuring of the transaction and are expected to receive benefits as a result
of its completion. First, in connection with the transaction, the Cap Source
General Partners will hold a 1% interest in the company as its general partner,
which continues their 1% interest in the partnerships. The General Partner will
receive this interest in exchange for making a capital contribution to the
company of some of the Cap Source General Partners' assets following the
transaction. In addition, the General Partner will be entitled to receive
management and other fees from the company. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses." Further, an affiliate of America First
Companies, the parent entity of the company's general partner and the entity
that controls the Cap Source General Partners, currently provides property
management services for the partnerships and will be retained to provide
property management services for the company. This entity also provides property
management services for other entities controlled by or affiliated with America
First Companies. In addition, another affiliate of America First Companies
manages and controls a limited partnership that engages in similar real estate
businesses to those planned by the company.
LEGAL PROCEEDINGS
The Cap Source General Partners, the partnerships and the company may be
involved in litigation incidental to their businesses, but, except as described
below, no material litigation is currently pending or threatened against the
partnerships, their properties, the Cap Source General Partners or the company.
On February 3, 1999, Alvin M. Panzer and Sandra G. Panzer (the "Panzers")
brought a complaint against the company, the Cap Source General Partners,
(collectively the "America First Defendant") the partnerships, Paul L. Abbott
and Lehman Brothers, Inc. (the "Lehman Defendant") in the Court of Chancery of
New Castle County, Delaware, Civil Action No. 16929NC (the "Panzer Complaint").
The Panzers seek to certify the action as a class action on behalf of all other
investors in the partnerships. The Panzer Complaint alleges that (a) the America
First Defendants structured the transaction in a manner which conveys economic
benefit to themselves using unfair terms and coercion (b) the America First
Defendants intend to disseminate a false and misleading prospectus/consent
solicitation statement, (c) the transaction is not in the best interests of the
investors, and (d) the defendants have breached their fiduciary duties of
loyalty and good faith to the investors. The Panzer Complaint is based, in part,
upon a registration statement filed on November 3, 1998. The Cap Source General
Partners abandoned that registration statement and notified the investors of
their intent to pursue other alternatives on or about December 1, 1998, prior to
the date the Panzer Complaint was filed.
The Panzer Complaint alleges that the prospectus/consent solicitation
statement is materially deficient and misleading, and that the investors are
being coerced into approving the transaction by means of the allegedly deficient
prospectus/consent solicitation statement. The Panzer Complaint further alleges
that the Cap Source General Partners' interest in the partnerships was
transferred to the America First Defendants by the Lehman Defendant in breach of
the partnership agreements and Lehman's fiduciary duties. The Panzer Complaint
also alleges that the defendants have breached their fiduciary duties of loyalty
and good faith through mismanagement of the partnerships and by taking fees from
the partnerships not permitted by the partnership agreements.
39
<PAGE>
The Panzer Complaint seeks an injunction against completion of the
transaction, the appointment of an independent representative of the investors
to investigate and obtain the best available alternative for the investors
including, if appropriate, dissolution of the partnerships and monetary damages.
The defendants deny all allegations of wrongdoing in the Panzer Complaint and
believe the allegations are without merit. The defendants intend to vigorously
defend the action. America First Companies, under a purchase agreement between
America First Companies and the Lehman Defendant dated May 16, 1997, has agreed
to indemnify the Lehman Defendant against any action arising out of the Lehman
Defendant's ownership of two of the Cap Source General Partners.
On July 12, 1999, the Panzers each brought a second complaint against the
Cap Source General Partners, the partnerships, and America First Companies
L.L.C. (the "Defendants") in the Court of Chancery of New Castle County,
Delaware, Civil Action No. 17292 and Civil Action No. 17293 (the "Second Panzer
Complaints"). The Second Panzer Complaints allege that the Defendants have
improperly denied the Panzers access to partnership information and documents.
The Second Panzer Complaints seek to have the Defendants furnish the requested
information to the Panzers and award damages. The Defendants deny all
allegations of wrongdoing in the Second Panzer Complaints and believe the
allegations are without merit. The Defendants intend to vigorously defend the
actions.
Insured Mortgage Equities, Inc., one of the Cap Source I General Partners,
and Insured Mortgage Equities II L.P., one of the Cap Source II General
Partners, are currently involved in litigation unrelated to the transaction
styled IN RE LEHMAN BROTHERS LIMITED PARTNERSHIPS LITIGATION, Consolidated
Action No. 14886, pending before the Court of Chancery for the State of Delaware
In and For New Castle County. This class action litigation was filed in 1996, on
behalf of the investors in several limited partnerships against the general
partners of those limited partnerships. The litigation relates to alleged breach
of fiduciary responsibilities, fraudulent mismanagement and self-dealing on the
part of the general partners. The plaintiffs seek injunctive relief, dissolution
of the partnerships if necessary, compensatory damages, attorney fees and costs.
Insured Mortgage Equities, Inc., Insured Mortgage Equities II L.P. and the
partnerships have been fully indemnified with regard to these proceedings by
Lehman Brothers, Inc.
FAIRNESS
BELIEF AS TO FAIRNESS
The Cap Source General Partners reasonably believe that the terms of the
transaction are fair as a whole, to the partnerships and to the investors in
each of the partnerships, regardless of whether an investor receives units or
notes. The material factors underlying the beliefs of the Cap Source General
Partners relating to the fairness of the transaction are discussed below under
"--Material Factors Underlying Belief as to Fairness."
The Cap Source General Partners based their determinations as to the
fairness of the transaction on the following material factors: (1) the terms and
conditions of the transaction will result in limited changes to the structure of
the partnerships and limited changes to the business and investment objectives
of the partnerships; (2) the opportunity for each investor to object to the
transaction and the requirement that the transaction be approved by investors
holding a majority in interest of the outstanding BACs of each partnership; (3)
the form and amount of consideration offered to the investors; (4) the method of
allocating the units and notes between the partnerships in the transaction; (5)
the lack of material differences with respect to the assets of the partnerships
and the consistent valuation methodology applied to the assets; (6) the fairness
opinion rendered by Sutro & Co.; (7) the independent Appraisals prepared by
Valuation Research, which were used in part in the determination of the exchange
values; and (8) the fact that all investors, including dissenting investors,
will be given the opportunity to elect to receive notes, with some limitations.
40
<PAGE>
The Cap Source General Partners also considered the potential benefits of
the transaction compared to the alternatives in reaching their conclusion as to
the fairness of the transaction. The potential benefits include, but are not
limited to: (1) enhanced liquidity resulting from the anticipated listing of the
units on NASDAQ and the company's larger equity market capitalization; (2) the
company's potential for growth and enhanced access to capital; (3) a larger
combined investment portfolio that is more diversified than the portfolio of a
single partnership; and (4) the administrative cost savings resulting from
combining the administration and management of each partnership into one entity.
See "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION."
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying the belief
of the Cap Source General Partners that the transaction is fair as a whole, to
the partnerships and to the investors in each of the partnerships.
LIMITED CHANGES IN STRUCTURE AND OBJECTIVES. The Cap Source General
Partners believe that the limited changes to the structure of the
partnerships and their business and investment objectives is fair to
investors. The organizational structures of the partnerships before the
transaction are, and the company following the transaction will be, limited
partnerships. In addition, the general partner of the company will be the
successor by merger to the Cap Source General Partners, resulting in limited
changes to the managing entity of the partnerships. The business and
investment objectives of both the partnerships and the company are to invest
primarily in multi-family residential properties. Therefore, the overall
business objectives of the company will be substantially the same following
the transaction as the objectives of the partnerships prior to the
transaction.
CONSENT PROCEDURES AND OPPORTUNITY TO ELECT TO RECEIVE NOTES. The Cap
Source General Partners believe that the consent process and alternatives
presented to investors, including dissenting investors, are fair. Each
investor has the opportunity to make an investment decision by voting "YES,"
"NO" or "ABSTAIN" with respect to the transaction, and the transaction must
be approved by investors holding a majority in interest of the outstanding
BACs of each partnership. See "CONSENT SOLICITATION." All investors,
including dissenting investors, are also being given the opportunity to
elect to receive notes instead of units in exchange for their BACs, with
some limitations. See "THE NOTES."
CONSIDERATION OFFERED. The Cap Source General Partners believe that the
units and notes offered to the investors constitute fair value. In reaching
this conclusion, the Cap Source General Partners considered the fact that
investors will surrender their right to receive cash proceeds from the
liquidation of the partnerships at some time in the future. In this regard,
the Cap Source General Partners compared the amount of consideration to be
received in alternative transactions, including liquidation, to the
anticipated market value of the company's units. The Cap Source General
Partners believe the exchange values, which are based in part on the
Appraisals, adequately take into account the relative values of each of the
partnerships.
METHOD OF ALLOCATION. The Cap Source General Partners believe that it
is fair to allocate the units and notes between the partnerships in
accordance with their respective exchange value. In view of the similarities
between the partnerships in terms of their investment objectives and
policies as well as in their assets, the Cap Source General Partners believe
there is no material difference between the partnerships with respect to
determinations related to the allocation of units and notes between the
partnerships. A majority of the assets of both partnerships are GNMA
Certificates, FHA Loans, cash and cash equivalents. Further, all of the
properties owned by the Operating Partnerships are multifamily apartment
complexes. The Cap Source General Partners therefore believe that the
consistent valuation methodology applied to these assets and the lack of
material difference between the assets of each partnership support their
conclusion that the allocation of the units and principal allocation of
notes to be received by the investors is fair.
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<PAGE>
FAIRNESS OPINION. The Cap Source General Partners have relied, in part,
upon the fairness opinion rendered by Sutro & Co. to support their
conclusion that the transaction is fair. Sutro & Co. was retained by the Cap
Source General Partners without any conditions or restrictions. See
"FAIRNESS." The qualifications, limitations and assumptions in the fairness
opinion did not limit the Cap Source General Partner's reliance on the
fairness opinion.
INDEPENDENT APPRAISALS. The Cap Source General Partners have relied
upon the Appraisals prepared by Valuation Research, an independent
appraiser, to establish the fair market value (the "Appraised Value") of the
properties. The Appraised Values were utilized, in part, in determining the
exchange values of the partnerships. In preparing the Appraisals, Valuation
Research was not engaged to represent the interests of the Cap Source
General Partners or any specific group of investors, but was engaged to
determine the fair market value of the properties in which the partnerships
hold an interest without taking into account the specific financial interest
of any person or group. The Cap Source General Partners believe that the use
of a single independent appraiser, applying consistent methodology and
criteria in assessing the value of each of the properties, increased the
likelihood that the value of each real property would be determined on a
fair, consistent and unbiased basis. Sutro & Co. also reviewed the
Appraisals in connection with its issuance of the fairness opinion. The Cap
Source General Partners therefore believe their conclusion as to the
fairness of the transaction is supported by the Appraisals.
NOTES. The indenture for the notes contains specific covenants for the
benefit of the noteholders. These covenants include (1) a limitation on
company indebtedness, (2) restrictions on the sale or transfer of company
assets and (3) prohibitions against mergers or transactions involving the
company. See "THE NOTES." In addition, the notes are variable rate
obligations. The Cap Source General Partners believe the use of a variable
rate note, combined with these restrictive covenants, may improve the
likelihood that after the transaction the price of the notes will not fall
below their face value upon issuance. Although the aggregate principal
amount of notes to be issued may not exceed $20 million, the Cap Source
General Partners believe this limitation is procedurally fair because the
notes will be allocated first to dissenting investors, who will be able to
receive notes under any circumstances, whereas an abstaining or consenting
investor who wishes to receive notes will receive units if the issuance of
notes has reached $20 million. See "THE NOTES--Allocation of Notes."
In addition to the foregoing material factors, the Cap Source General
Partners considered that the effects of the transaction may differ with respect
to each investor and may be disadvantageous to some investors, depending on
their individual circumstances and investment objectives. Further, the Cap
Source General Partners considered the following negative factors relating to
the transaction:
UNCERTAIN MARKET PRICE OF UNITS. There is substantial uncertainty as to
the prices at which the units will trade following the transaction.
Following the transaction, the market value of the units could be
substantially affected by numerous factors. Accordingly, the possibility
exists that the trading price of the units may be lower than the value
assigned to the units for purposes of the transaction.
LACK OF OPERATING HISTORY. The company will be newly formed, with no
operating history.
CONFLICTS OF INTEREST FACING THE CAP SOURCE GENERAL PARTNERS. There are
conflicts of interest facing the Cap Source General Partners with respect to
the completion of the transaction, including, as indicated above, that (1)
the Cap Source General Partners will hold a 1% interest in the company as
its General Partner, which continues their 1% interest in the partnerships,
and (2) the Cap Source General Partners will benefit from the completion of
the transaction by receiving fees as the company's general partner as
provided in the company's limited partnership agreement.
TRANSACTION EXPENSES. The payment of the expenses relating to the
transaction will reduce the net worth of the company following the
transaction.
NO ASSURANCE BENEFITS OF THE TRANSACTION WILL BE REALIZED. Because the
success of the company will depend on numerous factors, including the cost
of the company's borrowing, the cost and
42
<PAGE>
effectiveness of the company's risk management strategies, changing
conditions in the real estate markets, reserve requirements and the
operating expenses of the company, there can be no assurance the company
will be able to achieve the benefits of the transaction and successfully
implement its business plan.
The Cap Source General Partners did not believe that these negative factors
were sufficient, either individually or collectively, to outweigh the advantages
of the transaction.
The foregoing discussion of the information and factors considered by the
Cap Source General Partners includes material factors considered by the Cap
Source General Partners. The Cap Source General Partners did not assign relative
weights to the above factors. A determination of various weightings would, in
the view of the Cap Source General Partners, be impractical. Rather, the
determinations and recommendations of the Cap Source General Partners are based
on the totality of the information presented to, and considered by, them.
ALTERNATIVES TO THE TRANSACTION
Before concluding that the transaction should be proposed to investors and
to evaluate the fairness of the transaction, the Cap Source General Partners
examined the estimated values which could be derived from alternatives to the
transaction. The alternatives examined by the Cap Source General Partners were:
(1) continuation of the partnerships, and (2) liquidation of the partnerships.
To determine whether the transaction or one of these alternatives would be more
beneficial to investors, the Cap Source General Partners compared the potential
benefits and detriments of the transaction with the potential benefits and
detriments of each of the alternatives. Each of the transaction and its
alternatives have potential benefits and detriments not present in the other
alternatives. For the reasons listed below, the Cap Source General Partners
determined that the transaction is more beneficial to investors than either of
the alternatives to the transaction.
CONTINUATION OF THE PARTNERSHIPS. In assessing the transaction, the Cap
Source General Partners considered the advantages and disadvantages of keeping
the partnerships intact and continuing to operate them under their own separate
partnership agreements and existing business plans. If the partnerships were to
continue in their current form, they would remain separate legal entities
governed by their respective partnership agreements. In managing the businesses
of the partnerships, the Cap Source General Partners would continue to take
whatever actions they deemed were appropriate in satisfying their fiduciary
obligations to the investors and the partnerships. Under this alternative,
investors would have continued to receive cash distributions in the future and,
ultimately, a liquidation distribution.
Continuing the partnerships without change has a number of benefits,
including (1) the partnerships would remain separate entities, with their own
assets and liabilities, and their original investment objectives, consistent
with the guidelines, restrictions and safeguards in their partnership
agreements; (2) the partnership's performance would not be affected by the
performance of the other partnership, including the investment objectives,
interests and intentions of the investors in the other partnership; (3) there
would be no change in the nature of the investors' investments; (4) the
partnerships would not incur any expenses in connection with the transaction;
and (5) the partnerships would avoid the risks inherent in the transaction. See
"RISK FACTORS."
The Cap Source General Partners concluded that maintaining the partnerships
as separate entities may have the following potentially negative results when
compared with the benefits that the Cap Source General Partners believe may be
derived from the transaction: (1) lower liquidity of investment due to the
illiquid nature of the market for BACs; (2) inability to raise new capital or
make new investments, thus limiting growth of the partnerships' capital to that
inherent in the existing partnership investments; (3) less flexibility and
control in actively managing the portfolio; and (4) duplicative general and
administrative expenses.
LIQUIDATION. The Cap Source General Partners assessed the possibility of
commencing the orderly liquidation of the partnerships and distributing the net
proceeds from the liquidation to the investors. The
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<PAGE>
Cap Source General Partners concluded that liquidation would be costly and time
consuming and would not be as beneficial to investors as the transaction.
The Cap Source General Partners determined that an attempt to liquidate the
partnerships' investments at the current time would likely result in the
investors not achieving the full potential benefits from an investment in the
partnerships. They concluded that liquidation would not be the best option to
realize the optimum return on an investment in the partnerships because although
the partnerships' investments in mortgage loans could likely be sold at or
slightly above their face value in a short period of time, most of the
partnerships' equity positions in the Operating Partnerships are not attractive
to buyers. Liquidation of most of the equity positions would require either (1)
a protracted period of negotiations with some of the various general partners of
the Operating Partnerships which could potentially create both substantial
transaction costs and additional costs to the partnerships of continuing
operations during the negotiation period, and/or (2) the partnerships accepting
substantial discounts in value. In addition, there may be additional costs
associated with representations, warranties, and indemnifications that
purchasers generally require and which may result in additional escrow costs.
Furthermore, the liquidation of the partnerships would involve transaction
costs, like legal fees and various other closing costs, which would further
reduce the amount of net proceeds available for distribution.
On the other hand, in a liquidation of the partnerships, investors would
benefit by avoiding the risks of continuing their ownership of the partnerships
and those associated with the transaction. Liquidation would provide for the
final liquidation of the investors' investments and a likely substantial
distribution of cash equal to net liquidation proceeds, though not at a level
that would give investors a full return of their original investment. In
addition, the investors would have the potential to reinvest the net proceeds
received in the liquidation in similar or different investments.
Based upon this comparison of the potential benefits and detriments of the
transaction to the potential benefits and detriments of possible alternatives to
the transaction, the Cap Source General Partners have concluded that the
transaction is the more attractive alternative for investors.
Notwithstanding the belief of the Cap Source General Partners that the
assets of the partnerships cannot be liquidated on favorable terms and
conditions, the following table describes the estimated liquidation values of
the partnerships.
ESTIMATED LIQUIDATION VALUES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP PARTNERSHIP NET OTHER ASSETS TOTAL
AND MORTGAGE EQUITY TERMINATION AND LIQUIDATION
LOANS(1) INTERESTS(2) COSTS(3) LIABILITIES(4) VALUES
------------- ------------ ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Cap Source I.......................... $ 35,237,858 $ 1,996,838 $(500,000) $ 9,351,781 $ 46,086,477
Cap Source II......................... $ 27,414,004 $ 2,453,973 $(500,000) $ 17,876 $ 29,385,853
</TABLE>
ESTIMATED LIQUIDATION VALUES
AS OF DECEMBER 31, 1998
PER $1000 INVESTMENT*
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP PARTNERSHIP NET OTHER ASSETS INVESTOR
AND MORTGAGE EQUITY TERMINATION AND LIQUIDATION
LOANS(1) INTERESTS(2) COSTS(3) LIABILITIES(4) VALUES
--------------- --------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Cap Source I............................. $ 517 $ 29 $ (7) $ 137 $ 676
Cap Source II............................ $ 338 $ 30 $ (6) $ 1 $ 363
</TABLE>
- ------------
* Totals assume investors receive 99% of total liquidation value.
(1) GNMA Certificates and FHA Loans are reflected at an average premium over
their current principal balances equivalent to 1.5%.
44
<PAGE>
(2) Derived by using the value of the properties as determined by the Appraisals
using the direct capitalization approach, then deducting 4% of these values
to account for the costs of sales of these properties, then subtracting
repayment of the current principal balances of the mortgages, then
allocating the remaining proceeds, if any, according to the limited
partnership agreements. These resulting equity values were then discounted
37.5% to reflect the subordinated nature of the limited partnership
interests being sold.
(3) An estimate of costs to terminate the partnership's business.
(4) Includes cash, cash equivalents, miscellaneous GNMA Certificates, interest
receivables and accounts payable.
COMPARISON OF ALTERNATIVES TO THE TRANSACTION
To assist investors in evaluating the fairness of the consideration offered
by the company in the transaction, the Cap Source General Partners have compared
the estimated market value of the units with: (1) estimates of the value of the
BACs assuming the continuation of the partnerships, and assuming that the
Operating Partnerships would be in existence until December 31, 2003, followed
by the immediate liquidation of all the Operating Partnerships for cash and the
immediate distribution of the available proceeds to the partnerships for further
distribution to the investors and Cap Source General Partners as provided in
their partnership agreements; (2) estimates of the value of the BACs under a
liquidation scenario, assuming that the partnerships' mortgages were sold at
their current market value, the limited partner interests in the Operating
Partnerships were sold at prices reflecting discounts for the subordinated
nature of the interests plus estimated amounts, if any, to gain operating
control of the Operating Partnerships, and that these amounts together with
cash, cash equivalents and other net assets of the partnership are distributed
to investors and Cap Source General Partners as provided in their respective
partnership agreements; and (3) prices at which the BACs have been trading on
the illiquid secondary market over the 12-month period ended August 31, 1998, as
compiled and reported to the Cap Source General Partners by Service Data
Corporation. These valuation estimates are subject to significant uncertainties,
since the value of the units, as well as the comparative estimated values are
based upon numerous estimates, variables, assumptions and market conditions.
Therefore, no assurance can be given that the estimated values indicated could
be realized, and actual realized values may be higher or lower than the
estimates of these values.
The results of this comparative analysis are summarized in the table
entitled "Summary of Comparative Valuation Alternatives" below. Investors should
consider that the estimated values assigned to the units and alternative forms
of consideration are based on a variety of assumptions that have been made by
the Cap Source General Partners. These assumptions relate, among other things,
to: (1) projections as to the partnerships' future income, expenses, cash flow
and other significant financial matters; (2) the capitalization rates that would
likely be used by prospective buyers if the partnerships' assets were
liquidated; (3) appropriate discount rates applied to expected cash flows in
computing the present value of the cash flows that may be received with respect
to the BACs; and (4) selling costs and other expenses, discounts and
contingencies attributable to the sale of assets and liquidation of the
partnerships. In addition, these estimates are based upon information available
to the Cap Source General Partners at the time the estimates were prepared, and
no assurance can be given that the same conditions will exist at the time of
closing of the transaction. The assumptions have been determined by the Cap
Source General Partners and, where appropriate, are based upon current
historical information regarding the partnerships and current real estate
markets, and have been highlighted below to the extent material to the Cap
Source General Partners' conclusions. While the Cap Source General Partners
believe they have a reasonable basis for the assumptions made, it is unlikely
that all of the assumptions used by the Cap Source General Partners will prove
to be accurate in all material respects, and some assumptions used by the Cap
Source General Partners as to future events have been deleted to simplify the
analysis and may not approximate the actual experience of the partnerships. The
estimated values of the units and alternative forms of consideration would have
been different had the Cap Source General Partners made different assumptions.
No assurance can be given that the consideration would have been realized
through any of the alternatives described.
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<PAGE>
SUMMARY OF COMPARATIVE VALUATION ALTERNATIVES
PER $1,000 OF ORIGINAL INVESTMENT*
<TABLE>
<CAPTION>
ESTIMATED MARKET ESTIMATED LIQUIDATION ESTIMATED MARKET
VALUE VALUE OF
VALUE OF OF BACS IF ASSETS BACS BASED ON
UNITS(1) ESTIMATED VALUE OF SOLD AT ADJUSTED NET WEIGHTED
-------------------- BACS ASSUMING ASSET VALUE(3) AVERAGE OF
HIGH LOW CONTINUATION OF THE ----------------------- SECONDARY MARKET
PARTNERSHIP VALUE VALUE PARTNERSHIPS(2) RANGE MIDPOINT TRADES(4)
- ------------------------------------ --------- --------- --------------------- ---------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Cap Source I........................ $ 727 $ 643 $ 678 $ 669-684 $ 676 $ 558
Cap Source II....................... $ 379 $ 330 $ 375 $ 356-369 $ 363 $ 370
</TABLE>
- ------------
* An original investment of $1,000 consists of 50 BACs in either Cap Source I
or Cap Source II.
(1) The Cap Source General Partners have determined the range of estimated
market values of the company based upon a division of the assets in each
partnership into three asset types. Asset Type A is the limited partner
interests in the operating partnerships; Asset Type B is the mortgages and
Asset Type C is cash, cash equivalents and other net assets. On the low end
of estimated value, no value was assigned to Asset Type A. On the high end,
Funds from Operations ("FFO") attributable to the limited partner interests
were valued using an FFO multiple of 7.6. The FFO multiple of 7.6 was
derived by taking the average 1999 estimated FFO multiple from a peer group
of equity REITs. For both the high and low estimates, Asset Types B and C
were valued at their face values as of December 31, 1998. The values
assigned to Asset Types A, B and C were added together, reduced by estimated
transaction costs and divided by the number of original $1,000 investments
to determine the value per original $1,000. The Cap Source General Partners
recognized that there is substantial uncertainty as to the prices at which
the units will trade following the transaction, and it is possible that the
units will trade below the values reflected in this analysis.
(2) These values were derived from a discounted cash flow analysis at the
partnership level for the period from January 1, 1999 through December 31,
2003. The five-year period was used because it was a time period reasonably
determined by the Cap Source General Partners to obtain control of the
Operating Partnerships from non-affiliates of the Cap Source General
Partners, thus allowing the liquidation of the partnerships' assets on an
equivalent fee-simple basis. Cash flows from mortgages owned by the
partnerships were included at the fixed monthly amounts described in the
respective mortgage documents. To determine any cash flow to the
partnerships from the limited partner interests in the Operating
Partnerships, estimated cash flows for 1999 were taken from the direct
capitalization method in the Appraisals prepared by Valuation Research, and
revenue and expenses in subsequent years were increased at the rates
included in the Appraisals. From net income in each year, debt service
payments and applicable fees were deducted to arrive at net cash flow
available for distribution by the Operating Partnerships. This cash is then
assumed to be distributed to the partners in the Operating Partnerships as
prescribed in the limited partnership agreements for each Operating
Partnership; any shortfalls are assumed to be funded by the partnerships.
Interest income and cash from principal repayments on miscellaneous GNMA
certificates are estimated based on a model of partnership level cash flow;
that model includes an estimate of annual administrative and operating
expenses which were increased annually by 4%. At the end of the final year
of analysis, the properties were assumed to be sold at prices derived by
capitalizing the following year's net income at a rate 25 basis points
higher than the current year capitalization rate applied to each property in
the Appraisals. Selling costs are assumed to be 4% of proceeds. Net proceeds
are first used to repay the then outstanding principal balance of any
mortgage loan, and remaining cash is distributed in accordance with the
respective partnership agreements. At the partnership level at the end of
the final year of analysis, proceeds from repayment of the mortgage loans,
cash received in respect of limited partner interests in the operating
partnerships, and any other net assets, including cash and cash equivalents,
are then distributed to the investors and Cap Source General Partners in
accordance with the partnership agreement. Annual distributed cash flows,
inclusive of liquidating proceeds from the assets sales at the end of the
period, are discounted at a rate of 10% to arrive at an estimate of the
present value of each partnership on a "going concern" basis.
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<PAGE>
(3) The figures in this column represent the amount that would be available for
distribution to investors if the partnerships sold their assets as of
December 31, 1998, based on the following assumptions. Mortgages were sold
at their current market values which on the noted date would have been at
slight premiums to their current principal values. Premiums for the high
value are 2% and for the low value are 1%. These estimated premiums reflect,
to the best knowledge of the Cap Source General Partners, current pricing on
similar mortgage instruments which are generally prepayable with minimal or
no penalties. Limited partner interests in the Operating Partnerships were
sold at discounts to the values derived by using the value of the properties
as determined by the Appraisals using the direct capitalization approach,
then deducting 4% of these values to account for the cost of sales of these
properties, then subtracting repayment of the current principal balance of
the mortgages, then allocating the remaining proceeds, if any, according to
the limited partnership agreements. Discounts were determined by the Cap
Source General Partners by taking into account two factors. First, if the
Operating Partnership remains in the control of a non-affiliated general
partner, an amount was estimated that might be sufficient to acquire that
general partners' interest and was deducted from the derived value of the
limited partner interest. Second, discounts of 37.5% were taken to reflect
the subordinated nature of the limited partner interest being sold, and thus
the higher return requirement of a buyer. Cash and cash equivalents were
included at their current market values, along with any other net assets. A
deduction was made for estimated costs of winding up the partnerships. The
resulting amount was deemed to be distributed to the investors and Cap
Source General Partners in accordance with the partnership agreements.
(4) Based on the weighted average, by BACs sold, of secondary market trades
during the period from January 1 through August 31, 1998, provided to the
Cap Source General Partners by Service Data Corporation. Service Data
Corporation's records may not reflect all trading activity for the BACs. In
accordance with the partnerships' limited partnership agreements, the Cap
Source General Partners suspended trading of the BACs on August 31, 1998, to
prevent the partnerships from becoming publicly traded partnerships taxed as
a corporation under the Code. Due to this suspension, there was no trading
of BACs after August 31, 1998, until trading resumed on January 1, 1999.
THE CAP SOURCE GENERAL PARTNERS' ANALYSIS FOR THE TRANSACTION
The Cap Source General Partners' analysis for the transaction was based upon
a review of the alternatives to the transaction in comparison to the proposed
transaction. This analysis was based upon the assumptions and calculations for
the alternatives and the proposed transaction. Except as otherwise described,
there were no limitations for any analysis. In addition, as described under
"FAIRNESS-- Material Factors Underlying Belief as to Fairness," no relative
weight was assigned to any one factor.
With respect to the alternative of continued management, the assumptions are
under "FAIRNESS-- Comparison of Alternatives to the Transaction" in footnote 2
to the table entitled "Summary of Comparative Valuation Alternatives." The
resulting calculation is shown in this table.
With respect to the alternative of liquidating the partnerships, the
assumptions are included in the footnotes under tables entitled "Estimated
Liquidation Values as of December 31, 1998" and "Estimated Liquidation Values as
of December 31, 1998 per $1,000 Investment," under "--Comparison of Alternatives
to the Transaction." The resulting calculations are in these tables.
Other alternatives considered by the Cap Source General Partners include (1)
listing the BACs of each partnership on a national securities exchange or
automated quotation system; (2) merging the partnerships into a single
corporation and listing the corporation's common stock on a national securities
exchange or automated quotation system; (3) merging the partnerships together to
form a single REIT; and (4) qualifying each partnership as an individual REIT.
The General Partner's analysis did not quantify any of these alternatives or any
assumptions. A quantification of these alternatives was not done by the Cap
Source General Partners because it involved a quantification of the future
trading prices of the securities described in these alternatives. The Cap Source
General Partners concluded that using any assumption or group of assumptions
would result in a speculative valuation because of the limited capitalization,
market and trading assumptions.
47
<PAGE>
FAIRNESS OPINION AND APPRAISALS
Sutro & Co. has rendered its opinion, dated September 23, 1999, that the
Consideration, as defined in the fairness opinion, which is attached as Appendix
B to this prospectus/consent solicitation statement, to be received by
investors, the allocation of such Consideration among the investors in each
partnership, and the principal allocation of the notes in the transaction, is
fair to the investors from a financial point of view.
FAIRNESS OPINION
GENERAL. The partnerships engaged Sutro & Co. to conduct an analysis of the
proposed merger of Cap Source I and Cap Source II based upon Sutro & Co.'s
qualifications, expertise and reputation, as well as the firm's prior investment
banking relationship and familiarity with the partnerships. On September 23,
1999, Sutro & Co. rendered its opinion that the units to be received by the BAC
holders and the general partners and the principal allocation of the notes in
the merger is fair to the BAC holders and the general partners from a financial
point of view.
The full text of Sutro & Co.'s opinion, dated September 23, 1999, which sets
forth, among other things, assumptions made, procedures followed, matters
considered and limitations on the review undertaken, is attached as Appendix B
to this prospectus/consent solicitation statement. BAC holders are urged to, and
should, read Sutro & Co.'s opinion carefully and in its entirety. Sutro & Co.'s
opinion is issued to the partnerships, and it does not address any aspect of the
transaction other than its fairness, nor does it constitute a recommendation to
any holder of BACs as to how to vote for the proposed transaction. The summary
of the opinion of Sutro & Co. below is qualified in its entirety by reference to
the full text of the fairness opinion.
In connection with rendering its written opinion, Sutro & Co., reviewed
among other things:
- a draft of Amendment 4 to the Registration Statement on Form S-4 of the
Company substantially as it was filed on September 28, 1999, including the
preliminary prospectus/consent solicitation statement included therein;
- the appraisals prepared by Valuation Research dated December 31, 1998;
- individual Partnership Annual Reports and Reports on Forms 10-K and 10-Q
for the years ended December 31, 1997 and December 31, 1998 as amended,
and for the period ended June 30, 1999;
- the Prospectus of Capital Source I dated January 10, 1986;
- the Prospectus of Capital Source II dated February 6, 1987;
- the Agreement and Plan of Merger among the partnerships and the company;
- other publicly available business, financial and other information
concerning the partnerships;
- internal information, primarily financial in nature, including analytical
models, projections, forecasts, estimates and analyses, prepared by or on
behalf of the management of the partnerships;
- information provided to Sutro & Co. by the management of the partnerships
concerning the distributions on, the trading of, and the trading market
for, the equity securities of the partnerships; and
- other factors as it deemed appropriate.
In the course of Sutro & Co.'s engagement, Sutro & Co. held discussions with
the senior management of the partnerships concerning the historical, current and
projected future operations, business plans, financial conditions and results,
and prospects of the partnerships. Additionally, Sutro & Co. discussed with
representatives of Valuation Research the results, methodology and limitations
of the appraisals. Sutro & Co. did not, however, independently verify the
accuracy or completeness of the appraisals.
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<PAGE>
In conducting its review, Sutro & Co. relied upon and assumed the accuracy
and completeness of the financial and other information, including the
appraisals, provided to Sutro & Co. or which were publicly available, without
independent verification. Sutro & Co. relied upon the statements and information
provided by the management of the partnerships as to the reasonableness and
achievability of the financial and operating forecasts and projections, and the
assumptions and bases therefor, provided to Sutro & Co. Sutro & Co. assumed that
the financial models and the financial projections provided by the general
partners that project future results of the partnerships are the best currently
available estimates and good faith judgments of the general partners as to the
future performance of the partnerships.
Sutro & Co., in conducting its review and arriving at its opinion, noted
that the exchange ratios for Cap Source I and Cap Source II in the transaction
are based, in part, on the appraisals dated December 31, 1998 and the market
values of the partnerships' remaining assets and liabilities at December 31,
1998 and before transaction costs or other costs associated with the
transaction. The exchange ratios are used to determine the allocation of units
to be received by the BAC holders in Cap Source I and Cap Source II in the
transaction and the principal allocation of the notes to be received by BAC
holders in Cap Source I and Cap Source II in the transaction.
The following is a summary of the various methodologies underlying the
analyses conducted by Sutro & Co.
MARKED TO MARKET VALUATION OF ASSETS AND LIABILITIES. Sutro & Co. analyzed
the marked to market values of the assets and liabilities of each of the
partnerships. Cash and temporary cash investments, investments in FHA Loans and
GNMA Certificates, interest receivable, accounts payable and distributions
payable were valued at the stated values shown at June 30, 1999 in the unaudited
balance sheets in the quarterly report on Form 10-Q for the period ending June
30, 1999 of each of the partnerships. Values for the investments in the
operating partnerships were based on the low and high of the range of appraised
values for the fee simple ownership of the individual real estate properties net
of the outstanding mortgage indebtedness of the real estate properties and other
related property level liabilities at June 30, 1999. These marked to market
value evaluations indicated a range of marked to market values for Cap Source I
of $45.6 million to $50.3 million or for Cap Source I BAC holders a value of
$676 to $745 per $1,000 of original investment and a range of marked to market
values for Cap Source II of $29.6 million to $32.8 million or for Cap Source II
BAC holders a value of $370 to $409 per $1,000 of original investment.
LIQUIDATION VALUATION OF ASSETS AND LIABILITIES. Sutro & Co. calculated
liquidation values as net book values less costs associated with disposing of
the investments in the operating partnerships and winding down costs for the
partnerships. Such liquidation value evaluations indicated a range of
liquidation values for Cap Source I of $43.7 million to $47.8 million or for Cap
Source I BAC holders a liquidation value of $648 to $708 per $1,000 of original
investment and a range of liquidation values for Cap Source II of $28.2 million
to $31.0 million or for Cap Source II BAC holders a liquidation value of $351 to
$387 per $1,000 of original investment.
GOING CONCERN VALUATION. Sutro & Co. analyzed the going concern values for
the partnerships to approximate the pro forma values of the partnerships "as
is." A five-year discounted cash flow analysis was calculated based upon pro
forma dividends projected to be received by the BAC holders plus a pro forma
projected liquidation of the partnerships at the end of year five. Such cash
flows were discounted at a range of 10% to 13%. Such pro forma "as is" value
evaluations indicated a range of "as is" values for Cap Source I of $40.7
million to $45.7 million or for Cap Source I BAC holders an "as is" value of
$603 to $679 per $1,000 of original investment and a range of "as is" values for
Cap Source II of $26.7 million to $30.1 million or for Cap Source II BAC holders
an "as is" value of $332 to $375 per $1,000 of original investment. Pro forma
projected dividends were provided by the general partners and were based, in
part, on five-year pro forma projected income statements and balance sheets
derived from property level projections by Valuation Research and partnership
level projections by the general partners.
PEER GROUP ANALYSIS. Sutro & Co. reviewed a peer group of publicly traded
multifamily REITs with market capitalizations of less than $500 million. The
low, high, median and average stock price to
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estimated 1999 funds from operations for this peer group were 5.0x, 9.7x, 7.8x
and 7.6x, respectively. The following REITs were considered by Sutro & Co. in
its peer group analysis: AMLI Residential Properties Trust, Associated Estates
Realty Corporation, Berkshire Realty Company, Inc., Cornerstone Realty Income
Trust Inc., Lexford Residential Trust, Mid-America Apartment Communities, Inc.,
Roberts Realty Investors Inc., Town and Country Trust and Walden Residential
Properties, Inc.
OTHER CONSIDERATIONS. Sutro & Co. also considered the following financial
and other factors it deemed important under the circumstances: (a) the
historical and current operating results of the partnerships including, among
other things, the cash flow from the investments in FHA Loans and GNMA
Certificates and the cash flow from the investments in the partnerships, (b)
distributions over the life of each of the partnerships including distributions
and return of capital to the BAC holders, and (c) various balance sheet items of
the partnerships. Sutro & Co. also took into account its assessment of general
economic, market and financial conditions and its experience in other
transactions, as well as its experience in the securities industry and knowledge
of real estate generally.
Additionally, Sutro & Co. was requested to provide an opinion as to the
fairness, from a financial point of view, of the principal allocation of the
notes that may be elected by the BAC holders. As used herein, principal
allocation refers solely to the method of allocation, as determined by the
exchange values, of the notes among the BAC holders in the partnerships. Sutro &
Co. in arriving at its opinion as to the fairness, from a financial point of
view, of the allocation of the consideration to be received by the BAC holders,
and with respect to each partnership individually, assumed that the maximum
amount of notes that may be issued in the transaction is $20.0 million.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF FAIRNESS OPINIONS. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to a partial analysis or summary description. Sutro & Co. has
advised the partnerships that its entire analysis must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its opinion.
Sutro & Co.'s opinion is based upon conditions as of September 23, 1999, the
date of Sutro & Co.'s opinion, and the information made available to Sutro & Co.
as of the date the information made available to Sutro & Co. was prepared.
Sutro & Co.'s opinion does not constitute a recommendation of the
transaction over any alternative transactions which may be possible for the
partnerships and does not address the partnerships' underlying business decision
to effect the proposed transaction. Furthermore, Sutro & Co.'s opinion did not
consider any other aspect of the proposed transaction or any agreements or other
matters, which include, but are not limited to, the terms or fairness of the
compensation and fees as defined in the amended and restated Agreement of
Limited Partnership of America First Real Estate Investment Partners, L.P.
included as Appendix D to this prospectus/consent solicitation statement.
However, while Sutro & Co. did not consider the fairness of the compensation and
fees on a separate and individual basis, it did consider the effects of the fees
payable under the Company's limited partnership agreement in determining the
fairness of the units to be received by BAC holders and the 1% interest in the
Company to be held by its general partners and the allocation of the notes in
the transaction. Sutro & Co. was not asked to opine on and did not express an
opinion as to: (a) the terms of the transaction, (b) the tax consequences of the
transaction to the BAC holders, and (c) the prices at which the company's
securities may trade at in the future.
The partnerships retained Sutro & Co., based upon its experience and
expertise. As part of its investment banking business, Sutro & Co. is regularly
engaged in the evaluation of capital structures, the valuation of businesses and
their securities in connection with mergers and acquisitions, firm commitment
underwriting, secondary distributions of listed and unlisted securities, private
placements, financial restructurings and other financial services. The
partnerships selected Sutro & Co. based on its experience in similar
transactions, its familiarity with the partnerships, its research capabilities,
resources and more competitive fee structure. Sutro & Co. was also selected
because of its reputation in connection with companies involved in real estate
activities and real estate assets. In the course of its business, Sutro & Co.
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and its affiliates may actively trade the securities of America First Real
Estate Investment Partners, L.P. for their own accounts and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. In the past, Sutro & Co. has provided financial advisory and
investment banking services to the partnerships for which services Sutro & Co.
received customary fees.
Except for the assumptions described more fully above, which the
partnerships advised Sutro & Co. that it would be reasonable to make, the
partnerships did not impose conditions or limitations on the scope of Sutro &
Co.'s investigation or the methods and procedures to be followed in rendering
its opinion. There were no factors considered by Sutro & Co. that did not
support their fairness determination with respect to the transaction. The
partnerships have agreed to indemnify Sutro & Co. against some liabilities
arising out of its engagement to prepare and deliver its opinion. Upon
completion of the transaction, such indemnity obligations will be obligations of
the company.
If a material amendment is made to the merger agreement, a revised fairness
opinion will be obtained.
APPRAISALS
GENERAL. Valuation Research was engaged by the partnerships to appraise the
multi-family apartment complexes owned by the partnerships through their
interest in the Operating Partnerships. Valuation Research delivered a written
summary of its analysis, based upon the review, analysis, scope and limitations
described in its written summary, as to the fair market value of these
properties as of December 31, 1998 (the "Appraisals"). The Cap Source General
Partners have relied, in part, upon these Appraisals to determine the ratios for
allocating the units and notes in the transaction. Some of the material
assumptions, qualifications, limitations and methods used in the Appraisals are
described below.
SUMMARY OF METHODOLOGY. Valuation Research evaluated each property based
primarily upon the income approach to valuation. Appraisers typically use up to
three approaches in valuing real property: the cost approach, the direct sales
comparison approach and the income approach. These approaches are based on the
cost to replace assets, market exchanges for comparable properties and the
capitalization of income.
The Appraisals take into account all three methods of valuation. However,
due to the income-producing nature of the properties and current market
conditions, the Appraisals place more emphasis on the income approach and use
the direct sales comparison approach as a check on the reasonableness of the
results obtained using the income approach.
The scope of the Appraisals included an inspection of each property in
December 1997, and an analysis of recent comparable sales and rental rates of
similar property in each of the subject's specific area.
The highest and best use of each property was also considered. Valuation of
a property is based on its most profitable likely use. The highest and best use
is arrived at by testing potential uses of the property, both as improved and as
though vacant, to find the use which meets the following criteria: physically
possible--the uses of vacant land which are possible after considering physical
characteristics of the land; legally permitted--uses that are permissible after
considering local, state and federal regulations and private restrictions;
financially feasible--those uses which are physically possible and legally
permitted which produce a positive return beyond operating expenses, financial
obligations, and capital amortization; and maximum productive use--the use that
is physically possible, legally permitted and financially feasible which
produces the highest price or value, which is the highest and best use.
Valuation Research concluded that the highest and best use of the properties is
for multi-family residential development, which is also the current use of the
properties.
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THE COST APPROACH. The cost approach is a valuation technique that uses the
concept of replacement as a value indicator. Reproduction or replacement cost is
estimated for the property being appraised and is then adjusted for losses in
value, or appraised depreciation, due to a variety of factors. This process
requires valuing the site as if vacant, then adding the replacement cost new of
improvements based upon market derived costs for similarly constructed
properties. Then, accrued depreciation from physical deterioration and
obsolescence of all causes is estimated and subtracted from the replacement cost
new to arrive at the present value.
THE SALES COMPARISON APPROACH. The sales comparison approach is a valuation
technique in which value is estimated on the basis of market prices in actual
transactions. The technique consists of studying available market comparable
information and adjusting for differences. This process is essentially that of
comparison and correlation. Differences always exist between properties even
though they may be almost identical, and therefore adjustments for these
differences must be made. Some adjustments that may prove important are: (1)
conditions of sale, (2) financing terms, (3) market conditions, or time, (4)
location, (5) physical characteristics, and (6) income characteristics. A
minimum of three comparable sales were used to form the basis for estimating the
market value of the subject properties.
THE INCOME APPROACH. The income approach is a valuation technique that
capitalizes the anticipated income stream from the appraised assets. This
approach is predicated on developing either cash flow or income projections,
which are then discounted for risk and time value. Additionally, the present
value of a projected residual value is estimated and added to the present value
of the income stream to derive a total present value.
The income approach attempts to quantify expected, yet uncertain future
benefits. There are two accepted methods of applying the income approach: direct
capitalization and discounted cash flow analysis.
DIRECT CAPITALIZATION APPROACH
The direct capitalization approach is the determination of a proper rental
or revenue value that one would expect to be able to obtain for the subject
property based on actual historical operations and a study of comparable leased
properties with respect to rent levels, location, and amenities offered.
Adjustments are made for differences between the subject and comparable
properties to derive an estimated current economic rent. A similar analysis of
operating expenses aids in constructing an operating statement. The end result
is a net operating income ("NOI") for the first year income that can be
converted into an indicated property value through the overall capitalization
process.
The direct capitalization approach begins with an estimate of the subject's
market rent potential based on an analysis of comparable properties and their
current rental rates and an analysis of the actual rentals in place on the
subject property. The unit of comparison is typically the rent per unit. From
this is deducted an amount estimated to reflect the operating expenses
attributable to the subject property. This operating expense deduction is based
on published market surveys and actual historical data.
To arrive at an appropriate market rent, Valuation Research analyzed several
similar apartments in the immediate area of each subject. Gross potential rent
was derived from the historical revenue trends of the subject property, as well
as from the market surveys mentioned above. The market area for each subject was
also analyzed with respect to current and future apartment rental trends. This
information, taken together with the historical vacancy and collection loss
experience of the subject property based on discussions with the operating
manager and published data, was used to estimate the appropriate vacancy and
collection loss over the projection period.
Effective gross income for each property was estimated based on the
historical income information provided and the market rental information.
Operating expenses were estimated based upon information published by the
Institute of Real Estate Management ("IREM") along with the actual historical
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experience of the subject property. A management fee of 5% of effective gross
income, including miscellaneous income, is generally charged for properties like
the subject properties, and was used most often in Valuation Research's
analysis. A reserve for replacement was also included in the analysis.
Net operating income was calculated by taking potential gross rental income,
less vacancy and collection loss, less operating expenses, less a management fee
and less reserves for replacement. The relationship between NOI and value can be
expressed in its overall rate of return, or capitalization rate. Capitalization
rates were abstracted from market surveys conducted by reputable national firms
for each of the major metropolitan areas in which the subject properties are
located, as well as reports by The National Real Estate Index for the Fourth
Quarter, 1998, KORPACZ REAL ESTATE INVESTOR SURVEY in its Fourth Quarter 1998
report and the American Council of Life Insurance reports. The indicated value
for each property was derived from the NOI for each property divided by the
capitalization rate.
DISCOUNTED CASH FLOW METHOD
The discounted cash flow method has two components. The first component
equals the sum of the present value of cash flows over a selected holding
period. Valuation Research used a ten year holding period in its analysis. The
second component, a residual, equals the present value of a perpetuity paying
income equal to net income in year eleven and capitalized with the appropriate
capitalization rate. The residual reflects the property's ongoing potential
after the tenth year.
The income and expense projections for each property were based on
historical operating data, information provided by local lessors, and published
data sources. Income and expense statements, furnished by the building
management, were reviewed and adjusted, where necessary, to reflect more typical
market expenses as reported by IREM. These operating results were cross-checked
for reasonableness with market information obtained from area lessors, leasing
agents and brokers who also provided data relating to current rental rates,
vacancy levels, and typical lease terms.
The anticipated earnings received in the future must be discounted to a
present value using a discount rate derived from current market rates for
alternative investments. To determine the current discount rate applicable for
real estate investment, Valuation Research reviewed market surveys of large
institutional real estate investors. Using this market derived data, and
adjusting it based on the specific risks involved with investing in each of the
subject properties, a unique discount rate was estimated and used to discount
the projected cash flows to determine an estimated present value for each
property.
53
<PAGE>
CONCLUSIONS AS TO VALUE. Based on the valuation methodology described
above, Valuation Research assigned a value to each individual property as shown
in the following table:
PROPERTY/VALUE RANGE SCHEDULE
<TABLE>
<CAPTION>
CAPITAL SOURCE I VALUE RANGE
- ------------------------------------------ ----------------------------
<S> <C>
Bluff Ridge (108 units) $3,000,000--$3,800,000
Jacksonville, North Carolina
Waterman's Crossing (260 units) $12,750,000--$13,500,000
Newport News, Virginia
Water's Edge (108 units) $5,500,000--$6,500,000
Lake Villa, Illinois
Highland Park (252 units) $9,500,000--$10,500,000
Reynoldsburg, Ohio
Fox Hollow (184 units) $7,150,000--$8,300,000
High Point, North Carolina
Misty Springs (128 units) $4,000,000--$4,750,000
Daytona Beach, Florida
CAPITAL SOURCE II VALUE RANGE
- ------------------------------------------ ----------------------------
Crane's Landing (252 units) $11,500,000--$12,500,000
Winter Park, Florida
Delta Crossing (178 units) $7,500,000--$8,000,000
Charlotte, North Carolina
Monticello (106 units) $6,250,000--$7,200,000
Southfield, Michigan
CAPITAL SOURCE I AND II VALUE RANGE
- ------------------------------------------ ----------------------------
The Ponds at Georgetown (134 units) $7,000,000--$8,500,000
Ann Arbor, Michigan
</TABLE>
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF APPRAISALS. Valuation
Research utilized assumptions to determine the appraised value of the properties
under the income approach. The Appraisals reflect Valuation Research's valuation
of the properties as of December 31, 1998, in the context of information
available on that date. Events occurring after December 31, 1998, and before the
effective date could affect the properties or assumptions used in preparing the
Appraisals. Valuation Research will not deliver any additional written summary
of the analysis.
Financial statements and other related information provided by the Cap
Source General Partners in the course of the investigation was accepted, without
further verification, as fully and correctly reflecting the partnership's
business conditions and operating results for the respective periods, except as
specifically noted in the report. Public information and industry and
statistical information was obtained from sources Valuation Research deemed to
be reliable; however, Valuation Research made no representation as to the
accuracy or completeness of this information, and accepted the information
without further verification.
The conclusions of value are based upon the assumption that the current
level of management expertise and effectiveness would continue to be maintained
and that the character and integrity of the enterprise through any sale,
reorganization, exchange, or diminution of the owners' participation would not
be materially or significantly changed. Valuation Research did not render any
opinion as to title, which was assumed by Valuation Research to be marketable.
The Cap Source General Partners conducted an
54
<PAGE>
independent review of title to the properties. Valuation Research also assumed
that the properties will be responsibly owned and properly maintained.
Valuation Research did not make a land survey of the properties. The
boundaries used in the report were taken from records believed to be accurate.
Valuation Research assumed that there were no hidden or unapparent conditions of
the properties, subsoil, or structures which would render the properties more or
less valuable. Any information furnished by others and included in the Appraisal
report is from sources deemed by Valuation Research to be reliable and believed
to be true and accurate; however, no responsibility was assumed for its
accuracy.
It was assumed that there was full compliance with all applicable federal,
state, and local environmental regulations and laws unless noncompliance was
stated, defined and considered in the appraisal report. Valuation Research is
not an environmental consultant or auditor, and it did not take responsibility
for any actual or potential environmental liabilities. Valuation Research did
not conduct or provide environmental assessments. Valuation Research asked the
managers of the apartment complexes whether they were subject to any present or
future liability relating to environmental matters, including but not limited to
CERCLA/Superfund liability. Valuation Research did not determine independently
whether any of the apartment complexes or their owners were subject to any of
these liabilities, nor the scope of any of these liabilities. The Appraisal did
not take these liabilities into account except as they were reported expressly
to Valuation Research by the managers of the apartment complexes, and then only
to the extent that the liability was reported to Valuation Research in an actual
or estimated dollar amount. These matters are noted in the report. To the extent
the information was reported, Valuation Research relied on it without
verification and offered no warranty or representation as to its accuracy or
completeness.
It was assumed that all applicable zoning and use regulations and
restrictions were complied with, unless a nonconformity was stated, defined, and
considered in the appraisal report. It was also assumed that all required
licenses, certificates of occupancy, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity or organization was or could be obtained or renewed for any use
on which the value estimate contained in the appraisal report is based.
Valuation Research did not make a specific compliance survey or analysis of
the subject properties to determine whether they were subject to or in
compliance with the ADA and the opinion did not consider the impact, if any, of
noncompliance in estimating the value of the property. Finally, Valuation
Research did not investigate the year 2000 compliance of the management or
ownership of the properties or the compliance of their customers or suppliers
and the effect, if any, that the year 2000 issue might have on these entities.
SUMMARY OF VALUATION RESEARCH ASSUMPTIONS
<TABLE>
<CAPTION>
REVENUE EXPENSE
GROWTH GROWTH CURRENT YEAR
PROPERTY RATE RATE CAPITALIZATION RATE
- -------------------------------------------------------------------------- ------------- ------------- ---------------------
<S> <C> <C> <C>
Bluff Ridge............................................................... 3.5% 3.0% 9.75%
Waterman's Crossing....................................................... 3.0 2.0 9.25
Misty Springs............................................................. 3.0 3.0 9.50
Waters Edge............................................................... 3.0 3.0 9.25
Highland Park............................................................. 2.5 3.5 9.50
Ponds at Georgetown....................................................... 2.5 2.5 9.25
Crane's Landing........................................................... 3.0 3.0 9.25
Delta Crossing............................................................ 2.5 3.0 9.00
Monticello................................................................ 3.0 2.5 9.00
Fox Hollow................................................................ 3.0 3.0 9.75
</TABLE>
55
<PAGE>
COMPENSATION AND MATERIAL RELATIONSHIPS
Neither Valuation Research, Sutro & Co. nor any of their employees have a
present or intended material financial interest in the company, the partnerships
or the properties, nor has there been a material relationship between Valuation
Research or Sutro & Co. or any of their respective affiliates and the company,
the partnerships, the Cap Source General Partners or any of their respective
affiliates during the past two years.
The partnerships paid Valuation Research aggregate fees of $100,000 plus
expenses to prepare the Appraisals. The partnerships paid Sutro & Co. a fee of
$250,000 plus expenses to deliver the fairness opinion. The fees paid to Sutro &
Co. in connection with its delivery of the fairness opinion and the fees paid to
Valuation Research in connection with the preparation of the Appraisals were
determined through arm's-length negotiations between the Cap Source General
Partners and Sutro & Co. or Valuation Research, respectively. A copy of the
fairness opinion is included as Appendix B to this prospectus/consent
solicitation statement. Investors may obtain a copy of the Appraisal reports
prepared by Valuation Research upon written request directed to: America First
Investor Services Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska
68102.
EXCHANGE VALUES
Investors in the partnerships will receive units or notes based upon an
exchange value described below. The exchange values were determined by the Cap
Source General Partners.
The exchange values are based upon (1) the principal amount of GNMA
Certificates and the FHA Loans as shown in the partnership's audited financial
statements for the period ended December 31, 1998, (2) the value of the
partnership's limited partner interests in the Operating Partnerships, and (3)
the market value of the partnerships' remaining net assets as shown in the
partnerships' audited financial statements for the period ended December 31,
1998.
To determine the value of each partnership's limited partner interest in an
Operating Partnership, the Cap Source General Partners started with the values
provided by Valuation Research in its Appraisal of the Operating Partnership's
properties using the direct capitalization approach, then deducting 4% of these
values to account for the costs of sales of the properties. See "APPRAISALS."
The liabilities of the Operating Partnership, including amounts required to pay
off the insured mortgage on the property and amounts owed to the general partner
of the Operating Partnership, were then subtracted from the mean value. The net
value after these adjustments was then apportioned among the general partner and
limited partners of the Operating Partnership according to each Operating
Partnership's limited partnership agreement. In valuing the Operating
Partnerships, the Cap Source General Partners did not take into account amounts
that may be payable by some of the Operating Partnerships to affiliates of the
Cap Source General Partners that will be waived if the transaction is completed.
See "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION--Reasons for,
and Benefits of, the Transaction--WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL
PARTNERS OF AMOUNTS POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS."
The exchange values were determined as of December 31, 1998. As of the date
of this prospectus/ consent solicitation statement, the Cap Source General
Partners and the General Partner of the company do not know of any material
change in the partnerships which would affect the exchange values.
The following tables show the exchange values attributable to the
partnerships for purposes of the transaction, as well as the allocation of units
based on the exchange values. The tables assume that no notes are issued in
connection with the transaction.
56
<PAGE>
EXCHANGE VALUES
FOR ALLOCATION OF UNITS
<TABLE>
<CAPTION>
TOTAL NUMBER
TOTAL INVESTOR OF UNITS PERCENT OF
EXCHANGE VALUE EXCHANGE VALUE(1) TO INVESTORS TOTAL UNITS
-------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
PARTNERSHIPS
Cap Source I..................................... $ 47,569,968 $ 47,094,268 4,709,427 60.6%
Cap Source II.................................... 30,872,167 30,563,445 3,056,345 39.4
-------------- ----------------- ------------- -----
Total.......................................... $ 78,442,135 $ 77,657,713 7,765,772 100.0%
-------------- ----------------- ------------- -----
-------------- ----------------- ------------- -----
</TABLE>
<TABLE>
<CAPTION>
PER $1,000
ORIGINAL INVESTMENT BY INVESTORS
--------------------------------------
INVESTOR
EXCHANGE VALUE(1) NUMBER OF UNITS
------------------- -----------------
<S> <C> <C>
PARTNERSHIPS
Cap Source I............................................................... $ 698 69.79
Cap Source II.............................................................. $ 381 38.10
</TABLE>
- ------------
(1) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that the General Partner will hold a 1% interest
in the company as its general partner.
CALCULATION OF EXCHANGE VALUES. The following table shows the components of
the exchange values for the partnerships.
CALCULATION OF EXCHANGE VALUES
<TABLE>
<CAPTION>
GNMA NET OTHER
CERTIFICATES PARTNERSHIP ASSETS TOTAL
AND MORTGAGE EQUITY AND EXCHANGE
LOANS(1) INTERESTS(2) LIABILITIES VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cap Source I........................................... $ 35,023,246 $ 3,194,941 $ 9,351,781 $ 47,569,968
Cap Source II.......................................... 27,044,343 3,809,948 17,876 30,872,167
</TABLE>
- ------------
(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balances as of December 31, 1998.
(2) Partnership equity interests are derived by using the value of the
properties as determined by the Appraisals using the direct capitalization
approach then deducting 4% of these values to account for the costs of sales
of these properties, then subtracting the current principal balances of the
mortgages, then allocating the remaining proceeds, if any, according to the
limited partnership agreements.
NET OTHER ASSETS AND LIABILITIES TABLE. The following table shows the
components of net other assets and liabilities.
NET OTHER ASSETS AND LIABILITIES TABLE
FOR PARTNERSHIPS
<TABLE>
<CAPTION>
NET OTHER
CASH & CASH MISC. GNMA ASSETS & DISTRIBUTIONS
EQUIVALENTS CERTIFICATES(1) LIABILITIES(2) PAYABLE TOTAL
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cap Source I............................. $9,304,694 $ 879,182 $ 28,502 $ (860,597) $ 9,351,781
Cap Source II............................ 432,999 0 (111,252) (303,871) 17,876
</TABLE>
- ------------
(1) These assets are classified for reporting purposes as "available for sale"
and, are therefore reported at fair value.
(2) Generally, interest receivable less accounts payable.
57
<PAGE>
COMPARISON OF BACS AND UNITS
BUSINESS
THE PARTNERSHIPS. The partnership agreements limit the business of the
partnerships to originating, acquiring, holding, selling, disposing of and
otherwise dealing with insured mortgages on multi-family rental housing
complexes and to acquiring, holding, selling, disposing of and otherwise dealing
with limited partnership interests in operating partnerships which construct and
operate multi-family rental housing complexes. The partnership agreements do not
permit the partnerships to raise new capital.
THE COMPANY. The company will make equity investments primarily in
multifamily residential properties. The company's limited partnership agreement
will permit the company to borrow funds and raise new capital.
DURATION OF EXISTENCE
THE PARTNERSHIPS. The partnership agreements provide that the partnerships
may exist for terms ranging up to 45 to 49 years and that the partnerships have
a limited existence. In furtherance of this objective, the partnership
agreements generally provide that the proceeds from the sale, financing,
refinancing or other disposition of any property owned by the partnerships will
not be reinvested but will be distributed to the investors to the extent the
proceeds exceed the partnerships' other cash requirements.
THE COMPANY. The company's limited partnership agreement provides that the
company may exist for a term up to 40 years. The company may, however, reinvest
funds from the sale, financing, refinancing or other disposition of property
owned by the company. The company may also invest cash flow from operations in
real estate assets.
INVESTMENT OBJECTIVES AND POLICIES
THE PARTNERSHIPS. The principal investment objectives of the partnerships
are substantially the same: to preserve invested capital, to maximize the
potential for appreciation in property values and to provide for partially tax
deferred cash distributions throughout a finite life. Under the partnership
agreements, the partnerships are not permitted to reinvest cash from sales in
new properties, except in limited circumstances. The partnerships will
automatically dissolve in 2030, for Cap Source I and 2035, for Cap Source II,
unless dissolved earlier. The partnerships have no present intention to
liquidate or to sell or finance their properties.
THE COMPANY. The company's investment objectives will be to provide
unitholders with increased distributions, enhanced liquidity and an increase in
net asset value, which are similar to those of the partnerships. However, the
company will be permitted to reinvest cash from sales in new properties. The
company will dissolve in 2039, unless dissolved earlier.
BORROWING POLICIES
THE PARTNERSHIPS. The partnerships are not authorized to incur borrowings
or are restricted in the amount and nature of borrowings. The partnerships do
not incur borrowings in the ordinary course of business.
THE COMPANY. The company is not restricted in the amount and nature of the
funds it can borrow, except as provided in the indenture. See "THE
NOTES--Notes--Limitation on Indebtedness."
MANAGEMENT
THE PARTNERSHIPS. The partnerships are managed by the Cap Source General
Partners, which have exclusive authority over the partnerships' operations, with
some limitations contained in the partnership agreements. Under Delaware law,
the Cap Source General Partners are accountable to the partnerships and the
limited partners. Under the partnership agreements, the limited partners may not
participate in the control of the business of the partnerships. The Cap Source
General Partners have general liability for
58
<PAGE>
all partnership obligations. The partnership agreements provide generally that
the Cap Source General Partners are indemnified from losses relating to acts
performed or omitted to be performed in good faith and in the best interests of
the partnerships, provided the conduct did not constitute negligence, misconduct
or a breach of a duty under the partnership agreements. The Cap Source General
Partners may be removed by a vote of a majority of partnership interests in the
respective partnerships.
THE COMPANY. The company will be managed by the General Partner, which will
have exclusive authority over the company's operations, with some limitations
contained in the company's limited partnership agreement. Under Delaware law,
the General Partner is accountable to the company and the unitholders. Under the
company's limited partnership agreement, the unitholders may not participate in
the control of the business of the company. The General Partner has general
liability for all partnership obligations. The company's limited partnership
agreement provides generally that the General Partner is indemnified from losses
relating to acts performed or omitted to be performed in good faith and in the
best interests of the company, provided the conduct did not constitute fraud,
gross negligence, willful misconduct or a breach of duty under the company's
limited partnership agreement. The General Partner may be removed by a vote of a
majority of the limited partner interests in the company. If the General Partner
is removed without cause, the General Partner is entitled to receive termination
fees. See "--Compensation, Fees and Expenses--THE COMPANY."
COMPENSATION, FEES AND EXPENSES
THE PARTNERSHIPS.
CASH DISTRIBUTIONS
The partnership agreements generally provide that the Cap Source General
Partners are entitled to an amount not to exceed 1% of cash distributions in
each year.
ASSET MANAGEMENT COMPENSATION
The Cap Source I General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, payable only during years that an 8% return has been paid to
investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to Cap Source I investors has been paid
on a cumulative basis and investors have received the return of their capital
contributions. The Cap Source II General Partners are entitled to receive an
asset management and partnership administrative fee equal to 0.5% of invested
assets per annum, the first $50,000 of which is paid each year with the balance
payable only during years that a 6.5% annual return has been paid to Cap Source
II investors on a noncumulative basis. An additional fee of 0.5% of invested
assets will be paid in years that an 11.5% annual return has been paid to Cap
Source II investors on a cumulative basis. Any unpaid amounts will accrue and be
payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. The Cap Source General Partners also receive 1% of the net
proceeds from any sale of partnership assets. The Cap Source General Partners
will receive a termination fee equal to 3% of all sales proceeds less actual
costs incurred in connection with all sales transactions, payable only after the
investors have received a return of their capital contributions and a 13% annual
return on a cumulative basis with respect to Cap Source I or an 11.5% annual
return on a cumulative basis with respect to Cap Source II. The Cap Source
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds, after deducting from cash available or sales
proceeds any termination fee paid therefrom, after investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis with respect to Cap Source I or an 11.5% annual return on a cumulative
basis with respect to Cap Source II.
REIMBURSEMENT OF EXPENSES
The partnership agreements provide that all of the partnerships' expenses,
including legal, auditing and accounting expenses, will be billed directly to
and paid by the partnerships. Under the partnership agreements, the Cap Source
General Partners are reimbursed for their expenses for services performed for
the partnerships, for example, legal, accounting, transfer agent, data
processing and duplicating services.
59
<PAGE>
THE COMPANY.
CASH DISTRIBUTIONS
The company's limited partnership agreement generally provides that the
General Partner is entitled to an amount not to exceed 1% of cash distributions
in each year.
ASSET MANAGEMENT COMPENSATION
The General Partner will be paid a property acquisition fee in an amount
equal to 1.25% of the aggregate purchase price paid by the company for the
properties. The General Partner will also be paid an administrative fee each
month in an amount equal to 0.5%, on an annual basis, of the sum of (1) the fair
market value on the merger date of the partnerships' assets that are then still
owned by the company, plus (2) the purchase price paid by the company for new
assets acquired after the merger date that are then still owned by the company.
The first $100,000 of the administrative fee shall be payable each year, with
the balance payable only during years that funds from operations ("FFO"),
calculated before administrative fees, exceeds 7% of the unit holders' average
capital for that year. FFO represents net income or loss, computed in accordance
with GAAP, excluding gains or losses from debt restructuring and sales of
properties, plus real estate-related depreciation and amortization, excluding
amortization of deferred financing costs and depreciation of non-real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures.
REIMBURSEMENT OF EXPENSES
The company's limited partnership agreement provides that all of the
company's expenses, including legal, auditing and accounting expenses, may be
billed directly to and paid by the company, the General Partner or America First
Companies. Under the company's limited partnership agreement, the General
Partner and America First Companies are reimbursed for some of their expenses
for services performed for the company, for example, legal, accounting, transfer
agent, data processing and duplicating services. The General Partner and America
First Companies will also be reimbursed for an allocable portion of the salaries
and fringe benefits of their employees who provide services for the company. In
addition, the company will reimburse the General Partner and America First
Companies for all costs associated with the evaluation of potential new assets
acquired by the company, insurance premiums, the cost of compliance with all
state and federal regulatory requirements, securities exchange or NASDAQ listing
fees and charges or payments to third parties for services rendered to the
company.
TERMINATION COMPENSATION
The company's limited partnership agreement provides that if the General
Partner is removed without cause, the successor general partner, or the company,
if it so elects, will have the obligation to purchase the partnership interest
of the General Partner for fair market value unless the General Partner elects
to convert its interest. The fair market value is to be equal to the sum of (1)
the present value of all future asset management fees and net operating income
which would be paid to the General Partner if the removal had not occurred and
(2) the amount the General Partner would receive upon dissolution and winding up
of the company, assuming that the dissolution or winding up occurred on the date
of removal and the assets of the company were sold for their then fair market
value.
VOTING RIGHTS
THE PARTNERSHIPS. The investors are entitled to vote only as provided under
the Delaware Partnership Law and the respective partnership agreements.
Generally, an investor may vote on: (1) material amendments to the partnership
agreement; (2) the approval of the disposition of substantially all of the
partnership's assets; (3) an election to dissolve the partnership; (4) the
determination to remove the general partner; (5) the approval of the partnership
incurring material additional amounts of indebtedness;
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<PAGE>
(6) the determination to terminate a contract between the partnership and the
general partner or one of their affiliates; and (7) the approval of a successor
general partner. Under the Delaware Partnership Law and the partnership
agreements, decisions relating to the operation and management of the
partnerships are made by the general partners of each partnership. There are no
provisions for annual meetings of investors in the partnership agreements. If a
limited partner were granted additional voting rights, the possibility exists
under the Code that the partnership structure and the terms of the applicable
partnership agreement would be disregarded. In which case, the partnership may
be taxed as an association for tax purposes and thus would be incur double
taxation similar to a corporation.
THE COMPANY. The unitholders will be entitled to vote only as provided
under the Delaware Partnership Law and the company's limited partnership
agreement. Generally, a unitholder may vote on: (1) material amendments to the
company's limited partnership agreement; (2) the determination to remove the
General Partner; (3) the approval of a successor General Partner; and (4) the
determination to dissolve the company. Under the Delaware Partnership Law and
the company's limited partnership agreement, decisions relating to the operation
and management of the company are made by the General Partner. There are no
provisions for annual meetings of unitholders in the company's limited
partnership agreement. If a limited partner were granted additional voting
rights, the possibility exists under the Code that the partnership structure and
the terms of the company's limited partnership agreement would be disregarded.
In which case, the company may be taxed as an association for tax purposes and
thus would incur double taxation similar to a corporation.
THE COMPANY
OVERVIEW
The company was formed under the laws of the State of Delaware on June 18,
1999, for the purpose of acquiring, holding, operating, selling and otherwise
dealing primarily with multifamily residential properties, including the
acquisition of debt and equity securities of entities engaged in similar
activities. As a result of the transaction, the company will succeed to the
assets and liabilities of the partnerships.
Following the transaction, the company's primary business objective will be
to provide unitholders with increased distributions, an increase in net asset
value and to increase the liquidity and market value of the units. The company
expects to achieve this objective by listing the units on NASDAQ and by making
primarily equity investments in multifamily residential properties. There can be
no assurance, however, that the company's business objectives will be met.
In connection with the transaction, the partnerships' assets will be
transferred to the company. The company will also have the ability to acquire
additional multifamily residential properties. The company will have the ability
to more actively manage the makeup of its real estate portfolio as compared to
the partnerships. The company's investment strategy will be funded initially
from available cash and short-term investments and from (1) borrowing against or
sale of the existing properties, (2) borrowing against or sale of the GNMA
certificates and the FHA loans, and (3) borrowing against the additional
properties acquired by the company following the transaction. The company may
also use additional sources of financing, both debt and equity, to further its
business objectives and investment strategies.
The principal executive offices of the company are located at 1004 Farnam
Street, Suite 400, Omaha, Nebraska 68102, and its telephone number is (402)
444-1630.
THE GENERAL PARTNER
The company will be managed by its general partner. The General Partner,
America First Capital Source I L.L.C., is a Delaware limited liability company
that was originally organized as a corporation under the laws of the State of
Delaware on July 22, 1985, to serve as a general partner of Cap Source I. In
connection with the transaction, Insured Mortgage Equities II L.P., a Cap Source
II General Partner, will
61
<PAGE>
sell its general partner interest in Cap Source II to the other Cap Source II
General Partner, America First Capital Source II L.L.C. Then, America First
Capital Source II L.L.C. and the Cap Source I General Partners will be merged
together with the General Partner being the surviving entity. In return for
providing services to the company, the General Partner will be entitled to
receive management and acquisition fees as provided in the company's limited
partnership agreement. See "COMPARISON OF BACS AND UNITS--Compensation, Fees and
Expenses--THE COMPANY." Cap Source II investors voting in favor of the
transaction will also be deemed to have consented to the sale of Insured
Mortgage Equities II L.P.'s general partner interest in Cap Source II to America
First Capital Source II L.L.C.
To estimate the fees payable to the General Partner during the initial years
of operations of the company, the Cap Source General Partners made the following
assumptions: (1) the beginning base of assets upon which the Asset Management
Fee is computed is $78,442,000, which is approximately equal to the total
exchange value, (2) the company will initially have $40,000,000 available to
invest from internal sources including borrowing secured by the GNMA
Certificates and FHA Loans, (3) no other source of cash is available for
investment and all cash flows generated by the investments are distributed to
unitholders in the form of distributions, (4) the company will invest
$30,000,000 each year for a two year total of $60,000,000, (5) all of the
amounts invested will be on a leveraged basis using 50% leverage, (6) total
assets at the end of year 1 are $108,000,000, (7) total assets at the end of
year 2 are $138,000,000, (8) no assets are sold, (9) there is no appreciation or
depreciation of asset values, and (10) reimbursable expenses remain constant and
are 25% less than the historical reimbursements in 1998 due to consolidation of
management and administration of the partnerships. The following table shows the
estimated fees and reimbursements payable to the General Partner for the first
two years of operations of the company based solely upon the above assumptions.
ESTIMATED FEES AND REIMBURSEMENTS PAYABLE TO THE GENERAL PARTNER(1)
<TABLE>
<CAPTION>
YEAR 1 YEAR 2
------------ ------------
<S> <C> <C>
Administrative Fee................................................ $ 465,000 $ 615,000
Acquisition Fee................................................... 375,000 375,000
Reimbursement of Expenses......................................... 440,000 440,000
------------ ------------
Total............................................................. $ 1,280,000 $ 1,430,000
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) These fees are estimates based solely on the assumptions made by the Cap
Source General Partners listed above. There can be no assurance that the
fees payable to the General Partner will not be greater than these
estimates. The General Partner will also be entitled to receive 1% of the
cash distributions of the company in accordance with the company's limited
partnership agreement. This table does not include an estimate of these
amounts because the Cap Source General Partners believe that estimating and
quantifying future cash flows and distributions would require numerous
assumptions and be misleading to investors.
For a description of the fee structure of the General Partner see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE COMPANY."
The General Partner will not receive any units or other compensation in
connection with the transaction.
Under the terms of the company's limited partnership agreement, the General
Partner will manage the investments of the company, formulate investment
criteria, represent the company in connection with the acquisition and
disposition of real estate assets, develop and implement strategies to improve
the performance of the company's investments, administer the day-to-day
operation of the company, communicate with and maintain relations with the
investors of the company, and perform other services as contemplated by the
company's limited partnership agreement. The company's limited partnership
agreement provides that the General Partner will receive compensation in the
form of an Acquisition Fee and an
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Asset Management Fee, as more particularly described under "COMPARISON OF BACS
AND UNITS--Compensation, Fees and Expenses--THE COMPANY." The General Partner
may engage its affiliates to provide other services to the company, as provided
in the company's limited partnership agreement.
INVESTMENT STRATEGY
In furtherance of its business objectives, the company intends to acquire
additional multifamily residential properties. The company will only acquire a
multifamily residential property if there is a positive spread between the
current net rental revenue being generated by the property and the interest
payments that the company will incur on the mortgage issued to finance the
acquisition of the property. In addition, the company will authorize the General
Partner to take other steps to create a larger and more homogeneous asset base
which the General Partner believes will be more attractive to potential buyers
and which may provide unitholders with a greater potential for appreciation in
the value of their units.
The company will focus its acquisition efforts on established multifamily
properties in stable markets. In particular, the company will seek out
properties that it believes have the potential for increased revenues through
more effective management. In connection with each potential property
acquisition, the company will review many factors, including the following: (1)
the location of the property; (2) the construction quality, condition and design
of the property; (3) the current and projected cash flow generated by the
property and the potential to increase cash flow through more effective
management; (4) the potential for capital appreciation of the property; (5) the
potential for rental rate increases; (6) the economic situation and any
potential changes in the economic situation in the community in which the
property is located; (7) the occupancy and rental rates at competing properties;
and (8) the potential for liquidity through financing or refinancing of the
property or the ultimate sale of the property.
The company intends to hold and operate its properties as long-term
investments. In that regard, the company's business strategies are to (1)
maintain high occupancy and increase rental rates through effective leasing,
reducing turnover rates and providing quality maintenance and services to
maximize resident satisfaction, (2) manage operating expenses and achieve cost
reductions through operating efficiencies and economies of scale generally
inherent in the management of a portfolio of multiple properties, and (3)
emphasize regular programs of repairs, maintenance and property improvements to
enhance the competitive advantage and value of its properties in their
respective market areas.
After the transaction, the company will own limited partner interests in ten
limited partnerships owning multifamily properties. The company will conduct a
detailed evaluation of each of the properties to determine the best strategy to
maximize their value to the company. These strategies could include
rehabilitation, refinancing and disposition. Those efforts may be adversely
impacted by the fact that the company has limited control over most of the
partnerships. Consequently, the company will evaluate purchasing the interest of
the existing general partner interests to permit it to control the properties
and maximize their value to the company.
FINANCING STRATEGIES
The company intends to fund its new investments first by using its initial
cash and short-term investments, which are expected to be approximately $10
million at the completion of the transaction. Thereafter the company intends to
(1) borrow against or sell the existing properties, (2) borrow against or sell
the GNMA certificates and FHA loans by entering into "reverse repo agreements",
and (3) borrow against the additional properties acquired by the company
following the transaction.
The company will also consider entering into a line-of-credit or similar
corporate financing agreement, the issuance of additional securities either
directly in the market or to sellers of assets, or other ways to meet its
investment objectives.
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OPERATING RESTRICTIONS
The company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts, among other possible exemptions, entities that
are "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interest in real estate" (these mortgages and
liens being referred to as "Qualifying Interests"). Under current interpretation
of the staff of the Commission, to qualify for this exemption, the company must
maintain at least 55% of its assets directly in Qualifying Interests. In
addition, unless securities relating to federally insured mortgages ("Mortgage
Securities") represent all the certificates issued with respect to an underlying
pool of mortgages, these Mortgage Securities may be treated as securities
separate from the underlying mortgage loans and, thus, may not be considered
Qualifying Interests for purposes of the 55% requirement. The company will
closely monitor its compliance with this requirement and intends to maintain its
exempt status.
Except as provided under "THE NOTES," the company will have no restriction
on the ratio of debt to equity investments it holds and expects to use leverage
to achieve its objective. This leverage can be achieved by a combination of
direct borrowings by the company, borrowings secured by real estate, and through
investing in securities of issuers who themselves employ leverage.
DISTRIBUTION POLICY
The company intends to pay regular quarterly distributions to unit holders,
beginning with the first full fiscal quarter of operations following the
completion of the transaction. The company initially intends to distribute
substantially all of its net cash flow from operations, after giving effect to
any reasonable reserves. The company may, in its discretion, re-invest a portion
or all of net cash flow in accordance with its investment objectives, which may
cause distributions to the unit holders to be reduced. The company anticipates
that the initial level of distributions will be approximately $.72 per unit
annually. A portion of this amount may include a return of capital. The actual
amount of distributions may vary significantly from this level depending on
numerous factors like economic conditions or a change in the company's
distribution policy. The General Partner, in its sole discretion, may change the
company's distribution policy at any time.
POLICY WITH RESPECT TO CERTAIN ACTIVITIES
Other than the restrictions and policies in the company's limited
partnership agreement, the company does not have any policies or limitations
with respect to the following activities: (1) issuing senior securities, (2)
borrowing money, (3) making loans to other persons, (4) engaging in the purchase
and sale, or turnover, of investments, (5) offering securities in exchange for
property, and (6) repurchasing or otherwise reacquiring the company's own units
or other securities. In addition, the company does not have a specific policy
with regard to the amount of the company's assets that may be invested in any
particular type of investment or any one investment. The company does not plan
to invest in the securities of other issuers for the purpose of exercising
control or plan to underwrite securities of other issuers.
MANAGEMENT OF THE GENERAL PARTNER
GENERAL
Under the terms of the company's limited partnership agreement, the General
Partner is responsible for the management of the company and the management and
disposition of its property, and is responsible for the general supervision of
the company's activities. The General Partner will be managed by its sole
member, America First Companies L.L.C. Therefore, the General Partner will not
have any
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directors, officers or employees. The following individuals are managers and
executive officers of America First Companies and each serves for a term of one
year:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE GENERAL PARTNER
- ----------------------------------------- --- --------------------------------------------
<S> <C> <C>
Michael B. Yanney........................ 65 Chairman of the Board, President, Chief
Executive Officer and Manager
Michael Thesing.......................... 44 Vice President, Secretary, Treasurer and
Manager
William S. Carter, M.D................... 72 Manager
Martin A. Massengale..................... 65 Manager
Alan Baer................................ 76 Manager
Gail Walling Yanney...................... 62 Manager
Mariann Byerwalter....................... 38 Manager
</TABLE>
The business experience during the past five (5) years of each of the
current managers and executive officers is as follows:
MICHAEL B. YANNEY, Chairman, America First Companies, L.L.C. Since 1984, Mr.
Yanney has served as the Chairman and Chief Executive Officer of America First
Companies L.L.C. and its predecessors. America First Companies is a financial
services firm located in Omaha, Nebraska, that manages public investment funds
which have raised over $1.5 billion. Mr. Yanney has been Chairman of the general
partner of a number of publicly traded master limited partnerships including
America First Guaranteed Mortgage Funds I and II; America First Tax Exempt
Mortgage Funds I and II; America First Participating/ Preferred Equity Mortgage
Fund and America First PREP Fund 2; and America First Financial Fund 1987-A. He
currently serves as Chairman of the general partner of America First Apartment
Investors, L.P., America First Tax Exempt Investors, L.P., and of America First
Capital Source Funds I and II. He also serves as Chairman of the board of
advisors for America First Mortgage Investments, Inc. Mr. Yanney formed, and
serves as Chairman of the management companies of three private limited
partnerships, Agribusiness Partners International, L.P.; Rosewood Communities,
L.P. and The Linden Fund L.P. Mr. Yanney also serves as a member of the boards
of directors of Burlington Northern Santa Fe Corporation, Level 3
Communications, Inc., Forest Oil Corporation, RCN Corp., and Freedom
Communications, Inc.
MICHAEL THESING has been Vice President and Chief Financial Officer of
affiliates of America First Companies since July 1984. He serves as President of
America First Investment Advisors L.L.C. and is a member of the Board of
Managers of America First Companies. From January 1984 until July 1984 he was
employed by various companies controlled by Mr. Yanney. He was a certified
public accountant with Coopers & Lybrand from 1977 through 1983.
WILLIAM S. CARTER, M.D., has been a member of the Board of Managers of
America First Companies since 1994. Dr. Carter is a retired physician. Dr.
Carter practiced medicine for 30 years in Omaha, Nebraska, specializing in
otolaryngology, or disorders of the ears, nose and throat.
MARTIN A. MASSENGALE has been a member of the Board of Mangers of America
First Companies since 1994. Dr. Massengale is President Emeritus of the
University of Nebraska, Director of the Center for Grassland Studies and
Foundation Distinguished Professor. Prior to becoming President in 1991, he
served as Interim President from 1989, as Chancellor of the University of
Nebraska Lincoln from 1981 until 1990 and as Vice Chancellor for Agriculture and
Natural Resources from 1976 to 1981. Prior to that time, he was a professor and
associate dean of the College of Agriculture at the University of Arizona. Dr.
Massengale currently serves on the board of directors of Woodmen Accident & Life
Insurance Company and IBP, Inc. and is a member of the Board of Trustees of the
Great Plains Funds, Inc.
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ALAN BAER has been a member of the Board of Mangers of America First
Companies since 1994. Mr. Baer is presently Chairman of Alan Baer & Associates,
Inc., a management company located in Omaha, Nebraska. He is also Chairman of
Lancer Hockey, Inc., Baer Travel Services, Wessan Telemarketing, Total Security
Systems, Inc. and several other businesses. Mr. Baer is the former Chairman and
Chief Executive Officer of the Brandeis Department Store chain which, before its
acquisition, was one of the larger retailers in the Midwest. Mr. Baer has also
owned and served on the board of directors of several banks in Nebraska and
Illinois.
GAIL WALLING YANNEY has been a member of the Board of Mangers of America
First Companies since 1996. Dr. Walling is a retired physician. Dr. Walling
practiced anesthesia and was most recently the Executive Director of the
Clarkson Foundation until October of 1995. In addition, she was a director of
FirsTier Bank, N.A., Omaha prior to its merger with First Bank, N.A. Dr. Walling
is the wife of Michael B. Yanney.
MARIANN BYERWALTER has been a member of the Board of Mangers of America
First Companies since 1997. Ms. Byerwalter is Vice President of Business Affairs
and Chief Financial Officer of Stanford University. Ms. Byerwalter was Executive
Vice President of America First Eureka Holdings, Inc. ("AFEH") and EurekaBank
from 1988 to January 1996. Ms. Byerwalter was Chief Financial Officer and Chief
Operating Officer of AFEH, and Chief Financial Officer of EurekaBank from 1993
to January 1996. She was an officer of BankAmerica Corporation and its venture
capital subsidiary from 1984 to 1987. She served as Vice President and Executive
Assistant to the President of Bank of America and was a Vice President in the
bank's Corporate Planning and Development Department. Ms. Byerwalter currently
serves on the board of directors of Redwood Trust, Inc.
There are no arrangements or understandings between or among any of the
officers or managers and any other person pursuant to which any officer or
manager of America First Companies was selected as an officer or manager. Except
for Michael B. Yanney and Gail Walling Yanney, there are no family relationships
among any managers and officers of America First Companies.
A significant employee of the company will be its portfolio manager. The
portfolio manager will be responsible for identifying, evaluating and acquiring
additional properties for the company. The company's current portfolio manager
is Mr. Joseph N. Grego.
Mr. Grego, 52, has been employed by America First Companies since 1989 and
is responsible for the acquisition and management of various real estate and
mortgage investments, including office, apartment and retirement properties.
From 1980 to 1989, Mr. Grego held several positions with E.F. Hutton and
Shearson Lehman Hutton, including president and director of Hutton Real Estate
Services, Inc., where he was responsible for the asset management of 74
properties nationwide consisting of 3.6 million square feet of commercial real
estate and 8,300 apartment units. From 1974 to 1980 Mr. Grego held positions
with Levitt Corporation and Cavanaugh Communities Corporation, both real estate
development companies.
The company will reimburse the General Partner for an allocable portion of
the salaries and fringe benefits of employees of the General Partner's
affiliates. For a description of other expenses of the General Partner that will
be reimbursed by the company see "COMPARISON OF BACS AND UNITS-- Compensation,
Fees and Expenses--THE COMPANY."
INDEMNIFICATION
Subject to applicable law, the company's limited partnership agreement
requires the company to indemnify the General Partner against judgments, costs
and attorney's fees and amounts expended in settlement of any claims of
liability, loss or damage, to which the General Partner was made a party by
reason of being or having been the General Partner, provided that the General
Partner's conduct did not constitute fraud, gross negligence, willful misconduct
or breach of duty under the company's limited partnership agreement.
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PRIOR PARTNERSHIPS
America First Companies, an affiliate of the Cap Source General Partners,
has formed eleven prior public limited partnerships since 1984. These prior
public partnerships have raised approximately $1.3 billion in capital, from
approximately 93,000 investors. Three of the prior public partnerships were
merged with and into a newly formed corporation. Only four of the other prior
programs continue in existence. Although none of these prior public partnerships
had investment objectives similar to those of the company, some of the prior
public partnerships did invest in designated classes of real estate assets. See
"Appendix C" for detailed information about the performance of seven of these
prior public partnerships that invested in real estate assets. Information was
not provided regarding income tax because there have been substantial changes in
the tax laws during the period for which the information was presented. Prior
performance information was not included for four of the public programs because
those programs did not invest in real estate. In addition, information has not
been provided for prior programs that were not public. The eleven prior public
limited partnerships formed by America First Companies are:
AMERICA FIRST FEDERALLY GUARANTEED MORTGAGE FUND LIMITED PARTNERSHIP
("AFFGMF") commenced its offering in November 1984 and closed in January 1985,
and raised $200 million from approximately 11,000 investors. The purpose of this
partnership was to acquire "deep discount" FHA-insured mortgage loans on
multifamily housing projects. This partnership ceased operations and was
liquidated in 1986.
AMERICA FIRST FEDERALLY GUARANTEED MORTGAGE FUND 2 LIMITED PARTNERSHIP
("AFFGMF2") commenced its offering in April 1985 and closed in October 1985, and
raised approximately $200 million with sales to approximately 14,000 investors.
The purpose of this partnership was to acquire "deep discount" FHA-insured
mortgage loans on multifamily housing projects. This partnership ceased
operations and was liquidated in 1992.
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP ("AFTEMF")
commenced its offering in October 1985 and closed in December 1985, and raised
approximately $200 million with sales to approximately 10,000 investors. The
purpose of this partnership was to acquire tax-exempt mortgages on multifamily
housing projects.
AMERICA FIRST TAX EXEMPT MORTGAGE FUND 2 LIMITED PARTNERSHIP ("AFTEMF2")
commenced its offering in September 1986 and closed in October 1986, and raised
$105 million with sales to approximately 5,000 investors. The purpose of this
partnership was to acquire tax-exempt mortgages on multifamily housing projects.
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED
PARTNERSHIP ("AFPPEMF") commenced its offering in October 1986 and closed in
June 1987, and raised approximately $120 million with sales to approximately
7,000 investors. This partnership was formed to originate and acquire
FHA-insured mortgage loans and mortgage-backed securities guaranteed by GNMA,
FNMA and FHLMC and participating equity or debt interests in the multifamily
housing projects financed by these loans or securities.
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP commenced its
offering in April 1987 and closed in August 1987, and raised approximately $120
million with sales to approximately 11,000 investors. This partnership was
formed for the purpose of acquiring and operating one or more savings and loan
associations or other types of financial institutions.
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP ("AFPF2") commenced its
offering in October 1987 and closed in October 1988, and raised approximately
$34 million from approximately 1,900 investors. This partnership was formed to
originate and acquire FHA-insured mortgage loans and mortgage-backed securities
guaranteed by GNMA, FNMA and FHLMC and participating equity or debt interests in
the multifamily housing projects financed by these loans or securities.
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP ("AFPF2PS")
commenced its offering in March 1988 and closed in December 1988, and has raised
approximately $18 million with sales to
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approximately 850 investors. This partnership was formed to originate and
acquire FHA-insured mortgage loans and mortgage-backed securities guaranteed by
GNMA, FNMA and FHLMC and participating equity or debt interests in the
multifamily housing projects financed by these loans or securities.
AMERICA FIRST FINANCIAL FUND 1988 A LIMITED PARTNERSHIP commenced its
offering in September 1988 and closed in May 1989, and raised approximately $295
million from approximately 30,000 investors. This partnership was formed for the
purpose of acquiring and operating one or more savings and loan associations or
other types of financial institutions. This partnership ceased operations and
was liquidated in 1991.
AMERICA FIRST MORTGAGE SERVICING COMPANY L.P. I commenced its offering in
June 1991 and closed in September 1991, and raised approximately $18 million
from approximately 604 investors. The purpose of this partnership was to acquire
mortgage servicing rights.
AMERICA FIRST MORTGAGE SERVICING COMPANY L.P. II commenced its offering in
March 1992 and closed in April 1992, and raised approximately $9.9 million from
approximately 2,500 investors. The purpose of this partnership was to acquire
mortgage servicing rights. This partnership ceased operations and was liquidated
in 1995.
On April 10, 1998, AFPPEMF, AFPF2 and AFPF2PS were merged with and into
America First Mortgage Investments, Inc. The trading price of shares of common
stock of America First Mortgage Investments, Inc. has declined from 9 1/8 on
April 13, 1998, the initial day of trading, to 4 7/16 on September 8, 1999.
America First Mortgage Investments, Inc. is a REIT which invests primarily in
real estate mortgages, and consequently its operations and business are not
similar to those of the company.
The Cap Source General Partners will provide, upon request and without
charge, the latest Form 10-K filed with the Commission by the prior public
partnerships within the last twenty-four months, if any, and will provide upon
request, for a reasonable fee, the exhibits to each Form 10-K. Any request for
information described in this paragraph should be in writing to America First
Investor Services Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska
68102. The information contained in these Form 10-Ks should not be construed as
implying that the company will realize results similar to any prior partnership.
CONSENT SOLICITATION
THE MATTER TO WHICH THE INVESTORS ARE REQUESTED TO CONSENT IS OF GREAT
IMPORTANCE TO THE PARTNERSHIPS AND THE INVESTORS. ACCORDINGLY, INVESTORS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT AND TO COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ENCLOSED CONSENT CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SOLICITATION BY THE CAP SOURCE GENERAL PARTNERS
The Cap Source General Partners are seeking the consent of the investors of
the partnerships to the transaction. The Cap Source General Partners will not
hold a meeting of the investors to consider the transaction, but instead are
seeking the written consent of investors as provided in Article X of the
partnership agreements. Under the terms of the partnership agreements, the
transfer of all the assets of the partnerships in a single transaction and the
dissolution of the partnerships requires the consent of the holders of a
majority of the outstanding BACs. Accordingly, the transaction may not be
completed without the consent of the holders of a majority of the outstanding
BACs of each of the partnerships. This prospectus/consent solicitation statement
constitutes the solicitation of the approval of the investors to the
transaction.
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CONSENT PROCEDURES
We will not hold a meeting of the investors to consider the transaction, but
instead are seeking your written consent as provided in Article X of the
partnership agreements. Each BAC you own entitles you to one vote. You may only
grant your consent with respect to the transaction if you hold BACs of record at
the close of business on , 1999, the record date. A consent card is
included with this prospectus/consent solicitation statement and we are asking
you to complete, date and sign the consent card and return it to the tabulation
agent, Kissel-Blake, in the enclosed envelope as soon as possible. To be valid,
consents must be received by Kissel-Blake by 5:00 p.m. Eastern Time on
, 1999, the approval date, unless we extend this date, which we may
do in our sole discretion.
Each investor is being asked by the Cap Source General Partners to consider
the following elections with respect to the transaction:
"YES," I approve of my partnership's participation in the transaction and
the adoption of the Amendments to the partnership agreement.
or
"NO," I do not approve of my partnership's participation in the transaction
or the adoption of the Amendments to the partnership agreement.
Investors may also abstain from granting their consent.
You will receive units representing equity ownership in the new company
unless you elect to receive notes representing debt. You may elect to receive
notes regardless of whether you mark your consent card "YES" or "NO" with
respect to the transaction. An otherwise valid consent card will be deemed to
grant consent to the transaction if it is not marked "NO" or to abstain.
If you do not approve of your partnership's participation in the
transaction, you may either withhold your consent by marking your consent card
"NO" or abstain from granting your consent. If you vote "NO" and your
partnership approves the transaction, you will receive units, unless you elect
to receive notes as indicated on the consent card. If you abstain from granting
your consent, you will also receive units if the transaction is approved by your
partnership, unless you elect to receive notes as indicated on the consent card.
If you do not return your consent card, you will receive units if the
transaction is completed. YOU MAY NOT WITHDRAW OR REVOKE YOUR CONSENT AFTER YOUR
CONSENT CARD IS DELIVERED TO KISSEL-BLAKE.
Investors, including dissenting investors and investors who abstain from
granting their consent with respect to the transaction by indicating their
abstention on the consent card, will receive units if the transaction is
completed unless each investor elects to receive notes as indicated on the
consent card. An investor may elect to receive notes regardless of whether he
marks his consent card "YES" or "NO" with respect to the transaction. An
investor who does not return the consent card will receive units if the
transaction is completed. If dissenting investors elect to receive notes in
excess of the maximum note limitation, the transaction will not be completed. If
this does not occur, but the total amount of notes allocable to all investors
who elect to receive notes exceeds the maximum note limitation, notes will be
allocated first to dissenting investors who elected to receive notes and then,
on a pro rata basis, in denominations of $1,000, to investors who elected to
receive notes and either abstained from granting their consent or marked their
consent card "YES" consenting to the transaction. Thus, an investor could choose
notes but receive units instead. To be assured of receiving notes, an investor
must mark his consent card "NO" with respect to the transaction and elect to
receive NOTES. See "NOTES--Allocation of Notes." An otherwise valid consent card
will be deemed to grant consent to the transaction if it is not marked "NO" or
to abstain.
Each partnership agreement provides that the partnership's initial limited
partner (the "Initial Limited Partner") holds legal title to the limited partner
interests in the partnership. The rights and benefits of the limited partner
interests of the partnerships have been assigned by the Initial Limited
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Partners to the investors. Each investor will be entitled to direct its Initial
Limited Partner to vote on the approval date the number of BACs, which represent
the assigned limited partner interests, held by the investor. The Initial
Limited Partner is required to vote as directed by the investor. A REFERENCE IN
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT TO A CONSENT OR VOTE WITH RESPECT
TO BACS SHALL REFER TO THE DIRECTIONS GIVEN TO THE INITIAL LIMITED PARTNER BY
THE INVESTORS OF THE BACS BY A PROPERLY EXECUTED CONSENT CARD OR SUBSEQUENT
REVISION TO A PROPERLY EXECUTED CONSENT CARD. The Cap Source General Partners
have no right to vote with respect to transaction. Each investor reflected on
the books and records of each partnership at the close of business on the record
date will be entitled to vote its BACs with respect to the transaction.
A consent card is included with this prospectus/consent solicitation
statement and investors are asked to complete, date and sign the consent card
and return it to Kissel-Blake in the enclosed envelope as soon as possible.
INVESTORS SHOULD NOT SEND THE CERTIFICATES FOR THEIR BACS WITH THE CONSENT CARD.
Investors who sign and return the consent card without indicating a vote will be
deemed to have marked the consent card "YES" granting their consent to the
transaction. These investors and investors marking their consent card "YES" in
favor of the transaction will also be deemed to have ratified and consented to
the amendments to the partnership agreements and any other actions taken by the
Cap Source General Partners to facilitate the transaction. For a description of
the amendments, see "THE TRANSACTION--Amendments to the Partnership Agreements."
In addition, Cap Source II investors who sign and return the consent card
without indicating a vote and those marking their consent card "YES" granting
their consent to the transaction will also be deemed to have consented to the
sale of the Cap Source II general partner interest owned by one of the Cap
Source II General Partners. For a description of this sale, see "THE
COMPANY--The General Partner."
To be valid, consents must be received by Kissel-Blake by the approval date,
which is 5:00 p.m. Eastern Time on , 1999, which date may be extended by
the Cap Source General Partners in their sole discretion. If the Cap Source
General Partners receive valid consents to the transaction from the holders of a
majority of the outstanding BACs of each partnership prior to the approval date,
they may proceed with the completion of the transaction at that time. Consent
cards should be returned in the enclosed envelope to Kissel-Blake at the
following address:
Kissel-Blake
P.O. Box 343
New York, New York 10004
Abstentions and broker nonvotes will have the same effect as withholding
consent to the transaction. Investors who withhold their consent to the
transaction or abstain from granting their consent will have no right to require
the partnerships to purchase their BACs or any other rights similar to those
available to dissenting shareholders of corporations under Delaware law. See
"--No Right of Appraisal" below.
The consents of the investors with respect to the transaction will be
tabulated by Kissel-Blake on , 1999, unless this date is extended by the
Cap Source General Partners in their sole discretion. Kissel-Blake is not
affiliated with the company or the Cap Source General Partners.
THE CAP SOURCE GENERAL PARTNERS BELIEVE THAT THE TERMS OF THE TRANSACTION
ARE FAIR AND IN THE BEST INTERESTS OF THE PARTNERSHIPS AND ALL OF THE INVESTORS
AND RECOMMEND APPROVAL OF THE TRANSACTION BY THE INVESTORS.
RECORD DATE AND OUTSTANDING BACS
Only investors holding BACs of record at the close of business on
, 1999, will be entitled to receive this notice and to grant their
consent with respect to the transaction. Under the terms of the partnership
agreements, investors are entitled to grant one consent for each BAC they hold
as of the record date. As of the record date, there was a total of 3,374,222 Cap
Source I BACs and 4,011,101 Cap
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Source II BACs outstanding. Therefore, the affirmative consent of the holders of
1,687,112 Cap Source I BACs is required to approve the transaction, and the
affirmative consent of the holders of 2,005,551 Cap Source II BACs is required
to approve the transaction. As of the record date, no BACs were beneficially
owned by the Cap Source General Partners, America First Companies or any of the
officers or managers of America First Companies.
SOLICITATION OF CONSENTS; SOLICITATION EXPENSES
Consents of investors may be solicited by the management of the Cap Source
General Partners. Costs of solicitation will be allocated as shown under "THE
TRANSACTION--Transaction Expenses." Some of the officers and employees of the
Cap Source General Partners and affiliates may solicit consents without
additional compensation, other than reimbursement for actual and reasonable
out-of-pocket expenses incurred by these persons in connection with the
solicitation. Brokerage firms, fiduciaries, nominees and others will be
reimbursed for out-of-pocket expenses incurred by them in connection with
forwarding consent materials to beneficial holders of BACs held in their names.
In addition to the use of the mails, consents may be solicited by officers and
regular employees of the Cap Source General Partners and affiliates, who will
not be specifically compensated for these services, by means of personal calls
upon or telephonic communications with investors or their representatives.
Moreover, the Cap Source General Partners may engage the services of a
professional proxy solicitation firm in connection with the solicitation of
consents. No party will receive any compensation contingent upon solicitation of
a favorable consent.
If any material conditions to the transaction are waived, the consent of the
investors to the transaction will be resolicited.
COMMUNICATING WITH OTHER INVESTORS
Under Rule 14a-7 of the Securities Exchange Act, each partnership, upon
written request from an investor, will deliver to the investor (1) a statement
of the approximate number of investors of the partnership and (2) the estimated
cost of mailing proxy materials or similar communications to the investors of
the partnership. In addition, under this rule, an investor has the right, at his
or her option, to have his or her partnership (a) mail, at the investor's
expense, any of these materials which the investor desires to deliver to the
other investors of the partnership in connection with the transaction or (b) to
have the partnership deliver, within five business days of the receipt of the
request, a reasonably current list of the names and addresses of the investors
of the partnership as of the record date. The partnerships may require you to
pay the reasonable cost of duplicating and mailing the investor list. The
partnerships may also require you to affirm that you will not use the list
information for any purpose other than to solicit investors in your partnership
with respect to the transaction and that you will not disclose the list
information to any other person. Any requests should be sent to America First
Investor Services Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska,
68102.
NO RIGHT OF APPRAISAL
Neither dissenting investors nor investors who abstain from granting their
consent with respect to the transaction will be entitled to dissenters' or
appraisal rights under the partnership agreements or the Delaware Partnership
Law. These rights, when they exist, give the holders of securities the right to
surrender the securities for an appraised value in cash if the securityholder
opposes a merger or similar reorganization. No rights like these will be
provided by the partnerships or the company. Dissenting investors do, however,
have the right to exchange their BACs for notes rather than units. If a
dissenting investor withholds his consent to the transaction but does not elect
to receive notes, the dissenting investor will receive units if the transaction
is completed.
71
<PAGE>
RESPONSIBILITIES OF GENERAL PARTNERS
Under Delaware law, the General Partner is accountable to the company and
the unitholders and consequently must exercise good faith and fair dealing in
handling the company's affairs. Under Delaware law, the Cap Source General
Partners are accountable to the partnerships and the investors and consequently
must exercise good faith and fair dealing in handling the partnerships' affairs.
Investors who have questions concerning the duties of the General Partner with
respect to the company or the duties of the Cap Source General Partners with
respect to either of the partnerships should consult their counsel.
The partnership agreements provide for indemnification of the Cap Source
General Partners for losses arising out of any act or omission, provided that it
was determined in good faith that the conduct was in the best interest of the
partnership and that the conduct did not constitute negligence, misconduct or a
breach of fiduciary obligations to the investors.
The rights of unitholders against the general partner of the company in some
circumstances are more limited than the rights of investors against the Cap
Source General Partners.
The company's limited partnership agreement provides for indemnification of
the General Partner for losses arising out of any act or omission, provided that
it was determined in good faith that the conduct was in the best interest of the
company and that the conduct did not constitute fraud, gross negligence, willful
misconduct or a breach of a duty under the company's limited partnership
agreement. To the extent that the foregoing provisions concerning
indemnification apply to actions arising under the Securities Act, the company
has been advised that, in the opinion of the Commission, these provisions are
contrary to public policy and therefore are not enforceable.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statements of operations and cash flows
for the year ended December 31, 1998, and for the six months ended June 30,
1999, have been prepared to reflect the transaction and related adjustments and
assumptions described in the accompanying notes as if the transaction occurred
on January 1, 1998. The pro forma balance sheet has been prepared assuming the
transaction occurred on June 30, 1999. The pro forma financial information is
based on the historical financial statements of each of the partnerships and
should be read in conjunction with the financial statements and notes included
in the separately bound supplement delivered with this prospectus/consent
solicitation statement. In the opinion of management, all adjustments necessary
to reflect the effects of the transaction have been made.
To assist investors in analyzing the transaction, two presentations of pro
forma financial statements have been prepared. The first presentation of pro
forma financial statements assumes the company will not issue any notes. The
second presentation of pro forma financial statements assumes the company will
issue the maximum amount of notes. Investors should bear in mind that the
assumptions regarding the issuance of notes to investors in connection with the
transaction are not necessarily the company's or the Cap Source General
Partners' expectations regarding the outcome of the transaction.
Since the transaction will be accounted for using the purchase method of
accounting, the pro forma financial statements have been prepared using this
method. Under the purchase method, Cap Source I will be deemed to be the
acquirer of Cap Source II because Cap Source I investors will be allocated the
largest number of units of the company. As the surviving entity, Cap Source I's
assets and liabilities will be recorded by the company at their historical cost,
and the assets and liabilities of Cap Source II will be recorded at their
estimated fair market values.
The pro forma financial statements are based upon available information and
upon assumptions, as stated in the notes to the pro forma consolidated financial
statements, that the Cap Source General Partners believe are reasonable in the
circumstances. The pro forma information is unaudited and is not necessarily
indicative of the results which actually would have occurred if the transaction
had been completed on these dates or at the beginning of the periods, nor does
it purport to represent the financial position or results of operations for
future periods.
72
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and temporary cash investments, at cost
which approximates market value............. $ 8,972,106 $ 303,760 $ (1,022,687)(A) $ 8,253,179
Investment in FHA Loans....................... 12,385,942 6,488,420 5,515(B) 18,879,877
Investment in GNMA Certificates............... 23,261,408 20,433,993 239,099(B) 43,934,500
Investment in Operating Partnerships.......... -- -- 3,809,948(B) 3,809,948
Interest receivable........................... 300,904 194,259 -- 495,163
Other assets.................................. 251,955 79,326 (67,262)(B) 869,814
605,795(A)
------------- ------------- ------------------ -------------
$ 45,172,315 $ 27,499,758 $ 3,570,408 $ 76,242,481
------------- ------------- ------------------ -------------
------------- ------------- ------------------ -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable............................ $ 238,200 $ 135,550 $ -- $ 373,750
Distributions payable....................... 860,597 303,871 -- 1,164,468
------------- ------------- ------------------ -------------
1,098,797 439,421 -- 1,538,218
------------- ------------- ------------------ -------------
------------- ------------- ------------------ -------------
Partners' Capital (Deficit)
General Partners............................ (174,923) (295,854) 39,873(B) (430,904)
Limited Partners............................ 44,248,441 27,356,191 3,947,427(B) 75,135,167
(416,892)(A)
------------- ------------- ------------------ -------------
44,073,518 27,060,337 3,570,408 74,704,263
------------- ------------- ------------------ -------------
$ 45,172,315 $ 27,499,758 $ 3,570,408 $ 76,242,481
------------- ------------- ------------------ -------------
------------- ------------- ------------------ -------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
73
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income................ $3,262,922 $ 2,426,356 $ -- $ 5,689,278
Interest income on temporary cash investments.... 530,396 42,339 -- 572,735
Equity in income (losses) of Operating
Partnerships................................... (186,942) (407,218) 22,084(D) (572,076)
Other income..................................... 6,300 4,750 -- 11,050
Gain on sale of mortgage-backed securities....... -- 35,101 -- 35,101
------------ ------------- ---------------- ------------
Total income................................... 3,612,676 2,101,328 22,084 5,736,088
------------ ------------- ---------------- ------------
------------ ------------- ---------------- ------------
Expenses
Operating and administrative..................... 1,710,173 1,220,213 (62,376)(E) 2,984,210
100,000(F)
16,200(G)
------------ ------------- ---------------- ------------
1,710,173 1,220,213 53,824 2,984,210
------------ ------------- ---------------- ------------
Net income......................................... $1,902,503 $ 881,115 $ (31,740) $ 2,751,878
------------ ------------- ---------------- ------------
------------ ------------- ---------------- ------------
Net income per unit................................ $ 0.56 $ 0.22 $ 0.35
------------ ------------- ---------------- ------------
------------ ------------- ---------------- ------------
Weighted average number of units outstanding during
the period....................................... 3,374,222 4,011,101 7,765,772
------------ ------------- ---------------- ------------
------------ ------------- ---------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
74
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 1,902,503 $ 881,115 $ (31,740) $ 2,751,878
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in income (losses) of Operating
Partnerships..................................... 186,942 407,218 (22,084) 572,076
Amortization....................................... -- -- (46,176) (46,176)
Amortization of discount on mortgage-backed
securities....................................... (2,287) (1,471) -- (3,758)
Gain on sale of mortgage-backed securities......... -- (35,101) -- (35,101)
Decrease in interest receivable.................... 14,826 17,584 -- 32,410
Decrease (increase) in other assets................ (77,354) 22,950 -- (54,404)
Increase in accounts payable....................... 285,943 19,933 -- 305,876
Other non-cash adjustments......................... -- -- 100,000 100,000
------------- ------------- ------------- -------------
Net cash provided by operating activities........ 2,310,573 1,312,228 -- 3,622,801
------------- ------------- ------------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received......................................... 2,635,396 271,807 -- 2,907,203
Disposition of mortgage-backed securities.......... -- 5,046,437 -- 5,046,437
Proceeds from sale of available-for-sale
mortgage-backed securities....................... -- 915,012 -- 915,012
Acquisition of GNMA Certificate.................... (2,422,519) (5,029,094) -- (7,451,613)
Investment in Operating Partnerships............... (186,942) (407,218) -- (594,160)
------------- ------------- ------------- -------------
Net cash provided by investing activities........ 25,935 796,944 -- 822,879
------------- ------------- ------------- -------------
Cash flow used in financing activity
Distributions...................................... (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ------------- -------------
Net cash used in financing activity.............. (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ------------- -------------
Net decrease in cash and temporary cash
investments.................................... (1,105,870) (807,993) -- (1,913,863)
Cash and temporary cash investments at beginning of
period............................................. 10,410,564 1,240,992 (1,022,687) 10,628,869
------------- ------------- ------------- -------------
Cash and temporary cash investments at end of
period............................................. $ 9,304,694 $ 432,999 $ (1,022,687) $ 8,715,006
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Distributions--income................................ $ 2,751,878
Distributions--return of capital..................... 3,607,665
-------------
$ 6,359,543
-------------
-------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
75
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income.................. $1,612,472 $ 1,161,046 $ -- $ 2,773,518
Interest income on temporary cash investments...... 206,920 7,491 -- 214,411
Equity in losses of Operating Partnerships......... (50,000) -- (85,243)(D) (135,243)
Other income....................................... 2,000 400 -- 2,400
------------ ------------- ----------- ------------
Total income..................................... 1,771,392 1,168,937 (85,243) 2,855,086
------------ ------------- ----------- ------------
Expenses
Operating and administrative....................... 323,534 316,875 (31,188)(E) 667,321
50,000(F)
8,100(G)
------------ ------------- ----------- ------------
323,534 316,875 26,912 667,321
------------ ------------- ----------- ------------
Net income........................................... $1,447,858 $ 852,062 $(112,155) $ 2,187,765
------------ ------------- ----------- ------------
------------ ------------- ----------- ------------
Net income per unit.................................. $ 0.42 $ 0.21 $ 0.28
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of units outstanding during
the period......................................... 3,374,222 4,011,101 7,765,772
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
76
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income.......................................... $ 1,447,858 $ 852,062 $ (112,155) $ 2,187,765
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in losses of Operating Partnerships.......... 50,000 -- 85,243 135,243
Amortization........................................ -- -- (23,088) (23,088)
Amortization of discount on mortgage-backed
securities........................................ (1,346) (155) -- (1,501)
Decrease in interest receivable..................... 5,755 1,181 -- 6,936
Decrease (increase) in other assets................. (40,027) 59,878 -- 19,851
Decrease in accounts payable........................ (251,885) (211,896) -- (463,781)
Other non-cash adjustments.......................... -- -- 50,000 50,000
------------- ------------- ------------- ------------
Net cash provided by operating activities......... 1,210,355 701,070 -- 1,911,425
------------- ------------- ------------- ------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received.......................................... 228,251 81,305 -- 309,556
Investment in Operating Partnerships................ (50,000) -- -- (50,000)
------------- ------------- ------------- ------------
Net cash provided by investing activities......... 178,251 81,305 -- 259,556
------------- ------------- ------------- ------------
Cash flow used in financing activity
Distributions....................................... (1,721,194) (911,614) -- (2,632,808)
------------- ------------- ------------- ------------
Net cash used in financing activity............... (1,721,194) (911,614) -- (2,632,808)
------------- ------------- ------------- ------------
Net decrease in cash and temporary cash
investments..................................... (332,588) (129,239) -- (461,827)
Cash and temporary cash investments at beginning of
period.............................................. 9,304,694 432,999 (1,022,687) 8,715,006
------------- ------------- ------------- ------------
Cash and temporary cash investments at end of
period.............................................. $ 8,972,106 $ 303,760 $ (1,022,687) $ 8,253,179
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Distributions--income................................. $ 2,187,765
Distributions--return of capital...................... 445,043
------------
$ 2,632,808
------------
------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
77
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
WITHOUT NOTES ISSUED
<TABLE>
<C> <S>
A Represents the following adjustments to record remaining transaction costs expected to
be incurred: (i) a decrease in cash for anticipated transaction costs remaining to be
incurred of $1,022,687; (ii) goodwill of $605,795 resulting from Cap Source 1's share
of the remaining transaction costs; and (iii) a $416,892 reduction to partners' capital
for Cap Source II's share of the remaining transaction costs.
B The historical balance sheet of Cap Source II has been adjusted to reflect the impact
of applying the purchase method of accounting to this transaction. The net assets of
Cap Source II are being adjusted to their estimated fair value. The fair value is based
on: (i) the amount the Partnership would receive under the terms of the Operating
Partnerships' limited partnership agreements if the underlying properties were sold for
an amount equal to net realizable value (which is based on the appraised value of the
properties underlying the Operating Partnerships); (ii) the market value of the GNMA
Certificates and FHA Loan based on market prices; (iii) any undistributed cash and
other assets; less (iv) any outstanding liabilities owed by the Partnership.
The application of purchase accounting results in the following adjustments: (i) the
investment in the FHA Loan and GNMA Certificates and the investment in Operating
Partnerships has been adjusted to fair value as described above; (ii) intangible items
have been eliminated as these items were assigned no value; and (iii) the net effect of
those changes to the assets and liabilities has been applied to the partners' capital
account.
C Not used
D Represents the adjustment to record Cap Source II's share of the equity in income
(losses) of Operating Partnerships as a result of applying the purchase method of
accounting and recording the Cap Source II Operating Partnerships at their estimated
fair value (which is greater than zero).
E Represents the elimination of historical amortization of the initial advisory fee for
Cap Source II as these items were assigned no value in adjusting to fair value in
applying the purchase method of accounting.
F Represents the administrative fee payable to the General Partner pursuant to the terms
of the Partnership Agreement. The administrative fee is .50% per annum of the sum of
(i) the fair market value on the merger date of the original assets that are then still
owned by the Partnership, plus (ii) the purchase price paid by the Partnership for new
assets that are then held by the Partnership. The first $100,000 of the administrative
fee shall be payable each year, with the balance payable only during years that funds
from operations ("FFO"), calculated before administrative fees, exceeds 7% of the unit
holders' average capital for that year. FFO represents net income (or loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales
of properties, plus real estate-related depreciation and amortization (excluding
amortization of deferred financing costs and depreciation of non-real estate assets)
and after adjustments for unconsolidated partnerships and joint ventures. Such
administrative fee will be paid on a monthly basis. The administrative fee is limited
to $100,000 annually for all periods presented.
G Represents the amortization of goodwill using the straight line method over a period of
40 years.
</TABLE>
78
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENTAL PRO FORMA PER UNIT DATA(A)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
DISTRIBUTIONS NET INCOME
BOOK VALUE SIX MONTHS SIX MONTHS DISTRIBUTIONS NET INCOME
EXCHANGE AS OF ENDED ENDED YEAR ENDED YEAR ENDED
VALUE JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999 DEC. 31, 1998 DEC. 31, 1998
----------- --------------- --------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Pro forma--the Company (Per
Unit).......................... $ 10.00 $ 9.62 $ 0.3356 $ 0.28 $ 0.7876 $ 0.35
Historical--Cap Source I (Per
Unit).......................... $ 13.11 $ 0.5050 $ 0.42 $ 1.0100 $ 0.56
Equivalent pro forma--Cap Source
I
(Per Unit)..................... $ 13.96 $ 13.43 $ 0.4684 $ 0.39 $ 1.0993 $ 0.49
Historical--Cap Source II (Per
Unit).......................... $ 6.82 $ 0.2250 $ 0.21 $ 0.6600 $ 0.22
Equivalent pro forma--Cap Source
II
(Per Unit)..................... $ 7.62 $ 7.33 $ 0.2557 $ 0.21 $ 0.6002 $ 0.27
</TABLE>
<TABLE>
<C> <S> <C> <C>
A Equivalent pro forma data has been calculated by multiplying the
Company's pro forma amounts by the exchange ratio (below) for each
Partnership, so that the Partnership per unit pro forma amounts are
equated to the respective values for one unit of the respective
Partnership.
Exchange Values
(1 unit of Partnership = X units of Company)
Cap Source I.................................... 1.3957
Cap Source II................................... 0.7620
</TABLE>
79
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and temporary cash investments, at cost
which approximates market value............. $ 8,972,106 $ 303,760 $ (1,022,687)(A) $ 8,253,179
Investment in FHA Loans....................... 12,385,942 6,488,420 5,515(B) 18,879,877
Investment in GNMA Certificates............... 23,261,408 20,433,993 239,099(B) 43,934,500
Investment in Operating Partnerships.......... -- -- 3,809,948(B) 3,809,948
Interest receivable........................... 300,904 194,259 -- 495,163
Other assets.................................. 251,955 79,326 (67,262)(B) 869,814
605,795(A)
------------- ------------- ------------------ -------------
$ 45,172,315 $ 27,499,758 $ 3,570,408 $ 76,242,481
------------- ------------- ------------------ -------------
------------- ------------- ------------------ -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable............................ $ 238,200 $ 135,550 $ -- $ 373,750
Distributions payable....................... 860,597 303,871 -- 1,164,468
Notes payable............................... -- -- 20,000,000(C) 20,000,000
------------- ------------- ------------------ -------------
1,098,797 439,421 20,000,000 21,538,218
------------- ------------- ------------------ -------------
Partners' Capital (Deficit)
General Partners............................ (174,923) (295,854) 39,873(B) (430,904)
Limited Partners............................ 44,248,441 27,356,191 3,947,427(B) 55,135,167
(416,892)(A)
(20,000,000)(C)
------------- ------------- ------------------ -------------
44,073,518 27,060,337 (16,492,592) 54,704,263
------------- ------------- ------------------ -------------
$ 45,172,315 $ 27,499,758 $ 3,570,408 $ 76,242,481
------------- ------------- ------------------ -------------
------------- ------------- ------------------ -------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
80
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income............... $3,262,922 $ 2,426,356 $ -- $ 5,689,278
Interest income on temporary cash investments... 530,396 42,339 -- 572,735
Equity in income (losses) of Operating
Partnerships.................................. (186,942) (407,218) 22,084(D) (572,076)
Other income.................................... 6,300 4,750 -- 11,050
Gain on sale of mortgage-backed securities...... -- 35,101 -- 35,101
------------ ------------- ------------------ ------------
Total income.................................. 3,612,676 2,101,328 22,084 5,736,088
------------ ------------- ------------------ ------------
------------ ------------- ------------------ ------------
Expenses
Operating and administrative.................... 1,710,173 1,220,213 (62,376)(E) 4,288,210
100,000(F)
16,200(G)
1,304,000(H)
------------ ------------- ------------------ ------------
1,710,173 1,220,213 1,357,824 4,288,210
------------ ------------- ------------------ ------------
Net income........................................ $1,902,503 $ 881,115 $ (1,335,740) $ 1,447,878
------------ ------------- ------------------ ------------
------------ ------------- ------------------ ------------
Net income per unit............................... $ 0.56 $ 0.22 $ 0.25
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of units outstanding
during the period............................... 3,374,222 4,011,101 5,765,772
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
81
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 1,902,503 $ 881,115 $ (1,335,740) $ 1,447,878
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in income (losses) of Operating
Partnerships..................................... 186,942 407,218 (22,084) 572,076
Amortization....................................... -- -- (46,176) (46,176)
Amortization of discount on mortgage-backed
securities....................................... (2,287) (1,471) -- (3,758)
Gain on sale of mortgage-backed securities......... -- (35,101) -- (35,101)
Decrease in interest receivable.................... 14,826 17,584 -- 32,410
Decrease (increase) in other assets................ (77,354) 22,950 -- (54,404)
Increase in accounts payable....................... 285,943 19,933 -- 305,876
Other non-cash adjustments......................... -- -- 1,404,000 1,404,000
------------- ------------- ------------- -------------
Net cash provided by operating activities........ 2,310,573 1,312,228 -- 3,622,801
------------- ------------- ------------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received......................................... 2,635,396 271,807 -- 2,907,203
Disposition of mortgage-backed securities.......... -- 5,046,437 -- 5,046,437
Proceeds from sale of available-for-sale
mortgage-backed securities....................... -- 915,012 -- 915,012
Acquisition of GNMA Certificate.................... (2,422,519) (5,029,094) -- (7,451,613)
Investment in Operating Partnerships............... (186,942) (407,218) -- (594,160)
------------- ------------- ------------- -------------
Net cash provided by investing activities........ 25,935 796,944 -- 822,879
------------- ------------- ------------- -------------
Cash flow used in financing activity
Distributions...................................... (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ------------- -------------
Net cash used in financing activity.............. (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ------------- -------------
Net decrease in cash and temporary cash
investments.................................... (1,105,870) (807,993) -- (1,913,863)
Cash and temporary cash investments at beginning of
period............................................. 10,410,564 1,240,992 (1,022,687) 10,628,869
------------- ------------- ------------- -------------
Cash and temporary cash investments at end of
period............................................. $ 9,304,694 $ 432,999 $ (1,022,687) $ 8,715,006
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Distributions--income................................ $ 1,447,878
Distributions--return of capital..................... 4,911,665
-------------
$ 6,359,543
-------------
-------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
82
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income................. $1,612,472 $ 1,161,046 $ -- $ 2,773,518
Interest income on temporary cash investments..... 206,920 7,491 -- 214,411
Equity in losses of Operating Partnerships........ (50,000) -- (85,243)(D) (135,243)
Other income...................................... 2,000 400 -- 2,400
------------ ------------- ---------------- ------------
Total Income.................................... 1,771,392 1,168,937 (85,243) 2,855,086
------------ ------------- ---------------- ------------
Expenses
Operating and administrative........................ 323,534 316,875 (31,188)(E) 1,319,321
50,000(F)
8,100(G)
652,000(H)
------------ ------------- ---------------- ------------
323,534 316,875 678,912 1,319,321
------------ ------------- ---------------- ------------
Net income.......................................... $1,447,858 $ 852,062 $ (764,155) $ 1,535,765
------------ ------------- ---------------- ------------
------------ ------------- ---------------- ------------
Net income per share................................ $ 0.42 $ 0.21 $ 0.27
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of units outstanding during
the period........................................ 3,374,222 4,011,101 5,765,772
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
83
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income.......................................... $1,447,858 $ 852,062 $ (764,155) $ 1,535,765
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in losses of Operating Partnerships.......... 50,000 -- 85,243 135,243
Amortization........................................ -- -- (23,088) (23,088)
Amortization of discount on mortgage-backed
securities........................................ (1,346) (155) -- (1,501)
Decrease in interest receivable..................... 5,755 1,181 -- 6,936
Decrease (increase) in other assets................. (40,027) 59,878 -- 19,851
Decrease in accounts payable........................ (251,885) (211,896) -- (463,781)
Other non-cash adjustments.......................... -- -- 702,000 702,000
------------ ------------- ------------- -------------
Net cash provided by operating activities......... 1,210,355 701,070 -- 1,911,425
------------ ------------- ------------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received.......................................... 228,251 81,305 -- 309,556
Investment in Operating Partnerships................ (50,000) -- -- (50,000)
------------ ------------- ------------- -------------
Net cash provided by investing activities......... 178,251 81,305 -- 259,556
------------ ------------- ------------- -------------
Cash flow used in financing activity
Distributions....................................... (1,721,194) (911,614) -- (2,632,808)
------------ ------------- ------------- -------------
Net cash used in financing activity............... (1,721,194) (911,614) -- (2,632,808)
------------ ------------- ------------- -------------
Net increase in cash and temporary cash
investments..................................... (332,588) (129,239) -- (461,827)
Cash and temporary cash investments at beginning of
period.............................................. 9,304,694 432,999 (1,022,687) 8,715,006
------------ ------------- ------------- -------------
Cash and temporary cash investments at end of
period.............................................. $8,972,106 $ 303,760 $ (1,022,687) $ 8,253,179
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Distributions--income................................. $ 1,535,765
Distributions--return of capital...................... 1,097,043
-------------
$ 2,632,808
-------------
-------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
84
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
WITH NOTES ISSUED
A Represents the following adjustments to record remaining transaction costs
expected to be incurred: (i) a decrease in cash for anticipated transaction
costs remaining to be incurred of $1,022,687; (ii) goodwill of $605,795
resulting from Cap Source 1's share of the remaining transaction costs; and
(iii) a $416,892 reduction to partners' capital for Cap Source II's share of
the remaining transaction costs.
B The historical balance sheet of Cap Source II has been adjusted to reflect
the impact of applying the purchase method of accounting to this
transaction. The net assets of Cap Source II are being adjusted to their
estimated fair value. The fair value is based on: (i) the amount the
Partnership would receive under the terms of the Operating Partnerships'
limited partnership agreements if the underlying properties were sold for an
amount equal to net realizable value (which is based on the appraised value
of the properties underlying the Operating Partnerships); (ii) the market
value of the GNMA Certificates and FHA Loan based on market prices; (iii)
any undistributed cash and other assets; less (iv) any outstanding
liabilities owed by the Partnership.
The application of purchase accounting results in the following adjustments:
(i) the investment in the FHA Loan and GNMA Certificates and the investment
in Operating Partnerships has been adjusted to fair value as described
above; (ii) intangible items have been eliminated as these items were
assigned no value; and (iii) the net effect of those changes to the assets
and liabilities has been applied to the partners' capital account.
C Represents the maximum issuance of notes by the Company to investors electing
to receive notes. The issuance of the notes results in an increase in notes
payable and a reduction of partners' capital. The notes mature on 2007
and bear interest at 120% of the annual applicable federal rate for debt
instruments with a term of not over three years (assumed to be 6.52%).
D Represents the adjustment to record Cap Source II's share of the equity in
income (losses) of Operating Partnerships as a result of applying the
purchase method of accounting and recording the Cap Source II Operating
Partnerships at their estimated fair value (which is greater than zero).
E Represents the elimination of historical amortization of the initial advisory
fee for Cap Source II as these items were assigned no value in adjusting to
fair value in applying the purchase method of accounting.
F Represents the administrative fee payable to the General Partner pursuant to
the terms of the Partnership Agreement. The administrative fee is .50% per
annum of the sum of (i) the fair market value on the Merger Date of the
Original Assets that are then still owned by the Partnership, plus (ii) the
purchase price paid by the Partnership for New Assets that are then held by
the Partnership. The first $100,000 of the administrative fee shall be
payable each year, with the balance payable only during years that funds
from operations ("FFO"), calculated before administrative fees, exceeds 7%
of the unit holders' average capital for that year. FFO represents net
income (or loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of properties, plus real
estate-related depreciation and amortization (excluding amortization of
deferred financing costs and depreciation of non-real estate assets) and
after adjustments for unconsolidated partnerships and joint ventures. Such
administrative fee will be paid on a monthly basis. The administrative fee
is limited to $100,000 annually for all periods presented.
G Represents the amortization of goodwill using the straight line method over a
period of 40 years.
H Represents interest on the notes at an assumed rate of 6.52%.
85
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENTAL PRO FORMA PER UNIT DATA (A)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
DISTRIBUTIONS NET INCOME
BOOK VALUE SIX MONTHS SIX MONTHS DISTRIBUTIONS NET INCOME
EXCHANGE AS OF ENDED ENDED YEAR ENDED YEAR ENDED
VALUE JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999 DEC. 31, 1998 DEC. 31, 1998
----------- --------------- --------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Pro forma--the Company
(Per Unit)..................... $ 10.00 $ 9.49 $ 0.4521 $ 0.27 $ 1.0608 $ 0.25
Historical--Cap Source I
(Per Unit)..................... $ 13.11 $ 0.5050 $ 0.42 $ 1.0100 $ 0.56
Equivalent pro forma--
Cap Source I (Per Unit)........ $ 13.96 $ 13.25 $ 0.6310 $ 0.38 $ 1.4806 $ 0.35
Historical--Cap Source II
(Per Unit)..................... $ 6.82 $ 0.2250 $ 0.21 $ 0.6600 $ 0.22
Equivalent pro forma--
Cap Source II (Per Unit)....... $ 7.62 $ 7.23 $ 0.3445 $ 0.21 $ 0.8083 $ 0.19
</TABLE>
A Equivalent pro forma data has been calculated by multiplying the Company's
pro forma amounts by the exchange ratio (below) for each Partnership, so
that the Partnership per unit pro forma amounts are equated to the
respective values for one unit of the respective Partnership.
Exchange Values
(1 unit of Partnership = X units of Company)
<TABLE>
<S> <C>
Cap Source I..................................................... 1.3957
Cap Source II.................................................... 0.7620
</TABLE>
86
<PAGE>
THE PARTNERSHIPS
CAP SOURCE I
HISTORY. Cap Source I, a Delaware limited partnership, was formed August
22, 1985. The general partners of Cap Source I are Insured Mortgage Equities,
Inc. and America First Capital Source I L.L.C. The Initial Limited Partner of
Cap Source I, H/T Corp., a Delaware corporation wholly owned by the Cap Source I
General Partners, assigned some of the ownership attributes of the limited
partner interests to the Cap Source I investors, including rights to a
percentage of Cap Source I's income, gain, losses, deductions, credits and
distributions. H/T Corp. has agreed to vote the limited partner interests as
directed by the Cap Source I investors. The Cap Source I investors hold
beneficial assignment certificates, which represent beneficial assignments of
the limited partner interests in Cap Source I.
Cap Source I was formed to invest principally in federally insured mortgages
on multifamily housing property (the "Cap Source I Mortgage Securities") and to
acquire, hold, sell and otherwise deal with limited partnership interests (the
"Cap Source I Partnership Equity Interests") in the Cap Source I Operating
Partnerships. The Cap Source I partnership agreement originally provided that
the BACs would be listed on NASDAQ for trading. The investors voted by proxy not
to list the BACs on NASDAQ.
Cap Source I's assets originally consisted of debt and equity financing for
eight multifamily rental housing properties. Cap Source I's investments in these
properties consisted of: (a) approximately 85% in the form of permanent
mortgages and/or construction loans, each of which was insured or guaranteed, in
an amount substantially equal to the face amount of the mortgage, by the FHA or
GNMA; and (b) the balance to purchase up to a 99% limited partner interest in
limited partnerships which developed, constructed, own and operate these
properties.
The original Cap Source I Operating Partnerships were structured with the
developer of the respective property serving as the general partner (the "Cap
Source I Operating General Partner") with a 1% interest, Cap Source I as the
limited partner with a 98.99% interest and CS Properties I, Inc., a corporation
wholly owned by the Cap Source I General Partners, as the special limited
partner (the "Cap Source I Special Limited Partner") with a .01% interest. The
Cap Source I Special Limited Partner has the power, among other things, to
remove the Cap Source I Operating General Partners under certain circumstances
and to consent to the sale of the Cap Source I Operating Partnerships' Assets.
In the only exception to the above-described original structuring, in one of the
Cap Source I Operating Partnerships, the Ponds at Georgetown L.P., Cap Source I
is a limited partner with a 30.29% interest and Cap Source II is a limited
partner with a 68.7% interest.
Since inception, Cap Source I has been repaid by GNMA on one of its Cap
Source I Mortgage Securities, and, as a result, it no longer holds a Cap Source
I Partnership Equity Interest in the Cap Source I Operating Partnership which
owned the property collateralizing the repaid mortgage, Falcon Point. It has
also been repaid by FHA on another of its Cap Source I Mortgage Securities but
continues to own its Cap Source I Partnership Equity Interest in the Cap Source
I Operating Partnership, Fox Hollow. Three of the Cap Source I Operating
Partnerships, Fox Hollow, Misty Springs and Waterman's Crossing, have been
restructured with CS Properties I, Inc. succeeding to the general partner 1%
interest.
As a result of the foregoing, at December 31, 1998, Cap Source I held debt
and/or equity investments in seven properties. These investments consist of (1)
four mortgage-backed securities guaranteed as to principal and interest by GNMA,
collateralized by first mortgage loans insured as to principal and interest by
FHA on multifamily housing properties located in Virginia, Florida, Illinois and
Michigan; (2) two first mortgage loans insured as to principal and interest by
FHA on multifamily housing properties located in North Carolina and Ohio; and
(3) Cap Source I Partnership Equity Interests in seven limited partnerships. Cap
Source I also holds reserve investments in the form of cash and cash equivalents
and investments in GNMA securities backed by pools of single family mortgages
(the "Cap Source I Reserve Investments").
87
<PAGE>
The Cap Source I Mortgage Securities provide Cap Source I with monthly
payments of principal and interest which are guaranteed either by GNMA or FHA.
The Cap Source I Partnership Equity Interests were intended to be sufficient to
cover all costs not covered by the Cap Source I Mortgage Securities until the
Cap Source I Operating Partnerships' income was sufficient to cover their
expenses, including debt service on the Cap Source I Mortgage Securities, as
well as a return to Cap Source I on its investment during the period. The
current return to Cap Source I on its Cap Source I Partnership Equity Interests
is a function of the net cash flow generated by the properties and is dependent
on the rental and occupancy rates and on the level of expenses at the
properties.
The FHA Loans and GNMA Certificates owned by Cap Source I are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of FHA
and GNMA are backed by the full faith and credit of the United States
government. The Cap Source I Partnership Equity Interests, however, are not
insured or guaranteed. The value of these investments is a function of the value
of the real estate owned by the Cap Source I Operating Partnerships.
The following FHA Loans and GNMA Certificates associated with the Operating
Partnerships were owned by Cap Source I at December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
GUARANTEED OR PRINCIPAL AMOUNT
PROPERTY NAME INSURED BY INTEREST RATE MATURITY DATE OUTSTANDING
- -------------------------------------------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments............................ FHA 8.72% 11/15/2028 $ 3,487,222
Highland Park Apartments.......................... FHA 8.75 11/01/2028 8,942,263
Misty Springs Apartments.......................... GNMA 8.75 6/15/2029 4,246,682
The Ponds at Georgetown........................... GNMA 7.50 12/15/2029 2,438,761
Waterman's Crossing............................... GNMA 10.00 9/15/2028 10,873,980
Water's Edge Apartments........................... GNMA 8.75 12/15/2028 5,035,088
</TABLE>
The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source I in 1998:
<TABLE>
<CAPTION>
AVERAGE
EFFECTIVE
PERCENTAGE OF ANNUAL RENTAL
NUMBER OF UNITS RATE
PROPERTY NAME LOCATION UNITS OCCUPIED PER UNIT
- ---------------------------------------- ---------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments.................. Jacksonville, NC 108 99% $ 6,644
Fox Hollow Apartments................... High Point, NC 184 96 6,480
Highland Park Apartments................ Columbus, OH 252 94 6,392
Misty Springs Apartments................ Daytona Beach, FL 128 98 6,509
The Ponds at Georgetown................. Ann Arbor, MI 134 99 10,362
Waterman's Crossing..................... Newport News, VA 260 100 7,535
Water's Edge Apartments................. Lake Villa, IL 108 97 9,274
-----
1,174
-----
-----
</TABLE>
In the opinion of the Cap Source I General Partners, each of the properties
is adequately covered by insurance.
CAP SOURCE II
HISTORY. Cap Source II, a Delaware limited partnership, was formed August
22, 1986. The general partners of Cap Source II are Insured Mortgage Equities,
II L.P. and America First Capital Source II L.L.C. The Initial Limited Partner
of Cap Source II, H/T Corp. II-A, a Delaware corporation wholly owned by the Cap
Source II General Partners, assigned some of the ownership attributes of the
limited
88
<PAGE>
partner interests to the Cap Source II investors, including rights to a
percentage of Cap Source II's income, gain, losses, deductions, credits and
distributions. H/T Corp. II-A has agreed to vote the limited partner interests
as directed by the Cap Source II investors. The Cap Source II investors hold
beneficial assignment certificates, which represent beneficial assignments of
the limited partner interests in Cap Source II.
Cap Source II was formed to invest principally in federally insured
mortgages on multifamily housing property (the "Cap Source II Mortgage
Securities") and to acquire, hold, sell and otherwise deal with limited
partnership interests (the "Cap Source II Partnership Equity Interests") in the
Cap Source II Operating Partnerships. The Cap Source II partnership agreement
originally provided that the BACs would be listed on NASDAQ for trading. The
investors voted by proxy not to list the BACs on NASDAQ.
Cap Source II's assets originally consisted of debt and equity financing for
five multifamily rental housing properties. Cap Source II's investments in these
properties consisted of: (a) approximately 85% in the form of permanent
mortgages and/or construction loans, each of which was insured or guaranteed, in
an amount substantially equal to the face amount of the mortgage, by the FHA or
GNMA; and (b) the balance to purchase up to a 99% limited partner interest in
limited partnerships which developed, constructed, own and operate these
properties.
The Cap Source II Operating Partnerships were structured with the developer
of the respective property serving as the general partner (the "Cap Source II
Operating General Partner") with a 1% interest, Cap Source II as the limited
partner with a 98.99% interest and CS Properties II, Inc., a corporation wholly
owned by the Cap Source II General Partners, as the special limited partner (the
"Cap Source II Special Limited Partner") with a .01% interest. The Cap Source II
Special Limited Partner has the power, among other things, to remove the Cap
Source II Operating General Partners under certain circumstances and to consent
to the sale of the Cap Source II Operating Partnerships' Assets. In the only
exception to the above-described original structuring, in one of the Cap Source
II Operating Partnerships, the Ponds at Georgetown L.P., Cap Source II is a
limited partner with a 68.7% interest and Cap Source I, is a limited partner
with a 30.29% interest.
Since inception, Cap Source II has been repaid by GNMA on one of its Cap
Source II Mortgage Securities, and, as a result, it no longer holds a Cap Source
II Partnership Equity Interest in the Cap Source II Operating Partnership which
owned the property collateralizing the repaid mortgage.
As a result of the foregoing, at December 31, 1998, Cap Source II held debt
and/or equity investments in four properties. These investments consist of (1)
three mortgage-backed securities guaranteed as to principal and interest by
GNMA, collateralized by first mortgage loans insured as to principal and
interest by FHA on multifamily housing properties located in Michigan and
Florida; (2) one first mortgage loan insured as to principal and interest by FHA
on a multifamily housing property located in North Carolina; and (3) Cap Source
II Partnership Equity Interests in four limited partnerships. Cap Source II also
holds reserve investments in the form of cash and cash equivalents and
investments in GNMA securities backed by pools of single family mortgages (the
"Cap Source II Reserve Investments").
The Cap Source II Mortgage Securities provide Cap Source II with monthly
payments of principal and interest which are guaranteed either by GNMA or FHA.
The Cap Source II Partnership Equity Interests were intended to be sufficient to
cover all costs not covered by the Cap Source II Mortgage Securities until the
Cap Source II Operating Partnerships' income was sufficient to cover their
expenses, including debt service on the Cap Source II Mortgage Securities, as
well as a return to Cap Source II on its investment during the period. The
current return to Cap Source II on its Cap Source II Partnership Equity
Interests is a function of the net cash flow generated by the properties and is
dependent on the rental and occupancy rates and on the level of expenses at the
properties.
The FHA Loan and GNMA Certificates owned by Cap Source II are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of FHA
and GNMA are backed by the full faith
89
<PAGE>
and credit of the United States government. The Cap Source II Partnership Equity
Interests, however, are not insured or guaranteed. The value of these
investments is a function of the value of the real estate owned by the Cap
Source II Operating Partnerships.
The following FHA Loan and GNMA Certificates were owned by Cap Source II at
December 31, 1998. Interest income from the FHA Loan and GNMA Certificates is
the primary source of cash available for distribution to investors.
<TABLE>
<CAPTION>
AGGREGATE
GUARANTEED OR PRINCIPAL AMOUNT
PROPERTY NAME INSURED BY INTEREST RATE MATURITY DATE OUTSTANDING
- -------------------------------------------------- ------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Crane's Landing................................... GNMA 8.75% 12/15/2030 $ 10,176,802
Delta Crossing.................................... FHA 9.10 10/01/2030 6,505,857
Monticello Apartments............................. GNMA 8.75 11/15/2029 5,298,123
The Ponds at Georgetown........................... GNMA 7.50 12/15/2029 5,062,811
</TABLE>
The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source II in 1998:
<TABLE>
<CAPTION>
AVERAGE EFFECTIVE
NUMBER OF PERCENTAGE OF ANNUAL RENTAL RATE
PROPERTY NAME LOCATION UNITS UNITS OCCUPIED PER UNIT
- ---------------------------------------------- ------------------ ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Crane's Landing............................... Winter Park, FL 252 96% $ 7,577
Delta Crossing................................ Charlotte, NC 178 94 7,457
Monticello Apartments......................... Southfield, MI 106 98 9,627
The Ponds at Georgetown....................... Ann Arbor, MI 134 99 10,362
---
670
---
---
</TABLE>
In the opinion of the Cap Source II General Partners, each of the properties
is adequately covered by insurance.
90
<PAGE>
SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP BACS
SALE PRICES OF BACS
The BACs are not listed on any national or regional securities exchange or
quoted on any automated quotation system, and there is no established public
trading market for the BACs. Secondary sales activity for the BACs has been
limited and sporadic. The Cap Source General Partners monitor transfers of the
BACs (1) because the admission of the transferee as a substitute investor
requires the consent of the Cap Source General Partners under each of the
partnership agreements, and (2) to track compliance with safe harbor provisions
to avoid treatment of the partnerships as "publicly traded partnerships" for
federal income tax purposes.
Shown in the tables that follow is information regarding sale transactions
in the BACs. The information was obtained from the sources indicated. The
transactions reflected in the tables below represent only some of the sale
transactions in the BACs. There may have been other secondary sale transactions
in the BACs, although specific information regarding the transactions is not
readily available to the Cap Source General Partners. Because the information
regarding sale transactions in the BACs included in the tables below is provided
without verification by the Cap Source General Partners and because the
information provided does not reflect sufficient activity to cause the prices
shown to be representative of the values of the BACs, the information should not
be relied upon as indicative of the ability of investors to sell their BACs in
secondary sale transactions or as to the prices at which the BACs may be sold.
Therefore, the information presented should not necessarily be relied upon by
investors in determining whether or not to tender their BACs in the transaction.
The Cap Source General Partners do not believe that the secondary sale
prices of the BACs accurately reflect the value of the assets of the
partnerships because secondary sale prices are adversely affected by a variety
of factors unrelated to the value of the assets of a limited partnership.
Limited partner interests are generally traded on a sporadic basis. Sale prices
can vary dramatically based on the number of interests sold at once or over
time. Additionally, the Tax Reform Act of 1986 contained provisions which
eliminated some federal income tax advantages associated with investments in
limited partnerships and which caused limited partnerships to place restrictions
on transfers of interests to avoid taxation of income at the partnership and
partner levels. Accordingly, limited partnerships have not been well received by
investors and secondary sale prices have been adversely affected.
While the Cap Source General Partners receive some information regarding the
prices of secondary sales transactions of the BACs, the Cap Source General
Partners do not receive or maintain comprehensive information regarding all
activities of all broker/dealers and others known to facilitate secondary sales
of the BACs. The Cap Source General Partners estimate, based solely on the
transfer records of the partnerships, that the number of BACs transferred in
sale transactions, which excludes transactions believed to be between related
parties, family members or the same beneficial owner, was as follows:
91
<PAGE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
BAC SALES PRICE PER ORIGINAL
PER $1,000 ORIGINAL $1,000
INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 12/31/96 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 565.00 $ 568.00 $ 563.50 $ 917.50 (38.4)% (38.1)% (38.6)% 1,183
February............ 568.50 583.00 463.00 917.50 (38.0) (36.5) (49.5) 1,602
March............... 542.00 545.00 529.50 917.50 (40.9) (40.6) (42.3) 2,130
April............... 541.50 550.00 537.50 917.50 (41.0) (40.1) (41.4) 300
May................. 476.50 537.50 450.00 917.50 (48.1) (41.4) (51.0) 1,860
June................ N/A N/A N/A 917.50 N/A N/A N/A N/A
July................ 410.00 537.50 387.50 917.50 (55.3) (41.4) (57.8) 5,865
August.............. 454.00 537.50 374.50 917.50 (50.5) (41.4) (59.2) 914
September........... 568.50 606.00 482.50 917.50 (38.0) (34.0) (47.4) 2,740
October............. 588.50 625.00 512.50 917.50 (35.9) (31.9) (44.1) 6,355
November............ 405.00 405.00 405.00 917.50 (55.9) (55.9) (55.9) 1,875
December............ N/A N/A N/A 917.50 N/A N/A N/A N/A
</TABLE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1998 THROUGH AUGUST 31, 1998
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
BAC SALES PRICE PER ORIGINAL
PER $1,000 ORIGINAL $1,000
INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 8/31/98 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 514.06 $ 617.50 $ 405.00 $ 917.50 (44.0)% (32.7)% (55.9)% 15,773
February............ 513.77 565.00 405.00 917.50 (44.0) (38.4) (55.9) 19,948
March............... 421.00 605.00 405.00 917.50 (54.1) (34.1) (55.9) 6,283
April............... 604.00 637.50 500.00 917.50 (34.2) (30.5) (45.5) 3,400
May................. 608.00 705.50 500.00 917.50 (33.7) (23.1) (45.5) 29,621
June................ 551.00 635.50 500.00 917.50 (39.9) (30.7) (45.5) 40,838
July................ 612.00 645.00 403.00 917.50 (33.3) (29.7) (56.1) 16,017
August.............. 604.00 630.00 500.00 917.50 (34.2) (31.3) (45.5) 5,692
</TABLE>
92
<PAGE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE II L.P.-A
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
BAC SALES PRICE PER ORIGINAL
PER $1,000 ORIGINAL $1,000
INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 12/31/96 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 333.50 $ 342.50 $ 300.00 $ 619.50 (46.2)% (44.7)% (51.6)% 3,250
February............ 343.00 349.50 337.50 619.50 (44.6) (43.6) (45.5) 3,589
March............... 329.50 345.00 200.00 619.50 (46.8) (44.3) (67.7) 1,254
April............... 378.50 387.50 355.00 619.50 (38.9) (37.4) (42.7) 9,160
May................. 383.50 387.50 307.50 619.50 (38.1) (37.4) (50.4) 16,613
June................ 359.00 370.00 314.00 619.50 (42.1) (40.3) (49.3) 2,375
July................ 285.00 364.00 275.00 619.50 (54.0) (41.2) (55.6) 10,339
August.............. 338.50 350.00 334.00 619.50 (45.4) (43.5) (46.1) 850
September........... 372.00 407.00 362.50 619.50 (40.0) (34.3) (41.5) 4,636
October............. 363.50 368.00 225.50 619.50 (41.3) (40.6) (63.6) 3,350
November............ 387.50 387.50 387.50 619.50 (37.4) (37.4) (37.4) 1,000
December............ 305.00 305.00 305.00 619.50 (50.8) (50.8) (50.8) 250
</TABLE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1998 THROUGH AUGUST 31, 1998
CAPITAL SOURCE II L.P.-A
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
PER ORIGINAL
BAC SALES PRICE PER $1,000 $1,000
ORIGINAL INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 8/31/98 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 325.50 $ 325.50 $ 325.50 $ 619.50 (47.5)% (47.5)% (47.5)% 17,203
February............ 372.93 387.50 350.00 619.50 (39.8) (37.4) (43.5) 5,500
March............... 313.00 350.00 300.00 619.50 (49.5) (43.5) (51.6) 11,740
April............... 391.00 402.50 300.00 619.50 (36.9) (35.0) (51.6) 4,100
May................. 369.50 400.00 342.50 619.50 (40.4) (35.4) (44.7) 8,248
June................ 316.50 384.50 300.00 619.50 (48.9) (37.9) (51.6) 26,186
July................ 373.50 385.00 255.50 619.50 (39.7) (37.9) (58.8) 33,476
August.............. 341.50 385.00 300.00 619.50 (44.9) (37.9) (51.6) 1,992
</TABLE>
BAC HOLDERS
NUMBER OF BAC HOLDERS. As of the record date, Cap Source I had outstanding
3,374,222 BACs which were held of record by approximately investors.
Cap Source II had outstanding 4,011,101 BACs which were held of record by
approximately investors.
BENEFICIAL OWNERS OF MORE THAN 5% OF THE BACS. There are no persons known
by the Cap Source General Partners to be the beneficial owners of more than 5%
of the outstanding BACs in either of the partnerships.
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<PAGE>
PARTNERSHIP DISTRIBUTIONS
Cap Source I made the following cash distributions per BAC for the two most
recent fiscal years and the interim period ended June 30, 1999:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------ ------------------
<S> <C> <C> <C>
Regular quarterly distributions
Income......................................... $ .4248 $ .5582 $ .8952
Return of capital.............................. .0802 .4518 .1148
------ ------- -------
$ .5050 $ 1.0100 $ 1.0100
------ ------- -------
------ ------- -------
Distributions
Paid out of cash flow.......................... $ .5050 $ 1.0100 $ 1.0100
------ ------- -------
------ ------- -------
</TABLE>
Cumulative cash distributions as of June 30, 1999, totaled $17.53 and $17.32
per original $20.00 BAC, depending on the initial closing date of the investor's
investment. These amounts include a $1.65 per BAC special return of capital
distribution paid to investors in 1993. Accordingly, current cash distributions
are based on an adjusted BAC value of $18.35.
Regular quarterly distributions to investors consist primarily of interest
on the FHA Loans and GNMA Certificates. Additional cash for distributions is
received from other temporary investments. Cap Source I is permitted to
replenish reserves with cash flows in excess of distributions paid. For the six
months ended June 30, 1999, a net amount of $4,915 of undistributed cash flow
was placed in reserves. The total amount held in reserves at June 30, 1999, was
$9,098,013, of which $754,583 was invested in GNMA Certificates.
Cap Source II made the following cash distributions per BAC for the two most
recent fiscal years and the interim period ended June 30, 1999:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Regular monthly distributions
Income......................................... $ .2103 $ .2175 $ .4082
Return of capital.............................. .0147 .4425 .4018
------ ------ ------
$ .2250 $ .6600 $ .8100
------ ------ ------
------ ------ ------
Distributions
Paid out of cash flow.......................... $ .2250 $ .4005 $ .5172
Paid out of reserves........................... $ -- .2595 .2928
------ ------ ------
$ .2250 $ .6600 $ .8100
------ ------ ------
------ ------ ------
</TABLE>
Cumulative cash distributions as of June 30, 1999, totaled $19.39 and $18.42
per original $20.00 BAC, depending on the initial closing date of the investor's
investment. These amounts include a $7.61 per BAC special return of capital
distribution paid to investors in 1993. Accordingly, current cash distributions
are based on an adjusted BAC value of $12.39.
Regular monthly distributions to investors consist primarily of interest on
the FHA Loan and the GNMA Certificates. Additional cash for distributions is
received from other temporary investments. Cap Source II is permitted to
replenish its reserves with cash flows in excess of distributions paid. For the
six
94
<PAGE>
months ended June 30, 1999, $52,941 was placed into reserves for cash flow in
excess of the regular monthly cash distributions.
Following completion of the transaction, investors may receive a final
distribution from their partnership for the period commencing on the first day
following the end of the last fiscal quarter for which distributions are made
and ending on the effective date.
THIRD PARTY TENDER OFFERS
The Cap Source General Partners are aware of the following unsolicited
tender offers made by parties unaffiliated with the Cap Source General Partners
to purchase BACs in Cap Source I and Cap Source II between July of 1996 and May
of 1999. The Cap Source General Partners recommended that investors in each
partnership reject these offers because they were below what the Cap Source
General Partners believed was fair value for the BACs when the offers were made.
CAPITAL SOURCE L.P.
TENDER OFFERS AS OF MAY 1999
<TABLE>
<CAPTION>
DATE OF PER BAC
TENDER OFFER OFFER PRICE NUMBER OF BACS PARTY MAKING OFFER
- ------------ ----------- ---------------- ----------------------------------------------
<C> <C> <S> <C>
7/3/96 $ 6.00 Up to 150,000 Equity Resource Fund XIX
5/9/97 $ 8.00 Up to 4.9% First Trust Co., L.P.
9/4/97 $ 8.10 Up to 165,150 Maxwell Bay, LLC
9/4/97 $ 8.10 Up to 75,000 Sierra Fund 3
11/25/97 $ 8.10 Up to 142,600 Maxwell Bay, LLC
5/22/98 $ 10.00 Up to 140,000 Maxwell Bay, LLC
6/10/98 $ 11.00 Up to 50,000 Sierra Fund 3
7/24/98 $ 11.50 Up to 101,227 Everest Investors 8, LLC
5/13/99 $ 10.00 Up to 165,337 Madison Liquidity Investors 104, LLC
</TABLE>
CAPITAL SOURCE II L.P.-A
TENDER OFFERS AS OF MAY 1999
<TABLE>
<CAPTION>
DATE OF PER BAC
TENDER OFFER OFFER PRICE NUMBER OF BACS PARTY MAKING OFFER
- ------------ ------------- ---------------- ----------------------------------------------
<C> <C> <S> <C>
7/3/96 $ 4.00 Up to 180,000 Equity Resource Fund XIX
5/9/97 $ 5.50 Up to 4.9% First Trust Co., L.P.
8/11/97 $ 5.00 Up to 196,240 Maxwell Bay, LLC
11/25/97 $ 5.50 Up to 182,800 Maxwell Bay, LLC
5/22/98 $ 6.25 Up to 178,000 Maxwell Bay, LLC
5/13/99 $ 5.00 Up to 196,544 Madison Liquidity Investors 104, LLC
</TABLE>
95
<PAGE>
SELECTED FINANCIAL DATA OF THE PARTNERSHIPS
The following selected financial data of the partnerships has been derived
from, and should be read in conjunction with, the financial statements and
related notes for, and as of, the end of the period indicated, which are
contained in the separately bound supplement delivered with this
prospectus/consent solicitation statement. The financial statements as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, have been audited by KPMG LLP, independent public
accountants, whose reports thereon are included in the separately bound
supplement. The financial statements as of and for the six months ended June 30,
1998 and 1999, are unaudited.
Reference is made to the Pro Forma Financial Information which reflects the
historical financial statements of the company and the partnerships after giving
effect to the transaction under the assumptions and adjustments set forth in the
accompanying notes to the pro forma financial statements.
SELECTED FINANCIAL DATA
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities
income.......................... $3,924,176 $3,895,475 $3,340,747 $3,302,727 $3,262,922 $1,638,110 $1,612,472
Interest income on temporary cash
investments and U.S. government
securities...................... 130,252 193,257 523,636 554,604 530,396 274,605 206,920
Equity in losses of Operating
Partnerships.................... (232,361) (255,500) (257,512) (178,550) (186,942) (10,000) (50,000)
Other income...................... 2,400 3,950 9,749 5,334 6,300 3,450 2,000
Operating and administrative
expenses........................ (359,592) (365,125) (429,313) (632,894) (1,710,173) (419,369) (323,534)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $3,464,875 $3,472,057 $3,187,307 $3,051,221 $1,902,503 $1,486,796 $1,447,858
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income, basic and diluted, per
BAC............................. $ 1.02 $ 1.02 $ 0.94 $ 0.90 $ 0.56 $ 0.44 $ 0.42
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash distributions paid or accrued
per BAC......................... $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100 $ 0.5050 $ 0.5050
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in FHA Loans........... $12,716,874 $12,654,188 $12,585,755 $12,511,046 $12,429,485 $12,471,160 $12,385,942
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in GNMA Certificates... $31,770,666 $24,388,920 $23,937,795 $23,588,139 $23,454,411 $23,407,224 $23,261,408
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets...................... $47,448,997 $47,541,721 $47,248,776 $46,965,808 $45,707,177 $46,728,225 $45,172,315
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
96
<PAGE>
SELECTED FINANCIAL DATA
CAPITAL SOURCE II L.P.-A
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities
income.......................... $2,526,266 $2,561,901 $2,520,727 $2,499,844 $2,426,356 $1,237,723 $1,161,046
Interest income on temporary cash
investments and U.S. government
securities...................... 181,315 200,678 147,530 91,327 42,339 19,317 7,491
Equity in losses of Operating
Partnerships.................... (209,805) (109,900) -- (121,450) (407,218) -- --
Other income...................... 2,900 4,650 6,950 3,800 4,750 2,700 400
Gain on sale of mortgage-backed
securities...................... -- 15,670 -- -- 35,101 14,565 --
Operating and administrative
expenses........................ (479,388) (499,903) (552,170) (819,516) (1,220,213) (691,447) (316,875)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $2,021,288 $2,173,096 $2,123,037 $1,654,005 $ 881,115 $ 582,858 $ 852,062
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income, basic and diluted, per
BAC............................. $ 0.50 $ 0.54 $ 0.52 $ 0.41 $ 0.22 $ 0.15 $ 0.21
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash distributions paid or accrued
per BAC......................... $ 0.8100 $ 0.8100 $ 0.8100 $ 0.8100 $ 0.6600 $ 0.4050 $ 0.2250
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in FHA Loan............ $6,619,989 $6,595,251 $6,568,139 $6,538,424 $6,505,857 $6,522,514 $6,488,420
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in GNMA Certificates... $22,799,369 $22,142,421 $21,895,675 $21,674,940 $20,497,706 $21,149,726 $20,433,993
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets...................... $33,589,321 $32,541,767 $31,340,155 $29,829,534 $27,771,206 $28,663,394 $27,449,758
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
DESCRIPTION OF THE UNITS
GENERAL
The units represent assignments of limited partner interests by the Initial
Limited Partner of the company. Although unitholders will not be limited
partners of the company and have no right to be admitted as limited partners,
they will be bound by the terms of the company's limited partnership agreement
and will be entitled to the same economic benefits, including the same share of
income, gains, losses, deductions, credits and cash distributions, as if they
were limited partners of the company. A copy of the company's limited
partnership agreement is included as Appendix D to this prospectus/consent
solicitation statement.
There is currently no established trading market for the units, and before
the transaction, the units will not be listed on any national securities
exchange or quoted on an automated quotation system. Therefore, no sale or bid
price information is available with respect to the units. The units have been
approved for listing on NASDAQ under the symbol "AFREZ". However, there can be
no assurance that a public trading market for the units will develop. The
company will meet the market value standards established by NASDAQ.
A transfer or assignment of 50% or more of the outstanding units within a
12-month period may terminate the company for federal income tax purposes, which
may result in adverse tax consequences to unitholders. To protect against
termination, the company's limited partnership agreement permits the General
Partner to take appropriate action with respect to the manner in which the units
are or may be transferred or traded in order to preserve the status of the
company as a limited partnership, rather than an association or publicly traded
partnership taxable as a corporation for federal income tax purposes, or to
insure that unit holders will be treated as limited partners for federal income
tax purposes. This may include the General Partner suspending or deferring any
transfers or assignments of units at any time after
97
<PAGE>
it determines that 45% or more of all units may have been transferred, as
defined by the Code, within a 12-month period and that the resulting termination
of the company for tax purposes would adversely affect the economic interests of
the unitholders. Any deferred transfers will be effected, in chronological order
to the extent practicable, on the first day of the next succeeding period in
which transfers can be effected without causing a termination of the company for
tax purposes or any adverse effects from termination, as the case may be.
A purchaser of units will be recognized as a unitholder for all purposes on
the books and records of the company on the day on which the General Partner, or
other transfer agent appointed by the General Partner, receives satisfactory
evidence of the transfer of units. All unitholder rights, including voting
rights, rights to receive distributions and rights to receive reports, and all
allocations in respect of unitholders, including allocations of income and
expenses, will vest in, and be allocable to, unitholders as of the close of
business on such day. MAVRICC Management Systems, Inc. of Troy Michigan, has
been appointed by the General Partners to act as the registrar and transfer
agent for the units.
UNITS ELIGIBLE FOR FUTURE SALE
Units received by investors in the transaction will be freely transferable
without restriction, except for the restrictions on transfer contained in the
company's limited partnership agreement, or further registration under the
Securities Act, except for units acquired by "affiliates" of the company, as
that term is defined in Rule 144 under the Securities Act, which sales will have
the volume limitations and other restrictions described below.
In general, under Rule 144 as currently in effect, a person, including a
person who may be deemed an "affiliate" of the company, who has held restricted
securities for at least one year may sell those securities, with some volume
limitations and other restrictions, without registering them under the
Securities Act. Rule 144 generally also permits sales of restricted securities,
without any volume limitations, by a person who has not been an "affiliate" of
the company for at least three months preceding the sale of the securities and
who has held those restricted securities for at least two years.
THE NOTES
GENERAL
If the investors holding a majority of outstanding BACs of a partnership
approve the transaction and the other conditions to the transaction are met, the
transaction will be completed and the approval will bind all investors in that
partnership, including those who abstain from voting, fail to return a completed
consent card or vote "NO" against the transaction. All investors will be given
the opportunity to elect to receive either units or notes. An investor who
failed to return a completed consent card will receive units of the company for
his BACs. Each investor will receive written instructions on the proper
procedures for completing and submitting the consent card. See "CONSENT
SOLICITATION." Some of the provisions of the notes and the indenture under which
they will be issued are summarized under "--Notes" below.
Neither the partnership agreements nor the Delaware Partnership Law give an
investor the right to demand any type of dissenter's rights or to elect to
receive the appraised value of his BACs in connection with the transaction. No
dissenter's rights will be given to dissenting investors by the partnerships or
the company in connection with the transaction. See "CONSENT SOLICITATION--No
Right of Appraisal."
ALLOCATION OF NOTES
The aggregate principal amount of notes to be issued by the company may not
exceed the maximum note limitation, which is $20 million. If dissenting
investors elect to receive notes in excess of the maximum note limitation, the
transaction will not be completed. In the event dissenting investors do not
elect to receive notes in excess of the maximum note limitation, but the total
amount of notes allocable to all
98
<PAGE>
investors who elect to receive notes exceeds the limitation, notes will be
allocated first to dissenting investors who elected to receive notes and any
remaining notes will be allocated on a pro rata basis, in denominations of
$1,000, to those investors who elected to receive notes and either abstained
from voting by indicating their abstention on the consent card or voted "YES" in
favor of the transaction. In this event, the abstaining investors and consenting
investors who elected to receive notes will receive units in an amount equal to
the difference between the exchange value allocable to these investors and the
amount of notes distributed to these investors.
NOTES
The following summaries describing provisions of the notes do not purport to
be complete and are qualified in their entirety by reference to all of the
provisions of the indenture, which is included as an exhibit to the Registration
Statement.
GENERAL. The notes, if any, will be junior, unsecured obligations of the
company callable on or after the date of issuance, issued under the indenture,
to be dated as of the first day of the month in which the notes are issued, by
and between the company and U.S. Bank Trust National Association, as Trustee.
The notes will be limited to $20 million aggregate principal amount and will be
designated as Variable Rate Junior Notes Callable On or After the Date of
Issuance. The Company may, at its option, pay cash instead of issuing notes.
The company may issue additional indebtedness, which may be secured, only in
compliance with the covenants of the notes for the issuance of senior debt.
On , 2007 (the "Maturity Date") the outstanding principal balance of
the notes, plus accrued but unpaid interest, will be payable in full. The notes
will be payable as follows:
(a) annual installments of accrued interest, payable on the fifteenth
day of each January (an "Interest Payment Date"), commencing on the first
Interest Payment Date following the issuance of the notes and continuing
until the entire interest on and principal of each note is paid in full; and
(b) the unpaid principal balance and accrued but unpaid interest on the
Maturity Date.
Payments under the notes will be paid to the persons in whose names the notes
are registered, with some exceptions, at the close of business on the last day
of the month preceding the applicable Interest Payment Date. The notes will be
issued in registered form without coupons in denominations of $1,000.
FRACTIONAL NOTES. Since the number of notes with a $1,000 principal balance
to which an investor is entitled is determined by multiplying the number of the
investor's BACs by the exchange ratio for allocation of notes assigned to the
investor's partnership in the merger agreement, the investor may be entitled to
a fractional interest in a note. Rather than issue a fractional interest in a
note, the company will issue to each of these investors a promissory note with
an original principal balance equal to the fraction times $1,000, subject to the
company's right, at its option, to pay cash instead of any portion of a
promissory note. The promissory notes will be issued under the terms of the
indenture, but will not be listed on a national securities exchange.
INTEREST. For each period from and including an Interest Payment Date to
and including the day immediately preceding the next Interest Payment Date, the
notes will bear interest at a rate equal to 120% of the annual applicable
federal rate for debt instruments with a term of not over three years as
determined under the Code and applicable regulations thereunder. As of September
30, 1999, 120% of the annual applicable federal rate for debt instruments with a
term of not over three years was 6.52%. Therefore, the interest rate on the
notes as of September 30, 1999, is 6.52%. The interest rate will remain in
effect until the first day of the calendar year following completion of the
transaction. Interest on the notes will be adjusted annually and computed on the
basis of a 360-day year for the actual number of days elapsed.
99
<PAGE>
OPTIONAL REDEMPTION. The company may, at its option, redeem all or any
portion of the notes or promissory notes from time to time by giving written
notice of the proposed redemption to the holders of the notes or the promissory
notes, as the case may be. In the event less than all of the notes and
promissory notes are to be redeemed, the Trustee will select first the
promissory notes to be redeemed and then the notes to be redeemed by lot until
all notes and promissory notes are paid in full and redeemed. The redemption
price will be 100% of the outstanding principal balance of these notes or the
promissory notes, as the case may be, together with accrued interest to the date
fixed for redemption. There will be no sinking fund established to retire the
notes or the promissory notes.
MANDATORY REDEMPTION. The indenture requires that the company use 80% of
the net proceeds from sales or refinancings of assets of the company that were
owned by a partnership prior to the transaction ("Designated Assets") to prepay
the notes. Net proceeds from sales or refinancings of Designated Assets
generally means the gross proceeds of all sales, exchanges or refinancings
received with respect to assets acquired by the company from each partnership in
the transaction, less all costs and expenses incurred by the company in
connection with these sales, exchanges or refinancings. Upon receipt by the
company, at least 80% of the net proceeds from sales or refinancings of
Designated Assets will be deposited into a segregated trust account established
under the indenture, and when the funds in the account equal or exceed $5
million, the proceeds will be used to redeem the notes as provided in the
indenture. Eighty percent of the net proceeds from sales or refinancings of Cap
Source I Designated Assets will be used to prepay the notes held by former Cap
Source I investors. Eighty percent of the net proceeds from sales or
refinancings of Cap Source II Designated Assets will be used to prepay the notes
held by former Cap Source II investors. In the event less than all of the notes
are to be redeemed under this provision, the Trustee will select the promissory
notes and the notes to be redeemed in the same manner as for an optional
redemption until all notes and promissory notes are paid in full and redeemed.
LIMITATION ON INDEBTEDNESS. The indenture prohibits the company from
incurring any indebtedness if the new indebtedness would cause the company's
aggregate principal amount of indebtedness then outstanding to exceed 70% of the
greater of (1) the value which is placed by an independent appraiser on all the
assets of the company as of the date of the transaction, and (2) the value
placed by an independent appraiser on all assets of the company as of the date
of determination.
TRANSACTION, CONVEYANCE OR TRANSFER. The company will not merge or
consolidate with or into, or sell, assign, transfer, lease or otherwise dispose
of all or substantially all of its properties and assets as an entirety to any
other entity or entities, and the company will not permit any of its wholly
owned subsidiaries to enter into any such transaction if, in the aggregate, the
transaction would result in a sale, assignment, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
company and its subsidiaries on a consolidated basis to any other entity or
entities, unless at the time and after giving effect thereto (1) either (a) if
the transaction is a merger, the company shall be the surviving entity, or (b)
the entity formed by the transaction or into which the company or the subsidiary
is merged or to which the properties and assets of the company or the
subsidiary, as the case may be, substantially as an entirety, are transferred
shall be a corporation organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall
expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the company
under the notes and the indenture, and in each case, the indenture shall remain
in full force and effect; (2) immediately before and immediately after giving
effect to the transaction on a pro forma basis, including, without limitation,
any indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction, no event of default shall have occurred and be
continuing and the company, or the surviving entity, as the case may be, after
giving effect to this transaction on a pro forma basis, could incur $1.00 of
additional indebtedness under "--LIMITATION ON INDEBTEDNESS" above; and (3)
immediately after giving effect to such transaction on a pro forma basis, the
consolidated net worth of the company, or the surviving entity, as the case may
be, is at least equal to the consolidated net worth of the company immediately
before such transaction.
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EVENTS OF DEFAULT. A default will occur under the indenture with respect to
the notes if (1) the company defaults in the payment of the principal of any
note when the same becomes due and payable at maturity, upon redemption or
otherwise, (2) the company defaults in the payment of interest on any note when
the same becomes due and payable and the default continues for a period of 30
days, (3) the company fails to comply with any of its other agreements contained
in the indenture or the notes for a period of 30 days after written notice
thereof, as provided in the indenture, (4) the company shall default under any
agreement relating to any other indebtedness of the company where the
indebtedness exceeds $5 million, or (5) certain events of bankruptcy, insolvency
or reorganization shall have occurred.
If an event of default specified in (1) through (4) above occurs and is
continuing, either the Trustee or the holders of not less than 25% in principal
amount of the notes then outstanding may declare all unpaid principal of and
interest accrued on the notes to be immediately due and payable. In the event of
a default specified in (5) above, all unpaid principal and accrued interest on
the notes shall be immediately due and payable without any declaration or other
act on the part of the Trustee or any noteholders. Upon specific conditions
these declarations may be annulled by the holders of a majority in principal
amount of the notes and past defaults may be waived, except a continuing default
in payment of principal of or interest on the notes, by the holders of a
majority in principal amount of the notes.
The holders of a majority in principal amount of the outstanding notes may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee, provided that the direction shall not be in conflict with any rule of
law or the indenture. Before proceeding to exercise any right or power under the
indenture at the direction of the holders, the Trustee shall be entitled to
receive from the holders reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with any
such direction.
The company will be required to furnish to the Trustee annually a statement
of certain officers of the company as to their knowledge of the company's
compliance with all conditions and covenants under the indenture. The indenture
requires the Trustee to give to all noteholders notice of any default by the
company, unless the default shall have been cured or waived; however, except in
the case of a default in the payment of principal of or interest on any
outstanding notes, the Trustee is entitled to withhold the notice if a trust
committee of directors or certain officers of the Trustee in good faith
determine that withholding the notice is in the interest of the holders of the
outstanding notes.
DEFEASANCE AND DISCHARGE. The indenture provides that the company will be
discharged from obligations in respect of the notes under the indenture,
excluding some obligations, like the obligation to pay principal of and interest
on the notes then outstanding, obligations of the company in the event of
acceleration following default in the payment of any installment of interest on
and, if applicable, principal of the notes and obligations to register the
transfer or exchange of the outstanding notes and to replace stolen, lost or
mutilated certificates, upon the irrevocable deposit, in trust, of cash or U.S.
government obligations which through the payment of interest and principal
thereof in accordance with their terms will provide cash in an amount sufficient
to pay any installment of principal of and interest on the outstanding notes on
the stated maturity of the installments in accordance with the terms of the
indenture and the outstanding notes, provided that the company has received an
opinion of counsel or a favorable ruling of the IRS stating that this type of a
discharge will not be deemed, or result in, a taxable event with respect to
holders of the outstanding notes and that other conditions are met.
CHANGE IN CONTROL. The indenture does not contain provisions requiring
redemption of the notes or promissory notes by the company, or adjustment to any
terms of the notes or promissory notes, upon any change in control of the
company.
LIMITED PROTECTION AGAINST DECLINE IN CREDIT QUALITY. The indenture does
not contain any provisions protecting noteholders against a sudden and dramatic
decline in credit quality of the notes or promissory
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notes resulting from takeovers, restructuring, reorganizations or similar
transactions involving the company.
MODIFICATION OF THE INDENTURE. The company and the Trustee may amend or
supplement the indenture or the notes without the consent of the noteholders to:
(1) provide for uncertificated notes in addition to or in place of certificated
notes, (2) add covenants and events of default for the protection of the
noteholders, (3) cure any ambiguity, defect or inconsistency in the indenture or
to make any other change that does not adversely affect the rights of any
noteholder, and (4) evidence the acceptance of appointment by a successor
trustee.
The indenture also contains provisions permitting the company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the notes then outstanding, to add any provisions to, or
change in any manner or eliminate any of the provisions of, the indenture, or
modify in any manner the rights of the holders of the notes, provided that the
company and the Trustee may not, without the consent of the holder of each
outstanding note affected thereby, (1) reduce the amount of notes whose holders
must consent to an amendment, supplement or waiver; (2) reduce the rate of or
change the time for payment of interest on any note; (3) reduce the principal of
or change the fixed maturity of any note or alter the redemption provisions with
respect thereto; (4) waive a default in the payment of the principal of or
interest on any note; or (5) make any note payable in money other than that
stated in the note.
GOVERNING LAW. The notes, the promissory notes and the indenture will be
governed by and construed under the laws of the State of Delaware.
THE TRUSTEE. U.S. Bank Trust National Association (the "Trustee"), will be
the Trustee under the indenture. The Trustee does not serve as a trustee under
any other indenture relating to obligations of the company and has no prior
business relationship with the company, the Cap Source General Partners or any
of their affiliates.
PURCHASE OF NOTES IN SECONDARY MARKET. In addition to making partial
redemption of the notes, the company may purchase notes in the secondary market,
and these purchases may be at discounts from the outstanding principal balance
of the notes. These purchases have the effect of retiring the obligations, but
do not obligate the company to follow the procedures for partial redemption of
the notes described in the indenture.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion describes the material federal income tax
considerations to the partnerships, the investors, the unitholders and the
company that may result from the transaction. This discussion is based upon the
provisions of the Internal Revenue Code of 1986, (the "Code"), applicable
Treasury Department regulations promulgated thereunder (the "Regulations"),
rulings of the Internal Revenue Service (the "Service") and applicable court
decisions.
There can be no assurance that provisions of the Code, Regulations or
rulings will not be changed by new legislation, Regulations or rulings, which
may or may not apply retroactively to transactions entered into or completed
prior to the date of the change, or that there will not be differences of
opinion as to the interpretation of provisions of the Code and Regulations and
their application to the partnerships, the investors, the unitholders, the
company and the holders of the notes.
This summary is directed primarily to investors who are individual residents
or citizens of the United States. This summary does not discuss federal income
tax consequences peculiar to insurance companies, banking institutions,
regulated investment companies, real estate investment trusts, or other persons
or entities to which special rules apply by virtue of the nature of their
specific activities. Specific consideration
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is given, however, to entities that are exempt from federal income taxation in
"--Considerations for Tax-Exempt Unitholders" below. In addition, no
representations are made as to state or local tax consequences resulting from
the transaction or an investment in the company. In particular, investors who
are nonresident aliens are urged to contact their tax advisors concerning the
potential effects of the relevant provisions of the Foreign Investment in Real
Property Tax Act of 1980 to the transaction. ACCORDINGLY, THIS SUMMARY IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND INVESTORS AND IN
PARTICULAR TAX-EXEMPT INVESTORS, SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS
TO THEIR PARTICULAR CIRCUMSTANCES IN RELATION TO THE TAX CONSIDERATIONS
DESCRIBED IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT.
OPINIONS OF COUNSEL
Kutak Rock, counsel to the company, will render its opinion subject to
various assumptions and conditioned upon certain representations as to factual
matters, to the effect that, subject to the limitations described in this
prospectus/consent solicitation statement: (a) the transaction will be an
exchange subject to the nonrecognition provisions of Section 721 of the Code;
(b) the company will be characterized as a partnership for federal income tax
purposes; and (c) the discussion that follows fairly summarizes the material
federal income tax considerations associated with the transaction. It should be
noted that a ruling from the Service will not be requested and that the opinion
of counsel, unlike a ruling by the Service, is not binding on the Service or any
court. Therefore, no assurance can be given that the Service will not challenge
any views expressed in this discussion.
CERTAIN TAX DIFFERENCES BETWEEN
THE OWNERSHIP OF BACS AND THE UNITS
Investors are treated as limited partners of the partnerships for federal
income tax purposes. The partnerships are not subject to federal income taxation
and, instead, each investor is required to take into account his or her share of
income, deductions or loss of the partnership in which he or she invested,
regardless of whether any cash is distributed. The character of income to each
investor is dependent upon its character to the partnerships. Upon completion of
the transaction, the investors in Cap Source II will receive units in
liquidation of Cap Source II and, with respect to Cap Source I, the BACs of Cap
Source I investors will convert to units. Thereby, the investors become
unitholders of the company, which will be characterized as a partnership for
federal income tax purposes. Since the partnerships and the company are all
characterized as partnerships for federal income tax purposes, the taxation of
unitholders will, in most respects, be the same as the taxation of the
investors. See "--Taxation of Unitholders" and "--Taxation of The Company
Subsequent to the Transaction" below.
TAX TREATMENT OF THE TRANSACTION
OVERVIEW. The transaction will be completed as described in this
prospectus/consent solicitation statement under the laws of the State of
Delaware. For federal income tax purposes, however, the transaction shall be
treated as: (a) a contribution by Cap Source II of its assets to Cap Source I in
exchange for units, notes and the assumption of its liabilities; (b) the
distribution of the units and notes received in the transaction to the investors
in liquidation of Cap Source II; (c) the conversion of the BACs held by
investors in Cap Source I to units; and (d) the exchange of BACs in Cap Source I
for notes. In addition, the company will be considered a continuation of Cap
Source I for federal income tax purposes. See "--Tax Elections."
RECOGNITION OF GAIN OR LOSS AS A RESULT OF THE TRANSACTION. In general,
under Section 721 of the Code, no gain or loss is recognized as a result of a
contribution of property to a partnership in exchange for an interest in that
partnership. However, gain may be recognized by a contributor to the extent his
share of the liabilities of the partnership after the exchange is less than the
liabilities assumed or taken subject to by
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the partnership in connection with the transfer. Similarly, if a contributor
receives property other than partnership interests, like the notes, then the
transfer will be treated as, in part, a sale and gain will be recognized as a
result thereof. Each investor will be required to include in income a share of
any income recognized by the partnership of which he is a member even if he
receives units in connection with the transaction.
Section 721 of the Code will not apply and gain or loss will be recognized
if the transferee partnership would be treated as an investment company for
federal income tax purposes if it were a corporation. For this purpose, a
corporation would be treated as an investment company if the transfer results
directly or indirectly in the diversification of the transferors' interests and
the transferee is a corporation more than 80% of the value of the assets of
which are held for investment and are readily marketable stock or securities.
The Taxpayer Relief Act of 1997 changed the definition of an investment company
so that it includes certain partnerships if more than 80% of the value of their
assets consist of, among other things, readily marketable stock or securities,
money, stocks and other equity interests in corporations, evidences of
indebtedness, publicly traded partnership interests and interests in an entity
if substantially all of the assets of that entity are assets listed in this
sentence (the "Listed Assets"). The legislative history of the Taxpayer Relief
Act of 1997 indicates that even though money is treated as a Listed Asset, if
pursuant to a plan, money contributed to a partnership is used to acquire
assets, other than Listed Assets, the 80% test discussed above will be applied
immediately after that acquisition. In this regard, the General Partner has
represented that the cash to be contributed to the company will be used to
acquire assets, other than Listed Assets.
If there are two or more transferors in a Section 721 transaction, a
transferor may have taxable income in the event it receives interests in the
transferee with a value in excess of the property contributed by it. Thus, a
partnership, which receives units with a fair market value in excess of the fair
market value of the assets it contributes to the company, may recognize income
in amounts equal to this excess. Similarly, in the event the fair market values
of the assets of Cap Source II, the notes and the units are different from those
anticipated by the company, BAC holders of each partnership could recognize gain
as a result of the transaction.
The company (a) expects that, in addition to units, the partnerships will
receive, as a result of the transaction, notes, promissory notes or cash which
will be distributed to dissenting investors or, in some cases, investors (see
"THE NOTES"); (b) expects that more than 20% of the value of the assets of the
company, including for this purpose cash which pursuant to a plan will be
invested as described above, will be attributable to assets, other than Listed
Assets; and (c) expects that the value of the units each partnership receives
will not exceed the value of its assets contributed to the company. Based on the
foregoing, the company expects that the transaction will be treated as an
exchange subject to the nonrecognition provisions of Section 721 of the Code and
that gain will not be recognized except gain which may be recognized as a result
of the receipt of the notes or in the event the fair market value of the notes,
the assets of Cap Source II or the units is different from that anticipated by
the company.
It should be noted that the company will not request a ruling from the
Service that the transaction will be subject to the nonrecognition provisions of
Section 721 of the Code and that the opinion of counsel is based in part on
factual representations of the company. In addition, there is little guidance
regarding the interpretation of the foregoing provisions of the Taxpayer Relief
Act of 1997. Further, the valuation of the assets of the partnerships is subject
to uncertainty. As a result, there can be no assurance that the Service will
concur with the conclusions set forth in this prospectus/consent solicitation
statement.
FORMATION OF THE COMPANY. As discussed above, pursuant to the provisions of
Section 721 of the Code, the company expects that the partnerships will not
recognize gain or loss as a result of the contribution of assets to the company
in exchange for units, except as noted above. Each investor would be required to
include in income a share of any of this gain even if that investor did not vote
in favor of the transaction. The company does not expect to distribute cash to
investors which would correspond to any income
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recognized in connection with the transaction. See "RISK FACTORS--Risks
Associated with the Transaction--CERTAIN FEDERAL INCOME TAX RISKS."
The investors will be required to include in income a share of any gain
recognized in connection with the transaction. Any of this gain would be
characterized as capital gain, except for any portion of gain attributable to
the partnerships' recapture amounts. In general, an individual may only use up
to $3,000 of capital loss in excess of capital gains to offset ordinary income
in any taxable year. The amount of any of this gain recognized by an investor
would result in an increase in his adjusted basis in his BACs and a
corresponding increase in the adjusted basis of his units.
The basis of the company in assets acquired from Cap Source II will equal
Cap Source II's bases in these assets immediately prior to the transaction plus
any gain recognized by Cap Source II as a result of the transaction. The
company's holding period for assets contributed by Cap Source II will include
the period during which these assets were held by Cap Source II. The basis and
holding period of any assets of the company attributable to Cap Source I will
remain unchanged.
TERMINATION AND LIQUIDATION OF CAP SOURCE II. Section 708(b)(2)(A) of the
Code provides that in the case of a merger of two or more partnerships, the
merging partnership whose members own more than 50% of the capital and profits
of the resulting partnership is deemed to continue while the other merging
partnerships are deemed to terminate. The investors in Cap Source I will own
more than 50% of the interests in the capital and profits in the company after
the transaction. Therefore, although for state law purposes the company survives
the transaction, for federal income tax purposes, Cap Source I will be deemed to
survive the transaction and Cap Source II will terminate and distribute units in
liquidation.
As a general matter, a partner will recognize gain as a result of the
liquidation of a partnership only to the extent the amount of distributed cash
exceeds the basis of his or her partnership interest. For this purpose, some
marketable securities are treated as if they were cash. This provision will not,
however, apply to marketable securities received in a nonrecognition transaction
if: (1) the value of the marketable securities and cash exchanged by the
partnership in the nonrecognition transaction is less than 20% of all its assets
transferred in the exchange; and (2) the partnership distributes the marketable
securities acquired in the nonrecognition transaction within five years of their
acquisition. The general partners of Cap Source II do not expect that the
investors in Cap Source II will recognize gain or loss as a result of the deemed
liquidation under Section 708 of the Code.
Since Cap Source II will terminate upon completion of the transaction, the
taxable year for Cap Source II will end at that time and the Cap Source II
investors must report, in the taxable year of the transaction, their respective
share of all income, gain, loss, deduction and credits from Cap Source II
including, if any, their allocable share of gain resulting from the transaction.
An investor in Cap Source II whose taxable year differs from that of Cap Source
II may have a bunching of income because of the short taxable year.
UNITHOLDER'S BASES AND HOLDING PERIOD IN THEIR UNITS. The tax basis that
the investors will have in the units they receive as a result of the transaction
will equal the adjusted tax basis the investor had in his or her BACs prior to
the transaction increased by any taxable gain recognized as a result of the
transaction. For the purposes of calculating capital gain and loss on the sale
of units, the investors' holding period for the units will include the period
during which the investor held his or her BACs. Each unitholder will be required
to maintain a single aggregate basis for all units acquired in the company.
TAX ELECTIONS. For federal income tax purposes, the company will be deemed
a continuation of Cap Source I. See "--Tax Treatment of the
Transaction--TERMINATION AND LIQUIDATION OF CAP SOURCE II." Therefore, the
company will have the same tax elections as Cap Source I.
Some partnerships of more than 100 members may elect to apply simplified
procedures for the calculation and pass through of its income. The election is
in effect for the year for which it is made and all
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subsequent years, unless revoked with the consent of the Secretary of the
Treasury. Among other things, if this election were made, partners of the
electing large partnership would include in income a share of the partnership's
net capital gain. In addition, in computing its taxable income, an electing
large partnership would exclude 70% of its miscellaneous itemized deductions.
Further, the electing large partnership would not terminate as a result of the
sale of 50% or more of its interests. The General Partner may, in its
discretion, make this election on behalf of the company.
TAXATION OF THE COMPANY SUBSEQUENT TO THE TRANSACTION
The federal income tax consequences of owning units in the company described
in this prospectus/ consent solicitation statement are dependent upon
classification of the company as a partnership for federal income tax purposes
rather than as an association or publicly traded partnership taxable as a
corporation. For federal income tax purposes, a limited partnership, like the
company, will be treated as a partnership and its limited partners are treated
as partners therein if certain conditions, described below, are satisfied for
each of its taxable years. The General Partner believes that the partnerships
have satisfied those conditions for all of their taxable years prior to the
transaction and that the company will satisfy the conditions for all taxable
years subsequent to the transaction. Consequently, the company should be treated
as a partnership for federal income tax purposes and the federal income tax
treatment of a unitholder should be substantially similar to that of an
investor.
Upon completion of the transaction, counsel will issue its opinion to the
effect that, based upon certain representations, the company will be
characterized as a partnership for federal income tax purposes. However, no
ruling has been sought from the Service that the company will be treated as a
partnership for federal income tax purposes. The opinion will be based in part
on representations concerning the company's future operations and the sources of
its income. In the event the actual operations or income of the company differ
from that described in the representations, there can be no assurance that the
company will remain characterized as a partnership for federal income tax
purposes.
If for any reason the company were treated as an association or publicly
traded partnership taxable as a corporation for federal income tax purposes,
then: (a) the income, deductions and losses of the company would not
pass-through to the unitholders; (b) the company would be required to pay
federal income taxes on its taxable income at rates up to the maximum corporate
rate of 35%, thereby substantially reducing the amount of cash available for
distribution to unitholders; and (c) any distributions from the company would be
treated as dividends taxable as ordinary income to the extent of the current and
accumulated earnings and profits of the company.
In general, a partnership that otherwise qualifies as a partnership for
federal income tax purposes will be subject to taxation as a corporation if it
is characterized as a publicly traded partnership under Section 7704 of the
Code. A partnership will be characterized as a publicly traded partnership if
its partnership interests are traded on an established securities market like
NASDAQ. Notwithstanding the foregoing, a safe harbor provides that a publicly
traded partnership will not be taxable as a corporation, if for each of its
taxable years, at least 90% of its gross income is derived from certain passive
sources which include, among other things, rents from real property and
interest, provided that the partnership does not conduct a finance or insurance
business. The company believes that: (1) in all of the taxable years prior to
the transaction, the partnerships did not conduct a finance or insurance
business and that more than 90% of the gross income of the partnerships was
derived from real property rents or interest; and (2) subsequent to the
transaction, it will not operate a finance or insurance business and that more
than 90% of its gross income will be derived from real property rents and
interest. Therefore, the company believes that, although it may be characterized
as a publicly traded partnership, it is not and will not be subject to taxation
as a corporation for federal income tax purposes. However, in order to insure
that the company continues to qualify for the foregoing safe harbor,
restrictions will be placed on the types of activities the company may conduct
and the types of assets in which the company may invest.
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TAXATION OF UNITHOLDERS
GENERAL. For informational purposes, the company is required to report to
the Service each item of its income, gain, loss, deduction and items of tax
preference, if any. Although the company will be required to file this
informational return with the Service, the company will not be subject to any
federal income tax. Therefore, each unitholder will report on his or her
personal federal income tax return his or her distributive share of each item of
the company's income, gain, loss, deduction, credit and tax preference. Each
shareholder will be taxed on his or her distributive share of the company's
taxable income regardless of whether he or she has received or will receive any
cash distributions from the company. Moreover, a unitholder's distributive share
of the company's taxable income and the income tax payable by the unitholder
thereon, may exceed the cash actually distributed to him or her.
The income tax returns of the company may be audited by the Service, and
this audit may result in the audit of the individual returns of the unitholders.
As a result of an audit, various deductions claimed by the company on its return
could be disallowed in whole or in part, which would thereby increase a
unitholder's allocable share of taxable income or decrease a unitholder's share
of taxable loss.
Each unitholder is generally required to treat items of income, gain, loss,
deduction, credit or tax preference of the company in the same manner as
reported on the company's informational return. Failure to satisfy this
requirement could result in an adjustment to conform the unitholder's treatment
to that of the company and may cause the unitholder to be subject to penalties.
Audits of the company will be performed at the company level in a single
proceeding, rather than in separate proceedings with each unitholder.
Adjustments of the company's items of income, gain, loss, deduction, credits or
tax preference made on audit may be made by the tax matters partner. Suits
challenging a determination by the Service may be brought by the tax matters
partner. Only one such action may be litigated and all unitholders will
generally be bound by the court's final determination.
DISTRIBUTIONS. The company expects that distributions will be made in cash.
These distributions will be made to unitholders in proportion to the number of
units owned by a unitholder. A unitholder will recognize gain as a result of a
distribution of cash, or in some cases, marketable securities to the extent the
cash or marketable securities exceed the adjusted basis of his units.
Ordinarily, any of this gain will be treated as a gain from the sale or exchange
of units. See "--GAIN OR LOSS ON THE SALE OF UNITS."
PASSIVE INCOME AND LOSSES. Section 469 of the Code provides that losses or
deductions from passive trade or business activities in excess of income from
all such passive activities may not be deducted against wages, salaries,
portfolio income or other income. Similarly, credits from passive activities are
limited to tax allocable to these passive activities. Suspended losses and
credits may be carried forward and treated as deductions and credits against
income from passive trade or business activities in succeeding taxable years.
Moreover, suspended passive losses are allowed in full when the taxpayer
disposes of his entire interest in the passive activity in a fully taxable
transaction to an unrelated party.
Passive income, gain, losses and credits from publicly traded partnerships,
like the company, may only be applied against other items of income, gain or
loss from that publicly traded partnership. With respect to the passive loss
rules, the company will be deemed a publicly traded partnership. Therefore,
passive income, gain and losses from the company cannot be used to offset
passive income, gains and losses from other activities. In this regard, the
company will differ from the partnerships since the partnerships were not
characterized as publicly traded partnerships for federal income tax purposes.
Income of the company attributable to interest from mortgage loans likely
will be deemed portfolio income. Therefore, losses, if any, attributable to the
company's passive activities, like rental activities, cannot be offset against
this portfolio income. In addition, any passive income to be generated by the
company's rental activities may not be used to offset passive losses from other
sources.
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GAIN OR LOSS ON THE SALE OF UNITS. Under the IRS Restructuring and Reform
Act of 1998, in order to receive long-term capital gains rates, an individual
must now hold capital assets for 12 months. The maximum long-term capital gains
rate for individuals currently is 20%. However, an 18% maximum long-term capital
gains rate will apply to capital assets held for more than five years beginning
after December 31, 2000. In general, an individual may only use up to $3,000 of
capital loss in excess of capital gains to offset ordinary income, like wages
and interest income, in any taxable year. Assuming that a unitholder holds units
as a capital asset, and except to the extent attributable to the unitholder's
interest in the company's unrealized receivables or substantially appreciated
inventory, the sale of units will result in either capital gain or loss and be
subject to the foregoing rules.
INVESTMENT INTEREST. Investment interest, or for example, interest paid or
accrued on indebtedness incurred or continued to purchase or carry property held
for investment, is deductible by non-corporate taxpayers only to the extent it
does not exceed "net investment income," or investment income less investment
expenses. Investment income and investment interest do not include income from
or interest paid with respect to an investment that is a passive activity.
Investment interest which is not allowable as a deduction in one year pursuant
to this limitation may be carried over to subsequent years within certain
limits. Investors who borrowed to finance the purchase of their BACs should be
aware that interest on the borrowing may constitute investment interest and
would therefore be subject to the above-described limitations before and after
the transaction.
DEDUCTIBILITY OF FEES. All expenditures of the company must constitute
ordinary and necessary business expenses in order to be currently deductible,
unless the deduction for an item is otherwise expressly permitted by the Code.
The company intends to claim deductions for the disburseable cash fee and the
asset management compensation discussed in "COMPARISON OF BACS AND
UNITS--Compensation Fees and Expenses--THE COMPANY." The company believes that
these fees will be deductible as ordinary and necessary business expenses of the
company. However, because the determination as to deductibility is factually
sensitive, no assurance can be given that the deduction of any of these fees
will not be successfully challenged by the Service. If all or a portion of these
fees were disallowed as current deductions, the company's taxable income would
be increased or its losses reduced.
Section 67 of the Code limits the deductibility of an individual's
miscellaneous itemized deductions, including investment expenses, to the amount
by which the deductions exceed 2% of his or her adjusted gross income. Under
Regulation Section 1.67-2T(b) individual partners in a partnership are required
to separately take into account partnership deductions that would otherwise be
characterized as miscellaneous itemized deductions. Therefore, the unitholders
may be unable to deduct all or a portion of the company's fees and expenses.
TAX BASIS OF UNITS AND "AT-RISK" RULES. As discussed above, the investors
shall have a basis in the units they receive as a result of the transaction that
equals their adjusted basis in their BACs immediately prior to the transaction
plus any gain recognized as a result of the transaction. See "--Tax Treatment of
the Transaction--UNITHOLDER'S BASES AND HOLDING PERIOD IN THEIR UNITS."
Thereafter, each unitholder's basis in his or her units will be increased by the
amount of (a) his or her allocable share of items of income and gain of the
company and (b) any increase in his or her proportionate share of indebtedness
of the company and reduced, but not below zero, by (1) his or her allocable
share of losses and deductions of the company, (2) the amount of cash
distributions including reductions of his or her proportionate share of
liabilities, and (3) the company's basis in any property distributed by the
company.
The amount of losses of the company that may be deducted by a unitholder is
limited to the unitholder's adjusted basis in his or her units. Any excess is
carried over until the unitholder has sufficient basis to deduct the losses. The
"at-risk" rules of Section 465 of the Code further limit a unitholder's ability
to deduct losses by providing that a unitholder may not deduct losses from an
activity for a taxable year to the extent the losses exceed the aggregate amount
for which a unitholder is considered "at-risk" with respect to the activity. Any
amount in excess of this "at-risk" amount will be allowed in future taxable
years
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to the extent the unitholder has an "at-risk" amount. To the extent that any
borrowing by the company is deemed to be recourse debt or qualified nonrecourse
financing, the "at-risk" rules should not apply to the deductibility of company
losses. The company believes that all of its borrowings will be recourse debt or
qualified nonrecourse financings. Therefore, the company expects that the
"at-risk" rules will not apply to company losses.
CONSIDERATIONS FOR TAX-EXEMPT UNITHOLDERS
Unitholders that are tax-exempt entities, including charitable corporations,
pension, profit sharing or stock bonus plans, Keogh Plans, Individual Retirement
Accounts and some other employee benefit plans are subject to federal income tax
on unrelated business taxable income, for example, net income derived from the
conduct of a trade or business regularly carried on by a tax-exempt entity or by
a partnership in which it is a partner.
A $1,000 special deduction is allowed in determining the amount of unrelated
business taxable income subject to tax. Tax-exempt entities taxed on their
unrelated business taxable income are also subject to the alternative minimum
tax for items of tax preference which enter into the computation of unrelated
business taxable income. Tax-exempt persons who are members of a partnership
will be deemed engaged in the trade or business of the partnership. Moreover,
each tax-exempt person who is a member of the company will recognize unrelated
business taxable income in the event the company incurs acquisition indebtedness
with respect to its assets. Investors who are tax-exempt entities for federal
income tax purposes are urged to consult with their tax advisors with respect to
the application of the federal income tax rules associated with unrelated
taxable business income.
In addition, income generated by debt-financed property will constitute
unrelated business taxable income to tax-exempt persons. In general, certain
types of income, like interest and real property rents, are excluded from the
calculation of unrelated business taxable income. However, notwithstanding the
foregoing, income, including interest and real property rents, derived from
debt-financed property will be included in unrelated business taxable income.
Debt-financed property includes, among other things, debt incurred to acquire or
improve property and debt incurred after the acquisition or improvement if the
debt would not have been incurred but for the acquisition and improvement and at
the time of acquisition the incurrence of the debt was foreseeable.
CONSIDERATIONS FOR NON-U.S. UNITHOLDERS
A non-U.S. partner that is deemed to be engaged in a U.S. trade or business
who has income that is effectively connected to the trade or business will be
subject to regular U.S. income tax thereon. Non-resident aliens, foreign
corporations, foreign partnerships and foreign estates that are partners in a
United States partnership are generally deemed to be non-U.S. partners. A
non-U.S. partner in a partnership that is engaged in a trade or business in the
United States will be considered to be engaged in the trade or business, even if
the non-U.S. partner is only a limited partner.
Leasing property, together with the provision of services to the lessee or
the maintenance of the leased properties, generally will be deemed a U.S. trade
or business. Interest income can be deemed to be effectively connected to a U.S.
trade or business if the instrument generating the income is used or held
primarily for the principal purpose of promoting the present conduct of a U.S.
trade or business.
The company believes that subsequent to the transaction, its rental
activities, which will be conducted through the operating partnerships, will be
deemed to be a U.S. trade or business and rental income therefrom will be deemed
to be effectively connected to the U.S. trade or business. In addition, interest
income from the loans Cap Source I and Cap Source II made to the operating
partnerships likely will be deemed to be effectively connected to the company's
U.S. trade or business since the loans were made principally to promote its real
estate rental business. Therefore, a unitholder that is a non-U.S. partner will
be required to file a U.S. income tax return and pay U.S. income taxes on his
distributive share of the company's taxable income at regular U.S. income tax
rates.
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Section 1446 of the Code provides that a partnership, like the company, must
withhold effectively connected income allocable to non-U.S. partners at the
highest rate of tax imposed under Section 1 of the Code, which is currently
39.6% for individuals. Non-U.S. partners will treat their respective shares of
the foregoing withholding payments as credits against their federal income tax
liability.
Since a unitholder that is a non-U.S. partner likely will be deemed to be
engaged in a U.S. trade or business, some types of income from some other
business transactions could also be attributed to the company's U.S. trade or
business. This could cause the other income to be subject to U.S. income
taxation. Furthermore, a unitholder that is a non-U.S. partner may be subject to
tax on his distributive share of company income and gain in his country of
nationality, residence or elsewhere. The system of taxation in any such
jurisdiction, if any, may vary considerably from the U.S. tax system.
It should be noted that a non-U.S. partner unitholder's distributive share
of some investment income, like some short term investment income, may not be
considered to be income effectively connected with a U.S. trade or business of
the company and the income would not be subject to the 39.6% withholding
discussed above. However, the company, depending upon the type of income, may be
obligated to withhold tax equal to 30% of a non-U.S. partner unitholder's
distributive share of this income.
If Cap Source II realizes gain as a result of the transaction, a Cap Source
II investor that is a non-U.S. partner will be subject to the 39.6% withholding
discussed above on his distributive share of this gain. A non-U.S. partner
investor in Cap Source I that receives notes instead of units likely will be
subject to 10% withholding to the extent of the investor's interest in U.S. real
estate assets of the partnership.
It is impossible to predict the impact of the above-described principles on
specific unitholders that are non-U.S. partners, or how the provisions of tax
treaties between the U.S. and foreign governments may affect the federal income
taxation of unitholders that are non-U.S. partners. Consequently, we urge
unitholders that may be non-U.S. partners to consult their tax advisors with
respect to all U.S. federal income tax issues and other tax issues associated
with the transaction and ownership or holding of the units.
TAX ISSUES ASSOCIATED WITH NOTES
STATED INTEREST. Under general federal income tax principles, holders of
notes must include stated interest in income in accordance with their method of
tax accounting. Accordingly, holders of notes using the accrual method of tax
accounting must include stated interest in income as it accrues and holders of
notes using the cash method of tax accounting must include stated interest in
income as it is actually or constructively received.
Payments of interest to taxable holders of notes will constitute portfolio
income for purposes of Section 469 of the Code and not passive activity income.
Accordingly, this income will not be subject to reduction by losses from passive
activities, for example, any interest in a trade or business held as a limited
partner in which the holders of notes do not materially participate, of holders
of notes who are subject to the passive activity loss rules. However, income
attributable to interest payments may be offset by investment expense
deductions, subject to the limitation that individual investors may only deduct
miscellaneous itemized deductions, including investment expenses, to the extent
these deductions exceed two percent of the investor's adjusted gross income.
ORIGINAL ISSUE DISCOUNT. Original issue discount is generally defined as
the excess of a debt instrument's stated redemption price at maturity over its
issue price, subject to a statutorily-defined DE MINIMIS exception. This is
generally one-quarter of 1% of the debt instrument's stated redemption price at
maturity multiplied by the number of complete years to maturity from its issue
date. The "stated redemption price at maturity" of a debt instrument is
generally the sum of the debt instrument's stated principal amount plus all
other payments required thereunder, other than payments of "qualified stated
interest." Generally, this stated interest is unconditionally payable in cash or
in property at least annually at a single fixed rate. The
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"issue price" of a debt instrument that is not part of an issue of which a
substantial part is sold for money and is traded on an established securities
market is its fair market value when issued, or in the case of a debt instrument
that is not so traded, either (a) its stated principal amount, if the debt
instrument provides for "adequate stated interest," or generally, interest at
the applicable federal rate for the month of issuance, or (b) its "imputed
principal amount," which is generally the sum of the present value of all
payments due under the debt instrument, discounted at the applicable federal
rate, if the debt instrument does not provide for "adequate stated interest."
The Regulations have special rules applicable to debt instruments providing
for variable rates of interest. In general, if a debt instrument providing for
variable rates of interest qualifies as a variable rate debt instrument, then
the debt instrument generally would not be treated as issued with original issue
discount unless the debt instrument is issued at a price below its stated
principal amount, subject to the statutorily defined DE MINIMIS amount. A debt
instrument will qualify as a variable rate debt instrument under the Regulations
if (a) the issue price of the debt instrument does not exceed the total
noncontingent principal payments by more than a specified amount, (b) the debt
instrument provides for stated interest, paid or compounded at least annually,
at current values of (1) one or more qualified floating rates, (2) a single
fixed rate and one or more qualified floating rates, (3) a single objective
rate, or (4) a single fixed rate and a single objective rate that is a qualified
inverse floating rate. A qualified floating rate is any floating rate where
variations in the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds, including some rates based on a
qualified floating rate. An objective rate is a rate that is not itself a
qualified floating rate but which is determined using a single formula that is
fixed throughout the term of the debt instrument and which is (A) based upon one
or more qualified floating rates, (B) based upon one or more rates where each
rate would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the debt instrument is denominated,
(C) based upon the price of some types of actively traded personal property, or
(D) a combination of (A), (B) or (C).
The company believes that the variable rates of interest on the notes will
be treated as providing for stated interest, paid at least annually, at one or
more qualified floating rates and that, as a result, the notes should qualify as
variable rate debt instruments under the Regulations. Accordingly, the notes are
not expected to be issued with original issue discount.
Alternatively, if the notes qualify as variable rate debt instruments under
the Regulations but the fair market value of the notes is less than their stated
principal amount by more than the statutorily-defined DE MINIMIS amount, then
the notes would be issued with original issue discount. In which case, the
holders of notes would be required to include in gross income on a constant
yield to maturity basis the sum of the daily portions of original issue discount
for the period during the taxable year the holders of notes held the notes even
though the holders of notes may not receive a payment representing the original
issue discount in that year. Any amount of original issue discount included in
income would increase a holder of notes' tax basis in the notes.
In addition, if, contrary to the company's expectations, the notes do not
qualify as variable rate debt instruments under the Regulations, then the notes
may be subject to some of the contingent payment provisions of the Regulations.
In this event, holders of notes would generally be required to include stated
interest on the notes in income in the taxable year in which the amount of the
interest payments become fixed, regardless of their method of tax accounting.
BOND PREMIUM AND MARKET DISCOUNT. Holders of notes should have a basis in
the notes received in liquidation of their interests in a partnership equal to
the adjusted basis in their BACs, which may be more or less than the face amount
of notes received. As a result, holders of notes may have bond premium or market
discount with respect to the notes.
If a noteholder's initial adjusted basis in the notes or their fair market
value immediately after the transaction, whichever is lower, exceeds the amount
payable at maturity of the notes, or in some cases, on
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an earlier call date, the holders of notes may be able to elect to deduct the
excess using a constant yield method over the remaining term of the notes as
amortizable bond premium under Section 171 of the Code provided the notes are
held as a capital asset. Except as provided in the Regulations, the amortizable
bond premium will be treated as an offset to interest income on the notes rather
than as a separate deduction item. An election under Section 171 of the Code
generally is binding once made and applies to all obligations owned or
subsequently acquired by the taxpayer.
The market discount provisions of the Code generally provide that, subject
to a statutorily-defined DE MINIMIS exception, if a holder of a debt instrument
acquires it at a market discount and thereafter recognizes gain on a disposition
of the debt instrument, including a gift, the lesser of the gain or the portion
of the market discount that accrued while the debt instrument was held by the
holder will be treated as ordinary interest income at the time of the
disposition. For this purpose, in the case of a debt instrument not issued with
original issue discount, an acquisition at a market discount includes an
acquisition, other than an acquisition at original issuance, resulting in a
basis in the debt instrument below the debt instrument's stated redemption price
at maturity. The market discount rules also provide that a holder who acquires a
debt instrument at a market discount, and who does not elect to include the
market discount in income on a current basis, may be required to defer a portion
of any interest incurred or maintained to purchase or carry the debt instrument
until the holder disposes of the debt instrument in a taxable transaction.
The notes provide that they may be redeemed, in whole or in part, before
maturity. If some or all of the notes are redeemed, each holder of a note
acquired at a market discount would be required to treat the principal payment
as ordinary interest income to the extent of any accrued market discount on the
notes.
A holder of a debt instrument may elect to have market discount accrue on a
constant interest rate basis, as opposed to a straight line basis. The current
inclusion election, once made, applies to all market discount obligations
acquired by the holder on or after the first day of the first taxable year to
which the election applies and may not be revoked without the consent of the
Service. If a noteholder elects to include market discount in income in
accordance with the preceding sentence, the foregoing rules with respect to the
recognition of ordinary income on a sale or select other dispositions of a note
and the deferral of interest deduction on indebtedness related to the note will
not apply.
DISPOSITION OF NOTES. In general, a holder of notes will recognize gain or
loss upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (a) the amount of cash and the fair market
value of property received, except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest and (b) the holder's adjusted
basis in the note as increased by any original issue discount or market discount
previously included in income by the holder and decreased by any cash payments
received, other than payments constituting qualified stated interest, and any
amortizable bond premium deducted over the term of the note. Subject to the
market discount and bond premium rules discussed above, any of this gain or loss
will generally be long-term capital gain or loss, provided the note was a
capital asset in the hands of the holder and was held for more than one year.
GENERAL PARTNER LIABILITIES
Three of the Cap Source I operating partnerships currently have some
contingent liabilities which might in the future become payable to their
respective general partners which are affiliates of America First Companies
L.L.C. The contingent liabilities consist of:
(a) property development and management fees;
(b) asset management and partnership administration fees; and
(c) operating deficit and construction loans.
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The affiliates of America First Companies L.L.C. have agreed that the noted
liabilities should be waived if the transaction is completed. The Cap Source
General Partners believe that the forgiveness of these liabilities should not
give rise to any material amount of discharge of indebtedness income for federal
income tax purposes because there are conditions precedent to their payment. If
the forgiveness of these liabilities were characterized as discharge of
indebtedness income, however, the partnerships and the operating partnerships
would be required to recognize corresponding amounts of income. If this income
were recognized, no additional funds would be received by the partnerships and
distributed to the unitholders.
TERMINATION OF TRADE PROCESSING
In the event the Cap Source General Partners have reason to believe that a
requested sale, transfer or assignment of BACs would cause Cap Source I or Cap
Source II to be characterized as a publicly traded partnership for federal
income tax purposes, the Cap Source General Partners will, in accordance with
their powers under Section 5.09 of the partnership agreement, refuse to process
the requested sale, transfer or assignment unless the Cap Source General
Partners receive an unqualified opinion of counsel to the effect that the sale,
transfer or assignment of BACs, in conjunction with all other reasonably
expected sales, transfers or assignments of BACs, would not cause the
partnership to be characterized as a publicly traded partnership for federal
income tax purposes. Neither the Cap Source General Partners nor the
partnerships may be held liable for any losses resulting to a holder of BACs or
a purchaser of BACs as a result of a requested sale, transfer or assignment of
BACs not being processed due to these limitations.
The foregoing restrictions are intended to prevent the trading volume of
BACs from reaching a level that would cause the partnership to be characterized
as a publicly traded partnership under Section 7704 of the Code. In the event
the partnership were characterized as a publicly traded partnership, the
partnership could be subject to entity level taxation. In this event, amounts
otherwise distributable to holders of BACs would be used to satisfy federal
income tax liabilities of the partnership and, thus, amounts received by holders
of BACs would be less than anticipated.
EMPLOYEE RETIREMENT INCOME SECURITY ACT
The Employee Retirement Income Security Act of 1974, ("ERISA") applies to
investments by pension, profit sharing, stock bonus, Keogh and other employee
benefit plans, and by IRAs (collectively referred to as "Benefit Plans"). ERISA
does not prohibit Benefit Plans from investing in any specific type of
investment but does require that plan fiduciaries give appropriate consideration
to the facts and circumstances relevant to a particular investment, including
whether the investment is reasonably designed, as part of the investment
portfolio, to further the purposes of the Benefit Plan, taking into
consideration risk of loss and opportunity for gain. ERISA also requires
fiduciaries to take into account factors like composition of the portfolio with
regard to diversification, liquidity, current return relative to anticipated
cash flow requirements and projected return relative to funding objectives, and
the need to value plan assets annually. ERISA prohibits some transactions
between a Benefit Plan and a "party in interest" as defined by ERISA. Section
4975 of the Code imposes a 15% excise tax on any fiduciary or "disqualified
person" (as defined therein) who engages in transactions similar to those
transactions prohibited under ERISA. The excise tax may increase to 100% if
violations are not timely corrected after notice. A limited partnership, like
the company, will be subject to the foregoing rules restrictions and penalties
if its assets are deemed to be the assets of a Benefit Plan under ERISA. Whether
or not assets of the company will be deemed to be assets of a Benefit Plan for
purposes of ERISA or Section 4975 of the Code will be determined in accordance
with the "plan asset" regulations discussed below. It should be noted that
Benefit Plan fiduciaries should carefully consider whether an investment in the
company is consistent with their responsibilities under ERISA.
Under the Department of Labor plan assets regulations, the assets of a
pooled investment vehicle, the definition of which may include the company, will
not be plan assets of a Benefit Plan for ERISA purposes,
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and will not be subject to requirements regarding fiduciary responsibility and
the holding of plan assets in trust, if the issuer is an "operating company," or
"an entity that is primarily engaged in the production or sale of a product or
service other than the investment of capital," or if equity participation in the
entity by Benefit Plans is not significant, or less than 25% of the value of any
class of equity interests in an entity is held by Benefit Plan investors. The
company believes that it might be an operating company and anticipates that
ownership of units by Benefit Plans will be less than 25%. There can be no
absolute assurance, however, that the company will meet the operating company
exception or 25% test.
Alternatively, the plan assets regulations further provide that assets of a
limited partnership will not be treated as plan assets if equity interests in
the limited partnership are "publicly offered securities," or for example, a
security that is widely held, freely transferable, either registered under the
Securities Exchange Act or sold pursuant to a registration statement under the
Securities Act and the class of securities is registered under the Securities
Exchange Act within 120 days after the end of the issuer's fiscal year during
which the public offering occurred). In general, the regulations provide that
securities are "widely held" only if they are part of a class of securities
purchased and held by 100 or more persons who are independent of the issuer and
of one another. The company expects that (1) it will have significantly more
than 100 unitholders independent from it and one another; (2) the units will be
freely transferable; (3) the units are being offered pursuant to a registration
statement under the Securities Act; and (4) the company will be registered under
Section 12(g) of the Securities Exchange Act within the applicable period. Based
on these facts, the company believes that the units satisfy all criteria for the
"publicly offered securities exception." Accordingly, based on all the facts and
circumstances described above, the units will most likely be characterized as
"publicly offered securities" and the assets of the company will most likely not
be plan assets for ERISA purposes.
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of Capital Source L.P. and Capital Source II L.P.-A
as of December 31, 1998 and 1997, and for each of the years in the three year
period ended December 31, 1998, and America First Real Estate Investment
Partners, L.P. as of June 25, 1999, have been included in the prospectus/consent
solicitation statement in reliance upon the reports of KPMG LLP, independent
certified public accountants appearing elsewhere in this prospectus/consent
solicitation statement, and upon the authority of said firm as experts in
accounting and auditing. The financial statement of America First Capital Source
I L.L.C. as of December 31, 1998, has been included in the prospectus/consent
solicitation statement in reliance upon the report of PricewaterhouseCoopers
LLP, independent certified public accountants appearing elsewhere in this
prospectus/consent solicitation statement, and upon the authority of said firm
as experts in accounting and auditing.
LEGAL MATTERS
Kutak Rock, a national law firm, has delivered an opinion stating that the
units offered by this prospectus/consent solicitation statement will be validly
issued, and that the notes offered by this prospectus/consent solicitation
statement will be binding obligations of the company. Kutak Rock has relied on
Richards, Layton & Finger, P.A. as to matters of Delaware law. In addition,
Kutak Rock has delivered an opinion stating that the discussion under "FEDERAL
INCOME TAX CONSEQUENCES" fairly summarizes all of the material federal income
tax considerations for a holder of BACs who exchanges his or her BACs for units
or notes. Kutak Rock has previously performed legal services on behalf of the
partnerships, the Cap Source General Partners, the company and their affiliates.
The opinions of Kutak Rock are not attached as appendices to this
prospectus/consent solicitation statement; however, upon receipt of a written
request by an investor or representative so designated in writing, a copy of
these opinions will be sent by the Cap Source General Partners. All requests
should be directed to America First Investor Services Department, 1004 Farnam
Street, Suite 400, Omaha, Nebraska, 68102.
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AVAILABLE INFORMATION
The partnerships are subject to the informational requirements of the
Securities Exchange Act, and therefore file reports, proxy and information
statements and other information with the Commission as required by the
Securities Exchange Act. In addition, the company has filed with the Commission
a Registration Statement on Form S-4 of which this prospectus/consent
solicitation statement forms a part, including all amendments, exhibits, annexes
and schedules thereto (collectively the "Registration Statement"), pursuant to
the Securities Act and the rules and regulations promulgated thereunder, with
respect to the units and notes offered pursuant to this prospectus/consent
solicitation statement. This prospectus/ consent solicitation statement, which
is part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and financial schedules
thereto. For further information with respect to the partnerships and the
company, reference is made to the reports of the partnerships filed under the
Securities Exchange Act and the company's Registration Statement and the
exhibits and schedules, copies of which may be examined without charge or
obtained upon payment of prescribed fees at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission at 7
World Trade Center, New York, New York 10048 and Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and other information statements and other information regarding
registrants that file electronically with the Commission, including the
electronic filings of the partnerships and the company.
Statements contained in this prospectus/consent solicitation statement as to
the contents of any contract, agreement or other document are not necessarily
complete, and in each instance, reference is made to the copy of the contract,
agreement or other document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by each reference. The
information in this prospectus/consent solicitation statement concerning the
company, Cap Source I and Cap Source II has been furnished by the company, Cap
Source I and Cap Source II, respectively. For further information with respect
to the company, the partnerships and the units and notes offered hereby,
reference is made to the Registration Statement.
A separate supplement to this prospectus/consent solicitation statement has
been prepared for each partnership and will be delivered to each investor of the
partnership covered thereby. Upon receipt of a written request by an investor or
representative so designated in writing, the general partners of the investor's
partnership will send a copy of any supplement without charge. All requests
should be directed to America First Investor Services Department, 1004 Farnam
Street, Suite 400, Omaha, Nebraska 68102.
Upon completion of the transaction, the company will be required to file
reports and other information with the Commission pursuant to the Securities
Exchange Act. Unitholders and noteholders will receive annual reports containing
audited financial statements with a report thereon by the company's independent
public accountants, and quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year. If the
transaction is not completed, the partnerships will continue to file reports and
other information with the Commission as required by law.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEX TO FINANCIAL STATEMENTS OF
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
Report of Independent Accountants.......................................................................... FS-2
Balance Sheet at June 25, 1999............................................................................. FS-3
Notes to Balance Sheet..................................................................................... FS-4
INDEX TO FINANCIAL STATEMENTS OF
AMERICA FIRST CAPITAL SOURCE I L.L.C.
Report of Independent Accountants.......................................................................... FS-5
Balance Sheet at December 31, 1998......................................................................... FS-6
Notes to Balance Sheet..................................................................................... FS-7
</TABLE>
INDEX TO FINANCIAL STATEMENTS OF THE PARTNERSHIPS
Financial statements and related notes for each of the partnerships are
included in a separately bound volume provided with this prospectus/consent
solicitation statement. The index to the financial statements is included in the
separately bound volume.
FS-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders
America First Real Estate Investment Partners, L.P.
We have audited the accompanying balance sheet of America First Real Estate
Investment Partners, L.P. as of June 25, 1999. This financial statement is the
responsibility of the partnership's management. Our responsibility is to express
an opinion on this financial statement 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 financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of America First Real Estate
Investment Partners, L.P. as of June 25, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
June 28, 1999
FS-2
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
BALANCE SHEET
JUNE 25, 1999
<TABLE>
<S> <C>
Asset
Cash.............................................................................. $ 1,000
---------
---------
Partners' Capital
General Partner................................................................... $ 10
Limited Partner................................................................... 990
---------
$ 1,000
---------
---------
</TABLE>
The accompanying notes are an integral part of the balance sheet.
FS-3
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO BALANCE SHEET
JUNE 25, 1999
1. ORGANIZATION
America First Real Estate Investment Partners, L.P. (the "Partnership") was
formed on June 17, 1999, under the Delaware Revised Uniform Limited Partnership
Act for the purpose of facilitating the proposed merger of Capital Source L.P.
and Capital Source II L.P.-A (collectively referred to as the "Capital Source
Funds"). The Partnership intends to issue up to 7,765,772 units of assigned
limited partnership interests to holders of Beneficial Assignment Certificates
(BACs) of the Capital Source Funds. The General Partner will hold a 1% interest
in the Partnership. The Company has not yet commenced operations.
2. RELATED PARTY TRANSACTIONS
The Partnership will pay the General Partner an acquisition fee in
connection with the identification, evaluation and acquisition of new assets and
the financing thereof in an amount equal to 1.25% of the aggregate purchase
price paid by the Partnership for such new assets. The acquisition fee with
respect to an acquisition of a new asset will be payable at the time of the
closing of the acquisition. The Partnership will also pay the General Partner an
administrative fee in connection with the ongoing administration of the business
of the Partnership in an amount equal to 0.50%, per annum, of the sum of (i) the
fair market value on the merger date of the original assets that are then still
owned by the Partnership, plus (ii) the purchase price paid by the Partnership
for new assets that are then held by the Partnership. The first $100,000 of the
administrative fee shall be payable each year, with the balance payable only
during years that funds from operations ("FFO"), calculated before
administrative fees, exceeds 7% of the unit holders' average capital for that
year. FFO represents net income (or loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of properties,
plus real estate-related depreciation and amortization (excluding amortization
of deferred financing costs and depreciation of non-real estate assets) and
after adjustments for unconsolidated partnerships and joint ventures. Such
administrative fee will be paid on a monthly basis.
The Partnership may pay an affiliate of the General Partner a reasonable
property management fee in connection with the management of the Properties. The
property management fee paid with respect to any Property may not exceed 5% of
the gross revenues of such Property (in the case of residential property) or 6%
of the gross revenues of such Property (in the case of industrial or commercial
property); provided, however, that the property management fee shall not exceed
an amount that would be charged by unaffiliated parties rendering similar
services in the same geographic location and for comparable property.
The Partnership will reimburse the General Partner or its affiliates on a
monthly basis for the actual out-of-pocket costs of direct general and
administrative expenses.
FS-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Members
America First Capital Source I, L.L.C.:
We have audited the accompanying balance sheet of America First Capital
Source I, L.L.C. as of December 31, 1998. The balance sheet is the
responsibility of the Company's management; our responsibility is to express an
opinion on the balance sheet based on our audit. We did not audit the financial
statements of Capital Source L.P., an equity method investment which, combined
with the receivable from Capital Source L.P. represented 25.9% of total assets.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for
Capital Source L.P., is based solely on the report of other auditors.
We conducted our audit of the balance sheet in accordance with generally
accepted auditing standards, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion expressed.
In our opinion, based on our audit and the report of other auditors, the
accompanying balance presents fairly, in all material respects, the financial
position of America First Capital Source I, L.L.C. at December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Omaha, Nebraska
July 21, 1999
FS-5
<PAGE>
AMERICA FIRST CAPITAL SOURCE I L.L.C.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets
Current assets:
Cash.......................................................................... $ 464
Distributions receivable...................................................... 4,303
Due from affiliates (Note 3).................................................. 140,067
---------
Total current assets........................................................ 144,834
---------
Investments in affiliates:
Investment in Capital Source L.P................................................ (86,047)
Investment in CS Properties I, Inc.............................................. 149,696
---------
Total investments in affiliates............................................... 63,649
---------
$ 208,483
---------
---------
Liabilities and Members' Capital (Deficit)
Current liabilities:
Due to affiliate (Note 3)..................................................... $ 74,357
Note payable to CS Properties I, Inc. (Note 1)................................ 150,000
---------
Total current liabilities................................................... 224,357
---------
Members Capital (Deficit)......................................................... (15,874)
---------
$ 208,483
---------
---------
</TABLE>
The accompanying notes are an integral part of the balance sheet.
FS-6
<PAGE>
AMERICA FIRST CAPITAL SOURCE I L.L.C.
NOTES TO BALANCE SHEET
DECEMBER 31, 1998
1. ORGANIZATION
America First Capital Source I, L.L.C. (the "Company") was formed as of
March 1, 1994, when America First Companies, L.L.C. ("AFCLLC") contributed
various assets and liabilities to the Company. No member is obligated personally
for any debt, obligation or liability of the Company solely by reason of being a
member or acting as a manager. The Company will continue in existence until
April 5, 2025, unless terminated earlier under the provisions of the operating
agreement.
The Company and Insured Mortgage Equities Inc. are general partners of
Capital Source L.P. (the "Partnership"). The Partnership Agreement of the
Partnership provides that the Company will be allocated a percentage of profits
and losses and a share of cash distributions. In addition, the Company receives
fees related to the administration of the Partnership.
The Company also owns 50% of the outstanding stock of CS Properties I, Inc.,
the Special Limited Partner for operating partnerships in which the Partnership
has invested. CS Properties I, Inc. is also the general partner of the operating
partnerships which own Fox Hollow Apartments, Waterman's Crossing and Misty
Springs Apartments and as a co-general partner of The Ponds at Georgetown. The
Company was required to contribute $150,000 in the form of a noninterest bearing
demand note payable to CS Properties I, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
(B) Income Taxes
No provision has been made for income taxes since the members are
required to report their share of the Company's income for federal and state
tax purposes.
(C) Amortization
Amortization of goodwill is provided on the straight-line method based
upon the estimated remaining life of the Partnership.
(D) Investments in Affiliates
Investments in affiliates are included in the accompanying financial
statements using the equity method of accounting.
3. RELATED PARTY TRANSACTIONS
The Company incurs certain costs and expenses in connection with the
management of the Partnership, including legal and accounting fees and investor
communication costs, such as pricing and mailing charges which were reimbursed
by the Partnership.
FS-7
<PAGE>
AMERICA FIRST CAPITAL SOURCE I L.L.C.
NOTES TO BALANCE SHEET
DECEMBER 31, 1998
A portion of the Company's general and administrative expenses were paid by
AFCLLC and reimbursed by the Company. The Company's cash requirements are
managed by AFCLLC and the net borrowing or excess cash is included in amounts
due to/from affiliates.
The Company is entitled to receive, from the Partnership, an asset
management and partnership administration fee equal to 0.25% of invested assets
per annum, payable only during such years that an 8% return has been paid to
investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. For the year ended December 31, 1998, distributions to investors
represented less than an 8% return, accordingly, no fees were received or
accrued.
Amounts due to and from affiliates are summarized as follows:
<TABLE>
<S> <C>
Due from affiliate:
Capital Source L.P.............................................. $ 140,067
Due to affiliate:
CS Properties I, Inc............................................ $ 8
America First Companies L.L.C................................... 74,349
---------
$ 74,357
---------
---------
</TABLE>
4. INVESTMENTS IN AFFILIATES
The following summarizes financial information at December 31, 1998 for the
affiliates the Company has invested in:
<TABLE>
<CAPTION>
CAPITAL SOURCE CS PROPERTIES I,
L.P. INC.
----------------- -------------------
<S> <C> <C>
Assets............................................... $ 45,707,177 $ 299,274
Liabilities.......................................... (1,350,682) --
----------------- --------
Equity............................................... $ 44,356,495 $ 299,274
----------------- --------
----------------- --------
</TABLE>
FS-8
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF MERGER
AMONG THE COMPANY AND
THE PARTNERSHIPS
This Agreement and Plan of Merger (this "Agreement") dated as of
, 1999, is by and among America First Real Estate Investment
Partners, L.P., a Delaware limited partnership (the "Company"); Capital Source
L.P., a Delaware limited partnership ("Cap Source I"); and Capital Source II
L.P.-A, a Delaware limited partnership ("Cap Source II" and together with Cap
Source I the "Partnerships" and individually, a "Partnership"). Capitalized
terms used and not otherwise defined herein shall have the meanings assigned in
Section 11.12 of this Agreement.
W I T N E S S E T H:
WHEREAS, the Company and the Partnerships desire to merge the Partnerships
with and into the Company, pursuant to Delaware law, with the Company being the
surviving entity (the "Merger"), as part of the merger by consolidation of the
Partnerships and the Company. The Company has filed a registration statement on
Form S-4, No. 333-52117, including all amendments thereto (the "Registration
Statement"), with the Securities and Exchange Commission (the "SEC") pursuant to
the Securities Act of 1933, as amended (the "Act") relating to the Merger, of
which the prospectus/consent solicitation statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, Section 17-211 of the Delaware Revised Uniform Limited Partnership
Act (the "Partnership Act") authorizes the merger of Delaware limited
partnerships; and
WHEREAS, the Company's Limited Partnership Agreement permits, and
resolutions adopted by the Company's general partner authorize, this Agreement
and the consummation of the Merger.
NOW, THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties to this Agreement covenant and agree as
follows:
ARTICLE I
THE MERGER
Section 1.01. THE MERGER; SURVIVING LIMITED PARTNERSHIP. Subject to the
terms and conditions set forth in this Agreement, at the Effective Time (as
defined in Section 1.02 below), the Partnerships shall each be merged with and
into the Company, pursuant to Section 17-211(e) of the Partnership Act, and the
separate existence of each of the Partnerships shall cease. The Company shall be
the surviving entity (the "Surviving Limited Partnership") and shall continue to
be governed by the Partnership Act.
Section 1.02. EFFECTIVE TIME. In accordance with Section 17-211(e) of the
Partnership Act, the Merger shall become effective (the "Effective Time") on the
date and time specified in the certificate of merger (the "Certificate of
Merger"), such Effective Time to be at the same time as the effective time of
the merger of Insured Mortgage Equities Inc., America First Capital Source II
L.L.C. and Insured Mortgage Equities II L.P. with and into America First Capital
Source I L.L.C., with America First Capital Source I L.L.C. being the surviving
entity. All other filings or recordings required by Delaware law in connection
with the Merger shall also be made.
Section 1.03. EFFECT OF THE MERGER. The Merger shall have the effects set
forth in Section 17-211 of the Partnership Act.
A-1
<PAGE>
ARTICLE II
THE SURVIVING LIMITED PARTNERSHIP
Section 2.01. NAME. The name of the Surviving Limited Partnership shall be
America First Real
Estate Investment Partners, L.P.
Section 2.02. LIMITED PARTNERSHIP AGREEMENT. The Amended and Restated
Limited Partnership Agreement of the Company as filed as Appendix D to the
Prospectus/Consent Solicitation Statement shall be the Amended and Restated
Limited Partnership Agreement (the "Limited Partnership Agreement") of the
Surviving Limited Partnership unless and until amended in accordance with its
terms and applicable law.
Section 2.03. THE GENERAL PARTNER. Upon consummation of the Merger America
First Capital Source I L.L.C. shall be the general partner of the Surviving
Limited Partnership and remain general partner until removed and its successor
is duly appointed or until its resignation in accordance with the Company's
Limited Partnership Agreement.
ARTICLE III
CONVERSION OF PARTNERSHIP INTERESTS
Section 3.01. CONVERSION OF LIMITED PARTNER INTERESTS.
(a) At the Effective Time, as a result of the Merger each BAC shall be
converted, in proportion to the capital accounts of each Investor and
pursuant to the terms of the Partnership Agreements, into the number of
units (the "Units") of the Company representing assigned limited partner
interests in the Company, as follows:
<TABLE>
<CAPTION>
PARTNERSHIP NUMBER OF UNITS PER BAC
- -------------------------------------------------------------------- -------------------------
<S> <C>
Cap Source I........................................................ 1.3957
Cap Source II....................................................... 0.7620
</TABLE>
At the Effective Time, as a result of the Merger, each Initial Limited
Partner's Limited Partnership Interest shall be canceled and no
consideration shall be issued in respect thereof.
At the Effective Time, as a result of the Merger, the interests of the
Partnerships' general partners (the "Cap Source General Partners") in the
Partnerships shall be canceled and no consideration shall be issued in
respect thereof.
Each of the Partnerships has one class of BACs and all such BACs are
held by the Investors.
The number of Units per BAC to be issued as a result of the conversion
of BACs, as set forth in the above table, shall be multiplied by the number
of BACs held by an Investor on the record date, as defined in the
Prospectus/Consent Solicitation Statement. No fractional Units will be
issued. Each Investor who would otherwise be entitled to a fractional Unit
(which entitlement will be determined by combining such Investor's
allocation of Units from each Partnership as to which such Investor is
receiving Units) will instead receive cash equal to $10 multiplied by the
fraction.
(b) Notwithstanding subparagraph (a) above and subject to the
limitations described herein, Investors who, in connection with the Merger,
elected to receive the Company's Variable Rate Junior Notes Callable On or
After the Date of Issuance ("Notes"), will, except as hereinafter provided,
receive Notes. In the event Investors elect to receive Notes in the
aggregate principal amount which exceeds $20 million, the Notes will be
allocated first to such Investors who voted against the Merger, and any
remaining Notes will be allocated on a pro rata basis (in denominations of
$1,000) to those Investors who elected to receive Notes and either abstained
from voting by indicating their abstention on the consent card or voted
"YES" in favor of the Merger. In such event, the Investors who voted for the
Merger or abstained from voting and who elected to receive Notes will
receive Units in an amount
A-2
<PAGE>
equal to the difference between the exchange value allocable to such an
Investor and the amount of Notes distributed to such an Investor. Subject to
the foregoing limitations, each BAC held by an Investor who elected to
receive Notes shall be converted into the Notes as follows:
<TABLE>
<CAPTION>
PARTNERSHIP NUMBER OF NOTES PER BAC
- -------------------------------------------------------------------- ------------------------
<S> <C>
Cap Source I........................................................ 0.013957
Cap Source II....................................................... 0.007620
</TABLE>
Each Note will be in a principal amount of $1,000.00. The Company may, at
its option, issue one note in a corresponding integral amount of $1,000.00 to an
Investor in lieu of issuing multiple Notes to that Investor.
Section 3.02. TAX ASPECTS. For federal income tax purposes, the conversion
of the BACs pursuant to Section 3.01(a) of this Agreement shall be deemed (a) a
contribution by Cap Source II of its assets to Cap Source I in exchange for
Units, Notes and the assumption of its liabilities; (b) the distribution of the
Units and Notes received in the transaction to the Investors in Cap Source II in
liquidation of Cap Source II in accordance with the capital accounts of such
Investors; (c) the conversion of the BACs held by Investors in Cap Source I to
Units; and (d) the exchange of BACs in Cap Source I for Notes. In addition, the
Company will be considered a continuation of Cap Source I for federal income tax
purposes.
Section 3.03. ISSUANCE OF UNITS.
(a) The Company shall designate an exchange agent (the "Exchange Agent")
to act as such in connection with the issuance of certificates representing
Units and Notes pursuant to this Agreement.
(b) As soon as practicable after the Effective Time, the Company shall
cause the Exchange Agent to distribute to each Investor who, in connection
with the Merger, elected to receive Units, or who made no election with
respect to Units or Notes, certificates representing the number of Units to
which such Investor is entitled pursuant to Section 3.01(a).
Section 3.04. ISSUANCE OF NOTES. As soon as practicable after the
Effective Time, the Company shall cause the Exchange Agent to distribute to each
Investor who elected to receive Notes in connection with the Merger, Notes to
which such Investor is entitled pursuant to, and subject to the limitations set
forth in, Section 3.01(b) of this Agreement.
ARTICLE IV
TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES
Section 4.01. TRANSFER, CONVEYANCE AND ASSUMPTION. At the Effective Time,
the Company shall continue in existence as the Surviving Corporation and without
further transfer, succeed to and possess all the rights, privileges and powers
of the Partnerships, and all the assets and property of whatever kind and
character of the Partnerships shall vest in the Company without further act or
deed. Thereafter, the Company, as the Surviving Limited Partnership, shall be
liable for all of the liabilities and obligations of the Partnerships, and any
claim or judgement against the Partnerships may be enforced against the Company,
as the Surviving Limited Partnership, in accordance with Section 17-211 of the
Partnership Act.
Section 4.02. FURTHER ASSURANCES. If at any time the Company shall
consider or be advised that any further assignment, conveyance or assurance is
necessary or advisable to vest, perfect or confirm of record in the Surviving
Limited Partnership the title to any property or right of the Partnerships, or
otherwise, to carry out the provisions hereof, the proper representatives of the
Partnerships as of the Effective Time shall execute and deliver any and all
proper deeds, assignments and assurances, and do all things necessary and proper
to vest, perfect or convey title to such property or right in the Surviving
Limited Partnership and otherwise to carry out the provisions hereof.
A-3
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS
The Partnerships each severally represent and warrant to the Company and to
each other (with respect only to the Partnership making the representation and
warranty) as follows:
Section 5.01. VALIDITY OF ACTIONS. Each Partnership (a) is a limited
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware, (b) has the authority to conduct its business as
currently conducted and to own and operate the properties which it now owns and
operates, (c) is qualified to do business in all jurisdictions in which such
qualification is necessary, and (d) has full power and authority to enter into
this Agreement and to carry out all acts contemplated by it. This Agreement has
been duly executed and delivered on behalf of the Partnerships, and has received
all necessary authorization and is a legal, valid and binding obligation of the
Partnerships, enforceable against the Partnerships in accordance with its terms.
The execution and delivery of this Agreement and consummation of the
transactions contemplated by it will not violate any provision of the
Partnership Agreements nor violate, conflict with or result in any breach of any
of the terms, provisions or conditions of, or constitute a default or cause
acceleration of, any indebtedness under any agreement or instrument to which any
of the Partnerships are a party or by which they or their assets may be bound,
or cause a breach of any applicable federal or state law or governmental
regulation, or any applicable order, judgment, writ, award, injunction or decree
of any court or governmental instrumentality.
Section 5.02. PARTNERSHIPS' FINANCIAL STATEMENTS. The financial statements
and schedules of the Partnerships, together with related notes (the "Financial
Statements"), set forth in the Registration Statement of the Company, fairly
present, on the basis stated in the Registration Statement, the financial
position of the Partnerships at the date or for the periods specified in the
Registration Statement. The Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis ("GAAP"), except to the extent stated therein.
Section 5.03. NO MISSTATEMENTS. The representations of the Partnerships
contained in this Agreement and the information supplied by the Partnerships for
inclusion in the Registration Statement and the Prospectus/Consent Solicitation
Statement do not contain any untrue statement of a material fact or omit to
state any fact necessary to make such representations or information not
materially misleading.
Section 5.04. NO MATERIAL ADVERSE CHANGE. Since the respective dates as to
which information is given in the Registration Statement and the
Prospectus/Consent Solicitation Statement with respect to the Partnerships, and
except as described in the Registration Statement or the Prospectus/Consent
Solicitation Statement, there have been no changes in the business, operations,
properties, assets or the prospects or condition, financial or otherwise, of the
Partnerships which would, in the aggregate, have a material adverse effect on
the business, properties, prospects, profitability, assets or financial
condition of the Partnerships.
Section 5.05. TITLE TO ASSETS. Each Partnership has good and marketable
title to the assets reflected in the most recent balance sheet (the "Balance
Sheet") included in the Financial Statements with respect to such Partnership,
and will hold good and marketable title to such assets, and any assets acquired
by the Partnership prior to the Effective Time, as of the Effective Time, except
for assets disposed of in the ordinary course of business. Such assets, together
with the related goodwill and rights of each Partnership as a going concern,
tangible and intangible, are collectively referred to as the "Assets." Except as
otherwise disclosed in the Balance Sheet or related notes accompanying it, all
of the Assets are owned free and clear of any and all adverse claims, security
interests, charges or other encumbrances or restrictions of every nature, except
liens for current taxes not yet due and payable or landlords' liens as provided
for in the relevant leases or by applicable law.
Section 5.06. LIABILITIES OF THE PARTNERSHIPS. The Partnerships have no
material liabilities, including, without limitation, liabilities for state or
federal income, withholding or other taxes, except to the extent
A-4
<PAGE>
reflected, reserved against, or provided for in the Balance Sheet, and except
for any material liabilities disclosed in the Prospectus/Consent Solicitation
Statement or any other obligations incurred after , 1999, in the ordinary
course of business which subsequently incurred obligations are of an amount and
nature as to be capable of being discharged from the operations of the
Partnerships without requiring additional equity or borrowing.
Section 5.07. REPRESENTATIONS AND WARRANTIES PERTAINING TO REAL
PROPERTY. For purposes of the following representations and warranties, "Real
Property" shall mean those parcels of real property of a Partnership or
Operating Partnership owned by a Partnership as listed in the Prospectus/Consent
Solicitation Statement and "Improvements" shall mean any building, structure or
other improvements situated on the Real Property. Each Partnership makes the
following representations and warranties only with respect to the Real Property
owned by it as specified in the Prospectus/Consent Solicitation Statement.
(a) To the best knowledge of each Partnership, all assumptions of the
appraisers of the Real Property (the "Appraisers") used by the Appraisers in
preparing the appraisals of the Real Property, as the same may have been
revised (the "Appraisals"), are reasonable assumptions. All information
provided by each Partnership to the Appraisers with respect to the Real
Property was true and correct as of the date given.
(b) To the best knowledge of each Partnership, there is at present no
material violation of any law, ordinance, rule, requirement, resolution,
policy statement or regulation (including, without limitation, those
relating to land use, subdivision, zoning, environmental, occupational
health and safety, water, and building and fire codes) of any governmental
authority (collectively, "Governmental Regulations") applicable to the
construction, alteration, rehabilitation, maintenance, use, operation or
sale of any of the Real Property, which violation would have a material
adverse impact on the use of the Real Property or the Improvements. None of
the Partnerships have received notice or have knowledge that any
governmental authority, or any employee or agent thereof, considers the
operations, use or ownership of any of the Improvements to violate or have
violated in a material manner any Governmental Regulation, or that any
investigation has been commenced or is contemplated regarding such possible
violation.
(c) To the best knowledge of each Partnership, such Partnership has
neither received notice nor has knowledge of any plan or study of any
governmental authority which would materially adversely affect the use of
the Real Property or the Improvements for their intended uses, or result in
any public improvements which will result in any material charge being
levied against, or any material lien assessed upon, all or any portion of
such Real Property or Improvements.
(d) To the best knowledge of each Partnership, such Partnership has good
and marketable title to the Real Property and Improvements owned by it, free
and clear of all liens, encumbrances, claims, covenants, conditions and
restrictions, easements, rights of way, charges and any other exceptions to
or defects of title ("Encumbrances"), except for (i) those matters disclosed
in the Prospectus/Consent Solicitation Statement or the Title Insurance
Policy issued to each Partnership with respect to each Real Property
(collectively, the "Title Policies"), and (ii) those matters created by
third parties which are the liability of the lessee of such Real Property
and Improvements, or, in the absence of acceptance of responsibility by such
lessee, have been or will be resolved by the Partnership.
(e) Except as disclosed in the Prospectus/Consent Solicitation Statement
or the Title Policies, to the best knowledge of each Partnership, there are
no delinquent taxes, assessments, charges, debts, liabilities, claims or
obligations arising from the construction, design, development, ownership,
maintenance or operation of, or otherwise relating to, the Real Property or
the Improvements, which matters could give rise to any mechanic's or
materialmen's or other statutory or common law lien against such Real
Property or Improvements or any part thereof which, individually or in the
aggregate, would have a material adverse impact on the value of such Real
Property and Improvements.
A-5
<PAGE>
(f) Except as disclosed in the Prospectus/Consent Solicitation
Statement, to the best knowledge of each Partnership, none of the Real
Property, which for purposes of this paragraph shall include, without
limitation, subsurface soil and ground water, contains any substance,
including, without limitation, any asbestos, formaldehyde, radioactive
substance, hydrocarbons, industrial solvents, flammables, explosives, and
any hazardous substance or toxic material, which could presently or at any
time in the future cause a material detriment to or materially impair the
value or beneficial use of the Real Property, or constitute or cause a
health, safety or environmental hazard on or relating to the Real Property
or to any person who may enter on the Real Property or require remediation
at the behest of any governmental agency (collectively, "Hazardous
Materials"). Except as disclosed in the Prospectus/Consent Solicitation
Statement, none of the Partnerships have received notice that the ownership,
operation, use and condition of any of the Real Property is in violation of
any federal, state or local law, ordinance or regulation pertaining to
industrial hygiene, Hazardous Materials or environmental protection. Except
as disclosed in the Prospectus/Consent Solicitation Statement, to the best
knowledge of each Partnership, there is no proceeding or action pending or,
to its actual knowledge, threatened by any person or governmental agency
regarding the environmental condition of any of the Real Property.
Section 5.08. INSURANCE. Either each Partnership, or, in the absence of
each Partnership so doing, the respective tenants of the Real Property and
Improvements owned by each Partnership, or, where applicable, each borrower from
each Partnership which holds a loan secured by real property owned by such
borrower, carries, to the extent deemed reasonable by the Partnerships under the
circumstances, comprehensive liability, fire, extended coverage and rental loss
insurance with respect to the Partnerships' properties with policy
specifications and insured limits customarily carried for similar properties.
All such policies are currently in effect and will remain in effect after the
Merger.
Section 5.09. TAXES. Each Partnership has filed timely all federal, state
and local tax returns which it is required to file, has provided to its
Investors all required Form K-1's and such other tax forms as may be required by
federal, state or local authorities, and has no outstanding liability for any
federal, state or local taxes or interest or penalties thereon, whether disputed
or not, except taxes not yet payable which have been provided for in accordance
with GAAP and are disclosed in the Financial Statements.
Section 5.10. ACTIONS PENDING. Except as disclosed in the
Prospectus/Consent Solicitation Statement: (a) there are no actions, suits,
proceedings or claims pending or threatened against the Partnerships which, if
determined adversely to such Partnerships, could (i) have a material adverse
effect on the Partnerships, the Assets or the business of the Partnerships when
taken as a whole, or (ii) prevent or delay the consummation of any of the
transactions contemplated by this Agreement; (b) no Partnership, to the best of
its knowledge, is the subject of any pending or threatened investigation
relating to any aspect of such Partnership's operations by any federal, state or
local governmental agency or authority; and (c) each Partnership, to the best of
its knowledge, is not and has not been the subject of any formal or informal
complaint, investigation or inspection under the Equal Employment Opportunity
Act or the Occupational Safety and Health Act (or their state or local
counterparts) or by any other federal, state or local authority.
Section 5.11. APPRAISAL OF PARTNERSHIPS. To the best knowledge of each
Partnership, the information furnished by such Partnership to the appraisers
named in the Prospectus/Consent Solicitation Statement for the purposes of
determining the appraised value of the Partnerships is accurate and complete in
all material respects.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Partnerships as follows:
Section 6.01. VALIDITY OF ACTIONS. The Company (a) is duly formed, validly
existing and in good standing under the laws of the State of Delaware, (b) has
the authority to conduct its business as currently
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conducted, (c) is qualified to do business in all jurisdictions in which such
qualification is necessary, and (d) has full power and authority to enter into
this Agreement and to carry out all acts contemplated by it, and (e) has no
commitment to sell or otherwise transfer any of its assets except in the
ordinary course of business. This Agreement has been duly executed and delivered
on behalf of the Company, has received all necessary authorization and is a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms. The execution and delivery of this
Agreement and consummation of the transactions contemplated by it will not
violate any provision of the Limited Partnership Agreement of the Company nor
violate, conflict with or result in any breach of any of the terms, provisions
or conditions of, or constitute a default or cause acceleration of, any
indebtedness under any agreement or instrument to which the Company is a party
or by which it or its assets may be bound, or cause a breach of any applicable
federal or state law or regulation, or any applicable order, judgment, writ,
award, injunction or decree of any court or governmental instrumentality.
Section 6.02. MISSTATEMENTS. The representations of the Company contained
in this Agreement and the information regarding the Company contained in the
Registration Statement and the Prospectus/ Consent Solicitation Statement do not
contain any untrue statement of a material fact or omit to state any fact
necessary to make such representations or information not materially misleading.
Section 6.03. INVESTMENT OF CASH. Upon consummation of the Merger, the
Company will invest the cash it receives from the Partnerships so that not more
than 80% of the Company's assets will consist of assets listed under Section
351(e)(1) of the Code.
ARTICLE VII
COVENANTS OF THE PARTIES
Section 7.01. PROHIBITED ACTS. Pending consummation of the Merger or prior
to termination of this Agreement, the Partnerships agree that, without prior
written consent of the Company, given in a letter which specifically refers to
this Section of the Agreement, the Partnerships shall:
(a) use their reasonable efforts so as not to perform any act, or omit
to take any action that would make any of their representations made above
or any information pertaining to them in the Registration Statement or the
Prospectus/Consent Solicitation Statement inaccurate or materially
misleading as of the Effective Time;
(b) not enter into any commitment, contract or other transaction in any
way affecting any of the Partnerships' business, except to carry out its
business in the ordinary course, and as contemplated by this Agreement or in
the Prospectus/Consent Solicitation Statement;
(c) not make any loans or advances to, or investments in, any other
corporation, partnership or other legal entity or to any other persons
except in the ordinary course of business;
(d) not borrow money for any purpose or agree to become contingently
liable, by guaranty or otherwise, for the obligations or indebtedness of any
other person other than in the ordinary course of business; and
(e) not mortgage, pledge, encumber, sell, lease or transfer any of the
Assets other than in the ordinary course of business.
Section 7.02. NOTICE. Pending the consummation of the Merger or prior to
termination of this Agreement, each party agrees that it will promptly advise
the other of the occurrence of any condition or event which would make any of
its representations contained in this Agreement or the Prospectus/Consent
Solicitation Statement inaccurate, incorrect, or materially misleading.
Section 7.03. ADDITIONAL DOCUMENTS. At the request of any party, each
party will execute and deliver any additional documents and perform in good
faith such acts as reasonably may be required to complete the transactions
contemplated by this Agreement.
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ARTICLE VIII
CONDITIONS TO THE MERGER
The obligation of the Company and each Partnership to consummate the Merger
shall be subject to compliance with or satisfaction of the following conditions:
Section 8.01. BRING DOWN. The representations and warranties set forth in
this Agreement shall be true and correct in all material respects at and as of
the Effective Time as if then made (except for those representations and
warranties made as of a given date, which shall continue to be true and correct
as of such given date), as evidenced by a certificate made by the general
partners of each Partnership and the general partner of the Company, as of the
Effective Time.
Section 8.02. COMPLIANCE. The Company and each of the Partnerships shall
have complied with all of the covenants and agreements in this Agreement on its
part to be complied with as of or prior to the Effective Time.
Section 8.03. PARTNERSHIP APPROVALS. The Investors holding a majority of
outstanding BACs of each of Cap Source I and Cap Source II shall have approved
the Merger and the dissenting Investors of the Partnerships have not elected to
receive Notes exceeding $20,000,000 in principal amount.
Section 8.04. STOCK EXCHANGE LISTING. At or before the Effective Time, the
Units to be issued in the Merger shall be approved for listing on the NASDAQ
National Market, subject to official notice of issuance.
Section 8.05. CONSENTS OBTAINED. All necessary consents, waivers,
approvals, authorizations or orders required to be obtained, and the making of
all filings required to be made by any party to the Merger for the
authorization, execution and delivery of this Agreement and the Certificate and
Plan of Merger between the Company and the Partnerships, and the consummation of
the transactions contemplated thereby on or before (and remain in effect at) the
Effective Time shall have been obtained or made.
Section 8.06. NO MATERIAL ADVERSE CHANGE. Since the respective dates as to
which information is given in the Registration Statement and the
Prospectus/Consent Solicitation Statement, there shall not have occurred or been
threatened any material adverse changes in the overall business or prospects of
the Partnerships or in the tax or other regulatory provisions applicable to the
Partnerships or the Company, and the Company shall not have become aware of any
facts that, in the sole judgment of the Company and the Cap Source General
Partners, have or may have a material effect, whether adverse or otherwise, on
the Partnerships, taken as a whole, the Merger, or the value to the Company of
the properties of the Partnerships, taken as a whole.
Section 8.07. OPINIONS AND LETTERS. The Company shall have received, on or
prior to the Effective Time, an opinion of counsel, which shall not have been
withdrawn as of the Effective Time, to the effect that for federal income tax
purposes the Merger will be an exchange subject to the nonrecognition provisions
of Section 721 of the Code; provided, however, that for purposes of this Section
8.07, the Merger shall include only the merger of the Partnerships into the
Company.
Section 8.08. NO STATUTE, RULE OR REGULATION AFFECTING CONSUMMATION. At
the Effective Time, there shall be no statute, rule, regulation, injunction or
court order enacted or issued by the United States or any State, or by a court,
which prohibits or challenges the consummation of the Merger.
Section 8.09. NO DECLARATIONS. At the Effective Time, there shall be no
declaration of suspension of trading in, or limitation on prices for, securities
generally on the NASDAQ National Market, declaration of a banking moratorium by
federal or state authorities or any suspension of payments by banks in the
United States (whether mandatory or not) or of the extension of credit by
lending institutions in the United States, or commencement of war, armed
hostility, or other international or national calamity directly or indirectly
involving the United States, which war, hostility or calamity, in the sole
judgment of the Company, would have a material adverse effect on the business
objectives of the Company, or, in the
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case of any of the foregoing existing on the date of the Prospectus/Consent
Solicitation Statement, any material acceleration or worsening thereof.
Section 8.10. EFFECTIVENESS OF REGISTRATION STATEMENT. At or prior to the
Effective Time, the Registration Statement shall have been declared effective,
no stop order suspending the effectiveness of the Registration Statement shall
have been issued, no proceedings for such purpose shall have been initiated, and
all necessary approvals under state securities or blue sky laws shall have been
received.
ARTICLE IX
OTHER AGREEMENTS
Section 9.01. WAIVER BY CAP SOURCE GENERAL PARTNERS. Immediately prior to
the Effective Time, the Cap Source General Partners shall waive all rights to
any fees not accrued to the Effective Time. The Cap Source General Partners each
further acknowledge that they have no rights to additional distributions of fees
or proceeds of sale or liquidation by the Partnerships. The parties to this
Agreement hereby acknowledge and agree that at the Effective Time, CS Properties
I Inc., an affiliate of the Cap Source I General Partners that serves as the
general partner of Oyster Cove Limited Partnership, Cypress Landings II, Ltd.,
and Fox Hollow, Ltd. and co-general partner of The Ponds at Georgetown L.P., and
CS Properties II Inc., an affiliate of the general partners of Cap Source II
that also serves as a co-general partner of The Ponds at Georgetown L.P. will
waive all past due amounts, as set forth in the Partnerships' audited financial
statements for the fiscal year ending December 31, 1998, as included in the
Prospectus/Consent Solicitation Statement, due to or potentially due to CS
Properties I Inc. and CS Properties II Inc. by these limited partnerships.
Section 9.02. INDEMNIFICATION.
(a) To the fullest extent permitted by law, the Partnerships (the
"Indemnifying Parties"), jointly and severally, agree to defend, indemnify
and hold harmless the Company and its general partner, employees and agents
(the "Indemnified Parties") from and against any losses, claims, damages or
liabilities (including, without limitation, attorneys' fees and
disbursements) to which such Indemnified Party may become subject under the
Act, the Securities Exchange Act of 1934, as amended, or otherwise, insofar
as such losses, claims, damages or liabilities (or actions with respect
thereof arise out of or are based upon an untrue statement or an alleged
untrue statement of a material fact contained in the Registration Statement,
the Prospectus/Consent Solicitation Statement, or any amendment or
supplement to such documents, 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 not misleading, or to
the extent that such losses, claims, damages or liabilities (including,
without limitation, attorneys' fees and disbursements) result from a breach
by an Indemnifying Party of the representations and warranties of the
Partnerships contained in Article V of this Agreement.
(b) The Indemnified Parties shall give (or cause to be given) to the
Indemnifying Parties notice of claim or matter for which indemnity is (or
will be) sought under this Section 9.02; such notice shall be given promptly
after the Indemnified Parties receive actual notice or knowledge of the
claim or matter that is subject to indemnification. With respect to any
claim asserted by a third party against any Indemnified Parties for which
indemnity is sought, the relevant Indemnifying Party shall have the right to
employ counsel reasonably acceptable to the relevant Indemnified Parties to
defend against such assertion, and such Indemnifying Parties shall have the
right to compromise or otherwise settle any such action or claim only with
the prior written consent of the relevant Indemnified Party, which shall not
be unreasonably withheld.
(c) This Section 9.02 shall survive the Merger for a period of three (3)
years from the Effective Time.
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ARTICLE X
TERMINATION; AMENDMENT; WAIVER
Section 10.01. TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, (a)
by mutual consent of the general partner of the Company and the Cap Source
General Partners, (b) by action of the general partner of the Company in the
event of a failure of a condition to the obligations of the Company set forth in
Article VIII of this Agreement, (c) by action of the Cap Source General Partners
in the event of a failure of a condition to the obligations of the Partnerships
set forth in Article VIII of this Agreement, or (d) by action of the general
partner of the Company or of the Cap Source General Partners in the event that
the Merger is not consummated prior to , 1999, or such later date as
the parties shall mutually agree in writing.
Section 10.02. EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 10.01, this Agreement shall become void and of no effect
with no liability on the part of any party hereto.
Section 10.03. AMENDMENT. The parties hereto may, by written agreement,
amend this Agreement at any time prior to the filing of the Certificate of
Merger with the Delaware Secretary of State, such amendment to be approved by
the parties hereto; provided that, after the approval of the Merger by the
Investors holding a majority of the BACs of each Partnership no amendment shall
be made which alters or changes (a) the amount or kind of consideration which
the Investors of each Partnership are entitled to receive upon conversion of the
BACs of each Partnership, (b) the Limited Partnership Agreement of the Company,
or (c) the terms and conditions of this Agreement if such alteration or change
would have an adverse effect on the Investors of each Partnership or the
unitholders of the Company.
Section 10.04. WAIVER. At any time prior to the Effective Time, any party
to this Agreement may extend the time for the performance of any of the
obligations or other acts of any other party hereto, or waive compliance with
any of the agreements of any other party or with any condition to the
obligations hereunder, in each case only to the extent that such obligations,
agreements and conditions are intended for its benefit.
ARTICLE XI
MISCELLANEOUS
Section 11.01. EXPENSES. The expenses associated with the Merger shall be
paid as set forth in the Prospectus/Consent Solicitation Statement. Any
additional expenses associated with the Merger shall be paid by the Company.
Notwithstanding the foregoing, the Company shall have no obligation to pay any
personal expense of any beneficial owner of a transferor or any expense of a
transferor not a result of transactions contemplated under this Agreement.
Section 11.02. NOTICES. All notices or other communications required or
permitted under the terms of this Agreement by any party shall be made in
writing and shall be delivered by first class mail or by personal delivery,
postage or fees prepaid, to the other parties at America First Companies L.L.C.,
Attn: Michael B. Yanney, 1004 Farnam Street, Suite 400, Omaha, Nebraska, 68102,
with a copy to Kutak Rock, 717 17th Street, Suite 2900, Denver, Colorado 80202,
Attention: Paul E. Belitz, or to such other address as any of the parties hereto
may designate by notice to the others.
Section 11.03. NON-ASSIGNABILITY. This Agreement shall not be assignable
by any of the parties to this Agreement.
Section 11.04. ENTIRE AGREEMENT. This Agreement contains the parties'
entire understanding and agreement with respect to its subject matter, and any
and all conflicting or inconsistent discussions, agreements, promises,
representations and statements, if any, between the parties or their
representatives that are not incorporated in this Agreement shall be null and
void and are merged into this Agreement.
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Section 11.05. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
together shall constitute a single agreement.
Section 11.06. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to conflicts of law principles.
Section 11.07. HEADINGS. The various section headings are inserted for
purposes of reference only and shall not affect the meaning or interpretation of
this Agreement or any provision hereof.
Section 11.08. GENDER; NUMBER. All references to gender or number in this
Agreement shall be deemed interchangeably to have a masculine, feminine, neuter,
singular or plural meaning, as the sense of the context requires.
Section 11.09. SEVERABILITY. The provisions of this Agreement shall be
severable, and any invalidity, unenforceability or illegality of any provision
or provisions of this Agreement shall not affect any other provision or
provisions of this Agreement, and each term and provision of this Agreement
shall be construed to be valid and enforceable to the full extent permitted by
law.
Section 11.10. AUTHORIZATION. The Cap Source General Partners (a) shall be
authorized, at such time in their full discretion as they deem appropriate, to
execute, acknowledge, verify, deliver, file and record, for and in the name of
the Partnerships and, to the extent necessary, the Investors, any and all
documents and instruments, and (b) shall do and perform any and all acts
required by applicable law or which the Cap Source General Partners deem
necessary or advisable to effectuate the Merger.
Section 11.11. LIMITATIONS OF REMEDIES. If any party hereto becomes aware,
prior to the closing, of a breach of any representation, warranty or covenant
contained in this Agreement, the sole remedy of the nonbreaching party for such
breach shall be limited to termination of this Agreement.
Section 11.12. DEFINITIONS. The following terms used in this Agreement
have the meanings specified in this Section 11.12. Unless otherwise defined in
this Agreement, all other initially capitalized terms shall have the meanings
specified in the Partnership Agreements.
"INVESTOR" shall mean any person or entity who is either (i) a BAC holder or
(ii) a holder of a Limited Partner Interest, other than each Initial Limited
Partner.
"PARTNERSHIP AGREEMENT" shall mean the respective partnership agreement of
each Partnership, and such agreements are collectively referred to in this
Agreement as the "PARTNERSHIP AGREEMENTS."
"BAC" shall mean (i) a beneficial interest in a Limited Partner Interest
represented by a beneficial assignment certificate and (ii) a Limited
Partnership Interest, other than a Limited Partnership Interest held by an
Initial Limited Partner.
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by an officer duly authorized to do so, all as of the day and year
first above written.
<TABLE>
<S> <C> <C> <C> <C>
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.,
a Delaware limited partnership
By: AMERICA FIRST CAPITAL SOURCE I L.L.C.,
a Delaware limited liability company,
General Partner
By
---------------------------------------
, President
CAPITAL SOURCE L.P., a Delaware limited partnership
By: AMERICA FIRST CAPITAL SOURCE I L.L.C.,
a Delaware limited liability company,
General Partner
By
---------------------------------------
, President
By: INSURED MORTGAGE EQUITIES INC.,
a Delaware corporation, General Partner
By
---------------------------------------
, President
CAPITAL SOURCE II L.P.-A,
a Delaware limited partnership
By: AMERICA FIRST CAPITAL SOURCE II L.L.C.,
a Delaware limited liability company,
General Partner
By
---------------------------------------
, President
By: INSURED MORTGAGE EQUITIES II L.P.,
a Delaware limited partnership,
General Partner
By
---------------------------------------------
a Delaware corporation, General Partner
By
-----------------------------------
, President
</TABLE>
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<PAGE>
APPENDIX B
FAIRNESS OPINION
September 23, 1999
Capital Source L.P. and Capital Source II L.P.-A
Suite 400
1004 Farnam Street
Omaha, NE 68102
Ladies and Gentlemen:
You have requested Sutro & Co., Inc.'s ("Sutro & Co.") opinion as investment
bankers as to the fairness, from a financial point of view, of the consideration
to be received by the holders (the "Investors") of beneficial assignment
certificates representing assigned limited partnership interests (the "BACs") in
Capital Source L.P. ("Cap Source I") and Capital Source II L.P.-A ("Cap Source
II") (collectively, the "Partnerships"), in connection with the proposed merger
(the "Transaction") of Cap Source I and Cap Source II with and into America
First Real Estate Investment Partners, L.P., a newly formed Delaware limited
partnership (the "Company").
Sutro & Co. has been advised by the Partnerships and the Company that in
connection with the proposed Transaction, (i) Investors will receive, at their
election and subject to certain limitations, either units of assigned limited
partner interests (the "Units" or "Consideration"), and in some situations cash,
promissory notes and Variable Rate Junior Notes Callable on or after the Date of
Issuance (the "Notes") in exchange for the assets of the partnerships, (ii) up
to 4,709,427 Units have been allocated to Investors in Cap Source I in exchange
for the Investors' BACs and up to 3,056,345 Units have been allocated to
Investors in Cap Source II in exchange for the Investors' BACs, (iii) a 1%
interest in the Company will be assigned to America First Capital Source I
L.L.C., as general partner to the Company, and (iv) the Company will be managed
by America First Capital Source I L.L.C.
Sutro & Co., in conducting its review and arriving at its opinion, noted
that the exchange ratios (the "Exchange Ratios") for Cap Source I and Cap Source
II in the Transaction are based on (i) the principal amount of the investments
in FHA loans and GNMA certificates at December 31, 1998 in the audited Balance
Sheets contained in the Annual Report on Form 10-K for the period ending
December 31, 1998 for each of the Partnerships, (ii) the value of the
Partnerships' investments in the operating partnerships (that owned the
underlying real estate properties of each of the Partnerships) based on certain
appraisals prepared by Valuation Research dated December 31, 1998 (the
"Appraisals"), and (iii) the market values of the Partnerships' remaining assets
and liabilities at December 31, 1998 and before transaction costs or other costs
associated with the Transaction (individually or collectively the "Exchange
Values"). The Exchange Ratios relating to the Exchange Values for Cap Source I
and Cap Source II are used to determine the allocation of Units to be received
by the Investors in Cap Source I and Cap Source II in the Transaction and the
principal allocation of the Notes to be received by Investors in Cap Source I
and Cap Source II in the Transaction.
Additionally, Sutro & Co. was requested to provide an opinion as to the
fairness, from a financial point of view, of the principal allocation of the
Notes that may be elected by the Investors. As used herein, principal allocation
refers solely to the method of allocation, as determined by the Exchange Values,
of the Notes among the investors in the Partnerships. Sutro & Co. in arriving at
its opinion as to the fairness, from a financial point of view, of the
Consideration to be received by the Investors, assumes that the maximum amount
of Notes that may be issued in the Transaction is $20.0 million.
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Based upon and subject to the foregoing and following, Sutro & Co. is of the
opinion, as investment bankers, that, as of the date hereof, the Consideration
to be received by the Investors, the 1% interest in the Company to be received
by the General Partners, the allocation of such Consideration and 1% interest
among the Investors and the General Partners, and the principal allocation of
the Notes, in the Transaction, is fair to the Investors and the General Partners
from a financial point of view.
Sutro & Co., as part of its investment banking business, is regularly
engaged in the evaluation of capital structures, the valuation of businesses and
their securities in connection with mergers and acquisitions, firm commitment
underwritings, secondary distributions of listed and unlisted securities,
private placements, financial restructurings and other financial services. Sutro
& Co. is currently acting as a fairness opinion provider to the Partnerships in
connection with the proposed Transaction and will receive a fee for delivering
this opinion. The Partnerships have agreed to indemnify Sutro & Co against
certain liabilities arising out of or in connection with the services rendered
by Sutro & Co. under such engagement. Sutro & Co., in the ordinary course of
business, may in the future trade securities of the Company for its own account
or for the accounts of its customers, and accordingly, may at any time hold a
long or short position in those securities.
Sutro & Co., in arriving at its opinion, reviewed and analyzed, among other
things, the following: (i) a draft of Amendment 4 of the Registration Statement
on Form S-4 of the Company which is expected to be filed on September 28, 1999,
including the Preliminary Prospectus/Consent Solicitation Statement included
therein, (ii) the Appraisals, (iii) individual Partnership Annual Reports and
Reports of Forms 10-K and 10-Q for the years ended December 31, 1997 and
December 31, 1998 as amended, and for the period ended June 30, 1999, (iv) the
Prospectus of Capital Source I dated January 10, 1986, (v) the Prospectus of
Capital Source II dated February 6, 1987, (vi) the Agreement and Plan of Merger
among the Partnerships, the General Partners and the Company, (vii) certain
other publicly available business, financial and other information concerning
the Partnerships, (viii) certain internal information, primarily financial in
nature (including analytical models, projections, forecasts, estimates and
analyses) prepared by or on behalf of the management of the Partnerships, (ix)
certain information provided to us by the management of the Partnerships
concerning the distributions on, the trading of, and the trading market for, the
equity securities of the Partnerships, and (x) such other information which
Sutro & Co. deemed to be relevant to provide the fairness opinion.
In the course of Sutro & Co.'s engagement, Sutro & Co. held discussions with
the senior management of the Partnerships concerning the historical, current and
projected future operations, business plans, financial conditions and results,
and prospects of the Partnerships. Additionally, Sutro & Co. has discussed with
representatives of Valuation Research, the results, methodology, and limitations
of the Appraisals. Sutro & Co. has not, however, independently verified the
accuracy or completeness of the Appraisals.
In conducting its review, Sutro & Co. has relied upon and assumed the
accuracy and completeness of the financial and other information, including the
Appraisals, provided to Sutro & Co. or which were publicly available and have
not attempted to verify the same. Sutro & Co. has relied upon the statements and
information provided by the management of the Partnerships as to the
reasonableness and achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to Sutro & Co.
While the financial models and the financial projections, that were provided by
the management of the Partnerships, that project future results of the
Partnerships are inherently subject to uncertainty, we have assumed that such
forecasts and projections are the best currently available estimates and good
faith judgments of the management of the Partnerships as to the future
performance of the Partnerships.
In rendering its opinion, Sutro & Co. notes that the consummation of the
proposed Transaction is conditioned upon, among other things, the approval of
the majority of both Partnerships. Sutro & Co. is not recommending or
disapproving of any action that may be taken by the Investors, the Partnerships,
the
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Company or any other person in regard to the Transaction. This opinion does not
constitute a recommendation of the proposed Transaction over any alternative
transactions which may be possible for the Partnerships and does not address the
Partnerships' underlying business decision to effect the proposed Transaction.
Furthermore, our analysis in this matter has not considered any other aspect of
the proposed Transaction or any agreement or other matters which include, but
are not limited to, the terms or fairness of the compensation and fees as
defined in the amended and restated Agreement of Limited Partnership of America
First Real Estate Investment Partners, L.P. Sutro & Co. was not asked to opine
on and is not expressing an opinion as to: (i) the terms of the Transaction,
(ii) the tax consequences of the Transaction to the Investors, and (iii) the
prices at which the Company's securities may trade at in the future.
In connection with this opinion, we have assumed that the documents to be
prepared and used to effect the Transaction will be substantially on the terms
set forth in the Agreement and Plan of Merger among the Partnerships and the
Company. Sutro & Co. has not participated in the negotiation of the Transaction
or provided any legal or other advice with respect to the Transaction except as
otherwise described herein.
Sutro & Co.'s opinion is necessarily based upon conditions as they exist and
can be evaluated as of the date hereof and the information made available to
Sutro & Co. as of the dates that such information was prepared and based upon.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Sutro &
Co. has advised the Partnerships that its entire analysis must be considered as
a whole and that selecting portions of its analyses and the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion.
It is understood and agreed that this opinion is provided solely for the use
of the Partnerships and the Investors as one element of their consideration of
the Transaction, and may not be used for any other purpose or any other party,
or otherwise referred to, relied upon, quoted, summarized or circulated, except
with Sutro & Co.'s written consent. This opinion may be reproduced in full in
the Company's Prospectus/ Consent Solicitation Statement pertaining to the
Transaction.
Sutro & Co., Inc.
/s/ Sutro & Co., Inc.
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APPENDIX C
PRIOR PARTNERSHIPS PERFORMANCE TABLES
The following tables set forth financial information regarding partnerships
sponsored by America First Companies, an affiliate of the Cap Source General
Partners. For a description of these partnerships, see "PRIOR PARTNERSHIPS."
TABLE I
EXPERIENCE IN RAISING AND UTILIZING FUNDS
Table I presents a summary of the funds raised by prior public real estate
programs sponsored by affiliates of America First and the manner in which such
funds were utilized as of December 31, 1998.
<TABLE>
<CAPTION>
AFFGMF AFFGMF2 AFTEMF AFTEMF2 AFPPEMF AFPF2 AFPF2PS
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollar amount offered..... $200,000,000 $200,000,000 $300,000,000 $107,000,000 $200,000,000 $200,000,000 $100,000,000
Dollar amount raised
(100%).................. $200,000,000 $199,449,200 $199,582,560 $104,912,460 $119,450,540 $ 33,678,080 $ 18,119,480
Less offering expenses:
Selling commissions..... 4.00% 4.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Organizational and
offering expenses..... 1.00% 1.00% 2.05% 1.80% 1.90% 2.17% 2.17%
Investment evaluation
fee................... 0.00% 0.00% 0.00% 0.00% 0.68% 0.68% 0.68%
Reserves.................. 4.52% 1.38% 2.50% 4.77% 1.00% 1.00% 1.00%
Percent available for
investment.............. 90.48% 93.62% 90.45% 88.43% 91.42% 91.15% 91.15%
Acquisition costs:
Purchase price of
mortgages acquired or
committed for
acquisition........... 90.48% 91.78% 88.75% 86.51% 83.22% 81.13% 81.12%
Percent leveraged......... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Date offering commenced... 11/30/84 4/1/85 10/28/85 8/28/86 10/2/86 10/10/87 3/3/88
Length of offering (in
months)................. 1.5 6.0 2.0 1.0 8.5 12.0 9.5
Months to invest 90% of
amount available for
investment.............. 7.5 8.0 2.0 10.5 10.0 17.0 15.0
</TABLE>
C-1
<PAGE>
TABLE II
COMPENSATION TO SPONSORS AND THEIR AFFILIATES
Table II summarizes the types and amounts of compensation paid to affiliates
of America First by prior programs sponsored by such affiliates for the period
from the date of commencement of operations through the date of liquidation or
December 31, 1998.
<TABLE>
<CAPTION>
AFFGMF2 AFTEMF AFTEMF2(1) AFPPEMF(2) AFPF2(2) AFPF2PS(2)
AFFGMF 1/2/85 7/8/85 TO 11/21/85 TO 10/17/86 TO 11/26/86 TO 3/25/88 TO 5/25/88 TO
TO 11/17/86 3/16/92 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
------------- ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Date offering commenced... 1/30/84 4/1/85 10/28/85 8/28/86 10/2/86 10/10/87 3/3/88
Dollar amount raised...... $200,000,000 $199,449,200 $199,582,560 $104,912,460 $119,450,540 $33,678,080 $18,119,480
Amount paid to sponsor
from proceeds of
offering:
Selling commissions..... 8,000,000 7,977,968 9,979,128 5,245,623 5,972,527 1,683,904 905,974
Organizational and
offering expenses..... 2,000,000 1,994,492 4,091,442 1,888,425 2,299,423 732,499 394,099
Investment evaluation
fee................... 0 0 0 0 806,291 227,327 122,306
Dollar amount of cash
generated from
operations before
deducting payments to
sponsor................. 33,182,228 62,681,757 120,651,310 61,474,908 106,076,519 25,905,022 15,450,606
Amount paid to sponsor
from operations:
Mortgage evaluation fees
and syndication
costs................. 2,117,704 1,885,072 0 0 0 0 0
Administrative fees..... 1,058,562 2,802,432 1,673,662 2,298,424 2,779,844 714,677 425,245
Property management
fees.................. 0 0 1,700,291 2,702,941 732,823 325,824 158,560
Distributions........... 237,461 412,419 1,536,253 533,706 541,359 236,782 129,653
Dollar amount of property
sales before deducting
payments to sponsor..... 216,222,929 204,077,436 0 12,750,000 56,593,532 598,867 226,587
Stock received from
properties
transferred(3).......... 0 0 60,101,600 0 0 0 0
Amount paid to sponsor
from property sales..... 5,450,890 3,530,895 0 0 0 0 0
</TABLE>
- ---------------
(1) On August 20, 1996, AFTEMF2 merged with and into America First Apartment
Investors, L.P., a newly formed partnership. The operating results shown
above for AFTEMF2 include those of America First Apartment Investors, L.P.
subsequent to August 20, 1996.
(2) On April 10, 1998, AFPPEMF, AFPF2 and AFPF2PS merged with and into America
First Mortgage Investments, Inc. ("MFA"), a newly formed REIT.
(3) On June 1, 1993, AFTEMF transferred properties to America First REIT, Inc.,
a newly formed REIT, in exchange for all outstanding shares of the REIT's
common stock. Thereafter, all shares of the REIT's common stock were
distributed to investors.
C-2
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
Table III summarizes the operating results of seven prior public real estate
programs sponsored by affiliates of America First for the period from the date
of commencement of operations through the date of liquidation or December 31,
1998.
<TABLE>
<CAPTION>
AFFGMF2 AFTEMF AFTEMF2(1) AFPPEMF(2) AFPF2(2) AFPF2PS(2)
AFFGMF 1/2/85 7/8/85 TO 11/21/85 TO 10/17/86 TO 11/26/86 TO 3/25/88 TO 5/25/88 TO
TO 11/17/86 3/16/92 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
--------------- ------------ ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross revenues................ $ 26,662,820 $ 60,664,437 $161,800,754 $98,358,431 $77,311,094 $15,562,498 $8,701,363
Profit on sale of
properties.................. 34,541,492 22,227,208 0 0 0 598,867 226,587
Less operating expenses,
interest & depreciation..... (2,916,959) (7,384,641) (86,822,444) (71,584,293) (36,766,311) (4,836,008) (2,507,504)
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Net income.................... $ 58,287,353 $ 75,507,004 $72,978,310 $26,774,138 $40,544,783 $11,323,357 $6,420,448
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated from
operations.................. $ 33,182,228 $ 59,879,325 $117,277,357 $56,473,543 1$02,564,052 $24,864,521 1$4,866,801
Cash generated from sales and
prepayments................. 216,222,929 204,077,436 0 12,750,000 56,593,532 598,867 226,587
Stock received from properties
transferred(3).............. 0 0 60,101,600 0 0 0 0
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated from operations
and sales................... 249,405,157 263,956,761 177,378,957 89,223,543 159,157,584 25,463,388 15,093,388
Less distributions to
investors:
Cash from operating cash
flow...................... (30,826,963) (57,461,354) (133,854,402) (62,594,704) (80,563,201) (25,157,165) (13,283,839)
Cash from sales and
prepayments............... (210,772,039) (200,667,021) 0 (9,934,625) (24,159,992) (598,867) (226,587)
Stock from properties
transferred(3)............ 0 0 (60,101,600) 0 0 0 0
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated after cash
distributions............... 7,806,155 5,828,386 (16,577,045) (3,305,786) 54,434,391 (292,644) 1,582,962
Less special items:
Amount withdrawn from (added
to) reserves.............. 0 0 18,113,298 3,839,492 (53,893,032) 529,426 (1,453,309)
Amount withheld from income
for payment of mortgage
evaluation fees and
syndication costs......... (2,117,704) (1,885,072) 0 0 0 0 0
Distribution to sponsor....... (5,688,451) (3,943,314) (1,536,253) (533,706) (541,359) (236,782) (129,653)
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated after cash
distributions and special
items....................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
DISTRIBUTION DATA FOR $1,000
INVESTED
Cash distributions to
investors:
From operations:
Income.................... $ 106.96 $ 240.25 $ 413.20 $ 343.41 $ 387.31 $ 383.84 $ 419.21
Return of capital......... 47.20 32.99 257.47 253.23 287.14 369.09 313.92
From sales and prepayments:
Income.................... 145.45 94.34 0.00 0.00 3.10 17.78 12.51
Return of capital......... 908.39 911.76 0.00 94.69 199.16 0.00 0.00
From stock transferred:
Income.................... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Return of capital......... $ 0.00 $ 0.00 $ 301.14 $ 0.00 $ 0.00 $ 0.00 $ 0.00
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Percentage of original total
acquisition cost of
properties remaining
invested at December 31,
1997...................... 0% 0% 40% 63% 36% 51% 50%
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
<CAPTION>
MFA(2)
4/10/98
TO
12/31/98
---------
<S> <C>
Gross revenues................ $9,228,036
Profit on sale of
properties.................. 0
Less operating expenses,
interest & depreciation..... (6,296,967)
---------
Net income.................... $2,931,069
---------
---------
Cash generated from
operations.................. $2,931,069
Cash generated from sales and
prepayments................. 0
Stock received from properties
transferred(3).............. 0
---------
Cash generated from operations
and sales................... 2,931,069
Less distributions to
investors:
Cash from operating cash
flow...................... (5,700,110)
Cash from sales and
prepayments............... 0
Stock from properties
transferred(3)............ 0
---------
Cash generated after cash
distributions............... (2,769,041)
Less special items:
Amount withdrawn from (added
to) reserves.............. 2,769,041
Amount withheld from income
for payment of mortgage
evaluation fees and
syndication costs......... 0
Distribution to sponsor....... 0
---------
Cash generated after cash
distributions and special
items....................... $ 0
---------
---------
DISTRIBUTION DATA FOR $1,000
INVESTED
Cash distributions to
investors:
From operations:
Income....................
Return of capital.........
From sales and prepayments:
Income....................
Return of capital.........
From stock transferred:
Income....................
Return of capital.........
---------
---------
Percentage of original total
acquisition cost of
properties remaining
invested at December 31,
1997......................
---------
---------
</TABLE>
- ---------------
(1) On August 20, 1996, AFTEMF2 merged with and into America First Apartment
Investors, L.P., a newly formed partnership. The operating results shown
above for AFTEMF2 include those of America First Apartment Investors, L.P.
subsequent to August 20, 1996.
(2) On April 10, 1998, AFPPEMF, AFPF2 and AFPF2PS merged with and into America
First Mortgage Investments, Inc. ("MFA"), a newly formed REIT.
(3) On June 1, 1993, AFTEMF transferred properties to America First REIT, Inc.,
a newly formed REIT, in exchange for all outstanding shares of the REIT's
common stock. Thereafter, all shares of the REIT's common stock were
distributed to investors.
C-3
<PAGE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS
Table IV summarizes the results of two prior public real estate programs
sponsored by affiliates of America First which completed operations prior to
December 31, 1998. The results are for the period from the date of commencement
of operations through the date of dissolution.
<TABLE>
<CAPTION>
AFFGMF 1/2/85 TO AFFGMF2 7/8/85 TO
11/17/86 3/16/92
----------------- ------------------
<S> <C> <C>
Dollar amount raised....................................................... $ 200,000,000 $ 199,449,200
Number of mortgages purchased.............................................. 29 37
Date of closing of offering................................................ 1/2/85 11/1/85
Date of first mortgage sale................................................ 5/24/85 10/22/86
Date of final mortgage sale................................................ 10/22/86 1/30/92
DISTRIBUTION DATA FOR $1,000 INVESTED
Cash distributions to investors:
From operations:
Income................................................................. $ 106.96 $ 240.25
Return of capital...................................................... 47.20 32.99
From sales:
Income................................................................. 145.45 94.34
Return of capital...................................................... $ 908.39 $ 911.76
</TABLE>
C-4
<PAGE>
APPENDIX D
FORM OF
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
<PAGE>
AMERICA FIRST
REAL ESTATE INVESTMENT PARTNERS, L.P.
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARTICLE I
DEFINED TERMS............................................................................................. D-1
ARTICLE II
NAME, PLACE OF BUSINESS, PURPOSE AND TERM
Section 2.01. Name........................................................................................ D-5
Section 2.02. Principal Office and Name and Address of Registered Agent and Registered Office............. D-5
Section 2.03. Purpose..................................................................................... D-5
Section 2.04. Term........................................................................................ D-5
ARTICLE III
PARTNERS AND CAPITAL
Section 3.01. General Partner............................................................................. D-5
Section 3.02. Limited Partners............................................................................ D-6
Section 3.03. Partnership Capital......................................................................... D-6
Section 3.04. Liability of Partners and Unit Holders...................................................... D-6
ARTICLE IV
DISTRIBUTIONS OF CASH; ALLOCATIONS OF INCOME AND LOSS
Section 4.01. Distributions of Net Operating Income....................................................... D-7
Section 4.02. Distributions of Net Sale Proceeds and of Liquidation Proceeds.............................. D-7
Section 4.03. Allocation of Income and Loss............................................................... D-7
Section 4.04. Determination of Allocations and Distributions Among Limited Partners and Unit Holders...... D-8
Section 4.05. Capital Accounts............................................................................ D-8
Section 4.06. Rights to Distributions..................................................................... D-9
Section 4.07. Limitation on Distributions................................................................. D-9
ARTICLE V
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
Section 5.01. Management of the Partnership............................................................... D-9
Section 5.02. Authority of the General Partner............................................................ D-10
Section 5.03. Authority of General Partner and Its Affiliates to Deal With the Partnership................ D-11
Section 5.04. General Restrictions on Authority of the General Partner.................................... D-12
Section 5.05. Compensation and Fees....................................................................... D-13
Section 5.06. Duties and Obligations of the General Partner............................................... D-15
Section 5.07. Delegation of Authority..................................................................... D-15
Section 5.08. Other Activities............................................................................ D-16
Section 5.09. Limitation on Liability of the General Partner and Initial Limited Partner;
Indemnification............................................................................... D-16
Section 5.10. Special Amendments to the Agreement......................................................... D-16
ARTICLE VI
CHANGES IN GENERAL PARTNERS
Section 6.01. Withdrawal of General Partner............................................................... D-17
Section 6.02. Admission of a Successor or Additional General Partner...................................... D-17
Section 6.03. Removal of a General Partner................................................................ D-17
Section 6.04. Effect of Incapacity of a General Partner................................................... D-18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARTICLE VII
TRANSFERABILITY OF UNITS AND LIMITED PARTNERS' INTERESTS
Section 7.01. Free Transferability of Units............................................................... D-19
Section 7.02. Restrictions on Transfers of Interests of Limited Partners Other Than the Initial Limited
Partner....................................................................................... D-20
Section 7.03. Assignees of Limited Partners Other Than the Initial Limited Partner........................ D-20
Section 7.04. Joint Ownership of Interests................................................................ D-21
ARTICLE VIII
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
Section 8.01. Events Causing Dissolution.................................................................. D-21
Section 8.02. Liquidation................................................................................. D-22
ARTICLE IX
BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS
Section 9.01. Books and Records........................................................................... D-22
Section 9.02. Accounting Basis, Fiscal Year and Tax Elections............................................. D-23
Section 9.03. Reports..................................................................................... D-23
Section 9.04. Designation of Tax Matters Partner.......................................................... D-23
Section 9.05. Expenses of Tax Matters Partner............................................................. D-24
ARTICLE X
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS AND UNIT HOLDERS
Section 10.01. Meetings................................................................................... D-24
Section 10.02. Voting Rights of Limited Partners and Unit Holders......................................... D-25
Section 10.03. Other Activities........................................................................... D-26
ARTICLE XI
ASSIGNMENT OF LIMITED PARTNER INTERESTS TO UNIT
HOLDERS AND RIGHTS OF UNIT HOLDERS
Section 11.01. Assignment of Limited Partner Interests to Unit Holders.................................... D-26
Section 11.02. Rights of Unit Holders..................................................................... D-27
Section 11.03. Voting by the Initial Limited Partner on Behalf of Unit Holders............................ D-27
Section 11.04. Preservation of Tax Status................................................................. D-28
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01. Appointment of the General Partner as Attorney-in-Fact..................................... D-28
Section 12.02. Signatures................................................................................. D-28
Section 12.03. Amendments................................................................................. D-29
Section 12.04. Binding Provisions......................................................................... D-29
Section 12.05. Applicable Law............................................................................. D-30
Section 12.06. Separability of Provisions................................................................. D-30
Section 12.07. Captions................................................................................... D-30
Section 12.08. Entire Agreement........................................................................... D-30
</TABLE>
ii
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
This Amended and Restated Agreement of Limited Partnership is made as of
, 1999 by and between America First Capital Source I L.L.C., as the
general partner (the "General Partner"), and
H/T Corp., as the initial limited partner (the "Initial Limited Partner"), who
by joining in this Agreement agree to continue as partners in a limited
partnership (the "Partnership") under the laws of the State of Delaware.
ARTICLE I
DEFINED TERMS
The defined terms used in this Agreement shall, unless the context otherwise
requires, have the meanings specified in this Article I. The singular shall
include the plural and the masculine gender shall include the feminine and
neuter gender, and vice versa, as the context requires.
"Accountants" means such nationally recognized firm of independent public
accountants as shall be engaged from time to time by the General Partner on
behalf of the Partnership.
"Acquisition Fee" means the fee paid by the Partnership to the General
Partner pursuant to Section 5.05(b) hereof in connection with the
identification, evaluation and acquisition of New Assets by the Partnership.
"Act" means the Delaware Revised Uniform Limited Partnership Act, which
consists of Title 6, Chapter 17 of the Delaware Code Annotated, as it may be
amended or revised from time to time, or any other provision of Delaware law
which may, from time to time, supersede part or all of the Delaware Revised
Uniform Limited Partnership Act.
"Administrative Fee" means the fee paid by the Partnership to AFCSI pursuant
to Section 5.05(c) hereof for the administration of the Partnership and its
assets.
"AFCSI" means America First Capital Source I L.L.C., a Delaware limited
liability company, the general partner of the Partnership.
"Affiliate" 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 (or has the
power to designate) an officer of, general partner in or trustee of, or serves
(or has the power to designate a person to serve) in a similar capacity with
respect to, the specified Person, or of which the specified Person is an
officer, general partner or trustee, or with respect to which the specified
Person serves in a similar capacity, and (iii) any Person who, directly or
indirectly, is the beneficial owner of 10% or more of any class of equity
securities of the specified Person or of which the specified Person is directly
or indirectly the owner of 10% or more of any class of equity securities. An
Affiliate of the Partnership or the General Partner does not include any member
of the General Partner if such Person is not otherwise an Affiliate of the
Partnership or the General Partner.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
of the Partnership, as originally executed and as amended from time to time.
"Bankruptcy" or "Bankrupt" as to any Person means the filing of a petition
for relief by such Person as debtor or bankrupt under the Bankruptcy Code of
1978 or like provision of law or insolvency of such Person as finally determined
by a court proceeding. With respect to a General Partner, the foregoing
definition of "Bankruptcy" is intended to replace and shall supersede and
replace the definition of "Bankruptcy" set forth in Sections 17-402(a)(4) and
(5) of the Act.
D-1
<PAGE>
"Business Day" means any day other than a Saturday, Sunday or a day on which
banking institutions in either New York, New York or Omaha, Nebraska are
obligated by law or executive order to be closed.
"Capital Account" means the capital account of a Partner or a Unit Holder as
described in Section 4.05 hereof.
"Capital Contribution" means the total amount contributed to the capital of
the Partnership by or on behalf of all Partners or any class of Partners or by
any one Partner, as the context may require, as discussed in Article III hereof.
"Cap Source I" means Capital Source L.P., a Delaware limited partnership.
"Cap Source II" means Capital Source II L.P.-A, a Delaware limited
partnership.
"Cause" means conduct which constitutes fraud, gross negligence, willful
misconduct or breach of duty under this Agreement.
"Certificate" means the certificate of limited partnership filed pursuant to
Section 17-201 of the Act.
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of succeeding law.
"Consent" means either the consent given by a vote at a meeting called and
held in accordance with the provisions of Section 10.01 hereof or the written
consent, as the case may be, of a Person to do the act or thing for which the
consent is solicited, or the act of granting such consent, as the context may
require. Consent given after the act or thing is done with respect to which the
Consent is solicited shall be deemed to relate back to the date such act or
thing was done.
"Counsel" means the law firm representing the General Partner in connection
with the operation of the Partnership or the law firm, if any, selected by the
General Partner to represent the Partnership.
"Distribution Date" means a Business Day selected by the General Partner for
the distribution of Net Operating Income or Net Sale Proceeds with respect to a
Distribution Period, which Business Day shall be no later than 60 days following
the last day of the Distribution Period to which such Distribution Date relates.
"Distribution Period" means the period of time selected by the General
Partner for which the distribution of Net Operating Income or Net Sale Proceeds
is made, which period may be no longer than six calendar months.
"GAAP" means generally accepted accounting principles, consistently applied.
"General Partner" means AFCSI or any Person or Persons who, at the time of
reference thereto, have been admitted to the Partnership as general partners of
the Partnership and who succeed to the Partnership Interest of AFCSI or as
additional general partners of the Partnership, in each such Person's capacity
as a general partner of the Partnership.
"GNMA" or "GNMAs" means the mortgage-backed securities owned by the Prior
Partnerships immediately before the Merger Date that are guaranteed as to
principal and interest by the United States Government National Mortgage
Association or first mortgage loans insured by the Federal Housing
Administration.
"Incapacity" or "Incapacitated" means, as to any Person, death, the
adjudication of incompetency or insanity, Bankruptcy, dissolution, termination,
withdrawal pursuant to Section 6.01 or removal pursuant to Section 6.03, as the
case may be, of such Person.
"Income" means the taxable income and gain of the Partnership as determined
in accordance with the Partnership's method of accounting and computed under
Section 703 of the Code and any item of taxable
D-2
<PAGE>
income required to be separately stated on the Partnership's federal income tax
return pursuant to Section 703(a)(1) of the Code.
"Initial Limited Partner" means H/T Corp., a Delaware corporation, or any
Person or Persons who, at the time of reference thereto, have been admitted to
the Partnership, with the consent of the General Partner, as limited partners of
the Partnership and who succeed to the Limited Partner Interest of H/T Corp.
"Investment Company Act" means the Investment Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder.
"Limited Partner" means any Person who is a limited partner of the
Partnership, including the Initial Limited Partner, at the time of reference
thereto, in such Person's capacity as a limited partner of the Partnership. A
Unit Holder is not a Limited Partner and has no right to be admitted to the
Partnership as a Limited Partner. For purposes of the Act, the Limited Partners
shall constitute a single class or group of limited partners.
"Limited Partner Interest" means the Partnership Interest held by a Limited
Partner, including the Limited Partner Interests assigned to Unit Holders.
"Liquidation Proceeds" means all cash receipts of the Partnership (other
than Operating Income and Sale Proceeds) arising from the liquidation of the
Partnership's assets in the course of the winding up of the Partnership.
"Loss" means taxable losses of the Partnership, as determined in accordance
with the Partnership's method of accounting and computed under Section 703 of
the Code, any item of loss or expense required to be separately stated on the
Partnership's federal income tax return pursuant to Section 703(a)(1) of the
Code and any expenditures of the Partnership not deductible in computing its
taxable income and not properly treated as a capital expenditure.
"Merger" means the merger of the Partnership and the Prior Partnerships
pursuant to the Merger Agreement.
"Merger Agreement" means the Agreement of Merger, dated as of ,
1999, among the Partnership and the Prior Partnerships pursuant to which the
Partnership and the Prior Partnerships will be merged in accordance with the
provisions of the Act with the Partnership being the surviving partnership.
"Merger Date" means the effective date of the merger of the Partnership and
the Prior Partnerships specified in the Merger Agreement.
"Net Operating Income" means, with respect to any Distribution Period, all
Operating Income received by the Partnership during such Distribution Period,
plus any amounts previously set aside as Reserves from Operating Income which
the General Partner releases from Reserves as being no longer necessary to hold
as part of Reserves, less (i) expenses of the Partnership (including fees and
reimbursements paid to the General Partner but excluding any expenses of the
Partnership which are directly attributable to the sale of a Property) paid from
Operating Income during the Distribution Period (other than operating expenses
paid from previously established Reserves), (ii) all cash payments made from
Operating Income during such Distribution Period to discharge Partnership
indebtedness, and (iii) all amounts from Operating Income set aside as Reserves
or used to acquire additional Properties during such Distribution Period.
"Net Sale Proceeds" means, with respect to any Distribution Period, all Sale
Proceeds received by the Partnership during such Distribution Period, plus any
amounts previously set aside as Reserves from Sale Proceeds which the General
Partner releases from Reserves as being no longer necessary to hold as part of
Reserves, less (i) all expenses of the Partnership which are directly
attributable to the sale of a Property, (ii) all cash payments made from Sale
Proceeds during such Distribution Period to discharge Partnership
D-3
<PAGE>
indebtedness and (iii) all amounts from Sale Proceeds set aside as Reserves or
used to acquire additional Properties during such Distribution Period or held by
the Partnership to acquire additional Properties in future Distribution Periods.
"New Assets" means any and all Properties and Securities acquired by the
Partnership after the Merger Date.
"Notice" 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.
"Operating Income" means all cash receipts of the Partnership with respect
to any period (including any interest payments received on Original Assets)
except for (i) Capital Contributions, (ii) Sale Proceeds or (iii) the proceeds
of any loan to the Partnership or the refinancing of any loan.
"Operating Partnerships" means the limited partnerships in which the
Partnership is a partner that own real estate of the type described in Section
2.03 hereof.
"Original Assets" means the assets contributed to the Partnership on the
Merger Date.
"Partner" means the General Partner or any Limited Partner.
"Partnership" means the limited partnership continued by this Agreement and
known as "America First Real Estate Investment Partners, L.P.", as said limited
partnership may from time to time be constituted.
"Partnership Interest" means the entire 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 under this Agreement,
together with the obligations of such Partner to comply with all the terms and
provisions of this Agreement and the Act.
"Person" means any individual, partnership, corporation, trust, association
or other legal entity.
"Predecessor Limited Partner" means a limited partner in a Prior
Partnership.
"Prior General Partner" means a general partner of a Prior Partnership.
"Prior Partnership" or "Prior Partnerships" means Cap Source I and/or Cap
Source II.
"Property" or "Properties" means the real property, including land and the
buildings thereon, in which the Partnership holds an ownership interest, either
directly or indirectly, including interests in Operating Partnerships,
participating loans and joint ventures.
"Quarterly Record Date" means the last day of a calendar quarter.
"Regulations" means the United States Treasury Regulations promulgated or
proposed under the Code.
"REIT" means the classification for federal tax purposes as a real estate
investment trust pursuant to Part II, Subchapter M of Chapter 1 of Subtitle A of
the Code, as now enacted or hereafter amended, including successor statutes and
regulations promulgated thereunder.
"Reserve" means such amount of funds as shall be withheld from Operating
Income or Sale Proceeds by the General Partner from time to time in order to
provide working capital for the Partnership and which may be used for any
purpose relating to the operation of the Partnership and its Properties,
including the acquisition of additional Properties.
"Sale Proceeds" means all amounts received by the Partnership upon the sale
of a Property or other Partnership asset or from the repayment of all or a
portion of the principal of any Original Asset.
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"Schedule A" means the schedule, as amended from time to time, of Partners'
names, addresses and Capital Contributions, which schedule, in its initial form,
is attached to and made a part of this Agreement.
"Security" or "Securities" means a debt or equity security issued by an
entity that is a REIT or other entity that engages in a similar business that
invests in or otherwise deals with real estate assets.
"Tax Matters Partner" means the Partner designated as the Tax Matters
Partner of the Partnership by the General Partner pursuant to Section 9.04.
"Unit" means a Limited Partner Interest which is credited to the Initial
Limited Partner on the books and records of the Partnership and assigned by the
Initial Limited Partner to a Unit Holder.
"Unit Holder" means any Person who has been assigned one or more Limited
Partner Interests by the Initial Limited Partner pursuant to Section 11.01. A
Unit Holder is not a Limited Partner and will have no right to be admitted as a
Limited Partner.
ARTICLE II
NAME, PLACE OF BUSINESS, PURPOSE AND TERM
SECTION 2.01. NAME. The Partners have caused the formation of a limited
partnership pursuant to the Act under the name of "America First Real Estate
Investment Partners, L.P." The Partners and Unit Holders have entered into this
Agreement in order to set forth their respective rights and liabilities as such,
subject to the provisions of the Act unless otherwise provided herein.
SECTION 2.02. PRINCIPAL OFFICE AND NAME AND ADDRESS OF REGISTERED AGENT AND
REGISTERED OFFICE. The address of the principal office and place of business of
the Partnership, unless hereafter changed by the General Partner, shall be 1004
Farnam Street, Suite 400, Omaha, Nebraska 68102. Notification of any change in
the Partnership's principal office and place of business shall be promptly given
by the General Partner to the Limited Partners and Unit Holders. The name and
address of the initial registered agent and registered office of the Partnership
in the State of Delaware is The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801. The registered agent and registered office may be
changed by the General Partner.
SECTION 2.03. PURPOSE. The purpose of the Partnership is to acquire, hold,
operate, sell and otherwise deal with multifamily residential properties and
other types of commercial real estate and interests therein, and to acquire,
hold, sell and otherwise deal with Securities. The Partnership will pursue its
purpose in order (i) to preserve and protect the Partnership's capital and (ii)
to provide regular cash distribution to the Unit Holders.
SECTION 2.04. TERM. The Partnership began on the date of the filing of the
Certificate and shall continue in full force and effect until December 31, 2039
or until sooner dissolved pursuant to the provisions of this Agreement.
ARTICLE III
PARTNERS AND CAPITAL
SECTION 3.01. GENERAL PARTNER.
(a) The name, address and Capital Contribution of the General Partner
are set forth in Schedule A. The General Partner, as such, shall not be
required to make any additional Capital Contribution to the Partnership,
except as provided in paragraph (b) of this Section 3.01.
(b) Upon the dissolution of the Partnership, the General Partner will
contribute to the Partnership an amount equal to the lesser of (i) any
deficit balance in its Capital Account or (ii) the excess of (A) 1.01% of
the total Capital Contributions of the Limited Partners to the Partnership
(including the
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Capital Contribution of the Initial Limited Partner made on behalf of the
Unit Holders) over (B) the amount of total Capital Contributions made by the
General Partner to the Partnership.
SECTION 3.02. LIMITED PARTNERS.
(a) The name, address and Capital Contribution of the Initial Limited
Partner are as set forth in Schedule A. The Initial Limited Partner, for
federal income tax purposes, will be deemed the nominee holder of the
Limited Partner Interests on behalf of the Unit Holders. A Unit Holder will
be deemed a limited partner of the Partnership for federal income tax
purposes, but not for purposes of the Act. Upon consummation of the Merger,
the Partnership shall be deemed a continuation of Cap Source I for federal
income tax purposes. In addition, as a result of the Merger, the Predecessor
Limited Partners of Cap Source I shall be deemed to have contributed their
interests therein to the Partnership in exchange for Units in accordance
with the principles set forth in Revenue Ruling 84-52, regarding partnership
conversions. Further, Cap Source II shall be deemed to have transferred its
assets to the Partnership in exchange for Units. The Capital Contribution of
the Initial Limited Partner attributable to Cap Source II shall be deemed to
equal the fair market value of the assets of Cap Source II. The Capital
Contribution of the Initial Limited Partner attributable to the Predecessor
Limited Partners of Cap Source I shall be deemed to equal the fair market
value of the assets of Cap Source I. Moreover, to the extent it deems
necessary, the General Partner shall have the authority to adjust the
Capital Accounts of the Predecessor Limited Partners of Cap Source I to
reflect the fair market value of its assets immediately prior to the Merger
in accordance with the requirements of Treasury Regulation
1.704-1(b)(2)(iv)(f).
(b) Neither the Initial Limited Partner nor the Unit Holders shall be
required to make any additional Capital Contribution to the Partnership. No
Limited Partner or Unit Holder shall be required to lend any funds to the
Partnership. Other than to serve as Initial Limited Partner and to acquire,
hold and dispose of a Limited Partner Interest, the Initial Limited Partner
shall have no other business purpose and shall not engage in any other
activity or incur any debts. The Initial Limited Partner agrees not to amend
its articles of incorporation with respect to the incurrence of debt without
the written Consent of a majority in interest of the Unit Holders.
SECTION 3.03. PARTNERSHIP CAPITAL.
(a) No Partner or Unit Holder shall be paid interest on any Capital
Contribution.
(b) Except as specifically provided in Section 6.03, the Partnership
shall not be required to redeem or repurchase any Partnership Interest or
Unit and no Partner or Unit Holder shall have the right to withdraw, or
receive any return of, his Capital Contribution. Under circumstances
requiring a return of any Capital Contribution, no Limited Partner or Unit
Holder will have the right to receive property other than cash.
(c) No Limited Partner or Unit Holder shall have any priority over any
other Limited Partner or Unit Holder as to the return of his Capital
Contribution or as to distributions.
(d) The General Partner shall have no liability for the repayment of the
Capital Contributions of the Limited Partners or the Unit Holders.
SECTION 3.04. LIABILITY OF PARTNERS AND UNIT HOLDERS. The liability of any
Limited Partner or Unit Holder for the losses, debts, liabilities and
obligations of the Partnership shall, so long as the Limited Partner or Unit
Holder complies with Section 5.01(b), be limited to his Capital Contribution and
his share of any undistributed Income of the Partnership. Notwithstanding the
foregoing, it is possible that, under applicable law, a Limited Partner or Unit
Holder may be liable to the Partnership to the extent of previous distributions
made to such Limited Partner or Unit Holder in the event the Partnership does
not have sufficient assets to discharge liabilities to its creditors who
extended credit or whose claims arose prior to such distributions. To the extent
that the Initial Limited Partner is required by law to return any
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distributions or repay any amount each Unit Holder who has received any portion
of such distributions agrees, by virtue of accepting such distribution, to pay
his proportionate share of such amount to the Initial Limited Partner
immediately upon Notice by the Initial Limited Partner to such Unit Holder. In
lieu of requiring return of such distributions from Unit Holders, the General
Partner may withhold future distributions of Net Operating Income, Net Sale
Proceeds or Liquidation Proceeds until the amount so withheld equals the amount
of the distributions the Initial Limited Partner is required to repay or return
regardless of whether the Unit Holders entitled to receive such distribution
were the same Unit Holders who actually received the distribution required to be
returned. In the event that the Initial Limited Partner is determined to have
unlimited liability for losses, debts, liabilities and obligations of the
Partnership, nothing set forth in this Section shall be construed to require
Unit Holders to assume any portion of such liability.
ARTICLE IV
DISTRIBUTIONS OF CASH; ALLOCATIONS OF INCOME AND LOSS
SECTION 4.01. DISTRIBUTIONS OF NET OPERATING INCOME. On each Distribution
Date, all Net Operating Income will be distributed 99% to the Limited Partners
and Unit Holders as a class and 1% to the General Partner.
SECTION 4.02. DISTRIBUTIONS OF NET SALE PROCEEDS AND OF LIQUIDATION
PROCEEDS.
(a) On each Distribution Date, all amounts representing Net Sale
Proceeds will be distributed 99% to the Limited Partners and Unit Holders as
a class and 1% to the General Partner.
(b) All Liquidation Proceeds shall be applied and distributed in the
following amounts and order of priority:
(i) to the payment of the amounts and the establishment of the
reserves provided for in Section 8.02(b);
(ii) to the Partners and Unit Holders in accordance with the
positive balances in their respective Capital Accounts until such
accounts are reduced to zero; and
(iii) then 99% to the Limited Partners and Unit Holders as a class
and 1% to the General Partner.
SECTION 4.03. ALLOCATION OF INCOME AND LOSS.
(a) Income and Loss shall be determined in accordance with the
accounting methods followed by the Partnership for federal income tax
purposes. For purposes of determining the Income, Loss, tax credits or any
other items allocable to any period, Income, Loss, tax credits and any such
other items shall be determined on a daily, monthly or other basis, as
determined by the General Partner using any permissible method under Section
706 of the Code and the Regulations thereunder. An allocation to a Partner
or Unit Holder of a share of Income or Loss under this Section 4.03 shall be
treated as an allocation to such Partner or Unit Holder of the same share of
each item of income, gain, loss, deduction and credit that is taken into
account in computing such Income and Loss.
(b) Subject to the provisions of Sections 4.03(c) and (d) and 5.04(j),
Income and Loss for each Distribution Period shall be allocated 1% to the
General Partner and 99% to the Limited Partners and the Unit Holders as a
class.
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(c) Notwithstanding any provision hereof to the contrary, if any
Partners have deficit Capital Account balances as of the last day of any
fiscal year, then all items of Income for such fiscal year shall be first
allocated pro rata to such Partners in the amount and in the manner
necessary to eliminate such deficit Capital Account balances and thereafter
in such a manner so that the ratio of the Capital Account balances of the
Limited Partners and Unit Holders as a class to the Capital Account balance
of the General Partner shall be 99 to 1.
(d) Notwithstanding any other provision of this Agreement, all
allocations of Income and Loss shall be subject to and interpreted in
accordance with Section 704 of the Code to the extent applicable. The
foregoing allocations are intended to comply with Section 704 of the Code
and the Regulations promulgated thereunder and shall be interpreted
consistently therewith. The General Partner may amend such allocations
without the vote or consent of the Partners or the Unit Holders to make the
allocations comply with Section 704 of the Code and the Regulations
promulgated thereunder.
SECTION 4.04. DETERMINATION OF ALLOCATIONS AND DISTRIBUTIONS AMONG LIMITED
PARTNERS AND UNIT HOLDERS.
(a) As of each Quarterly Record Date during the term of the Partnership,
a determination shall be made of the amount of Income and Loss which, under
the Partnership's method of accounting, is properly attributable to the
quarter to which such Quarterly Record Date relates and which was allocable
to the Limited Partners and Unit Holders as a class in accordance with
Section 4.03.
(b) As of the last day of each Distribution Period during the term of
the Partnership, a determination shall be made of the amount of Net
Operating Income and Net Sale Proceeds available to the Partnership during
such Distribution Period which was allocated for distribution to the Limited
Partners and Unit Holders in accordance with Sections 4.01 and 4.02;
provided, however, that the General Partner may elect to make the
determination under this Section 4.04(b) as of each Quarterly Record Date.
(c) All allocations to the Limited Partners and Unit Holders as a class
pursuant to Section 4.03 shall be made on a quarterly basis among the
Limited Partners or Unit Holders who held of record a Limited Partner
Interest or Unit as of the Quarterly Record Date in the ratio that (i) the
number of Limited Partner Interests or Units held of record by each such
Limited Partner or Unit Holder as of the Quarterly Record Date bears to (ii)
the aggregate number of Limited Partner Interests and Units outstanding on
each such Quarterly Record Date.
(d) Net Operating Income and Net Sale Proceeds will be allocated to the
Limited Partners or Unit Holders of record on the last day of the
Distribution Period (or, if the General Partner so elects, on each Quarterly
Record Date during such Distribution Period) in the ratio that (i) the
number of Limited Partner Interests or Units owned of record by each such
Limited Partner or Unit Holder on each such date bears to (ii) the number of
Limited Partner Interests or Units outstanding on such date.
SECTION 4.05. CAPITAL ACCOUNTS. A separate Capital Account shall be
maintained and adjusted for each Partner in accordance with the Code and the
Regulations. Each Partner's Capital Account balance initially shall be equal to
its respective Capital Contributions and thereafter shall be increased by the
amount of all cash and the fair market value of all property actually or deemed
contributed by a Partner to the Partnership and all items of Income allocated to
such Partner and decreased by (a) the amount of cash or fair market value of all
actual and deemed distributions of cash or property made to such Partner, and
(b) all items of Loss allocated to such Partner.
The Initial Limited Partner's Capital Account attributable to Cap Source I
shall be subdivided into separate Capital Accounts for the Unit Holders that
were Predecessor Limited Partners of Cap Source I in the same proportions as
their capital accounts in Cap Source I. The remainder of the Initial Limited
Partner's Capital Account balance shall be subdivided into separate Capital
Accounts for Unit Holders
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that were Predecessor Limited Partners in Cap Source II in the same proportions
as their capital accounts in Cap Source II. Any items credited or charged to the
Unit Holders shall be reflected in the Capital Account of the Initial Limited
Partner and in the sub-accounts reflecting the interest of each Unit Holder. Any
Person who acquires a Limited Partner Interest or a Unit from a Limited Partner
or Unit Holder shall have a Capital Account equal to the Capital Account of the
Limited Partner or Unit Holder from which such Limited Partner Interest or Unit
was acquired.
SECTION 4.06. RIGHTS TO DISTRIBUTIONS. Each holder of Partnership
Interests and Units shall look solely to the assets of the Partnership for all
distributions with respect to the Partnership, his Capital Contributions and his
share of Net Operating Income, Net Sale Proceeds and Liquidation Proceeds and,
except as provided in Section 3.01(b), shall have no recourse therefor, upon
dissolution or otherwise, against the General Partner or the Initial Limited
Partner. No Partner or Unit Holder shall have any right to demand or receive
property other than cash upon dissolution of the Partnership. All distributions
pursuant to this Article IV are subject to the provisions of Section 3.04.
SECTION 4.07. LIMITATION ON DISTRIBUTIONS. Notwithstanding anything to the
contrary contained in this Agreement, the Partnership, and the General Partner
on behalf of the Partnership, shall not make a distribution to any Partner or
Unit Holder on account of his or its interest in the Partnership if such
distribution would violate the Act or other applicable law.
ARTICLE V
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
SECTION 5.01. MANAGEMENT OF THE PARTNERSHIP.
(a) The General Partner, within the authority granted to it under this
Agreement, shall have full, complete and exclusive discretion to manage and
control the business of the Partnership and to carry out the purposes of the
Partnership. In so doing, the General Partner shall use its best efforts to
take all actions necessary or appropriate to protect the interests of the
Limited Partners and the Unit Holders. All decisions made for and on behalf
of the Partnership by the General Partner shall be binding upon the
Partnership. Except as otherwise provided in the Act and this Agreement, the
General Partner shall have all the rights and powers and shall be subject to
all the restrictions and liabilities of a partner in a partnership without
limited partners.
(b) No Limited Partner or Unit Holder shall take part in the management
or control of the business of the Partnership or transact any business in
the name of the Partnership. No Limited Partner or Unit Holder shall have
the power or authority to bind the Partnership or to sign any agreement or
document in the name of the Partnership. No Limited Partner or Unit Holder
shall have any power or authority with respect to the Partnership except
insofar as the vote or Consent of the Limited Partners or Unit Holders shall
be expressly required or permitted by this Agreement.
(c) The Partnership may merge with, or consolidate into, another
Delaware limited partnership or other business entity (as defined in Section
17-211(a) of the Act) upon the approval by the General Partner and a
majority in interest of the Limited Partners (it being understood that the
Initial Limited Partner shall act at the direction of the Unit Holders). In
accordance with Section 17-211 of the Act (including Section 17-211(g)),
notwithstanding anything to the contrary contained in this Agreement, an
agreement of merger or consolidation approved by the General Partner and a
majority in interest of the Limited Partners (it being understood that the
Initial Limited Partner shall act at the direction of the Unit Holders) may
(i) effect any amendment to this Agreement, or (ii) effect the adoption of a
new partnership agreement for the Partnership if it is the surviving or
resulting limited partnership of the merger or consolidation. Any amendment
to this Agreement or adoption of a new partnership agreement made pursuant
to the foregoing sentence shall be effective at the effective time or date
of the merger or consolidation. For purposes of any vote required by the
Limited Partners in connection with any merger or consolidation, the Limited
Partners shall be treated for purposes of voting as a
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single class of limited partners. The provisions of this Section 5.01(c)
shall not be construed to limit the accomplishment of a merger by any other
means otherwise permitted by law.
SECTION 5.02. AUTHORITY OF THE GENERAL PARTNER.
(a) Subject to Sections 5.03 and 5.04, but otherwise without in any way
limiting the power and authority conferred on the General Partner by Section
5.01(a), the General Partner, for and in the name and on behalf of the
Partnership, is hereby authorized:
(i) to negotiate for and enter into agreements to acquire, hold,
operate, sell and otherwise deal with the Properties and Securities,
including the Original Assets, at such prices and upon such terms as it
determines in its sole discretion, including holding such Properties
through special purpose corporations or other entities as may be required
by a rating agency or a lender in connection with the refinancing of a
Property;
(ii) to acquire by purchase, lease, exchange or otherwise any real
or personal property to be used in connection with the business of the
Partnership; provided, however, that no property may be acquired from the
General Partner except for goods and services provided subject to the
restrictions of Section 5.03;
(iii) to borrow money and issue evidences of indebtedness and to
secure the same by a pledge, lien, mortgage or other encumbrance on any
assets of the Partnership and to apply the proceeds of such borrowing to
the acquisition of Properties or such other proper Partnership purpose as
the General Partner shall determine in its sole discretion;
(iv) to employ agents, accountants, attorneys, consultants and other
Persons that are necessary or appropriate to carry out the business and
operations of the Partnership and to pay fees, expenses and other
compensation to such Persons; provided, that if such Persons are
Affiliates of the General Partner, the terms of such employment shall be
subject to the restrictions of Section 5.03;
(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) except as otherwise expressly provided herein, to determine the
appropriate accounting method or methods to be used by the Partnership;
(vii) except as prohibited by this Agreement, to cause the
Partnership to make or revoke any of the elections referred to in the
Code or any similar provisions enacted in lieu thereof, including, but
not limited to, those elections provided for in Code Sections 108, 709
and 1017;
(viii) to amend the Certificate or this Agreement to reflect the
addition or substitution of Partners accomplished in accordance with this
Agreement and to amend this Agreement as provided in Section 12.03;
(ix) to deal with, or otherwise engage in business with, or provide
services to and receive compensation therefor from, any Person who has
provided or may in the future provide any services to, lend money to,
sell property to or purchase property from the General Partner or any of
its Affiliates;
(x) to obtain loans from the General Partner or its Affiliates,
provided that the requirements of Section 5.03(d)(iii) are met;
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(xi) to establish and maintain the Reserve in such amounts as it
deems appropriate from time to time and to increase, reduce or eliminate
the Reserve as it deems appropriate from time to time;
(xii) to invest all funds not immediately needed in the operation of
the business including, but not limited to, (A) Capital Contributions,
(B) the Reserves or (C) Net Operating Income and Net Sale Proceeds prior
to their distribution to the Partners and Unit Holders;
(xiii) to acquire Units for the account of the Partnership in the
secondary trading market, provided that the Units are listed on the
NASDAQ Stock Market or a national securities exchange, and to cause such
Units to be cancelled;
(xiv) to engage in any kind of activity and to enter into, perform
and carry out contracts of any kind necessary or incidental to, or in
connection with, the accomplishment of the purposes of the Partnership;
(xv) to cause the elimination of the mortgage insurance on the Prior
Partnerships' mortgage loans insured by GNMA or FHA;
(xvi) to issue additional Units or other debt or equity securities;
(xvii) to purchase and hold equity or debt securities issued by REITs;
(xviii) to enter into joint ventures or other similar business
arrangements with other Persons or Affiliates of the General Partners;
and
(xix) to invest any cash or cash equivalents of the Partnership in a
manner such that the Partnership, if incorporated, would not be
characterized as an investment company, as set forth in Section 351(e) of
the Code or as set forth in the Investment Company Act.
(b) With respect to all 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, trust instruments, agreements,
assignments, deeds, loan agreements, mortgages, deeds of trust, leases and
such other documents as it deems proper, all on such terms and conditions as
it deems proper.
(c) No Person dealing with the General Partner shall be required to
determine the General Partner's authority to enter into any contract,
agreement or undertaking on behalf of the Partnership or to determine any
facts or circumstances bearing upon the existence of such authority. 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 Unit Holder or
Limited Partner;
(ii) the existence or nonexistence of any fact or facts which
constitute a condition precedent to acts by the General Partner or are in
any other manner germane to the affairs of the Partnership;
(iii) the Persons who are authorized to execute and deliver any
instrument or document by or on behalf 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.
SECTION 5.03. AUTHORITY OF GENERAL PARTNER AND ITS AFFILIATES TO DEAL WITH
THE PARTNERSHIP.
(a) The General Partner and its Affiliates may, and shall have the right
to, provide goods and services to the Partnership (including the right to
act as property manager of a Property), subject to the conditions set forth
in Section 5.03(b).
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(b) The General Partner and its Affiliates shall have the right to
provide goods and services to the Partnership as long as (i) such goods and
services are reasonable for and necessary to the Partnership and are
actually furnished to the Partnership, (ii) the price paid for the goods and
services by the Partnership do not exceed the competitive rate charged by
unaffiliated persons rendering similar services in the same geographic
location and (iii) the provision of such goods and services in all other
respects meets the requirements of Section 5.03(c) and (d).
(c) Any payment made to the General Partner or any Affiliate for goods
and services provided to the Partnership shall be fully disclosed to all
Limited Partners and Unit Holders in the reports required under this
Agreement.
(d) 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 under which:
(i) the General Partner or any Affiliate shall be given an exclusive
right to sell, or exclusive employment to sell, a Property;
(ii) the Partnership lends money to the General Partner; or
(iii) the General Partner or any Affiliate of the General Partner
makes a loan to the Partnership which provides for a prepayment penalty
or provides for an interest rate or other finance charges and fees which
are in excess of amounts charged by unrelated banks or other financial
institutions on comparable loans, made for the same purpose and in the
same locality, to the Partnership.
(e) Notwithstanding any provisions of this Section 5.03, neither the
General Partner nor any of its Affiliates shall:
(i) receive any rebate or give-up, or participate in any reciprocal
arrangement, which would circumvent the provisions of this Section 5.03;
or
(ii) receive any compensation for providing insurance brokerage
services to the Partnership; or
(iii) charge the Partnership for, or take from any other Person, any
property management or real estate brokerage fee with respect to
Partnership property or assets, except as provided in Section 5.05(d).
(f) The Partnership may sell assets or securities to or buy assets or
securities from Affiliates of the General Partner, provided such assets or
securities are sold or purchased, as the case may be, for fair market value.
SECTION 5.04. GENERAL RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER. In
exercising management authority and control of the Partnership, the General
Partner, on behalf of the Partnership and in furtherance of the business of the
Partnership, shall have the authority to perform all acts which the Partnership
is authorized to perform. However, the General Partner shall not have any
authority to:
(a) perform any act in violation of this Agreement or any applicable law
or regulation thereunder;
(b) do any act required to be approved or ratified by the Limited
Partners under the Act without the Consent of the Limited Partners or the
Unit Holders, unless the right to do so is expressly otherwise given in this
Agreement;
(c) borrow money from the Partnership;
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(d) possess Partnership property, or assign the Partnership's rights in
specific Partnership property, for other than a Partnership purpose;
(e) admit a Person as a General Partner, except as provided in this
Agreement;
(f) admit a Person as a Limited Partner, except as provided in this
Agreement;
(g) underwrite the securities of other issuers;
(h) do any act which would make it impossible to carry on the ordinary
business of the Partnership;
(i) knowingly perform any act that would subject any Limited Partner or
Unit Holder to liability as a general partner in any jurisdiction;
(j) allocate any Income or Loss (or any item thereof) to any Partner or
Unit Holder in a manner that would cause the allocations of Income or Loss
(or any item thereof) provided for in Article IV hereof to fail to comply
with Section 704(b) of the Code and the Regulations promulgated thereunder;
(k) confess a judgment against the Partnership;
(l) engage in a transaction or an activity that would cause the
Partnership under Section 7704(c)(2) to be characterized as a regulated
investment company under Section 851(a) of the Code if it were a domestic
corporation;
(m) engage in a transaction or an activity that would cause, under
Section 7704(d) of the Code, the Partnership to derive interest income from
the conduct of an insurance business or a financial business;
(n) engage in a transaction or an activity that would cause, with
respect to any taxable years of the Partnership, less than 90% of the
Partnership's gross income to be derived from the sources set forth in
Section 7704(d) of the Code;
(o) engage in any transaction or activity that would cause the
Partnership, in any taxable year, to have less than 90 percent of its gross
income consist of qualifying income, as defined in Section 7704(d) of the
Code;
(p) make loans to the Partnership or accept loans on behalf of the
Partnership from the General Partner or any Affiliates of the General
Partner, except as provided in Section 5.03(d)(iii);
(q) amend this Agreement, except to the extent the right to amend this
Agreement is expressly provided for in other provisions of this Agreement;
(r) sell substantially all of the assets of the Partnership in one
transaction or in a series of transactions without the consent of a majority
in interest of the Limited Partners (it being understood that the Initial
Limited Partner shall act at the direction of the Unit Holders); or
(s) cause the Partnership to be regulated as an investment company by
the Investment Company Act.
SECTION 5.05. COMPENSATION AND FEES.
(a) Except as provided in this Agreement, the General Partner will
receive no compensation from the Partnership.
(b) The Partnership will pay the General Partner an Acquisition Fee in
connection with the identification, evaluation and acquisition of New Assets
and the financing thereof in an amount equal to 1.25% of the aggregate
purchase price paid by the Partnership for such New Asset. The Acquisition
Fee with respect to an acquisition of a New Asset will be payable at the
time of the closing of the
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acquisition. The Acquisition Fee will be treated as a guaranteed payment
under Section 707(c) of the Code.
(c) The Partnership will pay the General Partner an Administrative Fee
in connection with the ongoing administration of the business of the
Partnership in an amount equal to 0.50%, per annum, of the sum of (i) the
fair market value on the Merger Date of the Original Assets that are then
still owned by the Partnership, plus (ii) the purchase price paid by the
Partnership for New Assets that are then held by the Partnership. The first
$100,000 of the Administrative Fee shall be payable each year, with the
balance payable only during years that funds from operations ("FFO"),
calculated before Administrative Fees, exceeds 7% of the Unit Holders'
average capital for that year. FFO represents net income (or loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate-related depreciation
and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. The Unit Holders' average
capital shall be computed by taking an average of the Partners' Capital
balance attributable to the Unit Holders from the Partnership's balance
sheet at the end of each of the fiscal quarters for that year. Such
Administrative Fee will be payable on a monthly basis.
(d) The Partnership may pay an Affiliate of the General Partner a
reasonable property management fee in connection with the management of the
Properties. The property management fee paid with respect to any Property
will be subject to the provisions of Section 5.03 and may not exceed 5% of
the gross revenues of such Property (in the case of residential property) or
6% or the gross revenues of such Property (in the case of industrial or
commercial property); provided, however, that the property management fee
shall not exceed an amount that would be charged by unaffiliated parties
rendering similar services in the same geographic location and for
comparable property.
(e) Subject to Section 5.05(f), the Partnership will reimburse the
General Partner or its Affiliates on a monthly basis for the actual
out-of-pocket costs of direct telephone and travel expenses incurred by them
on Partnership business, direct out-of-pocket fees, expenses and charges
paid by them to third parties for rendering legal, auditing, accounting,
bookkeeping, computer, printing and public relations services, expenses of
preparing and distributing reports to Limited Partners and Unit Holders, an
allocable portion of the salaries and fringe benefits of employees of the
General Partner or its Affiliates, all costs associated with the evaluation
of potential New Assets for acquisition by the Partnership, insurance
premiums (including premiums for liability insurance which will cover the
Partnership, the General Partner and its Affiliates), the cost of compliance
with all state and federal regulatory requirements and stock exchange or
NASDAQ listing fees and charges and other payments to third parties for
services rendered to the Partnership. Any reimbursements pursuant to this
provision shall not be in excess of the lower of actual costs or the amount
the Partnership would be required to pay independent third parties for
comparable services in the same geographic location.
(f) The Partnership will not reimburse the General Partner or its
Affiliates for any items of general overhead, including, but not limited to,
rent, utilities or the use of computers, office equipment or other capital
items owned by the General Partner or its Affiliates. The Partnership will
not reimburse the General Partner for any salaries or fringe benefits of any
officer of America First Companies L.L.C. regardless of whether such persons
provide services to the Partnership.
(g) The Accountants will verify on the basis of generally accepted
auditing standards that any amounts reimbursed by the Partnership pursuant
to Section 5.05(e) were incurred by the General Partner or its Affiliates in
connection with the conduct of the business and affairs of the Partnership
or the acquisition and management of its assets and were permissible
reimbursements pursuant to Section 5.05(f).
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SECTION 5.06. DUTIES AND OBLIGATIONS OF THE GENERAL PARTNER.
(a) The General Partner shall devote to the affairs of the Partnership
such time as it deems necessary for the proper performance of its duties
under this Agreement, but neither the General Partner, its members or
managers, or any officer or manager of its members or managers, shall be
expected to devote full time to the performance of such duties.
(b) The General Partner shall take such action as may be necessary or
appropriate for the continuation of the Partnership's valid existence under
the laws of the State of Delaware and in order to qualify the Partnership
under the laws of any jurisdiction in which the Partnership is doing
business or in which such qualification is necessary or appropriate to
protect the limited liability of the Limited Partners and Unit Holders or in
order to continue in effect such qualification. The General Partner shall
file or cause to be filed for recordation in the office of the appropriate
authorities of the State of Delaware, and in the proper office or offices in
each other jurisdiction in which the Partnership is qualified, such
certificates, including limited partnership and fictitious name
certificates, and other documents as are permitted or required by the
applicable statutes, rules or regulations of any such jurisdiction.
(c) 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. The General
Partner shall cause the Partnership to pay any taxes payable by the
Partnership.
(d) The General Partner shall have responsibility for the safekeeping
and use of all funds and assets of the Partnership, whether or not in the
General Partner's 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. The General Partner
shall take all steps necessary to insure that the funds of the Partnership
are not commingled with the funds of any other entity. The General Partner
owes the same duty to the Unit Holders as the General Partner owes to the
Limited Partners.
(e) The General Partner shall take all such action as is necessary to
monitor the activities and investments of the Partnership to determine if,
at all times, the Partnership meets the requirements of Section 7704(c) of
the Code and shall take all such action as is necessary to meet such
requirements.
(f) Whenever in this Agreement the General Partner is permitted or
required to make a decision (i) in its "discretion" or under a grant of
similar authority or latitude, the General Partner shall be entitled to
consider only such interest and factors as it desires, including its own
interests, and shall have no duty or obligation to give any consideration to
any interest of or factors affecting the Partnership or any other Person,
including the Limited Partners and the Unit Holders, or (ii) in its "good
faith" or under another expressed standard, the General Partner shall act
under such expressed standard and shall not be subject to any other or
different standard imposed by this Agreement or other applicable law.
(g) To the extent that, at law or in equity, a Partner, Unit Holder,
liquidator, officer, employee, representative or agent of the Partnership,
or any other Person (each, a "Covered Person" and collectively, the "Covered
Persons") has duties (including fiduciary duties) and liabilities relating
thereto to the Partnership or to any other Partner, a Covered Person acting
under this Agreement shall not be liable to the Partnership or to any other
Partner for its good faith reliance on the provisions of this Agreement. The
provisions of this Agreement, to the extent that they restrict the duties
and liabilities of a Covered Person otherwise existing at law or in equity,
are agreed by the Partners and the Unit Holders to replace such other duties
and liabilities of such Covered Person.
SECTION 5.07. DELEGATION OF AUTHORITY. Subject to the provisions of this
Article V, the General Partner may delegate all or any of its powers, rights and
obligations under this Agreement and may appoint, employ, contract or otherwise
deal with any Person for the transaction of the business of the Partnership,
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which Person may, under supervision of the General Partner, perform any acts or
services for the Partnership as the General Partner may approve. Notwithstanding
any such delegation, the General Partner shall remain liable for any acts or
omissions by such Person under the standards of responsibility for the General
Partner set forth herein.
SECTION 5.08. OTHER ACTIVITIES. The General Partner and its Affiliates may
engage in or possess interests in other business ventures of every kind and
description for their own accounts, including, without limitation, serving as
general partner of other partnerships which own, either directly or through
interests in other partnerships, real estate similar in nature to the
Properties. Neither the Partnership nor the Partners or Unit Holders shall have
any rights by virtue of this Agreement in or to such other business ventures or
to the income or profits derived therefrom, and the pursuit of such ventures,
even if competitive with the business of the Partnership, shall not be deemed
wrongful, improper or a breach of fiduciary duty.
SECTION 5.09. LIMITATION ON LIABILITY OF THE GENERAL PARTNER AND INITIAL
LIMITED PARTNER; INDEMNIFICATION. Neither the General Partner, the Initial
Limited Partner nor their Affiliates (including the officers, managers and
employees of any member of AFCSI) shall be liable, responsible or accountable in
damages or otherwise to the Partnership or to any of the Limited Partners or
Unit Holders for any act or omission performed or omitted by such General
Partner, Initial Limited Partner or Affiliate in good faith and in a manner
reasonably believed by it to be within the scope of the authority granted to it
by this Agreement and in the best interests of the Partnership, provided that
such General Partner's, Initial Limited Partner's or Affiliate's conduct did not
constitute Cause. The Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the General Partner, the Initial Limited Partner and
their Affiliates (including the officers, managers and employees of any member
of AFCSI) against and for any loss, liability or damage incurred by any of them
or the Partnership by reason of any act performed or omitted to be performed by
them in connection with the business of the Partnership, including all
judgments, costs and attorneys' fees (which costs and attorneys' fees may be
paid as incurred) and any amounts expended in settlement of any claims of
liability, loss or damage, provided that the indemnified Person's conduct did
not constitute Cause. The satisfaction of any indemnification obligation shall
be from and limited to Partnership assets, and no Limited Partner or Unit Holder
shall have any personal liability on account thereof. The termination of any
action, suit or proceeding, by judgment or settlement, shall not, of itself,
create a presumption that the indemnified Person did not act in good faith and
in a manner which is reasonably believed to be in or not opposed to the best
interest of the Partnership. Any indemnification under this subsection, unless
ordered by a court, shall be made by the Partnership only upon a determination
by independent legal counsel in a written opinion that indemnification of the
indemnified Person is proper in the circumstances because he has met the
applicable standard of conduct set forth in this Agreement.
SECTION 5.10. SPECIAL AMENDMENTS TO THE AGREEMENT.
(a) Any provision to the contrary herein notwithstanding, the General
Partner may, without the Consent of the Limited Partners or Unit Holders,
amend Sections 4.03 and 4.04 of this Agreement on the advice of Counsel or
the Accountants and upon Notice to the Limited Partners and Unit Holders
mailed 10 days prior to the proposed effectiveness of such amendment (unless
earlier effectiveness is required by law) to the extent necessary to ensure
compliance with the Code and Regulations then in effect, provided that such
amendments do not materially adversely affect the interests of the Limited
Partners and Unit Holders in the sole determination of the General Partner.
(b) New allocations made by the General Partner in reliance upon the
advice of Counsel or the Accountants pursuant to Section 5.10(a) shall be
deemed to be made pursuant to the obligations of the General Partner to the
Partnership, the Limited Partners and the Unit Holders, and no such new
allocation shall give rise to any claim or cause of action by any Limited
Partner or Unit Holder.
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(c) The General Partner may take such action as it deems necessary or
appropriate, including action with respect to the manner in which Units are
being or may be transferred or traded, in order to preserve the status of
the Partnership as a partnership rather than an association taxable as a
corporation for federal income tax purposes or to insure that Unit Holders
will be treated as limited partners for federal income tax purposes.
ARTICLE VI
CHANGES IN GENERAL PARTNERS
SECTION 6.01. WITHDRAWAL OF GENERAL PARTNER. The General Partner shall not
be entitled to voluntarily withdraw from the Partnership or to sell, transfer or
assign all or a portion of its Partnership Interest as General Partner unless a
substitute General Partner has been admitted in accordance with the conditions
of Section 6.02.
SECTION 6.02. ADMISSION OF A SUCCESSOR OR ADDITIONAL GENERAL PARTNER. The
General Partner may at any time designate additional Persons to be General
Partners, whose Partnership Interest in the Partnership shall be such as shall
be agreed upon by the General Partner and such additional General Partners,
provided that the Partnership Interests of the Limited Partners and the Unit
Holders shall not be reduced thereby. A Person shall be admitted as a General
Partner of the Partnership only if each of the following conditions is
satisfied:
(a) The admission of such Person shall have been Consented to by a
majority in interest of the Limited Partners (including the Initial Limited
Partner voting on behalf of the Unit Holders) as a class;
(b) such Person shall have accepted and agreed to be bound by the terms
and provisions of this Agreement by executing a counterpart hereof, and such
documents or instruments as may be required or appropriate in order to
effect the admission of such Person as a General Partner shall have been
filed for recording, and all other actions required by law in connection
with such admission shall have been performed;
(c) if such Person is a corporation, it shall have provided the
Partnership evidence satisfactory to Counsel of its authority to become a
General Partner and to be bound by the terms and provisions of this
Agreement;
(d) the Partnership shall have received an opinion of Counsel that the
admission of such Person is in conformity with the Act and that none of the
actions taken in connection with the admission of such Person is in
violation of the Act;
SECTION 6.03. REMOVAL OF A GENERAL PARTNER.
(a) Subject to Section 10.02, a majority in interest of the Limited
Partners (including the Initial Limited Partner voting on behalf of the Unit
Holders) acting together as a class, without the Consent or other action by
the General Partner to be removed, may remove any General Partner and,
subject to the provisions of Sections 6.02 and 8.01(a), may elect a
replacement therefor. After the Limited Partners vote to remove a General
Partner pursuant to this Section 6.03, they shall provide the removed
General Partner with Notice thereof, which Notice shall set forth the date
upon which such removal is to become effective, which date shall be no
earlier than the date upon which the General Partner receives such Notice.
(b) If the General Partner is removed for Cause, the Limited Partners or
any successor General Partner, if any, proposed by them shall have the
option, but not the obligation, to acquire, upon payment of any agreed-upon
value or the then fair market value therefor, the Partnership Interest of
any General Partner so removed which has not been assigned to the successor
General Partner pursuant to Section 6.04(b). If such Partnership Interest is
acquired by the Limited Partners, it shall be
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converted to a Limited Partner Interest. If such Partnership Interest is not
acquired by any successor General Partner or by the Limited Partners, it
shall be converted to a limited partner interest as provided in Section
6.04(b). If the General Partner has been removed without Cause, the
successor General Partner shall have the obligation to acquire the
Partnership Interest of the General Partner so removed at the then fair
market value of such Partnership Interest, unless (i) the Partnership elects
to redeem the Partnership Interest of the removed General Partner at the
then fair market value of such Partnership Interest, or (ii) the removed
General Partner elects to have its Partnership Interest converted as
provided in Section 6.04(b). The then fair market value of such Partnership
Interest shall be determined by agreement of the removed General Partner and
the Partnership or, if they cannot agree, by arbitration in accordance with
the then current rules of the American Arbitration Association. The expense
of arbitration shall be borne equally by the removed General Partner and the
Partnership. The fair market value of the removed General Partner's
Partnership Interest shall be the sum of (i) the present value of future
Administrative Fees and Net Operating Income which would be paid to the
General Partner if the removal had not occurred and (ii) the amount the
removed General Partner would receive upon dissolution and winding up of the
Partnership, assuming that such dissolution and winding up occurred on the
date of the terminating event and the assets of the Partnership were sold
for their then fair market value without any compulsion on the part of the
Partnership to sell such assets. The method of payment to the removed
General Partner may be in cash or a promissory note with a term of no more
than five years with equal annual installments; provided that such note will
become due and payable when the last Property held by the Partnership is
sold. Such promissory note (i) will bear interest at the then current market
interest rate available to the Partnership from an unrelated bank, (ii) may
be prepaid at any time without penalty and (iii) will have not increased the
priority of distributions to the removed General Partner in relation to
distributions to the Limited Partners and Unit Holders made pursuant to
Article IV hereof.
SECTION 6.04. EFFECT OF INCAPACITY OF A GENERAL PARTNER.
(a) In the event of the Incapacity of the General Partner, the business
of the Partnership shall be continued by any other General Partner or
General Partners, and such General Partner or General Partners are hereby
authorized and shall continue the business of the Partnership without
dissolution; provided, however, that if the Incapacitated General Partner is
then the sole General Partner, the provisions of Section 8.01(a)(i) shall be
applicable.
(b) Upon the Incapacity of a General Partner, such General Partner shall
immediately cease to be a General Partner. Except in the case of the removal
of a General Partner without Cause, if at the time of such event the
aggregate of the Partnership Interests of the successor or remaining General
Partner(s) (including any Partnership Interest received by such successor or
remaining General Partner(s) pursuant to Section 6.04(e)) is less than 1% of
all Partnership Interests, there shall be then assigned and transferred, at
the then present fair market value as provided in Section 6.03(b), on a pro
rata basis, to the successor or remaining General Partner(s) such portion of
the Partnership Interest of the Incapacitated General Partner as shall be
necessary to increase the aggregate Partnership Interests of the successor
or remaining General Partner(s) to 1% of all Partnership Interests. To the
extent that the Partnership Interest of the Incapacitated General Partner is
not so assigned and transferred or acquired or redeemed pursuant to Section
6.03(b), such General Partner's Partnership Interest shall be converted into
a limited partner interest, with the same rights under Article IV accorded
to a General Partner to share in Income, Loss, Net Operating Income, Net
Sale Proceeds and Liquidation Proceeds, and such Incapacitated General
Partner shall be admitted to the Partnership as a limited partner of the
Partnership upon its execution of a counterpart of this Agreement. However,
any Incapacitated General Partner which becomes a limited partner pursuant
to this Section 6.04(b) shall not have the right to participate in the
management of the affairs of the Partnership or to vote on any matter
requiring the Consent of the Limited Partners (including with respect to a
merger involving the Partnership and amendments to this Agreement) and shall
not be entitled to any portion of the
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Income, Loss, Net Operating Income, Net Sale Proceeds or Liquidation
Proceeds payable to the class comprised of Limited Partners and Unit Holders
and, further, the aggregate distributions on the limited partner interest
held by the General Partner hereunder shall not exceed the fair market value
of the Partnership Interest converted, computed as set forth in Section
6.03(b). Any General Partner which becomes a limited partner pursuant to
this Section 6.04 shall be entitled to the allocations and distributions
such General Partner would have been entitled to as a General Partner under
Article IV of this Agreement but only to the extent of the Partnership
Interest held by such former General Partner. Nothing in this Section 6.04
shall affect any rights, including the rights to the payment of any fees
under this Agreement, of the Incapacitated General Partner which matured or
were earned prior to the Incapacity of such General Partner. Such
Incapacitated General Partner shall remain liable for all obligations and
liabilities incurred by it as General Partner before such Incapacity shall
have become effective, but shall be free from any obligations or liability
as General Partner incurred on account of the activities of the Partnership
from and after the time such Incapacity shall have become effective.
(c) If, at the time of Incapacity of the General Partner, the
Incapacitated General Partner was not the sole General Partner of the
Partnership, the remaining General Partner or Partners shall immediately (i)
give Notice to the Limited Partners and Unit Holders of such Incapacity and
(ii) prepare such amendments to this Agreement and execute and file for
recording such amendments or documents or other instruments necessary to
reflect the assignment, transfer, termination or conversion (as the case may
be) of the Partnership Interest of the Incapacitated General Partner.
(d) All parties hereto hereby agree to take all actions and to execute
all documents necessary or appropriate to effect the foregoing provisions of
this Section 6.04.
(e) Notwithstanding any other provision of Section 6.03 or 6.04, if
AFCSI is removed as the General Partner for fraud, gross negligence or
willful malfeasance, as determined by a final judgment of a court of
competent jurisdiction, and which fraud, gross negligence or willful
malfeasance is committed by the Person or Persons, if any, owning a majority
of the equity interests in America First Companies L.L.C. or by employees of
America First Companies L.L.C., then a portion of AFCSI's Partnership
Interest which is proportionately equal to such Person's or Persons'
interest in AFCSI (including any limited liability company interest held by
such Person in AFCSI) shall be assigned and transferred, on a pro rata basis
without any compensation therefor, to the successor or remaining General
Partner.
ARTICLE VII
TRANSFERABILITY OF UNITS AND LIMITED PARTNERS' INTERESTS
SECTION 7.01. FREE TRANSFERABILITY OF UNITS.
(a) Units shall be issued in registered form only and shall be freely
transferable (subject to compliance with federal or state securities law and
Section 7.02 or 11.04 of this Agreement); provided, however, nothing in this
Agreement shall impose any obligation on the General Partner, the
Partnership or any transfer agent to restrict or place conditions on the
transfer of Units.
(b) Units may be transferred only on the books and records of the
Partnership.
(c) A Person shall be recognized as a Unit Holder for all purposes on
the books and records of the Partnership as of the day on which the General
Partner (or other transfer agent appointed by the General Partner) receives
evidence of the transfer of a Unit to such Person which is satisfactory to
the General Partner. All Unit Holder rights, including voting rights, rights
to receive distributions and rights to receive reports, and all allocations
in respect of Unit Holders, including allocations of Income and Loss, will
vest in, and be allocable to, each Unit Holder as of the close of business
on such day.
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(d) In order to record a transfer of a Unit on the Partnership's books
and records, the General Partner may require such evidence of transfer or
assignment and authority of the transferor or assignor, including signature
guarantees, and such additional documentation as the General Partner may
determine.
(e) The General Partner is hereby authorized to do all things necessary
in order to register the Units under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, pursuant to the rules
and regulations of the Securities and Exchange Commission, to qualify the
Units with state securities regulatory authorities or to perfect exemptions
from qualification, to cause the Units to be listed on The NASDAQ Stock
Market or a national stock exchange and to take any other actions necessary
to allow the resale of Units by the Unit Holders.
SECTION 7.02. RESTRICTIONS ON TRANSFERS OF INTERESTS OF LIMITED PARTNERS
OTHER THAN THE INITIAL LIMITED PARTNER.
(a) A Limited Partner (other than the Initial Limited Partner) may
assign his Limited Partner Interests only by a duly executed written
instrument of assignment, the terms of which are not in contravention of any
of the provisions of this Agreement. Within 30 days after an assignment of
Limited Partner Interests (other than by the Initial Limited Partner) which
occurs without a transfer of record ownership of such Limited Partner
Interests, the assignor shall give Notice of such assignment to the General
Partner.
(b) The provisions of this Section 7.02 and of Section 7.03 shall not
apply to the transfer and assignment by the Initial Limited Partner of
Limited Partner Interests to Unit Holders in accordance with Section
11.01(a).
SECTION 7.03. ASSIGNEES OF LIMITED PARTNERS OTHER THAN THE INITIAL LIMITED
PARTNER.
(a) If a Limited Partner other than the Initial Limited Partner dies,
his executor, administrator or trustee, or, if he is adjudicated
incompetent, his committee, guardian or conservator, or, if he becomes
Bankrupt, the trustee or receiver of his estate, shall have all the rights
of a Limited Partner for the purpose of settling or managing his estate and
such power as the deceased or incompetent Limited Partner possessed to
assign all or any part of his Limited Partner Interests and to join with the
assignee thereof in satisfying any conditions precedent to such assignee
becoming a Limited Partner.
(b) The Partnership need not recognize for any purpose any assignment of
all or any fraction of the Limited Partner Interests of a Limited Partner
other than the Initial Limited Partner unless there shall have been filed
with the Partnership and recorded on the Partnership's books a duly executed
and acknowledged counterpart of the instrument effecting such assignment,
and unless such instrument evidences the written acceptance by the assignee
of all of the terms and provisions of this Agreement, contains a
representation that such assignment was made in accordance with all
applicable laws and regulations (including any investor suitability
requirements) and in all other respects is satisfactory in form and
substance to the General Partner.
(c) Any Limited Partner other than the Initial Limited Partner who shall
assign all of his Limited Partner Interests shall not cease to be a Limited
Partner unless and until a Limited Partner is admitted in his place.
(d) An assignee of Limited Partner Interests (other than a Unit Holder)
may become a Limited Partner only if each of the following conditions is
satisfied:
(i) the instrument of assignment sets forth the intentions of the
assignor that the assignee succeed to the assignor's Limited Partner
Interest in his place;
(ii) the assignee shall have fulfilled the requirements of Sections
7.03(b) and 12.03(b);
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(iii) the assignee shall have paid all reasonable legal fees and
filing costs incurred by the Partnership in connection with his
substitution as a Limited Partner; and
(iv) the assignee shall have received the Consent of the General
Partner to his admission as a Limited Partner, which Consent the General
Partner may withhold in its sole discretion.
(e) This Agreement shall be amended as necessary to recognize the
admission of any Limited Partners. Assignees of Limited Partner Interests
(other than a Unit Holder) shall be recognized as such, to the extent set
forth in Section 7.03(b) or 7.03(d), as of the day on which the Partnership
has received the instrument of assignment and all of the other conditions to
the assignment are satisfied.
(f) An assignee of Limited Partner Interests (other than a Unit Holder)
who does not become a Limited Partner and who desires to make a further
assignment of his Limited Partner Interests shall be subject to all of the
provisions of this Article VII to the same extent and in the same manner as
a Limited Partner desiring to make an assignment of Limited Partner
Interests.
SECTION 7.04. JOINT OWNERSHIP OF INTERESTS. Subject to the other
provisions of this Agreement, a Limited Partner Interest or Unit may be acquired
by two or more Persons, who shall, at the time they acquire such Limited Partner
Interest or Unit, indicate to the Partnership whether the Limited Partner
Interest or Unit is being held by them as joint tenants with the right of
survivorship, as tenants-in-common, as tenants by the entirety or as community
property. In the absence of any such designation, joint owners shall be presumed
to hold such Limited Partner Interest or Unit as tenants-in-common. The Consent
of such joint Limited Partners or Unit Holders shall not require the action or
vote of all owners of any such jointly held Limited Partner Interest or Unit.
ARTICLE VIII
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
SECTION 8.01. EVENTS CAUSING DISSOLUTION.
(a) The Partnership shall dissolve upon the happening of any of the
following events:
(i) the Incapacity of a General Partner or the occurrence of any
other event that results in the General Partner ceasing to be a general
partner of the Partnership under the Act, provided, the Partnership shall
not be dissolved and required to be wound up in connection with any of
the events specified in this clause (i) if (A) at the time of the
occurrence of such event there is at least one remaining General Partner
who is hereby authorized to and does carry on the business of the
Partnership, or (B) within ninety (90) days after the occurrence of such
event, the remaining Partners (it being understood that, notwithstanding
any other provision herein to the contrary, for purposes of this
provision the Initial Limited Partner shall act solely in accordance with
the direction of a majority in interest of the Unit Holders) agree in
writing to continue the business of the Partnership and to the
appointment, effective as of the date of such event, if required, of one
or more additional general partners of the Partnership satisfying the
standards set forth in Section 6.02;
(ii) in the General Partner's sole discretion, after the repayment,
sale or other disposition of all of the Properties and substantially all
other assets, if any, held by the Partnership;
(iii) the expiration of the term of the Partnership specified in
Section 2.04;
(iv) upon the determination by the General Partner to dissolve the
Partnership;
(v) upon the vote of a majority in interest of the Limited Partners
(it being understood that the Initial Limited Partner shall act at the
direction of the Unit Holders);
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(vi) at any time that there are no limited partners of the
Partnership, unless the business of the Partnership is continued in
accordance with the Act; or
(vii) the entry of a decree of judicial dissolution under Section
17-802 of the Act.
(b) 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 assets of the Partnership are distributed as
provided in Section 8.02 and a certificate of cancellation of the
Certificate is filed with the Delaware Secretary of State. Notwithstanding
the dissolution of the Partnership, prior to the termination of the
Partnership, the business of the Partnership and the affairs of the Partners
shall continue to be governed by this Agreement.
(c) The obligations imposed on the General Partner by Article IX of the
Agreement will cease upon the termination of the Partnership.
SECTION 8.02. LIQUIDATION.
(a) Upon dissolution of the Partnership, the General Partner shall
liquidate the assets of the Partnership and shall apply and distribute the
proceeds thereof as contemplated by this Section 8.02 and Article IV and
cause the cancellation of the Certificate in accordance with the Act. If
there is no General Partner, a majority in interest of the Limited Partners
(including the Initial Limited Partner voting on behalf of the Unit Holders)
may elect a liquidator to liquidate the assets of the Partnership and
perform the functions of the General Partner set forth in this Section 8.02.
(b) After satisfaction of the expenses of the liquidation and of
liabilities owing to creditors of the Partnership (including the repayment
of any loans from the General Partner or its Affiliates, to the extent
otherwise permitted by law), including the General Partner or liquidator
setting aside as a reserve such amount as it deems reasonably necessary for
any contingent, conditional or unmatured contractual liabilities or
obligations of the Partnership which may be paid over by the General Partner
or liquidator to a bank, to be held in escrow for the purpose of paying any
such contingent, conditional or unmatured contractual liabilities or
obligations, and, at the expiration of such period as the General Partner
may deem advisable, the remaining assets and liabilities shall be
distributed in the manner set forth in Section 4.02(b) among the Partners
and Unit Holders.
(c) Notwithstanding the foregoing, if the General Partner or liquidator
shall determine that an immediate sale of part or all of the Partnership's
assets would cause undue loss to the Partners or the Unit Holders, the
General Partner or liquidator may, after giving Notice to the Limited
Partners and Unit Holders, and to the extent not then prohibited by any
applicable law of any jurisdiction in which the Partnership is then formed
or qualified, defer liquidation and withhold from distribution for a
reasonable time any assets of the Partnership, except those assets necessary
to satisfy the Partnership's debts and obligations.
ARTICLE IX
BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS
SECTION 9.01. BOOKS AND RECORDS. The Partnership shall maintain its books
and records at its principal office. The Partnership's books and records shall
be available during ordinary business hours for examination and copying there at
the reasonable request, and at the expense, of any Partner or Unit Holder or his
duly authorized representative, or copies of such books and records may be
requested in writing by any Partner or Unit Holder or his duly authorized
representative, in each case for any purpose reasonably related to such
Partner's or Unit Holder's interest in the Partnership, provided that the
reasonable costs of fulfilling such request, including copying expenses, shall
be paid by the Partner or Unit Holder making such request. The Partnership's
books and records shall include the following:
(a) a current list of the full name, last known home or business address
and Partnership Interest of each Partner and Unit Holder set forth in
alphabetical order;
D-22
<PAGE>
(b) a copy of this Agreement and the Certificate, together with executed
copies of any powers of attorney pursuant to which such Certificate, and any
amendments thereto, have been executed;
(c) copies of the Partnership's federal, state and local income tax
returns and reports, if any, for the three most recent years;
(d) copies of all financial statements of the Partnership for the three
most recent years; and
(e) all appraisals, if any, obtained with respect to the Properties
(which appraisals shall be maintained for at least five years).
SECTION 9.02. ACCOUNTING BASIS, FISCAL YEAR AND TAX ELECTIONS. The
accounting method, taxable year and all tax elections of the Partnership shall
initially be the same as those of Cap Source I prior to the Merger, but may be
changed by the General Partner.
SECTION 9.03. REPORTS.
(a) Within 60 days after the end of each of the first three quarters of
each fiscal year, the General Partner shall send to each Person who was a
Limited Partner or a Unit Holder during such quarter a balance sheet and
statements of income, changes in Partners' capital and cash flow of the
Partnership (all prepared in accordance with generally accepted accounting
principles but none of which need be audited) and a statement showing
distributions of Net Operating Income and Net Sale Proceeds during such
quarter, which need not be audited.
(b) Within 75 days after the end of each taxable year, the General
Partner shall send to each Person who was a Limited Partner or a Unit Holder
at any time during the year then ended such tax information relating to the
Partnership as shall be necessary for the preparation by such Limited
Partner or Unit Holder of his federal income tax return and required state
income and other tax returns.
(c) Within 120 days after the end of each fiscal year, the General
Partner shall send to each Person who was a Limited Partner or Unit Holder
at any time during the year then ended a report including (i) the balance
sheet of the Partnership as of the end of such year and statements of
income, changes in Partners' capital and cash flow of the Partnership for
such year, all of which shall be prepared in accordance with generally
accepted accounting principles and accompanied by a report of the
Accountants containing an opinion of the Accountants, (ii) a report of the
activities of the Partnership during such year and (iii) a statement (which
need not be audited) showing cash distributions per Limited Partner Interest
and per Unit by investment date during such year in respect of such year,
which statement shall identify distributions of (a) Net Operating Income and
Net Sale Proceeds received by the Partnership during such year, (b) Net
Operating Income and Net Sale Proceeds received during prior years which had
been held in the Reserve and (c) cash placed in Reserves during such year.
The Partnership's annual report will include a detailed statement of (i) the
amount of the fees paid to the General Partner and its Affiliates pursuant
to Sections 5.05(b), (c) and (d) hereof and (ii) the amounts actually
reimbursed to the General Partner and its Affiliates pursuant to Section
5.05(e) hereof. The Accountants will certify that the amounts actually
reimbursed to the General Partner pursuant to Section 5.05(e) were costs
incurred by the General Partner in connection with the conduct of the
business and affairs of the Partnership or the acquisition and management of
its assets and were permissible reimbursements under this Agreement. The
methods of verification used by the Accountants will be in accordance with
generally accepted auditing standards and include such tests of the
accounting records and other auditing procedures which the Accountants
consider appropriate.
SECTION 9.04. DESIGNATION OF TAX MATTERS PARTNER. The General Partner is
hereby authorized to designate itself or any other General Partner as Tax
Matters Partner of the Partnership, as provided in Section 6231 of the Code and
the Regulations promulgated thereunder. Each Partner, by execution of this
Agreement, and each Unit Holder, by acceptance of his Units, consents to such
designation of the General Partner as the Tax Matters Partner and agrees to
execute, certify, acknowledge, deliver, swear to, file and
D-23
<PAGE>
record at the appropriate public offices such documents as may be necessary or
appropriate to evidence the appointment of the General Partner as such.
SECTION 9.05. EXPENSES OF TAX MATTERS PARTNER. The Partnership shall
reimburse the Tax Matters Partner for all expenses, including legal and
accounting fees, and shall, to the fullest extent permitted by law, indemnify
him for claims, liabilities, losses and damages incurred in connection with any
administrative or judicial proceeding with respect to the tax liability of the
Partners and Unit Holders. The payment of all such expenses and indemnification
shall be made before any distributions are made from Net Operating Income, Net
Sale Proceeds or Liquidation Proceeds. Neither the General Partner, nor any
Affiliate, nor any other Person shall have any obligation to provide funds for
such purpose. The taking of any action and the incurring of any expense by the
Tax Matters Partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole discretion of the Tax Matters Partner,
and the provisions on limitations of liability of the General Partner and
indemnification set forth in Section 5.09 of this Agreement shall be fully
applicable to the Tax Matters Partner in its capacity as such.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS AND UNIT HOLDERS
SECTION 10.01. MEETINGS.
(a) The General Partner may call a meeting of the Limited Partners and
Unit Holders for any purpose or call for a vote of the Limited Partners and
Unit Holders without a meeting or otherwise solicit the consent of the
Limited Partners and Unit Holders at any time and the General Partner shall
call for such a meeting or vote without a meeting or solicit the consents of
the Limited Partners and Unit Holders upon receipt of a written request for
such a meeting, vote or solicitation signed by 10% or more in interest of
the Limited Partners (it being understood that the Initial Limited Partner
will act in accordance with the directions of the Unit Holders). Any such
meeting shall be held not less than 15 days nor more than 60 days after the
receipt of such request. Any such request shall state the purpose of the
proposed meeting and the matters proposed to be acted upon at such meeting,
and no matter may be acted upon at the meeting other than as set forth in
such request or as otherwise permitted by the General Partner. Meetings
shall be held at the principal office of the Partnership or at such other
place as may be designated by the General Partner or, if the meeting is
called upon the request of the Limited Partners (including the Initial
Limited Partner acting on behalf of the Unit Holders), as designated by such
Limited Partners (including the Initial Limited Partner acting on behalf of
the Unit Holders).
(b) Notice of any meeting to be held pursuant to Section 10.01(a) shall
be given (in person or by certified mail) within 10 days of the receipt by
the General Partner of the request for such meeting to each Limited Partner
at his record address, or at such other address which he may have furnished
in writing to the General Partner and to the Unit Holders at the address
shown on the Partnership's books and records kept in accordance with Section
9.01. Such Notice shall state the place, date and hour of the meeting and
shall indicate that the Notice is being issued at the direction of, or by,
the Partner(s) calling the meeting. The Notice shall state the record date
established in Section 10.01(c) and state the purpose of the meeting. If a
meeting is adjourned to another time or place, and if an announcement of the
adjournment of time or place is made at the meeting, it shall not be
necessary to give Notice of the adjourned meeting. The presence in person or
by proxy of a majority in interest of the Limited Partners (including the
Initial Limited Partner acting for and at the direction of the Unit Holders)
considered as a class shall constitute a quorum at all meetings of the
Partners and Unit Holders; provided, however, that if no such quorum is
present, holders of a majority in interest of the Limited Partners
considered as a class (it being understood that the Initial Limited Partner
shall be present at the direction of the Unit Holders and only to the extent
of such direction) so present or so represented may adjourn the meeting from
time to time without further Notice, until a quorum shall have been
obtained. No Notice of the time, place or purpose of any meeting of Limited
Partners
D-24
<PAGE>
and Unit Holders need be given (i) to any Limited Partner or Unit Holder who
attends in person or is represented by proxy, except for a Partner attending
a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business on the ground that the meeting is
not lawfully called or convened, or (ii) to any Limited Partner or Unit
Holder entitled to such Notice who, in writing, executed and filed with the
records of the meeting, either before or after the time thereof, waives such
Notice.
(c) For the purpose of determining the Limited Partners entitled to vote
at any meeting of the Limited Partners and Unit Holders, and the Unit
Holders entitled to receive Notice of and direct the voting of the Initial
Limited Partner at any such meeting, or any adjournment thereof, or to act
by written Consent without a meeting, the General Partner or the Limited
Partners or the Unit Holders requesting such meeting or vote pursuant to
Section 11.03(a) may fix, in advance, a date as the record date of any such
determination of Limited Partners and Unit Holders. Such date shall not be
more than 60 days nor less than 15 days before any such meeting or not more
than 60 days prior to the initial solicitation of Consents from the Limited
Partners and Unit Holders.
(d) At each meeting of Limited Partners and Unit Holders, the Limited
Partners and Unit Holders present or represented by proxy shall elect such
officers and adopt such rules for the conduct of such meeting as they shall
deem appropriate.
SECTION 10.02. VOTING RIGHTS OF LIMITED PARTNERS AND UNIT HOLDERS.
(a) A majority in interest of the Limited Partners (it being understood
that the Initial Limited Partner shall act at the direction of the Unit
Holders), without the concurrence of the General Partner, may: (i) amend
this Agreement, provided that the concurrence of the General Partner shall
be required for any amendment to this Agreement which modifies the
compensation or distributions to which the General Partner is entitled or
which affects the duties of the General Partner; (ii) elect to dissolve the
Partnership, and (iii) remove any General Partner and elect a successor
therefor, which successor shall become a General Partner only in accordance
with Section 6.02. Amendments to this Agreement may be proposed at any time
by a writing signed by 10% or more in interest of the Limited Partners (it
being understood that the Initial Limited Partner will act in accordance
with the direction of the Unit Holders).
(b) A Limited Partner shall be entitled to cast one vote for each
Limited Partner Interest which he owns, and a Unit Holder shall be entitled
to direct the Initial Limited Partner to cast one vote for each Unit which
he owns (it being understood that the Initial Limited Partner will act at
the direction of the Unit Holders) at a meeting, in person, by written proxy
or by a signed writing directing the manner in which he desires that his
vote be cast, which writing must be received by the General Partner prior to
the adjournment SINE DIE of such meeting. In the alternative, Unit Holders
may Consent to actions without a meeting, by a signed writing identifying
the action taken or proposed to be taken. Every proxy must be signed by the
Limited Partner or Unit Holder or his attorney-in-fact. No proxy shall be
valid after the expiration of 12 months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the
pleasure of the Limited Partner or the Unit Holder executing it by Notice to
the Person to whom the proxy was given. Written Consents may be irrevocable
if stated in a writing delivered to Unit Holders at the time at which their
Consent is solicited. Only the votes or Consents of Limited Partners or Unit
Holders of record on the record date established pursuant to Section
10.01(c), whether at a meeting or otherwise, shall be counted. The laws of
the State of Delaware pertaining to the validity and use of corporate
proxies shall govern the validity and use of proxies given by the Limited
Partners and Unit Holders, except to the extent such laws are inconsistent
with this Agreement. The Unit Holders may give proxies only to the Initial
Limited Partner. The Initial Limited Partner will vote in accordance with
the directions of the Unit Holders so that each Unit will be voted
separately.
D-25
<PAGE>
(c) Reference in this Agreement to a specified percentage in interest of
the Limited Partners and Unit Holders means the Limited Partners and Unit
Holders whose combined Capital Contributions (it being understood that the
Unit Holders' Capital Contributions were made by the Initial Limited
Partner) represent the specified percentage of the Capital Contributions of
all Limited Partners and Unit Holders.
SECTION 10.03. OTHER ACTIVITIES. The Limited Partners and Unit Holders may
engage in or possess interests in other business ventures of every kind and
description for their own accounts, including without limitation serving as
general or limited partners of other partnerships which own, either directly or
through interests in other partnerships or otherwise, commercial real estate
similar to the Properties. Neither the Partnership nor any of the Partners or
Unit Holders shall have any rights by virtue of this Agreement in or to such
business ventures or to the income or profits derived therefrom.
ARTICLE XI
ASSIGNMENT OF LIMITED PARTNER INTERESTS TO UNIT HOLDERS AND RIGHTS OF UNIT
HOLDERS
SECTION 11.01. ASSIGNMENT OF LIMITED PARTNER INTERESTS TO UNIT HOLDERS.
(a) Except as otherwise provided herein, the Initial Limited Partner, by
the execution of this Agreement, irrevocably assigns to the Persons who are
Unit Holders of the Prior Partnerships as of the record date established
therefor by the General Partner, all of the Initial Limited Partner's rights
and interest in its Partnership Interest. The rights and interest so
transferred and assigned shall include, without limitation, the following:
(i) all rights to receive distributions of Net Operating Income
pursuant to Section 4.01;
(ii) all rights to receive Net Sale Proceeds and Liquidation
Proceeds pursuant to Section 4.02;
(iii) all rights in respect of allocations of Income and Loss
pursuant to Section 4.03;
(iv) all rights in respect of determinations of allocations and
distributions pursuant to Section 4.04;
(v) all rights to inspect records and to receive reports pursuant to
Article IX;
(vi) all rights to vote on Partnership matters pursuant to Article
X; and
(vii) all rights which Limited Partners have, or may have in the
future, under this Agreement or under the Act, except as otherwise
provided herein.
All Persons becoming Unit Holders shall be bound by the terms and conditions of,
and shall be entitled to all rights of, Limited Partners under this Agreement.
(b) The Initial Limited Partner shall remain as Initial Limited Partner
on the books and records of the Partnership notwithstanding the assignment
of all of its Partnership Interest until such time as the Initial Limited
Partner transfers its position as Initial Limited Partner to another Person
with the Consent of the General Partner. Other than pursuant to Section
11.01(a), the Initial Limited Partner may not transfer or assign a Limited
Partner Interest without the prior written Consent of the General Partner.
(c) The General Partner, by the execution of this Agreement, irrevocably
Consents to and acknowledges on behalf of itself and the Partnership that
(i) the foregoing assignment pursuant to Section 11.01(a) by the Initial
Limited Partner to the Unit Holders of the Initial Limited Partner's rights
and interest in the Limited Partner Interests is valid and binding on the
Partnership and the General Partner, and (ii) the Unit Holders are intended
to be third-party beneficiaries of all rights and
D-26
<PAGE>
privileges of the Initial Limited Partner in respect of the Limited Partner
Interests. The General Partner covenants and agrees that, in accordance with
the foregoing transfer and assignment, all the Initial Limited Partner's
rights and privileges in respect of the Limited Partner Interests assigned
to the Unit Holders may be exercised by the Unit Holders, including, without
limitation, those listed in Section 11.01(a).
SECTION 11.02. RIGHTS OF UNIT HOLDERS.
(a) Limited Partners (including the Initial Limited Partner but only
with respect to its own Limited Partner Interests) and Unit Holders shall
share PARI PASSU on the basis of one Limited Partner Interest for one Unit,
and shall be considered as a single class with respect to all rights to
receive distributions of Net Operating Income, Net Sale Proceeds and
Liquidation Proceeds, allocations of Income and Loss, and other
determinations of allocations and distributions pursuant to this Agreement.
(b) Limited Partners (including the Initial Limited Partner voting on
behalf of the Unit Holders) shall vote on all matters in respect of which
they are entitled to vote (either in person, by proxy or by written
Consent), as a single class with each entitled to one vote.
(c) A Unit Holder is entitled to the same duty from the General Partner
as the General Partner owes to a Limited Partner and may sue the General
Partner to enforce the same. A Unit Holder may bring a derivative action
against any Person (including the General Partner) to enforce any right of
the Partnership to recover a judgment to the same extent as a Limited
Partner has such a right under the Act.
(d) A Unit Holder is not a Limited Partner and has no right to be
admitted to the Partnership as such. However, the Unit Holders will be
deemed Partners in the Partnership for federal income tax purposes.
SECTION 11.03. VOTING BY THE INITIAL LIMITED PARTNER ON BEHALF OF UNIT
HOLDERS.
(a) Subject to Section 8.01(a)(i), the Initial Limited Partner hereby
agrees that, with respect to any matter on which a vote of the Limited
Partners is taken, the Consent of the Limited Partners is required or any
other action of the Limited Partners is required or permitted, it will not
vote its Limited Partner Interest or grant such Consent or take such action
(other than solely administrative actions as to which the Initial Limited
Partner has no discretion) except for the sole benefit of, and in accordance
with the written instructions of, the Unit Holders with respect to their
Units. The Initial Limited Partner (or the Partnership on behalf of the
Initial Limited Partner) will provide Notice to the Unit Holders containing
information regarding any matters to be voted upon or as to which any
Consent or other action is requested or proposed. The Partnership and the
General Partner hereby agree to permit Unit Holders to attend any meetings
of Partners and the Initial Limited Partner shall, upon the written request
of Unit Holders owning Units which represent in the aggregate 10% or more of
all of the outstanding Units, request the General Partner to call a meeting
of Partners pursuant to Section 10.01 or to submit a matter to the Initial
Limited Partner without a meeting pursuant to this Agreement. The General
Partner shall give the Unit Holders Notice of any meeting to be held
pursuant to Section 10.01(a) at the same time and manner as such Notice is
required to be given to the Initial Limited Partner pursuant to Section
10.01(b).
(b) The Initial Limited Partner will exercise its right to vote or
Consent to any action under this Agreement in accordance with the written
instructions of holders of Units outstanding as of the relevant record date.
In addition, holders of a majority of the Units outstanding may instruct the
Initial Limited Partner to take, and upon receipt of such instruction, the
Initial Limited Partner shall take, the actions permitted by Section 10.02.
D-27
<PAGE>
SECTION 11.04. PRESERVATION OF TAX STATUS. With the Consent of each Unit
Holder so affected, the General Partner may at any time cause such Unit Holder
to become a Limited Partner and may take such other action with respect to the
manner in which Units are being or may be transferred or traded as it may deem
necessary or appropriate, in order to preserve the status of the Partnership as
a partnership rather than an association or publicly traded partnership taxable
as a corporation for federal income tax purposes or to insure that Unit Holders
will be treated as limited partners for federal income tax purposes.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01. APPOINTMENT OF THE GENERAL PARTNER AS ATTORNEY-IN-FACT.
(a) Each Limited Partner by the execution of this Agreement irrevocably
constitutes and appoints, with full power of substitution, the General
Partner and each of its members, managers and officers as his true and
lawful attorney-in-fact with full power and authority in his name, place and
stead to execute, certify, acknowledge, deliver, swear to, file and record
at the appropriate public offices such documents as may be necessary or
appropriate to carry out the provisions of this Agreement, including but not
limited to:
(i) the Certificate and amendments thereto, and all certificates and
other instruments (including counterparts of this Agreement), and any
amendments thereof, which any such Person deems appropriate 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 on the date thereof) in a
jurisdiction in which the Partnership may conduct business or in which
such formation, qualification or continuation is, in the opinion of any
such Person, necessary to protect the limited liability of the Limited
Partners and Unit Holders;
(ii) any other instrument or document which may be required to be
filed by the Partnership under federal law or under the laws of any state
in which any such Person deems it advisable to file;
(iii) all amendments to this Agreement adopted in accordance with the
terms hereof and all instruments which any such Person deems appropriate
to reflect a change or modification of the Partnership in accordance with
the terms of this Agreement; and
(iv) any instrument or document, including amendments to this
Agreement, which may be required to effect the continuation of the
Partnership, the admission of a Limited Partner or an additional or
successor General Partner or the dissolution and termination of the
Partnership (provided such continuation, admission or dissolution and
termination are in accordance with the terms of this Agreement) or to
reflect any reductions in amount of Capital Accounts.
(b) The appointment by each Limited Partner of each of such Persons as
his attorney-in-fact is irrevocable and 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 such Persons
to act as contemplated by this Agreement in any filing and other action by
them on behalf of the Partnership, and such power shall survive the
Incapacity of any Person hereby giving such power and the transfer or
assignment of all or any part of the Limited Partner Interests of such
Person; provided, however, that in the event of a transfer by a Limited
Partner of all or any part of his Limited Partner Interests, the foregoing
power of attorney shall survive such transfer only until such time as the
transferee is admitted to the Partnership as a Limited Partner and all
required documents and instruments are duly executed, filed and recorded to
effect such substitution.
SECTION 12.02. SIGNATURES. Each Limited Partner and any additional or
successor General Partner shall become a signatory hereto by signing such number
of counterpart signature pages to this Agreement
D-28
<PAGE>
and such other instrument or instruments in such manner and at such time as the
General Partner shall determine. By so signing, each Limited Partner, successor
General Partner or additional 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, as amended from time to time; provided, however, that no such
counterpart shall be binding unless and until it has been accepted by the
General Partner.
SECTION 12.03. AMENDMENTS.
(a) In addition to any amendments otherwise authorized herein,
amendments may be made to this Agreement or the Certificate from time to
time by the General Partner, without the Consent of the Limited Partners or
the Unit Holders, (i) to add to the representations, duties or obligations
of the General Partner or surrender any right or power granted to the
General Partner in this Agreement; (ii) to cure any ambiguity or correct or
supplement any provision in this Agreement which may be inconsistent with
the manifest intent of this Agreement, if such amendment is not materially
adverse to the interests of Limited Partners and Unit Holders in the sole
judgment of the General Partner; (iii) to delete or add to any provision of
this Agreement required to be deleted or added to based upon comments by the
staff of the Securities and Exchange Commission or other federal agency or
by a state securities commissioner; (iv) to delete, add or revise any
provision of this Agreement that may be necessary or appropriate, in the
General Partner's judgment, to insure that the Partnership will be treated
as a partnership, and that each Unit Holder and each Limited Partner will be
treated as a limited partner, for federal income tax purposes; (v) to
reflect the withdrawal, removal or admission of Partners; (vi) to reflect a
change in the name or address of the Partnership's registered agent or
registered office in the State of Delaware; and (vii) change the allocations
set forth in Section 4.03 hereof so that they comply with the requirements
of Section 704 of the Code and the Regulations promulgated thereunder;
provided, however, that no amendment shall be adopted pursuant to this
Section 12.03(a) unless the adoption thereof (A) is consistent with Section
5.01 and is not prohibited by Section 5.04; (B) does not affect the
distribution of Net Operating Income, Net Sales Proceeds or Liquidation
Proceeds or the allocation of Income or Loss (except as provided in Section
5.10); (C) does not, in the sole judgment of the General Partner after
consultation with Counsel, affect the limited liability of the Limited
Partners or the Unit Holders or cause the Partnership to be characterized as
an association or publicly traded partnership taxable as a corporation for
federal income tax purposes; and (D) does not amend this Section 12.03(a).
(b) If this Agreement shall be amended as a result of substituting a
Limited Partner, the amendment to this Agreement shall be signed by the
General Partner, the Person to be substituted and the assigning Limited
Partner. If this Agreement shall be amended to reflect the designation of an
additional General Partner, such amendment shall be signed by the other
General Partners and by such additional General Partner. If this Agreement
shall be amended to reflect the withdrawal of a General Partner when the
business of the Partnership is being continued, such amendment shall be
signed by the withdrawing General Partner and by the remaining or successor
General Partner. In the event the withdrawing General Partner or the
assigning Limited Partner does not sign such an amendment within 30 days
following its withdrawal or substitution, the remaining or successor General
Partners are hereby appointed by the withdrawing General Partner or the
assigning Limited Partner as its attorney-in-fact for purposes of signing
such amendment.
(c) In making any amendments, there shall be prepared and filed by the
General Partner for recording such documents and certificates as shall be
required to be prepared and filed under the Act and in any other
jurisdictions under the laws of which the Partnership is then qualified.
SECTION 12.04. BINDING PROVISIONS. 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.
D-29
<PAGE>
SECTION 12.05. APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Delaware.
SECTION 12.06. 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 law, such
invalidity shall not impair the operation of or affect those portions of this
Agreement which are valid.
SECTION 12.07. CAPTIONS. Article and Section titles are for descriptive
purposes only and shall not control or alter the meaning of this Agreement as
set forth in the text.
SECTION 12.08. ENTIRE AGREEMENT. This Agreement, together with Schedule A
hereto, sets forth all, and is intended by all parties to be an integration of
all, of the promises, agreements and understandings among the parties hereto
with respect to the Partnership, the Partnership business and the property of
the Partnership, and there are no promises, agreements, or understandings, oral
or written, express or implied, among them other than as set forth, incorporated
or contemplated in this Agreement.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the day
of , 1999.
GENERAL PARTNER:
AMERICA FIRST CAPITAL SOURCE I L.L.C.
--------------------------------------
Michael B. Yanney, President
INITIAL LIMITED PARTNER:
H/T CORP.
--------------------------------------
Michael B. Yanney, President
D-30
<PAGE>
SCHEDULE A
CAPITAL CONTRIBUTIONS
<TABLE>
<CAPTION>
FAIR MARKET
DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
General Partner*................................................................................... $
Cap Source II**.................................................................................... $ 30,872,167
Predecessor Limited Partners of Cap Source I**..................................................... $ 47,569,968
</TABLE>
- ------------
* See Section 3.01 hereof
** See Section 3.02 hereof
D-31
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999
REGISTRATION NO. 333-52117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FINANCIAL STATEMENT SUPPLEMENT
TO
PRE-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1130
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CAPITAL SOURCE L.P.
Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31,
1998..................................................................................................... 1
Report of Independent Accountants.......................................................................... 8
Balance Sheets as of December 31, 1998 and 1997............................................................ 9
Statements of Income and Comprehensive Income for the Years Ended December 31, 1998, 1997, 1996............ 10
Statements of Partners' Capital for the Years Ended December 31, 1998, 1997, 1996.......................... 11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996............................. 12
Notes to Financial Statements.............................................................................. 13
Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30,
1999..................................................................................................... 23
Balance Sheets as of June 30, 1999 (Unaudited)............................................................. 28
Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 1999
(Unaudited).............................................................................................. 29
Statements of Partners' Capital for the Six Months Ended June 30, 1999 (Unaudited)......................... 30
Statements of Cash Flows for the Six Months Ended June 30, 1999 (Unaudited)................................ 31
Notes to Financial Statements (Unaudited).................................................................. 32
CAPITAL SOURCE II L.P.-A
Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31,
1998..................................................................................................... 37
Report of Independent Accountants.......................................................................... 44
Balance Sheets as of December 31, 1998 and 1997............................................................ 45
Statements of Income and Comprehensive Income for the Years Ended December 31, 1998, 1997, 1996............ 46
Statements of Partners' Capital for the Years Ended December 31, 1998, 1997, 1996.......................... 47
Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996............................. 48
Notes to Financial Statements.............................................................................. 49
Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30,
1999..................................................................................................... 58
Balance Sheets as of June 30, 1999 (Unaudited)............................................................. 63
Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 1999
(Unaudited).............................................................................................. 64
Statements of Partners' Capital for the Six Months Ended June 30, 1999 (Unaudited)......................... 65
Statements of Cash Flows for the Six Months Ended June 30, 1999 (Unaudited)................................ 65
Notes to Financial Statements (Unaudited).................................................................. 66
</TABLE>
<PAGE>
CAPITAL SOURCE L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1998
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
Capital Source L.P. (the "Partnership") originally acquired: (i) five
mortgage-backed securities guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in five states; (ii)
three first mortgage loans insured as to principal and interest by the Federal
Housing Administration ("FHA") on multifamily housing properties located in two
states; and (iii) Partnership Equity Investments in eight limited partnerships
which own the multifamily properties financed by the GNMA Certificates and FHA
Loans. The Partnership subsequently received FHA Debentures in payment of the
FHA Loan on Fox Hollow Apartments which were paid in full in 1993. In 1994,
foreclosure proceedings were initiated on Falcon Point Apartments and,
accordingly, the Partnership no longer holds a Partnership Equity Investment in
this property. In addition, during 1995, the GNMA Certificate related to Falcon
Point Apartments was paid-in-full to the Partnership. Collectively, the
remaining GNMA Certificates, FHA Loans and Partnership Equity investments are
referred to as the "Permanent Investments." The Partnership has also invested
amounts held in its reserve account in certain GNMA securities backed by pools
of single-family mortgages ("Reserve Investments"). The obligations of GNMA and
FHA are backed by the full faith and credit of the United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per Beneficial Assignment Certificate
("BAC") were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Regular monthly distributions
Income................................................ $ .5582 $ .8952 $ .9352
Return of capital..................................... .4518 .1148 .0748
------- ------- -------
$ 1.0100 $ 1.0100 $ 1.0100
------- ------- -------
------- ------- -------
Distributions
Paid out of cash flow................................. $ 1.0100 $ 1.0100 $ 1.0100
------- ------- -------
------- ------- -------
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for distributions
is received from other temporary investments. The Partnership may draw on
reserves to pay operating expenses or to supplement cash distributions to BAC
Holders. The Partnership is permitted to replenish reserves with cash flows in
excess of distributions paid. For the year ended December 31, 1998, a net amount
of $1,334,522 of undistributed cash flow was added to reserves. The total amount
held in reserves at December 31, 1998, was $9,229,246 of which $879,182 was
invested in GNMA Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BAC Holders. Under the terms of the
Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The Partnership
is not authorized to issue additional BACs to meet short-term and long-term
liquidity requirements.
<PAGE>
ASSET QUALITY
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.
The fair value of the properties underlying the Operating Partnerships is
based on management's best estimate of the fair value of such properties,
however; the ultimate realized values may vary from these estimates. The fair
value of the properties is determined based on the discounted estimated future
cash flows from the properties, including estimated sales proceeds. The
calculation of discounted estimated future cash flows includes certain variables
such as the assumed inflation rates for rents and expenses, capitalization rates
and discount rates. These variables are supplied to management by an independent
real estate firm and are based on local market conditions for each property. In
certain cases, additional factors such as the replacement value of the property
or comparable sales of similar properties are also taken into consideration.
The following table shows the occupancy levels of the properties financed by
the Partnership at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NUMBER OF UNITS OF UNITS
PROPERTY NAME LOCATION OF UNITS OCCUPIED OCCUPIED
- --------------------------------------------------------- ---------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments................................... Jacksonville, NC 108 107 99%
Fox Hollow Apartments.................................... High Point, NC 184 177 96%
Highland Park Apartments................................. Columbus, OH 252 236 94%
Misty Springs Apartments................................. Daytona Beach, FL 128 126 98%
The Ponds at Georgetown.................................. Ann Arbor, MI 134 133 99%
Waterman's Crossing...................................... Newport News, VA 260 260 100%
Water's Edge Apartments.................................. Lake Villa, IL 108 105 97%
----- ----- ---
1,174 1,144 97%
----- ----- ---
----- ----- ---
</TABLE>
The following sets forth certain information regarding the properties
financed by the Partnership:
BLUFF RIDGE APARTMENTS
Bluff Ridge Apartments is a 108-unit complex located in Jacksonville, North
Carolina. Average occupancy was 99% in 1998, compared to 96% in 1997. Operations
at Bluff Ridge are heavily dependent on demand from the local military
personnel. The Jacksonville rental market has remained relatively stable
throughout 1998. Operating revenue increased as a result of rental rate
increases and an increase in average occupancy. In addition, real estate
operating costs decreased primarily due to a decrease in repairs and maintenance
expenses and property improvements. As a result, net operating income, excluding
interest, depreciation and amortization, increased approximately 3% from 1997 to
1998. The property was current on its debt service payments during 1998.
FOX HOLLOW APARTMENTS
Fox Hollow Apartments is a 184-unit apartment community located in High
Point, North Carolina. Average occupancy was 95% in 1998, compared to 96% in
1997. Excluding interest, depreciation and amortization, net operating income
increased approximately 19% from 1997 to 1998. This increase was primarily due
to a decrease in repairs and maintenance expenses and a slight increase in
rental revenues due to rental rate increases. The property remained in
compliance with the terms of the Loan Modification Agreement entered into with
the mortgage holder in 1996. While there can be no assurance that the
2
<PAGE>
modified terms of the Fox Hollow mortgage will enable the property to remain
current on its mortgage obligations, the restructuring allows the Partnership to
retain its Partnership Equity Investment in the Fox Hollow Apartments and
improves the property's ability to make its required mortgage payments.
HIGHLAND PARK APARTMENTS
Highland Park Apartments contains 252 luxury garden apartments and is
located in Columbus, Ohio. Average occupancy was 95% in 1998, compared to 93% in
1997. Excluding interest, depreciation and amortization, net operating income
decreased approximately 5% from 1997 to 1998. This decrease is primarily due to
an increase in real estate operating expenses of approximately 9% which was
partially offset by a 1% increase in rental revenue resulting primarily from the
increase in average occupancy. The increases in real estate operating expenses
resulted from higher repairs and maintenance expenses and advertising costs
which were partially offset by a decrease in other administrative expenses. The
property remained current on its mortgage obligations throughout 1998.
MISTY SPRINGS APARTMENTS
Misty Springs Apartments is a 128-unit apartment community located in
Daytona Beach, Florida. Average occupancy was 100% in 1998, compared to 98% in
1997. Net operating income, excluding interest, depreciation and amortization,
was approximately 5% lower in 1998, compared to 1997. This decrease resulted
from a 14% increase in real estate operating expenses which was partially offset
by an increase of approximately 5% in operating revenue. Real estate operating
expenses were higher primarily due to increases in salaries and related expenses
and repairs and maintenance expenses which were partially offset by a 9%
decrease in administrative expenses. The increase in operating revenue was due
primarily to the increase in average occupancy. Shortfalls of $10,000 were
funded by the Partnership reserves in 1998.
At December 31, 1998, the Operating Partnership was in compliance with the
terms of a Reinstatement Agreement entered into in 1993. The Operating
Partnership was current on its debt service payments on its mortgage loan during
1998.
THE PONDS AT GEORGETOWN
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1998, compared to 97% in 1997. Rental
revenue increased approximately 3.5% in 1998, compared to 1997, primarily due to
the increase in average occupancy while real estate operating expenses increased
approximately 8%. The increase in real estate operating expenses was primarily
due to an 8% increase in repairs and maintenance expenses which was partially
offset by a 17% decrease in real estate taxes. As previously disclosed, the
mortgage loan for the Ponds at Georgetown was restructured in September 1998
which lowered the interest rate from 9.25% to 7.85%. In connection with the
restructuring, shortfalls of $176,942 were funded by the Partnership's reserves.
As a result of restructuring the mortgage loan, cash flow from the property is
now anticipated to be sufficient to cover all the operating partnership's cash
needs, including mortgage payments and taxes. The property was current on its
mortgage obligations as of December 31, 1998.
WATERMAN'S CROSSING
Waterman's Crossing is a 260-unit apartment community located in Newport
News, Virginia. Average occupancy was 100% in 1998, compared to 98% in 1997. The
operating partnership was current on its mortgage obligations in 1998. Excluding
interest, depreciation and amortization, operating income increased 6% from 1997
to 1998. This increase was primarily due to reductions of approximately 5% in
repairs and maintenance expenses and 11% in advertising expenses. These
decreases were partially offset by an increase in administrative expenses of
approximately 6% and an increase in operating revenue of
3
<PAGE>
approximately 4%. The increase in operating revenue resulted primarily from the
increase in average occupancy.
WATER'S EDGE APARTMENTS
Water's Edge Apartments is a 108-unit apartment complex located in Lake
Villa, Illinois. Average occupancy was 96% in 1998 and 1997. Net operating
income, excluding interest, depreciation and amortization, increased
approximately 2% in 1998 compared to 1997. This increase is primarily
attributable to higher operating revenue due primarily to the increase in
average occupancy. The operating partnership remained current on its mortgage
obligations in 1998.
RESULTS OF OPERATIONS
The tables below compare the results of operations for each year shown.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Mortgage-backed securities income...................................... $3,262,922 $3,302,727 $3,340,747
Interest income on temporary cash
Investments and U.S. government securities........................... 530,396 554,604 523,636
Equity in losses of Operating Partnerships............................. (186,942) (178,550) (257,512)
Other income........................................................... 6,300 5,334 9,749
------------ ------------ ------------
3,612,676 3,684,115 3,616,620
Operating and administrative expenses.................................. 1,710,173 632,894 429,313
------------ ------------ ------------
Net income............................................................. $1,902,503 $3,051,221 $3,187,307
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1997 FROM 1996
------------- -----------
<S> <C> <C>
Mortgage-backed securities income..................................................... $ (39,805) $ (38,020)
Interest income on temporary cash investments and U.S. government securities.......... (24,208) 30,968
Equity in losses of Operating Partnerships............................................ (8,392) 78,962
Other income.......................................................................... 966 (4,415)
------------- -----------
(71,439) 67,495
Operating and administrative expenses................................................. 1,077,279 203,581
------------- -----------
Net income............................................................................ $ (1,148,718) $ (136,086)
------------- -----------
------------- -----------
</TABLE>
Mortgage-backed securities income decreased $39,805 from 1997 to 1998 and
$38,020 from 1996 to 1997, due to the continued amortization of the principal
balances of the Partnership's mortgage-backed securities.
Interest income on temporary cash investments and U.S. government securities
decreased $24,208 from 1997 to 1998 due to a decrease in the average cash
balance primarily due to additional equity contributions made to The Ponds at
Georgetown and an increased investment in The Ponds at Georgetown GNMA
Certificate.
Interest income on temporary cash investments and U.S. government securities
increased $30,968 from 1996 to 1997 due to an increase in the Partnership's cash
reserve as additional cash was placed in reserves during 1996 and 1997.
4
<PAGE>
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnerships by
the Partnership.
The Partnership made additional investments in certain Operating
Partnerships of $186,942, $178,550, and $334,745 during 1998, 1997 and 1996,
respectively. During 1996, the Partnership received a distribution of $77,233
from one of the Operating Partnerships. The Partnership recorded equity in
losses of Operating Partnerships for 1998, 1997, and 1996 to the extent of the
additional investments in Operating Partnerships, net of distributions received.
Operating and administrative expenses increased $1,077,279 from 1997 to
1998. This increase was due to: (i) the write-off of approximately $767,000 in
transaction costs incurred in conjunction with the proposed merger described in
Note 9 to the financial statements; (ii) an increase of approximately $273,000
in salaries and related expenses primarily due to additional management time
incurred in conjunction with the aforementioned proposed merger; (iii) an
increase of approximately $30,000 in fees and expenses incurred in connection
with a review of various options for restructuring the Partnership to improve
total investment returns and provide liquidity to the Partnership's investors
and (iv) an increase of approximately $7,000 in other operating and
administrative expenses. Operating and administrative expenses increased
$203,581 from 1996 to 1997 primarily due to: (i) an increase of approximately
$137,000 in salaries and related expenses, and (ii) an increase of approximately
$44,000 in professional fees incurred in connection with a review of various
options available to the Partnership to improve total investment returns and
provide liquidity to the Partnership's investors and (iii) an increase of
approximately $23,000 in other operating and administrative expenses.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by America
First Companies L.L.C., the parent company of its general partners ("America
First"). In addition, the Partnership has business relationships with a number
of third parties whose ability to perform their obligations to the Partnership
depend on such systems and equipment. Some or all of these systems and equipment
may be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000 problem"
with respect to its information technology ("IT") systems, non-IT systems and
third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation, will be completed by mid-1999. America First believes any
Year 2000 problems relating to its IT systems will be resolved without
significant operational difficulties. However, there can be no assurance that
testing will discover all potential Year 2000 problems or that it will not
reveal unanticipated material problems with the America First IT systems that
will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning
5
<PAGE>
systems and other infrastructure systems that are used by America First in
connection with the operation of the Partnership's business. America First is
reviewing its non-IT systems along with the providers that service and maintain
these systems, with initial emphasis being placed on those, such as telephone
systems, which have been identified as necessary to America First's ability to
conduct the operation of the Partnership's business activities. America First
expects that any necessary modification or replacement of such "mission
critical" systems will be accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could have
a material adverse effect on the Partnership. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loans,
the Partnership's transfer and paying agent and the financial institutions with
which the Partnership maintains accounts. America First has received initial
assurances from certain of these third parties that their ability to perform
their obligations to the Partnership are not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to access their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000, America
First intends to seek an alternative vendor to the extent practical.
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities are expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loan encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problems may make it difficult to conduct necessary accounting and other
record keeping functions for the Partnership. However, based on currently
available information, the general partners do not believe that there will be
any protracted systemic failures of the IT or non-IT systems utilized by America
First in connection with the operation of the Partnership's business.
6
<PAGE>
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loans, who may experience Year 2000 problems. The Partnership has no
specific contingency plans for dealing with Year 2000 problems experienced with
these third parties.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is interest rate risk. The
Partnership's exposure to market risk for changes in interest rates relates
primarily to its investment securities which is comprised of investments in debt
securities with fixed interest rates. The Partnership does not use derivative
financial instruments to hedge its investment portfolio.
The table below presents principal amounts and weighted average interest
rates by year of maturity for the Partnership's investment portfolio:
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED AVERAGE
MATURITY AMOUNT INTEREST RATE
- ------------ ------------- -------------------
<S> <C> <C>
1999 $ 216,559 8.82%
2000 238,486 8.81%
2001 260,774 8.81%
2002 285,159 8.81%
2003 311,840 8.80%
Thereafter 34,532,160 9.01%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1998, was $36,129,123.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC holders and others should understand
that these forward looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward looking statements contained herein.
7
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners
Capital Source L.P.:
We have audited the accompanying balance sheets of Capital Source L.P. as of
December 31, 1998 and 1997, and the related statements of income and
comprehensive income, partners' capital (deficit) and cash flows for the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capital Source L.P. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 19, 1999
8
<PAGE>
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market value..... $ 9,304,694 $ 10,410,564
Investment in FHA Loans (Note 5)................................................. 12,429,485 12,511,046
Investment in GNMA Certificates (Note 5)......................................... 23,454,411 23,588,139
Investment in Operating Partnerships (Note 6).................................... -- --
Interest receivable.............................................................. 306,659 321,485
Other assets..................................................................... 211,928 134,574
------------- -------------
$ 45,707,177 $ 46,965,808
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 7)...................................................... 490,085 $ 204,142
Distribution payable (Note 4).................................................. 860,597 860,587
------------- -------------
$ 1,350,682 $ 1,064,729
------------- -------------
------------- -------------
Partners' Capital (Deficit)
General Partner................................................................ (172,094) (156,647)
Beneficial Assignment Certificate Holders ($13.20 per BAC in 1998 and $13.65 in
1997)........................................................................ 44,528,589 46,057,726
------------- -------------
44,356,495 45,901,079
------------- -------------
$ 45,707,177 $ 46,965,808
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 5)............................ $ 3,262,922 $ 3,302,727 $ 3,340,747
Interest income on temporary cash investments and U.S. government
securities.......................................................... 530,396 554,604 523,636
Equity in losses of Operating Partnerships (Note 6)................... (186,942) (178,550) (257,512)
Other income.......................................................... 6,300 5,334 9,749
------------ ------------ ------------
3,612,676 3,684,115 3,616,620
Expenses
Operating and administrative expenses (Note 7)........................ 1,710,173 632,894 429,313
------------ ------------ ------------
Net income.............................................................. $ 1,902,503 $ 3,051,221 $ 3,187,307
Other comprehensive income:
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the year........... (4,669) 2,114 (39,504)
------------ ------------ ------------
Net comprehensive income................................................ $ 1,897,804 $ 3,053,335 $ 3,147,803
------------ ------------ ------------
------------ ------------ ------------
Net income allocated to:
General Partner....................................................... $ 19,025 $ 30,512 $ 31,873
BAC Holders........................................................... 1,883,478 3,020,709 3,155,434
------------ ------------ ------------
$ 1,902,503 $ 3,051,221 $ 3,187,307
------------ ------------ ------------
------------ ------------ ------------
Net income, basic and diluted, per BAC.................................. $ .56 $ .90 $ .94
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of BACs outstanding............................. 3,374,222 3,374,222 3,374,222
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1995 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
GENERAL BAC
PARTNERS HOLDERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other comprehensive
income)
Balance at December 31, 1995........................................ (150,620) 46,654,333 46,503,713
Net income.......................................................... 31,873 3,155,434 3,187,307
Cash distributions paid or accrued (Note 4)......................... (34,424) (3,407,965) (3,442,389)
----------- ------------- -------------
Balance at December 31, 1996........................................ (153,171) 46,401,802 46,248,631
Net income.......................................................... 30,512 3,020,709 3,051,221
Cash distributions paid or accrued (Note 4)......................... (34,424) (3,407,965) (3,442,389)
----------- ------------- -------------
Balance at December 31, 1997........................................ (157,083) 46,014,546 45,857,463
Net income.......................................................... 19,025 1,883,478 1,902,503
Cash distributions paid or accrued (Note 4)......................... (34,425) (3,407,963) (3,442,388)
----------- ------------- -------------
(172,483) 44,490,061 44,317,578
----------- ------------- -------------
Accumulated Other Comprehensive Income
Balance at December 31, 1995........................................ 810 80,196 81,006
Other comprehensive income.......................................... (395) (39,109) (39,504)
----------- ------------- -------------
Balance at December 31, 1996........................................ 415 41,087 41,502
Other comprehensive income.......................................... 21 2,093 2,114
----------- ------------- -------------
Balance at December 31, 1997........................................ 436 43,180 43,616
Other comprehensive income.......................................... (47) (4,652) (4,699)
----------- ------------- -------------
389 38,528 38,917
----------- ------------- -------------
Balance at December 31, 1998.......................................... $ (172,094) $ 44,528,589 $ 44,356,495
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................................ $ 1,902,503 $ 3,051,221 $ 3,187,307
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in losses of Operating Partnerships...................... 186,942 178,550 257,512
Amortization of discount on mortgage-backed securities.......... (2,287) (2,665) (6,700)
(Decrease) increase in interest receivable...................... 14,826 275 10,926
Decrease (increase) in other assets............................. (77,354) (3,605) 67,223
Increase in accounts payable.................................... 285,943 106,086 1,641
------------- ------------- -------------
Net cash provided by operating activities........................... 2,310,573 3,329,862 3,517,909
------------- ------------- -------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received..................... 2,635,396 429,144 491,754
Acquisition of GNMA Certificate................................... (2,422,519) -- --
Investments in Operating Partnerships............................. (186,942) (178,550) (334,745)
Distributions received from Operating Partnerships................ -- -- 77,233
Maturity of U.S. government securities............................ -- -- 1,000,000
------------- ------------- -------------
Net cash provided by investing activities......................... 25,935 250,594 1,234,242
------------- ------------- -------------
Cash flows from financing activities
Distributions paid................................................ (3,442,378) (3,442,389) (3,442,389)
------------- ------------- -------------
Net increase in cash and temporary cash investments................. (1,105,870) 138,067 1,309,762
Cash and temporary cash investments at beginning of year.......... 10,410,564 10,272,497 8,962,735
------------- ------------- -------------
Cash and temporary cash investments at end of year................ $ 9,304,694 $ 10,410,564 $ 10,272,497
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION.
Capital Source L.P. (the "Partnership") was formed on August 22, 1985, under
the Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities Inc. and America First Capital
Source I, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests in
operating partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration (FHA) or the Government National
Mortgage Association (GNMA). Hereinafter, the Partnership's investments in such
mortgages are referred to as investments in mortgage-backed securities. The
Operating Partnerships are geographically located as follows: (i) two in North
Carolina; and, (ii) one each in Ohio, Florida, Michigan, Virginia and Illinois.
CS Properties I, Inc., which is owned by the General Partners, serves as the
Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties I, Inc. also serves as the
general partner of Misty Springs Apartments, Waterman's Crossing and Fox Hollow
Apartments and as a co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2030.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) FINANCIAL STATEMENT PRESENTATION. The financial statements of the
Partnership are prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale, or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are accounted for using the equity
method. The investments by the Partnership in the Operating Partnerships were
recorded at the cost to acquire such interests. Subsequently losses were
recorded by the Partnership as they were realized by the Operating Partnerships.
The Partnership suspended recognizing losses in the Operating Partnerships when
its entire initial investment had been consumed by such losses. Subsequently,
losses have been recognized only to the extent of additional contributions, net
of distribution received, to the Operating Partnerships by the Partnership. The
Operating Partnerships are not insured or guaranteed.
13
<PAGE>
The value of these investments is a function of the value of the real estate
owned by Operating Partnerships. With regard to the Operating Partnerships, the
Partnership is not the general partner and it has no legal obligation to provide
additional cash support, nor has it indicated any commitment to provide this
support; accordingly it has not reduced its investment in these Operating
Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since BAC
Holders are required to report their share of the Partnership's income for
federal and state income tax purposes. The book basis of the Partnerships'
assets and liabilities exceeded the tax basis by $10,331,740 and $9,517,551 at
December 31, 1998, and December 31, 1997, respectively.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with an original maturity of three months
or less.
(f) NET INCOME PER BENEFICIAL ASSIGNMENT CERTIFICATE ("BAC"). Net income per
BAC is based on the number of BACs outstanding (3,374,222) during each year
presented.
(g) COMPREHENSIVE INCOME. In 1998, the Partnership adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the display and reporting of comprehensive income,
which includes all changes in Partners' Capital with the exception of additional
investments by partners or distributions to partners. Comprehensive income for
the Partnership includes net income and the change in net unrealized holding
gains (losses) on investments. The adoption of SFAS 130 had no impact on total
Partners' Capital.
(h) SEGMENT REPORTING. In 1998, the Partnership adopted Statement of
Financing Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. The adoption of SFAS 131 did not have an
impact on the financial reporting of the partnership as it is engaged solely in
the business of owning mortgages and holding equity interests in real estate
limited partnerships.
(i) NEW ACCOUNTING PRONOUNCEMENTS. In June, 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the
Partnership effective January 1, 2000. Management believes that the impact of
such adoption will not be material to the financial statements.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This statement requires costs of start-up activities and organization costs to
be expensed as incurred. Adoption of this statement is required by the
Partnership effective January 1, 1999. Management intends to adopt the statement
as required in fiscal 1999. Management believes that the impact of such adoption
will not have an impact to the financial statements.
3. PARTNERSHIP RESERVE ACCOUNT.
The Partnership maintains a reserve account which consisted of the following
at December 31, 1998:
<TABLE>
<S> <C>
Cash and temporary cash investments............................. $8,350,064
GNMA Certificates............................................... 879,182
---------
$9,229,246
---------
---------
</TABLE>
14
<PAGE>
The reserve account was established to maintain working capital for the
Partnership and is available for distribution to BAC Holders and for any
contingencies related to mortgage-backed securities and the operation of the
Partnership. See Note 5 regarding the investment in mortgage-backed securities.
4. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each year and the cash distributions accrued at the end of each year.
The General Partners will also receive 1% of the net proceeds from any sale
of Partnership assets. The General Partners will receive a termination fee equal
to 3% of all sales proceeds less actual costs incurred in connection with all
sales transactions, payable only after the investors have received a return of
their capital contributions and a 13% annual return on a cumulative basis. The
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis.
5. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association ("GNMA") Certificates and Federal Housing
Administration ("FHA") Loans. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans. The FHA Loans are guaranteed as to the full
and timely payment of principal and interest on the underlying loans.
At December 31, 1998, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were $840,265,
$38,917 and $879,182, respectively. The total amortized cost, gross unrealized
holding gains and aggregate fair value of held-to-maturity securities were
$35,004,714, $245,227 and $35,249,941, respectively.
At December 31, 1997, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were
$1,044,910, $43,616 and $1,088,526, respectively. The total amortized cost,
gross unrealized holding gains and aggregate fair value of held-to-maturity
securities were $35,010,659, $491,651 and $35,502,310, respectively.
15
<PAGE>
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
INCOME
NUMBER INTEREST CARRYING EARNED IN
TYPE OF SECURITY AND NAME LOCATION OF UNITS RATE MATURITY DATE AMOUNT 1998
- ---------------------------------------- ----------------- -------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,246,682 $ 372,615
The Ponds at Georgetown Ann Arbor, MI 134 7.50%(1) 12-15-2029 2,419,479 196,242
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,873,980 1,089,882
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 5,035,088 441,852
----------- ----------
22,575,229 2,100,591
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,487,222 305,012
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,942,263 784,841
----------- ----------
12,429,485 1,089,853
----------- ----------
35,004,714 3,190,444
----------- ----------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(2) 2008 to 2009 437,306(3) 36,001
Pools of single-family mortgages 7.58%(2) 2007 to 2008 441,876(3) 36,477
----------- ----------
879,182 72,478
----------- ----------
Balance at December 31, 1998 $35,883,896 $3,262,922
----------- ----------
----------- ----------
</TABLE>
- ---------------
(1) During the fourth quarter of 1998, this GNMA Certificate was repaid and a
new GNMA Certificate was issued. The interest rate on the reissued GNMA
Certificate is 7.5% compared to 9.0% on the repaid GNMA Certificate.
(2) Represents effective yield to the Partnership.
(3) Reserve account asset--see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year........................................ $ 36,099,185 $ 36,523,550 $ 37,043,108
Additions
Acquisition of GNMA Certificate................................. 2,422,519 -- --
Amortization of discount on mortgage-backed securities.......... 2,287 2,665 6,700
Deductions
FHA Loan and GNMA principal payments received................... (2,635,396) (429,144) (491,754)
Change in net unrealized holding gains on Available-for-sale
mortgage-backed securities.................................... (4,699) 2,114 (34,504)
------------- ------------- -------------
Balance at end of year.............................................. $ 35,883,896 $ 36,099,185 $ 36,523,550
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
16
<PAGE>
6. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Operating Partnerships consist of interests in limited
partnerships which own multifamily properties financed by the GNMA Certificates
and FHA Loans held by the Partnership. The limited partnership agreements
originally provided for the payment of a base return on the equity provided to
the limited partnerships and for the payment of additional amounts out of a
portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
Descriptions of the Operating Partnerships held at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
1998 EQUITY
IN
LOSSES OF
CARRYING OPERATING
NAME LOCATION PARTNERSHIP NAME AMOUNT PARTNERSHIPS
- ------------------------------- ---------------------- ------------------------------ ----------- -------------
<S> <C> <C> <C> <C>
Misty Springs Apartments Daytona Beach, FL Cypress Landings II, LTD. $ -- $ (10,000)
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited
Partnership -- (176,942)
Waterman's Crossing Newport News, VA Oyster Cove Limited
Partnership -- --
Water's Edge Apartments Lake Villa, IL Water's Edge Limited
Partnership -- --
Bluff Ridge Apartments Jacksonville, NC Bluff Ridge Associates Limited
Partnership -- --
Highland Park Apartments Columbus, OH Interstate Limited Partnership -- --
----- -------------
Balance at December 31, 1998 $ -- $ (186,942)
----- -------------
----- -------------
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year........................................... $ -- $ -- $ --
Addition
Investment in Operating Partnerships............................... 186,942 178,550 334,745
Deductions
Equity in losses of Operating Partnerships......................... (186,942) (178,550) (257,512)
Distributions received from Operating Partnerships................. -- -- (77,233)
------------ ------------ ------------
Balance at end of year................................................. $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
17
<PAGE>
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS BALANCE SHEETS
<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1997
-------------- --------------
<S> <C> <C>
Assets
Investment in real estate:
Land.......................................................................... $ 3,098,171 $ 3,093,671
Buildings..................................................................... 38,090,720 37,716,906
Personal Property............................................................. 1,663,961 2,001,950
-------------- --------------
42,852,852 42,812,527
Less accumulated depreciation................................................. (12,219,492) (11,267,188)
-------------- --------------
Net investment in real estate................................................. 30,633,361 31,545,339
Cash and temporary cash investments, at cost which approximates market
value....................................................................... 358,887 294,233
Escrow deposits and property reserves......................................... 567,420 600,753
Interest and other receivables................................................ 56,782 16,103
Deferred mortgage issuance cost, net of accumulated amortization.............. 2,061,678 2,047,698
Other assets.................................................................. 448,844 518,661
-------------- --------------
$ 34,126,971 $ 35,022,787
-------------- --------------
-------------- --------------
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses......................................... $ 1,194,471 $ 1,303,872
Mortgage loan payable......................................................... 41,100,810 41,331,679
Intercompany interest payable................................................. 254,370 291,230
Due to general partners and their affiliates.................................. 3,941,467 4,013,626
-------------- --------------
46,491,118 46,940,407
-------------- --------------
Partners' Capital (Deficit)
General Partners.............................................................. (12,364,146) (11,917,620)
Limited Partners.............................................................. -- --
-------------- --------------
(12,364,146) (11,917,620)
-------------- --------------
$ 34,126,971 $ 35,022,757
-------------- --------------
-------------- --------------
</TABLE>
18
<PAGE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
DEC. 31, DEC. 31, YEAR ENDED
1998 1997 DEC. 31, 1996
------------ ------------ -------------
<S> <C> <C> <C>
Income
Rental income....................................................... $7,739,350 $7,555,700 $ 7,203,323
Interest on temporary cash investment and U.S. government
securities........................................................ 23,807 29,277 26,964
Other income........................................................ 374,279 246,723 260,383
------------ ------------ -------------
8,137,436 7,831,700 7,490,670
------------ ------------ -------------
Expenses
Real estate operating expenses...................................... 3,674,740 3,601,141 3,712,500
Depreciation expense................................................ 952,305 960,062 951,835
Interest expense.................................................... 4,067,738 4,073,157 3,855,732
Amortization........................................................ 75,201 73,980 69,309
------------ ------------ -------------
8,769,984 8,708,340 8,589,376
------------ ------------ -------------
Loss before extraordinary item........................................ (632,548) (876,640) (1,098,706)
Extraordinary item--gain from forgiveness of accrued interest......... -- -- 82,216
Net Loss.............................................................. $ (632,548) $ (876,640) $ (1,016,490)
------------ ------------ -------------
------------ ------------ -------------
Net Loss allocated to:
General Partners.................................................... (445,606) (698,090) (758,978)
Limited partners.................................................... (186,942) (178,550) (257,512)
------------ ------------ -------------
$ (632,548) $ (876,640) $ (1,016,490)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
19
<PAGE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
DEC. 31, DEC. 31, YEAR ENDED
1998 1997 DEC. 31, 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.............................................................. $ (632,546) $ (876,640) $ (1,016,490)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Extraordinary item--gain from forgiveness of accrued interest..... -- -- 82,216
Depreciation and amortization..................................... 1,027,506 1,034,042 1,021,144
Decrease (increase) in interest and other receivables............. (40,679) (7,298) 1,233
Decrease (increase) in escrow deposits and property reserves...... (33,333) (358) 55,329
Decrease (increase) in other assets............................... 69,817 21,962 (31,269)
Increase in accounts payable and accrued expenses................. (109,401) 9,152 209,282
Decrease in intercompany interest payable......................... (36,860) (1,173) (313,032)
Increase (decrease) in due to general partners and their
affiliates...................................................... (72,159) (103,479) 4,522
------------ ------------ -------------
Net cash provided by operating activities........................... 172,345 76,208 12,935
------------ ------------ -------------
Cash flows from investing activities:
Acquisition of real estate........................................ (378,315) (19,652) (12,000)
Acquisition of personal property.................................. 337,989 (8,971) (5,222)
------------ ------------ -------------
Net cash used in investing activities............................. (40,326) (28,623) (17,222)
------------ ------------ -------------
Cash flows from financing activities:
Principal payments on mortgage loan payable....................... (230,869) (219,993) (206,424)
Contributions..................................................... 186,942 178,550 334,745
Distributions..................................................... -- -- (77,233)
Other net......................................................... (23,438) (29,310) (93,005)
------------ ------------ -------------
Net cash used in financing activities............................. (67,365) (70,753) (41,917)
------------ ------------ -------------
Net increase (decrease) in cash and temporary cash investments........ 64,654 (23,168) (46,204)
Cash and temporary cash investments at beginning of year.............. 294,233 317,401 363,605
------------ ------------ -------------
Cash and temporary cash investments at end of year.................... $ 358,887 $ 294,233 $ 317,401
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
7. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors on a
noncumulative basis. Any unpaid amounts will accrue and be payable only after a
13% annual return to investors has been paid on a cumulative basis and the
investors have received the return of their capital contributions. For the years
ended December 31, 1998, 1997 and 1996, distributions
20
<PAGE>
to investors represented less than an 8% return; accordingly, no fees were paid
or accrued during these years.
Substantially all of the Partnership's general and administrative expenses
and certain costs capitalized by the Partnership are paid by a General Partner
or an affiliate and reimbursed by the Partnership. The amount of such expenses
reimbursed to the General Partner was $1,305,744, $533,419 and $347,522 for the
years ended December 31, 1998, 1997 and 1996, respectively. These reimbursed
expenses are presented on a cash basis and do not reflect accruals made at each
year end.
An affiliate of the General Partners has been retained to provide property
management services for Waterman's Crossing, Misty Springs Apartments, Fox
Hollow Apartments and The Ponds at Georgetown (beginning in November 1996). The
fees for services provided were $196,606, $183,069 and $165,721 for 1998, 1997
and 1996, respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS.
The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS, INTEREST RECEIVABLE, OTHER ASSETS,
ACCOUNTS PAYABLE, DISTRIBUTIONS PAYABLE: Fair value approximates the carrying
value of such assets.
INVESTMENT IN FHA LOANS AND GNMA CERTIFICATES. Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and temporary cash investments....... $9,304,694 $9,304,694 $10,410,564 $10,410,564
Investment in FHA Loans................... $12,429,485 $12,500,047 $12,511,046 $12,679,944
Investment in GNMA Certificates........... $23,454,411 $23,629,076 $23,588,139 $23,910,892
</TABLE>
9. PROPOSED MERGER.
Due to significant changes in the United States equity and real estate
markets in the Fall of 1998, the general partners of the Partnership have
reevaluated the terms of the proposed merger of the Partnership and Capital
Source II L.P.-A into a newly formed corporation that would have made
opportunistic, growth-oriented real estate investments that had the potential
for higher than average returns with correspondingly greater risks. The general
partners have decided to restructure the proposed transaction so that the
resulting entity is a publicly-traded limited partnership that will primarily
invest in residential apartment complexes and other commercial real estate.
Therefore, the investment objectives of the new limited partnership will be
substantially different than those of the originally proposed merger but similar
to those of the Partnership. As a result of restructuring the proposed
transaction, certain costs totaling approximately $767,000 that related to the
previous transaction that would have been capitalized by the Partnership were
expensed as of December 31, 1998.
10. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source II L.P.-A, a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all
21
<PAGE>
BAC holders of the Partnership and Capital Source II L.P.-A. The lawsuit
alleges, among other things, that a proposed merger transaction involving the
Partnership and Capital Source II L.P.-A is deficient and coercive, that the
defendants have breached the terms of the Partnership agreement and that the
defendants have acted in manners which violate their fiduciary duties to the BAC
holders. The plaintiffs seek to enjoin the proposed merger transaction and to
appoint an independent BAC holder representative to investigate alternative
transactions. The lawsuit also requests a judicial dissolution of the
Partnership, an accounting, and unspecified damages and costs. At this time, the
general partners are unable to estimate the effect of the litigation on the
financial statements of the Partnership.
11. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
FROM JANUARY 1, 1998, TO DECEMBER 31, FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total income............................ $ 949,619 $ 956,546 $ 797,305 $ 909,206
Total expenses.......................... (222,804) (196,565) (220,104)(1) (1,070,700)(2)
--------- --------- --------- -----------
Net income.............................. $ 726,815 $ 759,981 $ 577,201 $ (161,494)
--------- --------- --------- -----------
--------- --------- --------- -----------
Net income, basic and diluted, per
BAC................................... $ .22 $ .22 $ .17 $ (.05)
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
- ------------
(1) The Partnership had equity in losses of Operating Partnerships of $156,040.
(2) The Partnership wrote off approximately $767,000 in transaction costs
incurred in conjunction with the proposed merger described in Note 9.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FROM JANUARY 1, 1997, TO DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total income.............................................. $ 928,096 $ 885,712 $ 947,165 $ 923,142
Total expenses............................................ (120,423) (119,321) (138,961) (254,189)(1)
----------- ----------- ----------- -----------
Net income................................................ $ 807,673 $ 766,391 $ 808,204 $ 668,953
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income, basic and diluted per BAC..................... $ .24 $ .22 $ .24 $ .20
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------
(1) The Partnership incurred additional management time and expenses in
connection with a review of various options for restructuring to improve
total investment returns and provide liquidity to the Partnership's
investors.
22
<PAGE>
CAPITAL SOURCE L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
Capital Source L.P. (the "Partnership") originally acquired: (a) five
mortgage-backed securities guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in five states; (b)
three first mortgage loans insured as to principal and interest by the Federal
Housing Administration ("FHA") on multifamily housing properties located in two
states; and (c) Partnership Equity Investments in eight limited partnerships
which own the multifamily properties financed by the GNMA Certificates and FHA
Loans. The Partnership subsequently received FHA Debentures (which were paid in
full in 1993) in payment of the FHA Loan on Fox Hollow Apartments. In 1994,
foreclosure proceedings were initiated on Falcon Point Apartments and,
accordingly, the Partnership no longer holds a Partnership Equity Investment in
this property. In addition, during 1995, the GNMA Certificate related to Falcon
Point Apartments was paid-in-full to the Partnership. Collectively, the
remaining GNMA Certificates, FHA Loans and Partnership Equity Investments are
referred to as the "Permanent Investments." The Partnership has also invested
amounts held in its reserve account in certain GNMA securities backed by pools
of single-family mortgages ("Reserve Investments"). The obligations of GNMA and
FHA are backed by the full faith and credit of the United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------- ---------------
<S> <C> <C>
Regular quarterly distributions
Income................................................................. $ .4248 $ .4362
Return of capital...................................................... .0802 .0688
------ ------
$ .5050 $ .5050
------ ------
------ ------
Distributions
Paid out of cash flow.................................................. $ .5050 $ .5050
------ ------
------ ------
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for distributions
is received from other investments. The Partnership may draw on reserves to pay
operating expenses or to supplement cash distributions to investors. The
Partnership is permitted to replenish reserves with cash flows in excess of
distributions paid. For the six months ended June 30, 1999, $4,915 of
undistributed cash flow was placed in reserves ($13,305 was withdrawn for the
quarter ended June 30, 1999). The total amount held in reserves at June 30, 1999
was $9,098,013 of which $754,583 was invested in GNMA Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BAC Holders. Under the terms of its
Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing
23
<PAGE>
arrangements; however, the Partnership currently does not anticipate entering
into such arrangements. The Partnership is not authorized to issue additional
BACs to meet short-term and long-term liquidity requirements.
ASSET QUALITY
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships. The fair value of the
properties underlying the Operating Partnerships is based on management's best
estimate of the net realizable value of such properties; however, the ultimate
realized values may vary from these estimates.
The overall status of the Partnership's investments has remained relatively
constant since March 31, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership at June 30, 1999:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NUMBER OF UNITS OF UNITS
PROPERTY NAME LOCATION OF UNITS OCCUPIED OCCUPIED
- ------------------------------------- ------------------------------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments............... Jacksonville, NC 108 105 97%
Fox Hollow Apartments................ High Point, NC 184 179 97%
Highland Park Apartments............. Columbus, OH 252 237 94%
Misty Springs Apartments............. Daytona Beach, FL 128 128 100%
The Ponds at Georgetown.............. Ann Arbor, MI 134 133 99%
Waterman's Crossing.................. Newport News, VA 260 260 100%
Water's Edge Apartments.............. Lake Villa, IL 108 104 96%
----- ----- ---
1,174 1,146 98%
----- ----- ---
----- ----- ---
</TABLE>
RESULTS OF OPERATIONS
The tables below compare the results of operations for each period shown.
<TABLE>
<CAPTION>
FOR THE FOR THE INCREASE
QUARTER ENDED QUARTER ENDED (DECREASE)
JUNE 30, 1999 JUNE 30, 1998 FROM 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income............................... $ 805,006 $ 817,818 $ (12,812)
Interest income on temporary cash investments................... 102,894 136,428 (33,534)
Equity in losses of Operating Partnerships...................... -- -- --
Other income.................................................... -- 2,300 (2,300)
-------------- -------------- ---------------
907,900 956,546 (48,646)
Operating and administrative expenses........................... 179,413 196,565 (17,152)
-------------- -------------- ---------------
Net income...................................................... $ 728,487 $ 759,981 $ (31,494)
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX INCREASE
MONTHS ENDED MONTHS ENDED (DECREASE)
JUNE 30, 1999 JUNE 30, 1998 FROM 1998
------------- ------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income................................ $ 1,612,472 $ 1,638,110 $ (25,638)
Interest income on temporary cash investments.................... 206,920 274,605 (67,685)
Equity in losses of Operating Partnerships....................... (50,000) (10,000) (40,000)
Other income..................................................... 2,000 3,450 (1,450)
------------- ------------- ---------------
1,771,392 1,906,165 (134,773)
Operating and administrative expenses............................ 323,534 419,369 (95,835)
------------- ------------- ---------------
Net income....................................................... $ 1,447,858 $ 1,486,796 $ (38,938)
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
Mortgage-backed securities income decreased for the quarter and six months
ended June 30, 1999, compared to the same periods in 1998 due to the continued
amortization of the principal balances of the Partnership's mortgage- backed
securities.
Interest income on temporary cash investments decreased for the quarter and
six months ended June 30, 1999, compared to the same periods in 1998 due to
withdrawals made from the Partnership's reserves during 1998 to supplement
distributions to investors and provide additional equity to certain of the
Operating Partnerships.
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnerships by
the Partnership. During the quarters ended June 30, 1999 and June 30, 1998, the
Partnership did not make any additional investments in any Operating
Partnerships. During the six months ended June 30, 1999 and June 30, 1998, the
Partnership made additional investments in certain Operating Partnerships of
$50,000 and $10,000, respectively. The Partnership recorded equity in Losses of
Operating Partnerships for the respective periods to the extent of the
additional investments.
Operating and administrative expenses decreased for the quarter and six
months ended June 30, 1999, compared to the same periods in 1998 primarily due
to decreases in consulting and amortization expense.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by America
First Companies L.L.C., the parent company of its general partners ("America
First"). In addition, the Partnership has business relationships with a number
of third parties whose ability to perform their obligations to the Partnership
depend on such systems and equipment. Some or all of these systems and equipment
may be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000 problem"
with respect to its information technology ("IT") systems, non-IT systems and
third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record-keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation,
25
<PAGE>
will be completed by early in the final quarter of 1999. America First believes
any Year 2000 problems relating to its IT systems will be resolved without
significant operational difficulties. However, there can be no assurance that
testing will discover all potential Year 2000 problems or that it will not
reveal unanticipated material problems with the America First IT systems that
will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified as
necessary to America First's ability to conduct the operation of the
Partnership's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by early in the final quarter of 1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could have
a material adverse effect on the Partnership. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loans,
the Partnership's transfer and paying agent and the financial institutions with
which the Partnership maintains accounts. America First has received initial
assurances from certain of these third parties that their ability to perform
their obligations to the Partnership is not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to assess their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000, America
First intends to seek an alternative vendor to the extent practical.
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities is expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loans encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC Holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC Holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problems may make it difficult to conduct necessary accounting and other
record-keeping functions for the Partnership. However, based on
26
<PAGE>
currently available information, the general partners do not believe that there
will be any protracted systemic failures of the IT or non-IT systems utilized by
America First in connection with the operation of the Partnership's business.
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loans, who may experience Year 2000 problems. The Partnership has no
specific contingency plans for dealing with Year 2000 problems experienced with
these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important factors
upon which the Partnership's Year 2000 forward-looking statements are based
include, but are not limited to, (a) the belief of America First that the
software used in IT systems is already able to correctly read and interpret
dates after December 31, 1999 and will require little or any remediation, (b)
the ability to identify, repair or replace mission critical non-IT equipment in
a timely manner, (c) third parties' remediation of their internal systems to be
Year 2000 ready and their willingness to test their systems interfaces with
those of America First, (d) no third party system failures causing material
disruption of telecommunications, data transmission, payment networks,
government services, utilities or other infrastructure, (e) no unexpected
failures by third parties with which the Partnership has a material business
relationship and (f) no material undiscovered flaws in America First's Year 2000
testing process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Partnership's market risk since
December 31, 1998.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC Holders and others should understand
that these forward-looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward-looking statements contained herein.
27
<PAGE>
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED) DEC. 31, 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market value..... $ 8,972,106 $ 9,304,694
Investment in FHA Loans (Note 5)............................................... 12,385,942 12,429,485
Investment in GNMA Certificates (Note 5)....................................... 23,261,408 23,454,411
Investment in Operating Partnerships (Note 6).................................. -- --
Interest receivable............................................................ 300,904 306,659
Other assets................................................................... 251,955 211,928
------------- -------------
$ 45,172,315 $ 45,707,177
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 7)...................................................... $ 238,200 $ 490,085
Distribution payable (Note 4).................................................. 860,597 860,597
------------- -------------
1,098,797 1,350,682
------------- -------------
Partners' Capital (Deficit)
General Partner................................................................ (174,923) (172,094)
Beneficial Assignment Certificate Holders ($13.11 per BAC in 1999 and $13.20 in
1998)........................................................................ 44,248,441 44,528,589
------------- -------------
44,073,518 44,356,495
------------- -------------
$ 45,172,315 $ 45,707,177
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE SIX
QUARTER ENDED QUARTER ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income............... $ 805,006 $ 817,818 $ 1,612,472 $ 1,638,110
Interest income on temporary cash investments... 102,894 136,428 206,920 274,605
Equity in losses of Operating Partnerships...... -- -- (50,000) (10,000)
Other income.................................... -- 2,300 2,000 3,450
-------------- -------------- ------------- -------------
907,900 956,546 1,771,392 1,906,165
Expenses
Operating and administrative expenses (Note
7)............................................ 179,413 196,565 323,534 419,369
-------------- -------------- ------------- -------------
Net income........................................ 728,487 759,981 1,447,858 1,486,796
Other comprehensive income:
Unrealized holding losses on securities arising
during the period............................. (12,636) (6,745) (9,641) (2,707)
-------------- -------------- ------------- -------------
Net comprehensive income.......................... $ 715,851 $ 753,236 $ 1,438,217 $ 1,484,089
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Net income allocated to:
General Partner................................. $ 7,285 $ 7,600 $ 14,479 $ 14,868
Limited Partner................................. 721,202 752,381 1,433,379 1,471,928
-------------- -------------- ------------- -------------
$ 728,487 $ 759,981 $ 1,447,858 $ 1,486,796
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Net income, basic and diluted, per BAC............ $ .21 $ .22 $ .42 $ .44
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS CAPITAL (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
PARTNER BAC HOLDERS TOTAL
------------ ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other
comprehensive income)
Balance at December 31, 1998....................................... $ (172,483) $ 44,490,061 $ 44,317,578
Net income......................................................... 14,479 1,433,379 1,447,858
Cash distributions paid or accrued (Note 4)........................ (17,212) (1,703,982) (1,721,194)
------------ ------------- -------------
(175,216) 44,219,458 44,044,242
------------ ------------- -------------
Accumulated other comprehensive income
Balance at December 31, 1998....................................... 389 38,528 38,917
Other comprehensive income......................................... (96) (9,545) (9,641)
------------ ------------- -------------
293 28,983 29,276
------------ ------------- -------------
Balance at June 30, 1999............................................. $ (174,923) $ 44,248,441 $ 44,073,518
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
30
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income....................................................................... $ 1,447,858 $ 1,486,796
Adjustments to reconcile net income to net cash from operating activities
Equity in losses of Operating Partnerships................................... 50,000 10,000
Amortization of discount on mortgage-backed securities....................... (1,346) (1,313)
Decrease in interest receivable.............................................. 5,755 5,022
Increase in other assets..................................................... (40,027) (345,086)
Decrease in accounts payable................................................. (251,885) (478)
------------- -------------
Net cash provided by operating activities.......................................... 1,210,355 1,154,941
------------- -------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received.................................... 228,251 219,407
Investment in Operating Partnerships............................................. (50,000) (10,000)
------------- -------------
Net cash provided by investing activities.......................................... 178,251 209,407
------------- -------------
Cash flow used in financing activity
Distributions paid............................................................... (1,721,194) (1,721,194)
------------- -------------
Net decrease in cash and temporary cash investments................................ (332,588) (356,846)
Cash and temporary cash investments at beginning of period......................... 9,304,694 10,410,564
------------- -------------
Cash and temporary cash investments at end of period............................... $ 8,972,106 $10,053,718
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION.
Capital Source L.P. (the "Partnership") was formed on August 22, 1985, under
the Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities Inc. and America First Capital
Source I, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests in
Operating Partnerships which construct and operate these properties. Each
federally insured Loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration ("FHA") or the Government
National Mortgage Association ("GNMA"). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in mortgage-backed
securities. The Operating Partnerships are geographically located as follows:
(a) two in North Carolina; and, (b) one each in Ohio, Florida, Michigan,
Virginia and Illinois.
CS Properties I, Inc., which is owned by the General Partners, serves as the
Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties I, Inc. also serves as the
general partner of Misty Springs Apartments, Waterman's Crossing and Fox Hollow
Apartments and as a co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2030.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) FINANCIAL STATEMENT PRESENTATION. The financial statements of the
Partnership are prepared without audit on the accrual basis of accounting in
accordance with generally accepted accounting principles. The financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1998. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at June 30, 1999
and results of operations for all periods presented have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale, or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are accounted
32
<PAGE>
for using the equity method. The investments by the Partnership in the Operating
Partnerships were recorded at the cost to acquire such interests. Subsequently,
losses were recorded by the Partnership as they were realized by the Operating
Partnerships. The Partnership suspended recognizing Losses in the Operating
Partnerships when its entire initial investment had been consumed by such
losses. Subsequently, losses have been recognized only to the extent of
additional contributions, net of distributions received, to the Operating
Partnerships by the Partnership. The Operating Partnerships are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships. With regard to the Operating
Partnerships, the Partnership is not the general partner and it has no legal
obligation to provide additional cash support, nor has it indicated any
commitment to provide this support; accordingly, it has not reduced its
investment in these Operating Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since
Beneficial Assignment Certificate ("BAC") Holders are required to report their
share of the Partnership's income for federal and state income tax purposes.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with an original maturity of three months
or less.
(f) NET INCOME PER BAC. Net income per BAC has been calculated based on the
number of BACs outstanding (3,374,222) for all periods presented.
(g) NEW ACCOUNTING PRONOUNCEMENT. On January 1, 1999, the Partnership
adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of SOP 98-5 did not
have an impact on the Partnership's financial statements.
3. PARTNERSHIP RESERVE ACCOUNT.
The Partnership maintains a reserve account which consisted of the following
at June 30, 1999:
<TABLE>
<S> <C>
Cash and temporary cash investments............................. $8,343,430
GNMA Certificates............................................... 754,583
---------
$9,098,013
---------
---------
</TABLE>
The reserve account was established to maintain working capital for the
Partnership and is available to supplement distributions to investors and for
any contingencies related to the Partnership's investment in mortgage-backed
securities and the operation of the Partnership. See Note 5 regarding the
investment in mortgage-backed securities.
4. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each period and the change in cash distributions accrued at the end of each
period.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal to
3% of all sales proceeds less actual costs incurred in connection with all sales
transactions, payable only after the investors have received a return of their
capital contributions and a 13% annual return on a cumulative basis. The General
Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis.
33
<PAGE>
5. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association ("GNMA") Certificates and Federal Housing
Administration ("FHA") Loans. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans. The FHA Loans are guaranteed as to the full
and timely payment of principal and interest on the underlying loans.
At June 30, 1999, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $725,307, $29,276
and $754,583, respectively. At June 30, 1999, the total amortized cost, gross
unrealized holding gains and aggregate fair value of held-to-maturity securities
were $34,892,767, $244,469 and $35,137,236, respectively.
Descriptions of the Partnership's mortgage-backed securities at June 30,
1999, are as follows:
<TABLE>
<CAPTION>
NUMBER INTEREST CARRYING
TYPE OF SECURITY AND NAME LOCATION OF UNITS RATE MATURITY DATE AMOUNT
- -------------------------------- ------------------------ ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments.... Daytona Beach, FL 128 8.75% 06-15-2029 $4,233,166
The Ponds at Georgetown..... Ann Arbor, MI 134 7.50% 12-15-2029 2,410,115
Waterman's Crossing......... Newport News, VA 260 10.00% 09-15-2028 10,845,270
Water's Edge Apartments..... Lake Villa, IL 108 8.75% 12-15-2028 5,018,274
----------
22,506,825
FHA Loans:
Bluff Ridge Apartments...... Jacksonville, NC 108 8.72% 11-15-2028 3,475,042
Highland Park Apartments.... Columbus, OH 252 8.75% 11-01-2028 8,910,900
----------
12,385,942
----------
34,892,767
----------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(1) 2008 to 2009 390,750(2)
Pools of single-family mortgages 7.58%(1) 2007 to 2008 363,833(2)
----------
754,583
----------
Balance at June 30, 1999 $35,647,350
----------
----------
</TABLE>
- ------------
(1) Represents effective yield to the Partnership.
(2) Reserve account asset--see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1998........................................... $35,883,896
Addition
Amortization of discount on mortgage-backed securities............. 1,346
Deductions
FHA Loan and GNMA principal payments received...................... (228,251)
Change in net unrealized holding losses on available-for-sale
mortgage-backed securities....................................... (9,641)
----------
Balance at June 30, 1999............................................... $35,647,350
----------
----------
</TABLE>
34
<PAGE>
6. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Investment in Operating Partnerships consist of interests
in limited partnerships which own multifamily properties financed by the GNMA
Certificates and FHA Loans held by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
Descriptions of the Operating Partnerships held at June 30, 1999, are as
follows:
<TABLE>
<CAPTION>
CARRYING
NAME LOCATION PARTNERSHIP NAME AMOUNT
- -------------------------------------- ------------------------ -------------------------------------- -----------
<S> <C> <C> <C>
Misty Springs Apartments.............. Daytona Beach, FL Cypress Landings II, Ltd. $ --
Fox Hollow Apartments................. High Point, NC Fox Hollow Limited Partnership --
The Ponds at Georgetown............... Ann Arbor, MI Ponds at Georgetown Limited --
Partnership
Waterman's Crossing................... Newport News, VA Oyster Cove Limited Partnership --
Water's Edge Apartments............... Lake Villa, IL Water's Edge Limited Partnership --
Bluff Ridge Apartments................ Jacksonville, NC Bluff Ridge Associates Limited --
Partnership
Highland Park Apartments.............. Columbus, OH Interstate Limited Partnership --
-----
Balance at June 30, 1999 $ --
-----
-----
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, 1999
-------------
<S> <C>
Balance at beginning of year....................................................................... $ --
Addition
Investment in Operating Partnerships........................................................... 50,000
Deduction
Equity in losses of Operating Partnerships..................................................... (50,000)
-------------
Balance at end of period........................................................................... $
-------------
-------------
</TABLE>
7. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors on a
noncumulative basis. Any unpaid amounts will accrue and be payable only after a
13% annual return to investors has been paid on a cumulative basis and the
investors have received the return of their capital contributions. For the
quarter and six months ended June 30, 1999, distributions to investors
represented less than an 8% return; accordingly, no fees were paid or accrued
during this period.
Substantially all of the Partnership's general and administrative expenses
and certain costs capitalized by the Partnership are paid by a General Partner
or an affiliate and reimbursed by the Partnership. The amount of such expenses
reimbursed to the General Partner for the six months ended June 30, 1999, was
$403,710 ($241,736 for the quarter ended June 30, 1999). These reimbursed
expenses are presented on a cash basis and do not reflect accruals made at
quarter end.
35
<PAGE>
An affiliate of the General Partners has been retained to provide property
management services for Waterman's Crossing, Misty Springs Apartments, Fox
Hollow Apartments and The Ponds at Georgetown. The fees for services provided
were $50,597 and $100,456 for the quarter and six months ended June 30, 1999,
respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.
8. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
Holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source II L.P.-A, a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the Lawsuit certified as a class action on behalf of all BAC Holders of the
Partnership and Capital Source II L.P.-A. The lawsuit alleges, among other
things, that a proposed merger transaction involving the Partnership and Capital
Source II L.P.-A is deficient and coercive, that the defendants have breached
the terms of the Partnership's partnership agreement and that the defendants
have acted in manners which violate their fiduciary duties to the BAC Holders.
The plaintiffs seek to enjoin the proposed merger transaction and to appoint an
independent BAC Holder representative to investigate alternative transactions.
The Lawsuit also requests a judicial dissolution of the Partnership, an
accounting, and unspecified damages and costs.
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs in the
action described above, filed an additional complaint against the Partnership,
its general partners and America First in the Delaware Court of Chancery. The
complaint seeks to compel the general partners to supply the plaintiff with a
list of all BAC Holders of the Partnership and copies of the limited partnership
agreements of the Operating Partnerships.
At this time, the general partners are unable to estimate the effect of
either of these lawsuits, if any, on the financial statements of the
Partnership.
36
<PAGE>
CAPITAL SOURCE II L.P.-A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1998
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
Capital Source II L.P.-A (the "Partnership") originally acquired: (i) four
GNMA Certificates which are guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in three states; (ii)
an FHA Loan which is insured as to principal and interest by the Federal Housing
Administration ("FHA") on a multifamily housing property; and (iii) Partnership
Equity Investments in five Operating Partnerships which own the multifamily
properties financed by the GNMA Certificates and the FHA Loan. The Partnership
has been repaid by GNMA on one of the GNMA Certificates and the related property
has been deeded to GNMA in lieu of foreclosure, thus eliminating the Partnership
Equity Investment in this property. Collectively, the remaining GNMA
Certificates, the FHA Loan, and the Partnership Equity Investments are referred
to as the "Permanent Investments." The Partnership had also invested amounts
held in its reserve account in certain GNMA securities backed by pools of
single-family mortgages ("Reserve Investments"); however, at December 31, 1998
the Partnership no longer had any GNMA securities in its reserve account. The
obligations of GNMA and FHA are backed by the full faith and credit of the
United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Regular monthly distributions
Income................................................ $ .2175 $ .4082 $ .5240
Return of capital..................................... .4425 .4018 .2860
------ ------ ------
$ .6600 $ .8100 $ .8100
------ ------ ------
------ ------ ------
Distributions
Paid out of cash flow................................. .4005 $ .5172 $ .6019
Paid out of reserves.................................. .2595 .2928 .2081
------ ------ ------
$ .6600 $ .8100 $ .8100
------ ------ ------
------ ------ ------
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan, GNMA Certificates and the Reserve Investments.
Additional cash for distributions is received from other temporary investments.
The Partnership may draw on reserves to pay operating expenses or to supplement
cash distributions to BAC Holders. The Partnership is permitted to replenish
reserves with cash flows in excess of distributions paid. During 1998, the
Partnership depleted its reserves.
As previously reported, the Partnership reduced the level of distributions
from $.0675 per month to $.0375 per month effective with the August 1998
distribution payable in October 1998. A reduction in the distribution was
required so that cash provided by operating activities and, if necessary,
withdrawals from the Partnership's reserves, to the extent available, will be
adequate to meet its short-term liquidity requirements, including the payments
of distributions to BAC Holders. The Partnership has no other
37
<PAGE>
internal or external sources of liquidity. Under the terms of its Partnership
Agreement, the Partnership has the authority to enter into short- and long-term
debt financing arrangements; however, the Partnership currently does not
anticipate entering into such arrangements. The Partnership is not authorized to
issue additional BACs to meet short-term and long-term liquidity requirements.
ASSET QUALITY
The FHA Loan and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships.
The fair value of the properties underlying the Operating Partnerships is
based on management's best estimate of the net realizable value of such
properties, however; the ultimate realized values may vary from these estimates.
The net realizable value of the properties is determined based on the discounted
estimated future cash flows from the properties, including estimated sales
proceeds. The calculation of discounted estimated future cash flows includes
certain variables such as the assumed inflation rates for rents and expenses,
capitalization rates and discount rates. These variables are supplied to
management by an independent real estate firm and are based on local market
conditions for each property. In certain cases, additional factors such as the
replacement value of the property or comparable sales of similar properties are
also taken into consideration.
The following table shows the occupancy levels of the properties financed by
the Partnership as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NUMBER OF UNITS UNITS
PROPERTY NAME LOCATION UNITS OCCUPIED OCCUPIED
- ------------------------------------------------------------ ------------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Crane's Landing............................................. Winter Park, FL 252 242 96%
Delta Crossing.............................................. Charlotte, NC 178 168 94%
Monticello Apartments....................................... Southfield, MI 106 104 98%
The Ponds at Georgetown..................................... Ann Arbor, MI 134 132 99%
--- --- ---
670 646 96%
--- --- ---
--- --- ---
</TABLE>
The following sets forth certain information regarding the properties
financed by the Partnership.
CRANE'S LANDING
Crane's Landing, located in Winter Park, Florida, is a 252-unit complex with
one-, two- and three-bedroom apartments on fourteen acres of land. Average
occupancy was 96% during 1998 and 1997. Rental revenue remained constant from
1997 to 1998; however, real estate operating expenses increased approximately
17% in 1998, compared to 1997. Real estate operating expenses increased
primarily due to a 41% increase in repairs and maintenance expenses. As a
result, net operating income before depreciation, interest and amortization
decreased approximately 12% from 1997 to 1998. The property remained current on
its mortgage obligations during 1998.
DELTA CROSSING
Delta Crossing is a 178-unit apartment complex located in Charlotte, North
Carolina. Average occupancy was 94% in 1998, compared to 93% in 1997. As a
result of the increase in occupancy and rental rate increases, rental income
increased approximately 3% in 1998, compared to 1997. The increase in rental
income, combined with a decrease of approximately 7% in repairs and maintenance
expenses and
38
<PAGE>
property improvements, was more than offset by an increase of 10% in labor
expenses and slight increases in other expenses. As a result, net operating
income before depreciation, interest and amortization decreased approximately 2%
from 1997 to 1998. The property was current on its mortgage obligations during
1998.
MONTICELLO APARTMENTS
Monticello Apartments, located in Southfield, Michigan, contains 106 rental
units. Average occupancy was 98% in 1998, compared to 97% in 1997. Due to the
slight increase in average occupancy and rental rate increases, rental income
increased approximately 5% in 1998, compared to 1997. The increase in rental
income, was partially offset by an increase of approximately 27% in repairs and
maintenance expenses. As a result, net operating income before depreciation,
interest and amortization increased approximately 6% from 1997 to 1998. The
property was current on its mortgage obligations during 1998.
THE PONDS AT GEORGETOWN
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1998, compared to 97% in 1997. Rental
revenue increased approximately 3.5% in 1998, compared to 1997, primarily due to
the increase in average occupancy, while real estate operating expenses
increased approximately 8%. The increase in real estate operating expenses was
primarily due to an 8% increase in repairs and maintenance expenses which was
partially offset by a 17% decrease in real estate taxes. As previously
disclosed, the mortgage loan for the Ponds at Georgetown was restructured in
September 1998, which lowered the interest rate from 9.25% to 7.85%. In
connection with the restructuring, shortfalls of $407,218 were funded by the
Partnership's reserves. As a result of restructuring the mortgage loan, cash
flow from the property is now anticipated to be sufficient to cover all the
operating partnership's cash needs, including mortgage payments and taxes. The
property was current on its mortgage obligations as of December 31, 1998.
39
<PAGE>
RESULTS OF OPERATIONS
The tables below compare the results of operations for each year shown.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Mortgage-backed securities income...................................... $2,426,356 $2,499,844 $2,520,727
Interest income on temporary cash investments and U.S. government
securities........................................................... 42,339 91,327 147,530
Equity in losses of Operating Partnerships............................. (407,218) (121,450) --
Other income........................................................... 4,750 3,800 6,950
Gain on sale of mortgage-backed securities............................. 35,101 -- --
------------ ------------ ------------
2,101,328 2,473,521 2,675,207
Operating and administrative expenses.................................. 1,220,213 819,516 552,170
------------ ------------ ------------
Net income............................................................. $ 881,115 $1,654,005 $2,123,037
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1997 FROM 1996
----------- -----------
<S> <C> <C>
Mortgage-backed securities income....................................................... $ (73,488) $ (20,883)
Interest income on temporary cash investments and
U.S. government securities............................................................ (48,988) (56,203)
Equity in losses of Operating Partnerships.............................................. (285,768) (121,450)
Other income............................................................................ 950 (3,150)
Gain on sale of mortgage-backed securities.............................................. 35,101 --
----------- -----------
(372,193) (201,686)
Operating and administrative expenses................................................... 400,697 267,346
----------- -----------
Net income.............................................................................. $ (772,890) $ (469,032)
----------- -----------
----------- -----------
</TABLE>
Mortgage-backed securities income decreased $73,488 from 1997 to 1998 and
$20,883 from 1996 to 1997. Approximately $31,000 of such decrease from 1997 to
1998 was attributable to the payoff of the GNMA Certificate on the Ponds at
Georgetown which had an interest rate of 9% and the issuance of a new GNMA
Certificate at 7.25%. The remaining decrease from 1997 to 1998 and from 1996 to
1997 was attributable to the continued amortization of the principal balances of
the Partnership's mortgage-backed securities.
Interest income on temporary cash investments and U.S. government securities
decreased $48,988 from 1997 to 1998 and $56,203 from 1996 to 1997. These
decreases were due to withdrawals made from the Partnership's reserves to
supplement distributions to BAC Holders.
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnership by
the Partnership.
The Partnership made additional investments in certain Operating
Partnerships during 1998 and 1997. As such, equity in losses of Operating
Partnerships was recorded in 1998 and 1997 to the extent of the additional
investments in the amount of $407,218 and $121,450, respectively. No such
investments were made and therefore no equity in losses was recorded in 1996.
During 1998, the Partnership sold the mortgage-backed securities held in its
reserves and realized a gain of $35,101 on the sale. There were no such sales or
gains during either 1996 or 1997.
40
<PAGE>
Operating and administrative expenses increased $400,697 from 1997 to 1998.
The increase was due to: (i) an increase of approximately $341,000 in
transaction costs incurred in conjunction with the proposed merger described in
Note 8 to the financial statements; (ii) an increase of approximately $152,000
in salaries and related expenses primarily due to additional management time
incurred in conjunction with the aforementioned merger; (iii) an increase of
approximately $31,000 in consulting fees incurred in connection with a review of
various options for restructuring to improve total investment returns and
provide liquidity to the Partnership's investors; (iv) a decrease of $116,000 in
asset management and partnership administration fees payable to the General
Partners and (v) decreases of approximately $7,000 in other operating and
administrative expenses.
Operating and administrative expenses increased $267,346 from 1996 to 1997.
Approximately $126,000 of such increase was due to costs incurred in connection
with a review of various options available to the Partnership to improve total
investment returns and provide liquidity to the Partnership's investors. The
remaining increase of $141,346 from 1996 to 1997 was due primarily to increases
in salaries and related expenses.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by America
First Companies L.L.C., the parent company of its general partners ("America
First"). In addition, the Partnership has business relationships with a number
of third parties whose ability to perform their obligations to the Partnership
depend on such systems and equipment. Some or all of these systems and equipment
may be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000 problem"
with respect to its information technology ("IT") systems, non-IT systems and
third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation, will be completed by mid-1999. America First believes any
Year 2000 problems relating to its IT systems will be resolved without
significant operational difficulties. However, there can be no assurance that
testing will discover all potential Year 2000 problems or that it will not
reveal unanticipated material problems with the America First IT systems that
will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified as
necessary to America First's ability to conduct the operation of the
Partnership's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year
41
<PAGE>
2000 issues could have a material adverse effect on the Partnership.
Accordingly, America First has undertaken the process of contacting each such
third party to determine the state of their readiness for Year 2000. Such
parties include, but are not limited to, the obligors on the Partnership's GNMA
Certificates and FHA Loan, the Partnership's transfer and paying agent and the
financial institutions with which the Partnership maintains accounts. America
First has received initial assurances from certain of these third parties that
their ability to perform their obligations to the Partnership are not expected
to be materially adversely affected by the Year 2000 problem. America First will
continue to request updated information from these material third parties in
order to access their Year 2000 readiness. If a material third party vendor is
unable to provide assurance to America First that it is, or will be, ready for
Year 2000, America First intends to seek an alternative vendor to the extent
practical.
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities are expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loan encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problem may make it difficult to conduct necessary accounting and other
record keeping functions for the Partnership. However, based on currently
available information, the general partners do not believe that there will be
any protracted systemic failures of the IT or non-IT systems utilized by America
First in connection with the operation of the Partnership's business.
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loan, who may experience Year 2000 problems.
42
<PAGE>
The Partnership has no specific contingency plans for dealing with Year 2000
problems experienced with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important factors
upon which the Partnership's Year 2000 forward-looking statements are based
include, but are not limited to, (a) the belief of America First that the
software used in IT systems is already able to correctly read and interpret
dates after December 31, 1999 and will require little or any remediation; (b)
the ability to identify, repair or replace mission critical non-IT equipment in
a timely manner, (c) third parties' remediation of their internal systems to be
Year 2000 ready and their willingness to test their systems interfaces with
those of America First, (d) no third party system failures causing material
disruption of telecommunications, data transmission, payment networks,
government services, utilities or other infrastructure, (e) no unexpected
failures by third parties with which the Partnership has a material business
relationship and (f) no material undiscovered flaws in America First's Year 2000
testing process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is interest rate risk. The
Partnership's exposure to market risk for changes in interest rates relates
primarily to its investment securities which is comprised of investments in debt
securities with fixed interest rates. The Partnership does not use derivative
financial instruments to hedge its investment portfolio.
The table below presents principal amounts and weighted average interest
rates by year of maturity for the Partnership's investment portfolio:
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED AVERAGE
MATURITY AMOUNT INTEREST RATE
- ------------ ------------- -----------------
<S> <C> <C>
1999 $ 168,912 8.6%
2000 184,103 8.6%
2001 200,668 8.6%
2002 218,402 8.6%
2003 238,427 8.6%
Thereafter 26,033,070 8.6%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1998, was $27,248,970.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC holders and others should understand
that these forward looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward looking statements contained herein.
43
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners
Capital Source II L.P.-A:
We have audited the accompanying balance sheets of Capital Source II L.P.-A
as of December 31, 1998 and 1997, and the related statements of income and
comprehensive income, partners' capital (deficit) and cash flows for the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capital Source II L.P.-A as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 19, 1999
44
<PAGE>
CAPITAL SOURCE II L.P.-A
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market
value.................................................................. $ 432,999 $ 1,240,992
Investment in FHA Loan (Note 4).......................................... 6,505,857 6,538,424
Investment in GNMA Certificates (Note 4)................................. 20,497,706 21,674,940
Investment in Operating Partnerships (Note 5)............................ -- --
Interest receivable...................................................... 195,440 213,024
Other assets............................................................. 139,204 162,154
----------------- -----------------
$ 27,771,206 $ 29,829,534
----------------- -----------------
----------------- -----------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 6)................................................ $ 347,446 $ 327,513
Distribution payable (Note 3)............................................ 303,871 546,968
----------------- -----------------
651,317 874,481
----------------- -----------------
Partners' Capital (Deficit)
General Partner.......................................................... (295,259) (276,907)
Beneficial Assignment Certificate Holders ($6.83 per BAC in 1998 and
$7.29 in 1997)......................................................... 27,415,148 29,231,960
----------------- -----------------
27,119,889 28,955,053
----------------- -----------------
$ 27,771,206 $ 29,829,534
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 4)............................ $ 2,426,356 $ 2,499,844 $ 2,520,727
Interest income on temporary cash investments and U.S. government
securities.......................................................... 42,339 91,327 147,530
Equity in losses of Operating Partnerships (Note 5)................... (407,218) (121,450) --
Other income.......................................................... 4,750 3,800 6,950
Gain on sale of mortgage-backed securities............................ 35,101 -- --
------------ ------------ ------------
2,101,328 2,473,521 2,675,207
Expenses
Operating and administrative expenses (Note 6)........................ 1,220,213 819,516 552,170
------------ ------------ ------------
Net income.............................................................. 881,115 $ 1,654,005 $ 2,123,037
Other comprehensive income:
Unrealized gains on securities
Net unrealized holding gains (losses) arising during the year....... (7,110) 5,969 (42,500)
Plus: reclassification adjustment for losses included in net
income............................................................ (35,101) -- --
------------ ------------ ------------
Change in net unrealized holding gains.............................. (42,211) 5,969 (42,500)
------------ ------------ ------------
Net comprehensive income.............................................. $ 838,904 $ 1,659,974 $ 2,080,537
------------ ------------ ------------
------------ ------------ ------------
Net income allocated to:
General Partner....................................................... $ 8,811 $ 16,540 $ 21,230
BAC Holders........................................................... 872,304 1,637,465 2,101,807
------------ ------------ ------------
$ 881,115 $ 1,654,005 $ 2,123,037
------------ ------------ ------------
------------ ------------ ------------
Net income, basic and diluted, per BAC.................................. $ .22 $ .41 $ .52
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of BACs outstanding............................. 4,011,101 4,011,101 4,011,101
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1995 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
GENERAL
PARTNERS BAC HOLDERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other comprehensive
income)
Balance at December 31, 1995........................................ (249,463) 31,948,883 31,699,420
Net income.......................................................... 21,230 2,101,807 2,123,037
Cash distributions paid or accrued (Note 3)......................... (32,818) (3,248,992) (3,281,810)
----------- ------------- -------------
Balance at December 31, 1996........................................ (261,051) 30,801,698 30,540,647
Net income.......................................................... 16,540 1,637,465 1,654,005
Cash distributions paid or accrued (Note 3)......................... (32,818) (3,248,992) (3,281,810)
----------- ------------- -------------
Balance at December 31, 1999........................................ (277,329) 29,190,171 28,912,842
Net income.......................................................... 8,811 872,304 881,115
Cash distributions paid or accrued (Note 3)......................... (26,741) (2,647,327) (2,674,068)
----------- ------------- -------------
(295,259) 27,415,148 27,119,889
----------- ------------- -------------
----------- ------------- -------------
Accumulated Other Comprehensive Income
Balance at December 31, 1995........................................ 787 77,955 78,742
Other comprehensive income.......................................... (425) (42,075) (42,500)
----------- ------------- -------------
Balance at December 31, 1996........................................ 362 35,880 36,242
Other comprehensive income.......................................... 60 5,909 5,969
----------- ------------- -------------
Balance at December 31, 1997........................................ 422 41,789 42,211
Other comprehensive income.......................................... (422) (41,789) (42,211)
----------- ------------- -------------
-- -- --
----------- ------------- -------------
Balance at December 31, 1998.......................................... $ (295,259) $ 27,415,148 $ 27,119,889
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................ $ 881,115 $ 1,654,005 $ 2,123,037
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in losses of Operating Partnerships.......... 407,218 121,450 --
Amortization of discount............................ (1,471) (1,397) (9,400)
Gain on sale of mortgage-backed securities.......... (35,101) -- --
Decrease interest receivable........................ 17,584 6,637 26,654
Decrease in other assets............................ 22,950 63,589 62,156
Increase (decrease) in accounts payable............. 19,933 111,215 (339)
----------------- ----------------- -----------------
Net cash provided by operating activities........... 1,312,228 1,955,499 2,202,108
----------------- ----------------- -----------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received......... 271,807 257,816 253,258
Disposition of mortgage-backed securities............. 5,046,437 -- --
Proceeds from sale of available-for-sale securities... 915,012 -- --
Acquisition of GNMA Certificate....................... (5,029,094) -- --
Investment in Operating Partnerships.................. (407,218) (121,450) --
Maturity of U.S. government securities................ -- -- 2,500,000
----------------- ----------------- -----------------
Net cash provided by investing activities........... 796,944 136,366 2,753,258
----------------- ----------------- -----------------
Cash flows from financing activities
Distributions paid.................................... (2,917,165) (3,281,810) (3,281,810)
Net increase (decrease) in cash and temporary cash
investments........................................... (807,993) (1,189,945) 1,673,556
Cash and temporary cash investments at beginning of
year.................................................. 1,240,992 2,430,937 757,381
----------------- ----------------- -----------------
Cash and temporary cash investments at end of year...... $ 432,999 $ 1,240,992 $ 2,430,937
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION.
Capital Source II L.P.-A (the "Partnership") was formed on August 22, 1986,
under the Delaware Revised Uniform Limited Partnership Act. The General Partners
of the Partnership are Insured Mortgage Equities II L.P. and America First
Capital Source II, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests in
the Operating Partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration ("FHA") or the Government
National Mortgage Association ("GNMA"). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in mortgage-backed
securities. The Operating Partnerships are geographically located as follows:
(i) two in Michigan and (ii) one each in Florida and North Carolina.
CS Properties II, Inc., which is owned by the General Partners, serves as
the Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties II, Inc. also serves as a
co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2035.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) METHOD OF ACCOUNTING. The financial statements of the Partnership are
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are accounted for using the equity
method. The investments by the Partnership in the Operating Partnerships were
recorded at the cost to acquire such interests. Subsequently, losses were
recorded by the Partnership as they were realized by the Operating Partnerships.
The Partnership suspended recognizing losses in the Operating Partnerships when
its entire initial investment had been consumed by such losses. Subsequently,
losses have been recognized only to the extent of additional contributions net
of distribution received, to the Operating Partnerships by the Partnership. The
Operating Partnerships are not insured or guaranteed.
49
<PAGE>
The value of these investments is a function of the value of the real estate
owned by the Operating Partnerships. With regard to the Operating Partnerships,
the Partnership is not the general partner and it has no legal obligation to
provide additional cash support nor has it indicated any commitment to provide
this support; accordingly it has not reduced its investment in these Operating
Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since BAC
Holders are required to report their share of the Partnership's income for
federal and state income tax purposes. The tax basis of the Partnerships' assets
and liabilities exceeded the reported amounts by $1,236,222 and $1,817,163 at
December 31, 1998, and December 31, 1997, respectively.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with original maturities of three months or
less.
(f) NET INCOME PER BENEFICIAL ASSIGNMENT CERTIFICATE ("BAC"). Net income per
BAC was calculated based on the number of BACs outstanding (4,011,101) during
each year presented.
(g) COMPREHENSIVE INCOME. In 1998, the Partnership adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the display and reporting of comprehensive income,
which includes all changes in Partners' Capital with the exception of additional
investments by partners or distributions to partners. Comprehensive income for
the Partnership includes net income and the change in net unrealized holding
gains (losses) on investments. The adoption of SFAS 130 had no impact on total
Partners' Capital.
(h) SEGMENT REPORTING. In 1998, the Partnership adopted Statement of
Financing Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. The adoption of SFAS 131 did not have an
impact on the financial reporting of the partnership as it is engaged solely in
the business of owning mortgages and holding equity interests in real estate
limited partnerships.
(i) NEW ACCOUNTING PRONOUNCEMENTS. In June, 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the
Partnership effective January 1, 2000. Management believes that the impact of
such adoption will not be material to the financial statements.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This statement requires costs of start-up activities and organization costs to
be expensed as incurred. Adoption of this statement is required by the
Partnership effective January 1, 1999. Management intends to adopt the statement
as required in fiscal 1999. Management believes that the impact of such adoption
will not have an impact to the financial statements.
3. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the Investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each year and the change in cash distributions accrued at the end of each year.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal to
3% of all sales proceeds less actual costs incurred in connection with all sales
transactions, payable only after the investors have received a return of their
50
<PAGE>
capital contributions and an 11.5% annual return on a cumulative basis. The
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 11.5% annual return on a cumulative
basis.
4. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal Housing
Administration (FHA) Loans. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans. The FHA Loan is guaranteed as to the full and
timely payment of principal and interest on the underlying loans.
At December 31, 1998, there were no available-for-sale securities. At
December 31, 1998, the total amortized cost, gross unrealized holding gains and
aggregate fair value of held-to-maturity securities were $27,003,563, $245,407,
and $27,248,970, respectively.
At December 31, 1997, the total amortized cost, gross unrealized holding
gains and aggregate fair value of available-for-sale securities were $1,008,507,
$42,211, and $1,050,718, respectively. At December 31, 1997, the total amortized
cost, gross unrealized holding gains and aggregate fair value of held-to-
maturity securities were $27,162,646, $331,442, and $27,494,088, respectively.
During May and August of 1998, the Partnership sold available-for-sale
mortgage-backed securities with an amortized cost of $879,911 for $915,012
thereby recognizing a gain of $35,101 on the sales.
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
INCOME
NUMBER OF INTEREST CARRYING EARNED IN
TYPE OF SECURITY AND NAME LOCATION UNITS RATE MATURITY DATE AMOUNT 1998
- -------------------------------- ------------------ ------------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 $ 6,505,857 $ 593,414
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12-15-2030 10,176,802 892,610
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,298,123 464,821
The Ponds at Georgetown Ann Arbor, MI 134 7.50%(1) 12-15-2029 5,022,781 436,281
------------- ---------
20,497,706 1,793,712
------------- ---------
27,003,563 2,387,126
Available-for-Sale
GNMA Certificates:
Pools of single-family
mortgages 7.58%(2) 2008 to 2009 --(3) 39,230
------------- ---------
Balance at December 31, 1998 $ 27,003,563 $2,426,356
------------- ---------
------------- ---------
</TABLE>
- ---------------
(1) During the fourth quarter of 1998, this GNMA Certificate was repaid and a
new GNMA Certificate was issued. The interest rate on the reissued GNMA
Certificate is 7.5% compared to 9% on the repaid GNMA Certificate.
(2) Represents effective yield to the Partnership.
(3) Reserve account asset.
51
<PAGE>
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year........................................ $ 28,213,364 $ 28,463,814 $ 28,737,672
Additions
Acquisition of GNMA Certificate................................. 5,029,094 -- --
Amortization of discount on mortgage-backed securities.......... 1,471 1,397 1,470
Deductions
FHA Loan and GNMA principal payments received................... (271,807) (257,816) (253,258)
Disposition of mortgage-backed securities....................... (5,046,437) -- --
Proceeds from sale of available-for-sale securities............. (915,012) -- --
Change in net unrealized holding gains on available-for-sale
securities.................................................... (42,211) 5,969 (22,070)
------------- ------------- -------------
Balance at end of year.............................................. $ 27,003,563 $ 28,213,364 $ 28,463,814
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Operating Partnerships consist of interests in limited
partnerships which own multifamily properties financed by the GNMA Certificates
and FHA Loan held by the Partnership. The limited partnership agreements
originally provided for the payment of a base return on the equity provided to
the limited partnerships and for the payment of additional amounts out of a
portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
Descriptions of the Operating Partnerships held at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
EQUITY IN
LOSSES OF
CARRYING OPERATING
NAME LOCATION PARTNERSHIP NAME AMOUNT PARTNERSHIPS
- --------------------------------- ------------------ --------------------------------- ----------- ------------
<S> <C> <C> <C> <C>
Delta Crossing................... Charlotte, NC Delta Crossing Limited $ -- $ --
Partnership
Crane's Landing.................. Winter Park, FL Crane's Landing Partner, Ltd. -- --
Monticello Apartments............ Southfield, MI Centrum Monticello Limited -- --
Partnership
The Ponds at Georgetown.......... Ann Arbor, MI Ponds at Georgetown Limited -- (407,218)
Partnership
----------- ------------
Balance at December 31, 1998..... $ -- $ (407,218)
----------- ------------
----------- ------------
</TABLE>
52
<PAGE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ --
Addition
Investment in Operating Partnerships............................... 407,218 121,450 --
Deduction
Equity in losses of Operating Partnerships......................... (407,218) (121,450) $ --
------------ ------------ ------------
Balance at end of year................................................. $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS BALANCE SHEET
<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1997
------------- -------------
<S> <C> <C>
Assets
Investment in real estate:
Land........................................................................... $ 2,800,750 $ 2,800,750
Buildings...................................................................... 24,406,463 24,396,923
Personal Property.............................................................. 1,757,049 1,666,485
------------- -------------
28,964,262 28,864,158
Less accumulated depreciation.................................................. (7,290,932) (6,598,576)
------------- -------------
Net investment in real estate.................................................... 21,673,330 22,265,582
Cash and temporary cash investments, at cost which approximates market value..... 632,149 491,562
Escrow deposits and property reserves............................................ 606,575 613,261
Interest and other receivables................................................... 19,437 7,442
Deferred mortgage issuance cost, net of accumulated amortization................. 1,394,161 1,428,684
Other assets..................................................................... 193,964 234,560
------------- -------------
$ 24,519,616 $ 25,041,091
------------- -------------
------------- -------------
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses.......................................... $ 307,981 $ 850,743
Mortgage loan payable.......................................................... 27,186,893 27,164,788
Intercompany interest payable.................................................. 294,222 247,487
Due to general partners and their affiliates................................... 920,347 961,563
------------- -------------
28,709,443 29,224,581
------------- -------------
Partners' Capital (Deficit)
General Partners............................................................... (4,189,827) (4,183,490)
Limited Partners............................................................... -- --
------------- -------------
(4,189,827) (4,183,490)
------------- -------------
$ 24,519,616 $ 25,041,091
------------- -------------
------------- -------------
</TABLE>
53
<PAGE>
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS INCOME STATEMENT
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Rental income........................................................ $5,220,888 $5,105,108 $4,854,898
Interest on temporary cash investments............................... 19,993 13,084 20,781
Other income......................................................... 351,218 198,870 154,855
------------ ------------ ------------
5,592,099 5,317,062 5,030,534
------------ ------------ ------------
Expenses
Real estate operating expenses....................................... 2,779,741 2,504,026 2,325,848
Depreciation expense................................................. 692,357 700,297 725,922
Property development and management fees............................. -- -- 314
Interest expense..................................................... 2,493,145 2,476,272 2,487,587
Amortization......................................................... 46,008 48,768 48,819
------------ ------------ ------------
6,011,251 5,729,363 5,588,490
------------ ------------ ------------
Net Loss............................................................... $ (419,152) $ (412,301) $ (557,956)
------------ ------------ ------------
------------ ------------ ------------
Net Loss allocated to:
General Partners..................................................... (11,934) (290,851) (557,956)
Limited Partners..................................................... (407,218) (121,450) --
------------ ------------ ------------
$ (419,152) $ (412,301) $ (557,956)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
54
<PAGE>
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net Loss............................................................. $ (419,152) $ (412,301) $ (557,956)
Adjustments to reconcile net loss to net cash provided by operating
activities
Depreciation and amortization.................................... 738,365 749,065 774,741
Property development and management fees......................... -- -- 314
Decrease (increase) in interest and other receivables............ (11,995) (1,992) 10,467
Decrease (increase) in escrow deposits and property reserves..... 6,686 (125,385) 63,524
Decrease in other assets......................................... 13,654 (22,669) (21,816)
Increase (decrease) in accounts payable and accrued expenses..... (542,762) 110,274 22,040
Decrease in intercompany interest payable........................ 46,735 (794) (728)
Increase (decrease) in due to general partners and their
affiliates..................................................... (41,216) (9,646) 15,090
------------ ------------ ------------
Net cash provided by operating activities.......................... (209,685) 286,552 305,676
------------ ------------ ------------
Cash flows from investing activities
Acquisition of real estate........................................... (9,540) -- (60,663)
Acquisition of personal property..................................... (90,564) (68,819) (102,292)
------------ ------------ ------------
Net cash used in investing activities................................ (100,104) (68,819) (162,955)
------------ ------------ ------------
Cash flows from financing activities
Principal payments on mortgage loan payable.......................... (141,789) (129,902) (118,650)
Capital contributions................................................ 407,218 121,450 --
Other, net........................................................... 184,947 (904) (17,956)
------------ ------------ ------------
Net cash provided by (used in) financing activities.................. 450,376 (9,356) (136,606)
------------ ------------ ------------
Net increase in cash and temporary cash investments.................... 140,587 208,377 6,115
Cash and temporary cash investments at beginning of year............... 491,562 283,185 277,070
------------ ------------ ------------
Cash and temporary cash investments at end of year..................... $ 632,149 $ 491,562 $ 283,185
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
6. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum, the
first $50,000 of which will be paid each year with the balance payable only
during such years that a 6.5% annual return has been paid to investors on a
noncumulative basis. An additional fee equal to 0.5% of invested assets per
annum will be payable only during those years that an 11.5% annual return has
been paid to investors on a noncumulative basis. Any unpaid amounts will accrue
and be payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. Asset
55
<PAGE>
management and partnership administration fees amounted to $50,000, $166,000 and
$166,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Substantially all of the Partnership's general and administrative expenses
are paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner for the years
ended December 31, 1998, 1997 and 1996 amounted to $842,272, $494,165 and
$313,049, respectively. These reimbursed amounts are presented on a cash basis
and do not reflect accruals made at each year end.
An affiliate of the General Partners has been retained to provide property
management services for The Ponds at Georgetown beginning in November 1996. The
fees for services provided were $41,167, $31,924 and $4,933 for 1998, 1997 and
1996, respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS.
The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS, INTEREST RECEIVABLE, OTHER ASSETS,
ACCOUNTS PAYABLE, DISTRIBUTIONS PAYABLE: Fair value approximates the carrying
value of such assets.
INVESTMENT IN FHA LOAN AND GNMA CERTIFICATES: Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments................. $ 432,999 $ 432,999 $ 1,240,992 $ 1,240,992
Investment in FHA Loan.............................. $ 6,505,857 $ 6,531,230 $ 6,538,424 $ 6,645,393
Investment in GNMA Certificates..................... $ 20,497,706 $ 20,717,740 $ 21,674,940 $ 21,899,413
</TABLE>
8. PROPOSED MERGER.
Due to significant changes in the United States equity and real estate
markets in the Fall of 1998, the general partners of the Partnership have
reevaluated the terms of the proposed merger of the Partnership and Capital
Source L.P. into a newly formed corporation that would have made opportunistic,
growth-oriented real estate investments that had the potential for higher than
average returns with correspondingly greater risks. The general partners have
decided to restructure the proposed transaction so that the resulting entity is
a publicly-traded limited partnership that will primarily invest in residential
apartment complexes and other commercial real estate. Therefore, the investment
objectives of the new limited partnership will be substantially different than
those of the originally proposed merger but similar to those of the Partnership.
9. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source L.P., a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all BAC holders of the
Partnership and Capital Source L.P. The lawsuit alleges, among other things,
that a proposed merger transaction involving the Partnership and Capital Source
L.P. is deficient and coercive, that the defendants have breached the terms of
the Partnership agreement and that the defendants have
56
<PAGE>
acted in manners which violate their fiduciary duties to the BAC holders. The
plaintiffs seek to enjoin the proposed merger transaction and to appoint an
independent BAC holder representative to investigate alternative transactions.
The lawsuit also requests a judicial dissolution of the Partnership, an
accounting, and unspecified damages and costs. At this time, the general
partners are unable to estimate the effect of the litigation on the financial
statements of the Partnership.
10. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
FROM JANUARY 1, 1998 TO DECEMBER 31, 1998 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income................................. $ 634,350 $ 639,955 $ 296,136(1) $ 530,887(2)
Total expenses............................... (417,488)(3) (273,959)(3) (158,660) (370,106)(3)
--------------- --------------- --------------- ---------------
Net income................................... $ 216,862 $ 365,996 $ 137,476 $ 160,781
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income, basic and diluted, per BAC $ .06 $ .09 $ .03 $ .04
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
FROM JANUARY 1, 1997 TO DECEMBER 31, 1997 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income................................. $ 655,945 $ 529,318(1) $ 646,693 $ 641,565
Total expenses............................... (151,630) (148,583) (164,872) (354,431)(4)
--------------- --------------- --------------- ---------------
Net income................................... $ 504,315 $ 380,735 $ 481,821 $ 287,134
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income, basic and diluted, per BAC....... $ .12 $ .10 $ .12 $ .07
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
- ------------
(1) The Partnership had equity in losses of Operating Partnerships of $359,113
for the third quarter of 1998 and $121,450 for the second quarter of 1997.
(2) The Partnership earned less interest income during the quarter due primarily
to withdrawals from reserves to supplement monthly distributions to BAC
Holders, a reduction in the interest rate on The Ponds at Georgetown GNMA
Certificate (See Note 4), and an additional equity contribution made to The
Ponds at Georgetown Operating Partnership. In addition, the Partnership had
equity in losses of Operating Partnerships of $48,105 for the quarter.
(3) The Partnership incurred expenses of approximately $186,000, $66,000,
$38,000 and $177,000 during the first, second, third and fourth quarters,
respectively, in conjunction with the proposed merger described in Note 8.
(4) The Partnership incurred additional expenses in connection with a review of
various options for restructuring to improve total investment returns and
provide liquidity to the Partnership's investors.
57
<PAGE>
CAPITAL SOURCE II L.P.-A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1999
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
Capital Source II L.P.-A (the "Partnership") originally acquired: (a) four
GNMA Certificates which are guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in three states; (b) an
FHA Loan which is insured as to principal and interest by the Federal Housing
Administration ("FHA") on a multifamily housing property; and (c) Partnership
Equity Investments in five Operating Partnerships which own the multifamily
properties financed by the GNMA Certificates and the FHA Loan. The Partnership
has been repaid by GNMA on one of the GNMA Certificates and the related property
has been deeded to GNMA in lieu of foreclosure, thus eliminating the Partnership
Equity Investment in such Property. The obligations of GNMA and FHA are backed
by the full faith and credit of the United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------- ---------------
<S> <C> <C>
Regular monthly distributions
Income........................................................................... $ .2103 $ .1439
Return of capital................................................................ .0147 .2611
------ ------
$ .2250 $ .4050
------ ------
------ ------
Distributions
Paid out of cash flow............................................................ $ .2250 $ .1922
Paid out of reserves............................................................. .0000 .2128
------ ------
$ .2250 $ .4050
------ ------
------ ------
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership is permitted
to replenish its reserves with cash flows in excess of distributions paid. For
the six months ended June 30, 1999, $52,941 ($883 for the quarter) was placed
into reserves for cash flow in excess of the regular monthly cash distributions.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves, to
the extent available, will be adequate to meet short-term liquidity
requirements, including the payments of distributions to BAC Holders. The
Partnership has no other internal or external sources of liquidity. Under the
terms of its Partnership Agreement, the Partnership has the authority to enter
into short- and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The Partnership
is not authorized to issue additional BACs to meet short-term and long-term
liquidity requirements.
58
<PAGE>
ASSET QUALITY
The FHA Loan and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships. The fair value of the
properties underlying the Operating Partnerships is based on management's best
estimate of the net realizable value of such properties; however, the ultimate
realized values may vary from these estimates.
The overall status of the Partnership's investments has remained relatively
constant since March 31, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership as of June 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENTAGE OF
PROPERTY NAME LOCATION UNITS UNITS OCCUPIED UNITS OCCUPIED
- -------------------------------------------- ------------------ ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Crane's Landing............................. Winter Park, FL 252 238 94%
Delta Crossing.............................. Charlotte, NC 178 167 94%
Monticello Apartments....................... Southfield, MI 106 100 94%
The Ponds at Georgetown..................... Ann Arbor, MI 134 131 98%
--
--- ---
670 636 95%
--
--
--- ---
--- ---
</TABLE>
RESULTS OF OPERATIONS
The tables below compare the results of operations for each period shown.
<TABLE>
<CAPTION>
FOR THE FOR THE INCREASE
QUARTER ENDED QUARTER ENDED (DECREASE)
JUNE 30, 1999 JUNE 30, 1998 FROM 1998
-------------- -------------- -----------
<S> <C> <C> <C>
Mortgage-backed securities income..................................... $ 580,089 $ 616,279 $ (36,190)
Interest income on temporary cash investments......................... 3,340 7,561 (4,221)
Other income.......................................................... -- 1,550 (1,550)
Gain on sale of mortgage-backed securities............................ -- 14,565 (14,565)
-------------- -------------- -----------
583,429 639,955 (56,526)
Operating and administrative expenses................................. 183,429 273,959 (90,530)
-------------- -------------- -----------
Net income............................................................ $ 400,000 $ 365,996 $ 34,004
-------------- -------------- -----------
-------------- -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX INCREASE
MONTHS ENDED MONTHS ENDED (DECREASE)
JUNE 30, 1999 JUNE 30, 1998 FROM 1998
------------- ------------- -----------
<S> <C> <C> <C>
Mortgage-backed securities income.................................... $ 1,161,046 $ 1,237,723 $ (76,677)
Interest income on temporary cash investments........................ 7,491 19,317 (11,826)
Other income......................................................... 400 2,700 (2,300)
Gain on sale of mortgage-backed securities........................... -- 14,565 (14,565)
------------- ------------- -----------
1,168,937 1,274,305 (105,368)
Operating and administrative expenses................................ 316,875 691,447 (374,572)
------------- ------------- -----------
Net income........................................................... $ 852,062 $ 582,858 $ 269,204
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
Mortgage-backed securities income decreased for the quarter ended June 30,
1999, compared to the same period in 1998. Approximately $19,000 of such
decrease was due to the October 1998 payoff of The
59
<PAGE>
Ponds at Georgetown GNMA Certificate which had an interest rate of 9% and the
issuance of a new GNMA Certificate at 7.25%. Approximately $14,500 of the
remaining decrease of $17,000 was attributable to the 1998 sales of GNMA
Certificates held in the Partnership's reserves with the remaining $2,500
decrease due to the continued amortization of the principal balances of the
Partnership's mortgage-backed securities.
Mortgage-backed securities income decreased for the six months ended June
30, 1999, compared to the same period in 1998. Approximately $38,000 of such
decrease was due to the October 1998 payoff of The Ponds at Georgetown GNMA
Certificate which had an interest rate of 9% and the issuance of a new GNMA
Certificate at 7.25%. Approximately $33,000 of the remaining decrease of $39,000
was attributable to the 1998 sales of GNMA Certificates held in the
Partnership's reserves with the remaining $6,000 decrease due to the continued
amortization of the principal balances of the Partnership's mortgage-backed
securities.
Interest income on temporary cash investments decreased for the quarter and
six months ended June 30, 1999, compared to the same period in 1998, due to
withdrawals made from the Partnership's reserves during 1998 to supplement
distributions to BAC Holders.
Operating and administrative expenses decreased $90,530 for the quarter
ended June 30, 1999, compared to the same period in 1998. Approximately $51,000
of such decrease was attributable to the costs incurred during 1998 in
connection with the proposed merger under consideration during such period. The
remaining decrease was due primarily to decreases in salaries and related
expenses and the asset management and partnership administration fee.
Operating and administrative expenses decreased $374,572 for the six months
ended June 30, 1999, compared to the same period in 1998. Approximately $269,000
of such decrease was attributable to the costs incurred during 1998 in
connection with the proposed merger under consideration during such period. The
remaining decrease was due primarily to decreases in salaries and related
expenses and the asset management and partnership administration fee.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by America
First Companies L.L.C., the parent company of its general partners ("America
First"). In addition, the Partnership has business relationships with a number
of third parties whose ability to perform their obligations to the Partnership
depend on such systems and equipment. Some or all of these systems and equipment
may be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000 problem"
with respect to its information technology ("IT") systems, non-IT systems and
third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record-keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation, will be completed by early in the final quarter of 1999.
America First believes any Year 2000 problems relating to its IT systems will be
resolved without significant operational difficulties. However, there can be
60
<PAGE>
no assurance that testing will discover all potential Year 2000 problems or that
it will not reveal unanticipated material problems with the America First IT
systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified as
necessary to America First's ability to conduct the operation of the
Partnership's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by early in the final quarter of 1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could have
a material adverse effect on the Partnership. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loan,
the Partnership's transfer and paying agent and the financial institutions with
which the Partnership maintains accounts. America First has received initial
assurances from certain of these third parties that their ability to perform
their obligations to the Partnership are not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to assess their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000, America
First intends to seek an alternative vendor to the extent practical.
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities is expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loan encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC Holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC Holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problems may make it difficult to conduct necessary accounting and other
record-keeping functions for the Partnership. However, based on currently
available information, the general partners do not believe that there will be
any protracted systemic failures of the IT or non-IT systems utilized by America
First in connection with the operation of the Partnership's business.
61
<PAGE>
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loan, who may experience Year 2000 problems. The Partnership has no specific
contingency plans for dealing with Year 2000 problems experienced with these
third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important factors
upon which the Partnership's Year 2000 forward-looking statements are based
include, but are not limited to, (a) the belief of America First that the
software used in IT systems is already able to correctly read and interpret
dates after December 31, 1999 and will require little or any remediation; (b)
the ability to identify, repair or replace mission critical non-IT equipment in
a timely manner, (c) third parties' remediation of their internal systems to be
Year 2000 ready and their willingness to test their systems interfaces with
those of America First, (d) no third party system failures causing material
disruption of telecommunications, data transmission, payment networks,
government services, utilities or other infrastructure, (e) no unexpected
failures by third parties with which the Partnership has a material business
relationship and (f) no material undiscovered flaws in America First's Year 2000
testing process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Partnership's market risk since
December 31, 1998.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC Holders and others should understand
that these forward-looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward-looking statements contained herein.
62
<PAGE>
CAPITAL SOURCE II L.P.-A
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED) DEC. 31, 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market value..... $ 303,760 $ 432,999
Investment in FHA Loans (Note 4)................................................. 6,488,420 6,505,857
Investment in GNMA Certificates (Note 4)......................................... 20,433,993 20,497,706
Investment in Operating Partnerships (Note 5).................................... -- --
Interest receivable.............................................................. 194,259 195,440
Other assets..................................................................... 79,326 139,204
------------- -------------
$ 27,499,758 $ 27,771,206
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 6)...................................................... $ 135,550 $ 347,446
Distribution payable (Note 3).................................................. 303,871 303,871
------------- -------------
439,421 651,317
------------- -------------
Partners' Capital (Deficit)
General Partner................................................................ (295,854) (295,259)
Beneficial Assignment Certificate Holders
($6.82 per BAC in 1999 and $6.83 in 1998).................................... 27,356,191 27,415,148
------------- -------------
27,060,337 27,119,889
------------- -------------
$ 27,499,758 $ 27,771,206
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE SIX FOR THE SIX
QUARTER ENDED QUARTER ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income................. $ 580,089 $ 616,279 $ 1,161,046 $ 1,237,723
Interest income on temporary cash investments..... 3,340 7,561 7,491 19,317
Other income...................................... -- 1,550 400 2,700
Gain on sale of mortgage-backed securities........ -- 14,565 -- 14,565
-------------- -------------- ------------- -------------
583,429 639,955 1,168,937 1,274,305
Expenses
Operating and administrative expenses (Note 6).... 183,429 273,959 316,875 691,447
-------------- -------------- ------------- -------------
Net income........................................ 400,000 365,996 852,062 582,858
Other comprehensive income:
Unrealized gains on securities
Net unrealized holding gains (losses) arising
during the period............................. -- (7,514) -- (19,391)
Plus: reclassification adjustment for net
(gains) losses included in net income......... (13,498) -- 1,794
-------------- -------------- ------------- -------------
Change in net unrealized holding gains.......... -- (21,012) -- (17,597)
-------------- -------------- ------------- -------------
Net comprehensive income............................ $ 400,000 $ 344,984 $ 852,062 $ 565,261
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Net income allocated to:
General Partners.................................. $ 4,000 $ 3,660 $ 8,521 $ 5,829
Limited Partners.................................. 396,000 362,336 843,541 577,029
-------------- -------------- ------------- -------------
$ 400,000 $ 365,996 $ 852,062 $ 582,858
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Net income, basic and diluted, per BAC.............. $ .10 $ .09 $ .21 $ .15
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
PARTNER BAC HOLDERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1998.......................................... $ (295,259) $ 27,415,148 $ 27,119,889
Net income.......................................................... 8,521 843,541 852,062
Cash distributions paid or accrued (Note 3)......................... (9,116) (902,498) (911,614)
----------- ------------- -------------
Balance at June 30, 1999.............................................. $ (295,854) $ 27,356,191 $ 27,060,337
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income....................................................................... $ 852,062 $ 582,858
Adjustments to reconcile net income to net cash from operating activities
Amortization of discount on mortgage-backed securities....................... (155) (1,037)
Gain on the sale of mortgage-backed securities............................... -- (14,565)
Decrease in interest receivable.............................................. 1,181 6,211
Decrease in other assets..................................................... 59,878 32,516
Decrease in accounts payable................................................. (211,896) (90,496)
------------- -------------
Net cash provided by operating activities.......................................... 701,070 515,487
------------- -------------
Cash flow provided by investing activity
FHA Loan and GNMA Certificate principal payments received........................ 81,305 164,418
Disposition of mortgage-backed securities........................................ -- 374,711
------------- -------------
Net cash provided by investing activities.......................................... 81,305 539,129
------------- -------------
Cash flow used in financing activity
Distributions paid............................................................... (911,614) (1,640,905)
------------- -------------
Net decrease in cash and temporary cash investments................................ (129,239) (586,289)
Cash and temporary cash investments at beginning of period......................... 432,999 1,240,992
------------- -------------
Cash and temporary cash investments at end of period............................... $ 303,760 $ 654,703
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION.
Capital Source II L.P.-A (the "Partnership") was formed on August 22, 1986,
under the Delaware Revised Uniform Limited Partnership Act. The General Partners
of the Partnership are Insured Mortgage Equities II L.P. and America First
Capital Source II, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests in
Operating Partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration ("FHA") or the Government
National Mortgage Association ("GNMA"). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in mortgage-backed
securities. The Operating Partnerships are geographically located as follows:
(i) two in Michigan; and, (ii) one each in Florida and North Carolina.
CS Properties II, Inc., which is owned by the General Partners, serves as
the Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties II, Inc. also serves as a
co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2035.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) FINANCIAL STATEMENT PRESENTATION. The financial statements of the
Partnership are prepared without audit on the accrual basis of accounting in
accordance with generally accepted accounting principles. The financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1998. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at June 30, 1999,
and results of operations for all periods presented have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are
66
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
accounted for using the equity method. The investments by the Partnership in the
Operating Partnerships were recorded at the cost to acquire such interests.
Subsequently, losses were recorded by the Partnership as they were realized by
the Operating Partnerships. The Partnership suspended recognizing losses in the
Operating Partnerships when its entire initial investment had been consumed by
such losses. Subsequently, losses have been recognized only to the extent of
additional contributions, net of distributions received, to the Operating
Partnerships by the Partnership. The Operating Partnerships are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships. With regard to the Operating
Partnerships, the Partnership is not the general partner and it has no legal
obligation to provide additional cash support nor has it indicated any
commitment to provide this support; accordingly, it has not reduced its
investment in these Operating Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since
Beneficial Assignment Certificate ("BAC") Holders are required to report their
share of the Partnership's income for federal and state income tax purposes.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with an original maturity of three months
or less.
(f) NET INCOME PER BAC. Net income per BAC has been calculated based on the
number of BACs outstanding (4,011,101) for all periods presented.
(g) NEW ACCOUNTING PRONOUNCEMENT. On January 1, 1999, the Partnership
adopted Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of SOP 98-5 did not
have an impact on the Partnership's financial statements.
3. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each period and the change in cash distributions accrued at the end of each
period.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal to
3% of all sales proceeds less actual costs incurred in connection with all sales
transactions, payable only after the investors have received a return of their
capital contributions and an 11.5% annual return on a cumulative basis. The
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and an 11.5% annual return on a cumulative
basis.
4. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and a Federal Housing
Administration (FHA) Loan. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans.
67
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
The FHA Loan is guaranteed as to the full and timely payment of principal and
interest on the underlying loan.
At June 30, 1999, all of the Partnership's mortgage-backed securities were
classified as held-to-maturity. The total amortized cost, gross unrealized
holding gains and aggregate fair value of such securities were $26,922,413,
$244,614 and $27,167,027, respectively.
Descriptions of the Partnership's mortgage-backed securities at June 30,
1999, are as follows:
<TABLE>
<CAPTION>
NUMBER
OF INTEREST MATURITY CARRYING
TYPE OF SECURITY AND NAME LOCATION UNITS RATE DATE AMOUNT
- -------------------------------------------- ------------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12-15-2030 $ 10,148,732
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,281,919
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 5,003,342
-------------
20,433,993
-------------
-------------
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 6,488,420
-------------
Balance at June 30, 1999 $ 26,922,413
-------------
-------------
</TABLE>
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1998................................................... $27,003,563
Addition
Amortization of discount on mortgage-backed securities..................... 155
Deduction
FHA Loan and GNMA Certificate principal payments received.................. (81,305)
----------
Balance at June 30, 1999....................................................... $26,922,413
----------
----------
</TABLE>
5. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Investment in Operating Partnerships consist of interests
in limited partnerships which own multifamily properties financed by the GNMA
Certificates and FHA Loan held by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
68
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
Descriptions of the Operating Partnerships held at June 30, 1999, are as
follows:
<TABLE>
<CAPTION>
CARRYING
NAME LOCATION PARTNERSHIP NAME AMOUNT
- ---------------------------------------- ------------------ ---------------------------------------- ---------
<S> <C> <C> <C>
Delta Crossing.......................... Charlotte, NC Delta Crossing Limited Partnership $ --
Crane's Landing......................... Winter Park, FL Crane's Landing Partnership, Ltd. --
Monticello Apartments................... Southfield, MI Centrum Monticello Limited Partnership --
The Ponds at Georgetown................. Ann Arbor, MI Ponds at Georgetown Limited Partnership --
---------
Balance at June 30, 1999................ $
---------
---------
</TABLE>
6. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum, the
first $50,000 of which will be paid each year with the balance payable only
during such years that a 6.5% annual return has been paid to investors on a
noncumulative basis. An additional fee equal to 0.5% of invested assets per
annum will be payable only during those years that an 11.5% annual return has
been paid to investors on a noncumulative basis. Any unpaid amounts will accrue
and be payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. Asset management and partnership administration fees of $12,500
and $25,000 were incurred during the quarter and six months ended June 30, 1999,
respectively.
Substantially all of the Partnership's general and administrative expenses
are paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner for the quarter
and six months ended June 30, 1999 was $128,434 and $253,485, respectively.
These reimbursed expenses are presented on a cash basis and do not reflect
accruals made at quarter end.
An affiliate of the General Partners has been retained to provide property
management services for The Ponds at Georgetown. The fees for services provided
were $10,612 and $21,286 for the quarter and six months ended June 30, 1999,
respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.
7. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
Holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source L.P., a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all
69
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
BAC Holders of the Partnership and Capital Source L.P. The lawsuit alleges,
among other things, that a proposed merger transaction involving the Partnership
and Capital Source L.P. is deficient and coercive, that the defendants have
breached the terms of the Partnership's partnership agreement and that the
defendants have acted in manners which violate their fiduciary duties to the BAC
Holders. The plaintiffs seek to enjoin the proposed merger transaction and to
appoint an independent BAC Holder representative to investigate alternative
transactions. The lawsuit also requests a judicial dissolution of the
Partnership, an accounting, and unspecified damages and costs.
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs in the
action described above, filed an additional complaint against the Partnership,
its general partners and America First in the Delaware Court of Chancery. The
complaint seeks to compel the general partners to supply the plaintiff with a
list of all BAC Holders of the Partnership and copies of the limited partnership
agreements of the Operating Partnerships.
At this time, the general partners are unable to estimate the effect of
either of these lawsuits, if any, on the financial statements of the
Partnership.
70
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999
REGISTRATION NO. 333-52117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PARTNERSHIP SUPPLEMENTS
TO
PRE-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1130
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR
CAPITAL SOURCE L.P.
As described in detail in the accompanying prospectus/consent solicitation
statement, we are proposing a merger of Capital Source L.P. and Capital Source
II L.P.-A, which we refer to as the partnerships, with and into America First
Real Estate Investment Partners, L.P., a newly formed Delaware limited
partnership, which we refer to as the company. We, the general partners of the
partnerships, are soliciting your consent to this transaction. In the
transaction, the company will distribute units of assigned limited partner
interests, and in some situations cash, promissory notes and Variable Rate
Junior Notes Callable on or After the Date of Issuance, or notes, to the
partnerships in exchange for the assets of the partnerships. After the
transaction, you will be a unitholder or noteholder, as the case may be, of the
company and will no longer be a limited partner, or BAC holder, in your
respective partnership. We expect that the units will be listed for trading on
NASDAQ under the symbol "AFREZ". The notes will not be listed for trading.
Through this prospectus/consent solicitation statement and the accompanying
supplements, we are asking you, as a BAC holder, to approve the transaction. BAC
holders holding in excess of 50% in interest of the outstanding BACs of each
partnership must vote "YES" in favor of the transaction on the enclosed consent
form in order for the transaction to be completed.
We have proposed the transaction to enhance the liquidity of your investment
and to increase the cash flow and net asset values of the partnerships. We plan
to accomplish this by listing the company's units on NASDAQ, by leveraging its
assets, by making equity investments primarily in multifamily residential
properties and by actively managing the makeup of its real estate portfolio. We
believe that the proposed transaction permits you to realize the value of your
investment in the partnerships, as opposed to liquidating your partnership or
continuing your partnership unchanged.
We, as the general partners of the partnerships, strongly recommend that you
vote "YES" in favor of the transaction.
THIS TRANSACTION INVOLVES MATERIAL RISKS THAT YOU SHOULD CONSIDER. SEE "RISK
FACTORS" BEGINNING ON PAGE 20 OF THE PROSPECTUS/CONSENT SOLICITATION STATEMENT.
IN PARTICULAR, YOU SHOULD CONSIDER THE FOLLOWING:
- The units may trade at prices below the value of the company's assets and
the $10 per unit price arbitrarily assigned for the sole purpose of
allocating the units in the transaction. We do not expect a public market
for the notes to develop. If the notes are sold, they may sell at prices
substantially below their issuance price.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion.
- An unaffiliated third party has not been retained to represent your
interests in the transaction. Had a representative been retained, they may
have been able to negotiate, on your behalf, more favorable terms for the
transaction and different consideration may have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to our successor may increase.
- There can be no guarantee of the level of the company's future cash
distributions.
- The company is newly formed and has no operating history.
- If you vote "NO" against the transaction, but your partnership approves
it, you do not have any appraisal or other dissenters' rights under
Delaware law and none will be offered in the transaction.
<PAGE>
- There are alternatives to the transaction. By approving the transaction,
you will effectively preclude the pursuit of some of the alternatives.
- The company intends to use debt financing to increase its real estate
asset portfolio. An increase in debt may increase the possibility of
default on the company's obligations. This could affect the company's
ability to pay distributions to you.
- If your partnership approves the transaction, you will be bound even if
you vote "NO" against the transaction.
- If you choose to receive notes, you will not hold an equity interest in
the company and will not be able to participate in the company's growth or
benefit from any increases in the value of the units. The notes are
unsecured obligations of the company and may be redeemed before maturity
at the company's option.
This Supplement has been prepared for you, as a Cap Source I investor, to
discuss the effects and fairness of the transaction with respect to your BACs,
and to provide information on your partnership. The effects of the transaction
may be different for Cap Source I investors than for Cap Source II investors. A
supplement has also been prepared for Cap Source II investors. The supplements
are a part of the prospectus/consent solicitation statement. Capitalized terms
not defined in this supplement shall have the same meaning as those terms have
in the accompanying prospectus/consent solicitation statement.
You or your representatives may obtain a copy of any supplement without
charge by making a request in writing to the general partners of your
partnership. All requests should be directed to America First Investor Services
Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102.
SIMILARITIES BETWEEN CAP SOURCE I AND CAP SOURCE II
The investment objectives and the assets held by the partnerships are
substantially similar in nature and character. Although there are differences in
the geographic area, style of construction and specific locations for each
property owned by the operating partnerships, there are no significant
differences in occupancy rates or property types. All of the properties owned by
the operating partnerships are multifamily apartment complexes. In addition,
ownership of the operating partnership interests in the Ponds at Georgetown
Limited partnership ("The Ponds") is shared by Cap Source I and Cap Source II.
DIFFERENCES BETWEEN CAP SOURCE I AND CAP SOURCE II
Except for The Ponds, each partnership equity interest is unique to the
partnership that holds the interest. The style of construction, specific
location and geographic areas for each property owned by the operating
partnerships are different. Cap Source I has partnership equity interests in
four operating partnerships that have a general partner that is an affiliate of
Cap Source I, which include Waterman's Crossing, Fox Hollow, Misty Springs and
The Ponds. The remaining Cap Source I operating partnerships have general
partners that are not affiliated with Cap Source I. All of the Cap Source II
operating partnerships, except The Ponds, have general partners that are not
affiliated with Cap Source II. See "THE PARTNERSHIPS" in the prospectus/consent
solicitation statement.
Although both partnerships hold a majority of their assets in liquid
investments, the amount of cash and cash equivalents held by each partnership is
different. Cash, cash equivalents and net other assets and liabilities make up
20.4% of Cap Source I's assets, whereas only 1.5% of Cap Source II's assets are
in cash, cash equivalents and net other assets and liabilities.
Distributions for both partnerships are based upon the adjusted BAC value,
which is $20.00 per BAC of original investment, adjusted for returns of capital
to investors. The adjusted BAC value for Cap Source I is $18.35. The adjusted
BAC value for Cap Source II is $12.39.
In 1998, Cap Source I made distributions at the rate of 5.5% of its adjusted
BAC value, which equaled $1.01 per BAC for the year. Cap Source I made
distributions at an annual rate of 5.5% of its adjusted BAC value, which equaled
$.5050 per BAC for the first six months of 1999. Cap Source II made
Cap Source I Supp-2
<PAGE>
distributions at the rate of 5.3% of its adjusted BAC value, which equaled $.66
per BAC for 1998, $.2595 of which was made from reserves. Cap Source II made
distributions at an annual rate of 3.6% of its adjusted BAC value, which equaled
$.2250 per BAC for the first six months of 1999. See "SECONDARY MARKET AND
OWNERSHIP OF PARTNERSHIP BACS--Partnership Distributions" in the
prospectus/consent solicitation statement.
The partnerships have different fee structures for compensating their
general partners. The Cap Source I General Partners are entitled to receive an
asset management and partnership administrative fee equal to 0.5% of invested
assets per annum, payable only during such years that an 8% return has been paid
to investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to Cap Source I investors has been paid
on a cumulative basis and such investors have received the return of their
capital contributions.
The Cap Source II General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, the first $50,000 of which is paid each year with the balance payable
only during such years that a 6.5% annual return has been paid to Cap Source II
investors on a noncumulative basis. An additional fee of 0.5% of invested assets
will be paid in years that an 11.5% annual return has been paid to Cap Source II
investors on a cumulative basis. Any unpaid amounts will accrue and be payable
only after an 11.5% annual return to investors has been paid on a cumulative
basis and the investors have received the return of their capital contributions.
The general partners of both partnerships also receive 1% of the net
proceeds from any sale of partnership assets. The general partners of both
partnerships will receive a termination fee equal to 3% of all sales proceeds
less actual costs incurred in connection with all sales transactions, payable
only after the investors have received a return of their capital contributions
and a 13% annual return on a cumulative basis with respect to Cap Source I or an
11.5% annual return on a cumulative basis with respect to Cap Source II. The
general partners of both partnerships will also receive a fee equal to 9.1% of
all cash available for distribution and sales proceeds, after deducting from
cash available or sales proceeds any termination fee paid therefrom, after
investors have received a return of their capital contributions and a 13% annual
return on a cumulative basis with respect to Cap Source I or an 11.5% annual
return on a cumulative basis with respect to Cap Source II. However, the
difference in this latter fee is not a material difference since neither
partnership has achieved the target level since inception, and the Cap Source
General Partners do not anticipate that this level will be reached in the
foreseeable future.
RISK FACTORS
The transaction does not involve risks which are more significant to Cap
Source I investors than to Cap Source II investors. However, the transaction
involves some risks and other adverse factors which are applicable to both
partnerships. Because all of the risks and adverse factors described in the
prospectus/consent solicitation statement apply to the effects of the
transaction on both partnerships, you should carefully review the section
entitled "RISK FACTORS" in the prospectus/consent solicitation statement. Except
as otherwise stated in this supplement, there are no material differences in the
manner in which Cap Source I or Cap Source II will be effected by any of the
risks or adverse factors discussed in such "RISK FACTORS" section.
For most investors, the transaction will not result in a taxable transaction
except to the extent notes are received in the transaction. For a more detailed
discussion of the tax consequences of the transaction see the sections entitled
"FEDERAL INCOME TAX CONSEQUENCES" below and in the prospectus/consent
solicitation statement.
By participating in the transaction, you will assume risks associated with
the assets of the other partnership, Cap Source II. Although the majority of the
assets in Cap Source II are substantially similar to those of Cap Source I, the
multifamily apartment complexes in which Cap Source II owns limited partnership
interests are of different construction, geographic area and specific location
than
Cap Source I Supp-3
<PAGE>
the complexes in which your partnership owns interests. Because the market for
real estate may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than those
you are presently exposed. For geographic information regarding the
partnerships' properties, see "THE PARTNERSHIPS" in the prospectus/consent
solicitation statement. Moreover, because the properties owned by the
partnerships are not of uniform quality, combining assets and liabilities of the
partnerships in the transaction may diminish the overall asset quality
underlying the investments of some of the investors by comparison with their
existing partnership investment.
The following is a brief description of the potential disadvantages, adverse
consequences and risks of the transaction that is applicable to both
partnerships. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the prospectus/
consent solicitation statement.
- We cannot predict the prices at which the units will trade after the
transaction. The price of the units may decrease after the transaction due
to the potentially large number of units that may be sold immediately by
unitholders. Thus, the units may trade at prices substantially below the
estimated liquidation value of the company's assets and the $10 per unit
price we arbitrarily assigned for the sole purpose of allocating the units
in the transaction.
- We do not expect a public market for the notes to develop. If the notes
are sold, they may sell at prices substantially below their issuance
price. Investors who receive notes are likely to receive the full face
amount of the notes only if they hold the notes to maturity or if the
company repays or refinances the notes at or before maturity. The maturity
date of the notes is approximately eight years after the transaction.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion. We will
receive economic benefits as a result of the transaction. We will hold a
1% interest in the company as its general partner, which continues our 1%
interest in the partnerships. We will also receive management and other
fees from the company as its general partner following the transaction.
See "THE TRANSACTION--Conflicts of Interest and Benefits to Insiders" and
"MANAGEMENT OF THE GENERAL PARTNER" in the prospectus/consent solicitation
statement.
- We did not retain an unaffiliated third party to represent your interests
in the structuring of the transaction. Had we retained a party to
represent your interests, that party may have been able to negotiate, on
your behalf, more favorable terms for the structure of the transaction and
for different consideration to have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to the company's general partner, which will be our
successor, may increase.
- There can be no guarantee of the level of the company's future
distributions. Regardless of the initial level, distributions could
decline in the future so that you may receive distributions that are lower
than the distributions you currently receive as an investor in the
partnerships. The company may also reinvest cash generated by the sale of
existing assets or from operations to acquire additional assets. This
could cause cash distributions to be lower than the distributions made by
the partnerships in some cases.
- The company was recently formed and has no operating history. As a result,
there can be no assurance that any of the company's planned future
activities will be successful.
- If you vote "NO" against the transaction, but your partnership approves
the transaction, you will not be entitled to receive cash based on an
appraisal of your BACs or any other dissenters' rights under Delaware law,
nor will you be given any similar rights in the transaction. You will have
the right to exchange your BACs for notes if you so elect, with some
limitations. See "THE NOTES" in the prospectus/consent solicitation
statement.
Cap Source I Supp-4
<PAGE>
- There are alternatives to the transaction. If you approve the transaction,
you will effectively preclude the pursuit of some of the alternatives. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered" in the prospectus/ consent
solicitation statement.
- The company intends to use debt financing to increase its real estate
asset portfolio. Although the notes will be issued under an indenture that
creates debt limitations, the company's formation documents do not limit
the amount of debt the company may incur. The company will therefore be
more leveraged than either of the partnerships. This use of debt financing
may increase the possibility of default on the company's obligations,
which could adversely affect the company's earnings and its ability to pay
expected distributions to you.
- If the investors holding a majority in interest of the BACs of each
partnership approve the transaction, your partnership will be merged with
and into the company. You will be bound by this approval even if you vote
"NO" against the transaction or abstain from voting.
- The notes are prepayable at any time, unsecured obligations of the company
and, as a practical matter, will be junior to all other debt of the
company. The notes will bear interest at a variable rate that may be lower
than rates on other variable rate debt instruments that may be perceived
as having comparable or lower risks than the notes. If you choose and
receive notes, you will not hold an equity interest in the company and
therefore will not be able to participate in the company's growth or
benefit from any increases in the value of the units.
- The company may be liable for unknown, undisclosed or contingent
liabilities of the partnerships, which could adversely affect the
liquidity of the company and its ability to pay expected distributions to
you.
- If dissenting investors elect to receive notes in excess of the maximum
note limitation, the transaction will not be completed. If this does not
occur, but the total amount of notes allocable to all investors who elect
to receive notes exceeds the maximum note limitation, notes will be
allocated first to dissenting investors who elected to receive notes and
then, on a pro rata basis, to investors who abstained from voting or who
voted "YES" in favor of the transaction. Thus, you could choose notes but
receive units instead. To be assured of receiving notes, you must vote
"NO" with respect to the transaction and elect to receive notes.
For a more detailed discussion of the risks associated with the transaction,
see "RISK FACTORS" in the prospectus/consent solicitation statement.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE TRANSACTION" in the prospectus/consent
solicitation statement. If the transaction is not completed, we do not
contemplate liquidation of the partnerships, which would result in an all-cash
payment to you in the near future. The transaction, however, does not result in
an all-cash payment to you in liquidation of your investment. For example, if
you become a noteholder, you will have exchanged your BACs for unsecured debt
obligations of the company which may not be retired in full until ,
2007, a date approximately eight years after the effective date. On the other
hand, if you exchange your BACs for units, you will receive an equity interest
in the company whose marketability will depend upon the aftermarket that may
develop with respect to the units.
Cap Source I Supp-5
<PAGE>
If the transaction is approved, all transaction costs will be paid by the
partnerships and the company. If the transaction is rejected, the general
partners of each partnership will bear a percentage of all transaction costs,
excluding solicitation/communication costs, equal to the total number of
abstentions and "NO" votes cast by investors in that partnership with respect to
the transaction, divided by the total number of abstentions and votes cast by
investors in that partnership. In such event, the partnerships will bear the
remaining transaction costs. For a more detailed discussion of the transaction
costs see "THE TRANSACTION--Transaction Expenses" in the prospectus/consent
solicitation statement.
EXCHANGE VALUE TABLES
The first table below indicates the exchange value as it relates to the
allocation of units to Cap Source I in connection with the transaction. The
second table shows the calculation of the exchange value assigned to Cap Source
I, which is composed of (a) the principal amount of GNMA certificates and the
FHA loans as shown in the partnership's audited financial statements for the
period ended December 31, 1998, (b) the value of the partnership's limited
partnership interests in the operating partnerships, and (c) the market value of
the partnership's remaining net assets as shown in the partnership's audited
financial statements for the period ended December 31, 1998. See
"--Determination of Exchange Values" below, and the tables entitled "Calculation
Of Exchange Values" and "Net Other Assets and Liabilities Table for
Partnerships" in the prospectus/consent solicitation statement. The third table
shows the specific components of net other assets and liabilities of Cap Source
I.
EXCHANGE VALUE(1)
FOR ALLOCATION OF UNITS TO CAP SOURCE I
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
PER $1,000
ORIGINAL INVESTMENT
------------------------
<S> <C> <C> <C> <C> <C>
INVESTOR TOTAL NUMBER INVESTOR
TOTAL EXCHANGE EXCHANGE OF UNITS TO PERCENT OF TOTAL UNITS EXCHANGE NUMBER OF
VALUE(2) VALUE(3) INVESTORS(4) (EXCHANGE RATIO) VALUE UNITS(5)
- -------------- ------------- ------------- ----------------------- ----------- -----------
$ 47,569,968 $ 47,094,268 4,709,427 60.6% $ 698 69.79
</TABLE>
- ------------
(1) This Exchange Value Table assumes that no notes will be issued.
(2) See the table entitled "Calculation Of Exchange Values" in the
prospectus/consent solicitation statement for a determination of the
Exchange Values for each of the partnerships.
(3) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that we will hold a 1% interest in the company as
its general partner.
(4) The total number of units to be allocated to Cap Source I was calculated by
dividing the Investor Exchange Value assigned to the partnership by $10.
(5) The number of units to be issued per $1,000 original investment was
calculated by dividing the Investor Exchange Value per $1,000 original
investment by $10. No fractional unit will be issued. Each investor who
would otherwise be entitled to a fractional unit will instead receive a cash
payment equal to $10 multiplied by the fraction. See "THE TRANSACTION--No
Fractional Units" in the prospectus/consent solicitation statement.
Cap Source I Supp-6
<PAGE>
CALCULATION OF EXCHANGE VALUES
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP NET OTHER TOTAL
AND MORTGAGE EQUITY ASSETS AND EXCHANGE
LOANS(1) INTERESTS(2) LIABILITIES VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cap Source I........................................... $ 35,023,246 $ 3,194,941 $ 9,351,781 $ 47,569,968
</TABLE>
- ------------
(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balances as of December 31, 1998.
(2) Partnership equity interests are derived by using the value of the
properties as determined by the appraisals using the direct capitalization
approach then deducting 4% of these values to account for the costs of sales
of these properties, then subtracting the current principal balances of the
mortgages, then allocating the remaining proceeds, if any, according to the
limited partnership agreements.
NET OTHER ASSETS AND LIABILITIES TABLE
FOR CAP SOURCE I
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
NET OTHER
CASH & CASH MISC. GNMA ASSETS & DISTRIBUTIONS
EQUIVALENTS CERTIFICATES(1) LIABILITIES(2) PAYABLE TOTAL
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cap Source I............................. $9,304,694 $ 879,182 $ 28,502 $ (860,597) $ 9,351,781
</TABLE>
- ------------
(1) These assets are classified for reporting purposes as "available for sale"
and are therefore reported at fair value.
(2) Generally, interest receivable less accounts payable.
DETERMINATION OF EXCHANGE VALUES
You will receive units or notes based upon an exchange value described
below. If you elect to receive units, you will receive 1.3957 of the company's
units for each Cap Source I BAC you own. The company will not issue any
fractional units. See "THE TRANSACTION--No Fractional Units" in the
prospectus/consent solicitation statement. We determined the exchange values.
The exchange values are based upon (1) the principal amount of GNMA
Certificates and the FHA Loans as shown in the partnership's audited financial
statements for the period ended December 31, 1998, (2) the value of the
partnership's limited partner interests in the operating partnerships, and (3)
the market value of the partnerships' remaining net assets as shown in the
partnerships' audited financial statements for the period ended December 31,
1998.
To determine the value of each partnership's limited partner interest in an
operating partnership, we started with the values provided by Valuation Research
in its appraisal of the operating partnership's properties using the direct
capitalization approach, then deducting 4% of these values to account for the
costs of sales of the properties. See "APPRAISALS" in the prospectus/consent
solicitation statement. The liabilities of the operating partnership, including
amounts required to pay off the insured mortgage on the property and amounts
owed to the general partner of the operating partnership, were then subtracted
from the mean value. The net value after these adjustments was then apportioned
among the general partner and limited partners of the operating partnership
according to each operating partnership's limited partnership agreement. In
valuing the operating partnerships, we did not take into account amounts that
may be payable by some of the operating partnerships to our affiliates that will
be waived if the transaction is completed. See "BENEFITS OF, AND BACKGROUND AND
REASONS FOR, THE TRANSACTION--Reasons for, and Benefits of, the
Transaction--WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL PARTNERS OF AMOUNTS
POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS" in the prospectus/consent
solicitation statement.
Cap Source I Supp-7
<PAGE>
The exchange values were determined as of December 31, 1998. As of the date
of the prospectus/ consent solicitation statement, we did not know of any
material change in the partnerships which would affect the exchange values.
FEDERAL INCOME TAX CONSEQUENCES
The company will not recognize any gain or loss as a result of the
transaction. Cap Source II investors will be required to include in income a
share of income or gain recognized by Cap Source II as a result of the receipt
by Cap Source II of notes or cash, even if the Cap Source II investor receives
units in connection with the transaction. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the Transaction" in the prospectus/consent
solicitation statement. If the maximum amount of notes are issued in connection
with the transaction, the maximum potential gain that Cap Source II could
recognize will be approximately $2 million, or approximately $.50 per Cap Source
II BAC. Cap Source I investors will only recognize gain to the extent the fair
market value of the notes or the amount of cash actually received in the
transaction exceeds the adjusted basis in his or her BACs. The company will be
characterized as a partnership for federal income tax purposes. Therefore, the
company will not be subject to federal income taxation and, instead, each
unitholder is required to take into account his or her share of income,
deductions or loss of the company regardless of whether any cash is distributed.
The character of income to each unitholder will be dependent upon its character
to the company. See "FEDERAL INCOME TAX CONSEQUENCES--Taxation of Unitholders"
in the prospectus/consent solicitation statement. For the purposes of Section
469 of the Code, the company will be deemed a publicly traded partnership.
Therefore, passive income, gain and losses from the company may only be applied
against other items of income, gain or loss from the company.
Income of the company may be generated by debt-financed property. Therefore,
distributions of the company may constitute unrelated business taxable income to
tax-exempt unitholders. See "FEDERAL INCOME TAX CONSEQUENCES--Considerations for
Tax-Exempt Unitholders" and "--Taxation of Unitholders" in the
prospectus/consent solicitation statement.
FAIRNESS
GENERAL. There are no material differences with respect to the fairness of
the transaction to the partnerships, individually, or in the aggregate.
Therefore, the discussion of the fairness of the transaction below is intended
to summarize briefly our belief as to fairness and the material factors on which
our belief is based. In our analysis, we did not assign relative weights to
these factors. For a more detailed discussion of the fairness of the
transaction, see the sections entitled "FAIRNESS" in the prospectus/consent
solicitation statement.
CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We believe the terms of
the transaction are fair as a whole, to the partnerships and to the investors in
each of the partnerships, regardless of whether you receive units or notes.
BASIS FOR CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We have based
our determination as to the fairness of the transaction on the following
material factors: (1) the terms and conditions of the transaction will result in
limited changes to the structure of the partnerships and limited changes to the
business and investment objectives of the partnerships; (2) the opportunity for
you to object to the transaction and the requirement that the transaction be
approved by investors holding a majority in interest of the outstanding BACs of
each partnership; (3) the form and amount of consideration offered to you; (4)
the method of allocating the units and notes among the partnerships in the
transaction and the exchange values used in connection with this allocation; (5)
the fairness opinion dated September 23, 1999, rendered by Sutro & Co., Inc.;
(6) the independent appraisals prepared by Valuation Research Corporation, which
were used in part in the determination of the exchange values; (7) the lack of
material differences with respect to the assets of the partnerships and the
consistent valuation methodology applied to the assets; and (8) the fact that
all investors, including dissenting investors, will be given the opportunity to
elect to receive notes, with some limitations. For a complete discussion of
these factors, see "FAIRNESS" in the prospectus/consent solicitation statement.
Cap Source I Supp-8
<PAGE>
We also considered the potential benefits of the transaction compared to the
alternatives in reaching our conclusion as to the fairness of the transaction.
Some potential benefits include, but are not limited to: (1) enhanced liquidity
resulting from the anticipated listing of the units on NASDAQ; (2) the company's
potential for growth and enhanced access to capital; (3) a capital and operating
structure that will allow the company to respond more efficiently to changing
conditions in the U.S. equity markets, thereby potentially reducing the adverse
effects of such changes; and (4) general and administrative costs savings
resulting from combined operation of the partnerships as a single entity. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION" in the
prospectus/consent solicitation statement.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE CAP SOURCE GENERAL
PARTNERS
The following table compares the cash distributions, fees and reimbursements
we currently receive from the partnerships and the fees that we, as general
partner of the company, would have received from the company had the transaction
occurred before the periods indicated.
COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
CAP SOURCE GENERAL PARTNERS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------- ENDED
1996 1997 1998 JUNE 30, 1999
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL PARTNERS(1)
Capital Source I
1% Share of Cash Distributions............................ $ 34,424 $ 34,424 $ 34,425 $ 17,212
Asset Management and Partnership Administrative Fee....... 0 0 0 0
Reimbursements............................................ 192,896 243,973 319,874 219,421
---------- ---------- ---------- -------------
Subtotal................................................ $ 227,320 $ 278,397 $ 354,299 $ 236,633
---------- ---------- ---------- -------------
Capital Source II
1% Share of Cash Distributions............................ $ 32,818 $ 32,818 $ 26,741 $ 9,116
Asset Management and Partnership Administrative Fee....... 166,000 166,000 50,000 25,000
Reimbursements............................................ 175,922 225,782 266,946 156,888
---------- ---------- ---------- -------------
Subtotal................................................ $ 374,740 $ 424,600 $ 343,687 $ 191,004
---------- ---------- ---------- -------------
Total..................................................... $ 602,060 $ 702,997 $ 697,986 $ 427,637
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
COMPANY--AMOUNTS PAYABLE TO THE GENERAL PARTNER(2)
1% Share of Cash Distributions.............................. $ 67,242 $ 67,242 $ 61,166 $ 26,328
Acquisition Fee............................................. 0 0 0 0
Administrative Fee.......................................... 100,000 100,000 100,000 50,000
Reimbursements.............................................. 368,818 469,755 586,820 376,309
---------- ---------- ---------- -------------
Total..................................................... $ 536,060 $ 636,997 $ 747,986 $ 452,637
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>
- ------------
(1) Calculated based upon the compensation, fees and expenses we are currently
entitled to receive under the Cap Source partnership agreements. For a
description of this structure under the partnership agreements, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE
PARTNERSHIPS" in the prospectus/consent solicitation statement.
Cap Source I Supp-9
<PAGE>
(2) Calculated based upon the compensation, fees and expenses the company's
general partner would have been entitled to receive under the company's
partnership agreement for the periods indicated. For a description of this
structure under the company's partnership agreement, see "COMPARISON OF BACS
AND UNITS--Compensation, Fees and Expenses--THE COMPANY" in the
prospectus/consent solicitation statement.
This increase in our historical reimbursements from 1996 to 1998 is
primarily the result of an increase in salaries and related expenses. Starting
in 1996, additional management time was incurred in exploring various options
available to the partnerships to improve total returns. The historical
reimbursements for Cap Source I for 1996, 1997, 1998 and the six months ended
June 30, 1999, consisted of salaries and benefits of $171,494, $211,324,
$256,101 and $212,817, respectively, board member and consulting fees of
$10,499, $13,934, $38,937 and $0, respectively, and miscellaneous expenses of
$10,903, $18,715, $24,836 and $6,604, respectively. The historical
reimbursements for Cap Source II for 1996, 1997, 1998 and the six months ended
June 30, 1999, consisted of salaries and benefits of $154,576, $192,973,
$223,939 and $152,192, respectively, board member and consulting fees of
$10,499, $13,934, $25,963 and $0, respectively, and miscellaneous expenses of
$10,847, $18,875, $17,044 and $4,696, respectively.
The table above reflects the fact that no acquisition fees would have been
paid to the company during the periods indicated because no new assets were
purchased or permitted to be purchased during those periods. Since the company
will be permitted to acquire new assets, this fee will increase in future years
if the transaction is completed.
The total amounts that would have been paid to us under the company's
partnership agreement would have been higher than the amounts we actually
received during 1998 and the six months ended June 30, 1999, because the general
partner of the company is entitled to an annual base administrative fee of
$100,000. The Cap Source I partnership agreement does not provide for a base
administrative fee, and the Cap Source II partnership agreement provides for a
base asset management and partnership administrative fee of $50,000, which
corresponds to the company's administrative fee. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses" in the prospectus/consent solicitation
statement.
CASH DISTRIBUTIONS TO INVESTORS
The information below should be read in conjunction with the information in
the prospectus/ consent solicitation statement under the captions "SECONDARY
MARKET AND OWNERSHIP OF PARTNERSHIP BACS" and "SELECTED FINANCIAL DATA OF THE
PARTNERSHIPS."
The following table sets forth the distributions paid to investors in Cap
Source I, per $1,000 original investment, for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Distributions from Income.......................... $ 50.50 $ 50.500 $ 47.230 $ 45.214 $ 27.910 $ 21.240
Distributions from Return of Capital............... -- -- 3.270 5.286 22.590 4.010
--------- --------- --------- --------- --------- -----------
Total............................................ $ 50.500 $ 50.500 $ 50.500 $ 50.500 50.500 $ 25.250
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
</TABLE>
Cash from operations, defined in the partnership agreement as disbursable
cash, is distributed to the investors. Any variation in the amount of
distributions from operations is due to fluctuations in net cash from operating
activities. Reference is made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Financial Statement
Supplement to the prospectus/consent solicitation statement for a discussion and
analysis of such fluctuations. Cash proceeds from the sale of property may be
distributed separately to the investors as a return of capital. The adjusted
capital contribution of an investor is generally the investor's initial capital
contribution reduced by the cash distributions to the investor of proceeds from
the sale of
Cap Source I Supp-10
<PAGE>
partnership properties. The adjusted capital contribution per BAC for investors
in Cap Source I, as defined in its partnership agreement, was $18.35 as of June
30, 1999, based on an initial capital contribution of $20 per unit.
See the information in the prospectus/consent solicitation statement under
"SELECTED FINANCIAL DATA OF THE PARTNERSHIPS" for more detailed financial
information with respect to the partnerships and the effects of the transaction.
Cap Source I Supp-11
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR
CAPITAL SOURCE II L.P.-A
As described in detail in the accompanying prospectus/consent solicitation
statement, we are proposing a merger of Capital Source L.P. and Capital Source
II L.P.-A, which we refer to as the partnerships, with and into America First
Real Estate Investment Partners, L.P., a newly formed Delaware limited
partnership, which we refer to as the company. We, the general partners of the
partnerships, are soliciting your consent to this transaction. In the
transaction, the company will distribute units of assigned limited partner
interests, and in some situations cash, promissory notes and Variable Rate
Junior Notes Callable on or After the Date of Issuance, or notes, to the
partnerships in exchange for the assets of the partnerships. After the
transaction, you will be a unitholder or noteholder, as the case may be, of the
company and will no longer be a limited partner, or BAC holder, in your
respective partnership. We expect that the units will be listed for trading on
NASDAQ under the symbol "AFREZ". The notes will not be listed for trading.
Through this prospectus/consent solicitation statement and the accompanying
supplements, we are asking you, as a BAC holder, to approve the transaction. BAC
holders holding in excess of 50% in interest of the outstanding BACs of each
partnership must vote "YES" in favor of the transaction on the enclosed consent
form in order for the transaction to be completed.
We have proposed the transaction to enhance the liquidity of your investment
and to increase the cash flow and net asset values of the partnerships. We plan
to accomplish this by listing the company's units on NASDAQ, by leveraging its
assets, by making equity investments primarily in multifamily residential
properties and by actively managing the makeup of its real estate portfolio. We
believe that the proposed transaction permits you to realize the value of your
investment in the partnerships, as opposed to liquidating your partnership or
continuing your partnership unchanged.
We, as the general partners of the partnerships, strongly recommend that you
vote "YES" in favor of the transaction.
THIS TRANSACTION INVOLVES MATERIAL RISKS THAT YOU SHOULD CONSIDER. SEE "RISK
FACTORS" BEGINNING ON PAGE 20 OF THE PROSPECTUS/CONSENT SOLICITATION STATEMENT.
IN PARTICULAR, YOU SHOULD CONSIDER THE FOLLOWING:
- The units may trade at prices below the value of the company's assets and
the $10 per unit price arbitrarily assigned for the sole purpose of
allocating the units in the transaction. We do not expect a public market
for the notes to develop. If the notes are sold, they may sell at prices
substantially below their issuance price.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion.
- An unaffiliated third party has not been retained to represent your
interests in the transaction. Had a representative been retained, they may
have been able to negotiate, on your behalf, more favorable terms for the
transaction and different consideration may have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to our successor may increase.
- There can be no guarantee of the level of the company's future cash
distributions.
- The company is newly formed and has no operating history.
- If you vote "NO" against the transaction, but your partnership approves
it, you do not have any appraisal or other dissenters' rights under
Delaware law and none will be offered in the transaction.
<PAGE>
- There are alternatives to the transaction. By approving the transaction,
you will effectively preclude the pursuit of some of the alternatives.
- The company intends to use debt financing to increase its real estate
asset portfolio. An increase in debt may increase the possibility of
default on the company's obligations. This could affect the company's
ability to pay distributions to you.
- If your partnership approves the transaction, you will be bound even if
you vote "NO" against the transaction.
- If you choose to receive notes, you will not hold an equity interest in
the company and will not be able to participate in the company's growth or
benefit from any increases in the value of the units. The notes are
unsecured obligations of the company and may be redeemed before maturity
at the company's option.
This Supplement has been prepared for you, as a Cap Source II investor, to
discuss the effects and fairness of the transaction with respect to your BACs,
and to provide information on your partnership. The effects of the transaction
may be different for Cap Source I investors than for Cap Source II investors. A
supplement has also been prepared for Cap Source I investors. The supplements
are a part of the prospectus/consent solicitation statement. Capitalized terms
not defined in this supplement shall have the same meaning as those terms have
in the accompanying prospectus/consent solicitation statement.
You or your representatives may obtain a copy of any supplement without
charge by making a request in writing to the general partners of your
partnership. All requests should be directed to America First Investor Services
Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102.
SIMILARITIES BETWEEN CAP SOURCE I AND CAP SOURCE II
The investment objectives and the assets held by the partnerships are
substantially similar in nature and character. Although there are differences in
the geographic area, style of construction and specific locations for each
property owned by the operating partnerships, there are no significant
differences in occupancy rates or property types. All of the properties owned by
the operating partnerships are multifamily apartment complexes. In addition,
ownership of the operating partnership interests in the Ponds at Georgetown
Limited partnership ("The Ponds") is shared by Cap Source I and Cap Source II.
DIFFERENCES BETWEEN CAP SOURCE I AND CAP SOURCE II
Except for The Ponds, each partnership equity interest is unique to the
partnership that holds the interest. The style of construction, specific
location and geographic areas for each property owned by the operating
partnerships are different. Cap Source I has partnership equity interests in
four operating partnerships that have a general partner that is an affiliate of
Cap Source I, which include Waterman's Crossing, Fox Hollow, Misty Springs and
The Ponds. The remaining Cap Source I operating partnerships have general
partners that are not affiliated with Cap Source I. All of the Cap Source II
operating partnerships, except The Ponds, have general partners that are not
affiliated with Cap Source II. See "THE PARTNERSHIPS" in the prospectus/consent
solicitation statement.
Although both partnerships hold a majority of their assets in liquid
investments, the amount of cash and cash equivalents held by each partnership is
different. Cash, cash equivalents and net other assets and liabilities make up
20.4% of Cap Source I's assets, whereas only 1.5% of Cap Source II's assets are
in cash, cash equivalents and net other assets and liabilities.
Distributions for both partnerships are based upon the adjusted BAC value,
which is $20.00 per BAC of original investment, adjusted for returns of capital
to investors. The adjusted BAC value for Cap Source I is $18.35. The adjusted
BAC value for Cap Source II is $12.39.
In 1998, Cap Source I made distributions at the rate of 5.5% of its adjusted
BAC value, which equaled $1.01 per BAC for the year. Cap Source I made
distributions at an annual rate of 5.5% of its adjusted BAC value, which equaled
$.5050 per BAC for the first six months of 1999. Cap Source II
Cap Source II Supp-2
<PAGE>
made distributions at the rate of 5.3% of its adjusted BAC value, which equaled
$.66 per BAC for 1998, $.2595 of which was made from reserves. Cap Source II
made distributions at an annual rate of 3.6% of its adjusted BAC value, which
equaled $.2250 per BAC for the first six months of 1999. See "SECONDARY MARKET
AND OWNERSHIP OF PARTNERSHIP BACS--Partnership Distributions" in the
prospectus/consent solicitation statement.
The partnerships have different fee structures for compensating their
general partners. The Cap Source I General Partners are entitled to receive an
asset management and partnership administrative fee equal to 0.5% of invested
assets per annum, payable only during such years that an 8% return has been paid
to investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to Cap Source I investors has been paid
on a cumulative basis and such investors have received the return of their
capital contributions.
The Cap Source II General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, the first $50,000 of which is paid each year with the balance payable
only during such years that a 6.5% annual return has been paid to Cap Source II
investors on a noncumulative basis. An additional fee of 0.5% of invested assets
will be paid in years that an 11.5% annual return has been paid to Cap Source II
investors on a cumulative basis. Any unpaid amounts will accrue and be payable
only after an 11.5% annual return to investors has been paid on a cumulative
basis and the investors have received the return of their capital contributions.
The general partners of both partnerships also receive 1% of the net
proceeds from any sale of partnership assets. The general partners of both
partnerships will receive a termination fee equal to 3% of all sales proceeds
less actual costs incurred in connection with all sales transactions, payable
only after the investors have received a return of their capital contributions
and a 13% annual return on a cumulative basis with respect to Cap Source I or an
11.5% annual return on a cumulative basis with respect to Cap Source II. The
general partners of both partnerships will also receive a fee equal to 9.1% of
all cash available for distribution and sales proceeds, after deducting from
cash available or sales proceeds any termination fee paid therefrom, after
investors have received a return of their capital contributions and a 13% annual
return on a cumulative basis with respect to Cap Source I or an 11.5% annual
return on a cumulative basis with respect to Cap Source II. However, the
difference in this latter fee is not a material difference since neither
partnership has achieved the target level since inception, and the Cap Source
General Partners do not anticipate that this level will be reached in the
foreseeable future.
RISK FACTORS
The transaction does not involve risks which are more significant to Cap
Source II investors than to Cap Source I investors. However, the transaction
involves some risks and other adverse factors which are applicable to both
partnerships. Because all of the risks and adverse factors described in the
prospectus/consent solicitation statement apply to the effects of the
transaction on both partnerships, you should carefully review the section
entitled "RISK FACTORS" in the prospectus/consent solicitation statement. Except
as otherwise stated in this supplement, there are no material differences in the
manner in which Cap Source I or Cap Source II will be effected by any of the
risks or adverse factors discussed in such "RISK FACTORS" section.
For most investors, the transaction will not result in a taxable transaction
except to the extent notes are received in the transaction. For a more detailed
discussion of the tax consequences of the transaction see the sections entitled
"FEDERAL INCOME TAX CONSEQUENCES" below and in the prospectus/consent
solicitation statement.
By participating in the transaction, you will assume risks associated with
the assets of the other partnership, Cap Source I. Although the majority of the
assets in Cap Source I are substantially similar to those of Cap Source II, the
multifamily apartment complexes in which Cap Source I owns limited
Cap Source II Supp-3
<PAGE>
partnership interests are of different construction, geographic area and
specific location than the complexes in which your partnership owns interests.
Because the market for real estate may vary from one region of the country to
another, the change in geographic diversity may expose you to different and
greater risks than those you are presently exposed. For geographic information
regarding the partnerships' properties, see "THE PARTNERSHIPS" in the
prospectus/consent solicitation statement. Moreover, because the properties
owned by the partnerships are not of uniform quality, combining assets and
liabilities of the partnerships in the transaction may diminish the overall
asset quality underlying the investments of some of the investors by comparison
with their existing partnership investment.
The following is a brief description of the potential disadvantages, adverse
consequences and risks of the transaction that is applicable to both
partnerships. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the prospectus/
consent solicitation statement.
- We cannot predict the prices at which the units will trade after the
transaction. The price of the units may decrease after the transaction due
to the potentially large number of units that may be sold immediately by
unitholders. Thus, the units may trade at prices substantially below the
estimated liquidation value of the company's assets and the $10 per unit
price we arbitrarily assigned for the sole purpose of allocating the units
in the transaction.
- We do not expect a public market for the notes to develop. If the notes
are sold, they may sell at prices substantially below their issuance
price. Investors who receive notes are likely to receive the full face
amount of the notes only if they hold the notes to maturity or if the
company repays or refinances the notes at or before maturity. The maturity
date of the notes is approximately eight years after the transaction.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion. We will
receive economic benefits as a result of the transaction. We will hold a
1% interest in the company as its general partner, which continues our 1%
interest in the partnerships. We will also receive management and other
fees from the company as its general partner following the transaction.
See "THE TRANSACTION--Conflicts of Interest and Benefits to Insiders" and
"MANAGEMENT OF THE GENERAL PARTNER" in the prospectus/consent solicitation
statement.
- We did not retain an unaffiliated third party to represent your interests
in the structuring of the transaction. Had we retained a party to
represent your interests, that party may have been able to negotiate, on
your behalf, more favorable terms for the structure of the transaction and
for different consideration to have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to the company's general partner, which will be our
successor, may increase.
- There can be no guarantee of the level of the company's future
distributions. Regardless of the initial level, distributions could
decline in the future so that you may receive distributions that are lower
than the distributions you currently receive as an investor in the
partnerships. The company may also reinvest cash generated by the sale of
existing assets or from operations to acquire additional assets. This
could cause cash distributions to be lower than the distributions made by
the partnerships in some cases.
- The company was recently formed and has no operating history. As a result,
there can be no assurance that any of the company's planned future
activities will be successful.
- If you vote "NO" against the transaction, but your partnership approves
the transaction, you will not be entitled to receive cash based on an
appraisal of your BACs or any other dissenters' rights under Delaware law,
nor will you be given any similar rights in the transaction. You will have
the right to exchange your BACs for notes if you so elect, with some
limitations. See "THE NOTES" in the prospectus/consent solicitation
statement.
Cap Source II Supp-4
<PAGE>
- There are alternatives to the transaction. If you approve the transaction,
you will effectively preclude the pursuit of some of the alternatives. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered" in the prospectus/ consent
solicitation statement.
- The company intends to use debt financing to increase its real estate
asset portfolio. Although the notes will be issued under an indenture that
creates debt limitations, the company's formation documents do not limit
the amount of debt the company may incur. The company will therefore be
more leveraged than either of the partnerships. This use of debt financing
may increase the possibility of default on the company's obligations,
which could adversely affect the company's earnings and its ability to pay
expected distributions to you.
- If the investors holding a majority in interest of the BACs of each
partnership approve the transaction, your partnership will be merged with
and into the company. You will be bound by this approval even if you vote
"NO" against the transaction or abstain from voting.
- The notes are prepayable at any time, unsecured obligations of the company
and, as a practical matter, will be junior to all other debt of the
company. The notes will bear interest at a variable rate that may be lower
than rates on other variable rate debt instruments that may be perceived
as having comparable or lower risks than the notes. If you choose and
receive notes, you will not hold an equity interest in the company and
therefore will not be able to participate in the company's growth or
benefit from any increases in the value of the units.
- The company may be liable for unknown, undisclosed or contingent
liabilities of the partnerships, which could adversely affect the
liquidity of the company and its ability to pay expected distributions to
you.
- If dissenting investors elect to receive notes in excess of the maximum
note limitation, the transaction will not be completed. If this does not
occur, but the total amount of notes allocable to all investors who elect
to receive notes exceeds the maximum note limitation, notes will be
allocated first to dissenting investors who elected to receive notes and
then, on a pro rata basis, to investors who abstained from voting or who
voted "YES" in favor of the transaction. Thus, you could choose notes but
receive units instead. To be assured of receiving notes, you must vote
"NO" with respect to the transaction and elect to receive notes.
For a more detailed discussion of the risks associated with the transaction,
see "RISK FACTORS" in the prospectus/consent solicitation statement.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE TRANSACTION" in the prospectus/consent
solicitation statement. If the transaction is not completed, we do not
contemplate liquidation of the partnerships, which would result in an all-cash
payment to you in the near future. The transaction, however, does not result in
an all-cash payment to you in liquidation of your investment. For example, if
you become a noteholder, you will have exchanged your BACs for unsecured debt
obligations of the company which may not be retired in full until , 2007,
a date approximately eight years after the effective date. On the other hand, if
you exchange your BACs for units, you will receive an equity interest in the
company whose marketability will depend upon the aftermarket that may develop
with respect to the units.
Cap Source II Supp-5
<PAGE>
If the transaction is approved, all transaction costs will be paid by the
partnerships and the company. If the transaction is rejected, the general
partners of each partnership will bear a percentage of all transaction costs,
excluding solicitation/communication costs, equal to the total number of
abstentions and "NO" votes cast by investors in that partnership with respect to
the transaction, divided by the total number of abstentions and votes cast by
investors in that partnership. In such event, the partnerships will bear the
remaining transaction costs. For a more detailed discussion of the transaction
costs see "THE TRANSACTION--Transaction Expenses" in the prospectus/consent
solicitation statement.
EXCHANGE VALUE TABLES
The first table below indicates the exchange value as it relates to the
allocation of units to Cap Source II in connection with the transaction. The
second table shows the calculation of the exchange value assigned to Cap Source
II, which is composed of (a) the principal amount of GNMA certificates and the
FHA loans as shown in the partnership's audited financial statements for the
period ended December 31, 1998, (b) the value of the partnership's limited
partnership interests in the operating partnerships, and (c) the market value of
the partnership's remaining net assets as shown in the partnership's audited
financial statements for the period ended December 31, 1998. See
"--Determination of Exchange Values" below, and the tables entitled "Calculation
Of Exchange Values" and "Net Other Assets and Liabilities Table for
Partnerships" in the prospectus/consent solicitation statement. The third table
shows the specific components of net other assets and liabilities of Cap Source
II.
EXCHANGE VALUE(1)
FOR ALLOCATION OF UNITS TO CAP SOURCE II
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
PER $1,000
ORIGINAL INVESTMENT
------------------------
<S> <C> <C> <C> <C> <C>
INVESTOR TOTAL NUMBER INVESTOR
TOTAL EXCHANGE EXCHANGE OF UNITS TO PERCENT OF TOTAL UNITS EXCHANGE NUMBER OF
VALUE(2) VALUE(3) INVESTORS(4) (EXCHANGE RATIO) VALUE UNITS(5)
- -------------- ------------- ------------- ----------------------- ----------- -----------
3$0,872,167... $ 30,563,445 3,056,345 39.4% $ 381 38.10
</TABLE>
- ------------
(1) This Exchange Value Table assumes that no notes will be issued.
(2) See the table entitled "Calculation Of Exchange Values" in the
prospectus/consent solicitation statement for a determination of the
Exchange Values for each of the partnerships.
(3) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that we will hold a 1% interest in the company as
its general partner.
(4) The total number of units to be allocated to Cap Source II was calculated by
dividing the Investor Exchange Value assigned to the partnership by $10.
(5) The number of units to be issued per $1,000 original investment was
calculated by dividing the Investor Exchange Value per $1,000 original
investment by $10. No fractional unit will be issued. Each investor who
would otherwise be entitled to a fractional unit will instead receive a cash
payment equal to $10 multiplied by the fraction. See "THE TRANSACTION--No
Fractional Units" in the prospectus/consent solicitation statement.
Cap Source II Supp-6
<PAGE>
CALCULATION OF EXCHANGE VALUES
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP NET OTHER TOTAL
AND MORTGAGE EQUITY ASSETS AND EXCHANGE
LOANS(1) INTERESTS(2) LIABILITIES VALUE
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Cap Source II............................................ $ 27,044,343 $ 3,809,948 $ 17,876 $ 30,872,167
</TABLE>
- ------------
(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balances as of December 31, 1998.
(2) Partnership equity interests are derived by using the value of the
properties as determined by the appraisals using the direct capitalization
approach then deducting 4% of these values to account for the costs of sales
of these properties, then subtracting the current principal balances of the
mortgages, then allocating the remaining proceeds, if any, according to the
limited partnership agreements.
NET OTHER ASSETS AND LIABILITIES TABLE
FOR CAP SOURCE II
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
NET OTHER
CASH & CASH MISC. GNMA ASSETS & DISTRIBUTIONS
EQUIVALENTS CERTIFICATES(1) LIABILITIES(2) PAYABLE TOTAL
------------ ------------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Cap Source II............................... $ 432,999 $ 0 $ (111,252) $ (303,871) $ 17,876
</TABLE>
- ------------
(1) These assets are classified for reporting purposes as "available for sale"
and are therefore reported at fair value.
(2) Generally, interest receivable less accounts payable.
DETERMINATION OF EXCHANGE VALUES
You will receive units or notes based upon an exchange value described
below. If you elect to receive units, you will receive 0.7620 of the company's
units for each Cap Source II BAC you own. The company will not issue any
fractional units. See "THE TRANSACTION--No Fractional Units" in the
prospectus/consent solicitation statement. We determined the exchange values.
The exchange values are based upon (1) the principal amount of GNMA
Certificates and the FHA Loans as shown in the partnership's audited financial
statements for the period ended December 31, 1998, (2) the value of the
partnership's limited partner interests in the operating partnerships, and (3)
the market value of the partnerships' remaining net assets as shown in the
partnerships' audited financial statements for the period ended December 31,
1998.
To determine the value of each partnership's limited partner interest in an
operating partnership, we started with the values provided by Valuation Research
in its appraisal of the operating partnership's properties using the direct
capitalization approach, then deducting 4% of these values to account for the
costs of sales of the properties. See "APPRAISALS" in the prospectus/consent
solicitation statement. The liabilities of the operating partnership, including
amounts required to pay off the insured mortgage on the property and amounts
owed to the general partner of the operating partnership, were then subtracted
from the mean value. The net value after these adjustments was then apportioned
among the general partner and limited partners of the operating partnership
according to each operating partnership's limited partnership agreement. In
valuing the operating partnerships, we did not take into account amounts that
may be payable by some of the operating partnerships to our affiliates that will
be waived if the transaction is completed. See "BENEFITS OF, AND BACKGROUND AND
REASONS FOR, THE TRANSACTION--Reasons for, and Benefits of, the
Transaction--WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL PARTNERS OF AMOUNTS
POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS" in the prospectus/consent
solicitation statement.
Cap Source II Supp-7
<PAGE>
The exchange values were determined as of December 31, 1998. As of the date
of the prospectus/ consent solicitation statement, we did not know of any
material change in the partnerships which would affect the exchange values.
FEDERAL INCOME TAX CONSEQUENCES
The company will not recognize any gain or loss as a result of the
transaction. Cap Source II investors will be required to include in income a
share of income or gain recognized by Cap Source II as a result of the receipt
by Cap Source II of notes or cash, even if the Cap Source II investor receives
units in connection with the transaction. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the Transaction" in the prospectus/consent
solicitation statement. If the maximum amount of notes are issued in connection
with the transaction, the maximum potential gain that Cap Source II could
recognize will be approximately $2 million, or approximately $.50 per Cap Source
II BAC. Cap Source I investors will only recognize gain to the extent the fair
market value of the notes or the amount of cash actually received in the
transaction exceeds the adjusted basis in his or her BACs. The company will be
characterized as a partnership for federal income tax purposes. Therefore, the
company will not be subject to federal income taxation and, instead, each
unitholder is required to take into account his or her share of income,
deductions or loss of the company regardless of whether any cash is distributed.
The character of income to each unitholder will be dependent upon its character
to the company. See "FEDERAL INCOME TAX CONSEQUENCES--Taxation of Unitholders"
in the prospectus/consent solicitation statement. For the purposes of Section
469 of the Code, the company will be deemed a publicly traded partnership.
Therefore, passive income, gain and losses from the company may only be applied
against other items of income, gain or loss from the company.
Income of the company may be generated by debt-financed property. Therefore,
distributions of the company may constitute unrelated business taxable income to
tax-exempt unitholders. See "FEDERAL INCOME TAX CONSEQUENCES--Considerations for
Tax-Exempt Unitholders" and "--Taxation of Unitholders" in the
prospectus/consent solicitation statement.
FAIRNESS
GENERAL. There are no material differences with respect to the fairness of
the transaction to the partnerships, individually, or in the aggregate.
Therefore, the discussion of the fairness of the transaction below is intended
to summarize briefly our belief as to fairness and the material factors on which
our belief is based. In our analysis, we did not assign relative weights to
these factors. For a more detailed discussion of the fairness of the
transaction, see the sections entitled "FAIRNESS" in the prospectus/consent
solicitation statement.
CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We believe the terms of
the transaction are fair as a whole, to the partnerships and to the investors in
each of the partnerships, regardless of whether you receive units or notes.
BASIS FOR CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We have based
our determination as to the fairness of the transaction on the following
material factors: (1) the terms and conditions of the transaction will result in
limited changes to the structure of the partnerships and limited changes to the
business and investment objectives of the partnerships; (2) the opportunity for
you to object to the transaction and the requirement that the transaction be
approved by investors holding a majority in interest of the outstanding BACs of
each partnership; (3) the form and amount of consideration offered to you; (4)
the method of allocating the units and notes among the partnerships in the
transaction and the exchange values used in connection with this allocation; (5)
the fairness opinion dated September 23, 1999, rendered by Sutro & Co., Inc.;
(6) the independent appraisals prepared by Valuation Research Corporation, which
were used in part in the determination of the exchange values; (7) the lack of
material differences with respect to the assets of the partnerships and the
consistent valuation methodology applied to the assets; and (8) the fact that
all investors, including dissenting investors, will be given the opportunity to
elect to receive notes, with some limitations. For a complete discussion of
these factors, see "FAIRNESS" in the prospectus/consent solicitation statement.
Cap Source II Supp-8
<PAGE>
We also considered the potential benefits of the transaction compared to the
alternatives in reaching our conclusion as to the fairness of the transaction.
Some potential benefits include, but are not limited to: (1) enhanced liquidity
resulting from the anticipated listing of the units on NASDAQ; (2) the company's
potential for growth and enhanced access to capital; (3) a capital and operating
structure that will allow the company to respond more efficiently to changing
conditions in the U.S. equity markets, thereby potentially reducing the adverse
effects of such changes; and (4) general and administrative costs savings
resulting from combined operation of the partnerships as a single entity. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION" in the
prospectus/consent solicitation statement.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE CAP SOURCE GENERAL
PARTNERS
The following table compares the cash distributions, fees and reimbursements
we currently receive from the partnerships and the fees that we, as general
partner of the company, would have received from the company had the transaction
occurred before the periods indicated.
COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
CAP SOURCE GENERAL PARTNERS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------- ENDED
1996 1997 1998 JUNE 30, 1999
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL PARTNERS(1)
Capital Source I
1% Share of Cash Distributions........................... $ 34,424 $ 34,424 $ 34,425 $ 17,212
Asset Management and Partnership Administrative Fee...... 0 0 0 0
Reimbursements........................................... 192,896 243,973 319,874 219,421
---------- ---------- ---------- --------------
Subtotal............................................... $ 227,320 $ 278,397 $ 354,299 $ 236,633
Capital Source II
1% Share of Cash Distributions........................... $ 32,818 $ 32,818 $ 26,741 $ 9,116
Asset Management and Partnership Administrative Fee...... 166,000 166,000 50,000 25,000
Reimbursements........................................... 175,922 225,782 266,946 156,888
---------- ---------- ---------- --------------
Subtotal............................................... $ 374,740 $ 424,600 $ 343,687 $ 191,004
---------- ---------- ---------- --------------
Total...................................................... $ 602,060 $ 702,997 $ 697,986 $ 427,637
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
COMPANY--AMOUNTS PAYABLE TO THE GENERAL PARTNER(2)
1% Share of Cash Distributions............................. $ 67,242 $ 67,242 $ 61,166 $ 26,328
Acquisition Fee............................................ 0 0 0 0
Administrative Fee......................................... 100,000 100,000 100,000 50,000
Reimbursements............................................. 368,818 469,755 586,820 376,309
---------- ---------- ---------- --------------
Total.................................................... $ 536,060 $ 636,997 $ 747,986 $ 452,637
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
</TABLE>
- ------------
(1) Calculated based upon the compensation, fees and expenses we are currently
entitled to receive under the Cap Source partnership agreements. For a
description of this structure under the partnership agreements, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE
PARTNERSHIPS" in the prospectus/consent solicitation statement.
Cap Source II Supp-9
<PAGE>
(2) Calculated based upon the compensation, fees and expenses the company's
general partner would have been entitled to receive under the company's
partnership agreement for the periods indicated. For a description of this
structure under the company's partnership agreement, see "COMPARISON OF BACS
AND UNITS--Compensation, Fees and Expenses--THE COMPANY" in the
prospectus/consent solicitation statement.
The increase in our historical reimbursements from 1996 to 1998 is primarily
the result of an increase in salaries and related expenses. Starting in 1996,
additional management time was incurred in exploring various options available
to the partnerships to improve total returns. The historical reimbursements for
Cap Source I for 1996, 1997, 1998 and the six months ended June 30, 1999,
consisted of salaries and benefits of $171,494, $211,324, $256,101 and $212,817,
respectively, board member and consulting fees of $10,499, $13,934, $38,937 and
$0, respectively, and miscellaneous expenses of $10,903, $18,715, $24,836 and
$6,604, respectively. The historical reimbursements for Cap Source II for 1996,
1997, 1998 and the six months ended June 30, 1999, consisted of salaries and
benefits of $154,576, $192,973, $223,939 and $152,192, respectively, board
member and consulting fees of $10,499, $13,934, $25,963 and $0, respectively,
and miscellaneous expenses of $10,847, $18,875, $17,044 and $4,696,
respectively.
The table above reflects that no acquisition fees would have been paid to
the company during the periods indicated because no new assets were purchased
during those periods. Since the company will be permitted to acquire new assets,
this fee will increase in future years if the transaction is completed.
The total amounts that would have been paid to us under the company's
partnership agreement would have been higher than the amounts we actually
received during 1998 and the six months ended June 30, 1999, because the general
partner of the company is entitled to an annual base administrative fee of
$100,000. The Cap Source I partnership agreement does not provide for a base
administrative fee, and the Cap Source II partnership agreement provides for a
base asset management and partnership administrative fee of $50,000, which
corresponds to the company's administrative fee. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses" in the prospectus/consent solicitation
statement.
CASH DISTRIBUTIONS TO INVESTORS
The information below should be read in conjunction with the information in
the prospectus/ consent solicitation statement under the captions "SECONDARY
MARKET AND OWNERSHIP OF PARTNERSHIP BACS" and "SELECTED FINANCIAL DATA OF THE
PARTNERSHIPS."
The following table sets forth the distributions paid to investors in Cap
Source II, per $1,000 original investment, for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Distributions from Income.............................. $ 25.196 $ 27.089 $ 26.465 $ 20.410 $ 10.875 $ 10.515
Distributions from Return of Capital................... 15.304 13.411 14.035 20.090 22.125 0.735
--------- --------- --------- --------- --------- -----------
Total................................................ $ 40.500 $ 40.500 $ 40.500 $ 40.500 $ 33.000 $ 11.250
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
</TABLE>
Cash from operations, defined in the partnership agreement as disbursable
cash, is distributed to the investors. Any variation in the amount of
distributions from operations is due to fluctuations in net cash from operating
activities. Reference is made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Financial Statement
Supplement to the prospectus/consent solicitation statement for a discussion and
analysis of such fluctuations. Cash proceeds from the sale of property may be
distributed separately to the investors as a return of capital. The adjusted
capital contribution of an investor is generally the investor's initial capital
contribution reduced by the cash distributions to the investor of proceeds from
the sale of partnership properties. The adjusted capital contribution per BAC
for investors in Cap Source II, as
Cap Source II Supp-10
<PAGE>
defined in its partnership agreement, was $12.39 as of June 30, 1999, based on
an initial capital contribution of $20 per unit.
See the information in the prospectus/consent solicitation statement under
"SELECTED FINANCIAL DATA OF THE PARTNERSHIPS" for more detailed financial
information with respect to the partnerships and the effects of the transaction.
Cap Source II Supp-11
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS/CONSENT
SOLICITATION STATEMENT
ITEM 20. INDEMNIFICATION
The Delaware Revised Uniform Limited Partnership Act provides that a limited
partnership may indemnify and hold harmless any partner or other person from and
against any and all claims and demands whatsoever, subject to any limitations
contained in its limited partnership agreement. The company's limited
partnership agreement provides generally that the general partner is indemnified
from losses, liabilities or damages relating to acts performed or omitted to be
performed in good faith and in the best interests of the company, provided the
conduct did not constitute fraud, gross negligence, willful misconduct, breach
of a fiduciary duty or a breach of obligations under the company's limited
partnership agreement. Such indemnification also includes expenses and
attorney's fees, which expenses and fees may be advanced as incurred.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of exhibits filed as part of the
Registration Statement. For electronic filing purposes only, this registration
statement contains Exhibit 27.1, the Financial Data Schedule. Exhibit numbers
correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.01 Form of Agreement and Plan of Merger to be entered into by and among the partnerships and the company
is incorporated herein by reference to Appendix A to the Prospectus/ Consent Solicitation Statement.
3.01 Certificate of Limited Partnership of the company.(1)
3.02 Limited Partnership Agreement of the company.(1)
3.03 Form of Amended and Restated Limited Partnership Agreement of the company is incorporated herein by
reference to Appendix D to the Prospectus/Consent Solicitation Statement.
3.04 Limited Partnership Agreement and Amended Certificate of Limited Partnership of Capital Source
L.P.(1)
3.05 Limited Partnership Agreement and Amended Certificate of Limited Partnership of Capital Source II
L.P.-A.(1)
3.06 Amended Certificate of Limited Partnership of Capital Source L.P.(1)
3.07 Amended Certificate of Limited Partnership of Capital Source II L.P.-A(1)
3.08 Amendment to Limited Partnership Agreement of Capital Source L.P.(1)
3.09 Amendment to Limited Partnership Agreement of Capital Source II L.P.-A.(1)
4.01 The Certificate of Limited Partnership and Amended and Restated Agreement of Limited Partnership of
the company included as Exhibits 3.01 and 3.03 are incorporated herein by reference.
4.02 Form of indenture between the company and the trustee relating to the notes being registered pursuant
to this Registration Statement, including the form of Variable Rate Junior Notes Callable On or After
the Date of Issuance and the form of promissory notes.(1)
4.03 Form of Units Certificate of the company.(2)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.04 Form of Variable Rate Junior Notes Callable On or After the Date of Issuance and Promissory Notes of
the company are included in Exhibit 4.02.
5.01 Opinion of Kutak Rock as to the legality of the units and the validity of the notes.(2)
8.01 Opinion of Kutak Rock as to certain tax matters.(2)
12.01 Ratio of Earnings to Fixed Charges.(2)
23.01 Consents of Independent Accountants.(2)
23.02 Consent of Kutak Rock (included in Exhibits 5.01 and 8.01).
23.03 Consent of Valuation Research Corporation to being named in the Registration Statement.(1)
23.04 Consent of Sutro & Co., Inc. to being named in the Registration Statement.(2)
24.01 The Power of Attorney, included on Page II-4 of the Registration Statement filed on July 21, 1999, is
incorporated herein by reference.
25.01 Statement of Eligibility of Trustee.(1)
27.01 Financial Data Schedule of the Company.(1)
99.01 Market Value Report of Valuation Research Corporation.(2)
99.02 Form of consent card for Capital Source I and Capital Source II.(2)
99.03 The Fairness Opinion of Sutro & Co., Inc. is incorporated herein by reference from Appendix B to the
Prospectus/Consent Solicitation Statement.
</TABLE>
- ------------
(1) Previously filed.
(2) Filed herewith.
(b) Not Applicable.
(c) The Fairness Opinion of Sutro & Co., Inc. is included as Appendix B
to the Prospectus/ Consent Solicitation Statement. The Market Value Report
of Valuation Research Corporation is included as Exhibit 99.01 to this
Registration Statement.
ITEM 22. UNDERTAKINGS
A. The Company hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) 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
(c) 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 any 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.
II-2
<PAGE>
(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.
B. (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant undertakes that every prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act
of 1933 and is used in connection with an offering of securities subject to
Rule 415, will be filed as part of an amendment to the registration
statement and will not be used until such amendment is effective, and that,
for purposes of determining any 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.
C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the 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 Registrant 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 the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
D. The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Consent
Solicitation Statement pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
E. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Pre-Effective Amendment No. 4 to the Form S-4
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Omaha, State of Nebraska, on September 28, 1999.
<TABLE>
<S> <C> <C>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS,
L.P.
By: America First Capital Source I L.L.C.,
general partner
By: America First Companies L.L.C., sole
member By: /s/ MICHAEL B. YANNEY
-------------------------------------
Michael B. Yanney,
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN OF THE BOARD OF MANAGERS
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL B. YANNEY Chief Executive Officer, September 28, 1999
- ------------------------------ President and Chairman
Michael B. Yanney of the Board of Managers
of America First
Companies L.L.C.
*** Chief Financial Officer, September 28, 1999
- ------------------------------ Principal Accounting
Michael Thesing Officer, Secretary,
Treasurer, and Manager
of America First
Companies L.L.C.
*** Manager of America First September 28, 1999
- ------------------------------ Companies L.L.C.
Martin A. Massengale
*** Manager of America First September 28, 1999
- ------------------------------ Companies L.L.C.
Alan Baer
*** Manager of America First September 28, 1999
- ------------------------------ Companies L.L.C.
Gail Walling Yanney
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*** Manager of America First September 28, 1999
- ------------------------------ Companies L.L.C.
Mariann Byerwalter
</TABLE>
- ------------
<TABLE>
<S> <C> <C> <C>
***By: /s/ MICHAEL B. YANNEY
-------------------------
Michael B. Yanney,
AS ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.01 Form of Agreement and Plan of Merger to be entered into by and among the partnerships and the company
is incorporated herein by reference to Appendix A to the Prospectus/ Consent Solicitation Statement.
3.01 Certificate of Limited Partnership of the company.(1)
3.02 Limited Partnership Agreement of the company.(1)
3.03 Form of Amended and Restated Limited Partnership Agreement of the company is incorporated herein by
reference to Appendix D to the Prospectus/Consent Solicitation Statement.
3.04 Limited Partnership Agreement and Amended Certificate of Limited Partnership of Capital Source
L.P.(1)
3.05 Limited Partnership Agreement and Amended Certificate of Limited Partnership of Capital Source II
L.P.-A.(1)
3.06 Amended Certificate of Limited Partnership of Capital Source L.P.(1)
3.07 Amended Certificate of Limited Partnership of Capital Source II L.P.-A(1)
3.08 Amendment to Limited Partnership Agreement of Capital Source L.P.(1)
3.09 Amendment to Limited Partnership Agreement of Capital Source II L.P.-A.(1)
4.01 The Certificate of Limited Partnership and Amended and Restated Agreement of Limited Partnership of
the company included as Exhibits 3.01 and 3.03 are incorporated herein by reference.
4.02 Form of indenture between the company and the trustee relating to the notes being registered pursuant
to this Registration Statement, including the form of Variable Rate Junior Notes Callable On or After
the Date of Issuance and the form of promissory notes.(1)
4.03 Form of Units Certificate of the company.(2)
4.04 Form of Variable Rate Junior Notes Callable On or After the Date of Issuance and Promissory Notes of
the company are included in Exhibit 4.02.
5.01 Opinion of Kutak Rock as to the legality of the units and the validity of the notes.(2)
8.01 Opinion of Kutak Rock as to certain tax matters.(2)
12.01 Ratio of Earnings to Fixed Charges.(2)
23.01 Consents of Independent Accountants.(2)
23.02 Consent of Kutak Rock (included in Exhibits 5.01 and 8.01).
23.03 Consent of Valuation Research Corporation to being named in the Registration Statement.(1)
23.04 Consent of Sutro & Co., Inc. to being named in the Registration Statement.(2)
24.01 The Power of Attorney, included on Page II-4 of the Registration Statement filed on July 21, 1999, is
incorporated herein by reference.
25.01 Statement of Eligibility of Trustee.(1)
27.01 Financial Data Schedule of the Company.(1)
99.01 Market Value Report of Valuation Research Corporation.(2)
99.02 Form of consent card for Capital Source I and Capital Source II.(2)
99.03 The Fairness Opinion of Sutro & Co., Inc. is incorporated herein by reference from Appendix B to the
Prospectus/Consent Solicitation Statement.
</TABLE>
- ------------
(1) Previously filed.
(2) Filed herewith.
<PAGE>
EXHIBIT 4.03
FORM OF UNITS CERTIFICATE
Certificate No. CUSIP 02364Y 10 1
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
UNIT CERTIFICATE
THIS CERTIFICATES THAT
IS THE REGISTERED OWNER OF
Unit Certificates evidencing an assignment of a portion of the limited
partner interest held by H/T Corp. (the "Initial Limited Partner") in America
First Real Estate Investment Partners, L.P., a Delaware limited partnership
(the "Partnership"), and holds the same subject to the terms of an Agreement
of Limited Partnership, dated ______________, 1999, by and between America
First Capital Source I L.L.C. (the "General Partner") and the Initial Limited
Partner, as it may be amended from time to time (the "Partnership
Agreement"). Such Unit Certificates are transferable on the books of the
Partnership, subject to the limitations in the Partnership Agreement, by the
holder hereof in person or by duly authorized attorney, on surrender of this
certificate properly endorsed. All capitalized terms not otherwise defined
herein have the meaning set forth in the Partnership Agreement.
IN WITNESS WHEREOF, the Initial Limited Partner has caused this instrument to
be duly executed.
Dated: ____________, 1999
H/T CORP. MAVRICC MANAGEMENT SYSTEMS, INC.,
Initial Limited Partner Transfer Agent
By By
--------------------------- ---------------------------
Michael Yanney, President _____________, Authorized Officer
By
---------------------------
Michael Thesing, Secretary
<PAGE>
[REVERSE OF SECURITY]
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM-as tenants in common UNIF GIFT MIN ACT-____ Custodian _______
TEN ENT-as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors Act
survivorship and not as _________________________________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
the Unit Certificates evidenced hereby in America First Real Estate
Investment Partners, L.P., and do hereby irrevocably constitute and appoint
- -----------------------------------------------------------------------------
to transfer the said Unit Certificates on the books of the Partnership with
full power of substitution in the premises.
NOTICE: The signature(s) to this assignment must correspond with the name as
written upon the face of the Certificate in every particular, without
alteration or enlargement or any change whatever.
In the presence of:
X Dated:
----------------------- ----------------------- -------------------
Witness
X Dated:
----------------------- ----------------------- -------------------
Witness
2
<PAGE>
KUTAK ROCK
ATLANTA
SUITE 2900 KANSAS CITY
717 SEVENTEENTH STREET LINCOLN
LITTLE ROCK
DENVER, COLORADO 80202-3329 NEW YORK
NEWPORT BEACH
303-297-2400 OKLAHOMA CITY
FACSIMILE 303-292-7799 OMAHA
PASADENA
http://www.kutakrock.com PHOENIX
PITTSBURGH
WASHINGTON
September 28, 1999
America First Real Estate Investment Partners, L.P.
1004 Farnam Street, Suite 400
Omaha, Nebraska 68102
Re: Securities Offering
Gentlemen:
We have acted as counsel to America First Real Estate Investment
Partners, L.P. (the "Company") in connection with the filing of a registration
statement on Form S-4 (Registration No. 333-52117), including a related
Prospectus/Consent Solicitation Statement, under the Securities Act of 1933, as
amended (the "Act"), and such amendments thereto and such amended
Prospectus/Consent Solicitation Statements as may have been required to the date
hereof. The registration statement covers a proposed offering by the Company of
up to 7,765,772 units of assigned limited partner interests in the Company (the
"Units"), and up to $20,000,000 principal amount of Variable Rate Junior Notes
and Promissory Notes (the "Notes"). Such registration statement, as amended, and
the Prospectus/Consent Solicitation Statement on file with the Securities and
Exchange Commission (the "Commission") at the time such registration statement
becomes effective (including financial statements and schedules, exhibits and
all other documents filed as a part thereof or incorporated therein) are herein
called, respectively, the "Registration Statement" and the "Prospectus/Consent
Solicitation Statement."
In connection with this opinion, we have made such investigations and
examined such records, including the Company's Certificate of Limited
Partnership and Limited Partnership Agreement, and other partnership documents
as we deemed necessary to the performance of our services and to give this
opinion. We have also examined and are familiar with the originals or copies,
certified or otherwise identified to our satisfaction, of such other documents,
partnership records and other instruments as we have deemed necessary for the
preparation of this opinion. In expressing this opinion, we have relied, as to
any questions of fact upon which our opinion is predicated, upon representations
and certificates of the officers of the Company.
In giving this opinion we assumed:
(a) the genuineness of all signatures and the authenticity and
completeness of all documents submitted to us as originals;
(b) the conformity to originals and the authenticity of all
documents supplied to us as certified, photocopied, conformed or
facsimile copies and the authenticity and completeness of the originals
of any such documents; and
<PAGE>
KUTAK ROCK
America First Real Estate
Investment Partners, L.P.
September 28, 1999
Page 2
(c) the proper, genuine and due execution and delivery of all
documents by all parties to them and that there has been no breach of
the terms thereof.
Based upon the foregoing and subject to the qualifications set forth
above, and assuming (i) that the Registration Statement has become effective
under the Act, (ii) that all required actions are taken and conditions satisfied
with respect to the issuance of the Company's Units and Notes as specified in
the Prospectus/Consent Solicitation Statement and (iii) consideration is
received for the Units and the Notes: we are of the opinion that: (a) at the
time the Units are issued, the Units will be legally issued, fully paid and
nonassessable; and (b) at the time the Notes are issued, the Notes will be
binding obligations of the Company.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the use of our name in the Registration Statement. In
giving such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Act or the Rules and
Regulations of the Commission promulgated pursuant thereto.
Very truly yours,
/s/ Kutak Rock
Kutak Rock
<PAGE>
KUTAK ROCK
ATLANTA
SUITE 2900 KANSAS CITY
717 SEVENTEENTH STREET LINCOLN
LITTLE ROCK
DENVER, COLORADO 80202-3329 NEW YORK
NEWPORT BEACH
303-297-2400 OKLAHOMA CITY
FACSIMILE 303-292-7799 OMAHA
PASADENA
http://www.kutakrock.com PHOENIX
PITTSBURGH
WASHINGTON
September 28, 1999
America First Real Estate Investment Partners, L.P.
1004 Farnam Street, Suite 400
Omaha, NE 68102
Re: Certain Federal Income Tax Issues
Ladies and Gentlemen:
We have acted as your tax counsel in connection with the proposed
merger of Capital Source L.P., a Delaware limited partnership ("Cap Source I"),
and Capital Source II, L.P.-A, a Delaware limited partnership ("Cap Source II,"
and together with Cap Source I, the "Partnerships") with and into you (the
"Merger") pursuant to that certain Agreement and Plan of Merger (the "Merger
Agreement"), which is included in the Registration Statement (defined below) as
Appendix A to the Prospectus/Consent Solicitation Statement contained therein,
by and among the Partnerships and you. Terms not otherwise defined herein shall
have the same meaning as ascribed to them in the registration statement on Form
S-4 Registration No. 333-52117, including all amendments and supplements thereto
(the "Registration Statement").
As an initial matter, we note that under the provisions of Treasury
Regulation 1.708-1(b)(2): for federal income tax purposes (i) the Merger will be
characterized as a transfer of assets by Cap Source II to you followed by the
liquidation of Cap Source II; and (ii) you will be deemed a continuation of Cap
Source I. For purposes of this opinion we will refer to such transfer,
liquidation and continuation collectively as the "Transaction". In this regard,
you have requested our opinion concerning certain federal income tax matters
associated with the Merger, including, but not limited to, the characterization
of the Transaction as an exchange subject to the nonrecognition provisions of
Section 721 of the Internal Revenue Code of 1986, as amended (the "Code").
The opinions set forth herein are based on the applicable provisions of
the Code (including the Taxpayer Relief Act of 1997 and portions of its
legislative history), the Treasury Regulations promulgated thereunder (the
"Regulations") and interpretations thereof by the Internal Revenue Service (the
"Service") and the courts having jurisdiction over such matters, each as of the
date hereof. The opinions set forth herein are also based upon certain
assumptions and representations described below. There can be no assurance that
the Code or the Regulations will not be amended or that interpretations of the
Service or the courts will not change in a manner which would preclude us from
rendering similar opinions in the future. Moreover, any such changes in the
Code, the Regulations or the interpretations thereof may have retroactive
effect.
<PAGE>
KUTAK ROCK
America First Real Estate Investment Partners, L.P.
September 28, 1999
Page 2
These opinions further depend upon the facts and circumstances
surrounding your operations, the operations of the Partnerships, the operations
of the Operating Partnerships and the consummation of the Merger and the
Transaction. In the event such operations differ from your representations
concerning the foregoing or the descriptions of operations set forth in the
Registration Statement and the registration statements filed by the Partnerships
with Securities Exchange Commission, (the "Partnership Registration
Statements"), our conclusions could differ from those set forth herein.
In connection with rendering the opinions set forth herein, we have
examined and relied upon such documents as we believe necessary, including, but
not limited to, the following:
(a) the Registration Statement;
(b) the federal income tax returns of the Partnerships for the
taxable years ended December 31, 1995, December 31, 1996, December 31,
1997 and December 31, 1998;
(c) the reports that set forth certain data regarding the
trading volume of the BACs of each Partnership as prepared by Service
Data Corporation and MMS Escrow and Transfer Agency, Inc.
(collectively, the "Trading Volume Reports");
(d) the organizational documents, including the limited
partnership agreements, of the Partnerships (the "Partnership
Agreements");
(e) the Partnership Registration Statements;
(f) the Appraisals;
(g) the limited partnership agreements of the Operating
Partnerships;
(h) the fairness opinion rendered by Sutro & Co., Inc. dated
as of September 23, 1999 (the "Fairness Opinion");
(i) the Merger Agreement;
(j) your organizational documents, including, but not limited
to, your limited partnership agreement and the form of amended and
restated limited partnership agreement (the "Limited Partnership
Agreement") included as Appendix D to the Prospectus/Consent
Solicitation Statement, which is a part of the Registration Statement;
and
(k) the balance sheet of each Partnership dated as of March
31, 1999 (the "Balance Sheets").
2
<PAGE>
KUTAK ROCK
America First Real Estate Investment Partners, L.P.
September 28, 1999
Page 3
In rendering the opinions set forth herein, we have assumed the
authenticity of all original documents, the accuracy of copies and the
genuineness of signatures, and that the forms of documents supplied to us are
substantially identical to those documents which will be executed by you or for
your benefit. In this regard, you should note that we have reviewed only those
documents which appeared relevant to the opinions set forth herein and have not
undertaken a review of any other documents or matters. In addition, we have not
independently verified any of the information described in the foregoing
documents or in the following representations. We have further assumed
compliance with the provisions of the Partnership Agreements, the Limited
Partnership Agreement and the Merger Agreement and that the investors in the
Partnerships (the "Investors") have no binding commitment to sell or otherwise
transfer the units of assigned limited partnership interests (the "Units")
acquired in the Transaction. In addition, we have, with your permission, in
connection with the delivery of our opinions, relied upon the following
representations made by you:
(a) that you believe the assumptions used in preparation of
the Appraisals are reasonable;
(b) that you believe the assumptions used in the preparation
of the Fairness Opinion are reasonable;
(c) that you believe the data contained in the Trading Volume
Reports is true, correct and accurate in all material respects;
(d) that the assets and liabilities of the Partnerships do not
differ in any material respect from those described in the Balance
Sheets;
(e) that to the best of your knowledge the Partnerships and
the Operating Partnerships each is characterized as a partnership and
not as a publicly traded partnership or association taxable as a
corporation for federal income tax purposes;
(f) that pursuant to the Merger Agreement, you will invest the
cash received by you from Cap Source II and the cash attributable to
Cap Source I so that, subsequent to the consummation of the
Transaction, not more than 80% of your assets, will consist of: (i)
cash, foreign currency or readily marketable securities, (ii) stocks or
other equity interests in corporations, (iii) evidences of
indebtedness, (iv) options, (v) forward or futures contracts, (vi)
notional principal contracts or derivatives, (vii) interests in real
estate investment trusts, (viii) interests in regulated investment
companies, (ix) interests in publicly traded partnerships, as defined
under Section 7704(b) of the Code, or (x) other securities or assets
set forth in Section 351(e) of the Code;
(g) that, in connection with the Transaction, the aggregate
fair market value of the Units received by the Investors in Cap Source
II in the Transaction will equal the fair market value of the assets
which Cap Source II will contribute to you;
3
<PAGE>
KUTAK ROCK
America First Real Estate Investment Partners, L.P.
September 28, 1999
Page 4
(h) that, in connection with the Merger, the aggregate fair
market value of the Units received by the Investors in Cap Source I in
exchange for their BACs in Cap Source I will equal the fair market
value of the assets of Cap Source I immediately prior to the
consummation of the Transaction;
(i) that Cap Source II will, in all material respects,
distribute in liquidation the Units and Notes it receives in the
Transaction in accordance with the respective positive capital account
balances of each Investor in Cap Source II;
(j) that each Investor in Cap Source I will, in all material
respects, receive Units and Notes in exchange for BACs in proportion to
their respective positive capital account balances;
(k) that, as of the date of the Transaction, the liabilities
of each Partnership will not exceed their bases in their assets;
(l) that all of the limited partner interests in the Operating
Partnerships are owned by the Partnerships;
(m) that as of the date hereof, the Partnerships do not own
any equity interests in the general partners of the Operating
Partnerships;
(n) that you believe that the assumptions used in determining
the Exchange Values are reasonable;
(o) that less than 20% of the value of the assets contributed
to you by each of the Partnerships is attributable to money or
marketable securities, as such term is used in Regulation
1.731-2(d)(1)(ii)(A);
(p) that you have no binding commitment to issue any Units or
other types of equity interests except as contemplated by the
Transaction;
(q) that you have no binding commitment to dispose of any of
the assets acquired in the Transaction, except in the ordinary course
of business;
(r) that you have no binding agreement to purchase, redeem or
otherwise acquire Units subsequent to the consummation of the
Transaction;
(s) that you believe, based on your proposed operations, that
for each of your taxable years at least 90% of your gross income will
be derived from real property rents, interest and other sources
described as qualifying income in Section 7704(d) of the Code; and
4
<PAGE>
KUTAK ROCK
America First Real Estate Investment Partners, L.P.
September 28, 1999
Page 5
(t) that you believe that Cap Source I and Cap Source II for
each of their respective taxable years derived at least 90% of their
gross income from real property rents, interest and other sources
described as qualifying income in Section 7704(d) of the Code.
Based solely on the documents, representations and assumptions set
forth above and subject to limitations described herein, we are of the opinion
that: (a) the Transaction will be an exchange subject to the nonrecognition
provisions of Section 721 of the Code; (b) you will be characterized as a
partnership for federal income tax purposes; and (c) the discussion set forth in
the section of the Registration Statement entitled "FEDERAL INCOME TAX
CONSEQUENCES" fairly summarizes the material federal income tax considerations
associated with the Transaction.
The opinions set forth herein are rendered only to you and are solely
for your benefit. Please be advised that we have rendered no opinion, except as
expressly set forth above, with regard to any other federal income tax or other
tax issue associated with you, the Investors, the Transaction, the Partnerships,
the Merger, the Operating Partnerships, the Cap Source I General Partners, the
Cap Source II General Partners, the General Partners or any other party
described in the Registration Statement. Specifically, we have rendered no
opinion with respect to the merger of Cap Source I General Partners and the Cap
Source II General Partners with and into the General Partner or with respect to
the General Partner's contribution of assets or property to the Company in
exchange for its general partner interest therein. We disclaim any obligation to
update this opinion letter for events occurring or coming to our attention after
the date hereof.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the use of our name in the Registration Statement. In
giving such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Act or the Rules and
Regulations of the Commission promulgated pursuant thereto.
Very truly yours,
/s/ Kutak Rock
Kutak Rock
5
<PAGE>
EXHIBIT 12.01
RATIO OF EARNINGS TO FIXED CHARGES
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
June 30, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Income 1,447,858 1,902,503 3,051,221 3,187,307 3,472,057 3,464,875
Interest -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
1,447,858 1,902,503 3,051,221 3,187,307 3,472,057 3,464,875
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Ratio** N/A N/A N/A N/A N/A N/A
</TABLE>
CAPITAL COURSE II L.P.-A
<TABLE>
<CAPTION>
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
June 30, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Income 852,062 881,115 1,654,005 2,123,037 2,173,096 2,021,288
Interest -- -- -- -- -- --
------- --------- --------- --------- --------- ---------
852,062 881,115 1,654,005 2,123,037 2,173,096 2,021,288
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
Ratio** N/A N/A N/A N/A N/A N/A
</TABLE>
** Pretax income plus interest/interest
* (Pretax income = net income)
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
To the Unitholders:
America First Real Estate Investment Partners, L.P.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Independent Public Accountants" in the
registration statement.
/s/ KPMG LLP
KPMG LLP
Omaha, Nebraska
September 27, 1999
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
To the Partners:
Capital Source II L.P.-A
We consent to the use of our report included herein and to the references to
our firm under the headings "Independent Public Accountants" and "Selected
Financial Data of the Partnerships" in the registration statement.
/s/ KPMG LLP
KPMG LLP
Omaha, Nebraska
September 27, 1999
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
To the Partners:
Capital Source L.P.
We consent to the use of our report included herein and to the references to
our firm under the headings "Independent Public Accountants" and "Selected
Financial Data of the Partnerships" in the registration statement.
/s/ KPMG LLP
KPMG LLP
Omaha, Nebraska
September 27, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
America First Real Estate Investment Partners, L.P. of our report dated
July 21, 1999 relating to the balance sheet of America First Capital
Source I, L.L.C. as of December 31, 1998. We also consent to the reference
to us under the heading "Independent Public Accountants" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
September 28, 1999
<PAGE>
Ex. 23.04
CONSENT OF SUTRO & CO., INC.
We hereby consent to the use of our Fairness Opinion included in this
Pre-Effective Amendment No. 4 to the Registration Statement and related
Prospectus/Consent Solicitation Statement, and we further consent to all
references to our firm under the headings "FAIRNESS OPINION AND APPRAISALS"
in the Prospectus/Consent Solicitation Statement, and to the use of our name
wherever appearing in this Pre-Effective Amendment No. 4 to the Registration
Statement and the related Prospectus/Consent Solicitation Statement.
Dated: September 27, 1999 SUTRO & CO., INC.
/s/ Sutro & Co., Inc.
<PAGE>
EXHIBIT 99.01
CAPITAL SOURCE L.P. AND
CAPITAL SOURCE II L.P. - A
OMAHA, NEBRASKA
MARKET VALUE REPORT
AS OF DECEMBER 31, 1998
OF
VARIOUS PROPERTIES
<PAGE>
[LETTERHEAD]
March 18, 1999
Capital Source L.P. and Capital Source II L.P. - A
1004 Farnam Street
Omaha, Nebraska 68102
Ladies and Gentlemen:
At your request, we have completed a limited scope appraisal of the multi-family
apartment complexes owned by Capital Source L.P. and Capital Source II L.P. - A.
We submit this restricted appraisal report relative to our findings.
The appraised property consists of various multi-family apartment complexes
located throughout the Midwest and Southeast. The properties are typical
apartment complexes, which are usually two story multi-building complexes
situated on campus type settings with common area swimming pool, parking area,
etc.
The appraisal was conducted for the purpose of expressing an opinion of the
market value of the property as of December 31, 1998. The function of the
appraisal is to serve as a basis for management planning purposes.
Market Value is defined as follows:
The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer
and seller each acting prudently and knowledgeably, and assuming the
price is not affected by undue stimulus and that the assets will
continue to function in their present capacity as part of an ongoing
business enterprise at their present location. Implicit in this
definition is the assumption that the earnings generated from operations
are sufficient to justify the investment in the assets appraised and
that the consummation of a sale as of a specified date and the passing
of title from the seller to buyer under conditions whereby:
- Both parties are well informed or well advised, and acting in what
they consider their own best interests;
<PAGE>
Capital Source L.P. and Capital Source II L.P. - A March 18, 1999
Page 2
- A reasonable time is allowed for exposure in the open market;
- Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
- The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Source: UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE, Published
by the Appraisal Foundation, 1994.
PROPERTY RIGHTS APPRAISED are the fee simple estate which is defined as:
Absolute ownership unencumbered by any other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power, and escheat.
The appraised property is the fee-simple ownership interest in land, land
improvements, the building, and building service systems. Machinery and
equipment, furniture and fixtures, and any other tangible or intangible assets
are excluded from consideration in this report.
Our investigation included an analysis of recent sales and rentals of comparable
property in the subject's area and a detailed analysis of the financial history
of the apartment complexes that is the subject of this appraisal.
Because Valuation Research Corporation appraised these properties in December,
1997, the scope of this assignment did not include site inspections.
This is a restricted appraisal report which is intended to comply with the
reporting requirements set forth under Standard Rule 2-2(c) of the Uniform
Standards of Professional Appraisal Practice. As such, it does not include full
discussions of the data, reasoning, and analyses that were used in the appraisal
process to develop the appraiser's opinion of value. Supporting documentation
concerning the data, reasoning, and analyses is retained in our files. The
information contained in this report is specific to the needs of the client and
for the intended use stated in this report. Other users of appraisal services
and the public may find such a restricted report misleading without this file
memorandum.
<PAGE>
Capital Source L.P. and Capital Source II L.P. - A March 18, 1999
Page 3
Valuation Research Corporation does not conduct or provide environmental
liability assessments of any kind in performing its appraisals so that our
opinion of the appraised value will not reflect any actual or contingent
environmental liabilities except to the extent we are provided with a specific
monetary assessment of such liabilities in writing. In any event, Valuation
Research Corporation will not verify such monetary assessment and will offer no
warranty or representation as to its accuracy or completeness.
All portions of this appraisal are to be used only in conjunction with the full
report, which is subject to the assumptions and limiting conditions contained
herein.
We have not investigated the title to, nor the liabilities against the appraised
property and assume no responsibility concerning these matters. Neither
Valuation Research Corporation nor any of its personnel have any present or
contemplated financial interest in the property appraised, and we certify that
the compensation received for this study is not contingent on the conclusions
stated. Additionally, the appraisal assignment was not based on a requested
minimum valuation, a specific valuation, or the approval of a loan.
Respectfully submitted,
VALUATION RESEARCH CORPORATION
/s/ VALUATION RESEARCH CORPORATION
Engagement Number: 04-2824-00
<PAGE>
PROPERTY/VALUE RANGE SCHEDULE
<TABLE>
<CAPTION>
VALUE RANGE
<S> <C>
Bluff Ridge (108 Units)
Jacksonville, North Carolina $3,000,000 - $3,800,000
Waterman's Crossing (260 Units)
Newport News, Virginia $12,750,000 - $13,500,000
Water's Edge (108 Units)
Lake Villa, Illinois $5,500,000 - $6,500,000
Ponds at Georgetown (134 Units)
Ann Arbor, Michigan $7,000,000 - $8,500,000
Highland Park (252 Units)
Reynoldsburg, Ohio $9,500,000 - $10,500,000
Fox Hollow (184 Units)
High Point, North Carolina $7,150,000 - $8,300,000
Crane's Landing (252 Units)
Winter Park, Florida $11,500,000 - $12,500,000
Delta Crossing (178 Units)
Charlotte, North Carolina $7,500,000 - $8,000,000
Misty Springs (128 Units)
Daytona Beach, Florida $4,000,000 - $4,750,000
Monticello (106 Units)
Southfield, Michigan $6,250,000 - $7,200,000
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRODUCTION................................................................................1
IDENTIFICATION OF THE PROPERTIES......................................................1
STATEMENT OF OWNERSHIP................................................................2
LEGAL DESCRIPTIONS....................................................................2
PROPERTY RIGHTS APPRAISED.............................................................2
PURPOSE OF THE APPRAISAL..............................................................2
FUNCTION OF THE APPRAISAL.............................................................2
DEFINITION OF VALUE...................................................................2
DATE OF THE APPRAISAL.................................................................3
SCOPE OF THE APPRAISAL................................................................3
FLOOD ZONE............................................................................4
ZONING................................................................................4
ENVIRONMENTAL.........................................................................4
MARKETING PERIOD......................................................................4
VALUATION THEORY............................................................................5
APPRAISAL PROCESS.....................................................................5
The Three Approaches to Value....................................................5
Cost Approach....................................................................5
Sales Comparison Approach........................................................5
Income Capitalization Approach...................................................6
Reconciliation and Conclusion....................................................6
Approaches Used..................................................................6
HIGHEST AND BEST USE..................................................................6
Definition.......................................................................6
HIGHEST AND BEST USE AS IF VACANT.....................................................7
Physically Possible..............................................................7
Legally Permitted Uses...........................................................8
Financially Feasible Uses........................................................8
Maximally Productive Use.........................................................8
Conclusion.......................................................................8
HIGHEST AND BEST USE AS IMPROVED......................................................8
Physically Possible..............................................................8
Legally Permitted................................................................8
Financially Feasible.............................................................8
Maximally Productive Use.........................................................9
<PAGE>
VALUATION METHODOLOGY......................................................................10
COST APPROACH........................................................................10
SALES COMPARISON APPROACH............................................................10
Introduction....................................................................10
Improved Comparable Sales Discussion and Analysis...............................11
Property Rights - Financing - Conditions of Sale - Market Conditions............11
Physical Characteristics........................................................11
Conclusion......................................................................12
INCOME CAPITALIZATION APPROACH.......................................................12
Introduction....................................................................12
Direct Capitalization...........................................................13
Discussion of Market Rent.......................................................14
Potential Gross Rent............................................................14
Vacancy and Collection Loss.....................................................14
Effective Gross Income..........................................................14
Operating Expenses..............................................................14
Management......................................................................14
Reserve for Replacement.........................................................14
Net Operating Income............................................................15
Capitalization of NOI...........................................................15
Summary.........................................................................17
Direct Capitalization Computation...............................................17
DISCOUNTED CASH FLOW.................................................................17
Calculation of Income and Expenses..............................................17
Discount Rate...................................................................18
BLUFF RIDGE APARTMENTS.....................................................................19
SALES COMPARISON APPROACH............................................................21
Improved Comparable Sales Analysis..............................................21
INCOME APPROACH......................................................................24
SUMMARY..............................................................................28
WATERMAN'S CROSSING APARTMENTS.............................................................29
SALES COMPARISON APPROACH............................................................31
Improved Comparable Sales Analysis..............................................31
INCOME APPROACH......................................................................34
SUMMARY..............................................................................38
WATER'S EDGE APARTMENTS....................................................................39
SALES COMPARISON APPROACH............................................................41
Improved Comparable Sales Analysis..............................................41
INCOME APPROACH......................................................................44
SUMMARY..............................................................................48
<PAGE>
PONDS AT GEORGETOWN APARTMENTS.............................................................49
SALES COMPARISON APPROACH............................................................51
Improved Comparable Sales Analysis..............................................51
INCOME APPROACH......................................................................54
SUMMARY..............................................................................58
HIGHLAND PARK APARTMENTS...................................................................59
SALES COMPARISON APPROACH............................................................61
Improved Comparable Sales Analysis..............................................61
INCOME APPROACH......................................................................63
SUMMARY..............................................................................67
FOX HOLLOW APARTMENTS......................................................................68
SALES COMPARISON APPROACH............................................................70
Improved Comparable Sales Analysis..............................................70
INCOME APPROACH......................................................................72
SUMMARY..............................................................................76
CRANE'S LANDING APARTMENTS.................................................................77
SALES COMPARISON APPROACH............................................................79
Improved Comparable Sales Analysis..............................................79
INCOME APPROACH......................................................................82
SUMMARY..............................................................................86
DELTA CROSSING APARTMENTS..................................................................87
SALES COMPARISON APPROACH............................................................89
Improved Comparable Sales Analysis..............................................89
INCOME APPROACH......................................................................92
SUMMARY..............................................................................96
MISTY SPRINGS APARTMENTS...................................................................97
SALES COMPARISON APPROACH............................................................99
Improved Comparable Sales Analysis..............................................99
INCOME APPROACH.....................................................................101
SUMMARY.............................................................................105
MONTICELLO APARTMENTS.....................................................................106
SALES COMPARISON APPROACH...........................................................108
Improved Comparable Sales Analysis.............................................108
INCOME APPROACH.....................................................................110
SUMMARY.............................................................................114
LIMITING FACTORS AND ASSUMPTIONS..........................................................115
</TABLE>
<PAGE>
INTRODUCTION
IDENTIFICATION OF THE PROPERTIES
The properties, which are the subject of this appraisal assignment, are owned by
Capital Source, L.P. and Capital Source II, L.P. - A. These properties are
primarily garden style residential apartment complexes located in the states of
Michigan, North Carolina, Florida, Ohio, Virginia, and Illinois.
The apartment buildings have an average age of approximately 10 years, are
typically of wood frame with brick and wood veneer construction, are located in
a campus type setting, and include typical amenities such as swimming pools, in
unit appliances, ample open parking areas, adequate landscaping, etc. Following
is a listing of the subject properties.
Bluff Ridge Fox Hollow
215 Valencia Drive 177 West Hartley Drive
Jacksonville, North Carolina High Point, North Carolina
Waterman's Crossing Crane's Landing
638 Riverbend Court 3440 Goldenrod Road
Newport News, Virginia Winter Park, Florida
Water's Edge Delta Crossing
705 Water's Edge Drive 6000 Delta Crossing Lane
Lake Villa, Illinois Charlotte, North Carolina
Ponds at Georgetown Misty Springs
2511 Packard Road 1420 New Bellevue Avenue
Ann Arbor, Michigan Daytona Beach, Florida
Highland Park Monticello
2796 Prendergast Place 22700 Civic Center Drive
Reynoldsburg, Ohio Southfield, Michigan
1
<PAGE>
STATEMENT OF OWNERSHIP
The subject properties are owned by various limited partnerships of which
Capital Source L.P. and/or Capital Source II, L.P.-A are the limited partners.
The properties have been owned by these partnerships for a minimum of three
years prior to the appraisal date.
LEGAL DESCRIPTIONS
Legal descriptions of the subject properties were not provided.
PROPERTY RIGHTS APPRAISED
The property rights appraised are that bundle of rights afforded to the most
complete form of property ownership, the fee simple estate (subject to existing
tenancies). Fee simple ownership allows the owner to use, dispose of, and
exclude others from using the property.
FEE SIMPLE OWNERSHIP is further defined as follows:
Absolute ownership unencumbered by any other interest or estate,
subject only to the limitations imposed by the government powers of
taxation, eminent domain, police power, and escheat.
Source: THE DICTIONARY OF REAL ESTATE APPRAISAL, Third Edition, pate
140, published by the Appraisal Institute, 1993.
PURPOSE OF THE APPRAISAL
The purpose of the appraisal is to express our opinion of the market value of
the fee simple estate in the subject property, subject to existing tenancies, as
of December 31, 1998.
FUNCTION OF THE APPRAISAL
The results of this appraisal and this appraisal report will be used by
management for planning purposes.
DEFINITION OF VALUE
MARKET VALUE is defined for purposes of this report as:
The most probable price which a property should bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is
not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title
from seller to buyer under conditions whereby:
2
<PAGE>
Buyer and seller are typically motivated;
- Both parties are well informed or well advised, and acting in
what they consider their best interests;
- A reasonable time is allowed for exposure in the open market;
- Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
- The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
Source: UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE, Published
by the Appraisal Foundation, 1997.
DATE OF THE APPRAISAL
The date of this appraisal is December 31, 1998.
SCOPE OF THE APPRAISAL
Valuation Research Corporation has been retained by the American First
Properties to assist in estimating the value of the underlying assets of various
limited partnerships.
The scope of this assignment included a review of the appraisal analysis
performed in 1997 and an analysis of recent comparable sales and rental rates
of similar property in each of the subject's specific area. In addition, a
detailed analysis of current and past financial statements for each of the
subject properties was performed. The data gathered and the sources that were
utilized are listed as follows:
1. Review of the local apartment real estate market
2. Demographic Information
a. Local Chamber of Commerce
b. Local Convention and Visitors Bureau
c. Area Planning Commission
d. Area Planning Board
e. Urban Land Institute
f. National Sources
3. Cost Data
a. Ownership
b. Cost Manuals -- Marshall Valuation Service and Boeckh
Commercial Building Valuation System
3
<PAGE>
4. Sales Data
a. Office files
b. Local Assessor's Office
c. Various Service Bureaus
d. Society of Industrial and Office Realtors
e. Urban Land Institute
f. Real Estate Brokers and Appraisers
5. Rental Data
a. Society of Industrial and Office Realtors
b. Institutions of Real Estate Management
c. Urban Land Institute
d. Real Estate Brokers and Appraisers
6. Confirmation of data -- endeavored to verify all data used in this
report with at least one source.
FLOOD ZONE
Based on our site inspections in 1997 there did not appear to be any apparent
flood hazards with respect to any of the subject properties. Most are located in
developed neighborhoods with similar apartment complexes in the subject's
proximity.
ZONING
All of the subject properties are assumed to be a legal conforming use. This is
based on our previous observance of the surrounding land usage which, in most
cases, is similar to that of the subjects'.
ENVIRONMENTAL
Valuation Research Corporation has not determined independently whether the
subject properties are subject to any environmental liabilities. During the
course of our previous inspection we did not notice anything that would lead us
to believe that an environmental liability existed on the subject properties.
MARKETING PERIOD
Because of the strength of the current multi-family real estate market and based
on an analysis of the comparable sales information used in this appraisal, the
typical marketing period for any of the subject properties would be less than
twelve months if appropriately priced and aggressively marketed. This is
considered to be a normal marketing period and thus would not affect the
subject's value.
4
<PAGE>
VALUATION THEORY
APPRAISAL PROCESS
THE THREE APPROACHES TO VALUE
The appraised value as set forth in this report is supported with consideration
and use of standard accepted appraisal practices and valuation procedures. The
Uniform Standards of Professional Appraisal Practice require that the appraiser
consider three basic approaches to value: the cost approach, the direct sales
comparison approach, and the income capitalization approach. These approaches
are based on the cost to replace assets, market exchanges for comparable
properties and the capitalization of income. Each approach is defined and
explained as follows:
COST APPROACH
The cost approach is a valuation technique that uses the concept of replacement
as a value indicator. This approach is based on the principle of substitution,
which states that a prudent investor would pay no more for an asset than the
amount for which he could replace the asset new. Reproduction or replacement
cost is estimated for the property being appraised and then adjusted for losses
in value (appraised depreciation) due to a variety of factors.
The first step in this process is the valuation of the site as if vacant. This
valuation is based on a comparative analysis of the most recent land sales
suitable for comparability. As in the sales comparison approach, adjustments are
made to reflect differences between the subject and the various comparables,
with the final result being a land value estimate. The next step is a detailed
analysis of the replacement cost new of the improvements based upon market
derived costs for similarly constructed properties. Finally, accrued
depreciation from physical deterioration and obsolescence of all causes is
estimated and subtracted from the replacement cost new to arrive at the present
value. Combining the land value estimate with the depreciated value of the
improvements results in a total indicated property value using the cost
approach.
SALES COMPARISON APPROACH
The sales comparison approach is a valuation technique in which value is
estimated on the basis of market prices in actual transactions. The technique
consists of studying available market comparable information and adjusting for
comparability differences. This process is essentially that of comparison and
correlation. The Principle of Substitution is particularly applicable to this
approach since a prudent purchaser would pay no more for a particular property
than he would have to pay for a substitute property which offers equal utility.
5
<PAGE>
INCOME CAPITALIZATION APPROACH
The income capitalization approach is a valuation technique that capitalizes the
anticipated income stream from the appraised assets. This approach is predicated
on developing either cash flow or income projections, which are then discounted
for risk and time value. Additionally, the present value of a projected residual
value is estimated and added to the present value of the income stream.
RECONCILIATION AND CONCLUSION
The use of more than one approach is desirable because it provides a check on
the approaches to value. In some cases all three approaches are used, but
normally only one or two are employed. In the final analysis, the appraiser must
evaluate the relative merit of each approach in light of the property appraised
and must place heavy emphasis on the approach that offers the greatest degree of
reliability for the type of property appraised. Land is usually valued by the
sales comparison approach, with other tangible assets valued by the cost, sales
comparison and income approach.
APPROACHES USED
In this appraisal we have considered all three approaches to value. However, due
to the income-producing nature of the property, current market conditions, and
the scope of the appraisal assignment we have placed more emphasis on the income
capitalization approach using the direct sales comparison approach as a check on
the reasonableness of the results obtained using the income capitalization
approach.
HIGHEST AND BEST USE
Central to the concept of value is the theory of highest and best use. The
theory is based on the observation that properties in the market tend to be
priced according to their most profitable likely use. The highest and best use
conclusions are drawn from an economic study of market forces and form the basis
of the appraisal process.
DEFINITION
HIGHEST AND BEST USE for the purposes of this report is defined as:
The reasonable and probable use that supports the highest present value
of vacant land or improved property, as defined, as of the date of the
appraisal. Alternately, it is defined as the reasonable probable and
legal use of land or sites as though vacant, found to be physically
possible, appropriately supported, financially feasible, and that
results in the highest present land value.
6
<PAGE>
The definition immediately preceding applies specifically to the highest and
best use of land. It is to be recognized that in cases where a site has existing
improvements on it, the highest and best use may very well be determined to be
different from the existing use. The existing use will continue, however, unless
and until land value in its highest and best use exceeds the total value of the
property in its existing use.
The highest and best use is arrived at by testing potential uses of the
property, both as improved and as though vacant, to find the use which meets the
criteria discussed below. Improved properties are considered also as though
vacant to reflect the fact that any existing improvement can be demolished.
1. PHYSICALLY POSSIBLE -- Those uses of vacant land which are
possible after considering physical characteristics such as area,
shape, dimensions, topography, frontage, access, soil conditions
and other physical factors which are physically possible.
2. LEGALLY PERMITTED USE -- Legally permitted uses after considering
local, state and federal regulations and private restrictions.
Local zoning is often one of the key factors affecting land use
within an area and includes restrictions on uses permitted, such
as lot size and dimension, coverage, set backs, building height,
and floor area ratio among other zoning regulations.
3. FINANCIALLY FEASIBLE -- Those uses which are physically possible
and legally permitted which meet the test for financial
feasibility. For a use to be financially feasible it must produce
a positive return beyond operating expenses, financial
obligations, and capital amortization.
4. MAXIMALLY PRODUCTIVE -- Those uses which are physically possible,
legally permissible, and financially feasible which produces the
highest price, or value is the highest and best use.
HIGHEST AND BEST USE AS IF VACANT
PHYSICALLY POSSIBLE
All of the subject properties are improved with apartment buildings. The sites'
size, shape, topography, access to utilities, street frontage, soil and subsoil
conditions are conducive to development. None appeared to suffer from any
adverse physical conditions, encroachments, easements or restrictions which
would affect its potential development. Indeed, the fact that the sites are
currently improved indicates that the parcels are buildable.
7
<PAGE>
LEGALLY PERMITTED USES
Because the sites are buildable, allowable development would be any use that
conforms to the current zoning ordinance governing the site.
FINANCIALLY FEASIBLE USES
The fact that the current developed use is generating an adequate return on
invested capital indicates that a financially feasible use is the current use as
a site for an apartment complex.
MAXIMALLY PRODUCTIVE USE
For the majority of the properties, development of the subject sites for
multi-family apartment units is probably the most productive use. The
predominant use in each of the subject's neighborhoods is some sort of apartment
development. Given the character of the surrounding neighborhoods and the
current zoning, apartment development is the only likely use that would be
legally permissible and financially feasible.
CONCLUSION
Based on the above, it is our opinion that the highest and best use of the
subject sites, as if vacant, is for multi- family residential development.
HIGHEST AND BEST USE AS IMPROVED
PHYSICALLY POSSIBLE
As outlined under the highest and best use as if vacant discussion, the subject
sites are suitable for any legally permitted uses which could be developed on
them. The existing improvements, however, are well suited for their intended use
as apartment complexes. Other physically possible uses include retirement
community complex or office development.
LEGALLY PERMITTED
As discussed under zoning, legally permitted uses include a number of uses
including the current use. In general, subject sites and current improvements
conform to the municipal zoning ordinance and are thus legally permitted uses.
No other unusual legal limitations to development are known to exist.
FINANCIALLY FEASIBLE
Of those uses identified as legally and physically possible, only those that are
capable of generating a return sufficient to justify the risk for the investment
are considered financially feasible alternate uses.
The current improvements, because of their location and demand, are capable of
generating a return on invested capital and are thus considered to be
financially feasible.
8
<PAGE>
Converting the subject to any other legally permitted use would be too costly to
be financially feasible.
MAXIMALLY PRODUCTIVE USE
Based on the discussions above, it is our opinion that the highest and best use
of the subject properties as improved is continued use as currently configured
as either apartment complexes or retirement community complexes.
9
<PAGE>
VALUATION METHODOLOGY
COST APPROACH
The cost approach to value is one of the three approaches in the appraisal
process. The principle of substitution provides the basic foundation for the
cost approach and affirms the principle that no prudent person would pay more
for a property than the amount for which the site can be acquired and on which
improvements that have equal desirability and utility can be constructed without
undue delay.
However, because the value of property such as the subject(s) is normally
determined based on the revenue it is capable of generating for its owner, the
cost approach is not a significant factor in establishing value. As a result, it
is not used in this assignment.
SALES COMPARISON APPROACH
INTRODUCTION
The sales comparison approach to value is based on an analysis of actual sales
of other similar properties which are compared to the subject. Comparable sales
represent the actions of typical buyers and sellers in the marketplace and their
actions in the market will determine a price for the subject. When there is an
adequate number of sales of truly similar properties with sufficient information
for comparison, a range of values for the subject property can be developed.
The range of values developed by using units of comparison such as sales price
per square foot or any of several other units can be studied and necessary
adjustments made to provide for the differences between all the comparable sales
and the subject. An analysis of the adjusted units of comparison can then form
the basis of the market value of the subject property. Only unit factors
considered by the subject market are relevant.
The degree to which the appraiser can rely on the sales comparison approach
depends on an adequate number and similarity of the circumstances involved in
the comparable sales. Differences always exist between properties even though
they may be almost identical. Adjustments for these differences serve to define
more clearly the price that could reasonably be expected, subject to the
limitations of the definition of market value.
Some adjustments that may prove important are: 1) conditions of sale, 2)
financing terms, 3) market conditions (time), 4) location, 5) physical
characteristics, and 6) income characteristics.
10
<PAGE>
Pertinent details and pictures of the sales considered most comparable to the
subject property are kept in our file. A summary of the most important facts is
presented in the specific property valuation section found later in this report.
The scope of this appraisal assignment precluded inspection of the comparable
sales sites and thus precise adjustments to the reported unit sales price cannot
be made. However, the sales data provides a general indication of current market
prices for apartment complexes similar to the subject(s) and located in its
general vicinity.
IMPROVED COMPARABLE SALES DISCUSSION AND ANALYSIS
Because of the strong apartment complex real estate market during the past few
years, comparable sale activity is readily available. Most apartments in the
metropolitan areas in which the subject properties are located have experienced
stable occupancy with slowly rising rental rates. However, that trend may be
moderating. Projections indicate a slowing of rental rate increases and
occupancy rates will either hold steady or perhaps decrease slightly as supply
begins to outpace demand. Potential investors in multi-family residential
property look to the income potential of the investment and negotiate an
exchange price accordingly. All of these factors must be considered when
analyzing the actual sales price of comparable sales so that the resulting range
of prices most accurately reflect what a potential investor in the subject
property would be willing to pay.
PROPERTY RIGHTS - FINANCING - CONDITIONS OF SALE - MARKET CONDITIONS
All of the sales used in this analysis were reported to involve the transfer of
the fee simple estate, (fee simple subject to existing short term tenancies),
were sold for cash or with financing terms that were at market, and were arms
length transactions. As a result, adjustments for real property rights,
financing and conditions of sale are not required. In addition, because the
apartment real estate market seems to be stabilizing and because most, if not
all, of the comparable sales information pertains to sales that occurred within
the past 12 - 18 months, the affects of changing market conditions are not
considered to be significant.
PHYSICAL CHARACTERISTICS
LOCATION
All of the comparable sales used in this appraisal are located in the proximity
of the subject(s) and would be considered competitors of the subject. Although
we did not visit each improved comparable, we did discuss the location and other
physical attributes of the comparable sale, vis-a-vis the subject, with real
estate brokers and other appraisers in the subject area and thus became familiar
with the comparable sale's neighborhood and the impact its location would have
on its selling price.
11
<PAGE>
SIZE
All of the comparable apartment complexes are relatively close to the subject
properties in size and thus size is often not considered to be a significant
factor.
AGE
The age of a building has a significant impact in determining the selling price.
Potential purchasers perceive older buildings as having higher maintenance costs
and less appeal from a renter's standpoint. As a result, the comparable sales
prices are influenced based on the age of the building vs. the age of the
subject.
QUALITY
The quality of construction is an important element in the setting of sales
prices. Masonry veneer buildings are usually of higher quality than buildings
with aluminum or wood siding. Features such as this were considered when
analyzing the comparable property's sale price vis-a-vis the subject.
CONDITION
The actual physical condition of the comparable complex compared to that of the
subject is important. Although the age adjustment reflects a portion of this
influencing factor, the actual physical appearance and deferred maintenance as
reported at the time of the sale is the basis for this adjustment.
CONCLUSION
In this appraisal a minimum of three comparable sales were used to form the
basis for estimating the market value of the subject properties. Each of the
comparable unit sale price was analyzed after taking into consideration the
physical differences that affect value vis-a-vis the subject. The result was a
subjective estimated unit price figure which was based on relevant factors that
influence price.
INCOME CAPITALIZATION APPROACH
INTRODUCTION
The income capitalization approach to value is considered to be one of the
better approaches in the valuation of income-producing properties and is still
the primary factor in investment decisions for today's apartment investors. The
basic premise of the income capitalization approach is that the earning power of
a real estate investment is the critical element affecting its value. Value is
often defined as the present worth of anticipated future income. All income
capitalization methods, techniques, and procedures represent attempts to
quantify expected future benefits.
12
<PAGE>
The two accepted methods of applying the income capitalization approach are:
DIRECT CAPITALIZATION - A method by which an estimate of a single
year's income expectancy or an annual average of several years' income
expectancies are converted to an indication of value by one direct
step, either by dividing the income estimate by an appropriate rate or
by multiplying the income estimate by an appropriate factor.
DISCOUNTED CASH FLOW ANALYSIS - A set of procedures in which the
quantity, variability, timing, and duration of periodic income, as well
as the quantity and timing of reversions, are specified and discounted
to a present value at a specified yield rate.
The principle of anticipation has a crucial role in this approach. This
principle states that value is created by the expectations of benefits to be
derived in the future. The relevance of anticipation to the approach cannot be
overstated. Since value is created by the expectation of benefits to be derived
in the future, value may be defined as the present worth of all rights to future
benefits. As stated earlier, all income capitalization methods, techniques, and
procedures represent attempts to quantify expected future benefits.
With adequate information and proper use, direct capitalization and yield
capitalization methods should produce similar value indications. In choosing
which of the two (or both) methods to apply, the appraiser considers the typical
investor's view of market value.
DIRECT CAPITALIZATION
The first step in the direct capitalization approach is the determination of a
proper rental or revenue value that one would expect to be able to obtain for
the subject property based on actual historical operations and a study of
comparable leased properties with respect to rent levels, location, and
amenities offered. Adjustments based on differences between the comparable
rentals and the subject are set forth and analyzed so that an estimated current
economic rent for the subject can be established. A similar analysis of
operating expenses further aids in constructing an operating statement by
providing an allowance for vacancy and collection loss, and deductions for all
operating expenses. The end result is a net operating income (NOI) for the first
year income that can be converted into an indicated property value through the
overall capitalization process.
This approach begins with an estimate of the subject's market rent potential
based on an analysis of comparable properties and their current rental rates and
an analysis of the actual rentals in place with the subject property. The unit
of comparison is typically the rent per unit. From this is deducted an amount
estimated to reflect the operating expenses attributable to the subject
property. This operating expense deduction is based on published market surveys
and actual historical data.
13
<PAGE>
DISCUSSION OF MARKET RENT
In arriving at an opinion of the appropriate market rent for the subject, we
have analyzed several apartments in the immediate area of the subject. All are
considered to be direct competition and are similar in condition, utility and
amenities to that of the subject. Although each apartment complex is reasonably
similar to the subject, adjustments are necessary to reflect size of space,
exposure, rent concessions, amenities, etc.
POTENTIAL GROSS RENT
Gross potential rent is estimated from both the historical revenue trends taken
from the financial statements and/or existing lease contracts which currently
encumber the subject and the market surveys mentioned above.
VACANCY AND COLLECTION LOSS
The subject's market area has been analyzed with respect to current and future
apartment rental trends for the purpose of estimating the appropriate vacancy
and collection loss over the projection period. In addition, the historical
vacancy and collection loss experience of the subject was analyzed along with
projections based on discussions with the operating manager and published data.
EFFECTIVE GROSS INCOME
Effective gross income is the result of gross income from all sources including
rent, income from parking and storage space, less the vacancy and collection
allowance. We have used the historical income information provided along with
the market rental information to estimate this amount.
OPERATING EXPENSES
To account for the expense element, the information published by the Institute
of Real Estate Management (IREM) along with the actual historical experience of
the subject was used to assess this expense.
MANAGEMENT
A management fee of 4% of effective gross income (potential net rental minus
vacancy and collection loss), including miscellaneous income, is generally
charged for properties such as the subject, and is the amount most often used in
our analysis.
RESERVE FOR REPLACEMENT
A reserve for replacement, based on the replacement of major structural and
mechanical elements of the building plus the roof, is also included in the
analysis. This cost is relatively uniform throughout our analysis and ranges
from $300 to $400 per unit. This cost includes an allowance for the replacement
of kitchen appliances, air conditioning units, carpeting, etc.
14
<PAGE>
NET OPERATING INCOME
Using the above information and analysis, the estimated net operating income for
the subject is calculated as follows:
EXAMPLE
<TABLE>
<S> <C>
Potential Gross Rental Income $ 000,000
Less: Vacancy & Collection Loss (00,000)
------------
Effective Gross Rental Income 000,000
Less: Operating Expenses (0,000)
Management Fee (0,000)
Reserve for Replacement @ $____/Unit (0,000)
------------
Net Operating Income (NOI) $0,000,000
------------
------------
</TABLE>
CAPITALIZATION OF NOI
The relationship between net operating income and value can be expressed in its
overall rate of return (OAR), or capitalization rate. Capitalization rates were
abstracted from market surveys conducted by reputable national firms for each of
the major metropolitan areas in which the subject properties are located. The
National Real Estate Index for the Fourth Quarter, 1998, reports on recent
transactions and the resulting average capitalization rate. In addition, KORPACZ
REAL ESTATE INVESTOR SURVEY reports national apartment capitalization rates in
its Fourth Quarter 1998 report. Finally, the American Council of Life Insurance
reports current capitalization rates for apartment buildings in various regions
and major metroplexes.
To check these ranges, we calculated an overall rate by the Mortgage-Equity
technique. In general, the mortgage-equity analysis involves estimating a
capitalization rate based on both mortgage and equity returns requirements.
Because of the size of the subject investments, we looked to the national
mortgage debt market and reviewed a survey published by the American Council of
Life Insurance which reported mortgage debt rates, for the Third quarter of
1998, for the various regions in which the subject properties are located. Using
this information, a market mortgage rate can be estimated. The American Council
Life Insurance also reports typical market holding periods and loan to value
ratios.
In order to determine a proper equity yield, we analyzed the perceived risk of
the equity investor in the general marketplace as well as for our particular
property. We reviewed a survey published by the Korpacz Real Estate Investor
Survey, fourth quarter, National
15
<PAGE>
Apartment Market which detailed internal rates of return required by large
investors during the fourth quarter of 1998. Desired yield rates for apartment
properties were found to range from 10.0% to 13.0% with a 11.36% average.
Further, a Real Estate Research Corporation investor survey for the third
quarter of 1998 showed expected returns of 11.0% for apartment property.
The final component of the Mortgage Equity technique is the property value
change over the course of the equity holding period. As noted in the market
analysis section of this report, current market conditions indicate that value
growth for properties similar to the subject is guarded optimism for the long
term. Therefore, it is our opinion that the value growth due to the rising
apartment market will equal its physical depreciation over the next 15-20 years.
Thus, our overall capitalization rate according to the Mortgage-Equity Analysis
Technique is computed as follows:
CAPITALIZATION RATE DERIVATION
(EXAMPLE)
<TABLE>
<CAPTION>
ASSUMPTIONS:
<S> <C>
Mortgage Interest Rate 7.5%
Mortgage Term 20
Loan-to-Value Ratio 70.00%
Annual Loan Constant 0.0967
Yield Rate 11.5%
Annual Appreciation 0%
Holding Period - Years 10
Sinking Fund Factor - Holding Period 0.05838
% of Principal Paid during Holding Period 0.32133
</TABLE>
<TABLE>
<CAPTION>
COMPONENT WEIGHT WEIGHTED AVERAGE
<S> <C> <C> <C>
Mortgage 0.09667 0.7 0.06767
Equity 0.115 0.3 0.03450
-------
Weighted Average 0.1022
Less: Equity Build-up 0.0131
-------
Basic Rate 0.0890
Appreciation (or Depreciation) 0
-------
Capitalization Rate 0.0890
Rounded 9.0%
-------
-------
</TABLE>
16
<PAGE>
SUMMARY
Using the market data and techniques described above, a unique market
capitalization rate that would be appropriate for the subject properties can be
derived.
DIRECT CAPITALIZATION COMPUTATION
Using the data compiled above, the market value for the subject property using
the direct capitalization method of value analysis is calculated as follows:
EXAMPLE
Net Operating Income DIVIDED BY Capitalization Rate = Indicated Value
<TABLE>
<S> <C>
$000,000 DIVIDED BY 0.0% = $000,000
Rounded $000,000
--------
--------
</TABLE>
DISCOUNTED CASH FLOW
In the subject market, the typical investor often values income producing
properties by the application of a discounted cash flow analysis which has two
components. The first component equals the sum of the present value of cash
flows over a selected holding period. For purpose of analysis the cash flows
will be projected for a ten-year period, a common length utilized by investment
analysts. The second component, a residual, equals the present value of a
perpetuity paying income equal to net income in year eleven and capitalized with
the appropriate capitalization rate. The residual reflects the property's
ongoing potential after the tenth year.
CALCULATION OF INCOME AND EXPENSES
The estimated annual income is determined based on the historical experience of
the subject. Market rent for future vacant space and rollovers is estimated. An
income estimate is then produced and projected over the holding period.
In the discounted cash flow model for the subject, income and expense
projections have been based on historical operating data, information provided
by local lessors, and published data sources. Income and expense statements,
furnished by the building management, were reviewed and adjusted, where
necessary, to reflect more typical market expenses as reported by IREM in its
annual INCOME EXPENSE ANALYSIS FOR CONVENTIONAL APARTMENTS.
17
<PAGE>
These operating results were cross-checked for reasonableness with market
information obtained from area lessors, leasing agents and brokers who also
provided data relating to current rental rates, vacancy levels, and typical
lease terms. Any adjustments to the actual reported expenses are noted and
explained in the individual valuation section of this report.
DISCOUNT RATE
Because the subject property is income producing, the value of the property is
based on the present value of the expected future benefits derived from rentals.
Basic to this concept is the fact that future earnings are not available as
current earnings. As a result, the anticipated earnings received in the future
must be discounted to a present value using a discount rate derived from current
market rates for alternative investments.
To determine the current discount rate applicable for real estate investment, we
reviewed market surveys of large institutional real estate investors. The
Appraisal Institute reports discount rates for apartment complex investments
range from 10.0% to 14.0%, with an 11.69% average. The Real Estate Research
Corporation reports national apartment building investments at 11.0%, and the
Korpacz Real Estate Investor Survey reports fourth quarter, 1998, apartment
market, discount rates of 10.0% to 13.0%.
Again, using this market derived data, and adjusting it based on the specific
risks involved with investing in each of the subject properties, a unique
discount rate can be estimated and used to discount the projected cash flows to
a present value for each of the subject properties.
Using the discounted cash flows for the subject property, as presented in the
specific valuation section of this report, an estimate of value for each
property has been made.
18
<PAGE>
- -------------------------------------------------------------------------------
BLUFF RIDGE APARTMENTS
- -------------------------------------------------------------------------------
19
<PAGE>
[PHOTO]
BLUFF RIDGE APARTMENTS
215 VALENCIA DRIVE
JACKSONVILLE, NORTH CAROLINA
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Three-story, walk-up garden style apartment buildings
<TABLE>
<S> <C> <C> <C>
Land Area 8.56 Acres Number of Units 108
Density 12.62 Units/Acre Average Unit Size 1,078 Sq. Ft.
Net Rentable Area 116,460 Sq. Ft. Year Built 1988
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Masonite siding on wood frame
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Washer/dryer, fireplace, dishwasher, microwave oven, patios with
sliding doors, mini blinds, walk-in closets, carpeting
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Swimming pool, parking, tennis court, playground, picnic area,
fitness center
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $3,000,000 - $3,800,000
Value per Sq. Ft. of NRA $ 25.76 - $ 32.63
Value Per Unit $ 27,778 - $ 35,185
</TABLE>
- -------------------------------------------------------------------------------
20
<PAGE>
SALES COMPARISON APPROACH
BLUFF RIDGE
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located within the proximity of a highly
traveled major thoroughfare in Jacksonville, North Carolina. The neighborhood is
a developing residential neighborhood with good access to U. S.
Highway 17, surrounding retail/ commercial pockets and the Jacksonville Mall.
All of the comparable sales are located in neighborhoods that are considered
similar to the subject. Adjustments for location are not warranted.
SIZE - The subject is much larger than two of the Comparable Sales, Sales A and
B Because there is a tendency in most real estate markets for smaller parcels of
land or improved real estate to sell for a higher unit price, downward
adjustments to these would be appropriate. Sale 1 would be adjusted slightly
upward because it is larger than the subject.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate, we have tempered this 2.22% factor downward.
Newer structures have been adjusted downward based on a 1.0% per year rate while
older buildings have been adjusted upward.
QUALITY - Based on discussions held with various real estate brokers, an
adjustment for differences in quality would be minimal.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average/good condition
while the comparable buildings were judged to be in about the same or equal
condition, except for Comparable Sale A. This complex was reported to be in poor
condition at the time of its sale and an upward adjustment is deemed warranted.
21
<PAGE>
AMENITIES - The subject is adequately equipped with amenities including swimming
pool, tennis court, volleyball pad, etc. Each of the comparable sales is
equipped with similar amenities.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
22
<PAGE>
BLUFF RIDGE APARTMENTS
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/Sq. Ft. $1.39 SALE A SALE B SALE 1
<S> <C> <C> <C> <C>
Sale Date: Jun-98 Dec-98 Nov-95
Net Rentable Area: 116,460 64,704 54,179 174,880
Land Area - sq. ft 372,874 263,102 119,790 583,704
Lnd/Bld Ratio: 9.61 8.13 4.42 6.68
Stories: 3 2 2 2
Age: 11 12 32 21
Units 108 68 90 176
Price: $1,586,000 $1,850,000 $4,375,000
Price / Ft. - NRA $24.51 $34.15 $25.02
Price / Unit $23,324 $20,556 $24,858
GIM 3.50
OAR:
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $ 0.00 $ 0.00 $0.00
Adjusted Price* $24.51 $34.15 $25.02
FINANCING Market Market Market
Adjustment $ 0.00 $ 0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $ 0.00 $ 0.00 $0.00
Adjusted Price** $24.51 $34.15 $25.02
MARKET CONDITIONS Similar Similar Similar
Adjustment $0.00 $ 0.00 $0.00
Adjusted Price*** $24.51 $34.15 $25.02
PHYSICAL CHARACTERISTICS
Location o o o
Size - - +
Age o ++ +
Quality o o o
Condt ++ o o
Amenities o o o
Adjustment + + ++
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
23
<PAGE>
INCOME APPROACH
BLUFF RIDGE
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted if dramatically
different from the surveys or deviated from the historical trend. In addition,
market based management fees were used rather than the actual so that the income
would more closely reflect typical market expectations.
Because of the recent financial history of the subject with a steady revenue
stream which is increasing at a 4.1% annual compound rate, although there was a
slowdown in 1998, and an equally nominal operating expense growth rate, plus the
subject's location within the Jacksonville area and its reliance on the economic
impact of Camp Lejeune, a capitalization and discount rate that is above the
average was used in this analysis. The terminal capitalization rate is standard
for the Jacksonville area. The growth in rental rates is equal to the national
average as is the expense growth rate, both of which are slightly less than the
historical compound growth rate. However, as stated above, the future for rental
property in the Jacksonville area is cloudy and the 1998 financial information
for the subject reflects this concern (decreasing rental income growth rate but
increasing expense growth rate).
24
<PAGE>
BLUFF RIDGE APARTMENTS
Historical Financial statement
Year Ending Decamber 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 720,311 99% $ 703,704 96% $ 680,664 102% $ 670,110 104% $ 658,816 106%
Vacancy Loss -$ 9,369 -1% -$ 27,861 -4% -$ 55,139 -8% -$ 48,620 -8% -$ 51,534 -8%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 710,942 98% $ 675,843 92% $ 625,525 94% $ 621,490 97% $ 607,282 98%
Other Income $ 18,118 2% $ 58,864 8% $ 41,671 6% $ 20,168 3% $ 14,318 2%
TOTAL RECEIPTS $ 729,059 100% $ 734,707 100% $ 667,196 100% $ 641,658 100% $ 621,600 100%
EXPENSES:
Management Fee $ 44,802 $ 41,655 $ 32,768 $ 33,140 $ 33,295
Other Admin $ 52,620 $ 43,160 $ 44,520 $ 34,507 $ 44,170
Subtotal Admin $ 97,422 13.4% $ 84,815 11.5% $ 77,288 11.6% $ 67,647 10.5% $ 77,465 12.5%
Supplies
Utilities $ 54,451 $ 51,669 $ 53,868 $ 44,907 $ 58,839
Building Services
Other Operating $ 14,167 $ 11,620 $ 11,986 $ 9,290 $ 11,891
Subtotal Operating $ 68,618 9% $ 63,289 9% $ 65,854 10% $ 54,197 8% $ 70,730 11%
Security $ - $ -
Grounds Maint $ - $ -
Maint-Repairs $ 121,432 $ 99,601 $ 102,737 $ 79,632 $ 101,931
Painting/Decorating $ 14,167 $ 11,620 $ 11,986 $ 9,290 $ 11,892
Subtotal Maint. $ 135,599 19% $ 111,221 15% $ 114,723 17% $ 88,922 14% $ 113,823 18%
R.E. Taxes $ 36,793 $ 37,517 $ 34,831 $ 31,776 $ 28,593
Insurance $ 9,023 $ 7,423 $ 6,876 $ 7,501 $ 7,397
Other
Subtotal Taxes-insur $ 45,816 6% $ 44,940 6% $ 41,707 6% $ 39,277 6% $ 35,990 6%
TOTAL EXPENSES $ 347,455 48% $ 304,265 41% $ 299,572 45% $ 250,043 39% $ 298,008 48%
NET OPERATING INCOME $ 381,604 52% $ 430,442 59% $ 367,624 55% $ 391,615 61% $ 323,592 52%
</TABLE>
25
<PAGE>
BLUFF RIDGE
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Bluff Ridge
215 Valencia Drive
Jacksonville, North Carolina
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 108
Revenue @ $560 per Unit $ 725,760
Expenses @ $2.94 per Sq. Ft. 342,395
----------
Net Income 383,365
Replacement Reserves @ $ 400 43,200
----------
Net Operating Income (NOI) $ 340,165
Cap Rate @ 9.75% $3,488,872
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$3,500,000
- -------------------------------------------------------------------------------
26
<PAGE>
BLUFF RIDGE APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 750,000 $ 776,250 $ 803,419 $ 831,538 $ 860,642 $ 890,765 $ 921,941
Vacancy Loss -$ 60,000 -$ 62,100 -$ 64,274 -$ 66,523 -$ 68,851 -$ 71,261 -$ 73,755
Rent Concessions $ -
Other $ 10,000 $ 10,350 $ 10,712 $ 11,087 $ 11,475 $ 11,877 $ 12,293
EFFECTIVE INCOME $ 700,000 $ 724,500 $ 749,858 $ 776,103 $ 803,266 $ 831,380 $ 860,479
EXPENSES:
Management Fee $ 28,000 $ 28,980 $ 29,994 $ 31,044 $ 32,131 $ 33,255 $ 34,419
Other Admin $ 50,100 $ 51,603 $ 53,151 $ 54,746 $ 56,388 $ 58,080 $ 59,822
Subtotal Admin $ 78,100 $ 80,583 $ 83,145 $ 85,790 $ 88,519 $ 91,335 $ 94,241
Supplies $ - $ - $ - $ - $ - $ - $ -
Utilities $ 57,000 $ 58,710 $ 60,471 $ 62,285 $ 64,154 $ 66,079 $ 68,061
Building Services $ - $ - $ - $ - $ - $ - $ -
Other Operating $ 14,500 $ 14,935 $ 15,383 $ 15,845 $ 16,320 $ 16,809 $ 17,314
Subtotal Operating $ 71,500 $ 73,645 $ 75,854 $ 78,130 $ 80,474 $ 82,888 $ 85,375
Security $ - $ - $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ - $ - $ -
Maint-Repairs $ 117,010 $ 120,520 $ 124,136 $ 127,860 $ 131,696 $ 135,647 $ 139,716
Painting/Decorating $ 13,500 $ 13,905 $ 14,322 $ 14,752 $ 15,194 $ 15,650 $ 16,120
Subtotal Maint $ 130,510 $ 134,425 $ 138,458 $ 142,612 $ 146,890 $ 151,297 $ 155,836
R.E. Taxes $ 40,500 $ 41,715 $ 42,966 $ 44,255 $ 45,583 $ 46,951 $ 48,359
Insurance $ 10,000 $ 10,300 $ 10,609 $ 10,927 $ 11,255 $ 11,593 $ 11,941
Other $ - $ - $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 50,500 $ 52,015 $ 53,575 $ 55,183 $ 56,838 $ 58,543 $ 60,300
TOTAL EXPENSES $ 330,610 $ 340,668 $ 351,033 $ 361,714 $ 372,721 $ 384,063 $ 395,751
NON-OPERATING EXPENSES
Capital Improvements $ 43,200 $ 44,496 $ 45,831 $ 47,206 $ 48,622 $ 50,081 $ 51,583
Other $ -
NET CASH FLOW $ 340,590 $ 354,240 $ 368,419 $ 383,148 $ 398,448 $ 414,339 $ 430,846
P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523
P.V. Cash Flow $ 304,098 $ 282,398 $ 262,233 $ 243,497 $ 226,090 $ 209,917 $ 194,893
<CAPTION>
2006 2007 2008
<S> <C> <C> <C>
REVENUE
Gross Potential $ 954,209 $ 987,607 $1,022,173
Vacancy Loss -$7 6,337 -$ 79,009 -$ 81,774
Rent Concessions
Other $ 12,723 $ 13,168 $ 13,629
EFFECTIVE INCOME $ 890,595 $ 921,766 $ 954,028
EXPENSES:
Management Fee $ 35,624 $ 36,871 $ 38,161
Other Admin $ 61,617 $ 63,465 $ 65,369
Subtotal Admin $ 97,241 $ 100,336 $ 103,530
Supplies $ - $ - $ -
Utilities $ 70,103 $ 72,206 $ 74,372
Building Services $ - $ - $ -
Other Operating $ 17,833 $ 18,368 $ 18,919
Subtotal Operating $ 87,936 $ 90,574 $ 93,291
Security $ - $ - $ -
Grounds Maint $ - $ - $ -
Maint-Repairs $ 143,908 $ 148,225 $ 152,672
Painting/Decorating $ 16,603 $ 17,101 $ 17,614
Subtotal Maint $ 160,511 $ 165,326 $ 170,286
R.E. Taxes $ 49,810 $ 51,304 $ 52,843
Insurance $ 12,299 $ 12,668 $ 13,048
Other $ - $ - $ -
Subtotal Taxes-insur $ 62,109 $ 63,972 $ 65,891
TOTAL EXPENSES $ 407,796 $ 420,208 $ 432,999
NON-OPERATING EXPENSES
Capital Improvements $ 53,131 $ 54,724 $ 56,366
Other
NET CASH FLOW $ 447,990 $ 465,796 $ 484,289
P.V. Factor 0.4009 0.3606 0.3220
P.V. Cash Flow $ 180,936 $ 167,971 $ 155,928
SUM P.V. $2,227,961
RESIDUAL $1,562,926
TOTAL VALUE $3,790,887
</TABLE>
27
<PAGE>
SUMMARY
BLUFF RIDGE
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Bluff Ridge
215 Valencia Drive
Jacksonville, North Carolina
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $3,000,000
Income Approach:
Direct Capitalization $3,500,000
DCF $3,800,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$3,000,000 - $3,800,000
- -------------------------------------------------------------------------------
28
<PAGE>
- -------------------------------------------------------------------------------
WATERMAN'S CROSSING APARTMENTS
- -------------------------------------------------------------------------------
29
<PAGE>
[PHOTO]
WATERMAN'S CROSSING
638 RIVERBEND COURT
NEWPORT NEWS, VIRGINIA
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Two and three-story garden style apartment buildings.
<TABLE>
<S> <C> <C> <C>
Land Area 20.00 Acres Number of Units 260
Density 13.00 Units/Acre Average Unit Size 945 Sq. Ft.
Net Rentable Area 245,732 Sq. Ft. Year Built 1987
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Vinyl siding on wood frame
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Washer/dryer in each unit, wood doors and windows, slate
fireplace, large walk-in closet space, mini blinds,
microwave oven, ceiling fans in all bedrooms, private patios
and decks
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Swimming pool, parking, clubhouse, fitness center, two
lighted tennis courts, sand volleyball court, car wash area,
two playground areas
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $12,750,000 - $13,500,000
Value per Sq. Ft. of NRA $51.89 - $54.94
Value Per Unit $49,038 - $51,923
</TABLE>
- -------------------------------------------------------------------------------
30
<PAGE>
SALES COMPARISON APPROACH
WATERMAN'S CROSSING
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located in close proximity to a highly
traveled major thoroughfare in Newport News, Virginia. The neighborhood is a
developing residential neighborhood with good access to I-64 and the Patrick
Henry Mall. In addition, it is within the region dominated by the Oyster Point
Industrial Park, the site of numerous high-tech businesses, and directly south
of the complex known as the Oyster Point Master Plan Development Community, a
700-acre industrial business park.
According to area real estate brokers, all of the comparable sales used in this
appraisal are located in equally desirable areas. No adjustments for location
differences are warranted.
SIZE - Although the size of the subject is larger than all but one of the
comparable sales, the size differential is not large enough to warrant any type
of drastic adjustment.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate, we have tempered this 2.22% factor downward.
Newer structures would be adjusted downward while older comparable properties
would be adjusted up.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered good. Comparable Sales A and D are judged to be of equal quality and
adjustments are not required. Sales B and C are of quality that is slightly
better than the subject. A slight negative adjustment should be made.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in very good condition as
were the comparable buildings. Adjustments for condition are not required.
31
<PAGE>
AMENITIES - The subject and comparable sales are adequately equipped with
amenities including swimming pools, tennis courts, exercise facility, etc. All
of the comparables appear to have an equal level of amenities and an adjustment
is not warranted.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
32
<PAGE>
WATERMAN'S CROSSING
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/sq. ft. $1.00 SALE A SALE B SALE C SALE D
<S> <C> <C> <C> <C> <C>
Sale Date: Mar-98 Jan-98 Dec-97 May-96
Net Rentable Area: 245,732 208,872 293,500 193,112 142,800
Land Area - sq. ft 871,200 743,569 747,315 801,526 421,661
Lnd/Bld Ratio: 10.64 8.90 5.09 8.30 5.91
Stories: 3 2.5 2 2 2
Age: 10 1 24 10 7
Units 260 216 250 202 174
Price: $13,000,000 $11,900,000 $9,600,000 $8,420,000
Price / Ft. - NRA $62.24 $40.55 $49.71 $58.96
Price / Unit $60,185 $47,600 $47,525 $48,391
GIM 7.88 5.25 7.13 6.35
OAR: 8.96% 10.30% 9.34% 9.23%
REAL PROPERTY RIGHTS
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price* $62.24 $40.55 $49.71 $58.96
FINANCING Market Market Market Market
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price** $62.24 $40.55 $49.71 $58.96
MARKET CONDITIONS Similar 0% Similar 0% Similar 0% Similar
Adjustment $0.00 $0.00 $0.00 $0.00
Adjusted Price*** $62.24 $40.55 $49.71 $58.96
PHYSICAL CHARACTERISTICS
Location o o o o
Size o o o o
Age -- + o o
Quality o - - o
Condt. o o o o
Amenities o o o o
Adjustment --- + - o
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
33
<PAGE>
INCOME APPROACH
WATERMAN'S CROSSING
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
Because of the recent financial history of the subject with revenue increasing
at a nominal 2.3 +/- % rate and expenses are under control with very little
increase, plus the optimistic economic outlook for the Newport News area, a
capitalization and discount rate that is at, or only slightly above the national
average was used in this analysis. The historical gross revenue trend is
extended in our model because we don't see anything that would cause it to
change in the near future. The terminal capitalization rate at 10% is standard
for the Newport News/Norfolk area.
34
<PAGE>
WATERMAN'S CROSSING
Historical Financial statement
Year Ending Decamber 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996
<S> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,982,597 98% $ 1,952,592 100% $ 1,926,053
Vacancy Loss -$ 59,820 -3% -$ 78,782 -4% -$ 147,483
Rent Concessions $ - 0% $ - 0% $ -
Model Apt. $ - 0% $ - 0% $ -
TOTAL RENTAL INCOME $ 1,922,777 95% $ 1,873,810 96% $ 1,778,570
Other Income $ 95,512 5% $ 77,737 4% $ 107,025
TOTAL RECEIPTS $ 2,018,289 100% $ 1,951,547 100% $ 1,885,595
EXPENSES:
Management Fee $ 80,719 $ 78,081 $ 75,424
Other Admin $ 60,499 $ 38,828 $ 48,672
Subtotal Admin $ 141,218 7.0% $ 116,909 6.0% $ 124,096
Supplies $ - $ -
Utilities $ 116,906 $ 114,489 $ 114,264
Building Services $ - $ -
Other Operating $ 199,973 $ 209,849 $ 208,299
Subtotal Operating $ 316,880 16% $ 324,338 17% $ 322,563
Security $ - $ -
Grounds Maint $ - $ -
Maint-Repairs $ 95,507 $ 99,796 $ 83,018
Painting/Decorating $ - $ -
Subtotal Maint. $ 95,507 5% $ 99,796 5% $ 83,018
R.E. Taxes $ 131,265 $ 131,267 $ 131,263
Insurance $ 20,537 $ 21,565 $ 20,766
Other $ 1,698
Subtotal Taxes-insur $ 153,499 8% $ 152,832 8% $ 152,029
TOTAL EXPENSES $ 707,103 35% $ 693,875 36% $ 681,706
NET OPERATING INCOME $ 1,311,186 65% $ 1,257,672 64% $ 1,203,889
<CAPTION>
% 1995 % 1994 %
<S> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income 102% $ 1,875,005 101% $ 1,837,212 100%
Vacancy Loss -8% -$ 123,370 -7% -$ 126,495 -7%
Rent Concessions 0% $ - 0% $ - 0%
Model Apt. 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME 94% $ 1,751,635 94% $ 1,710,717 93%
Other Income 6% $ 110,186 6% $ 132,350 7%
TOTAL RECEIPTS 100% $ 1,861,821 100% $ 1,843,067 100%
EXPENSES:
Management Fee $ 74,472 $ 73,834
Other Admin $ 74,359 $ 80,066
Subtotal Admin 6.6% $ 148,831 8.0% $ 153,900 8.4%
Supplies
Utilities $ 114,184 $ 125,496
Building Services
Other Operating $ 188,422 $ 172,806
Subtotal Operating 17% $ 302,606 16% $ 298,302 16%
Security
Grounds Maint
Maint-Repairs $ 97,151 $ 108,555
Painting/Decorating 5% $ 108,555 6%
Subtotal Maint.
R.E. Taxes $ 142,055 $ 141,564
Insurance $ 21,901 $ 27,579
Other
Subtotal Taxes-insur 9% $ 169,143 9%
TOTAL EXPENSES 36% $ 712,544 38% $ 729,900 40%
NET OPERATING INCOME 64% $ 1,149,277 62% $ 1,113,167 60%
</TABLE>
35
<PAGE>
WATERMAN'S CROSSING
DIRECT CAPITALIZATION
- ------------------------------------------------------------------------------
PROPERTY:
- ------------------------------------------------------------------------------
Waterman's Crossing
638 Riverbend Court
Newport News, Virginia
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 260
Revenue @ $665.00 per unit $ 2,074,800
Expenses @ $2.93 per sq. ft. 719,995
-----------
Net Income 1,354,805
Replacement Reserves @ $400 104,000
-----------
Net Operating Income (NOI) $ 1,250,805
Cap Rate @ 9.25% $13,522,216
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ESTIMATED VALUE:
- ------------------------------------------------------------------------------
$13,500,000
- ------------------------------------------------------------------------------
36
<PAGE>
WATERMANS CROSSING APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 2,088,250 $2,150,898 $2,215,424 $2,281,887 $2,350,344 $2,420,854
Vacancy Loss -$ 104,413 -$ 107,545 -$ 110,771 -$ 114,094 -$ 117,517 -$ 121,043
Rent Concessions $ -
Other $ 95,000 $ 96,900 $ 98,838 $ 100,815 $ 102,831 $ 104,888
EFFECTIVE INCOME $ 2,078,838 $2,140,253 $2,203,491 $2,268,608 $2,335,658 $2,404,699
EXPENSES:
Management Fee $ 83,154 $ 85,610 $ 88,140 $ 90,744 $ 93,426 $ 96,188
Other Admin $ 70,000 $ 71,400 $ 72,828 $ 74,285 $ 75,770 $ 77,286
Subtotal Admin $ 153,154 $ 157,010 $ 160,968 $ 165,029 $ 169,197 $ 173,474
Supplies $ - $ - $ - $ - $ - $ -
Utilities $ 114,000 $ 116,280 $ 118,606 $ 120,978 $ 123,397 $ 125,865
Building Services $ - $ - $ - $ - $ - $ -
Other Operating $ 200,000 $ 204,000 $ 208,080 $ 212,242 $ 216,486 $ 220,816
Subtotal Operating $ 314,000 $ 320,280 $ 326,686 $ 333,219 $ 339,884 $ 346,681
Security $ - $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ - $ -
Maint-Repairs $ 102,200 $ 104,244 $ 106,329 $ 108,455 $ 110,625 $ 112,837
Painting/Decorating $ - $ - $ - $ - $ - $ -
Subtotal Maint $ 102,200 $ 104,244 $ 106,329 $ 108,455 $ 110,625 $ 112,837
R.E. Taxes $ 133,893 $ 136,571 $ 139,303 $ 142,089 $ 144,930 $ 147,829
Insurance $ 20,580 $ 20,992 $ 21,411 $ 21,840 $ 22,276 $ 22,722
Other $ - $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 154,473 $ 157,563 $ 160,714 $ 163,928 $ 167,207 $ 170,551
TOTAL EXPENSES $ 723,827 $ 739,097 $ 754,696 $ 770,632 $ 786,912 $ 803,543
NON-OPERATING EXPENSES
Capital Improvements $ 104,000 $ 107,120 $ 110,334 $ 113,644 $ 117,053 $ 120,565
Other $ -
NET CASH FLOW $ 1,251,011 $1,294,036 $1,338,461 $1,384,332 $1,431,693 $1,480,591
P.V. Factor 0.8949 0.8008 0.7166 0.6412 0.5738 0.5135
P.V. Cash Flow $ 1,119,473 $1,036,218 $ 959,099 $ 887,667 $ 821,509 $ 760,239
<CAPTION>
2005 2006 2007 2008
<S> <C> <C> <C> <C>
REVENUE
Gross Potential $ 2,493,480 $2,568,284 $2,645,333 $2,724,693
Vacancy Loss -$ 124,674 -$ 128,414 -$ 132,267 -$ 136,235
Rent Concessions
Other $ 106,985 $ 109,125 $ 111,308 $ 113,534
EFFECTIVE INCOME $ 2,475,791 $2,548,995 $2,624,374 $2,701,992
EXPENSES:
Management Fee $ 99,032 $ 101,960 $ 104,975 $ 108,080
Other Admin $ 78,831 $ 80,408 $ 82,016 $ 83,656
Subtotal Admin $ 177,863 $ 182,368 $ 186,991 $ 191,736
Supplies $ - $ - $ - $ -
Utilities $ 128,383 $ 130,950 $ 133,569 $ 136,241
Building Services $ - $ - $ - $ -
Other Operating $ 225,232 $ 229,737 $ 234,332 $ 239,019
Subtotal Operating $ 353,615 $ 360,687 $ 367,901 $ 375,259
Security $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ -
Maint-Repairs $ 115,094 $ 117,396 $ 119,744 $ 122,138
Painting/Decorating $ - $ - $ - $ -
Subtotal Maint $ 115,094 $ 117,396 $ 119,744 $ 122,138
R.E. Taxes $ 150,786 $ 153,801 $ 156,877 $ 160,015
Insurance $ 23,176 $ 23,640 $ 24,113 $ 24,595
Other $ - $ - $ - $ -
Subtotal Taxes-insur $ 173,962 $ 177,441 $ 180,990 $ 184,610
TOTAL EXPENSES $ 820,534 $ 837,892 $ 855,626 $ 873,744
NON-OPERATING EXPENSES
Capital Improvements $ 124,181 $ 127,907 $ 131,744 $ 135,696
Other
NET CASH FLOW $ 1,531,076 $1,583,196 $1,637,004 $1,692,552
P.V. Factor 0.4595 0.4112 0.3679 0.3292
P.V. Cash Flow $ 703,500 $ 650,960 $ 602,312 $ 557,271
SUM P.V. $ 8,098,248
RESIDUAL $ 5,238,350
TOTAL VALUE $13,336,597
</TABLE>
37
<PAGE>
SUMMARY
WATERMANS' CROSSING
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Waterman's Crossing
638 Riverbend Court
Newport News, Virginia
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $12,750,000
Income Approach:
Direct Capitalization $13,500,000
DCF $13,335,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$12,750,000 - $13,500,000
- -------------------------------------------------------------------------------
38
<PAGE>
- -------------------------------------------------------------------------------
WATER'S EDGE APARTMENTS
- -------------------------------------------------------------------------------
39
<PAGE>
[PHOTO]
WATER'S EDGE
705 WATER'S EDGE DRIVE
LAKE VILLA, ILLINOIS
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Three story garden style apartments
<TABLE>
<S> <C> <C> <C>
Land Area 34.57 Acres Number of Units 108
Density 3.12 Units/Acre Average Unit Size 883 Sq. Ft.
Net Rentable Area 95,400 Sq. Ft. Year Built 1988
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Aluminum siding, wood frame
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Patio and balcony, washer/dryer, microwave oven, mini blinds, frost free
refrigerator, range with vented hood, disposal, dishwasher
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Private sand beach and boat launching facilities, basketball courts, Metra
station within walking distance, 24 hour maintenance
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $5,500,000 - $6,500,000
Value per Sq. Ft. of NRA $ 57.65 - $ 68.13
Value Per Unit $ 50,926 - $ 60,185
</TABLE>
- -------------------------------------------------------------------------------
40
<PAGE>
SALES COMPARISON APPROACH
WATER'S EDGE
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located approximately fifty minutes northwest
of Chicago's central business district in a small lake side community. The
complex is extensively landscaped with 950 feet of lake frontage. Linkage to
residential support facilities is good while access to major highways leading
into Chicago is fair. There is a Metra rail station within walking distance
which partially offsets the lack of easy commuting to Chicago's downtown.
Although comparable Sales A and B are in proximity to the subject, neither has
lake access and thus upward adjustments are warranted, Sale C has much better
linkage to typical metropolitan amenities but not like access on frontage. These
are offsetting location attributes and an adjustment is not necessary.
SIZE - Although the size of the subject is smaller than three of the comparable
sales used in this appraisal, size adjustments for these comparable sales are
nominal. Comparable Sale C is smaller and would be adjusted downward.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land which does not depreciate we have tempered this 2.22 factor downward. Newer
structures would be adjusted downward while older buildings would be adjusted
upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered average/good. Comparable Sales A and C, built of brick and wood
siding, are judged to be of slightly superior quality and would be adjusted
down. Comparable Sale B is of similar quality and would not be adjusted.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as were comparable Sales A and C. Comparable Sale B was judged to be in fair
condition at the time of the sale and should be adjusted upward.
41
<PAGE>
AMENITIES - The subject is located on the shores of an inland lake which is a
very desirable feature. It does not have any other exterior features that would
cause it to stand out from any of the other properties used in this analysis.
Sales A, B and C are void of any meaningful exterior amenities and should be
adjusted upward.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
42
<PAGE>
WATER'S EDGE
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
<S> <C> <C> <C> <C>
Land Value/sq. ft. $1.00 SALE A SALE B SALE C
Sale Date: Jun-98 Jul-97 Feb-98
Net Rentable Area: 95,400 144,528 153,592 64,785
Land Area - sq. ft 378,101 731,808 109,620
Lnd/Bld Ratio: 0.00 5.23 14.29 4.23
Stories: 3 2 3 2.5
Age: 8 22 18 7
Units 108 132 144 81
Price: $5,814,789 $4,800,000 $3,845,000
Price / Ft. - NRA $ 40.23 $ 31.25 $ 59.35
Price / Unit $ 44,051 $ 33,333 $ 47,469
GIM 5.54 4.11 N/A
OAR: 9.80% 10.38% 9.00%
REAL PROPERTY RIGHTS
Adjustment $ 0.00 $ 0.00 $0.00
Adjusted Price* $ 40.23 $ 31.25 $ 59.35
FINANCING Market Market Market
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price** $ 40.23 $ 31.25 $ 59.35
MARKET CONDITIONS Similar Similar Similar
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price*** $ 40.23 $ 31.25 $ 59.35
PHYSICAL CHARACTERISTICS
Location + + o
Size o o -
Age + + o
Quality - o -
Condt. o + o
Amenities + o +
Adjustment + ++ --
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
43
<PAGE>
INCOME APPROACH
WATER'S EDGE
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
Taking into consideration the strong Chicago area apartment market with vacancy
rates in the low single digits and new construction unable to keep up with
demand, but tempered by the recent financial history of the subject with revenue
increasing at a sporadic 2.7 + % compound rate, and expenses escalating at a
healthy 7.4% pace, although they moderated in 1998, a capitalization and
discount rate that is at or slightly above the national and regional average was
used in this analysis. The historical gross revenue and expense trend is
extended in our model because we don't see anything that would cause it to
change in the near future. The terminal capitalization rate is standard for the
Chicago area.
44
<PAGE>
WATER'S EDGE
Historical Financial statement
Year Ending Decamber 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996 % 1995 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 963,889 98% $1,015,280 101% $974,648 104% $948,595 96%
Vacancy Loss 0% -$ 73,168 -7% -$ 92,372 -10% -$ 24,178 -2%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 963,889 98% $ 942,112 93% $882,276 94% $924,417 94%
Other Income $ 15,642 2% $ 66,343 7% $ 57,281 6% $ 62,726 6%
TOTAL RECEIPTS $ 979,532 100% $1,008,455 100% $939,557 100% $987,143 100%
EXPENSES:
Management Fee $ 48,929 $ 47,806 $ 44,478 $ 46,441
Other Admin $ 103,222 $ 101,407 $ 95,145 $ 86,243
Subtotal Admin $ 152,151 15.5% $ 149,213 14.8% $139,623 14.9% $132,684 13.4%
Supplies $ - $ -
Utilities $ 51,145 $ 50,613 $ 47,293 $ 41,760
Building Services $ - $ -
Other Operating $ 7,790 $ 7,563 $ 7,181 $ 6,509
Subtotal Operating $ 58,935 6% $ 58,176 6% $ 54,474 6% $ 48,269 5%
Security $ - $ -
Grounds Maint $ - $ -
Maint-Repairs $ 72,060 $ 70,794 $ 66,421 $ 60,208
Painting/Decorating $ 11,686 $ 11,480 $ 10,771 $ 9,763
Subtotal Maint. $ 83,746 9% $ 82,274 8% $ 77,192 8% $ 69,971 7%
R.E. Taxes $ 134,239 $ 133,357 $116,009 $124,112
Insurance $ 8,007 $ 10,240 $ 10,315 $ 9,217
Subtotal Taxes-insur $ 142,246 15% $ 143,597 14% $126,324 13% $133,329 14%
TOTAL EXPENSES $ 437,079 45% $ 433,260 43% $397,613 42% $384,253 39%
NET OPERATING INCOME $ 542,453 55% $ 575,195 57% $541,944 58% $602,890 61%
<CAPTION>
1994 %
<S> <C> <C>
RECEIPTS:
Rental Income $844,805 96%
Vacancy Loss $ 32,429 4%
Rent Concessions $ - 0%
Model Apt. $ - 0%
TOTAL RENTAL INCOME $877,234 100%
Other Income $ 1,625 0%
TOTAL RECEIPTS $878,859 100%
EXPENSES:
Management Fee $ 44,213
Other Admin $ 87,508
Subtotal Admin $131,721 15.0%
Supplies
Utilities $ 49,002
Building Services
Other Operating $ 6,604
Subtotal Operating $ 55,606 6%
Security
Grounds Maint
Maint-Repairs $ 61,090
Painting/Decorating $ 9,907
Subtotal Maint. $ 70,997 8%
R.E. Taxes $ 61,996
Insurance $ 7,977
Other
Subtotal Taxes-insur $ 69,973 8%
TOTAL EXPENSES $328,297 37%
NET OPERATING INCOME $550,562 63%
</TABLE>
45
<PAGE>
WATER'S EDGE
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Water's Edge
705 Water's Edge Drive
Lake Villa, Illinois
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 108
Revenue @ $825 per Unit $1,069,200
Expenses @ $4.60 per Sq. Ft. 438,840
----------
Net Income 630,360
Replacement Reserves @ $ 400 43,200
----------
Net Operating Income (NOI) 587,160
Cap Rate @ 9.25% $6,347,675
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$6,350,000
- -------------------------------------------------------------------------------
46
<PAGE>
WATER'S EDGE APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,055,000 $1,086,650 $1,119,250 $1,152,827 $ 1,187,412
Vacancy Loss -$ 52,75 -$ 54,333 -$ 55,96 -$ 57,64 -$ 59,371
Rent Concessions $ -
Other $ 12,000 $ 12,360 $ 12,731 $ 13,113 $ 13,506
EFFECTIVE INCOME $1,014,250 $1,044,678 $1,076,018 $1,108,298 $ 1,141,547
EXPENSES:
Management Fee $ 40,570 $ 41,787 $ 43,041 $ 44,332 $ 45,662
Other Admin $ 57,900 $ 59,637 $ 61,426 $ 63,269 $ 65,167
Subtotal Admin $ 98,470 $ 101,424 $ 104,467 $ 107,601 $ 110,829
Supplies $ - $ - $ - $ - $ -
Utilities $ 56,100 $ 57,783 $ 59,516 $ 61,302 $ 63,141
Building Services $ - $ - $ - $ - $ -
Other Operating $ 4,500 $ 4,635 $ 4,774 $ 4,917 $ 5,065
Subtotal Operating $ 60,600 $ 62,418 $ 64,291 $ 66,219 $ 68,206
Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 40,572 $ 41,789 $ 43,043 $ 44,334 $ 45,664
Painting/Decorating $ 6,000 $ 6,180 $ 6,365 $ 6,556 $ 6,753
Subtotal Maint. $ 46,572 $ 47,969 $ 49,408 $ 50,890 $ 52,417
R.E. Taxes $ 160,000 $ 164,800 $ 169,744 $ 174,836 $ 180,081
Insurance $ 10,615 $ 10,933 $ 11,261 $ 11,599 $ 11,947
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 170,615 $ 175,733 $ 181,005 $ 186,435 $ 192,028
TOTAL EXPENSES $ 376,257 $ 387,544 $ 399,171 $ 411,146 $ 423,480
NON-OPERATING EXPENSES
Capital Improvements $ 43,200 $ 44,496 $ 45,831 $ 47,206 $ 48,622
Other
NET CASH FLOW $ 594,793 $ 612,637 $ 631,016 $ 649,947 $ 669,445
P.V. Factor 0.8969 0.8044 0.7214 0.6470 0.5803
P.V. Cash Flow $ 533,447 $ 492,781 $ 455,214 $ 420,512 $ 388,455
<CAPTION>
2004 2005 2006 2007 2008
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,223,034 $1,259,725 $1,297,517 $1,336,442 $1,376,536
Vacancy Loss -$ 61,15 -$ 62,98 -$ 64,87 -$ 66,82 -$ 68,827
Rent Concessions
Other $ 13,911 $ 14,329 $ 14,758 $ 15,201 $ 15,657
EFFECTIVE INCOME $1,175,794 $1,211,068 $1,247,400 $1,284,822 $1,323,366
EXPENSES:
Management Fee $ 47,032 $ 48,443 $ 49,896 $ 51,393 $ 52,935
Other Admin $ 67,122 $ 69,136 $ 71,210 $ 73,346 $ 75,546
Subtotal Admin $ 114,154 $ 117,578 $ 121,106 $ 124,739 $ 128,481
Supplies $ - $ - $ - $ - $ -
Utilities $ 65,035 $ 66,986 $ 68,996 $ 71,066 $ 73,198
Building Services $ - $ - $ - $ - $ -
Other Operating $ 5,217 $ 5,373 $ 5,534 $ 5,700 $ 5,871
Subtotal Operating $ 70,252 $ 72,360 $ 74,530 $ 76,766 $ 79,069
Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 47,034 $ 48,445 $ 49,898 $ 51,395 $ 52,937
Painting/Decorating $ 6,956 $ 7,164 $ 7,379 $ 7,601 $ 7,829
Subtotal Maint. $ 53,990 $ 55,609 $ 57,278 $ 58,996 $ 60,766
R.E. Taxes $ 185,484 $ 191,048 $ 196,780 $ 202,683 $ 208,764
Insurance $ 12,305 $ 12,675 $ 13,055 $ 13,446 $ 13,850
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 197,789 $ 203,723 $ 209,835 $ 216,130 $ 222,614
TOTAL EXPENSES $ 436,185 $ 449,270 $ 462,748 $ 476,631 $ 490,930
NON-OPERATING EXPENSES
Capital Improvements $ 50,081 $ 51,583 $ 53,131 $ 54,724 $ 56,366
Other
NET CASH FLOW $ 689,528 $ 710,214 $ 731,521 $ 753,466 $ 776,070
P.V. Factor 0.5204 0.4667 0.4186 0.3754 0.3367
P.V. Cash Flow $ 358,842 $ 331,486 $ 306,216 $ 282,872 $ 261,308
SUM P.V. $3,831,132
RESIDUAL $2,456,293
TOTAL VALUE $6,287,425
</TABLE>
47
<PAGE>
SUMMARY
WATER'S EDGE
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Water's Edge
705 Water's Edge Drive
Lake Villa, Illinois
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $5,500,000
Income Approach:
Direct Capitalization $6,350,000
DCF $6,300,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$5,500,000 - $6,500,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
48
<PAGE>
- -------------------------------------------------------------------------------
PONDS AT GEORGETOWN APARTMENTS
- -------------------------------------------------------------------------------
49
<PAGE>
[PHOTO]
PONDS AT GEORGETOWN
2511 PACKARD ROAD
ANN ARBOR, MICHIGAN
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Eight, two and three story garden style apartment buildings
<TABLE>
<S> <C> <C> <C>
Land Area 13.08 Acres Number of Units 134
Density 10.24 Units/Acre Average Unit Size 1,050 Sq. Ft.
Net Rentable Area 143,400 Sq. Ft. Year Built 1988
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Brick, aluminum siding
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Washer/dryer, pantry, microwave, self-cleaning oven, frost-free
refrigerator, dishwasher, gas fireplace, cable connections, two
full-size bathrooms, marble window sills, window blinds,
carpeting, central air, balconies or patios, carports, alarm
system. Some units have cathedral ceilings
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Clubhouse, fitness center, swimming pool, tennis and platform
tennis courts, limited access entryways with intercom system, play
area, jacuzzi, and 24 hour emergency
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $7,000,000 - $8,500,000
Value per Sq. Ft. of NRA $48.81 - $59.27
Value Per Unit $52,239 - $63,433
</TABLE>
- -------------------------------------------------------------------------------
50
<PAGE>
SALES COMPARISON APPROACH
PONDS AT GEORGETOWN
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject property is centrally located in a residential
neighborhood within two miles of the downtown area of Ann Arbor, and within easy
reach of two or three major shopping malls, Arborland Consumer Mall, Carpenter
Plaza, and University Square.
Comparable Sale 1 is located in an inferior neighborhood and should be adjusted
upward. Sales 2 and 3 are both in more residential neighborhoods, similar to the
subject and need not be adjusted.
SIZE - Although the size of the subject is equal to or smaller than each of the
comparable improved sales used in this analysis, the size differential is not
significant enough to warrant any type of adjustment with the exception of Sale
1, which should be adjusted slightly downward because of its smaller size.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate we have tempered this 2.22% factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered average. Although comparable Sale 1 is of masonry construction, the
overall quality appears to be much less than the subject. An upward adjustment
is appropriate. Comparable Sales 2 and 3 are deemed to be of equal construction
quality and would not be adjusted.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average/fair condition.
Comparable Sale 1 was reported to require dramatic improvements at the time of
its sale and should be adjusted substantially upward because of the extensive
remodeling that took place. Sales 2 and 3 were in excellent condition and would
be adjusted down slightly.
51
<PAGE>
AMENITIES - The subject is adequately equipped with amenities including a
swimming pool, tennis courts, exercise facility, etc. Both Comparable Sales 2
and 3 are equipped with similar amenities but not to the same extent and need be
adjusted slightly upward. Sale 1, however, is void of any external recreational
amenities and would be adjusted upward.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
52
<PAGE>
THE PONDS AT GEORGETOWN
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/sq. ft. $1.00 SALE 1 SALE 2 SALE 3
<S> <C> <C> <C> <C>
Sale Date: May-97 Mar-95 Jan-95
Net Rentable Area: 143,400 102,950 173,472 185,392
Land Area - sq. ft
Lnd/Bld Ratio: 0.00 0.00 0.00 0.00
Stories: 2 3 2.5 2
Age: 10 33 18 7
Units 134 175 216 168
Price: $5,230,000 $11,262,397 $8,900,000
Price / Ft. - NRA $50.80 $64.92 $48.01
Price / Unit $29,886 $52,141 $52,976
GIM 4.83 6.40 6.47
OAR: 9.27% 8.70% 9.50%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $0.00 $0.00 $0.00
Adjusted Price* $50.80 $64.92 $48.01
FINANCING Market Market Market
Adjustment $0.00 $0.00 $0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $0.00 $0.00 $0.00
Adjusted Price** $50.80 $64.92 $48.01
MARKET CONDITIONS Similar Similar Similar
Adjustment $0.00 $0.00 $0.00
Adjusted Price*** $50.80 $64.92 $48.01
PHYSICAL CHARACTERISTICS
Location ++ o o
Size - o o
Age ++ + o
Quality ++ o o
Condt. ++ - -
Amenities ++ + +
Adjustment ++++ o o
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
53
<PAGE>
INCOME APPROACH
PONDS AT GEORGETOWN
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
Because of the recent financial history of the subject with revenue increasing
at a strong 4.3% compound annual rate but expenses escalating at a higher 8.9%
rate, although they are down in 1998, plus the current apartment market in the
Ann Arbor area where most are granting one months free rent, a capitalization
and discount rate that is above the national average was used in this analysis.
The perception of apartment supply out pacing the demand contributed to this
slightly above average choice and the use of a modest 2.5% revenue growth rate.
The terminal capitalization rate, is slightly higher than the national average,
but within reason for the expectations of the future market in the Ann Arbor
area.
54
<PAGE>
THE PONDS AT GEORGETOWN
Historical Financial statement
Year Ending Decamber 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996 %
<S> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $1,447,357 100% $1,410,886 99% $1,363,342 103%
Vacancy Loss -$ 96,983 -7% -$ 86,511 -6% -$ 88,329 -7%
Rent Concessions $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $1,350,374 94% $1,324,375 93% $1,275,013 97%
Other Income $ 89,813 6% $ 104,988 7% $ 45,178 3%
TOTAL RECEIPTS $1,440,186 100% $1,429,363 100% $1,320,191 100%
EXPENSES:
Management Fee $ 57,574 $ 46,127 $ 40,272
Other Admin $ 125,903 $ 138,139 $ 138,445
Subtotal Admin $ 183,477 12.7% $ 184,266 12.9% $ 178,717 13.5%
Supplies $ - $ -
Utilities $ 73,420 $ 59,155 $ 68,596
Building Services $ - $ - $
Other Operating $ 91,565 $ 100,465 $ 100,687
Subtotal Operating $ 164,985 11% $ 159,620 11% $ 169,283 13%
Security $ - $ - $
Grounds Maint $ - $ - $
Maint-Repairs $ 68,674 $ 75,348 $ 75,516
Painting/Decorating $ - $ - $
Subtotal Maint. $ 68,674 5% $ 75,348 5% $ 75,516 6%
R.E. Taxes $ 202,917 $ 236,045 $ -
Insurance $ 797 $ 8,871 $ 18,765
Other
Subtotal Taxes-insur $ 203,715 14% $ 244,916 17% $ 18,765 1%
TOTAL EXPENSES $ 620,851 43% $ 664,150 46% $ 442,281 34%
NET OPERATING INCOME $ 819,336 57% $ 765,213 54% $ 877,910 66%
<CAPTION>
1995 % 1,994 %
<S> <C> <C> <C> <C>
RECEIPTS:
Rental Income $1,346,560 108% 1,354,652 111%
Vacancy Loss -$ 117,302 -9% - 154,737 -13%
Rent Concessions $ - 0% - 0%
Model Apt. $ - 0% - 0%
TOTAL RENTAL INCOME $1,229,258 98% 1,199,915 99%
Other Income $ 19,464 2% 15,719 1%
TOTAL RECEIPTS $1,248,722 100% 1,215,634 100%
EXPENSES:
Management Fee $ 37,985 36,502
Other Admin $ 124,064 136,833
Subtotal Admin $ 162,049 13.0% 173,335 14.3%
Supplies
Utilities $ 66,098 73,884
Building Services $
Other Operating $ 90,229 99,514
Subtotal Operating $ 156,327 13% 173,398 14%
Security $
Grounds Maint $
Maint-Repairs $ 67,671 74,637
Painting/Decorating $
Subtotal Maint. $ 67,671 5% 74,637 6%
R.E. Taxes $ 89 13,897
Insurance $ 13,214 6,453
Other
Subtotal Taxes-insur $ 13,303 1% 20,350 2%
TOTAL EXPENSES $ 399,350 32% 441,720 36%
NET OPERATING INCOME $ 849,372 68% 773,914 64%
</TABLE>
55
<PAGE>
PONDS AT GEORGETOWN
DIRECT CAPITALIZATION
- ------------------------------------------------------------------------------
PROPERTY:
- ------------------------------------------------------------------------------
Ponds at Georgetown
2511 Packard Road
Ann Arbor, Michigan
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 134
Revenue @ $920.00 per Unit $1,479,360
Expenses @ $4.59 per Sq. Ft. 658,205
----------
Net Income 821,155
Replacement Reserves @ $ 400 53,600
----------
Net Operating Income (NOI) $ 767,555
Cap Rate @ 9.25% $8,297,892
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ESTIMATED VALUE:
- ------------------------------------------------------------------------------
$8,300,000
- ------------------------------------------------------------------------------
56
<PAGE>
THE PONDS AT GEORGETOWN
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,480,000 $1,517,000 $ 1,554,925 $1,593,798 $ 1,633,643
Vacancy Loss -$ 103,600 -$ 106,190 -$ 108,845 -$ 111,566 -$ 114,355
Rent Concessions $ -
Other $ 85,000 $ 87,125 $ 89,303 $ 91,536 $ 93,824
EFFECTIVE INCOME $1,461,400 $1,497,935 $ 1,535,383 $1,573,768 $ 1,613,112
EXPENSES:
Management Fee $ 58,456 $ 59,917 $ 61,415 $ 62,951 $ 64,524
Other Admin $ 132,500 $ 135,813 $ 139,208 $ 142,688 $ 146,255
Subtotal Admin $ 190,956 $ 195,730 $ 200,623 $ 205,639 $ 210,780
Supplies $ - $ - $ - $ - $ -
Utilities $ 70,000 $ 71,750 $ 73,544 $ 75,382 $ 77,267
Building Services $ - $ - $ - $ - $ -
Other Operating $ 95,000 $ 97,375 $ 99,809 $ 102,305 $ 104,862
Subtotal Operating $ 165,000 $ 169,125 $ 173,353 $ 177,687 $ 182,129
Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 70,000 $ 71,750 $ 73,544 $ 75,382 $ 77,267
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 70,000 $ 71,750 $ 73,544 $ 75,382 $ 77,267
R.E. Taxes $ 205,768 $ 210,912 $ 216,185 $ 221,589 $ 227,129
Insurance $ 8,000 $ 8,200 $ 8,405 $ 8,615 $ 8,831
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 213,768 $ 219,112 $ 224,590 $ 230,204 $ 235,959
TOTAL EXPENSES $ 639,724 $ 655,717 $ 672,110 $ 688,912 $ 706,135
NON-OPERATING EXPENSES
Capital Improvements $ 53,600 $ 55,208 $ 56,864 $ 58,570 $ 60,327
Other $ -
NET CASH FLOW $ 768,076 $ 787,010 $ 806,409 $ 826,285 $ 846,650
P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674
P.V. Cash Flow $ 685,782 $ 627,400 $ 573,986 $ 525,119 $ 480,412
<CAPTION>
2004 2005 2006 2007 2008
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $1,674,484 $1,716,346 $1,759,255 $1,803,236 $1,848,317
Vacancy Loss -$ 117,214 -$ 120,144 -$ 123,148 -$ 126,227 -$ 129,382
Rent Concessions
Other $ 96,170 $ 98,574 $ 101,038 $ 103,564 $ 106,153
EFFECTIVE INCOME $1,653,440 $1,694,776 $1,737,145 $1,780,574 $1,825,088
EXPENSES:
Management Fee $ 66,138 $ 67,791 $ 69,486 $ 71,223 $ 73,004
Other Admin $ 149,912 $ 153,659 $ 157,501 $ 161,438 $ 165,474
Subtotal Admin $ 216,049 $ 221,450 $ 226,987 $ 232,661 $ 238,478
Supplies $ - $ - $ - $ - $ -
Utilities $ 79,199 $ 81,179 $ 83,208 $ 85,288 $ 87,420
Building Services $ - $ - $ - $ - $ -
Other Operating $ 107,484 $ 110,171 $ 112,925 $ 115,748 $ 118,642
Subtotal Operating $ 186,682 $ 191,349 $ 196,133 $ 201,036 $ 206,062
Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 79,199 $ 81,179 $ 83,208 $ 85,288 $ 87,420
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 79,199 $ 81,179 $ 83,208 $ 85,288 $ 87,420
R.E. Taxes $ 232,807 $ 238,627 $ 244,593 $ 250,708 $ 256,976
Insurance $ 9,051 $ 9,278 $ 9,509 $ 9,747 $ 9,991
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 241,858 $ 247,905 $ 254,103 $ 260,455 $ 266,967
TOTAL EXPENSES $ 723,789 $ 741,883 $ 760,430 $ 779,441 $ 798,927
NON-OPERATING EXPENSES
Capital Improvements $ 62,137 $ 64,001 $ 65,921 $ 67,899 $ 69,936
Other
NET CASH FLOW $ 867,514 $ 888,891 $ 910,794 $ 933,234 $ 956,225
P.V. Factor 0.5066 0.4523 0.4039 0.3606 0.3220
P.V. Cash Flow $ 439,510 $ 402,089 $ 367,854 $ 336,534 $ 307,879
SUM P.V. $4,746,565
RESIDUAL $2,894,062
TOTAL VALUE $7,640,628
</TABLE>
57
<PAGE>
SUMMARY
PONDS AT GEORGETOWN
- ------------------------------------------------------------------------------
PROPERTY:
- ------------------------------------------------------------------------------
Ponds at Georgetown
2511 Packard Road
Ann Arbor, Michigan
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
VALUE ESTIMATE:
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $7,000,0000
Income Approach:
Direct Capitalization $8,300,000
DCF $7,650,000
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
FINAL VALUE:
- ------------------------------------------------------------------------------
$7,000,000 - $8,500,000
- ------------------------------------------------------------------------------
58
<PAGE>
- ------------------------------------------------------------------------------
HIGHLAND PARK APARTMENTS
- ------------------------------------------------------------------------------
59
<PAGE>
[PHOTO]
HIGHLAND PARK APARTMENTS
2796 PRENDERGAST PLACE
REYNOLDSBURG, OHIO
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Garden style apartment buildings
<TABLE>
<S> <C> <C> <C>
Land Area 20.83 Acres Number of Units 252
Density 12.10 Units/Acre Average Unit Size 907 Sq. Ft.
Net Rentable Area 228,690 Sq. Ft. Year Built 1988
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Wood frame, brick and vinyl siding, three levels
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Fireplace, gas heat, cable television, washer/dryer, range, dishwasher,
patio or balcony
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Tennis courts, swimming pool
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $9,500,000 - $10,500,000
Value per Sq. Ft. of NRA $ 41.54 - $ 45.91
Value Per Unit $ 37,698 - $ 41,667
</TABLE>
- -------------------------------------------------------------------------------
60
<PAGE>
SALES COMPARISON APPROACH
HIGHLAND PARK
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject is located with frontage along Tussing and Prendergast
Road in a developing area along the I-70 corridor.
Comparable Sales B and D are fairly similar in location, however they do not
benefit from the I-70 access, thus requiring an upward adjustment. Comparable
Sales A and C are in a slightly more attractive neighborhood and would be
adjusted down.
SIZE - Sale A is smaller than the subject and should be adjusted down while Sale
B is much larger and should be adjusted up. Sales C and D need not be adjusted
for size.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate we have tempered this 2.22 % factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered average/fair. Sales A and D appear to be of equal quality while Sale
B is of inferior quality and should be adjusted upward. Sale C is slightly
superior to the subject and should be adjusted downward.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are the comparable Sales A, C and D. No adjustment is warranted. Sale B,
however, was in very poor condition and required substantial renovations. It
should be adjusted upward.
AMENITIES - The subject has fireplaces in each unit and offers tennis courts.
Sales A and C, although they do not have fireplaces, each has lake views. No
adjustments are warranted. Sales B and D have standard amenities but lack the
fireplaces of the subject. Upward adjustments should be made.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
61
<PAGE>
HIGHLAND PARK APARTMENTS
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/sq. ft. $1.39 SALE A SALE B SALE C SALE D
<S> <C> <C> <C> <C> <C>
Sale Date: Nov-98 Apr-98 Sep-98 Sep-98
Net Rentable Area 228,690 105,580 585,120 265,804 257,280
Land Area - acre 21 12 50 25 21
Lnd/Bld Ratio: 7.93 9.87 9.31 8.18 9.09
Stories: 2 2 2.5 2 2.5
Age: 8 1 27 1 23
Units 252 136 770 256 238
Price: $6,210,000 $19,150,000 $14,425,000 $7,020,000
Price / Ft. - NRA $ 58.82 $ 32.73 $ 54.27 $ 27.29
Price / Unit $ 45,662 $ 24,870 $ 56,348 $ 29,496
GIM
OAR:
REAL PROPERTY RIGHTS
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price* $ 58.82 $ 32.73 $ 54.27 $ 27.29
FINANCING Market Market Market Market
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length Arm's Length
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price** $ 58.82 $ 32.73 $ 54.27 $ 27.29
MARKET CONDITIONS Similar Similar Similar Similar
Adjustment $ 0.00 $0.00 $0.00 $ 0.00
Adjusted Price*** $ 58.82 $ 32.73 $ 54.27 $ 27.29
PHYSICAL CHARACTERISTICS
Location - + - +
Size - ++ o o
Age - ++ - ++
Quality o + - o
Condt. o + o o
Amenities o + o +
Other
Composite Adjustment
Adjustment --- +++++ --- ++++
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
62
<PAGE>
INCOME APPROACH
HIGHLAND PARK
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
The general Columbus apartment market is showing signs of softening with vacancy
rates climbing. Some of this softness is due to the recent strong construction
pace for multifamily units and the strong single family housing market which
competes with the apartment market. The subject financial statements reflect
this weakening market.
Revenue has been increasing at a modest 2% compound rate over the past four
years, but expenses have been escalating at a more rapid 9%. As a result, a
capitalization and discount rate that is at a slightly higher than the national
and regional average was used in this analysis. The historical gross revenue and
expense trend is extended in our model at a slightly moderated level for we feel
that rental rate increases in the future will continue to increase at a moderate
2.5% - 3.0% level and the expenses incurred by the subject will probably only
increase at slightly higher than the rate of inflation, 3.5% now that the
abnormally high maintenance expenses are in the past. The terminal
capitalization rate is standard or slightly higher than normal for the Columbus
area but in line with the national average.
63
<PAGE>
HIGHLAND PARK
Historical Financial statement
Year Ending Decamber 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996 %
<S> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $1,760,936 108% $1,746,774 108% $1,662,082 105%
Vacancy Loss -$ 145,537 -9% -$ 150,927 -9% -$ 106,870 -7%
Rent Concessions $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $1,615,399 99% $1,595,847 99% $1,555,212 99%
Other Income $ 17,890 1% $ 15,776 1% $ 23,415 1%
TOTAL RECEIPTS $1,633,289 100% $1,611,623 100% $1,578,627 100%
EXPENSES:
Management Fee $ 81,992 $ 73,600 $ 79,500
Other Admin $ 139,263 $ 110,606 $ 97,604
Subtotal Admin $ 221,255 13.5% $ 184,206 11.4% $ 177,104 11.2%
Supplies $ - $ -
Utilities $ 86,299 $ 77,897 $ 81,183
Building Services $ - $ -
Other Operating $ 30,111 $ 23,914 $ 21,104
Subtotal Operating $ 116,410 7% $ 101,811 6% $ 102,287 6%
Security $ - $ -
Grounds Maint $ 112,915 $ 89,680 $ 79,138
Maint-Repairs $ 67,750 $ 53,808 $ 47,483
Painting/Decorating $ 26,248 $ 20,925 $ 18,466
Subtotal Maint. $ 206,913 13% $ 164,413 10% $ 145,087 9%
R.E. Taxes $ 125,050 $ 115,492 $ 109,700
Insurance $ 22,723 $ 12,996 $ 16,405
Other
Subtotal Taxes-insur $ 147,773 9% $ 128,488 8% $ 126,105 8%
TOTAL EXPENSES $ 692,351 42% $ 578,918 36% $ 550,583 35%
NET OPERATING INCOME $ 940,937 58% $1,032,705 64% $1,028,044 65%
<CAPTION>
1995 % 1994 %
<S> <C> <C> <C> <C>
RECEIPTS:
Rental Income $1,594,090 103% $1,562,782 103%
Vacancy Loss -$ 64,133 -4% -$ 57,349 -4%
Rent Concessions $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0%
TOTAL RENTAL INCOME $1,529,957 99% $1,505,433 100%
Other Income 10342 1% $ 5,541 0%
TOTAL RECEIPTS $1,540,299 100% $1,510,974 100%
EXPENSES:
Management Fee $ 78,176 $ 76,103
Other Admin $ 96,760 $ 82,812
Subtotal Admin $ 174,936 11.4% $ 158,915 10.5%
Supplies
Utilities $ 59,825 $ 58,893
Building Services
Other Operating $ 20,921 $ 17,905
Subtotal Operating $ 80,746 5% $ 76,798 5%
Security
Grounds Maint $ 78,454 $ 67,145
Maint-Repairs $ 47,073 $ 40,287
Painting/Decorating $ 18,306 $ 15,667
Subtotal Maint. $ 143,833 9% $ 123,099 8%
R.E. Taxes $ 118,172 $ 112,853
Insurance $ 12,110 $ 14,144
Other
Subtotal Taxes-insur $ 130,282 8% $ 126,997 8%
TOTAL EXPENSES $ 529,797 34% $ 485,809 32%
NET OPERATING INCOME $1,010,502 66% $1,025,165 68%
</TABLE>
64
<PAGE>
HIGHLAND PARK
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Highland Park
2796 Prendergast Place
Reynoldsburg, Ohio
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 252
Revenue @ 555 per Unit $1,678,320
Expenses @ 2.80 per Sq. Ft. 640,330
----------
Net Income 1,037,990
Replacement Reserves @ $400 100,800
----------
Net Operating Income (NOI) $937,190
Cap Rate @ 9.5% $9,865,157
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$9,900,000
- -------------------------------------------------------------------------------
65
<PAGE>
HIGHLAND PARK APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,805,000 $1,850,125 $1,896,378 $1,943,788 $1,992,382 $2,042,192
Vacancy Loss -$ 144,400 -$ 148,010 -$ 151,710 -$ 155,503 -$ 159,391 -$ 163,375
Rent Concessions $ -
Other $ 20,000 $ 20,700 $ 21,425 $ 22,174 $ 22,950 $ 23,754
EFFECTIVE INCOME $ 1,680,600 $1,722,815 $1,766,092 $1,810,459 $1,855,942 $1,902,570
EXPENSES:
Management Fee $ 67,224 $ 68,913 $ 70,644 $ 72,418 $ 74,238 $ 76,103
Other Admin $ 113,400 $ 26,460 $ 26,460 $ 26,460 $ 26,460 $ 26,460
Subtotal Admin $ 180,624 $ 95,372 $ 97,103 $ 98,878 $ 100,697 $ 102,562
Supplies $ - $ - $ - $ - $ - $ -
Utilities $ 110,000 $ 113,850 $ 117,835 $ 121,959 $ 126,228 $ 130,645
Building Services $ - $ - $ - $ - $ - $ -
Other Operating $ 23,700 $ 24,530 $ 25,388 $ 26,277 $ 27,196 $ 28,148
Subtotal Operating $ 133,700 $ 138,380 $ 143,223 $ 148,236 $ 153,424 $ 158,794
Security $ - $ - $ - $ - $ - $ -
Grounds Maint $ 90,040 $ 93,191 $ 96,453 $ 99,829 $ 103,323 $ 106,939
Maint-Repairs $ 54,650 $ 56,563 $ 58,542 $ 60,591 $ 62,712 $ 64,907
Painting/Decorating $ 23,500 $ 24,323 $ 25,174 $ 26,055 $ 26,967 $ 27,911
Subtotal Maint. $ 168,190 $ 174,077 $ 180,169 $ 186,475 $ 193,002 $ 199,757
R.E. Taxes $ 120,000 $ 124,200 $ 128,547 $ 133,046 $ 137,703 $ 142,522
Insurance $ 20,500 $ 21,218 $ 21,960 $ 22,729 $ 23,524 $ 24,348
Other $ - $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 140,500 $ 145,418 $ 150,507 $ 155,775 $ 161,227 $ 166,870
TOTAL EXPENSES $ 623,014 $ 553,246 $ 571,003 $ 589,364 $ 608,350 $ 627,983
NON-OPERATING EXPENSES
Capital Improvements $ 100,800 $ 103,824 $ 106,939 $ 110,147 $ 113,451 $ 116,855
Other $ -
NET CASH FLOW $ 956,786 $1,065,745 $1,088,151 $1,110,948 $1,134,141 $1,157,732
P.V. Factor 0.8949 0.8008 0.7166 0.6412 0.5738 0.5135
P.V. Cash Flow $ 856,184 $ 853,411 $ 779,734 $ 712,367 $ 650,773 $ 594,460
<CAPTION>
2005 2006 2007 2008
<S> <C> <C> <C> <C>
REVENUE
Gross Potential $2,093,247 $2,145,578 $2,199,217 $2,254,198
Vacancy Loss -$ 167,460 -$ 171,646 -$ 175,937 -$ 180,336
Rent Concessions
Other $ 24,585 $ 25,446 $ 26,336 $ 27,258
EFFECTIVE INCOME $1,950,372 $1,999,377 $2,049,616 $2,101,120
EXPENSES:
Management Fee $ 78,015 $ 79,975 $ 81,985 $ 84,045
Other Admin $ 26,460 $ 26,460 $ 26,460 $ 26,460
Subtotal Admin $ 104,475 $ 106,435 $ 108,444 $ 110,504
Supplies $ - $ - $ - $ -
Utilities $ 135,218 $ 139,951 $ 144,849 $ 149,919
Building Services $ - $ - $ - $ -
Other Operating $ 29,133 $ 30,153 $ 31,208 $ 32,301
Subtotal Operating $ 164,351 $ 170,104 $ 176,057 $ 182,219
Security $ - $ - $ - $ -
Grounds Maint $ 110,682 $ 114,556 $ 118,565 $ 122,715
Maint-Repairs $ 67,179 $ 69,530 $ 71,964 $ 74,482
Painting/Decorating $ 28,888 $ 29,899 $ 30,945 $ 32,028
Subtotal Maint. $ 206,748 $ 213,985 $ 221,474 $ 229,226
R.E. Taxes $ 147,511 $ 152,674 $ 158,017 $ 163,548
Insurance $ 25,200 $ 26,082 $ 26,995 $ 27,939
Other $ - $ - $ - $ -
Subtotal Taxes-insur $ 172,710 $ 178,755 $ 185,012 $ 191,487
TOTAL EXPENSES $ 648,285 $ 669,278 $ 690,987 $ 713,437
NON-OPERATING EXPENSES
Capital Improvements $ 120,360 $ 123,971 $ 127,690 $ 131,521
Other
NET CASH FLOW $1,181,727 $1,206,127 $1,230,938 $1,256,162
P.V. Factor 0.4595 0.4112 0.3679 0.3292
P.V. Cash Flow $ 542,981 $ 495,922 $ 452,906 $ 413,590
SUM P.V. $ 6,352,329
RESIDUAL $ 3,792,926
TOTAL VALUE $10,145,254
</TABLE>
66
<PAGE>
SUMMARY
HIGHLAND PARK
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Highland Park
2796 Prendergast Place
Reynoldsburg, Ohio
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $10,000,000
Income Approach:
Direct Capitalization $ 9,900,000
DCF $10,150,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$9,500,000 - $10,500,000
- -------------------------------------------------------------------------------
67
<PAGE>
- -------------------------------------------------------------------------------
FOX HOLLOW APARTMENTS
- -------------------------------------------------------------------------------
68
<PAGE>
[PHOTO]
FOX HOLLOW APARTMENTS
177 WEST HARTLEY DRIVE
HIGH POINT, NORTH CAROLINA
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Two story garden style apartment buildings
<TABLE>
<S> <C> <C> <C>
Land Area 26.00 Acres Number of Units 184
Density 7.08 Units/Acre Average Unit Siz 880 Sq. Ft.
Net Rentable Area 161,712 Sq. Ft. Year Built 1987
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Aluminum siding
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Cable ready, air conditioning, dishwasher, microwave oven, disposal,
balcony or patio, fireplace, washer/dryer
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Swimming pool, fitness center, tennis courts, clubhouse, courtyard
area, paid utilities, storage
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $7,150,000 - $8,300,000
Value per Sq. Ft. of NRA $44.21 - $51.33
Value Per Unit $38,859 - $45,109
</TABLE>
- -------------------------------------------------------------------------------
69
<PAGE>
SALES COMPARISON APPROACH
FOX HOLLOW
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject is located three miles north of downtown High Point with
good access to Hwy 311, North Main Street. It is situated on 26 acres of land
with frontage along Hartley Avenue
Comparable Sales A, B, 1 and 3 are all in the subject's area and are not
adjusted for location differences.
SIZE - All of the comparable sales are about the same size as the subject and
thus no adjustments were necessary.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate we have tempered this 2.22% factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. Based on the
information provided, quality adjustments should be made to comparable Sales A,
B and 1 which are of a higher quality of construction.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are all three of the comparable sales. No adjustment is warranted.
AMENITIES - The subject has fireplaces in each unit and offers tennis courts and
other outdoor features. All of the comparable sales had similar amenities and
adjustments are not required.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
70
<PAGE>
FOX HOLLOW
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/sq. ft. $ 1.00 SALE A SALE B SALE 1 SALE 3
<S> <C> <C> <C> <C> <C>
Sale Date: Sep-97 Oct-97 Mar-96 Mar-97
Net Rentable Area 161,712 204,360 207,600 244,750 233,728
Land Area - acre 13 14
Lnd/Bld Ratio: 0.00 8.49 8.51 0.00 0.00
Stories: 2 3 3 2 3
Age: 10 10 1 7 4
Units 184 240 240 244 256
Price: $12,750,000 $12,750,000 $13,450,000 $14,050,000
Price / Ft. - NRA $ 62.39 $ 61.42 $ 54.95 $ 60.11
Price / Unit $ 53,125 $ 53,125 $ 55,123 $ 54,883
GIM 7.08 7.20 7.17 6.89
OAR: 11.44% 9.22% 8.66% 8.90%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple Fee Simple
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price* $ 62.39 $ 61.42 $ 54.95 $ 60.11
FINANCING Market Market Market Market
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length Arm's Length
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price** $ 62.39 $ 61.42 $ 54.95 $ 60.11
MARKET CONDITIONS Similar 0% Similar 0% Similar 0% Similar
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price*** $ 62.39 $ 61.42 $ 54.95 $ 60.11
PHYSICAL CHARACTERISTICS
Location o o o o
Size o o o o
Age o - o -
Quality -- - - o
Condt. o o o o
Ammenities o o o o
Adjustment -- -- - -
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
71
<PAGE>
INCOME APPROACH
FOX HOLLOW
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
A review of the subject's recent financial statements indicates a relatively
stable increase in rental rates and a trend to bring operating costs under
control. Its location in the Greensboro/Winston-Salem "Piedmont Triad" is of
some concern for it is reported that the multifamily sector has become
moderately oversupplies, as is evidenced by the flattening of rents over the
past 12 - 18 months. Therefore we have used a modest 3.0% rental increase in our
model along with a slightly above average 11.75 % discount rate which reflects
the uncertainty of the market's future in this area. The terminal capitalization
rate is normal for the area but slightly higher than the national average.
Expenses are projected to grow at a normal 3% growth rate.
72
<PAGE>
FOX HOLLOW
Historical Financial statement
Year Ending December 31
<TABLE>
<CAPTION>
1998 Anl % 1997 act % 1996 %
<S> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,319,230 102% $ 1,308,230 102% $ 1,285,085 101%
Vacancy Loss -$ 136,553 -11% -$ 115,607 -9% -$ 114,771 -9%
Rent Concessions $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,182,677 92% $ 1,192,623 93% $ 1,170,314 92%
Other Income $ 108,157 8% $ 93,173 7% $ 107,796 8%
TOTAL RECEIPTS $ 1,290,834 100% $ 1,285,796 100% $ 1,278,110 100%
EXPENSES:
Management Fee $ 56,784 $ 58,861 $ 56,235
Other Admin $ 72,636 $ 72,431 $ 71,775
Subtotal Admin $ 129,420 10.0% $ 131,292 10.2% $ 128,010 10.0%
Supplies
Utilities $ 81,373 $ 76,193 $ 70,488
Building Services $ -
Other Operating $ 142,115 $ 141,713 $ 140,431
Subtotal Operating $ 223,488 17% $ 217,906 17% $ 210,919 17%
Security $ - $ -
Grounds Maint $ - $ -
Maint-Repairs $ 101,059 $ 100,773 $ 99,863
Painting/Decorating $ - $ -
Subtotal Maint. $ 101,059 8% $ 100,773 8% $ 99,863 8%
R.E. Taxes $ 89,387 $ 86,702 $ 73,766
Insurance $ 12,134 $ 14,160 $ 14,328
Other $ 749 $ -
Subtotal Taxes-insur $ 102,269 8% $ 100,862 8% $ 88,094 7%
TOTAL EXPENSES $ 556,237 43% $ 550,833 43% $ 526,886 41%
NET OPERATING INCOME $ 734,597 57% $ 734,963 57% $ 751,224 59%
<CAPTION>
1995 % 1994 %
<S> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,257,020 105% $ 1,209,700 106%
Vacancy Loss -$ 120,666 -10% -$ 86,961 -8%
Rent Concessions $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,136,354 95% $ 1,122,739 98%
Other Income $ 58,717 5% $ 21,249 2%
TOTAL RECEIPTS $ 1,195,071 100% $ 1,143,988 100%
EXPENSES:
Management Fee $ 56,121 $ 58,124
Other Admin $ 66,896 $ 63,188
Subtotal Admin $ 123,017 10.3% $ 121,312 10.6%
Supplies
Utilities $ 60,146 $ 57,376
Building Services
Other Operating $ 130,884 $ 123,630
Subtotal Operating $ 191,030 16% $ 181,006 16%
Security
Grounds Maint
Maint-Repairs $ 93,074 $ 87,914
Painting/Decorating
Subtotal Maint. $ 93,074 8% $ 87,914 8%
R.E. Taxes $ 91,249 $ 49,197
Insurance $ 7,387 $ 10,033
Other
Subtotal Taxes-insur $ 98,636 8% $ 59,230 5%
TOTAL EXPENSES $ 505,757 42% $ 449,462 39%
NET OPERATING INCOME $ 689,314 58% $ 694,526 61%
</TABLE>
73
<PAGE>
FOX HOLLOW
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Fox Hollow
177 West Hartley Drive
High Point, North Carolina
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 184
Revenue @ $615 per Unit $1,357,920
Expenses @ $3.63 per Sq. Ft. 587,015
----------
Net Income 770,905
Replacement Reserves @ $ 400 73,600
----------
Net Operating Income (NOI) $ 697,305
Cap Rate @ 9.75% $7,151,846
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$7,150,000
- -------------------------------------------------------------------------------
74
<PAGE>
FOX HOLLOW APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,360,000 $ 1,400,800 $ 1,442,824 $ 1,486,109 $ 1,530,692
Vacancy Loss -$ 136,000 -$ 140,080 -$ 144,282 -$ 148,611 -$ 153,069
Rent Concessions $ -
Other $ 90,000 $ 92,700 $ 95,481 $ 98,345 $ 101,296
EFFECTIVE INCOME $ 1,314,000 $ 1,353,420 $ 1,394,023 $ 1,435,843 $ 1,478,919
EXPENSES:
Management Fee $ 52,560 $ 54,137 $ 55,761 $ 57,434 $ 59,157
Other Admin $ 69,325 $ 71,405 $ 73,547 $ 75,753 $ 78,026
Subtotal Admin $ 121,885 $ 125,542 $ 129,308 $ 133,187 $ 137,183
Supplies $ - $ - $ - $ - $ -
Utilities $ 83,815 $ 86,329 $ 88,919 $ 91,587 $ 94,335
Building Services $ - $ - $ - $ - $ -
Other Operating $ 135,000 $ 139,050 $ 143,222 $ 147,518 $ 151,944
Subtotal Operating $ 218,815 $ 225,379 $ 232,141 $ 239,105 $ 246,278
Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 96,000 $ 98,880 $ 101,846 $ 104,902 $ 108,049
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 96,000 $ 98,880 $ 101,846 $ 104,902 $ 108,049
R.E. Taxes $ 90,000 $ 92,700 $ 95,481 $ 98,345 $ 101,296
Insurance $ 14,000 $ 14,420 $ 14,853 $ 15,298 $ 15,757
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 104,000 $ 107,120 $ 110,334 $ 113,644 $ 117,053
TOTAL EXPENSES $ 540,700 $ 556,921 $ 573,629 $ 590,837 $ 608,563
NON-OPERATING EXPENSES
Capital Improvements $ 73,600 $ 75,808 $ 78,082 $ 80,425 $ 82,837
Other $ -
NET CASH FLOW $ 699,700 $ 720,691 $ 742,312 $ 764,581 $ 787,519
P.V. Factor 0.8949 0.8008 0.7166 0.6412 0.5738
P.V. Cash Flow $ 626,130 $ 720,691 $ 742,312 $ 787,519 $ 93,234
<CAPTION>
2004 2005 2006 2007 2008
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,576,613 $ 1,623,911 $ 1,672,628 $ 1,722,807 $ 1,774,492
Vacancy Loss -$ 157,661 -$ 162,391 -$ 167,263 -$ 172,281 -$ 177,449
Rent Concessions
Other $ 104,335 $ 107,465 $ 110,689 $ 114,009 $ 117,430
EFFECTIVE INCOME $ 1,523,286 $ 1,568,985 $ 1,616,054 $ 1,664,536 $ 1,714,472
EXPENSES:
Management Fee $ 60,931 $ 62,759 $ 64,642 $ 66,581 $ 68,579
Other Admin $ 80,367 $ 82,778 $ 85,261 $ 87,819 $ 90,453
Subtotal Admin $ 141,298 $ 145,537 $ 149,903 $ 154,400 $ 159,032
Supplies $ - $ - $ - $ - $ -
Utilities $ 97,165 $ 100,079 $ 103,082 $ 106,174 $ 109,360
Building Services $ - $ - $ - $ - $ -
Other Operating $ 156,502 $ 161,197 $ 166,033 $ 171,014 $ 176,144
Subtotal Operating $ 253,667 $ 261,277 $ 269,115 $ 277,188 $ 285,504
Security $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ -
Maint-Repairs $ 111,290 $ 114,629 $ 118,068 $ 121,610 $ 125,258
Painting/Decorating $ - $ - $ - $ - $ -
Subtotal Maint. $ 111,290 $ 114,629 $ 118,068 $ 121,610 $ 125,258
R.E. Taxes $ 104,335 $ 107,465 $ 110,689 $ 114,009 $ 117,430
Insurance $ 16,230 $ 16,717 $ 17,218 $ 17,735 $ 18,267
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 120,565 $ 124,181 $ 127,907 $ 131,744 $ 135,696
TOTAL EXPENSES $ 626,819 $ 645,624 $ 664,993 $ 684,943 $ 705,491
NON-OPERATING EXPENSES
Capital Improvements $ 85,323 $ 87,882 $ 90,519 $ 93,234 $ 96,031
Other
NET CASH FLOW $ 811,144 $ 835,478 $ 860,543 $ 886,359 $ 912,950
P.V. Factor 0.5135 0.4595 0.4112 0.3879 0.3292
P.V. Cash Flow $ 416,498 $ 383,886 $ 353,828 $ 326,123 $ 300,588
SUM P.V. $ 4,458,222
RESIDUAL $ 2,690,978
TOTAL VALUE $ 7,149,200
</TABLE>
75
<PAGE>
SUMMARY
FOX HOLLOW
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Fox Hollow
177 West Hartley Drive
High Point, North Carolina
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $8,300,000
Income Approach:
Direct Capitalization $7,150,000
DCF $7,150,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$7,150,000 - $8,300,000
- -------------------------------------------------------------------------------
76
<PAGE>
- -------------------------------------------------------------------------------
CRANE'S LANDING APARTMENTS
- -------------------------------------------------------------------------------
77
<PAGE>
[PHOTO]
CRANE'S LANDING
3440 GOLDENROD ROAD
WINTER PARK, FLORIDA
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Two and three-story walk up apartments
<TABLE>
<S> <C> <C> <C>
Land Area 14.00 Acres Number of Units 252
Density 18.00 Units/Acre Average Unit Size 797 Sq. Ft.
Net Rentable Area 200,824 Sq. Ft. Year Built 1990
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Wood frame, stucco
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Air conditioning, deluxe bedrooms, washer/dryer, vaulted ceilings
in upper units, dishwasher, disposal, electric stove, double
security door locks, sliding glass patio doors, ceiling fan in
living room, carpeting
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Two swimming pools, clubhouse, exercise room, pool table, jacuzzi,
lighted tennis court, sand volleyball court, children's playground
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $11,500,000 - $12,500,000
Value per Sq. Ft. NRA $57.26 - $62.24
Value per Unit $45,635 - $49,603
</TABLE>
- -------------------------------------------------------------------------------
78
<PAGE>
SALES COMPARISON APPROACH
CRANE'S LANDING
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject is located approximately five miles northeast of
Orlando's central business district in the proximity of the Florida 417 toll
road which is a short distance to the east. It is in a neighborhood of numerous
multi-family apartment complexes just south of the major intersection of
Goldenrod Road, Highway 551, and University Blvd. Access to the downtown area is
fair using the toll road.
Comparable Sale A is located in a slightly better neighborhood and should be
adjusted down. The other two comparable sales are judged to be in neighborhoods
that are similar to the subject.
SIZE - All of the comparable sales are larger than the subject and thus upward
adjustments would be necessary.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate we have tempered this 2.22% factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are of average quality construction as is comparable Sale C. Sales A
and 1, however, are judged to be of slightly superior quality with masonry
exterior walls and should be adjusted downward.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are comparable Sales A and 1. No adjustment is required. Sale C, however,
required substantial renovation at the time of the sale and should be adjusted
up.
79
<PAGE>
AMENITIES - The subject has interior features that are relatively common in the
Orlando area. Its common amenities are also rather common and similar to the
comparable sales.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
80
<PAGE>
CRANE'S LANDING
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/Sq. Ft. $ 1.00 SALE A SALE C SALE 1
<S> <C> <C> <C> <C>
Sale Date: Dec-97 Mar-97 Apr-97
Net Rentable Area 200,824 309,219 342,702 270,000
Land Area - acre 18 243 30 20
Lnd/Bld Ratio: 9.60 85.68 11.52 9.73
Stories: 2.5 2.5 3 3
Age: 7 6 11 7
Units 252 338 396 308
Price: $ 20,736,000 $ 16,200,000 $ 16,000,000
Price / Ft. - NRA $ 67.06 $ 47.27 $ 59.26
Price / Unit $ 61,349 $ 40,909 $ 51,948
GIM 6.86 6.01
OAR: 8.60% 9.36%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price* $ 67.06 $ 47.27 $ 59.26
FINANCING Market Market Market
Adjustment $0.00 $ 0.00 $ 0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price** $ 67.06 $ 47.27 $ 59.26
MARKET CONDITIONS Similar Similar Similar
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price*** $ 67.06 $ 47.27 $ 59.26
PHYSICAL CHARACTERISTICS
Location - o o
Size + + +
Age o o o
Quality - o -
Condt. o ++ o
Amenities o o o
Adjustment - ++ o
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
81
<PAGE>
INCOME APPROACH
CRANE'S LANDING
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
The Orlando area has witnessed a surge in apartment demand over the past two
years which lead some to believe that the supply could quickly surpass the
demands. However, the migration of residents from the Southeast and Eastern
Seaboard to Orlando continues unabated. Vacancy rates have remained stable and
rental rates are rising.
A review of the subject's recent financial statements reflects the strong market
with a relatively stable increase in rental income, 4.0% compound rate over the
past four years, although at a minimal 0.6% increase over the past year. Because
of the optimistic outlook for the apartment market in the Orlando area, we have
used a more optimistic 3% rental revenue growth along with a similar expense
growth rate. The discount rate used is slightly above the nations average and
reflects the guarded outlook for Orlando. The terminal cap rate is the standard
10% based on the market's 9.25% going-in cap rate.
82
<PAGE>
CRANE'S LANDING
Historical Financial statement
Year Ending December 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996 % 1995 %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 2,046,276 104% $ 1,969,380 101% $ 1,937,940 105% $ 1,907,145 113%
Vacancy Loss -$ 157,322 -8% -$ 113,078 -6% -$ 185,539 -10% -$ 312,771 -19%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,888,954 96% $ 1,856,302 95% $ 1,752,401 95% $ 1,594,374 94%
Other Income $ 71,910 4% $ 92,221 5% $ 95,966 5% $ 93,807 6%
TOTAL RECEIPTS $ 1,960,864 100% $ 1,948,523 100% $ 1,848,367 100% $ 1,688,181 100%
EXPENSES:
Management Fee $ 79,799 $ 71,314 $ 79,593 $ 60,738
Other Admin $ 244,591 $ 233,976 $ 212,201 $ 206,765
Subtotal Admin $ 324,390 16.5% $ 305,290 15.7% $ 291,794 15.8% $ 267,503 15.8%
Supplies $ - $ -
Utilities $ 58,977 $ 64,902 $ 68,152 $ 63,766
Building Services $ - $ -
Other Operating $ 31,248 $ 29,893 $ 27,111 $ 26,416
Subtotal Operating $ 90,225 5% $ 94,795 5% $ 95,263 5% $ 90,182 5%
Security $ - $ -
Grounds Maint $ - $ -
Maint-Repairs $ 109,951 $ 105,179 $ 95,394 $ 92,948
Painting/Decorating $ -
Subtotal Maint. $ 109,951 6% $ 105,179 5% $ 95,394 5% $ 92,948 6%
R.E. Taxes $ 191,323 $ 189,565 $ 176,228 $ 179,982
Insurance $ 10,978 $ 12,039 $ 13,013 $ 12,414
Other
Subtotal Taxes-insur $ 202,301 10% $ 201,604 10% $ 189,241 10% $ 192,396 11%
TOTAL EXPENSES $ 726,868 37% $ 706,868 36% $ 671,692 36% $ 643,029 38%
NET OPERATING INCOME $ 1,233,996 63% $ 1,241,655 64% $ 1,176,675 64% $ 1,045,152 62%
Sales Growth Rate 0.6% 5.4% 9.5% 0.8%
Expense Growth Rate 2.8% 5.2% 4.5% -1.2%
NOI Growth Rate -0.6% 5.5% 12.6% 2.0%
<CAPTION>
1994 %
<S> <C> <C>
RECEIPTS:
Rental Income $ 1,893,450 113%
Vacancy Loss -$ 300,357 -18%
Rent Concessions $ - 0%
Model Apt. $ - 0%
TOTAL RENTAL INCOME $ 1,593,093 95%
Other Income $ 82,335 5%
TOTAL RECEIPTS $ 1,675,428 100%
EXPENSES:
Management Fee $ 67,760
Other Admin $ 206,877
Subtotal Admin $ 274,637 16.4%
Supplies
Utilities $ 57,101
Building Services
Other Operating $ 26,430
Subtotal Operating $ 83,531 5%
Security
Grounds Maint
Maint-Repairs $ 93,018
Painting/Decorating
Subtotal Maint. $ 93,018 6%
R.E. Taxes $ 188,087
Insurance $ 11,292
Other
Subtotal Taxes-insur $ 199,379 12%
TOTAL EXPENSES $ 650,565 39%
NET OPERATING INCOME $ 1,024,863 61%
</TABLE>
83
<PAGE>
CRANE'S LANDING
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Crane's Landing
3440 Goldenrod Road
Winter Park, Florida
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 252
Revenue @ $670 per Unit $ 2,026,080
Expenses @ $4.00 per Sq. Ft. 803,295
-----------
Net Income 1,222,785
Replacement Reserves @ $400 100,800
-----------
Net Operating Income (NOI) $ 1,121,985
Cap Rate @ 9.25% $12,129,570
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$12,100,000
- -------------------------------------------------------------------------------
84
<PAGE>
CRANE'S LANDING APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 2,025,522 $ 2,086,288 $ 2,148,876 $ 2,213,343 $ 2,279,743 $ 2,348,135 $ 2,418,579
Vacancy Loss -$ 91,14 -$ 93,88 -$ 96,69 -$ 99,60 -$ 102,588 -$ 105,666 -$ 108,836
Rent Concessions $ -
Other $ 60,000 $ 61,800 $ 63,654 $ 65,564 $ 67,531 $ 69,556 $ 71,643
EFFECTIVE INCOME $ 1,994,374 $ 2,054,205 $ 2,115,831 $ 2,179,306 $ 2,244,685 $ 2,312,026 $ 2,381,386
EXPENSE:
Management Fee $ 79,775 $ 82,168 $ 84,633 $ 87,172 $ 89,787 $ 92,481 $ 95,255
Other Admin $ 271,495 $ 279,640 $ 288,029 $ 296,670 $ 305,570 $ 314,737 $ 324,179
Subtotal Admin $ 351,270 $ 361,808 $ 372,662 $ 383,842 $ 395,357 $ 407,218 $ 419,435
Supplies $ - $ - $ - $ - $ - $ - $ -
Utilities $ 60,000 $ 61,800 $ 63,654 $ 65,564 $ 67,531 $ 69,556 $ 71,643
Building Services $ - $ - $ - $ - $ - $ - $ -
Other Operating $ 34,675 $ 35,715 $ 36,787 $ 37,890 $ 39,027 $ 40,198 $ 41,404
Subtotal Operating $ 94,675 $ 97,515 $ 100,441 $ 103,454 $ 106,558 $ 109,754 $ 113,047
Security $ - $ - $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ - $ - $ -
Maint-Repairs $ 121,900 $ 125,557 $ 129,324 $ 133,203 $ 137,200 $ 141,316 $ 145,555
Painting/Decorating $ - $ - $ - $ - $ - $ - $ -
Subtotal Maint. $ 121,900 $ 125,557 $ 129,324 $ 133,203 $ 137,200 $ 141,316 $ 145,555
R.E. Taxes $ 192,000 $ 197,760 $ 203,693 $ 209,804 $ 216,098 $ 222,581 $ 229,258
Insurance $ 12,391 $ 12,763 $ 13,146 $ 13,540 $ 13,946 $ 14,365 $ 14,795
Other $ - $ - $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 204,391 $ 210,523 $ 216,838 $ 223,344 $ 230,044 $ 236,945 $ 244,053
TOTAL EXPENSES $ 772,236 $ 795,403 $ 819,265 $ 843,843 $ 869,158 $ 895,233 $ 922,090
NON-OPERATING EXPENSES
Capital Improvements $ 100,800 $ 103,824 $ 106,939 $ 110,147 $ 113,451 $ 116,855 $ 120,360
Other $ -
NET CASH FLOW $ 1,121,338 $ 1,154,978 $ 1,189,627 $ 1,225,316 $ 1,262,075 $1,299,938 $ 1,338,936
P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523
P.V. Cash Flow $ 1,001,194 $ 920,741 $ 846,753 $ 778,710 $ 716,135 $ 658,589 $ 605,667
<CAPTION>
2006 2007 2008
<S> <C> <C> <C>
REVENUE
Gross Potential $ 2,491,137 $ 2,565,871 $ 2,642,847
Vacancy Loss -$ 112,101 -$ 115,464 -$ 118,928
Rent Concessions
Other $ 73,792 $ 76,006 $ 78,286
EFFECTIVE INCOME $ 2,452,828 $ 2,526,413 $ 2,602,205
EXPENSE:
Management Fee $ 98,113 $ 101,057 $ 104,088
Other Admin $ 333,905 $ 343,922 $ 354,239
Subtotal Admin $ 432,018 $ 444,978 $ 458,328
Supplies $ - $ - $ -
Utilities $ 73,792 $ 76,006 $ 78,286
Building Services $ - $ - $ -
Other Operating $ 42,646 $ 43,925 $ 45,243
Subtotal Operating $ 116,438 $ 119,931 $ 123,529
Security $ - $ - $ -
Grounds Maint $ - $ - $ -
Maint-Repairs $ 149,922 $ 154,419 $ 159,052
Painting/Decorating $ - $ - $ -
Subtotal Maint. $ 149,922 $ 154,419 $ 159,052
R.E. Taxes $ 236,136 $ 243,220 $ 250,516
Insurance $ 15,239 $ 15,696 $ 16,167
Other $ - $ - $ -
Subtotal Taxes-insur $ 251,375 $ 258,916 $ 266,684
TOTAL EXPENSES $ 949,753 $ 978,245 $ 1,007,593
NON-OPERATING EXPENSES
Capital Improvements $ 123,971 $ 127,690 $ 131,521
Other
NET CASH FLOW $ 1,379,104 $ 1,420,477 $ 1,463,091
P.V. Factor 0.4039 0.3606 0.3220
P.V. Cash Flow $ 556,997 $ 512,238 $ 471,076
SUM P.V. $ 7,068,101
RESIDUAL $ 4,428,116
TOTAL VALUE $11,496,218
</TABLE>
85
<PAGE>
SUMMARY
CRANE'S LANDING
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Crane's Landing
3440 Goldenrod Road
Winter Park, Florida
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $12,500,000
Income Approach:
Direct Capitalization $12,100,000
DCF $11,500,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$11,500,000 - $12,500,000
- -------------------------------------------------------------------------------
86
<PAGE>
- -------------------------------------------------------------------------------
DELTA CROSSING APARTMENTS
- -------------------------------------------------------------------------------
87
<PAGE>
[PHOTO]
DELTA CROSSING
6000 DELTA CROSSING LANE
CHARLOTTE, NORTH CAROLINA
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan Two and three-story apartment homes
<TABLE>
<S> <C> <C> <C>
Land Area 22.00 Acres Number of Units 178
Density 8.09 Units/Acre Average Unit Size 894 Sq. Ft.
Net Rentable Area 159,132 Sq. Ft. Year Built 1989
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Aluminum siding on wood frame
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Woodburning fireplace, cathedral ceilings, gourmet kitchen,
microwave, private patio or balcony, washer/dryer, outdoor
storage area
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Complete fitness center, swimming pool, tennis court, outdoor
spa, recycling, courtyard entrance, social activities,
convenience to University area and Uptown Charlotte
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $7,500,000 - $8,000,000
Value per Sq. Ft. of NRA $47.13 - $50.27
Value Per Unit $42,135 - $44,944
</TABLE>
- -------------------------------------------------------------------------------
88
<PAGE>
SALES COMPARISON APPROACH
DELTA CROSSING
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject property is located within two miles of a major regional
mall in Charlotte's southeast quadrant. The central business district is
approximately seven miles northwest of the complex and the University of North
Carolina is approximately five miles north. Access to the downtown area and U.S.
Highway 74 (Independence Boulevard) is fair.
Comparable Sales 2, A and E are in the subject's proximity but Sales 2 and E
have slightly better access to the downtown area and its neighborhood is
considered to be slightly better. They are adjusted downward. Comparable Sales 1
and 3 are both located on the northern edge of the city limit with excellent
access to I-77 and thus the downtown area. The neighborhood is a newer area
which warrants downward adjustment, vis-a-vis the subject.
SIZE - The size adjustment is based on the phenomenon that smaller real estate
parcels normally sell for a higher unit price than larger parcels. We have used
this observed behavior in our adjustment reasoning.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
However, because the reported selling price of the comparable property included
land, which does not depreciate we have tempered this 2.22% factor downward.
Newer structures have been adjusted downward at a 1.0% per year rate while older
buildings have been adjusted upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are well constructed and the quality of construction could be
considered average/good. All of the comparable sales used in this report are
judged to be of equal quality and adjustments are not required.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average/fair condition
while the comparable buildings were judged to be in above average condition.
Each was adjusted downward according the difference in condition vis-a-vis the
subject.
89
<PAGE>
AMENITIES - The subject is adequately equipped with amenities including swimming
pools, tennis courts, exercise facility, etc. Each of the comparable sales is
equipped with similar amenities, although all seem to offer a higher level of
exterior amenity. Each was adjusted down to compensate.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
90
<PAGE>
DELTA CROSSING
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
SALE A SALE E SALE 1 SALE 2 SALE 3
<S> <C> <C> <C> <C> <C> <C>
Sale Date: Dec-98 Apr-98 Jun-97 Dec-96 May-97
Net Rentable Area 159,132 80,000 333,258 280,946 164,724 321,190
Land Area - acre 22 10 43 27 15 25
Lnd/Bld Ratio: 12.04 8.22 10.02 8.48
Stories: 2 2 2 2.5 2.5
Age: 9 9 10 2 9 2
Units 178 84 330 318 178 288
Price: $ 4,200,000 $ 18,500,000 $ 20,250,000 $ 11,250,000 $ 23,500,000
Price / Ft. - NRA $ 52.50 $ 55.51 $ 72.08 $ 68.30 $ 73.17
Price / Unit $ 50,000 $ 56,061 $ 63,679 $ 63,202 $ 81,597
GIM 6.93 7.23 7.10 7.93
OAR: 9.23% 8.99% 9.18% 8.75%
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple Fee Simple Fee Simple
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price* $ 52.50 $ 55.51 $ 72.08 $ 68.30 $ 73.17
FINANCING Market Market Market Market Market
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length Arm's Length Arm's Length
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price** $ 52.50 $ 55.51 $ 72.08 $ 68.30 $ 73.17
MARKET CONDITIONS Similar Similar Similar Similar Similar
Adjustment $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Adjusted Price*** $ 52.50 $ 55.51 $ 72.08 $ 68.30 $ 73.17
PHYSICAL CHARACTERISTICS
Location o - - - -
Size -- + + o +
Age o o - o -
Quality o o o o o
Condt. - - - - -
Amenities - - - - -
Adjustment ---- - --- --- ---
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
91
<PAGE>
INCOME APPROACH
DELTA CROSSING
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
The multi-family real estate market seems to be leveling off after a strong
surge of construction back in 1996/1997. Actual multi-family construction has
declined in 1988. Occupancy is at about 95% and rents are steady. The southeast,
home of the subject, appears to be the area of greatest growth with about 27% of
the new units being built in this area.
The recent financial history of the subject with revenue increasing at a nominal
3.1% rate but expenses escalating at a higher 7% rate mirrors the market.
However, because the uncertainty of Charlotte's apartment market, caused by the
recent building surge, a capitalization and discount rate that is slightly above
the average was used in this analysis. The perception of apartment supply out
pacing the demand contributed to the use of a modest 2.5% (similar to the
historical) revenue growth rate. The terminal capitalization rate is standard
for the Charlotte area.
92
<PAGE>
DELTA CROSSING
Historical Financial statement
Year Ending Decamber 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996 %
<S> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,477,801 108% $ 1,450,761 107% $ 1,423,282 108%
Vacancy Loss -$ 163,193 -12% -$ 158,440 -12% -$ 160,083 -12%
Rent Concessions 0% 0% $ - 0%
Model Apt. 0% 0% $ - 0%
TOTAL RENTAL INCOME $ 1,314,608 96% $ 1,292,321 95% $ 1,263,199 96%
Other Income $ 59,342 4% $ 65,144 5% $ 58,958 4%
TOTAL RECEIPTS $ 1,373,950 100% $ 1,357,465 100% $ 1,322,157 100%
EXPENSES:
Management Fee $ 54,386 $ 53,770 $ 52,685
Other Admin $ 194,978 $ 186,713 $ 175,268
Subtotal Admin $ 249,364 18.1% $ 240,483 17.7% $ 227,953 17.2%
Supplies $ - $ -
Utilities $ 61,453 $ 62,899 $ 61,621
Building Services $ - $ -
Other Operating $ - $ - $ -
Subtotal Operating $ 61,453 4% $ 62,899 5% $ 61,621 5%
Security $ - $ -
Grounds Maint $ 72,214 $ 69,152 $ 64,915
Maint-Repairs $ 43,329 $ 41,492 $ 38,948
Painting/Decorating $ 50,552 $ 48,407 $ 45,440
Subtotal Maint. $ 166,095 12% $ 159,051 12% $ 149,303 11%
R.E. Taxes $ 100,456 $ 98,487 $ 98,447
Insurance $ 12,500 $ 12,342 $ 11,551
Other $ -
Subtotal Taxes-insur $ 112,956 8% $ 110,829 8% $ 109,998 8%
TOTAL EXPENSES $ 589,869 43% $ 573,262 42% $ 548,875 42%
NET OPERATING INCOME $ 784,082 57% $ 784,203 58% $ 773,282 58%
<CAPTION>
1995 % 1994 %
<S> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,356,902 106% $ 1,195,083 98%
Vacancy Loss -$ 134,719 -11% -$ 59,516 -5%
Rent Concessions $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,222,183 95% $ 1,135,567 93%
Other Income $ 59,196 5% $ 82,198 7%
TOTAL RECEIPTS $ 1,281,379 100% $ 1,217,765 100%
EXPENSES:
Management Fee $ 51,279 $ 48,497
Other Admin $ 146,726 $ 127,202
Subtotal Admin $ 198,005 15.5% $ 175,699 14.4%
Supplies
Utilities $ 58,653 $ 60,077
Building Services
Other Operating $ - $ -
Subtotal Operating $ 58,653 5% $ 60,077 5%
Security
Grounds Maint $ 54,343 $ 47,113
Maint-Repairs $ 32,606 $ 28,267
Painting/Decorating $ 38,040 $ 32,978
Subtotal Maint. $ 124,989 10% $ 108,358 9%
R.E. Taxes $ 94,988 $ 92,357
Insurance $ 10,790 $ 9,473
Other
Subtotal Taxes-insur $ 105,778 8% $ 101,830 8%
TOTAL EXPENSES $ 487,425 38% $ 445,964 37%
NET OPERATING INCOME $ 793,954 62% $ 771,801 63%
</TABLE>
93
<PAGE>
DELTA CROSSING
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Delta Crossing
6000 Delta Crossing Lane
Charlotte, North Carolina
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 178
Revenue @ $710 per Unit $1,516,560
Expenses (incl. Mgmt. Fee) @ $4.60 per Sq. Ft. 732,000
----------
Net Income 784,560
Replacement Reserves @ $400 71,200
----------
Net Operating Income (NOI) $ 713,360
Cap Rate @ 9.0% $7,926,222
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$8,000,000
- -------------------------------------------------------------------------------
94
<PAGE>
DELTA CROSSING
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,522,135 $ 1,560,188 $ 1,599,193 $ 1,639,173 $ 1,680,152
Vacancy Loss -$ 182,640 -$ 124,815 -$ 127,935 -$ 131,134 -$ 134,412
Rent Concessions $ -
Other $ 58,000 $ 59,740 $ 61,532 $ 63,378 $ 65,280
EFFECTIVE INCOME $ 1,397,495 $ 1,495,113 $ 1,532,790 $ 1,571,417 $ 1,611,020
EXPENSES:
Management Fee $ 55,900 $ 59,805 $ 61,312 $ 62,857 $ 64,441
Other Admin $ 200,827 $ 206,852 $ 213,058 $ 219,449 $ 226,033
Subtotal Admin $ 256,727 $ 266,657 $ 274,369 $ 282,306 $ 290,474
Supplies $ - $ - $ - $ - $ -
Utilities $ 62,989 $ 64,879 $ 66,825 $ 68,830 $ 70,895
Building Services $ - $ - $ - $ - $ -
Other Operating $ - $ - $ - $ - $ -
Subtotal Operating $ 62,989 $ 64,879 $ 66,825 $ 68,830 $ 70,895
Security $ - $ - $ - $ - $ -
Grounds Maint $ 74,380 $ 76,612 $ 78,910 $ 81,277 $ 83,716
Maint-Repairs $ 44,629 $ 45,968 $ 47,347 $ 48,767 $ 50,230
Painting/Decorating $ 52,069 $ 53,631 $ 55,240 $ 56,897 $ 58,604
Subtotal Maint. $ 171,078 $ 176,210 $ 181,496 $ 186,941 $ 192,550
R.E. Taxes $ 102,465 $ 105,539 $ 108,705 $ 111,966 $ 115,325
Insurance $ 12,545 $ 12,921 $ 13,309 $ 13,708 $ 14,119
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 115,010 $ 118,460 $ 122,014 $ 125,674 $ 129,444
TOTAL EXPENSES $ 605,804 $ 626,206 $ 644,705 $ 663,752 $ 683,363
NON-OPERATING EXPENSES
Capital Improvements $ 71,200 $ 73,336 $ 75,536 $ 77,802 $ 80,136
Other $ -
NET CASH FLOW $ 720,491 $ 795,571 $ 812,549 $ 829,863 $ 847,521
P.V. Factor 0.8969 0.8044 0.7214 0.6470 0.5803
P.V. Cash Flow $ 646,180 $ 639,926 $ 586,172 $ 536,917 491,786
<CAPTION>
2004 2005 2006 2007 2008
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,722,156 $ 1,765,210 $ 1,809,340 $ 1,854,574 $ 1,900,938
Vacancy Loss -$ 137,772 -$ 141,217 -$ 144,747 -$ 148,366 -$ 152,075
Rent Concessions
Other $ 67,238 $ 69,255 $ 71,333 $ 73,473 $ 75,677
EFFECTIVE INCOME $ 1,651,621 $ 1,693,248 $ 1,735,926 $ 1,779,680 $ 1,824,540
EXPENSES:
Management Fee $ 66,065 $ 67,730 $ 69,437 $ 71,187 $ 72,982
Other Admin $ 232,814 $ 239,798 $ 246,992 $ 254,402 $ 262,034
Subtotal Admin $ 298,879 $ 307,528 $ 316,429 $ 325,589 $ 335,016
Supplies $ - $ - $ - $ - $ -
Utilities $ 73,022 $ 75,213 $ 77,469 $ 79,793 $ 82,187
Building Services $ - $ - $ - $ - $ -
Other Operating $ - $ - $ - $ - $ -
Subtotal Operating $ 73,022 $ 75,213 $ 77,469 $ 79,793 $ 82,187
Security $ - $ - $ - $ - $ -
Grounds Maint $ 86,227 $ 88,814 $ 91,479 $ 94,223 $ 97,050
Maint-Repairs $ 51,737 $ 53,289 $ 54,888 $ 56,535 $ 58,231
Painting/Decorating $ 60,362 $ 62,173 $ 64,038 $ 65,959 $ 67,938
Subtotal Maint. $ 198,326 $ 204,276 $ 210,404 $ 216,716 $ 223,218
R.E. Taxes $ 118,785 $ 122,349 $ 126,019 $ 129,800 $ 133,694
Insurance $ 14,543 $ 14,979 $ 15,428 $ 15,891 $ 16,368
Other $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 133,328 $ 137,328 $ 141,447 $ 145,691 $ 150,062
TOTAL EXPENSES $ 703,555 $ 724,344 $ 745,750 $ 767,789 $ 790,482
NON-OPERATING EXPENSES
Capital Improvements $ 82,540 $ 85,017 $ 87,567 $ 90,194 $ 92,900
Other
NET CASH FLOW $ 865,527 $ 883,887 $ 902,609 $ 921,697 $ 941,158
P.V. Factor 0.5204 0.4667 0.4186 0.3754 0.3367
P.V. Cash Flow $ 450,434 $ 412,546 $ 377,834 $ 346,031 $ 316,894
SUM P.V. $ 4,804,719
RESIDUAL $ 3,055,183
TOTAL VALUE $ 7,859,901
</TABLE>
95
<PAGE>
SUMMARY
DELTA CROSSING
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Delta Crossing
6000 Delta Crossing Lane
Charlotte, North Carolina
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $8,000,000
Income Approach:
Direct Capitalization $8,000,000
DCF $7,900,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$7,500,000 - $8,000,00
- -------------------------------------------------------------------------------
96
<PAGE>
- -------------------------------------------------------------------------------
MISTY SPRINGS APARTMENTS
- -------------------------------------------------------------------------------
97
<PAGE>
[PHOTO]
MISTY SPRINGS
1420 NEW BELLEVUE AVENUE
DAYTONA BEACH, FLORIDA
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
Percentage Ownership
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan
<TABLE>
<S> <C> <C> <C>
Land Area Acres Number of Units 128
Density N/A Units/Acre Average Unit Size 800 Sq. Ft.
Net Rentable Area 102,400 Sq. Ft. Year Built 1988
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Wood exterior
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Microwave oven, ceiling fans, reserved parking, outside storage
areas, washer/dryer
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Lakeside swimming pool, lighted tennis court, racquet ball
courts, car wash, 24 hour emergency maintenance
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $4,000,000 - $4,750,000
Value per Sq. Ft. of NRA $39.06 - $46.39
Value Per Unit $31,250 - $37,109
</TABLE>
- -------------------------------------------------------------------------------
98
<PAGE>
SALES COMPARISON APPROACH
MISTY SPRINGS
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject is located approximately three-and-a-half miles west of
Daytona Beach's Central Business District in the proximity of the Daytona Beach
International Airport with good access to I-95 and I-4. It is located in a
neighborhood that is predominately developed with other multi-family apartment
complexes.
Comparable Sale 1 is located in the subject's neighborhood and thus does not
require adjustments. Sale B, however, is located closer to the Humana and
Halifax hospital complexes, the Volusia Mall, etc. As a result, it should be
adjusted downward, while Sale A should be adjusted upward.
SIZE - Two of the comparable sales are slightly smaller than the subject but not
enough to warrant adjustments. Sale 1, however, is much larger and would require
an upward adjustment.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
Newer structures have been adjusted downward while older buildings have been
adjusted upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are of average quality construction as are two of the comparable
sales. No adjustment is required. Sale B, however, is of superior quality and
should be adjusted slightly downward.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are the comparable sales. No adjustment required.
AMENITIES - Comparable Sales 1 and B have amenities that are equal to those of
the subject and would not require adjustments. Sale A was reported to have been
in need of additional amenities to make it more competitive. An upward
adjustment should be made.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
99
<PAGE>
MISTY SPRINGS
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/sq. ft. $1.00 SALE A SALE B SALE 1
<S> <C> <C> <C> <C>
Sale Date: Dec-95 Mar-96 Aug-95
Net Rentable Area: 102,400 91,478 84,679 174,880
Land Area - sq. ft
Lnd/Bld Ratio: 0.00 0.00 0.00 0.00
Stories: 2 2 2 2
Age: 10 5 10 15
Units 128 172 208 108
Price: $ 5,464,200 $ 7,100,000 $ 3,760,000
Price / Ft. - NRA $ 59.73 $ 83.85 $ 21.50
Price / Unit $ 31,769 $ 34,135 $ 34,815
GIM
OAR:
REAL PROPERTY RIGHTS Fee Simple Fee Simple Fee Simple
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price* $ 59.73 $ 83.85 $ 21.50
FINANCING Market Market Market
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price** $ 59.73 $ 83.85 $ 21.50
MARKET CONDITIONS Similar Similar Similar
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price*** $ 59.73 $ 83.85 $ 21.50
PHYSICAL CHARACTERISTICS
Location + + o
Size o o +
Age - o +
Quality o - o
Condt. o o o
Amenities + o +
Adjustment o o ++
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
100
<PAGE>
INCOME APPROACH
MISTY SPRINGS
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
The subject has experienced a rapid growth in rental income over the past three
years. We have used that rental income growth rate of 3% in our model. The
expense growth rate is an average 3%, down from the actual growth over the past
four years.
Because of the subject's location, in the westward growth path of Daytona Beach,
and the relatively optimistic outlook for the area in general, but with the
concern for over building, we have used a discount rate that is slightly above
the nation's average and a terminal capitalization rate that reflects long term
optimism.
101
<PAGE>
MISTY SPRINGS
Historical Financial statement
Year Ending December 31
<TABLE>
<CAPTION>
1998 act % 1997 act % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 852,650 102% $ 824,679 102% $ 801,864 108% $ 776,268 102% $ 645,476 87%
Vacancy Loss -$ 31,435 -4% -$ 43,715 -5% -$ 88,423 -12% -$ 32,670 -4% $ 69,782 9%
Rent Concessions $ - 0% $ - 0% $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 821,215 98% $ 780,964 97% $ 713,441 96% $ 743,598 97% $ 715,258 97%
Other Income $ 18,106 2% $ 26,915 3% $ 28,002 4% $ 19,472 3% $ 22,668 3%
TOTAL RECEIPTS $ 839,321 100% $ 807,879 100% $ 741,443 100% $ 763,070 100% $ 737,926 100%
EXPENSES:
Management Fee $ 33,758 $ 32,311 $ 29,659 $ 30,523 $ 29,404
Other Admin $ 28,949 $ 27,556 $ 26,987 $ 26,071 $ 24,839
Subtotal Admin $ 62,707 7.5% $ 59,867 7.4% $ 56,646 7.6% $ 56,594 7.4% $ 54,243 7.4%
Supplies $ - $ -
Utilities $ 68,606 $ 64,940 $ 69,422 $ 63,647 $ 58,606
Building Services
Other Operating $ 74,484 $ 68,889 $ 67,467 $ 65,177 $ 62,098
Subtotal Operating $ 143,090 17% $ 133,829 17% $ 136,889 18% $ 128,824 17% $ 120,704 16%
Security $ - $ -
Grounds Maint $ - $ -
Maint-Repairs $ 66,053 $ 56,642 $ 55,473 $ 53,589 $ 51,059
Painting/Decorating $ - $ -
Subtotal Maint. $ 66,053 8% $ 56,642 7% $ 55,473 7% $ 53,589 7% $ 51,059 7%
R.E. Taxes $ 98,931 $ 82,621 $ 98,719 $ 82,028 $ 83,858
Insurance $ 14,360 $ 9,396 $ 10,342 $ 12,928 $ 9,268
Other
Subtotal Taxes-insur $ 113,291 13% $ 92,017 11% $ 109,061 15% $ 94,956 12% $ 93,126 13%
TOTAL EXPENSES $ 385,141 46% $ 342,355 42% $ 358,069 48% $ 333,963 44% $ 319,132 43%
NET OPERATING INCOME $ 454,180 54% $ 465,524 58% $ 383,374 52% $ 429,107 56% $ 418,794 57%
</TABLE>
102
<PAGE>
MISTY SPRINGS
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Misty Springs
1420 New Bellevue Avenue
Daytona Beach, Florida
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 128
Revenue @ $570 per Unit $ 875,520
Expenses @ $3.83 per Sq. Ft. 392,190
----------
Net Income 483,330
Replacement Reserves @ $400 51,200
----------
Net Operating Income (NOI) $ 432,130
Cap Rate @ 9.5% $4,548,736
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$4,500,000
- -------------------------------------------------------------------------------
103
<PAGE>
MISTY SPRINGS APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004 2005
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 876,600 $ 902,898 $ 929,985 $ 957,884 $ 986,621 $1,016,220 $ 1,046,706
Vacancy Loss -$ 43,830 -$ 45,145 -$ 46,499 -$ 47,894 -$ 49,331 -$ 50,811 -$ 52,335
Rent Concessions $ -
Other $ 32,875 $ 33,861 $ 34,877 $ 35,923 $ 37,001 $ 38,111 $ 39,254
EFFECTIVE INCOME $ 865,645 $ 891,614 $ 918,363 $ 945,914 $ 974,291 $1,003,520 $ 1,033,625
EXPENSE:
Management Fee $ 34,626 $ 35,665 $ 36,735 $ 37,837 $ 38,972 $ 40,141 $ 41,345
Other Admin $ 31,500 $ 32,445 $ 33,418 $ 34,421 $ 35,454 $ 36,517 $ 37,613
Subtotal Admin $ 66,126 $ 68,110 $ 70,153 $ 72,257 $ 74,425 $ 76,658 $ 78,958
Supplies $ - $ - $ - $ - $ - $ - $ -
Utilities $ 70,000 $ 72,100 $ 74,263 $ 76,491 $ 78,786 $ 81,149 $ 83,584
Building Services $ - $ - $ - $ - $ - $ - $ -
Other Operating $ 80,000 $ 82,400 $ 84,872 $ 87,418 $ 90,041 $ 92,742 $ 95,524
Subtotal Operating $ 150,000 $ 154,500 $ 159,135 $ 163,909 $ 168,826 $ 173,891 $ 179,108
Security $ - $ - $ - $ - $ - $ - $ -
Grounds Maint $ - $ - $ - $ - $ - $ - $ -
Maint-Repairs $ 65,000 $ 66,950 $ 68,959 $ 71,027 $ 73,158 $ 75,353 $ 77,613
Painting/Decorating $ - $ - $ - $ - $ - $ - $ -
Subtotal Maint. $ 65,000 $ 66,950 $ 68,959 $ 71,027 $ 73,158 $ 75,353 $ 77,613
R.E. Taxes $ 90,000 $ 92,700 $ 95,481 $ 98,345 $ 101,296 $ 104,335 $ 107,465
Insurance $ 8,000 $ 8,240 $ 8,487 $ 8,742 $ 9,004 $ 9,274 $ 9,552
Other $ - $ - $ - $ - $ - $ - $ -
Subtotal Taxes-insur $ 98,000 $ 100,940 $ 103,968 $ 107,087 $ 110,300 $ 113,609 $ 117,017
TOTAL EXPENSES $ 379,126 $ 390,500 $ 402,215 $ 414,281 $ 426,709 $ 439,511 $ 452,696
NON-OPERATING EXPENSES
Capital Improvements $ 51,200 $ 52,736 $ 54,318 $ 55,948 $ 57,626 $ 59,355 $ 61,135
Other $ -
NET CASH FLOW $ 435,319 $ 448,379 $ 461,830 $ 475,685 $ 489,956 $ 504,654 $ 519,794
P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523
P.V. Cash Flow $ 388,678 $ 357,445 $ 328,722 $ 302,306 $ 278,014 $ 255,674 $ 235,128
<CAPTION>
2006 2007 2008
<S> <C> <C> <C>
REVENUE
Gross Potential $ 1,078,107 $ 1,110,451 $ 1,143,764
Vacancy Loss -$ 53,905 -$ 55,523 -$ 57,188
Rent Concessions
Other $ 40,432 $ 41,645 $ 42,894
EFFECTIVE INCOME $ 1,064,634 $ 1,096,573 $ 1,129,470
EXPENSE:
Management Fee $ 42,585 $ 43,863 $ 45,179
Other Admin $ 38,741 $ 39,903 $ 41,100
Subtotal Admin $ 81,326 $ 83,766 $ 86,279
Supplies $ - $ - $ -
Utilities $ 86,091 $ 88,674 $ 91,334
Building Services $ - $ - $ -
Other Operating $ 98,390 $ 101,342 $ 104,382
Subtotal Operating $ 184,481 $ 190,016 $ 195,716
Security $ - $ - $ -
Grounds Maint $ - $ - $ -
Maint-Repairs $ 79,942 $ 82,340 $ 84,810
Painting/Decorating $ - $ - $ -
Subtotal Maint. $ 79,942 $ 82,340 $ 84,810
R.E. Taxes $ 110,689 $ 114,009 $ 117,430
Insurance $ 9,839 $ 10,134 $ 10,438
Other $ - $ - $ -
Subtotal Taxes-insur $ 120,528 $ 124,143 $ 127,868
TOTAL EXPENSES $ 466,277 $ 480,265 $ 494,673
NON-OPERATING EXPENSES
Capital Improvements $ 62,970 $ 64,859 $ 66,804
Other
NET CASH FLOW $ 535,388 $ 551,449 $ 567,993
P.V. Factor 0.4039 0.3606 0.3220
P.V. Cash Flow 216,234 $ 198,858 $ 182,876
SUM P.V. $ 2,743,937
RESIDUAL $ 1,637,198
TOTAL VALUE $ 4,381,135
</TABLE>
104
<PAGE>
SUMMARY
MISTY SPRINGS
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Misty Springs
1420 New Bellevue Avenue
Daytona Beach, Florida
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $4,750,000
Income Approach:
Direct Capitalization $4,500,000
DCF $4,380,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$4,000,000 - $4,750,000
- -------------------------------------------------------------------------------
105
<PAGE>
- -------------------------------------------------------------------------------
MONTICELLO APARTMENTS
- -------------------------------------------------------------------------------
106
<PAGE>
[PHOTO]
MONTICELLO APARTMENTS
22700 CIVIC CENTER DRIVE
SOUTHFIELD, MICHIGAN
OWNERSHIP
- -------------------------------------------------------------------------------
Partnership Name Capital Source LLP
Percentage Ownership
- -------------------------------------------------------------------------------
PROPERTY STATISTICS
- -------------------------------------------------------------------------------
Land Plan
<TABLE>
<S> <C> <C> <C>
Land Area 9.18 Acres Number of Units 106
Density 11.54 Units/Acre Average Unit Size 912 Sq. Ft.
Net Rentable Area 96,732 Sq. Ft. Year Built 1989
</TABLE>
- -------------------------------------------------------------------------------
CONSTRUCTION TYPE
- -------------------------------------------------------------------------------
Brici Brick, stucco, aluminum siding
- -------------------------------------------------------------------------------
UNIT FEATURES
- -------------------------------------------------------------------------------
Vaulted ceiling, microwave oven, dishwasher, blinds, balcony or
patio, full size washer/dryer, central air conditioning, walk-in
closets, pre-wired for cable television, covered parking area
- -------------------------------------------------------------------------------
PROJECT AMENITIES
- -------------------------------------------------------------------------------
Clubhouse with swimming pool, sundeck, weight room, aerobics
studio, fireplace lounge, boardwalk path system
- -------------------------------------------------------------------------------
VALUATION SUMMARY
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Indicated Value $6,250,000 - $7,200,000
Value per Sq. Ft. of NRA $64.61 - $74.43
Value Per Unit $58,962 - $67,925
</TABLE>
- -------------------------------------------------------------------------------
107
<PAGE>
SALES COMPARISON APPROACH
MONTICELLO
IMPROVED COMPARABLE SALES ANALYSIS
PHYSICAL CHARACTERISTICS
LOCATION - The subject is located approximately ten miles from Detroit's central
business district which is easily accessible via the Northwestern Highway.
Although none of the comparable sales are in the subject's immediate
neighborhood, each is in a neighborhood that has similar attributes to those of
the subject. Location adjustments are not warranted.
SIZE - Comparable Sale A is similar to the subject in terms of size. Sales C and
D, however, are much larger and should be adjusted upward.
AGE - The Marshall Valuation Service Cost Manual reports that the typical
economic life of apartment buildings such as the subject is 45 years which
indicates a 2.22% per year depreciation rate. Using this as a guideline, we have
adjusted the comparable sales, vis-a-vis the subject based on this relationship.
Newer structures have been adjusted downward at between 1.5% and 2.0% per year
depending on the quality of the building while older buildings have been
adjusted upward.
QUALITY - Quality adjustments are somewhat subjective but are based on the
differences in cost between different types of construction. The subject
buildings are of average quality construction as are Comparable Sales A and C.
Comparable Sale D is superior to the subject and should be adjusted downward.
CONDITION - The physical condition is an adjustment that is made in addition to
the adjustment for age. The subject appeared to be in average to good condition
as are Comparable Sales C and D. Sale A, however, was reported to be in
fair/poor condition at the time of its sale and the unit price should be
adjusted upward.
AMENITIES - All of the comparable sales have amenities equal to those of the
subject and adjustments are not required.
A summary of these adjustments is presented on the following page in the
adjustment grid found on that page.
108
<PAGE>
MONTICELLO
IMPROVED SALES ADJUSTMENT GRID
<TABLE>
<CAPTION>
SUBJECT
Land Value/sq. ft. $ 1.00 SALE A SALE C SALE D
<S> <C> <C> <C> <C>
Sale Date: Sep-95 Oct-97 Nov-97
Net Rentable Area 96,732 92,678 200,034 522,236
Land Area - acre 9 8 26 44
Lnd/Bld Ratio: 8.27 7.09 11.48 11.09
Stories: 2 2 2 3
Age: 8 22 10 15
Units 106 67 224 544
Price: $ 3,550,000 $ 14,792,500 $ 31,120,000
Price / Ft. - NRA $ 38.30 $ 73.95 $ 59.59
Price / Unit $ 52,985 $ 66,038 $ 57,206
GIM 6.60 6.80 6.61
OAR: 9.60% 8.58% 8.73%
REAL PROPERTY RIGHTS
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price* $ 38.30 $ 73.95 $ 59.59
FINANCING Market Market Market
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price
CONDITIONS OF SALE Arm's Length Arm's Length Arm's Length
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price** $ 38.30 $ 73.95 $ 59.59
MARKET CONDITIONS Similar Similar Similar
Adjustment $ 0.00 $ 0.00 $ 0.00
Adjusted Price*** $ 38.30 $ 73.95 $ 59.59
PHYSICAL CHARACTERISTICS
Location o o o
Size o + ++
Age + o +
Quality o o -
Condt. + o o
Amenities o o o
Adjustment ++ + ++
</TABLE>
* Sale price further adjusted for property rights conveyed
** Sale price further adjusted for financing and conditions of sale
*** Sale price further adjusted for market conditions
109
<PAGE>
INCOME APPROACH
MONTICELLO
Both the direct capitalization technique and the discounted cash flow techniques
were used in this appraisal.
One of the basic elements in both of these appraisal techniques is the estimate
of the proper capitalization or discount rate to use in the calculations. As
stated in the introduction section of this report, we have used market surveys
as the basis for our opinion as to the proper rate to use. In addition to the
surveys, the actual capitalization rates from the comparable improved sales used
in the sales comparison approach were analyzed in an attempt to adjust the
market surveys to more accurately define the rate applicable to the subject.
Finally, the specifics of each property were taken into consideration, e.g.
location, past financial strength and estimates of potential economic strength
and rental demand in the subject's area.
The second element, revenue and expense estimates, are based primarily on
historical financial information provided by the managing partner. These figures
were analyzed and compared to market surveys and adjusted only if dramatically
different from the surveys. In addition, market based management fees were used
rather than the actual so that the income would more closely reflect typical
market expectations.
The multi-family real estate market is not a significant force in the greater
Detroit area market which is dominated by the single-family housing segment.
1997 multi-family construction permits were down nearly 50% from 1996 although
1998 saw some increase. Supply appear to be in equilibrium with demand as is
evidenced by the overall 5% vacancy rate. However, some see this increasing in
the near future.
The subject has experienced moderate growth in rental income over the past four
years, 3.6% on a compound basis. We have modified that rental income rate
somewhat to a more typical 3.0% in our model. The expense growth rate is equal
to a 2.5% inflationary rate increase, slightly less than the anticipated revenue
increase, and in line with the historical trend.
Because of the subject's location, which is influenced to a great degree by
Detroit's economy, we have used market averages pertaining to that area, which
is judged to be only fair in the apartment real estate market. As a result, a
slightly above average 12% discount rate and a 9.0% capitalization rate were
used in our models.
110
<PAGE>
MONTICELLO APARTMENTS
Historical Financial statement
Year Ending December 31
<TABLE>
<CAPTION>
1998 anl % 1997 act % 1996 %
<S> <C> <C> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 1,050,300 104% $ 999,243 106% $ 970,531 105%
Vacancy Loss -$ 44,916 -4% -$ 58,725 -6% -$ 37,360 -4%
Rent Concessions $ - 0% $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 1,005,384 99% $ 940,518 100% $ 933,171 101%
Other Income $ 5,750 1% -$ 998 0% -$ 4,947 -1%
TOTAL RECEIPTS $ 1,011,134 100% $ 939,520 100% $ 928,224 100%
EXPENSES:
Management Fee $ 35,276 $ 32,985 $ 31,974
Other Admin $ 68,503 $ 68,765 $ 60,661
Subtotal Admin $ 103,779 10.3% $ 101,750 10.8% $ 92,635 10.0%
Supplies $ - $ -
Utilities $ 43,469 $ 37,590 $ 40,782
Building Services $ - $ -
Other Operating $ 6,342 $ 6,367 $ 5,617
Subtotal Operating $ 49,811 5% $ 43,957 5% $ 46,399 5%
Security $ - $ -
Grounds Maint $ 17,762 $ 17,828 $ 15,727
Maint-Repairs $ 22,834 $ 22,921 $ 20,221
Painting/Decorating $ 11,417 $ 11,461 $ 10,110
Subtotal Maint. $ 52,013 5% $ 52,210 6% $ 46,058 5%
R.E. Taxes $ 122,448 $ 122,278 $ 119,450
Insurance $ 8,810 $ 9,402 $ 9,135
Other $ -
Subtotal Taxes-insur $ 131,258 13% $ 131,680 14% $ 128,585 14%
TOTAL EXPENSES $ 336,862 33% $ 329,597 35% $ 313,677 34%
NET OPERATING INCOME $ 674,273 67% $ 609,923 65% $ 614,547 66%
<CAPTION>
1995 % 1994 %
<S> <C> <C> <C> <C>
RECEIPTS:
Rental Income $ 960,535 104% $ 948,744 108%
Vacancy Loss -$ 45,789 -5% -$ 70,307 -8%
Rent Concessions $ - 0% $ - 0%
Model Apt. $ - 0% $ - 0%
TOTAL RENTAL INCOME $ 914,746 99% $ 878,437 100%
Other Income $ 11,520 1% -$ 1,465 0%
TOTAL RECEIPTS $ 926,266 100% $ 876,972 100%
EXPENSES:
Management Fee $ 37,937 $ 21,767
Other Admin $ 57,642 $ 59,217
Subtotal Admin $ 95,579 10.3% $ 80,984 9.2%
Supplies
Utilities $ 30,872 $ 35,822
Building Services
Other Operating $ 5,337 $ 5,483
Subtotal Operating $ 36,209 4% $ 41,305 5%
Security
Grounds Maint $ 14,944 $ 15,354
Maint-Repairs $ 19,214 $ 19,738
Painting/Decorating $ 9,607 $ 9,869
Subtotal Maint. $ 43,765 5% $ 44,961 5%
R.E. Taxes $ 115,004 $ 124,017
Insurance $ 10,788 $ 12,486
Other
Subtotal Taxes-insur $ 125,792 14% $ 136,503 16%
TOTAL EXPENSES $ 301,345 33% $ 303,753 35%
NET OPERATING INCOME $ 624,921 67% $ 573,219 65%
</TABLE>
111
<PAGE>
MONTICELLO
DIRECT CAPITALIZATION
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Monticello
22700 Civic Center Drive
Southfield, Michigan
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIRECT CAPITALIZATION:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Number of Units 106
Revenue @ $850 per Unit $1,081,200
Expenses @ $4.14 per Sq. Ft. 400,470
----------
Net Income 680,730
Replacement Reserves @ $400 42,400
----------
Net Operating Income (NOI) $ 638,330
Cap Rate @ 9.0% $7,092,555
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ESTIMATED VALUE:
- -------------------------------------------------------------------------------
$7,100,000
- -------------------------------------------------------------------------------
112
<PAGE>
MONTICELLO APARTMENTS
Cash Flow Analysis
31-Dec-98
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,080,000 $ 1,112,400 $1,145,772 $ 1,180,145 $ 1,215,550
Vacancy Loss -$ 46,250 -$ 44,496 -$ 45,831 -$ 47,206 -$ 48,622
Rent Concessions $ -
Other $ 6,000 $ 6,150 $ 6,304 $ 6,461 $ 6,623
EFFECTIVE INCOME $ 1,039,750 $ 1,074,054 $1,106,245 $ 1,139,401 $ 1,173,550
EXPENSE:
Management Fee $ 41,590 $ 42,962 $ 44,250 $ 45,576 $ 46,942
Other Admin $ 75,000 $ 76,875 $ 78,797 $ 80,767 $ 82,786
Subtotal Admin $ 116,590 $ 119,837 $ 123,047 $ 126,343 $ 129,728
Supplies $ - $ - $ - $ - $ -
Utilities $ 45,000 $ 46,125 $ 47,278 $ 48,460 $ 49,672
Building Services $ - $ - $ - $ - $ -
Other Operating $ 7,000 $ 7,175 $ 7,354 $ 7,538 $ 7,727
Subtotal Operating $ 52,000 $ 53,300 $ 54,633 $ 55,998 $ 57,398
Security $ - $ - $ - $ - $ -
Grounds Maint $ 19,825 $ 20,321 $ 20,829 $ 21,349 $ 21,883
Maint-Repairs $ 24,500 $ 25,113 $ 25,740 $ 26,384 $ 27,043
Painting/Decorating $ 13,000 $ 13,325 $ 13,658 $ 14,000 $ 14,350
Subtotal Maint. $ 57,325 $ 58,758 $ 60,227 $ 61,733 $ 63,276
R.E. Taxes $ 125,000 $ 128,125 $ 131,328 $ 134,611 $ 137,977
Insurance $ 10,000 $ 10,250 $ 10,506 $ 10,769 $ 11,038
Other $ - $ - $ - $ - $ -
Subtotal $ 135,000 $ 138,375 $ 141,834 $ 145,380 $ 149,015
Taxes-insur
TOTAL EXPENSES $ 360,915 $ 370,270 $ 379,741 $ 389,454 $ 399,417
NON-OPERATING EXPENSES
Capital Improvements $ 42,400 $ 43,672 $ 44,982 $ 46,332 $ 47,722
Other $ -
NET CASH FLOW $ 636,435 $ 660,112 $ 681,522 $ 703,615 $ 726,412
P.V. Factor 0.8929 0.7972 0.7118 0.6355 0.5674
P.V. Cash Flow $ 568,246 $ 526,237 $ 485,094 $ 447,160 $ 412,186
<CAPTION>
2004 2005 2006 2007 2008
<S> <C> <C> <C> <C> <C>
REVENUE
Gross Potential $ 1,252,016 $ 1,289,576 $ 1,328,264 $ 1,368,112 $ 1,409,155
Vacancy Loss -$ 50,081 -$ 51,583 -$ 53,131 -$ 54,724 -$ 56,366
Rent Concessions
Other $ 6,788 $ 6,958 $ 7,132 $ 7,310 $ 7,493
EFFECTIVE INCOME $ 1,208,724 $ 1,244,952 $ 1,282,265 $ 1,320,698 $ 1,360,282
EXPENSE:
Management Fee $ 48,349 $ 49,798 $ 51,291 $ 52,828 $ 54,411
Other Admin $ 84,856 $ 86,977 $ 89,151 $ 91,380 $ 93,665
Subtotal Admin $ 133,205 $ 136,775 $ 140,442 $ 144,208 $ 148,076
Supplies $ - $ - $ - $ - $ -
Utilities $ 50,913 $ 52,186 $ 53,491 $ 54,828 $ 56,199
Building Services $ - $ - $ - $ - $ -
Other Operating $ 7,920 $ 8,118 $ 8,321 $ 8,529 $ 8,742
Subtotal Operating $ 58,833 $ 60,304 $ 61,812 $ 63,357 $ 64,941
Security $ - $ - $ - $ - $ -
Grounds Maint $ 22,430 $ 22,991 $ 23,566 $ 24,155 $ 24,759
Maint-Repairs $ 27,720 $ 28,412 $ 29,123 $ 29,851 $ 30,597
Painting/Decorating $ 14,708 $ 15,076 $ 15,453 $ 15,839 $ 16,235
Subtotal Maint. $ 64,858 $ 66,479 $ 68,141 $ 69,845 $ 71,591
R.E. Taxes $ 141,426 $ 144,962 $ 148,586 $ 152,300 $ 156,108
Insurance $ 11,314 $ 11,597 $ 11,887 $ 12,184 $ 12,489
Other $ - $ - $ - $ - $ -
Subtotal $ 152,740 $ 156,559 $ 160,473 $ 164,484 $ 168,597
Taxes-insur
TOTAL EXPENSES $ 409,636 $ 420,117 $ 430,868 $ 441,894 $ 453,204
NON-OPERATING EXPENSES
Capital Improvements $ 49,153 $ 50,628 $ 52,147 $ 53,711 $ 55,322
Other
NET CASH FLOW $ 749,935 $ 774,207 $ 799,251 $ 825,092 $ 851,755
P.V. Factor 0.5066 0.4523 0.4039 0.3606 0.3220
P.V. Cash Flow $ 379,940 $ 350,212 $ 322,804 $ 297,537 274,242
SUM P.V. $ 4,063,557
RESIDUAL $ 2,643,978
TOTAL VALUE $ 6,707,635
</TABLE>
113
<PAGE>
SUMMARY
MONTICELLO
- -------------------------------------------------------------------------------
PROPERTY:
- -------------------------------------------------------------------------------
Monticello
22700 Civic Center Drive
Southfield, Michigan
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
VALUE ESTIMATE:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Sales Comparison Approach $6,360,000
Income Approach:
Direct Capitalization $7,100,000
DCF $6,700,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FINAL VALUE:
- -------------------------------------------------------------------------------
$6,250,000 - $7,200,000
- -------------------------------------------------------------------------------
114
<PAGE>
LIMITING FACTORS AND ASSUMPTIONS
In accordance with recognized professional ethics, the professional fee for this
service is not contingent upon our conclusion of value, and neither Valuation
Research Corporation nor any of its employees have a present or intended
material financial interest in the subject company appraised.
The opinion of value expressed herein is valid only for the stated purpose as of
the date of the appraisal.
Financial statements and other related information provided by the subject
company or its representatives in the course of this investigation have been
accepted, without further verification, as fully and correctly reflecting the
company's business conditions and operating results for the respective periods,
except as specifically noted herein.
Public information and industry and statistical information has been obtained
from sources we deem to be reliable; however, we make no representation as to
the accuracy or completeness of such information, and have accepted the
information without further verification.
The conclusions of value are based upon the assumption that the current level of
management expertise and effectiveness would continue to be maintained and that
the character and integrity of the enterprise through any sale, reorganization,
exchange, or diminution of the owners' participation would not be materially or
significantly changed.
This report and the conclusions arrived at herein are for the exclusive use of
our client for the sole and specific purposes as noted herein. Furthermore, the
report and conclusions are not intended by the author, and should not be
construed by the reader, to be investment advice in any manner whatsoever. The
conclusions reached herein represent the considered opinion of Valuation
Research Corporation, based upon information furnished to them by the company
and other sources.
Neither all nor any part of the contents of this report (especially any
conclusions as to value, the identity of any appraiser or appraisers, or the
firm with which such appraisers are connected, or any reference to any of their
professional designations) should be disseminated to the public through
advertising media, public relations, news media, sales media, mail, direct
transmittal, or any other public means of communication, without the prior
written consent and approval of Valuation Research Corporation.
115
<PAGE>
Future services regarding the subject matter of this report, including, but not
limited to, testimony or attendance in court, shall not be required of Valuation
Research Corporation, unless previous arrangements have been made in writing.
The appraiser assumes no responsibility for matters legal in nature, nor does
the appraiser render any opinion as to the title, which is assumed to be
marketable.
The appraiser assumes that the property will be responsibly owned and properly
maintained.
The appraiser has not made a land survey of the property. The boundaries used in
this report are taken from records believed to be accurate. The sketches
included in this report are provided to assist the reader in visualizing the
property, and no responsibility is assumed for their accuracy.
The allocation of the total value between land and improvements stated in this
report is invalid if used separately or in conjunction with any other appraisal.
This report is to be used in its entirety and only for the purpose for which it
was prepared.
The appraiser assumes that there are no hidden or unapparant conditions of the
property, subsoil, or structures which would render the property more or less
valuable. The appraiser assumes no responsibility for any such conditions or for
any engineering surveys which might be required to discover such conditions.
Any information furnished by others and included in this report is from sources
deemed to be reliable and believed to be true and accurate; however, no
responsibility is assumed for its accuracy.
It is assumed that there is full compliance with all applicable federal, state,
and local environmental regulations and laws unless noncompliance is stated,
defined, and considered in the appraisal report.
Valuation Research Corporation is not an environmental consultant or auditor,
and it takes no responsibility for any actual or potential environmental
liabilities. Any person entitled to rely on this report wishing to know whether
such liabilities exist, or their scope, and the effect on the value of the
property is encouraged to obtain a professional environmental assessment.
Valuation Research Corporation does not conduct or provide environmental
assessments and has not performed one for the subject property.
Valuation Research Corporation has not determined independently whether the
property is subject to any present or future liability relating to environmental
matters (including, but not limited to CERCLA/Superfund liability), nor the
scope of any such liabilities. Valuation Research Corporation's appraisal takes
no such liabilities into account except
116
<PAGE>
as they have been reported expressly to Valuation Research Corporation, or by an
environmental consultant working for the subject owner, and then only to the
extent that the liability was reported to us in an actual or estimated dollar
amount. Such matters are noted in the report. To the extent such information has
been reported to us, Valuation Research Corporation has relied on it without
verification and offers no warranty or representation as to its accuracy or
completeness.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with, unless a nonconformity has been stated, defined, and
considered in the appraisal report.
It is assumed that all required licenses, certificates of occupancy, consents,
or other legislative or administrative authority from any local, state, or
national government or private entity or organization have been or can be
obtained or renewed for any use on which the value estimate contained in this
report is based.
Valuation Research Corporation has not made a specific compliance survey or
analysis of the subject property to determine whether it is subject to or in
compliance with the Americans with Disabilities Act of 1990 (ADA) and this
opinion does not consider the impact, if any, of noncompliance in estimating the
value of the property.
Valuation Research Corporation has not investigated the subject Company's Y2K
compliance or the compliance of its customers or suppliers and the effect, if
any, that the Y2K issue might have on these entities.
117
<PAGE>
CONSENT
THIS CONSENT IS SOLICITED ON BEHALF OF THE GENERAL PARTNERS OF [CAPITAL
SOURCE L.P.] [CAPITAL SOURCE II L.P.-A]
Reference is made to the Prospectus/Consent solicitation Statement dated
, 1999, sent with this Consent Card relating to the proposed
consolidation by merger (the "Transaction") of Capital Source L.P. and Capital
Source II L.P.-A (the "Partnerships") with and into America First Real Estate
Investment Partners, L.P., a Delaware limited partnership (the "Company"). The
undersigned hereby directs the Initial Limited Partner to vote as indicated
below with respect to all Partnership BACs which the undersigned may be entitled
to vote. Please put an "X" in the appropriate box to grant your consent "YES" in
favor of the Transaction, "NO" to withhold your consent to the Transaction or to
"ABSTAIN" from voting.
/ / "YES" I approve of my Partnership's participation in the Transaction and
the adoption of the Amendments to the partnership agreement [and consent to
the sale by Insured Mortgage Equities II, L.P. of its general partner
interest in my Partnership to America First Capital Source II L.L.C.]
/ / "NO" I do not approve of my Partnership's participation in the Transaction
or the adoption of the Amendments to the partnership agreement [and do not
consent to the sale by Insured Mortgage Equities II, L.P. of its general
partner interest in my Partnership to America First Capital Source II
L.L.C.]
/ / I wish to "ABSTAIN" from voting.
<TABLE>
<S> <C>
Signature of Investor Signature of Co-Owner (if any)
Dated: Dated:
</TABLE>
PLEASE DATE, SIGN EXACTLY AS YOUR NAME APPEARS ON THE MAILING LABEL, UNLESS
YOUR NAME IS PRINTED INCORRECTLY; AND MAIL THIS CONSENT CARD IN THE ENVELOPE
PROVIDED. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
YOU MAY NOT REVOKE YOUR CONSENT AFTER IT HAS BEEN DELIVERED TO THE
TABULATION AGENT, KISSEL-BLAKE.
THIS CONSENT WHEN PROPERLY EXECUTED, WILL BE VOTED BY THE INITIAL LIMITED
PARTNER IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS
MADE, THIS CONSENT WILL BE VOTED FOR THE TRANSACTION.
(Continued on reverse side)
<PAGE>
INVESTORS WILL RECEIVE UNITS OF THE COMPANY UNLESS THE FOLLOWING ELECTION IS
MARKED:
/ / I wish to receive Variable Rate Junior Notes of the Company as described in
the Prospectus/Consent Solicitation Statement.
<TABLE>
<C> <S>
If you sign and return this Consent Card
without indicating a vote, you will be
deemed to have voted "YES" in favor of
the Transaction and you will receive
Units of the Company if the Transaction
is consummated.
By signing this Consent Card, you hereby
acknowledge receipt of the
Prospectus/Consent Solicitation
Statement dated , 1999, and
furnished herewith.
MAILING LABEL
[Includes name of Partnership] IF YOU HAVE ANY QUESTIONS OR NEED
ASSISTANCE IN COMPLETING THE CONSENT
CARD, PLEASE CALL AMERICA FIRST INVESTOR
SERVICES DEPARTMENT, TOLL-FREE AT (800)
239-8787, AND SELECT OPTION 2. YOU MAY
E-MAIL INVESTOR SERVICES AT
[email protected].
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT CARD USING THE ENCLOSED
ENVELOPE SO THAT IT ARRIVES NO LATER THAN 5:00 P.M. EASTERN TIME ON ,
1999.
</TABLE>
